Coverage First then Try Bad Faith

Mandamus Granted to Sever Bad Faith from Contract Action

When an insured litigates an uninsured motorist or Underinsured motorist UM/UIM) claim against his or her insurer the insured must prove that there is a policy in effect, that he or she was injured by an UM or UIM enabling the insured to then collect as if his insurer was the insurer for the UM.

The Texas Court of Appeal dealt with the issue of whether the insured may also sue for bad faith and do discovery and a trial about both the UM cover and the claim against the insurer in IN RE: AAA Texas County Mutual Insurance Company v. Hon. David Scott Brabham, Court of Appeals of Texas, 2016 WL 4395817, NO. 12-15-00277-CV (August 18, 2016). AAA argued that because the insureds extracontractual claims ultimately could be rendered moot, the two claims should be severed by seeking a writ of mandamus to change the trial court’s November 6, 2015 orders denying its motion to sever and abate Thomas Jackson’s extracontractual claims and compelling discovery.

BACKGROUND

On June 12, 2013, vehicles driven by Thomas Jackson and Patricia Tompkins collided in Longview. Jackson filed a claim for underinsured motorist (UIM) benefits with AAA, his insurer. Jackson later filed a lawsuit against AAA for breach of contract under the UIM portion of his policy, violations of the Texas Deceptive Trade Practices Act and the Texas Insurance Code, and breach of the duty of good faith and fair dealing.

PREREQUISITES TO MANDAMUS

Mandamus is an extraordinary remedy that is available only when the trial court has clearly abused its discretion and there is no adequate remedy by appeal

SEVERANCE AND ABATEMENT

AAA argues that the trial court abused its discretion when it denied AAA’s motion to sever and abate Jackson’s extracontractual claims and compelled discovery.

Standard of Review

The trial court has broad discretion in the severance of causes of action. In most circumstances, a trial court’s decision to grant or deny a motion to abate is within the court’s discretion.

Abatement of extracontractual claims is required when, under the circumstances, both parties would incur unnecessary expenses if the breach of contract claim were decided in the insurer’s favor.  Thus, abatement is necessary when a determination on the breach of contract claim in favor of the insurer will negate the insured’s extracontractual claims. Without the abatement, the parties would be put to the effort and expense of conducting discovery and preparing for trial of claims that may be disposed of in a previous trial.

Governing Law

Any claim against a party may be severed and proceeded with separately. A severance divides the lawsuit into two or more separate and independent causes.  When this has been done, a judgment that disposes of all parties and issues in one of the severed causes is final and appealable. An order for a bifurcated trial leaves the lawsuit intact but enables the court to hear and determine one or more issues without trying all controverted issues that the same hearing. The order rendered at the conclusion of a separate trial is often interlocutory, because no final and appealable judgment can properly be rendered until all of the controlling issues have been tried and decided. The same jury hears both parts of a separate or bifurcated trial. On the other hand, a suit severed into two separate and distinct causes will be heard by two different juries.

An insurer generally cannot be liable for failing to settle or investigate a claim that it has no contractual duty to pay. An insurer is under no contractual duty to pay UIM benefits until the insured proves that the insured has UIM coverage, that the other driver negligently caused the accident that resulted in covered damages, the amount of the insured’s damages, and that the other driver’s insurance coverage is deficient.

ANALYSIS

 AAA argues that its motion to sever and abate should have been granted because it made a settlement offer to Jackson. AAA urges that, absent a severance and abatement, Jackson will use the settlement offer as evidence for his breach of contract and extracontractual claims before proving he has a right to recover under the UIM policy.

AAA has shown that severance and abatement are necessary to do justice, avoid prejudice, and further convenience.  Jackson also seeks production of documents related to AAA’s claim handling process and procedures. AAA argues that Jackson will attempt to introduce the settlement offer and AAA’s claim handling procedures as evidence that AAA breached its contract. While these may be relevant to the extracontractual claims, they are irrelevant to the breach of contract claim and privileged from discovery. Allowing Jackson to conduct broad discovery into AAA’s claims handling history and evaluation process and then allowing Jackson to introduce such evidence to support his breach of contract claim would be manifestly unjust.

Because Jackson’s extracontractual claims ultimately could be rendered moot, AAA is not required to put forth the effort and expense of conducting discovery, preparing for a trial, and conducting voir dire on those claims. Acordingly, the court of appeal concluded that severance of the extracontractual claims is required. Therefore, the trial court abused its discretion when it denied AAA’s motion to sever and abate and compelled discovery on Jackson’s extracontractual claims.

DISPOSITION

For the reasons set forth above, we have concluded that AAA has shown it is entitled to mandamus relief. Accordingly, the court conditionally granted AAA’s petition for writ of mandamus and directed the trial court to (1) vacate its November 6, 2015 order denying AAA’s motion to sever and abate and issue an order granting the motion, severing Jackson’s extracontractual claims against AAA, and abating the severed cause and (2) vacate the portion of its November 6, 2015 order compelling AAA respond to discovery on the extracontractual claims.

ZALMA OPINION

Bad faith suits are brought to add the expense needed to properly defend a simple breach of contract action. When the insured believes the insurer has breached its contract it can sue to collect on the contract and if it wins it can consider whether there is evidence to establish that the insurer acted in bad faith. By combining the breach of contract and bad faith claims the litigation becomes more complex. Texas has an efficient rule that lets the two issues be separated so that if the UM/UIM suit is lost there is no case and the second part of the claim can be avoided.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

Notice-Prejudice Rule Now the Law In Wyoming

Court Rewrites a Policy To Adopt Notice-Prejudice Rule

 Insurance companies insuring people against the risk of loss due to heir negligence require notice as soon as possible so that the insurer can conduct a complete and thorough investigation to properly protect the interests of the insured. Wyoming is one of the few states that have not yet ruled upon the applicability of a notice condition where a party claims the insurer was not prejudiced by the late report..

In Century Surety Company, Appellant v. Jim Hipner, LLC; and Huey Brock, Supreme Court of Wyoming, 2016 WL 4399921, S–15–0294 (August 17, 2016)  the United States Court of Appeals for the Eighth Circuit certified a question to this Court concerning the enforceability of an insurance policy notice provision.

Specifically, the Eighth Circuit asked: “Whether, under Wyoming law, an insurer must be prejudiced before being entitled to deny coverage when the insured has failed to give notice ‘as soon as practicable.’ Many states have expressly adopted a notice-prejudice rule under which an insurer will only be able to disclaim coverage if it demonstrates it was actually prejudiced by late notice.

FACTS

In 2010, [Jim Hipner, LLC (“Hipner”) ], a trucking company, obtained a $2 million umbrella policy (“Century Policy”) from Century [Surety Company (“Century”)] in order to secure a contract with a customer. In paragraph 3, the Century Policy contains the following notice provision: “b. If you notify any “underlying insurer” of an “occurrence” or an offense involving “bodily injury” or “personal and advertising injury”, you must see to it that we are also notified in writing as soon as practicable.” Later, in the same paragraph, the Century Policy contains an exclusion provision that states: “Failure to notify us, as required per paragraphs 3.a. and 3.b. above, of an ‘occurrence’ or offense as soon as practicable will result in exclusion of coverage whether we are prejudiced or not.” (Emphasis Added)

On March 31, 2011, one of Hipner’s drivers created a road obstruction that produced an injury-generating, multi-vehicle collision (“the accident”) in North Dakota. According to the North Dakota Motor Vehicle Crash Report, a passenger in a car that was rear-ended by another vehicle suffered injuries deemed minor at the time.

On the day of the accident, Jim called and reported the accident to representatives at Willis of Wyoming and Great West Casualty Company (“Great West”), the underlying primary insurance companies for Hipner. But, no one at Hipner notified Century. In his deposition, Jim stated that he thought notifying Willis of Wyoming satisfied his obligations to notify all of the insurance companies. On March 31, Great West set up a claim and began investigating the accident.

Brock’s injuries rendered him quadriplegic. Jim testified that he did not know that Brock sustained significant injuries from the accident until May 2011. On September 20, 2011, Century was notified of the accident indirectly when Willis of Wyoming sent Century the policy renewal for Hipner.  Century did not perform its own investigation of the accident because “[t]he duty to investigate the accident fell upon Great West Casualty. Century Surety relied upon Great West Casualty to perform a competent investigation.”  In November 2012, Century received Brock’s settlement demand but declined to participate in the settlement “based upon lack of coverage for Jim Hipner LLC under the Century Policy coupled with serious questions regarding liability and damages.”

Century then sued seeking a declaratory judgment that Century does not have an obligation to defend or indemnify Hipner in connection with any claims arising out of or relating to the accident.

DISCUSSION

Century argues that the policy language at issue is unambiguous and even a strict construction of that language in favor of Hipner requires its enforcement. Century also claims that because the notice provision language is not unconscionable, it must be enforced. Finally, Century avers that Wyoming law requires the rejection of the notice-prejudice rule (which requires an insurance company to be prejudiced before it can deny coverage based upon the violation of a notice provision in an insurance policy), especially in this case where the notice provision contains language requiring notice whether Century was prejudiced or not.

The Traditional Rule and the Notice-Prejudice Rule

Traditionally, courts held that in order to avoid liability or its duty to defend, an insurance carrier only needed to establish that an insured’s notice of an occurrence or claim was untimely; prejudice to the insurer was irrelevant to the inquiry. This approach is grounded upon a strict contractual interpretation of insurance policies under which delayed notice was viewed as constituting a breach of contract, making the issue of insurer prejudice immaterial.  A handful of jurisdictions still follow the traditional rule.

Many courts and commentators have acknowledged the public policy rationales justifying the inclusion of notice provisions in insurance policies. Recognizing that this public policy is not harmed by requiring insurers to be prejudiced before denying coverage for late notice, many courts have adopted the notice-prejudice rule which requires proof of prejudice for an insurer to avoid liability in the event that a policyholder provides them with untimely notice of an occurrence. A “vast majority” of jurisdictions now follow the modern trend and have adopted the notice-prejudice rule. Very few courts today follow the traditional approach in notice cases.  These courts have countenanced three policy justifications for departing from the traditional approach: 1) the adhesive nature of insurance contracts; 2) the public policy objective of compensating tort victims; and 3) the inequity of the insurer receiving a windfall due to a technicality.

The Wyoming Supreme Court has repeatedly recognized the unequal bargaining power between an insurance company and an insured, and in a number of cases, it has held that insurance policies are contracts of adhesion. A second basis for adopting the notice-prejudice rule is the public interest in enforcing insurance contracts to further compensate accident victims, including innocent third parties. Adoption of the modern notice-prejudice-rule promotes the social function of insurance coverage: providing compensation for injuries sustained by innocent members of the public.

Insurance contracts are not purely private matters between insurance companies and their insureds; rather there is a public interest in automobile liability insurance contracts and that is the protection of innocent victims. Wyoming’s legislature recognized this public interest when it enacted the Motor Vehicle Safety Responsibility Act, Wyo. Stat. Ann. §§ 31–9–101 through 31–9–415. That statute requires motor vehicle owners and operators to provide proof (via insurance, a bond, or depositing money with the director of the department of transportation) that they are financially able to meet a minimum level of damages to third parties that might result from accidents arising out of the use of their motor vehicle. In upholding the constitutionality of that act, the court acknowledged the need to protect innocent parties and that insurance serves such a purpose.

A final justification given for adopting the notice-prejudice rule is that when prejudice to the insurer is required before it can deny coverage based upon late notice, no undeserved windfalls will be reaped by the insurer.

The Supreme Court noted that while it has never had the occasion to adopt the notice-prejudice rule before, its precedent is consistent with such an approach. In a case where the court upheld the notice condition because the notice was three years after the loss, it considered the prejudice to the insurance company caused by this late notice. If a timely claim for accident benefits had been made, evidence pertaining to the happening of the accident and to the nature and extent of injuries, together with evidence of resulting complications, if any, could probably have been obtained at that time which cannot be obtained some three years later.

The Supreme Court of Wyoming established a two-step approach to an insurer’s claim of late notice is appropriate. This approach requires a preliminary determination that an insured’s notice was untimely, in violation of the notice requirement contained in the insurance policy. The question of the timeliness of the insured’s delay in providing notice will depend upon a number of factors, including, but not limited to, the language of the notice requirement in the policy, the timing of the notice, the insured’s knowledge of the underlying facts and ability to provide notice, the sophistication of the parties, the type of insurance at issue, and the reasonableness of any delay.

Once it is determined that notice was untimely, a court should then turn to the question of whether the insurer was prejudiced by that delay. If the insurer was prejudiced, then the insurer will be relieved of its obligation to provide coverage. The notice-prejudice rule is supported, according to the Wyoming Supreme Court, by sound public policy.  Century cannot circumvent that rule by simply adding language to its policy stating that insufficient notice will result in exclusion of coverage whether Century is prejudiced or not. The court concluded the language about late reporting is void as against public policy.

Before being entitled to deny coverage based upon untimely notice of an occurrence that triggers coverage, an insurer must be prejudiced, regardless of the express language of the policy.

ZALMA OPINION

Contrary to the common law rule that an insurer has an unquestioned right to enter into any term or condition it requires and that courts have no right to change the terms of a policy, the Wyoming Supreme Court has changed the terms of the contract of insurance by making void the language “whether we are prejudiced or not”  and changing it to “if we are prejudiced.” So much for the unquestioned right to write a contract.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

 

Posted in Zalma on Insurance | 2 Comments

Two Excess Policies are Repugnant

Even True Excess Policies Must Share Loss Pro-Rata

When two or more insurance policies have excess clauses that say they owe nothing until another policy pays out its limits the true excess policy pays nothing until the other policies are exhausted. However, when two policies contain true excess policies who pays what and when requires a court to sort out the obligations of the insurers.

In EMJ Corporation; Westchester Fire Insurance Company, v. Hudson Specialty Insurance Company, United States Court of Appeals, 2016 WL 4375011, Fifth Circuit No. 15-60254 (August 16, 2016) the Fifth Circuit analyzed convoluted facts and insurance policy wording to resolve the dispute between the insurers.

BACKGROUND

In early 2005, Westchester was a commercial umbrella insurer for EMJ Corporation, a general contractor building a J.C. Penney store in Southaven, Mississippi. During that project, EMJ subcontracted with Contract Steel Construction, Inc. for steel erection services. As part of the subcontract, Contract Steel agreed to obtain insurance to protect it and EMJ from personal injury claims. Contract Steel purchased a commercial umbrella policy from Hudson Insurance.

Contract Steel installed a ladder leading from the ground to the roof of the building. The ladder was too short and was installed at an angle. Contract Steel made EMJ aware of this and EMJ accepted the ladder as it was. Two weeks later, a building inspector examining Contract Steel’s work fell off the ladder and suffered a severe spinal injury.

The inspector filed suit against a group of defendants, including EMJ, in Mississippi state court seeking damages of $25 million. All of the defendants were dismissed until only EMJ was left and EMJ settled for five million dollars. Of this amount, EMJ’s primary liability insurer covered one million dollars. Westchester covered the remaining four million dollars.

EMJ and Westchester filed suit against Hudson in the federal district court seeking reimbursement for the four million dollar settlement. In September 2014, the district court held a trial. The trial court entered judgment for EMJ and Westchester and awarded the full four million dollars against Hudson.

Upon Hudson’s motion for reconsideration, the district court reversed its earlier ruling on the priority of coverage. It  determined that the four million dollars should be apportioned between Hudson and Westchester based on their policy limits. This led the district court to determine that Hudson was responsible for paying Westchester only $667,000 in damages.

DISCUSSION

The main thrust of Hudson’s appeal is that it has no duty to indemnify EMJ for the inspector’s fall because the conditions of its policy were not satisfied. Hudson asserts four arguments for non-coverage: First, there was no “occurrence” under its policy. Second, EMJ’s actions did not cause the inspector’s fall. Third, EMJ was not an “additional insured” under its policy. Finally, EMJ did not exhaust all of the primary collectible insurance available to cover the inspector’s fall.

Intentional actions taken without an intent or expectation of causing any injury are occurrences for insurance purposes. Because EMJ accepted the ladder without any intention or expectation of causing the inspector’s injuries this was an occurrence under the Hudson policy.

There was substantial uncontroverted evidence demonstrating that the inspector fell, in part, because of the faulty ladder that EMJ accepted. There is also no merit to Hudson’s contention that because the inspector’s injury was not the expected result of EMJ’s action, the injury could not have been proximately “caused” by EMJ’s actions.

It is undisputed that EMJ was not listed on the Hudson policy by name. However, the Hudson policy’s “Additional Insured” provision covers “[a]ny person or organization for whom you have agreed in writing prior to any ‘occurrence’ … to provide insurance such as is afforded by this policy, but only with respect to operations performed by you [Contract Steel] or on your behalf.” (emphasis added). The interpretation of the italicized phrase went to the jury, which found that the inspector’s activities and injuries respected Contract Steel’s operations.

EMJ presented evidence that none of its other subcontractors were involved in the ladder’s installation and no involved entities besides Contract Steel were required (by EMJ) to maintain insurance. Thus, there could be no other collectible primary insurance.

Westchester’s cross-appeal: Must it contribute to cover the settlement?

Westchester’s cross-appeal concerns the district court’s ruling that both the Hudson and Westchester policy were “true excess” policies and must contribute to the settlement amount pro rata. Initially, the district court ruled that Westchester’s policy was excess to Hudson’s policy and thus Hudson must exhaust its limit before Westchester would pay. On reconsideration, the court reinterpreted the policy language. The court ruled that both policies were excess and conflicted with each other.

Westchester first argues that the presence of the phrase “shall not contribute” marks it as a true excess policy, while Hudson’s policy envisions contribution by stating that it will pay its “share of the amount” and thus is a pro rata policy. If this is correct, the pro rata policy must be fully exhausted before the excess policy has to pay.

By its plain terms, Hudson’s policy only pays after every other type of policy pays (“As this insurance is excess over any other insurance, whether primary, excess, contingent or on any other basis …”), except for a policy that “is specifically purchased to apply in excess of this policy’s Limit on Insurance.”

Hudson is correct: Both policies negate the prospect of contribution. Westchester’s policy does so more explicitly, but the plain language of Hudson’s policy also negates contribution.  Contrary to Westchester’s argument, Hudson’s policy does not say it will “share” in the excess amount or pay “our share” of the excess amount. Instead, Hudson will pay its “share” of the “ultimate net loss, if any” that exceeds what “all such other insurance would pay for the loss in the absence of this insurance.” The reference to “all such other insurance” refers back to the first part of the sentence, which says “this insurance is excess over any other insurance.”

Reading both policies as true excess policies is consistent with the Mississippi Supreme Court’s instruction that more specific rejections of insurance coverage should not be favored over more general rejections of coverage. Though Westchester’s policy contains more specific language negating contribution, the “two policies are indistinguishable in meaning and intent” on this topic.

Retained Limit Clauses

Westchester also points to the “Retained Limit” clauses as supporting its preferred result. Both policies state they will pay after the “Retained Limit” is exhausted, but they define that limit in different ways. Hudson’s policy envisions being triggered after the exhaustion of any underlying insurance and “other collectible primary insurance.” (emphasis added). Westchester’s policy, in contrast, is triggered by the exhaustion of the underlying insurance and “any other insurance.” Westchester argues this indicates that its policy alone is a true excess policy, as it only begins to pay when there is no other insurance left. Hudson’s policy follows the primary policies, but does not envision being the absolute last policy to pay.

Since the “Other Insurance” clauses are both true excess clauses they are mutually repugnant and must share the loss pro rata with the other insurers.

ZALMA OPINION

Excess insurance is less expensive than primary insurance because it need not pay a claim until the primary insurance is exhausted. The policy language is written to protect the insurer from paying more than contemplated when the risk of loss was accepted. When the dispute, however, is by two excess insurers the true excess clauses simply do not work because neither would pay until the other exhausts its limits. Because the two are repugnant to each other the court must make them share the excess pro rata.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

 

Posted in Zalma on Insurance | 1 Comment

Child Molestation is Always an Intentional Act

Intoxication Does Not Eliminate Intent to Molest a Child 

Some intentional conduct is inexcusable. Getting drunk and molesting a minor is an inexcusable act and, for insurance purposes, should never be the type of fortuitous conduct that can be insurable. In State Farm Fire And Casualty Company v. Mark Tully, Supreme Court of Connecticut, 2016 WL 4268660, No. 19600 (Aug. 23, 2016) the Supreme Court of Connecticut was asked to find that a voluntarily intoxicated person could not form the intent to harm the minors he molested and negate intent thereby requiring the insurer to defend the insured person against civil claims arising from sexual misconduct with a minor.

State Farm Fire and Casualty Company sought a declaratory judgment that it owed no duty to defend the named defendant, Mark Tully, under a homeowners insurance policy, in a separate civil action filed on behalf of the defendant Child Doe. The defendants appeal from the judgment of the trial court granting State Farm’s motion for summary judgment on the ground that, because the policy excluded coverage for acts “intended” by the insured, Tully’s actions fell outside the scope of the policy and, thus, the plaintiff had no duty to defend him under the presumption of intent established in United Services Automobile Assn. v. Marburg, 46 Conn.App. 99, 104–105, 698 A.2d 914 (1997).

FACTS

On July 2, 2012, Doe and two other girls were in the shower area of Winding Trails Park in Farmington. At that time, Doe was fourteen years old and the two other girls were, respectively, thirteen and eight years old. Tully, who was fifty-six years old and “under the influence of intoxicating liquor,” approached the three girls and offered to buy them ice cream. After the girls refused, Tully grabbed Doe’s breast, nearly removing her bathing suit top. Tully then fondled the buttocks of the eight year old girl in Doe’s view.

Doe, by and through her parent as next friend, subsequently filed a civil action against Tully alleging, inter alia, that he “negligen[tly]” sexually assaulted her while he was intoxicated. State Farm denied coverage, however, on the ground that Doe’s claim fell within the intentional act exclusion of the policy.

State Farm sued to obtain an order that it does not have a duty to defend Tully. Tully submitted two affidavits, one from a physician and one from a psychologist, which opined that he was an alcoholic and so intoxicated on the day of the incident that he could not have formed the requisite intent to harm Doe. The defendants argued that this evidence raised a genuine issue of material fact as to whether Tully’s actions were intentional. The trial court concluded that voluntary intoxication does not establish a question of intent when defending against an exclusionary clause of an insurance policy.

ANALYSIS

The obligation of the insurer to defend does not depend on whether the injured party will successfully maintain a cause of action against the insured but on whether he has, in his complaint, stated facts which bring the injury within the coverage. If the latter situation prevails, the policy requires the insurer to defend, irrespective of the insured’s ultimate liability. The insurer’s duty to defend is measured by the allegations of the complaint. On the other hand, if the complaint alleges a liability which the policy does not cover, the insurer is not required to defend.

Harmful intent may be inferred at law in circumstances where the alleged behavior in the underlying action is so inherently harmful that the resulting damage is unarguably foreseeable.  State Farm argued that Tully’s intent may be presumed in this case as a matter of law under Marburg because the complaint in the underlying civil action alleged sexual misconduct with a minor.

In Marburg, our Appellate Court, in presuming intent to harm as a matter of law when an insured has engaged in sexual misconduct with a minor, did not consider any restrictions on the type or manner of sexual assault of a minor by an adult. This was for good reason. The very nature of the act of sexual abuse of minors, inevitably causes injury extending to emotional harm to minors from sexual abuse in all forms regardless of whether the abuser subjectively meant no harm from his actions, and the abuse was not violent in nature.

The Marburg presumption remains good law in Connecticut. Construing the relevant pleadings “broadly,” “realistically” and “reasonably, to contain all that it fairly means,” but not “contorted in such a way so as to strain the bounds of rational comprehension”; Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 778, 905 A.2d 623 (2006); the Supreme Court concluded that the complaint in the underlying civil action alleged that Tully engaged in sexual misconduct with a minor. That complaint, therefore, alleges presumptively intentional conduct on the part of Tully.

Because the complaint in the underlying civil action alleges deliberate sexual misconduct with a minor, the trial court properly allowed the plaintiff to rely on the Marburg presumption of intent in satisfying its initial burden on summary judgment. Because the Marburg presumption of intent is rebuttable.

In Connecticut, as a matter of law, evidence of voluntary intoxication  may not be used to negate intent for the purposes of determining whether an insurer owes a duty to defend an insured in cases in which the insured’s intent is presumed because the conduct in question involved sexual misconduct with a minor.

Evidence of voluntary intoxication may never, in any case, serve to negate intent for insurance purposes. The first policy consideration for holding that voluntary intoxication should not operate to negate intent is not to relieve the insured of responsibility, financial and otherwise, for his otherwise intentional actions. Further, permitting voluntary intoxication to negate intent would allow commission of a crime without the requisite responsibility and would create the ability to act unwisely without the requisite financial responsibility.

Tully voluntarily consumed alcohol, went to a local park, attempted to lure children, grabbed one child’s breast, and fondled the buttocks of another. The act of sexual molestation of minors was not unintentional or accidental. The situation at hand is more similar to a scenario in which a driver voluntarily consumes alcohol, gets behind the wheel of a car, sees a pedestrian in the road and then intentionally hits the person with his vehicle. In that situation, the driver’s act of injuring the pedestrian was intentional, despite the driver’s voluntary intoxication, which lowered his inhibition.

Evidence of voluntary intoxication may not negate intent in duty to defend cases in which the insured’s intent is inferred from an underlying complaint that alleges the insured committed sexual misconduct with a minor. Applying this rule to the present case, the trial court properly granted the plaintiff’s motion for summary judgment because the defendants failed, as a matter of law, to rebut the presumption of intent based on Tully’s sexual misconduct with a minor.

The Supreme Court concluded that: (1) the Marburg presumption of intentional conduct based on an insured’s sexual misconduct with a minor remains good law; (2) the trial court properly applied the Marburg presumption in the present case; and (3) evidence of voluntary intoxication may not be used to negate intent in duty to defend cases in which the insured’s intent is inferred from the underlying complaint that alleges that the insured committed sexual misconduct with a minor. Therefore, State Farm satisfied its burden of demonstrating that no genuine issue of material fact exists insofar as the complaint in the underlying civil action alleges intentional acts and, thus, the plaintiff has no duty to defend Tully.

ZALMA OPINION

Getting drunk requires the intentional act of consuming sufficient alcohol to cause intoxication. Intoxication may never be an excuse for criminal conduct or conduct involving the molestation of a child is always an intentional act that always causes damage. Insurance only insures against a fortuitous event. The molestation of a child – regardless of how a suit is pleaded – is always intentional and should never be a subject an insurer will be required to defend. In Connecticut it will never require an insurer to defend a child molester.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

 

 

Posted in Zalma on Insurance | Leave a comment

Cancellation for Failure to Respond to Underwriting Proper

Dangerous to Ignore Requests from Insurer

North Carolina has an assigned risk plan for workers’ compensation where insurers are required to take a business assigned to the insurer. The insurer can, after accepting the risk, seek additional information to properly underwrite and rate the risk. It does so by simply writing a letter to the insured requesting the information.

In Donald Edward Owen, Jr. v. Bruce Hogsed and/or Tammy Hogsed D/B/A Hogsed Landscaping & Tree Service, and St. Paul Travelers/Zurich, Carrier, and Sydney Bruce Hogsed and Tammy Hogsed, Court of Appeals of North Carolina, 2016 WL 4366821, No. COA15-1321 (16 August 2016) failure of an insured to respond resulted in the cancellation of the policy.

Donald Edward Owen, Jr. (“Plaintiff”) appeals from two opinions and awards of the North Carolina Industrial Commission (the “Commission”) determining that his employer’s workers’ compensation insurance policy had been lawfully terminated by its insurance carrier, American Zurich Insurance Company (“Zurich”), at the time of Plaintiff’s on-the-job injury and, therefore, did not provide coverage for his injury.

FACTS

From 17 August 2009, Tammy Hogsed was the sole proprietor of Tammy Hogsed d/b/a Hogsed Landscaping and Tree Service (“Hogsed Landscaping”). Prior to her assuming ownership of the company, it was owned by her father, Bruce Hogsed, and was registered as Bruce Hogsed d/b/a Hogsed Landscaping and Tree Service.

On 17 August 2009, Hogsed Landscaping submitted to the North Carolina Rate Bureau (the “Rate Bureau”) an application for an assigned risk workers’ compensation insurance policy through the Hooper Insurance Agency. The application stated, inter alia, that Hogsed Landscaping (1) had been in business for 12 years; (2) had not had a name or ownership change in the previous five years; (3) had previously possessed workers’ compensation insurance; (4) had no employees or subcontractors; and (5) was in the business of tree pruning, spraying, and repairing.

The Rate Bureau assigned coverage to Zurich, which issued a workers’ compensation insurance policy (the “Policy”) to Hogsed Landscaping on 3 September 2009 for the policy period encompassing 18 August 2009 to 18 August 2010. Zurich is an affiliate of Travelers Insurance Company (“Travelers”), which serviced the account.

On 3 September 2009, the same day the Policy was issued, Zurich sent Hogsed Landscaping a letter containing a request requesting a copy of the last year’s audit and a copy of your 1040 & Schedule C for 2008.

Having received no response to its 3 September 2009 letter, Zurich sent Hogsed Landscaping a letter on 16 November 2009 stating that the Policy was cancelled effective 20 December 2009 because “requested underwriting information has not been provided ….”

On 23 November 2009, Bruce Hogsed, who had remained an agent of Hogsed Landscaping despite relinquishing his ownership of the company, called Zurich Account Manager Cindy O’Connell (“O’Connell”). During this call, he stated that “he had not filed 2008 annual taxes” and that Hogsed Landscaping “did not maintain workers’ compensation insurance during the year prior to Zurich’s coverage period.”

Because Zurich did not receive responses to its underwriting inquiries the Policy was cancelled on 20 December 2009.

Four months after the cancellation Plaintiff was injured when he fell from a tree in the course of his employment for Hogsed Landscaping. He initially filed a workers’ compensation claim on 1 June 2010 and then filed an amended claim on 2 August 2010. Travelers denied the claim on 18 February 2011, asserting that the Policy was not in effect at the time of Plaintiff’s injury.

The Commission found coverage did not exist at the time of the injury and determined  Plaintiff’s 19 April 2010 injury was compensable.

ANALYSIS

Plaintiff’s sole argument on appeal is that the Commission erred in concluding that Zurich lawfully cancelled the Policy before the expiration of the policy period. Plaintiff does not challenge any of the Commission’s findings of fact.

In its opinion and award, the Commission explained the reasoning underlying its determination that Zurich’s cancellation of the Policy was authorized by N.C. Gen. Stat. § 58-36-105(a)(4): “The items that Zurich was seeking from Hogsed Landscaping would have contained information, or revealed a lack of information, that Zurich would have used to determine whether the premium estimate from the N.C. Rate Bureau needed to be revised to reflect the proper risk presented to Zurich from insuring Hogsed Landscaping. Zurich had no source other than the insured to obtain that information; therefore, Hogsed Landscaping’s failure to respond to Zurich constituted a substantial breach of its contractual duties that materially affected the insurability of the risk, and Zurich was permitted to cancel Hogsed Landscaping’s policy prior [to] the expiration of its term.”

This conclusion was supported by specific findings of fact.

Plaintiff contends, Hogsed Landscaping’s failure to respond to Zurich’s 3 September 2009 request for information was not a violation of Hogsed Landscaping’s duty to “keep records of information needed to compute premium” and to “provide [Zurich] with copies of those records when [it] ask[s] for them.”

The initial premium was calculated using the historical data Hogsed Landscaping provided in its application to the Rate Bureau. After issuing the Policy, Zurich attempted to verify this information by requesting the business’s most recent workers’ compensation insurance audit and prior year’s tax filing. These documents were needed to verify the type of work performed by Hogsed Landscaping, its prior job classifications, its number of employees or subcontractors, and other relevant information — all of which was necessary to verify that the premium was calculated accurately. The information requested was unremarkable, consisting of basic documents that would typically be requested by a workers’ compensation insurer from its insured.

Because of the nature of assigned risk policies, an insurer initially accepts an assignment based on nothing more than the information given by the insured to the Rate Bureau. The court of appeal agreed with Zurich that its request to verify the information provided by an employer to the Rate Bureau is the type of “simple due diligence that Zurich would ordinarily perform prior to writing coverage on a direct market policy, but in an assigned risk case those tasks by necessity cannot occur until after coverage is bound.”

In addition, Bruce Hogsed’s 23 November 2009 phone call was not responsive to O’Connell’s 3 September 2009 request for information. In his phone call, Bruce Hogsed stated that he did not file 2008 taxes. However this statement did not address the fact that Zurich “needed the annual taxes for the business” to assist in verifying that the premium was accurately calculated. In fact, the record reflects that during discovery it was revealed that Tammy Hogsed’s 2008 tax return included a Schedule C relating to Hogsed Landscaping. Thus, although O’Connell had specifically requested the 2008 Schedule C for Hogsed Landscaping in her 3 September 2009 request for information, this document was not provided to Zurich despite the fact that it clearly existed.

In sum, Hogsed Landscaping’s failure to provide an adequate response to Zurich’s request for information constituted a substantial breach of a contractual duty materially affecting the insurability of the risk.

ZALMA OPINION

Assigned risk plans are difficult for insurers because they do not have the ability to refuse to insure a particular risk. To have the person insured ignore underwriter’s request for necessary information to properly calculate premium and a notice that the policy was cancelled, is inane. The injured worker can collect benefits from the uninsured Hogsed Landscaping – if it has any assets – but he can’t collect from an insurer that had no policy in effect.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Leave a comment

You Only Get What You Pay For

Clear and Unambiguous Policy Term Must Be Applied

People believe that only insurance lawyers actually read insurance policies. They are, in most situations, wrong because people are compelled to read their policy. However, after a loss, people and their lawyers read the policy, find the coverage is limited, and then try to convince a court that the policy terms are ambiguous and should provide coverage neither party intended at the time the policy was issued.

In Chandra v. MemberSelect Insurance Company, Appellate Court of Illinois, 2016 IL App (1st) 153437-U, No. 1–15–3437 (Aug. 11, 2016) Plaintiff Sudeep Chandra filed a claim with MemberSelect Insurance Company (MemberSelect) after his home had been burglarized pursuant to a homeowner’s insurance policy he purchased from MemberSelect. During the burglary, jewelry was stolen. Chandra alleged the value of the stolen jewelry was approximately $86,000. MemberSelect paid Chandra $2,500 for the stolen jewelry claiming that was the maximum amount it could pay out pursuant to the terms of Chandra’s insurance policy. Chandra disagreed and filed a lawsuit against MemberSelect claiming that the policy language allowed for coverage for the full value of his stolen jewelry.

Both parties filed motions for summary judgment, and the trial court granted summary judgment in favor of MemberSelect finding that the unambiguous language in the insurance policy only allowed for $2,500 in coverage for the stolen jewelry. Chandra now appeals that ruling.

BACKGROUND

Plaintiff Sudeep Chandra was insured by MemberSelect Insurance Company (MemberSelect) under a Homeowner’s Insurance Policy (Policy) which was issued to him as the named insured. During the policy period Chandra’s home was burglarized and a number of items were stolen, including a safe that contained jewelry estimated to be worth $86,000. Subsequent to the burglary, Chandra notified MemberSelect, and sought recovery for his items, including the stolen jewelry. MemberSelect acknowledged receipt Chandra’s claim.

ISSUE

At issue in this appeal is the amount of coverage that MemberSelect was required to provide for the stolen jewelry. MemberSelect paid Chandra $2,500 claiming that was the maximum amount allowed for coverage for stolen jewelry under the language of the Policy. Chandra argues that this was insufficient because, pursuant to the language of the Policy, which he claims is ambiguous, MemberSelect should provide coverage for the full value of his stolen jewelry, approximately $86,000.

Chandra’s Policy provides for special limits on certain property, including jewelry, watches, precious and semi-precious stones and furs. Chandra paid an additional premium of $119 for “H–500 Protection Plus Homeowners Package.” “Included in H–500” is “H–210 Special Jewelry and Furs Coverage Total Limit: $2,500.”

On December 17, 2013, Chandra filed a complaint against MemberSelect after it declined to pay him coverage beyond $2,500 for the jewelry that was stolen from his home during the May 21, 2013 burglary. Following briefing and oral arguments on the matter, the trial court granted MemberSelect’s motion for summary judgment and denied Chandra’s motion for summary judgment.

ANALYSIS

The construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court which are appropriate subjects for disposition by way of summary judgment. In construing an insurance policy, the primary function of the court is to ascertain and enforce the intentions of the parties as expressed in the agreement. To ascertain the intent of the parties and the meaning of the words used in the insurance policy, the court must construe the policy as a whole, taking into account the type of insurance for which the parties have contracted, the risks undertaken and purchased, the subject matter that is insured and the purposes of the entire contract. If the words in the policy are plain and unambiguous, the court will afford them  and apply their plain, ordinary meaning as written.

Whether an ambiguity exists turns on whether the policy language is subject to more than one reasonable interpretation. All the provisions of the insurance contract, rather than an isolated part, should be read together to interpret it and to determine whether an ambiguity exists. The court will not interpret an insurance policy in such a way that any of its terms are rendered meaningless or superfluous.

Like the trial court judge, the appellate court found that when reading the Policy as a whole, it very clearly limits the coverage for Chandra’s stolen jewelry at $2,500. “Part I” of the Policy, entitled “Property Insurance Coverage” states, under “Coverage C—Personal Property,” that the limit of liability for the theft of jewelry is $1,000. As such, under the basic coverage under the Policy, coverage for stolen jewelry is limited at $1,000. However, as stated in the Declaration Certificate, Chandra purchased additional coverage for theft of jewelry and paid an additional premium of $119 for that additional coverage increasing the “Total Limit” on liability is “$2,500.”

When construing an insurance policy, the court must assume that every provision was intended to serve a purpose, construe the insurance policy as a whole, give effect to every provision and take into account the type of insurance provided, the nature of the risks involved, and the overall purpose of the contract.

If the court was to interpret the Policy as Chandra would like — that the replacement cost provision of the basic policy offers unlimited coverage for stolen jewelry — that would render section H–210, section H500(8), as well as statements in the Declaration Certificate meaningless. A court may not, nor will it interpret an insurance policy in such a way that any of its terms are rendered meaningless or superfluous.

The Policy clearly and unambiguously limits coverage for stolen jewelry at $2,500, which is the amount that MemberSelect has already paid to Chandra.

In this case there is no ambiguity in regard to the limit of the insurer’s liability. The Policy clearly states the maximum the insurer will pay for stolen jewelry is $2500.

Where the insurance policy provisions, which limit coverage for stolen jewelry at $2,500, are clear and unambiguous and that amount was paid to plaintiff, summary judgment in favor of insurer is appropriate.

ZALMA OPINION

The Illinois court of appeals refused to be confused by Chandra’s argument and read the policy as written. Chandra bought a policy that had an original limit of $1,000 for theft of jewelry and elected to pay more to increase the limit to $2500. He could have bought more but did not. The fact that he had full limits if the jewelry was destroyed by fire or some other peril did not change the fact that he only had $2500 in coverage for theft of jewelry. This case should never have been filed and the appeal, in light of such clear policy language, was, to me a waste of judicial time.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

The Need For A Professional, Well Trained & Experienced Claims Staff

Excellence in Claims Handling

In search of profit, insurers have decimated their professional claims staff. They laid off experienced personnel and replaced them with young, untrained, unprepared people. A virtual clerk replaced the old professional claims handler. Process and computers replaced hands-on human skill and judgment. Money was saved by paying lower salaries. Within three months of firing the experienced claims people gross profit increased.

The promises made by an insurance policy are kept by the professional claims person. Keeping a professional claims staff dedicated to excellence in claims handling is cost-effective over long periods of time. A professional and experienced adjuster will save the insurer millions by resolving disputes, paying claims owed promptly and fairly, and by so doing avoiding litigation.

The professional claims person is an important part of the insurer’s defense against litigation by insureds against insurers for breach of contract and the tort of bad faith. Claims professionals resolve more claims for less money without the need for either party to involve counsel. A happy claimant satisfied with the results of his or her claim will never sue the insurer.

Incompetent or inadequate claims personnel force insureds and claimants to public insurance adjusters and lawyers. Every study performed on claims establishes that claims with an insured or claimant represented by counsel cost more to resolve than those where counsel is not involved. Prompt, effective, professional claims handling saves money for both the insured and the insurer and fulfills the promises made when the insurer sold the policy.

Insurers who believe they can handle first or third party claims with young, inexpensive, inexperienced and untrained claims handlers should be accosted by angry stockholders whose dividends have plummeted or will plummet as a result. When an insurer compromises on staff, profits, thin as they may have been previously, will move rapidly into negative territory. Tort and punitive damages will deplete reserves. Insurers will quickly question why they are writing insurance. Those who stay in the business of insurance will either adopt a program requiring excellence in claims handling from every member of their claims staff, or they will fail.

Insurance is a business. It must change—this time for the better—if it is to survive. It must rethink the firing of experienced claims staff and reductions in training to save “expense.” Insurers should, if they wish to succeed, adopt a program to promote excellence in claims handling that can help insurers keep the promises made by the insurance policy and avoid charges of breach of contract and the tort  bad faith in both first and third party claims.

Insurers must understand that they cannot adequately fulfill the promises they make to their insureds and their obligations under fair claims practices acts without a professional, well trained and experienced claims staff. An insurer must work vigorously and intelligently to create a professional claims department or recognize it will  lose its market and any hope of profit.

Insurance claims professionals are people who:

  • can read and understand the insurance policies issued by the insurer.
  • understand the promises made by the policy and their obligation, as an insurer’s claims staff, to fulfill the promises made.
  • are competent investigators.
  • have empathy, and recognize the difference between empathy and sympathy.
  • understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals.
  • understand how to repair damage to real and personal property and the value of the repairs or the property.

An insurer whose claims staff is made up of people who are less than professional will find itself the subject of multiple instances of expensive, counterproductive litigation.

[This article was adapted from my book: “Insurance Claims: A Comprehensive Guide” available at the Zalma Insurance Claims Library.]

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | 1 Comment

Policy Lapse Not Cancellation

Failure to Timely Pay Premium Causes Policy to Expire

Insurance, like all other contracts, requires that there is first an offer, the offer is accepted and consideration passes between the person accepting the offer and the person making the offer and there must be a “meeting of the minds” – an agreement by both to the terms of the contract. If any of the elements is missing, there is no contract.

The basic analysis of contract law was applied by the Supreme Court of Mississippi to resolve a coverage dispute in AMFED National Insurance Co., American Federated Insurance Co., and AmFed Companies, LLC v. NTC Transportation, Inc., Supreme Court of Mississippi, 2016 WL 4245423, No. 2014–CA–01288–SCT (Aug. 11, 2016).

 Background:

An employee of NTC Transportation, Inc. (“NTC”) filed petitions to controvert with the Mississippi Workers’ Compensation Commission (“the Commission”), claiming he had suffered compensable work-related injuries on two occasions. AmFed National Insurance Co. (“Amfed”) — believing NTC’s workers’ compensation coverage to have lapsed due to NTC’s failure to timely pay the premium—responded and denied both liability and coverage as to the latter injury. 

NTC operates a business which provides nonemergency medical transportation services for sixteen Mississippi counties. Due to the nature of its business, NTC is unable to obtain workers’ compensation coverage in the voluntary market. The Mississippi Legislature established the Mississippi Assigned Risk Plan (“the Plan”) to provide access to workers’ compensation insurance to businesses like NTC. AmFed is an insurance company located in Madison, Mississippi, and participates in the Plan because it is required to do so — the Plan requires all insurers who write workers’ compensation coverage in Mississippi to participate.

On November 13, 2003 — more than sixty days before the current Assigned Risk policy was set to expire — AmFed sent a renewal notice to NTC, in which it offered to renew NTC’s coverage for an additional year provided that the premium payment was received on or before January 19, 2004 and the new policy, if timely renewed, would be effective January 19, 2004, through January 19, 2005. The notice indicated a policy premium of $42,347 and provided for three different installment options. The notice also included the following language: “payment must be received by the due date shown above to insure no lapse in coverage.”

Because the premium was so expensive, NTC resorted to third-party financing — NTC obtained a loan from Premium Financing Specialists of the South (“PFS”), and PFS  and payment was received by AmFed on February 4, 2004 — two weeks past the January 19 deadline indicated in the renewal notice. After receipt of the premium payment, Claudine Burkes (“Burkes”), AmFed’s Operations and Residual Market Manager, deposited the payment and issued NTC a workers’ compensation policy effective from February 4, 2004, through February 4, 2005.

Beginning in March 2004, Rhondy Mickle (“Mickle”), an NTC employee, filed two workers’ compensation claims with the Commission, alleging that he had suffered compensable work-related injuries on January 16, 2004, and January 22, 2004.  AmFed responded to the January 16, 2004, claim on behalf of NTC and denied liability but not coverage.

The trial court granted NTC’s motion for partial summary judgment and denied AmFed’s cross-motion for summary judgment on November 20, 2008.

DISCUSSION

NTC asserts that it had workers’ compensation coverage in effect at the time of Mickle’s January 22, 2004, injury for two reasons. First, NTC argues that when it tendered a premium payment two weeks late, it had presented AmFed with a counter-offer for backdated coverage, which AmFed then accepted by depositing the payment. Second, in the alternative, NTC argues that its workers’ compensation coverage with AmFed continued in effect because, according to NTC, AmFed was required to comply with, and admittedly did not comply with, the notice requirements found in Mississippi Code Section 71–3–77.

Whether NTC’s premium payment—which undisputably was two weeks late—constituted a counter-offer for backdated coverage, which AmFed accepted by depositing said payment into its account thereby creating a valid and enforceable contract for a policy in effect from January 19, 2004, through January 19, 2005.

NTC argues that when it sent in its late premium payment it had submitted a counter-offer to AmFed for backdated coverage, in particular for coverage beginning on January 19, 2004, which AmFed then accepted by depositing the premium check. We simply cannot accept such an argument.

Insurance policies are matters of contract and the interpretation of insurance contracts is according to the same rules which govern other contracts.  Therefore, to have an enforceable insurance contract, the general contract elements must be present: offer, acceptance, and consideration.  Additionally, there must be a meeting of the minds.

After AmFed received NTC’s two-week late payment, AmFed issued a new policy that clearly stated the coverage period would be from February 4, 2004, through February 4, 2005. After receiving the policy, NTC made no objections to the new coverage period until after Mickle filed his workers’ compensation claim with the Commission, and Mickle filed his first claim on March 15, 2004 — almost a month and a half after AmFed had issued NTC the new policy with new coverage dates.

Furthermore, even if the court concluded that NTC believed it was submitting a counter-offer to AmFed, nothing in the record indicates that AmFed ever perceived it to be a counter-offer for retroactive coverage, nor do was there any evidence that AmFed agreed to backdate coverage. Quite the contrary AmFed’s issuance of a policy with effective dates different from those NTC’s alleges that it proposed, establish, at the very least, that no “meeting of the minds” occurred — and consequently, no insurance contract for backdated coverage was created.

We also find it important that the Plan supports AmFed’s position that it was within its prerogative to issue a policy with a gap, or lapse, in coverage for the period that the premium payment had not been paid. The Plan provides guidance for exactly the type of scenario that occurred in the instant case. Rule III–3 of the Plan provides for the “effective date of policy” and states that “policies shall be … renewed … without a lapse in coverage when premium is received or U.S. mail postmarked prior to the policy effective date. …” This rule demonstrates that, when an insured makes an untimely premium payment, the insurer is permitted, though not required, to renew the policy with a lapse in coverage if it so chooses. AmFed’s actions also are consistent with the standard procedures contained within the Assigned Risk Supplement, a supplement to the Plan.

The record is devoid of anything indicating that NTC was not afforded the opportunity to raise the issue or to make an argument related to the issue, when making its case for summary judgment before the lower courts or in its defense against AmFed’s motion for summary judgment.

Based on the statute’s plain language, these notice requirements do not apply unless AmFed chose to cancel NTC’s workers’ compensation coverage within the policy period or did not intend to renew NTC’s policy upon its expiration. Surely it cannot be concluded, and NTC does not even attempt to argue, that AmFed’s renewal proposals amounted to a “cancellation” of NTC’s policy. Cancellation as used in insurance law, means termination of a policy prior to the expiration of the policy period by an act of one or all the parties.  It is undisputed that the renewal notices sent by AmFed did not attempt to terminate NTC’s workers’ compensation policy prior to its expiration date.

AmFed sent NTC renewal notices showing its desire to renew NTC’s coverage for an additional year — nothing in the notices indicates any intent on the part of AmFed not to renew.

What occurred was simply a “termination” of NTC’s policy as “termination refers to the expiration of the policy by lapse of the policy period.  It should be noted that the same practice used by AmFed in the instant case has been approved by the Commission.

In sum, what occurred cannot properly be characterized as a cancellation of NTC’s workers’ compensation coverage, nor did AmFed manifest that it did not intend to renew NTC’s policy. Instead, NTC’s policy simply expired and its coverage lapsed for its own failure to pay its premium on time. Accordingly, the notice requirements found in Section 71–3–77 do not apply.

ZALMA OPINION

Insurance is nothing more than a contract. When the terms of the contract are fulfilled there is an insurance policy. In this case the insured failed to timely pay the premium charged and allowed the policy to expire. The late payment did not accept the offer made by AMFED it made a new policy that provided coverage only from the date the premium was received and did not renew the old policy without lapse. When an insured fails to pay a premium the policy will lapse.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Leave a comment

The Role of The Insurer’s Lawyer in a Fraud Investigation

Zalma’s Insurance Fraud Letter

August 15, 2016, Volume 2, No. 16  

At Least, This Time, Fraud Doesn’t Pay

In this, the Sixteenth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on August 15, 2016 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:

The Role of the Insurer’s Lawyer in a Fraud Investigation

  • Barry Zalma
  • New Jersey Officials Obtain Judgment of  $3.5M, Allstate $20M in PIP Fraud Case
  • Proformative Academy Webinars
  • More Life Insurers Settle and Agree to Use Death Master File
  • Good News From the Coalition Against Insurance Fraud
  • At Least, This Time, Fraud Doesn’t Pay
  • New E-Books from Barry Zalma
  • Wisdom
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • The EUO Is a Serious and Important Part of the Insurer’s Investigation
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Zalma Insurance Consultants

Zalma Insurance Consultants (ZIC) makes available Barry Zalma’s more than 48 LEGEND-TROPHY-2years of practical insurance claims experience to serve those who are faced with an insurance claims or coverage dispute.  ZIC will assist its clients to resolve any insurance problem faced by lawyers representing insurers, lawyers representing policyholders, insurance claims management, insurance claims personnel, and those they seek to serve. The experience and skill of Mr. Zalma as a consultant and expert witness can make the difference before a jury, other trier of fact, or mediator.

Visit the Zalma Insurance Claims Library

You can read about Insurance Claims: A Comprehensive Guide; Construction Defects Coverage Guide; Mold Coverage Guide; and Insurance Law.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.

 Check in every day for a case summary including:

Zalma’s Insurance 101

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

 

If you start at Volume 1 at the bottom of the page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

Has this email been forwarded to you by a colleague? Register with Zalma’s Insurance Fraud Letter at this link to receive the latest news directly to your inbox regularly.

Regards,

Barry Zalma
Zalma Insurance Consultants

 

Posted in Zalma on Insurance | Leave a comment

Even Innocent Clients May Not Benefit From The Fraud Of Their Attorney.

At Least, This Time, Fraud Doesn’t Pay

Although insurance is not mentioned in the following case there is little doubt in my mind that Chevron’s defense involved some of its insurers.

In Chevron Corporation v. Donziger, — F.3d —-, United States Court of Appeal,  Second Circuit, 2016 WL 4173988 (August 8, 2016) Defendants-appellants Steven Donziger, Donziger & Associates, PLLC, and the Law Offices of Steven R. Donziger (collectively the “Donziger Firm” or “Firm”), and defendants-appellants Hugo Gerardo Camacho Naranjo (“Camacho”) and Javier Piaguaje Payaguaje (“Piaguaje”), appeal from a judgment of the United States District Court for the Southern District of New York, Lewis A. Kaplan, Judge, granting certain relief against them in favor of plaintiff-appellee Chevron Corporation (“Chevron”), in connection with an $8.646 billion judgment obtained against Chevron in Ecuador (“Ecuadorian Judgment”), by several dozen named plaintiffs from Ecuador’s Lago Agrio area (the “Lago Agrio Plaintiffs” or “LAPs”) represented by the Donziger Firm, for environmental damage in connection with 1960s–1990s oil exploration activities in Ecuador by Texaco, Inc. (“Texaco”), whose stock was later acquired by Chevron.

The district court’s judgment, entered after a bench trial, principally (1) enjoins defendants-appellants from seeking to enforce the Ecuadorian Judgment in any court in the United States, and (2) imposes a constructive trust for Chevron’s benefit on any property defendants-appellants have received or may receive anywhere in the world that is traceable to the Ecuadorian Judgment or its enforcement, based on the court’s findings that the Ecuadorian Judgment was procured through, inter alia, defendants’ bribery, coercion, and fraud, warranting relief against Steven Donziger (“Donziger”) and his Firm under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968, and against all defendants-appellants under New York common law.

BACKGROUND

In February 2011, the trial court in Ecuador entered a judgment in favor of the LAPs awarding $8.646 billion in compensatory damages, plus $8.646 billion in punitive damages unless Chevron issued an apology, for a total of $17.292 billion (“Lago Agrio Judgment” or “Initial Judgment” or “Judgment”). The punitive damages aspect of the award was eventually eliminated on appeal leaving the judgment against Chevron, as modified, at $8.646 billion (the Ecuadorian Judgment).

The present action was commenced by Chevron in 2011 against Donziger, his Firm, and the named Lago Agrio Plaintiffs, including Camacho and Piaguaje (referred to in the district court and this opinion as the “LAP Representatives”), alleging that the LAPs procured the Lago Agrio Judgment by a variety of unethical, corrupt, and illegal means, including: making secret payments to industry experts who would submit pro-LAPs opinions to the court while pretending to be neutral; announcing multi-billion-dollar remediation cost estimates while knowing them to be without scientific basis; persuading an expert to sign blank pages that were then submitted to the court with opinions he did not authorize; employing extortion to coerce an Ecuadorian judge to curtail inspections of alleged contamination sites after the experts began to find pro-Chevron conditions at other such sites; using the same extortionate means to coerce that judge to appoint, as a supposedly neutral expert court adviser, an expert who was bribed to submit—as his own opinion—a report written by the LAPs; and providing ex parte to another judge—or to whoever wrote the $17.292 billion Lago Agrio Judgment—material that is not part of the record for inclusion in that judgment.

Chevron originally sought damages and a global injunction forbidding enforcement of the Lago Agrio Judgment. Initially, the district court bifurcated the case and granted Chevron’s request for a global preliminary injunction, citing New York’s Uniform Foreign Country Money-Judgments Recognition Act (the “Recognition Act”), N.Y. C.P.L.R. §§ 5301–5309 (McKinney 2008).  After an earlier decisions of the Second Circuit Chevron gave up its claim of damages and sought only injunctive relief.

The Scope of the Trial in the Present Case

The judgment now on appeal was entered after a seven-week trial at which the evidence included live testimony from more than 30 witnesses, 25 of whom were called by Chevron; deposition testimony of 22 witnesses, all presented by Chevron; and more than 4,000 documents.

The issues in the present case concerned the conduct of—not the environmental issues in—the Lago Agrio Litigation. Before making its findings of specific facts as to the issues in this case, the trial court stated: “The issue here is not what happened in the Orienté more than twenty years ago and who, if anyone, now is responsible for any wrongs then done. It instead is whether a court decision was procured by corrupt means, regardless of whether the cause was just. An innocent defendant is no more entitled to submit false evidence, to coopt and pay off a court-appointed expert, or to coerce or bribe a judge or jury than a guilty one. So even if Donziger and his clients had a just cause—and the Court expresses no opinion on that—they were not entitled to corrupt the process to achieve their goal.”

The court made extensive factual findings as to the acts undertaken by Donziger to procure the Lago Agrio Judgment, including the following. None of them is disputed.

  1. Donziger Attempts To Intimidate Chevron Into Settling by Trumpeting a Huge Remediation Cost Estimate Based Only on “SWAG”
  2. Donziger Causes a Change to Less Probative Tests When the LAPs’ Experts Find Pollution that Likely Was Not Caused by Texaco
  3. Donziger Knowingly Submits to the Court Reports that Falsify a LAPs’ Expert’s Conclusions
  4. Donziger Secretly Hires Industry Experts To Offer Their Supposedly Neutral Monitoring Services to the Court, But To Disagree With Any Pro-Chevron Findings
  5. Donziger, Anticipating Additional Pro-Chevron Testing Results, Coerces then-Presiding Judge Yánez To Cancel Most of the Remaining Site Inspections
  6. Donziger Coerces Judge Yánez To Appoint a “Global” Expert—Cabrera—Who “[W]ould [T]otally [P]lay [B]all With” the LAPs
  7. Donziger and the LAPs Plan the Cabrera Report and Begin To Pay Him Secretly
  8. Donziger and the LAPs’ Team Control Cabrera’s “Work,” While Denying Any Contact or Involvement
  9. The LAPs’ Consultant, Stratus, Writes Cabrera’s Report
  10. Donziger Has Stratus Fabricate Objections To Be Submitted By the LAPs to the Cabrera Report that Stratus Wrote For the LAPs
  11. When “Crude” Is Released and Chevron Gets Discovery Revealing the LAPs-Cabrera Collaboration, Donziger Hires New Consultants To “Cleanse” the Cabrera Report

Findings by the District Court as to the Sources and Authorship of the Lago Agrio Judgment

Zambrano, who was the judge presiding over the case when the Lago Agrio Judgment was issued, testified in the present action that he had written the single-spaced, 188–page Lago Agrio Judgment without any assistance from anyone other than an 18–year–old typist to whom he dictated the entire decision. The Judgment and the clarification order stated that the court had not relied on the Cabrera Report. And Zambrano testified that he relied only on evidence in the record. The district court found that each of these representations was false.

The Lago Agrio Judgment Drew Heavily on the Cabrera Report

Notwithstanding the disclaimers in the Lago Agrio Judgment and clarification order, the district court found that the principal aspects of that Judgment were drawn from the Cabrera Report. For example, of the $8.646 billion awarded for, inter alia, harm to the environment and human health, $5.4 billion was awarded for remediation of soil at “ ‘880 [waste] pits’ ” in the Concession area, supposedly “ ‘proven through aerial photographs’ ” in “ ‘the record,’ ” Donziger, 974 F.Supp.2d at 682 n.53 (quoting Lago Agrio Judgment).

In sum, the trial court found that the Judgment, although it purported not to rely on the Cabrera Report, did so rely at least (1) for the pit count—which drove its largest damages award [$5.4 billion], (2) for the potable water damages award [$150 million], and (3) by virtue of its reliance on the Barnthouse report [$200 million].

Then–Presiding Judge Zambrano Did Not Write the Lago Agrio Judgment

The district court also found that Zambrano did not write the Judgment, at least in any material part. In light of Zambrano’s “astonishing[ ] unfamiliar[ity] with important aspects of [the Judgment’s] contents,” along with the “evasive[ness] and internal [ ] inconsisten[cies]” in his trial testimony and the differences between his trial testimony and “his deposition just days before,” the district court found that “Zambrano did not write the Judgment issued under his name.”

The Lago Agrio Judgment Was Written by the LAPs

Having found that Zambrano did not write the Lago Agrio Judgment, the district court found—based in part on comparisons of the Judgment against internal LAPs’ documents, which were produced in discovery in the present action but were nowhere to be found in the Lago Agrio Chevron case record—that the Lago Agrio Judgment had been written by the team representing the LAPs.

The Judgment Copied Documents That Were Not in the Court Record but Were LAPs’ Internal Documents

The district court noted that the record in the Lago Agrio Litigation consisted of the documents duly filed with the clerk of court; that “[c]onsideration of any other materials, including any materials provided to a judge or court official informally or ex parte, would have been improper under Ecuadorian law”; and that Zambrano testified that “he considered only documents that were in the court record.”

The district court noted that “[t]he fundamental point … is not that the Judgment came to mistaken or odd conclusions about the law of the United States or Australia. It instead is that both the Moodie Memo written at the instruction of Donziger and the Judgment made the same mistakes in characterizing them. Nothing in the Moodie Memo appears anywhere in the Lago Agrio Record.

The LAPs’ Team Prepared the Judgment, Beginning Work on It as Early as mid-2009

In all the circumstances, the district court found “that the LAPs wrote the Judgment in its entirety or in major part and that Zambrano made little or no contribution apart from his signature and perhaps some light editing designed to make it read more like other decisions he had signed in this and other cases.”

The LAPs Bribed Zambrano To Sign the Judgment They Wrote

The district court found that the LAPs bribed Zambrano to allow them to write the Judgment in the Lago Agrio Chevron case (or “Chevron case”) and that this bribe was facilitated by Guerra. Guerra so testified at trial.

The Final Judgment in the Present Action

 

The district court concluded that Donziger and the LAPs’ team of attorneys, investors, experts, and consultants constituted a RICO enterprise, and that Donziger had conducted the affairs of that enterprise in a pattern of racketeering activity. Having found that Donziger “and the Ecuadorian lawyers he led,” in representing the LAPs, “corrupted the Lago Agrio case” by, inter alia,

  • “submitt[ing] fraudulent evidence,”
  • “coerc[ing] one judge” to use a single, “supposedly impartial, ‘global expert’ to make an overall damages assessment” for the judge,
  • “hand-pick[ing]” and illegally “pa[ying]” an expert who would “ ‘totally play ball’ with the LAPs” in making such a damages assessment for the judge,
  • coercing that judge to appoint Donziger’s “hand-picked” expert as the court’s “ ‘global expert,’ ”
  • “pa[ying] a Colorado consulting firm secretly to write all or most of the global expert’s report,”
  • “falsely present[ing] the report as the work of the court-appointed and supposedly impartial expert,”
  • fraudulently having the Colorado firm write supposed criticisms by the LAPs of the expert’s report that that firm had written for the LAPs, to cause it to appear that the expert was impartial and his report neutral, rather than, as in fact it was, written by agents of the LAPs,
  • telling “half-truths or worse to U.S. courts in attempts to prevent exposure of that and other wrongdoing,”
  • having “the LAP team wr[i]te the Lago Agrio court’s Judgment themselves,”
  • and “promis[ing] $500,000 to the [then-presiding] Ecuadorian judge” in exchange for his agreement “to rule in the[ LAPs’] favor and sign their judgment,” (Donziger, 974 F.Supp.2d at 384; see id. at 443-45)

The district court concluded that “[i]f ever there were a case warranting equitable relief with respect to a judgment procured by fraud, this is it.”

The court noted that fraud in its procurement is an ancient basis for enjoining enforcement of or granting other equitable relief with respect to a judgment where other requisites of the exercise of equitable power are present.

DISCUSSION

The RICO-Based Rulings Against Donziger

Chevron asserted RICO claims against Donziger and others (not including the LAPs), alleging that, in orchestrating the frauds, extortions, and briberies leading to the entry of the $17.292 billion Lago Agrio Judgment, Donziger conducted the affairs of an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c), and conspired to do so, in violation of § 1962(d).

RICO Injury and Causation

After Donziger promised Judge Zambrano $500,000 from the proceeds of a judgment in favor of the LAPs, Judge Zambrano entered the Lago Agrio Judgment, which had been written by the LAPs’ team, against Chevron for $8.646 billion in damages (plus $8.646 billion in punitive damages, which was thereafter eliminated by the National Court because Ecuadorian law does not authorize the imposition of punitive damages). Thus, Chevron has an $8.646 billion judgment debt. The imposition of a wrongful debt constitutes an injury to one’s business or property.

The Availability of Equitable Relief Under RICO

Donziger contends that the District Court Judgment against him should be overturned on the ground that RICO does not authorize the granting of equitable relief to a private plaintiff.

The Second Circuit interpreted § 1964(c) as not authorizing awards of treble damages or attorneys’ fees to the United States. Subsection (c) allows awards of that type of relief to a “person,” a term defined as “any individual or entity capable of holding a legal or beneficial interest in property,” 18 U.S.C. § 1961(3). And while the United States is capable of owning property, the term “person” in RICO is used in § 1964 to apply both to potential plaintiffs (subsection (c)) and to potential defendants (subsection (a). In sum, the Second Circuit  rejected Donziger’s contention that RICO does not authorize the granting of equitable relief to a private plaintiff that has proven injury to its business or property by reason of a defendant’s violation of § 1962.

The Availability of Equitable Relief Under New York Common Law

Chevron did not assert RICO claims against the LAPs, and the district court based its grant of equitable relief against the LAP Representatives—for procurement of the Judgment by means of fraud—on principles of common law.

The LAP Representatives are indigenous people living in the Ecuadorian rainforest. Both they and Donziger repeatedly have cited their lack of resources as reasons to delay this action. Donziger’s claim, in particular, is strikingly at odds with innumerable representations to this Court concerning his claimed lack of resources. In such circumstances, the theoretical availability of an action [by Chevron] for damages is and always was entirely immaterial. As Justice Scalia has written, while economic injury usually “is not considered irreparable, … that is because money can usually be recovered from the person to whom it is paid. If the expenditures cannot be recouped, the resulting loss may be irreparable.” That is this case.

The district court noted that “the Judgment has been enforceable in Ecuador, and elsewhere, at least since the intermediate appellate court ruled,” and “[a]ssets already have been seized in Ecuador.” Donziger, 974 F.Supp.2d at 637. The court noted that even if Chevron could pursue its claims of LAPs’ team corruption in Ecuador’s Constitutional Court (a route never suggested by the opinions of the Ecuadorian Appeal Division or National Court, which referred only to the actions in the United States “[g]iven the size of the Judgment and the comparative impecuniousness of the defendants, there is no assurance that Chevron could recoup property applied to the Judgment between now and any decision by the Constitutional Court even if it prevailed.” Donziger, 974 F.Supp.2d at 637. The district court also noted that Donziger and the LAPs had, in addition, “taken extensive steps to ensure that any funds recovered are held offshore and beyond the reach either of U.S. or Ecuadorian courts.” Id.

Nor does Chevron’s right to defend against enforcement actions provide a basis for finding that it has an adequate remedy at law, given that the Donziger and Invictus strategy is to inundate Chevron with such actions, forcing it to incur sizeable legal fees. Even if Chevron prevailed in every such action, its legal expenses would likely not be recoverable from the impecunious LAPs or Donziger.

The Second Circuit concluded that the district court had authority under New York common law to grant equitable relief against Donziger and the LAP Representatives over whom the court had personal jurisdiction.

Responsibility of the LAPs for the Misconduct of Their Attorneys

The LAP Representatives contend that any misdeeds by Donziger did not provide a basis for the district court to grant relief against them, arguing that they were unaware of any misconduct, “had absolutely no control over the[ir] so-called ‘agents,’ ” and are simply “unsophisticated client-principals following the lawyers’ lead”.

As an initial matter, there is no authority suggesting that a party ignorant of its attorney’s fraudulent actions may enforce a fraudulently procured judgment. To hold otherwise would run afoul of the Supreme Court’s warning that fraud “is a wrong against the institutions set up to protect and safeguard the public, institutions in which fraud cannot complacently be tolerated consistently with the good order of society.” Hazel–Atlas Glass Co. v. Hartford–Empire Co., 322 U.S. 238, 246 (1944). Even innocent clients may not benefit from the fraud of their attorney.

It is well established that a principal is subject to liability to a third party harmed by an agent’s conduct when the agent’s conduct is either within the scope of the agent’s actual authority or ratified by the principal.

The district court found the LAP Representatives liable on the basis that they (along with the other LAPs) retained Donziger as their attorney and gave Fajardo power of attorney. This finding is amply supported by the record, as the LAPs in November 2010 granted Fajardo a new power of attorney that expressly ratified all of his prior acts, direct or indirect, in pursuit of their litigation interests.

Appropriateness of the Equitable Relief Granted

 The relief tailored by the district court, while prohibiting Donziger and the LAP Representatives from seeking enforcement of the Ecuadorian judgment in the United States, does not invalidate the Ecuadorian judgment and does not prohibit any of the LAPs from seeking enforcement of that judgment anywhere outside of the United States. What it does is prohibit Donziger and the LAP Representatives from profiting from the corrupt conduct that led to the entry of the Judgment against Chevron, by imposing on them a constructive trust for the benefit of Chevron. Assets acquired by fraud are subject to a constructive trust for the benefit of the defrauded party.  SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 88 (2d Cir. 2002).

Given all of the above considerations, including the Ecuadorian courts’ statements deferring to the United States courts for adjudication of Chevron’s allegations of corruption by the LAPs’ legal team. above, and the district court’s unchallenged findings of fact as to the fraud, coercion, and bribery engaged in by the LAPs’ team, the judgment of the district court was affirmed.

ZALMA OPINION

The 127-page ruling is an emphatic affirmation of Judge Lewis Kaplan’s 2014 decision, which came after a bench trial on Chevron’s claims against Donziger under the Racketeer Influenced and Corrupt Organizations Act, or RICO. Just because Chevron is an unpopular and gigantic oil company it should never be the victim of a fraud. It fought back against a fraudulently obtained $8 billion judgment and won. Even the poor alleged victims of the actions alleged by Donzinger and the plaintiffs they should never be allowed to profit from the fraud of their lawyers. Even if they collect the judgment it must be held for the benefit and in trust for Chevron. The plaintiffs are not without a remedy. They can sue their lawyers for the fraud that lost them their $8 billion judgment. Why Donzinger is still licensed to practice law I leave to his local and federal bar associations.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | Leave a comment

Flood Insurance Procurement Not a Federal Issue

National Flood Doesn’t Preempt State Court Action Against Broker

The National Flood Insurance Program (NFIP) is different from commercial insurance since all claims are paid from the treasury of the United States. For that reason the NFIP is strictly construed by the federal courts.

In Harris v. Nationwide Mutual Fire Insurance Company, United States Court of Appeals, Sixth Circuit, — F.3d —-, WL 4174381 (August 8, 2016) the Sixth Circuit USCA was called upon to resolve a dispute between various parties relating to the priorities and federal preemption required of claims against an NFIP policy.

Plaintiffs, Michael and Beverly Harris, appealed the district court’s orders dismissing their claims against Nationwide Mutual.

FACTS

In August 2006, plaintiffs procured a mortgage from Regions, a bank, to purchase a home near the Cumberland River. The deed of trust for the property obligated Regions to ensure that the flood-zone designation was correct, and that plaintiffs had proper insurance coverage. The National Flood Insurance Act (“NFIA”) also requires mortgagors to obtain flood insurance for properties in flood zones. CoreLogic provided Regions with flood-zone certification services for the property. The 1981 National Flood Insurance Program (“NFIP”) Flood Insurance Rate Map (“FIRM”) for the area showed that the property was in a Special Flood Hazard Area (“SFHA”), but CoreLogic informed plaintiffs that they did not need flood insurance because their property was in an “X” (non-SFHA) flood zone.

The Federal Emergency Management Agency (“FEMA”) issued a revised FIRM for the area in September 2006, and Regions promptly contacted plaintiffs to inform them that their home was in an “AE” flood zone, and that they must procure flood insurance within 45 days. Plaintiffs hired David Vandenbergh to purchase flood insurance from Nationwide.

The Standard Flood Insurance Policy (“SFIP”) that Vandenbergh procured was a pre-FIRM policy, that is, a policy for a home constructed before the effective FIRM for the property. Plaintiffs’ home, however, was built in 1984, after the 1981 FIRM for the area. It therefore required a post-FIRM policy, under which they could receive full coverage only after obtaining an elevation certificate showing sufficient elevation above the base flood zone. Plaintiffs received copies of their pre-FIRM SFIP reflecting no coverage for their personal property, and did not opt to alter their coverage.

A flood struck the area in May 2010, submerging plaintiffs’ home in 16” of water. Nationwide informed plaintiffs that the flood-zone rating information on their property was incomplete, due to the pre-/post-FIRM discrepancy, and Nationwide required an elevation certificate for full building coverage. Plaintiffs obtained an elevation certificate showing that their home’s lower level was below the base flood-zone elevation. Nationwide adjusted plaintiffs’ flood claim according to post-FIRM criteria, and did not cover certain building and personal property losses excluded in the relevant coverage limitations. Specifically, because plaintiffs’ home was post-FIRM and situated below the base flood-zone elevation, their SFIP did not cover all building and personal property losses “below the lowest elevated floor.” Following administrative review, FEMA upheld Nationwide’s coverage determination.

Plaintiffs sued in both state and federal courts seeking damages for claim underpayment, diminution in property value, and wrongful purchase of the home. With the exception of one claim against Vandenbergh the district court granted each defendant’s motion to dismiss and accepted a stipulation dismissing Nationwide as a defendant. In light of plaintiffs’ inaction, the district court dismissed the case without prejudice.

ANALYSIS

The NFIA aims to foster availability of affordable flood insurance. Plaintiffs rightly concede that the NFIA does not provide them, as borrowers, with a private right of action against lenders or flood-zone certifiers. On appeal, they renew only their state-law claims arising from procurement of their SFIP — namely, that they would not have purchased their home absent defendants-appellees’ negligence and breach of fiduciary duty in mistakenly determining their flood zone. At issue is whether the NFIA preempts such claims.

The NFIA indisputably preempts state-law causes of action based on the handling and disposition of SFIP claims. In determining whether a plaintiff’s cause of action arises from claim handling or policy procurement, the Fifth Circuit looked to whether the plaintiff was already covered by an SFIP, or instead was a potential future policyholder.

The NFIA does not preempt policy-procurement claims such as the claims presented by the plaintiffs. Damages stemming from policy-procurement claims, unlike those arising from policy-coverage claims, are not flood policy claim payments. That being so, the Federal Treasury bears no responsibility for damages awarded in policy-procurement actions.

Since policy-procurement damages, therefore, pose no danger to the federal interests prompting preemption in the claims-handling context, i.e., reducing fiscal pressure on federal flood relief efforts, the policy-procurement claims of the plaintiff are not preempted by Federal Law.

Although the Sixth Circuit expressed no view on the merits of plaintiffs’ claims under Tennessee law, they are claims which, if proven, entitle plaintiffs to relief.

The district court’s partial grant of summary judgment to Vandenbergh was granted and its orders dismissing the remaining defendants was vacated and the case was remanded to the district court for proceedings consistent with its opinion.

ZALMA OPINION

The plaintiffs were not served well by their lender and by the people charged with determining the flood zone in which their property was situated. They suffered uninsured flood damage because of the failure and those who caused the damage tried to avoid responsibility by claiming federal preemption. They failed because the procurement claims could not possibly take money from the Treasury and they must now defend on the merits.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | 1 Comment

A Party Must Act Fairly When Seeking Equity

The Anti-Subrogation Rule And Equity

Under the “anti-subrogation rule,” an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered. In other words, an insurer may not step into the shoes of its insured to sue a third-party tortfeasor—if that third party also qualifies as an insured under the same policy—for damages arising from the same risk covered by the policy. To do otherwise would encourage collusion and fraud.

In HDI-Gerling America Insurance Company v. Navigators Insurance…, United States District Court, D. Massachusetts , Slip Copy, 2016 WL 4148216 (08/04/2016) the USDC was faced with an insurance coverage dispute between a primary insurer and an excess insurer following the settlement of a wrongful death claim. Plaintiff HDI-Gerling America Insurance Company has filed suit against defendant Navigators Insurance Company seeking declaratory relief and alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of Mass. Gen. Laws. Navigators has filed counterclaims against HDI-Gerling, alleging bad faith and violation of Mass. Gen. Laws.

Each party submitted a motion for partial summary judgment on the anti-subrogation rule  issue.

BACKGROUND

Feeney Brothers Excavation, LLC is a construction company. In 2013, HDI-Gerling America Insurance Company issued two insurance policies to Feeney Brothers.  The first policy was a general liability policy with a limit of insurance of $1 million per occurrence (the “General Liability Policy”).  National Grid (more precisely, Mohawk Power Corporation, doing business as National Grid) was an additional insured under the General Liability Policy.

The second policy issued to Feeney Brothers was a workers’ compensation and employer’s liability policy (the “Employer Liability Policy”). Under a New York Limit of Liability Endorsement, HDI-Gerling’s liability under the Employer Liability Policy was unlimited if the underlying claim involved bodily injury that would be compensable under New York workers’ compensation law. National Grid was not an additional insured under the Employer Liability Policy.

Navigators Insurance Company also issued an insurance policy to Feeney Brothers. That policy was a commercial excess insurance policy with limits of insurance of $10 million per occurrence and $10 million general aggregate (the “Navigators Excess Policy”). National Grid was an additional insured under the excess policy.  The Navigators Excess Policy identified both the General Liability Policy and the Employer Liability Policy as underlying insurance policies.

Gary Thomas Feeney was an employee of Feeney Brothers Excavation LLC. On April 13, 2013, Feeney was killed in a workplace accident in New York. At the time of the accident, Feeney was employed by Feeney Brothers on a job it was performing under a contract with National Grid.

The legal representative of Gary Feeney’s estate filed suit against National Grid in the Supreme Court of New York (the “Feeney Action”). The suit alleged that National Grid negligently caused the accident and Gary Feeney’s death. National Grid sought coverage as an additional insured under the General Liability Policy and the Navigators Excess Policy. HDI-Gerling agreed to defend and indemnify National Grid under the General Liability Policy.

HDI-Gerling eventually negotiated a global settlement of the Feeney Action that included a settlement of the wrongful-death action for a total $1,500,000 and a workers’ compensation claim payment of $250,000.

ANALYSIS

The Anti-Subrogation Rule

Subrogation “entitles an insurer to ‘stand in the shoes’ of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse.” North Star Reinsurance Corp. v. Continental Ins. Co., 82 N.Y.2d 281, 294 (1993) The insurer’s right of subrogation [has been] long recognized as a matter of equity.

There are at least two purposes of the anti-subrogation rule. First, the rule prevents an insurer from using the right of subrogation to avoid paying coverage that is due under the policy. In addition, the rule limits the instances in which an insurer and its insured have adverse interests, which might undercut an insurer’s incentive to provide a vigorous defense to its insured.

The application of the rule becomes more complex when the facts presented involve more than one policy and more than one insured.

Application of the Rule

HDI-Gerling paid the entire global settlement of $1.75 million. It contends that the $500,000 difference between the $1 million limit of the General Liability Policy and the $1.5 million of the settlement should be paid from the Navigators Excess Policy.. Navigators, however, contends that HDI-Gerling should have asserted claims for contractual indemnity, common-law indemnity, and contribution against Feeney Brothers, which would have triggered the coverage of the Employer Liability Policy. In response, HDI-Gerling asserts that under the anti-subrogation rule, it was precluded from asserting third-party claims on behalf of National Grid against Feeney Brothers.

Authorities reviewed establish that the anti-subrogation rule does not bar a third-party claim by an insurer on behalf of one co-insured against another when the impleaded co-insured is not actually covered by the common policy. The question here then becomes whether the General Liability Policy actually covered the Feeney claim, such that Feeney Brothers and National Grid were co-insureds.

Whether an Exclusion Applies

There is almost no evidence currently before the Court as to whether that exclusion (or any other exclusion) was, in fact, implicated by the facts of the underlying accident. There is, however, at a minimum, evidence that HDI-Gerling at least initially believed the exclusion might apply before it later conceded that coverage applied. On cross-motions for summary judgment, a court must determine whether either of the parties deserves judgment as a matter of law on facts that are not disputed.  If no exclusions apply, the court will have to answer a more difficult question, but that is not an issue that need be resolved here.

Equitable Considerations

The right of subrogation is a matter of equity. Accordingly, as an exception to normal subrogation principles, the anti-subrogation rule is also equitable in nature. Navigators contends that because the anti-subrogation rule is an equitable doctrine, it should not apply based on HDI-Gerling’s allegedly inequitable conduct.

It is well-established that a litigant who seeks equity must do equity.  That requirement “closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief.

Navigators has submitted a number of e-mails detailing that when taken in the light most favorable to Navigators, those e-mails tend to show that HDI-Gerling deliberately allocated the settlement in such a manner as to force Navigators to cover the excess amount at issue here.

If so, application of the anti-subrogation rule would, in effect, reward HDI-Gerling for acting inequitably, not prevent it from doing so as the rule is intended. In substance, instead of preventing HDI-Gerling from avoiding coverage under a policy or passing liability on to its insured, the anti-subrogation rule here would in fact facilitate HDI-Gerling’s avoidance of coverage under the Employer Liability Policy. Taking the facts in the light most favorable to Navigators, it could be argued that instead of defending Feeney Brothers, HDI-Gerling conceded coverage under the General Liability Policy so that it could cap its liability at $1,000,000 and avoid its responsibility for unlimited coverage under the Employer Liability Policy.

Thus, even assuming that no exclusions applied under the General Liability Policy, material disputed issues of fact remain with respect to HDI-Gerling’s conduct in arranging and allocating the settlement in the Feeney Action. Accordingly, the Court cannot ascertain whether HDI-Gerling is entitled to an equitable remedy.

At a minimum, the court concluded that disputed issues of material fact remain with respect to the applicability of any coverage exclusions contained in the General Liability Policy, as well as with respect to HDI-Gerling’s conduct in negotiating and finalizing the settlement of the underlying Feeney Action. As a result both motions for summary judgment were denied.

ZALMA OPINION

When more than one insurer are required to defend and indemnify the insured it is necessary that all insurers involved deal with the insured and insurer with the utmost good faith. If, as alleged, one insurer acted to resolve a claim against its insured in a manner to remove the obligation to defend and indemnify from itself to another they are no longer acting in good faith. Equity requires that each party act fairly. The trial will reveal who was acting fairly and who was not.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

Primary Insurer’s Failure to Settle Within Limits Allows Excess Insurer to Sue

Excess Insurer Can Recover From Primary Excess of Limits from Primary

A primary insurer owes the same good faith and fair dealing to an excess insurer to settle within policy limits that it has owed to the insured since the California Supreme Court created the tort of bad faith in Crisci v. Security Ins. Co. (1967) 66 Cal. 2d 425, 429 [58 Cal. Rptr. 13, 426 P.2d 173]. The California Court of Appeal was asked to apply the same covenant of good faith and fair dealing to a primary insurer who failed to accept a settlement within policy limit, without a judgment, to an excess insurer who contributed to a settlement it claimed would have not been necessary, in ACE American Insurance Company v. Fireman’s Fund Insurance Company, Court of Appeal, Second District, Division 4, California, 2016 WL 4156686, B264861 (8/5/2016)

INTRODUCTION

Ace American then sued Fireman’s Fund for equitable subrogation, alleging that the injured worker initially offered to settle his case within the limits of the Fireman’s Fund policies, and that Fireman’s Fund unreasonably rejected those settlement offers. Ace American alleged that as a result, it was required to contribute to the eventual settlement, which exceeded the limits of the Fireman’s Fund policies.

FACTUAL BACKGROUND

In July 2010, John Franco was working on a film set when a special effects accident caused him to suffer serious injuries. Franco’s injuries included pelvic crush injuries, a broken hip, fractures to both femurs, crush injuries to both knees, broken tibias and fibulas, broken ribs, a punctured lung, and soft tissue injuries to his face. Franco alleged that the incident left him with permanent nerve pain, an eye injury, urinary and sexual dysfunction, and fear and depression.

In April 2011, Franco and his wife sued Warner Brothers Entertainment, Inc. and related entities for damages and loss of consortium. Fireman’s Fund provided the Warner Brothers entities a primary insurance policy with a $2 million limit, and an umbrella insurance policy with a $3 million limit. Ace American provided the Warner Brothers entities an excess insurance policy with a $50 million limit.

Fireman’s Fund defended the Warner Brothers entities in the Francos’ lawsuit. In April and May 2012, the Francos made settlement demands within the limits of the Fireman’s Fund policies. According to Ace American’s complaints, the demands were reasonable and supported by substantial evidence, but Fireman’s Fund “failed and/or refused to pay those demands within [the insurance policies’] limits.” In October 2012, the Francos settled their lawsuit “for an amount substantially in excess” of the limits of the Fireman’s Fund policies. According to Ace American, Fireman’s Fund “consented to the settlement and contributed to it”, and Ace American contributed the amounts in excess of the Fireman’s Fund policies’ limits.

Ace American sued Fireman’s Fund for equitable subrogation and breach of the covenant of good faith and fair dealing. Ace American alleged that the Francos’ settlement demands within the limits of the Fireman’s Fund policy were reasonable, and there was a substantial likelihood that a jury verdict would exceed the limits of the Fireman’s Fund policies.

Fireman’s Fund demurred, arguing that the rights of an excess insurer such as Ace American derive from the rights of the insured, Warner Brothers. As such, an excess insurer may only sue for equitable subrogation if there has been a judgment against the insured that exceeds the limits of the primary policy. Because the Franco lawsuit settled and there was no judgment against Warner Brothers, Fireman’s Fund argued, Ace American could not sue for equitable subrogation.

The trial court sustained Fireman Fund’s demurrer without leave to amend. The court held that until the judgment is actually entered, the mere possibility or probability of an excess judgment does not render the refusal to settle actionable.

DISCUSSION

Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability. While excess or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted. Fireman’s Fund is the primary insurer, and Ace American is the excess insurer.

California recognizes an implied duty on the part of the insurer to accept reasonable settlement demands on [covered] claims within the policy limits. An insurer’s liability for failing to accept a reasonable settlement offer is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.  An insurer that breaches its duty of reasonable settlement is liable for all the insured’s damages proximately caused by the breach, regardless of policy limits.

Equitable subrogation allows an insurer that paid coverage or defense costs to be placed in the insured’s position to pursue a full recovery from another insurer who was primarily responsible for the loss.  Since the insured would have been able to recover from the primary carrier for a judgment in excess of policy limits caused by the carrier’s wrongful refusal to settle, the excess carrier, who discharged the insured’s liability as a result of this tort, stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier which the insured himself could have asserted.

An insurer that breaches its duty of reasonable settlement is liable for all the insured’s damages proximately caused by the breach, regardless of policy limits. Where the underlying action has proceeded to trial and a judgment in excess of the policy limits has been entered against the insured, the insurer is ordinarily liable to its insured for the entire amount of that judgment.

Ace American alleged that Fireman’s Fund unreasonably refused to settle within policy limits, and as a result, Ace American (as Warner Brothers’ subrogee) actually contributed to the eventual settlement, in which Fireman’s Fund, as the primary insurer, also participated. This is a situation in which a bad faith action may be brought by the insured or the insured’s assignee, despite the absence of a litigated excess judgment.

There is no explicit requirement for bad faith liability that an excess judgment is actually suffered by the insured, since the reasonableness analysis of settlement decisions is performed in terms of the probability or risk that such a judgment may be forthcoming in the future.

Ace American alleged that it was damaged in an ascertainable amount as a direct result of Fireman’s Fund’s failure to accept the Francos’ reasonable, within-limits settlement offers. The Court of Appeal could not see a persuasive reason to hold that either Warner Brothers or its assignee, Ace American, must suffer that loss with no remedy simply because the case reached an eventual settlement instead of being litigated through trial. Ace American’s alleged damages are clear, liquidated, and certain, and Fireman’s Fund participated in reaching the settlement.

California’s public policy is to encourage settlement. In sum, the court concluded that in an equitable subrogation action, an excess insurer which has settled and discharged the insured’s liability may recover from the primary insurer an amount in excess of the primary insurer’s policy limits if the excess insurer can prove the primary insurer’s unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer.

An excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing. Where the insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.

The court of appeal, therefore, reversed the judgment sustaining Fireman’s Fund’s demurrer.

ZALMA OPINION

After a detailed analysis of the earlier case law the court took away the limitation that there be an excess of limits judgment before an insured or an excess insurer standing in the shoes of the insured, can recover bad faith damages from a primary insurer. The existence of excess insurance that prevents the insured from being personally damaged, does not protect the primary insurer from a bad faith suit when an eventual settlement exceeds the primary limit.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | Leave a comment

When a Roof is not a Roof

Component Parts Are Not a Roof

Homeowners insurance, for dozens of years, have attempted to limit the coverage provided for damages caused by entry of water into the residence unless the roof is damaged as a result of windstorm. Of course, if there is no roof, it can’t be damaged by windstorm.

In Annalee Poulsen And Troy Poulsen v. Farmers Insurance Exchange, Court of Appeals of Utah, 2016 WL 4151905 (August 4, 2016) the dispute over water damage arose over a dispute as to what was a roof.

FACTS

Annalee Poulsen and Troy Poulsen purchased a homeowner’s insurance policy from Farmers Insurance Exchange to cover their primary residence. The policy generally excluded from coverage water intrusion into the house with certain exceptions outlined in a limited water coverage provision, which the court referred to as the LWC Provision.

In short, and as relevant to these facts, the insurance policy did not cover water damage unless the water entered through an opening in the roof caused by a windstorm. The LWC Provision further specified that temporary coverings were not to be considered as roofs, in a clause we refer to as the Temporary-Roof Exception: “for any such specified cause of loss or extension of coverage. A roof or wall does not include a temporary roof or wall structure or any kind of temporary tarp, sheeting or other covering.” (Emphasis added.)

In September of 2013, the Poulsens, with the help of their friends and neighbors, began replacing the roof shingles on their house. They removed the old shingles and an underlayment of black felt tar paper, exposing the plywood deck. The Poulsens then installed the new ice and water shield (the IWS) and underlayment. As the Poulsens installed the last two rolls of the underlayment, a sudden and severe storm arrived, bringing with it “gusting winds and torrential rains.” The storm winds ripped the underlayment off the roof, allowing the rain to penetrate the house and damage both the structure and the Poulsens’ personal property. The Poulsens filed an insurance claim that Farmers refused to pay.

THE SUIT

The Poulsens then brought suit against Farmers, alleging breach of contract, bad faith, intentional infliction of emotional distress, fraud, and estoppel. Farmers filed a motion seeking summary judgment on the ground that the Temporary-Roof Exception applied because the plywood, IWS, and underlayment layers amounted to a temporary roof.

The Poulsens opposed that motion and submitted an expert witness affidavit. In the affidavit, their expert witness opined that the underlayment and IWS would have prevented water from entering the house had the windstorm not damaged them. The expert further explained that, because these two layers were intended to be permanently installed on the house, the covering was not a temporary roof or other covering. Finally, the expert, damning the Poulsens with his honesty, stated that “underlayment without shingles is not a complete roofing system, neither are shingles without … underlayment a complete roofing system per code. It takes both components to make the roofing system resistant to high wind, snow, ice and water.”

The district court ruled that the insurance policy did not provide coverage for the house because, at the time of the storm, “there was no ‘roof’ as contemplated by the policy.” Specifically, the district court stated that the combination of plywood, IWS, and underlayment “is not a roof at all” and that these components “constitute[d] only ‘other coverings’ until such time as shingles are installed.”

ANALYSIS

Utah has a longstanding commitment to “[t]he principle that ‘insurance policies should be construed liberally in favor of the insured and their beneficiaries so as to promote and not defeat the purposes of insurance.’ ” United States Fid. & Guar. Co. v. Sandt, 854 P.2d 519, 521 (Utah 1993) (quoting Richards v. Standard Accident Ins. Co., 200 P. 1017, 1020 (Utah 1921)). In case of ambiguity, uncertainty, or doubt, the terms of an insurance contract will be construed strictly against the insurer and in favor of the insured. The insured is entitled to the broadest protection that he could reasonably believe the commonly understood meaning of its terms afforded him. Ambiguous or uncertain language in an insurance contract that is fairly susceptible to different interpretations should be construed in favor of coverage.

Whether There Was a Roof

In the Poulsens’ view, the plywood, IWS, and underlayment constituted a roof within the meaning of the LWC Provision. The Poulsens concede that, at the time of the windstorm, this “roof [was] in a state of partial completion” due to the absence of shingles, but they argue that the LWC Provision “does not say anything about the state of completion.” The Poulsens essentially argue that the presence of a roof, albeit an incomplete one, entitled them to coverage under the LWC Provision because the rain “enter[ed] through an opening in the roof … caused by damage from the direct force of” the windstorm.

The court, after reviewing the evidence found that the word “roof” in such a policy is not fairly susceptible to interpretation as meaning an incomplete roof. Layers of plywood, IWS, and underlayment covered the Poulsens’ house at the time of the windstorm. The Poulsens accept that this roof was only partially complete due to the lack of shingles. The Poulsens’ memorandum in opposition to summary judgment included an affidavit from their expert witness explaining that the “underlayment without shingles is not a complete roofing system” because “[i]t takes both components to make the roofing system resistant to high wind, snow, ice and water.”

Although a court is bound to construe ambiguities in an insurance policy in favor of coverage, that obligation disappears when the court is unable to identify any uncertainty in the LWC Provision’s use of the word “roof”.

The Poulsens have not shown that the insurance policy’s use of the word “roof” was fairly susceptible to interpretation as including incomplete roofing systems. The court, therefore, held that the district court did not err by concluding that the layers of plywood, IWS, and underlayment did not constitute a roof within the meaning of the insurance policy.

Whether the Roof Was Temporary

The Poulsens also contended that the district court erred by concluding that the plywood, IWS, and underlayment constituted only a temporary roof or temporary covering. They further contended that the district court erred by weighing competing evidence as to whether the elements in place at the time of the windstorm were temporary.  It is true that the court stated that the plywood, IWS, and underlayment “constitute[d] only ‘other coverings’ until such time as shingles are installed.” But the trial court did not rule these layers made up a temporary roof that the Temporary-Roof Exception would exclude from the LWC Provision’s coverage. Rather, the court ruled that no roof, temporary or permanent, existed at the time of the windstorm, and thus that the LWC Provision did not come into play at all.

Until the roof is complete, there are only individual components. As a result, the trial court concluded that these components were “not a roof at all” and that “there was no ‘roof’ as contemplated by the policy.” In essence, the court determined that the absence of a roof foreclosed any analysis of the LWC Provision and the Temporary-Roof Exception because, if there was no roof, water could not have entered through a windstorm-created opening in the roof.

ZALMA OPINION

A roof is a roof only, as the Paulson’s expert opined, is a system that requires all of its component parts. It is no more a roof without shingles that a car is not a car without an engine or wheels. In this case the Paulsons, by submitting the report of a thorough and honest expert, compelled the court to grant summary judgment because, in essence, he testified that at the time of the loss there was no roof.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

Bad Injuries Cause Interesting Litigation

What’s My Limit?

Insurance policy interpretation can be convoluted and difficult for the parties, especially when there are arguments over the jurisdiction of the court involved. If there is jurisdiction a federal court can issue a declaratory judgment interpreting an insurance policy. If not, it should send the case back to the state court.

In Evanston Insurance Co. v. Housing Authority Of Somerset; Kentucky Housing Authorities Self-Insurance Fund, Inc., v. Rhonda Kay Griffin, Individually and as Co-Administrator of the Estates of Kaitlyn Griffin and N.A.S. and Administratrix of the Estate of Derel Griffin; Jason Steele, Individually and as Co-Administrator of the Estate of N.A.S.; Robin Mullins, Mother and Next Friend of J.T., United States Court of Appeals, Sixth Circuit, 2016 WL 4119850, (August 03, 2016) the Sixth Circuit was called upon to resolve a dispute over the payment of a $3,736,278 jury award. Evanston Insurance Co. provided excess liability insurance to the defendant in that action, Housing Authority of Somerset (HAS). Following trial, Evanston filed a declaratory judgment action in federal court to determine coverage limits under its policy with HAS. The parties cross-moved for summary judgment and the district court granted summary judgment to Evanston in December 2015.

BACKGROUND

On December 9, 2009, Kaitlyn Griffin and her cousin, Joshua Thacker, both minors, were unloading a vehicle in a common area maintained by HAS when a large maple tree fell on them. Mr. Thacker was severely injured, sustaining multiple injuries to the head, back, neck, legs, and shoulder that required hospitalization, physical therapy, and mental health treatment. Seventeen-year-old Kaitlyn, who was pregnant, died within minutes, at 2:05 p.m., from blunt force trauma to her head and upper body. Doctors later delivered her 26 to 27 week-old baby (posthumously named Nicolas Ayden Steele), who died at 3:05 p.m., shortly after birth, from cardiorespiratory arrest.

After a trial in state court, a jury found that HAS had breached its duty to exercise ordinary care to maintain its common areas. The jury awarded a total judgment of $3,736,278.00 to the victims and their parents.

THE POLICIES

HAS is part of a risk-management pool called the Kentucky Housing Authorities Self-Insurance Fund (KHASIF), which provides coverage for general liability up to $150,000. Members of KHASIF also have coverage through Evanston Insurance Co. for claims that exceed that amount. KHASIF’s insurance coverage through Evanston has two parts. The first part, Coverage Part A, insures KHASIF members for general liability stemming from bodily injury, personal or advertising injury, and property damage. The policy limits under Coverage Part A are $1,000,000 for “each occurrence” and $2,000,000 in the aggregate. The second part, Coverage Part B, insures KHASIF members for “wrongful acts,” including “neglect, negligence, or breach of duty.” The policy limits under Coverage Part B are $1,000,000 for “each claim” and $2,000,000 in the aggregate.

THE ALIGNMENT OF THE PARTIES

In February 2014, before mediation had been completed, Evanston filed this declaratory judgment action in federal court to determine the “policy limits.” Evanston aligned itself as the only plaintiff in the action; it aligned KHASIF, HAS, and the plaintiffs in the state tort suit—the estates of the victims and the parents of the victims—as defendants. The parties reached a settlement in spring 2014. The settlement agreement provided that Evanston would pay the “policy limits” to the plaintiffs. The agreement left unresolved the amount of the “policy limits” available to satisfy the judgment, acknowledging that a declaratory judgment action had been filed by Evanston, but provided that, at a minimum, Evanston would pay the plaintiffs $980,000, the maximum coverage of $1,000,000.00 less “claim expenses” under the policy. In exchange, the plaintiffs agreed to release their claims against KHASIF and HAS. All parties agreed to dismiss their claims and appeals in state court.

ANALYSIS

The first step in this analysis is to identify the “primary dispute in the controversy.” Cleveland Hous. Renewal Project, 621 F.3d at 559.

In its complaint, Evanston alleged that “coverage is only available under Coverage Part A,” “the falling tree … constituted a single occurrence,” and thus “that there is only $1,000,000.00 available to cover the entire suit.”

The positions taken by the Housing Authority Defendants in this litigation provide some indication that the parties may not be properly aligned. There are two reasons to doubt that the Housing Authority Defendants’ interests are aligned with the Individual Defendants’ interests.

First, the Housing Authority Defendants have declined to file a brief on appeal or join the Individual Defendants’ brief. That suggests acceptance of the district court’s order, which granted summary judgment for Evanston.

Second, the terms of the parties’ settlement would seem to align the Housing Authority Defendants’ interests with Evanston’s. As part of the settlement agreement, the individual Defendants released the Housing Authority Defendants from any and all claims. Thus, although the Housing Authority Defendants had an incentive to maximize insurance coverage before the settlement—since they would be liable for any portion of the $3.7 million judgment that their insurance policy did not cover—this incentive dissipated once the settlement was reached. If more coverage in this case will result in higher insurance premiums, then the Housing Authority Defendants would have an incentive to minimize coverage.

The district court did not consider whether the parties were properly aligned. The appellate court remanded the case to the district court to examine its subject-matter jurisdiction in the first instance. Whether the district court had jurisdiction depends upon the state of things at the time the action was brought. Thus, if the parties were properly aligned at the time of filing, then the district court need not dismiss the case—even if the Housing Authority Defendants’ interests changed after filing.

Given this disposition, the appellate court did not address the Individual Defendants’ alternative arguments that the district court erroneously concluded that there was only one “occurrence” under Part A of the Evanston policy and that there was no coverage under Part B.

CONCLUSION

The appellate court reversed the district court’s order granting plaintiff’s motion for summary judgment and denying defendants’ motion for summary judgment.

ZALMA OPINION

In this case the appellate court punted – although it could have agreed with the trial court and established the limit available. Rather, it converted the thorny issue, by sending it back to the trial court on a jurisdictional issue. Since the defendant against whom a judgment was rendered had settled with the plaintiffs it had no interest in the coverage available from Evanston. More money wasted in extensive litigation.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

HHS May Not Amend a Law

Insurers and Those Insured May Purchase Whatever Coverage they Want

An insurance company is entitled to determine for itself what risks it will accept.  It has the unquestioned right to select those whom it will insure may wisely discriminate in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39].) The so-called Affordable Care Act (ACA) requires insurers and individual insureds to buy specific health insurance coverages or pay a fine.

In Central United Life Insurance Co. v. Burwell, United States Court of Appeals, District of Columbia Circuit — F.3d —-, 2016 WL 3568084 (July 1, 2016) the D.C. Court of Appeals dealt with a situation where insurers that offered fixed indemnity policies sued the Secretary of Health and Human Services (HHS), challenging a regulation that required fixed indemnity plans to be provided only to individuals who had minimum essential coverage required by Patient Protection and Affordable Care Act (ACA) in order for such plans to be considered an excepted benefit plan under Public Health Service Act (PHSA). The United States District Court for the District of Columbia, Royce C. Lamberth, J., 128 F.Supp.3d 321, permanently enjoined HHS’s enforcement of rule. HHS appealed.

ISSUE

At issue in this appeal is whether the Department of Health and Human Services (“HHS”) exceeded “colored outside the lines” its authority. The district court held that it did.

THE PHSA

The Public Health Service Act, 42 U.S.C. § 201 (“PHSA”), establishes coverage requirements for all health insurance plans except those it deems “excepted benefits.” Only those forms of insurance specifically enumerated in the PHSA can qualify as an excepted benefit and, for the benefits at issue here, that status is further conditioned on specific requirements: (1) the insurance plans must be “provided under a separate policy, certificate, or contract of insurance,” and (2) they must be “offered as independent, non-coordinated benefits.”

Among the excepted benefits listed in the PHSA is a form of insurance known as “fixed indemnity.” As their label suggests, these policies pay out a fixed amount of cash upon the occurrence of a particular medical event. For instance, if a policyholder visits a hospital or purchases prescription drugs, the provider pays out a predetermined amount, which the policyholder is then free to use however she chooses.

In 2010, Congress passed the Patient Protection and Affordable Care Act (“ACA”), which, among other things, updated the PHSA’s coverage requirements and mandated that all applicable individuals maintain “minimum essential coverage.” Despite the ACA’s sweeping reforms to the health insurance market, it left intact and incorporated the PHSA’s rules regarding excepted benefits.

But HHS foreclosed that option four years later in the regulation under review by the D.C. Circuity Court of Appeal. In May 2014, HHS announced its plan “to amend the criteria for fixed indemnity insurance to be treated as an excepted benefit” in the individual health insurance market. On top of the requirements codified in the PHSA, HHS added another. To be an “excepted benefit,” the plan may be “provided only to individuals who have … minimum essential coverage.” Now, those who had previously purchased these plans as a substitute for minimum essential coverage would have to find a fixed indemnity plan that satisfies the PHSA’s coverage requirements for non-excepted benefits. The very nature of fixed indemnity insurance, however, renders such plans incapable of satisfying those requirements, so this new rule effectively eliminated stand-alone fixed indemnity plans altogether.

ANALYSIS

Where Congress “has directly spoken” to the parameters of the agency’s authority, the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. But if Congress grants an agency flexibility to flesh out a particular policy, the regulation will be upheld as long as the agency stays within that delegation..

HHS described its rule as an attempt to “amend the criteria for fixed indemnity insurance to be treated as an excepted benefit.” (emphasis added). HHS’s rule proposed to “amend” the PHSA itself.

The PHSA lists only certain defined criteria for fixed indemnity plans to have “excepted benefits” status: the plan (1) is provided under a separate policy, contract, etc., and (2) offers independent, non-coordinated benefits. So long as these conditions are met, the plan qualifies as an excepted benefit. Thus, where Congress exempted all such conforming plans from the PHSA’s coverage requirements, HHS, with its additional criterion, exempts less than all. Disagreeing with Congress’s expressly codified policy choices isn’t an option that administrative agencies enjoy.

Nothing in the PHSA suggests Congress left any leeway for HHS to tack on additional criteria. At no point does the ACA give even the slightest indication the definition of “excepted benefit” was suddenly debatable; rather, the Act doubled down on the PHSA’s existing requirements. Ever since it first carefully defined what counts as an “excepted benefit” in 1996, Congress has never changed course or put its original definition in any doubt. Where the text is as clear as it is in this case that is the end of the matter!

The statute allows for the possibility of a buyer possessing other coverage but does not require it. Another part of the PHSA addresses “coordination” with language that corroborates this reading. HHS’s attempt to regulate consumers under a provision directed at providers confirms the agency’s rule was an act of amendment, not interpretation.  An agency’s interpretation of a statute is not entitled to deference when it goes beyond the meaning that the statute can bear.

An agency’s decision to add an obligation that is not in the statute changes the nature of the statute. The Secretary may not rewrite the statute.  Because HHS lacked authority to demand more of fixed indemnity providers than Congress required, the district court’s permanent injunction was affirmed.

 ZALMA OPINION

The ACA is an annoyingly comprehensive attempt to control the medical insurance industry. Still, the government in the guise of the HHS, found the ACA to be insufficient to control the insurance buying public and tried, by regulation, to change a statute that could only be changed by the Congress.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

The Role of the Insurer’s Lawyer in a Fraud Investigation

The Examination Under Oath

A good, thorough, examination under oath (EUO) is the insurer’s most effective weapon to defeat fraud. Lawyers, whose job it is to ask questions, will usually do a more thorough job of examination under oath than an insurance claims person.

The adjuster, the independent adjuster, the Special Investigation Unit (“SIU”) investigator, the independent insurance adjuster and, in complex cases, the attorney retained to represent the insurer questions the person interviewed in a manner similar to a deposition in a legal proceeding. Because of the formality of the proceeding — it includes an oath, and the presence of a certified shorthand reporter — the task of establishing rapport with the person interviewed so that relevant information may be obtained from the insured is more difficult than in an informal interview. Unlike legal proceedings where questions are limited to those seeking a “yes” or “no” or brief answer the EUO seeks narrative responses from the person questioned.

The person taking the EUO, therefore, must be capable of transitioning from lawyer like questions in litigation to the broad, inquisitive, narrative seeking questioning. An EUO should never be conducted as if it is an adversarial activity but merely a fact seeking activity that is directed to the needs of an insurance policy and the need to prove a loss is either compensable or not.

Because the EUO is a tool for gleaning the maximum amount of information the EUO is an effective weapon against insurance fraud. This is because the person taking the EUO is knowledgeable about insurance and insurance law while the person being questioned is only aware of the claim presented and the fraud he or she may be attempting.

Often, however, the purpose of the EUO is not to stop fraud but to allow an insured the opportunity to prove his or her claim of loss in cases where evidence has been destroyed by a casualty or is otherwise unavailable.

The authority to take an EUO is provided by the insurance contract and exists, as a result of statutes, establishing a state mandated fire insurance policy that must be incorporated in every policy in the state that insures against the peril of fire.

The lawyer can also, after completing an examination, give the insurer legal advice as to its rights, duties, and obligations. The adjuster should attend the examination under oath to help the lawyer and to study questioning techniques.

The adjuster must make it clear to the attorney taking an examination under oath that it is his or her obligation to provide sufficient factual information supported by legal authority for the insurer to make a decision on the claim. Counsel’s report should include:

  • all facts learned in the investigation; and
  • the testimony at the examination under oath that supports his opinion.

The claims person and counsel must analyze the facts in relation to statutory and case law. The insurer will then be in a position to make a fully informed decision on the claim.

More often than not, the examination will cause the insurer’s lawyer to recommend payment of full indemnity to the insured. If the lawyer advises the insurer that indemnity should not be paid, the adjuster should carefully analyze the recommendations to independently verify that there are sufficient facts, supported by policy language and legal precedent, to support the conclusion. It is the claims person who makes the decision, not the lawyer. The claims person must decide whether or not it is best for the insurer to take the lawyer’s advice. Decisions made by insurers must sometimes be based on reasons other than the law. The claims person must require the attorney to provide the insurer sufficient facts before the insurer makes a decision.

Insurers should use the examination under oath tool judiciously. It should only be used in cases where the insured is unable to prove its loss, when the insured’s proof is inconsistent or incomplete, or when the insurer has a reasonable belief that a fraud is being attempted. Used properly by insurers, adjusters, and insureds who are intent on providing (or obtaining) only the indemnity promised by a policy of insurance to which the insured is entitled, the examination under oath will help the insured and the insurer fulfill the promises made at the inception of the policy.

Although the EUO is a formal proceeding it is not part of a judicial process. The EUO is not controlled by the rules of civil procedure. In most states it is considered a condition precedent to recovery under a policy of insurance. The EUO is not limited by any statute relating to civil discovery. Some states have enacted regulations that try to limit insurers taking of the EUO and place certain requirements upon the insurer to chill the desire to take an EUO.

An insurer’s right to ask questions at EUO is basically unlimited.

As early as 1884, the U.S. Supreme Court explained the purpose of the EUO, as follows:

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an EUO, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured. A false answer as to any matter of fact material to the inquiry, would be fraudulent. If it made, with intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if it failed it would be a fraud attempted. And if the matter were material and the statement false, to the knowledge of the party making it, and willfully made, the intention to deceive the insurer would be necessarily implied, for the law presumes every man to intend the natural consequences of his acts. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed; and if they are knowingly false and willfully made, the fact that they are material is proof of an attempted fraud, because their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them, and to whom they are addressed. [Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884)] (Emphasis added)

The position taken by the U.S. Supreme Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945).

In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgement because of the refusal of the insured to answer material ques­tions. The court stated:

It is well settled in other jurisdictions that noncompliance with a provi­sion in an insurance policy requiring the insured to submit to an EUO precludes recovery by the insured.

Although a delay in receiving notice does not necessarily impair the insurer’s ability to investigate the claim. In contrast, an insured’s refusal to submit to an EUO significantly affects the insurer’s investigation of the claim. When the insurer, Progressive, requested the EUO in order to resolve the residency issue and make a coverage determination. The court refused to require Progressive to prove that it has been prejudiced by the petitioner’s refusal to submit to the EUO. [Krigsman v. Progressive Northern Ins. Co., 151 N.H. 643, 864 A.2d 330 (2005)]

ZALMA OPINION

The EUO is a tool to help an insurer complete a thorough investigation into a suspected claim. It is not an interrogation. It is a fact gathering tool that more times than not will help the insured prove his or her loss and result in prompt payment of a claim. It is an important tool. On occasion it establishes fraud. On one EUO the transcript came back, in a Perry Mason fashion, correcting a lie and admitting to fraud. Such an even is rare and required the insurer’s lawyer to recommend denial for fraud and resulted in the arrest and conviction of the insured. Unlike the fictional Perry Mason it was one of only three confessions is 49 years of practice.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Leave a comment

No Breach of Contract – No Bad Faith

Limit of Liability is Cost Actually Spent to Replace Destroyed House

Homeowners policies, except in a valued property state, agrees to first pay actual cash value (ACV) first and the difference between ACV and replacement cost value (RCV) after the insured actually replaces the dwelling up to the limit of the policy. As a result the limit is not necessarily the amount listed on the policy but the amount actually expended by the insured to replace.

In Parks v. Safeco Insurance Company of Illinois, Supreme Court of Idaho, — P.3d —- 2016 WL 4043494 (July 27, 2016) the Supreme Court of Idaho was faced with a claim by an insured for the limit of their policy and bad faith because the insurer paid only the amount expended by the insured to replace the dwelling

FACTS

David and Kristina Parks (collectively the “Parks”) appealed from a district court dismissal on summary judgment. A wildfire destroyed the Parks’ house, which was insured by Safeco Insurance Company (“Safeco”). The Parks purchased an existing house, and Safeco paid the Parks a total of $255,000, the cost of the replacement house less the value of the land.

On June 28, 2012, a fire in Pocatello, Idaho destroyed the Parks’ house. The Parks’ house was insured through a homeowners policy (“Policy”) issued by Safeco, which provided a total home coverage of $464,875. Following the fire, Safeco hired an appraiser to determine the actual cash value (“ACV”) of the Parks’ destroyed house. The Policy defined ACV as “the market value of property in a used condition equal to that of the lost or damaged property, if reasonably available on the used market.” Mrs. Parks understood that, pursuant to the Policy, Safeco would pay the ACV as soon as the appraisal was completed, but the replacement cost payment would be handled once a replacement was made.

The Parks sued Safeco alleging: (1) they are entitled to $440,195.55 under the policy and (2) Safeco committed bad faith in handling the claim. The district court held that: (1) there was no breach of contract because the policy was unambiguous and the Parks received the amount due under the clear language of the policy; (2) Safeco did not commit bad faith in handling the claim because it complied with the terms of the policy and paid the Parks the amount owed; and (3) the Parks had not established a reasonable likelihood of proving facts at trial sufficient to support an award of punitive damages.

The appraisal was completed on July 21, 2012, and stated that the ACV of the Parks’ destroyed house was $169,000. Accordingly, on July 26, 2012, Safeco mailed a check for $169,000 to the Parks. Although the Parks believed the ACV of their house was higher than the appraisal, Mr. Parks acknowledged that he had no grounds upon which to argue. Safeco clarified to Mr. Parks that the ACV was not the complete payment; it was “just the beginning.”

In a letter sent with the ACV payment, Safeco informed the Parks that the limit of their coverage was $464,875. The letter stated, “[i]n order to claim the full replacement cost, you must replace the dwelling.” The letter included the relevant portions of the Policy and informed the Parks that Safeco was “in the process of obtaining a replacement cost bid for equivalent construction of your home…. You may replace your dwelling on the existing location; build on a new location or purchase an existing home.”

On September 20, 2012, Belfor Construction (“Belfor”), which was hired by Safeco, estimated that it would cost $440,195.55 to replace the Parks’ house, using equivalent construction. Safeco confirmed that it approved the Belfor estimate and clarified that it would “pay the replacement cost of the dwelling up [to] $440,195.55 or the amount actually incurred, whichever is less.”

The Parks purchased a home in the Idaho Falls area for $300,000 (the house was valued at $255,000 and the land was valued at $45,000). Mr. Parks acknowledged that the amount actually incurred as a result of the fire, in terms of replacing the existing structure, was $300,000, less the value of the land.

Safeco agreed “to pay the additional undisputed amount for the difference between the market value and replacement cost of the dwelling which has been incurred by Mr. And Mrs. Parks at this time.”  Safeco paid the Parks $86,000 for the undisputed dwelling replacement cost ($300,000 for the cost of the Idaho Falls home, less $45,000 for the land, less the $169,000 previously paid).

TRIAL COURT DECISION

The district court held that the word “replace” was unambiguous. The district court noted that the Parks had three options to replace their destroyed home: (1) rebuild their house in the same location; (2) build a house in a new location; or (3) purchase an existing home. Despite the fact that the definition of “replace” varied depending on the context, the district court held that it was not reasonably subject to conflicting interpretations. Thus, “[w]ithin the context of the Replacement Cost provision, all interpretations of ‘replace’ as used in the Policy plainly provide that [Safeco had] three options to ‘supply or substitute an equivalent for’ the [Parks’] destroyed home.”

The district court noted: “[t]here is nothing in the Policy that allows Plaintiffs to purchase a less expensive house and then claim the difference between the less expensive house and the cost to rebuild.” Therefore, the district court held that the Policy was unambiguous, the Parks were bound by its plain terms, and the Parks received the amount due under the clear language of the Policy.

ANALYSIS

When a court interprets an insurance policy where the policy language is clear and unambiguous, coverage must be determined, as a matter of law, according to the plain meaning of the words used. Subsection (1) of the Loss Settlement provision states that Safeco would pay the full cost of replacement, but not exceeding the smallest of the following: (a) the limit of liability under the policy ($464,875); (b) the replacement cost on the same premises ($440,195.55); (c) the amount actually and necessarily incurred to replace the building ($255,000); or (d) the direct financial loss incurred (the Parks claim this is the insurer’s appointed contractor estimate of $440,195.55.

In order for a first-party insured to recover on a bad faith claim, the insured must show: 1) the insurer intentionally and unreasonably denied or withheld payment; 2) the claim was not fairly debatable; 3) the denial or failure to pay was not the result of a good faith mistake; and 4) the resulting harm is not fully compensable by contract damages.

The Supreme Court has held in the past and continues to hold that a duty under a contract must be breached in order to find bad faith. Since Safeco did not breach the Policy  Safeco did not commit bad faith.

Safeco is entitled to attorney’s fees on appeal.

The Supreme Court concluded that the Parks failed to demonstrate that Safeco did not pay the amount justly due within thirty days after receipt of the proof of loss. In fact, Safeco paid the Parks five days after the appraiser determined the ACV of the Parks destroyed home. Then, Safeco paid the remaining amount due two weeks after receiving the closing documents of the purchase of the Idaho Falls home.

An Idaho statute provides in pertinent part: “attorney’s fees may be awarded by the court when it finds, from the facts presented to it that a case was brought, pursued or defended frivolously, unreasonably or without foundation.” I.C. § 41–1839(4). Here, the Parks’ arguments were unreasonable and lacked foundation. The language in the Policy was unambiguous.

ZALMA OPINION

Most litigants believe that suing an insurance company is without risk. Juries and courts dislike insurers and will invariably give something to the plaintiff or the insurer will settle to avoid the cost of defense. This case proves that the assumption is incorrect and that an insured who brings a frivolous or without foundation suit against an insurer. They could have obtained the full amount of the replacement cost by hiring the contractor to actually rebuild their house or buy a more expensive one.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | Leave a comment

Contractor Controlled Insurance Program

A CCIP Provides Immunity to The General Contractor

Major construction projects involve many contractors serving under a general contractor. a general contractor that implemented a contractor controlled insurance program (CCIP) can, if properly formulated, provides the general contractor protection from tort suits by the employees of subcontractors. In Gonzalez v. O and G Industries, Inc., — A.3d —-, 2016 WL 4039203, Supreme Court of Connecticut (Aug. 2, 2016), the Supreme Court of Connecticut was asked to eliminate the immunity provided by statute and allow the plaintiffs to recover damages resulting from the alleged negligence of the named defendant, O & G Industries, Inc. The plaintiffs appealed from the trial court’s grant of the defendant’s motion for summary judgment with respect to their tort claims.

FACTS

In 2009, the defendant served as the general contractor for the construction of a gas fired power plant in Middletown. The defendant hired multiple subcontractors. Thompson, one of the plaintiffs, was an employee of a subcontractor.  McVay, another plaintiff, was an employee of a sub-subcontractor.

Both subcontractors agreed to the standard subcontract used by the defendant. The defendant’s standard subcontract required all bidders to include, as a line item in their bids, their insurance costs to complete their work. The standard subcontract stated, however, that the defendant “may” elect to implement a CCIP to “centralize the purchasing of insurance” for the project. This “consolidated purchasing of insurance” would include, inter alia, workers’ compensation insurance for the defendant and all tiers of subcontractors.

The defendant subsequently implemented a CCIP, which provided workers’ compensation coverage for itself and all enrolled subcontractors through policies issued by the Old Republic General Insurance Corporation (Old Republic). Both of the plaintiffs employers enrolled in the program, and each received individual insurance policies in their names. As the “[s]ponsor” of the program, the defendant was solely responsible for paying the premiums for its own coverage and that of all enrolled subcontractors. The defendant subsequently paid a premium in the amount of $1,150,465 for workers’ compensation coverage provided under the CCIP.

On February 7, 2010, an explosion occurred at the power plant construction site, injuring Thompson and McVay. Under the terms of the CCIP, the defendant was required to pay a $250,000 deductible in the event that workers’ compensation benefits were to be paid. The defendant paid this deductible to Old Republic, along with a claim handling fee in the amount of $17,500 to administer workers’ compensation benefits. Both of these payments were made to Old Republic by checks drawn on the defendant’s account. Thompson and McVay subsequently applied for and received workers’ compensation benefits under the CCIP, including medical expenses and lost wages.

Because it was undisputed that the defendant had paid the premium, deductible, and other costs for the CCIP, the trial court concluded that no genuine issue of material fact existed as to whether the defendant “paid” workers’ compensation benefits to Thompson and McVay.

Although the statute requires a principal employer to bear the costs of all of the injured employees’ benefits to be entitled to immunity. It was undisputed that the defendant bore all of those costs in this case.

ANALYSIS

To determine whether the defendant “paid compensation benefits” to the plaintiffs, the Supreme Court first found it necessary to discern the proper meaning of that term under the statute.  If, after examining the text of the statute and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered.

The first sentence of § 31–291 embodies the “principal employer doctrine,” under which an employer that hires a contractor or subcontractor, and meets the statutory definition of a “principal employer,” is liable to pay workers’ compensation benefits to the injured employees of those contractors or subcontractors. Furthermore, if the principal employer actually pays those benefits, according to the second sentence of the statute it enjoys immunity from further claims by the injured employees brought under statutory law.

The words “paid” and “pay” appear in relation to compensation in several sections of the act, but the act does not define those words.  The court looked to the common usage of the word “paid” to discern the definition intended by the legislature in § 31–291, the legislative history of § 31—291 and the circumstances surrounding its enactment for further guidance. The purpose of the principal employer provision in the statute is to afford full protection to workers, by preventing the possibility of defeating the act by hiring irresponsible contractors or subcontractors to carry on a part of the principal employer’s work.

The principal employer provision has been part of the act since its enactment in 1913. Prior to 1988, however, § 31–291 did not require the contractor to actually pay workers’ compensation benefits to the injured employees in order to obtain immunity. So long as the employer was a principal employer—and, thus, was liable to pay the benefits—the employer enjoyed immunity from civil actions regardless of whether it actually paid those benefits. In 1988 the legislature amended § 31–291 to require principal employers to actually pay workers’ compensation benefits in order to obtain the statutory immunity from civil actions.

On the basis of the legislative history, the Supreme Court concluded that the legislature intended the word “paid” in § 31291 to mean bear a cost, rather than simply transfer money.  A principal employer cannot pass these costs on to its contractors or subcontractors, or the second injury fund, and receive the statutory immunity under to § 31–291.

Under the trial court’s interpretation of § 31–291, as advanced by the defendant, principal employers could pay a mere pittance of the injured employees’ workers’ compensation benefits and still obtain complete immunity from claims by those employees. Principal employers could also seek direct reimbursement from their contractors or subcontractors for nearly all of the cost of the benefits. Therefore, the Supreme Court concluded that the term “paid compensation benefits” in the statute requires a principal employer to demonstrate that it bore the cost of all of the workers’ compensation benefits to an injured employee in order to obtain statutory immunity from civil actions.

First, the defendant’s standard subcontract and the manual demonstrate that the change orders eliminated the subcontractors’ costs to procure their own insurance, rather than required the subcontractors to bear the costs of the CCIP. Both documents required the subcontractors to include a statement of their insurance costs in their bids.  Both documents also explain that if the defendant opted to implement a CCIP, those costs would be subtracted from each subcontract through appropriate change orders.

The manual and insurance policies also confirm that the defendant would pay the entire cost of the workers’ compensation coverage provided to all subcontractors under the CCIP. The manual states that the defendant “provides” and “will furnish” workers’ compensation insurance “for the benefit of all enrolled parties.” The manual characterizes the defendant as the “[s]ponsor” of the program, and explicitly states that it “pays the cost of the CCIP insurance coverage.”

The defendant did, in fact, pay the CCIP premium “on behalf of the subcontractor[s],” because the subcontractors received the benefit of workers’ compensation coverage under the CCIP, rather than having to provide their own coverage. This language in the manual therefore does not suggest that the defendant served as a mere pass-through for the costs of the CCIP.

Furthermore, the manual’s statement that the subcontractors’ insurance costs would be “taken against” their contracts does not raise a genuine question of whether the subcontractors directly reimbursed the defendant for the costs of the CCIP. The defendant had no choice but to “take” these costs “against” its subcontracts in order to avoid double paying for the subcontractors’ insurance coverage. Otherwise, the defendant would have paid its subcontractors to provide their own insurance coverage and paid for the same coverage under the CCIP.

Duplicative insurance coverage would be contrary to the state’s long-standing public policy against economic waste. No genuine issue of material fact exists as to whether the defendant “paid compensation benefits” to Thompson and McVay under § 31–291. Accordingly, the trial court properly rendered summary judgment in favor of the defendant on the plaintiffs’ claims.

ZALMA OPINION

CCIP’s make it possible for major construction projects to operate without multiple workers’ compensation insurance policies. If, as did the defendant in this case, the CCIP is created properly the general contractor will be immune from suit by injured employees since it becomes the principal employer and provides the statutory benefits to those injured on the job.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

Zalma’s Insurance Fraud Letter – August 1, 2016

State Fraud Investigation Files Not Subject to Discovery by Subpoena

  Zalma’s Insurance Fraud Letter August 1, 2016, Volume 20, No. 15

BZBACKSUIT3

State Fraud Investigation Files Not Subject to Discovery by Subpoena

 Welcome to the August 1, 2016 Issue of ZIFL

In this, the Fifteenth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on August 1, 2016 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:

  • State Fraud Investigation Files Not Subject to Discovery by Subpoena
  • Barry Zalma
  • Insurance Fraud Investigation
  • Proformative Academy Webinars
  • Some Red Flags or Indicators of Fraud
  • Good News From the Coalition Against Insurance Fraud
  • It’s Not Nice To Lie to Get Life Agency Appointment
  • New E-Books from Barry Zalma
  • Wisdom
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

ZALMA INSURANCE CONSULTANTS

The Zalma Insurance Claims Library

One of the four books in the Claims Library is Insurance Law, the most comprehensive, and yet practical, insurance law authority available today.  Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

Also available are: Insurance Claims: A Comprehensive Guide; Construction Defect Claims Coverage Guide and Mold Claims Coverage Guide.

 THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.

Zalma on Insurance

Check in every day for a case summary at http://zalma.com/blog

Zalma’s Insurance 101

I have also created a video blog called Zalma’s Insurance 101 which currently has over 1014 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

Some of the most recent of the 1,014 videos follow:

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

Failure to Disclose Known Loss Fatal to Malpractice Claim

Malpractice Insured Must Report all Potential Claims

When a probate lawyer committed malpractice, she knew she had committed malpractice, and did not report that fact to her insurer at renewal, she knew that her insurer properly denied her claim for defense and indemnity. The plaintiff, suing her, obtained a large judgment and elected (perhaps because the lawyer was judgment proof) to sue the insurer to collect the judgment rather than attempting to get the judgment paid by the lawyer. The lawyers for the plaintiffs learned and important lesson, only sue an insurer if you can prove coverage.

FACTS

In John N. Thomson, v. Hartford Casualty Insurance Company, United States Court of Appeals, Sixth Circuit, 2016 WL 4036403, No. 15-1501 (July 28, 2016) the trustees and beneficiaries of the Vitello family trust sued Kathleen King O’Brien, a Michigan lawyer, for malpractice. O’Brien sought coverage from her malpractice insurer, Hartford Casualty Insurance Company, which denied her claim because she had failed to timely notify Hartford of the foreseeable possibility that the Vitello trust would pursue a malpractice claim against her.

In 1998, Silverio and Anna Vitello hired Kathleen King O’Brien, a trusts-and-estates lawyer, to establish a family trust for the benefit of the Vitellos’ four children. The trust agreement named O’Brien as independent trustee. In that role, she was responsible for managing the trust’s sole asset, a life-insurance policy bearing a face value of $1 million, payable on the death of Silverio or Anna, whoever died later. In the meantime, the policy required Silverio and Anna to pay an annual premium of $25,000.

After Silverio passed away in 2001, Anna became unable to pay the annual premium. The Vitellos’ life insurer, Lincoln National, agreed to modify the policy so that Anna would pay only $7,800 per year towards the premium, while Lincoln drew the rest from the equity the Vitellos had already put into the policy. O’Brien established an automatic monthly electronic funds transfer from Anna’s bank account to pay the modified premium.

The Vitellos’ equity in the insurance policy eventually dried up. In July 2008, Lincoln sent O’Brien a notice informing her that the policy would lapse unless Anna’s monthly payments were tripled. O’Brien did not act on the notice. In November 2008, Lincoln sent O’Brien another notice, informing her that the policy would lapse unless Anna made an $8,684.30 payment to Lincoln by December 12, 2008. O’Brien informed neither Anna nor the Vitello children of the pending lapse.

The policy thereafter lapsed, and Lincoln denied O’Brien’s belated efforts to reinstate it. Several months later, in May 2009, Anna filed a petition in state probate court to remove O’Brien as trustee. In her petition, Anna complained that “O’Brien has refused to provide Anna Vitello with a copy of the Trust Agreement,” and that O’Brien had “not conveyed sufficient information to [Anna] for [Anna] to determine the status of the [life insurance] policy and what options may be available to prevent any lapse.” The trust eventually obtained another, more expensive life-insurance policy that carried a lower face value.

RENEWAL OF THE POLICY

In June 2010, O’Brien—who had maintained continuous malpractice insurance coverage through Hartford Casualty Insurance Company since 1994—applied to renew her malpractice insurance policy. O’Brien herself specified in the application that the “retroactive date” of the policy was September 3, 1994, and that the “proposed coverage effective date” of the new policy was September 3, 2010. In a section labeled “underwriting questions,” the application asked O’Brien whether she was “aware of any act, error or omission that could result in a professional liability claim being made[.]” O’Brien answered “no[.]”

Finally, the application carried a disclaimer—marked “IMPORTANT”—warning O’Brien that, “[t]o avoid loss of coverage, it is imperative that all known circumstances, acts, errors, omissions, or personal injuries which could result in a professional liability claim against you … be reported to your present insurer within the time period specified in your present policy. All known claims and/or circumstances are specifically excluded by The Hartford, should coverage become effective.”

Hartford thereafter renewed O’Brien’s policy for a “policy period” running from an “effective date” of September 3, 2010 until an end date of September 3, 2011, and with a “retroactive date” of September 3, 1994.

In May 2011, Thomson and the Vitello trust’s beneficiaries sued O’Brien in Michigan probate court for malpractice and breach of fiduciary duties. O’Brien faxed the complaint to Hartford, which declined to indemnify her after concluding that, as of the effective date of her insurance policy (September 3, 2010), O’Brien could have foreseen (and did not disclose on her application form) that she would be subject to a malpractice claim for her performance as independent trustee of the Vitello trust. O’Brien and the plaintiffs later agreed that O’Brien would assign her indemnity claim against Hartford to the plaintiffs and would “not oppose” the plaintiffs’ case in state probate court; in exchange, the plaintiffs promised to seek collection of any state-court judgment only from Hartford. The Michigan probate court entered a $770,065.42 judgment for the plaintiffs after a one-hour bench trial.

ANALYSIS

Michigan courts enforce an insurance contract’s “clear and precise” terms as they are written. The terms of O’Brien’s malpractice insurance policy were straightforward: Hartford agreed to indemnify O’Brien for any “damages” stemming from a “claim first made against” the proposed insured. The contract expressly disavowed indemnification for claims arising from an act or omission where the insured, “[a]s of the effective date of [the contract], … knew or could have foreseen that such act, error, [or] omission … could result in a ‘claim[.]” ’ And when the contract took effect in September 2010, O’Brien had every reason to foresee that her nonfeasance as trustee of the Vitello trust—nonfeasance that resulted in her forced resignation in May 2009—might give rise to a malpractice claim against her.

 The plaintiffs contend that this proviso creates “uneven” coverage for Hartford’s insureds, and suggest that it works an unfair result because O’Brien had “seamless, uninterrupted” insurance coverage with Hartford under earlier insurance contracts. Plaintiffs’ But under O’Brien’s identical 2008-09 contract with Hartford, O’Brien could have obtained coverage for liabilities arising from her nonfeasance by immediately notifying Hartford of the acts and omissions that led to her resignation as trustee. And had she done so, the contract would have covered any later claim as a claim made within the policy period, “regardless of when such ‘claim’ [was] actually made.” O’Brien was denied coverage because she failed to report her nonfeasance, not because she and Hartford entered into an “uneven” insurance contract.

When Anna Vitello petitioned the state probate court to remove O’Brien, she specifically asserted that O’Brien had failed to provide Anna with “sufficient information … to determine the status of the [life-insurance] policy and what options may be available to prevent any lapse.” The petition also made clear that any “lapse of the policy” would result in a “tremendous loss of value to the Trust and its beneficiaries.”

As the district court correctly pointed out, these very allegations “formed the basis” for the successful malpractice claims that the plaintiffs later filed in state court. Soon after the Vitellos presented these allegations to the probate court, O’Brien resigned her position as trustee. Any reasonable lawyer would have known that this course of events bore the seeds of a malpractice claim.

ZALMA OPINION

Lawyers, as a category, have extremely high belief in their own skill. Even when they make a stupid error and are told so by a client who filed a suit removing the lawyer as a trustee for misfeasance, will still not report such a fact as a potential claim, regardless of how obvious as was the claim in this case. That hubris defeated the coverage available to Ms. O’Brien.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

STOLI Fraud Voided

STOLI Fraudsters Can’t Get Back Premiums Paid

Usually, when an insurance policy is declared void, the parties are placed in status quo ante with the policies returned to the insurer and the premiums returned to the insured. However, in the event of a “stranger-originated life insurance” (STOLI) fraud the insurer was authorized to retain the premium paid.

In Ohio Nat. Life Assur. Corp. v. Davis, United States Court of Appeals, Seventh Circuit, 803 F.3d 904 (Oct. 20, 2015) Judge Posner of the Seventh Circuit Court of Appeals dealt with fraudulently obtained life insurance policies that were purchased in hope that the insured would die quickly.

BACKGROUND

The Court of Appeals, Posner, Circuit Judge, held that:

  1. insurance agent engaged in fraud and conspired with her husband to violate prohibition against insurance contracts procured by persons who did not have insurable interest;
  2. company was entitled to reimbursement of expenses that it had incurred; and
  3. purchaser was entitled to return of life insurance premiums paid.

 

Judge Posner wrote about the challenging issues of Illinois insurance law concerning what is called STOLI. The district court resolved the case at the summary judgment stage in favor of the plaintiff, the insurance company Ohio National, awarding it damages of $726,000 (we round all figures to the nearest $1000) against all the defendants.

The facts are complicated (the briefs occupy 150 pages, and the district judge’s commendably thorough two opinions occupy 50 pages). Defendant Mavash Morady, an insurance agent, contracted with Ohio National to sell life insurance policies issued by it. Defendant Douglas Davis, a lawyer formerly licensed in California, approached elderly persons and persuaded them to become the nominal buyers of the policies, with Mavash Morady as the insurance agent. Davis promised to pay these persons small amounts of money for obtaining policies, and in exchange for the promises they filled out applications for life insurance. A typical such buyer was Charles M. Bonaparte, Sr. His application was accepted, the policy was issued to him, and the defendants had him place the policy in the Charles M. Bonaparte Sr. Irrevocable Life Insurance Trust (which they created), designating the trust as the policy’s owner and beneficiary. This was an irrevocable trust, with Davis as trustee. The defendants paid (in the name of the trust) the premiums on the insurance policy; Bonaparte paid nothing.

Life insurance trusts are nothing new; they are a familiar way of shielding the proceeds of a life insurance policy from liability for estate tax. The wrinkle here is that the defendants were creating trusts in the names of the insured in order to conceal from Ohio National the fact that they, rather than the insured, controlled the policy and that they planned to sell it as an investment.

By having a real person buy a policy insuring his life, the defendants were trying to appear to comply with the legal requirement that one who buys an insurance policy must have an interest in the continued life of the insured rather than in his early death. To the insurance company it looked like a normal insurance transaction—it’s common for people to create life insurance trusts to obtain tax benefits.

However, Judge Posner of the Seventh Circuit Court of Appeal found that “the defendants in this case were creating life-insurance trusts to hoodwink Ohio National.”

Having acquired the beneficial interest in the policy the investor would pay the remaining premiums as they came due. Ohio National would not have sold the policies to the persons recruited by the defendants had it known that the premiums would be paid or financed by an unrelated third party (an investor) in the expectation that the policy would be transferred to him.

An insurance policy on a person’s life generally is void if the person did not consent to the issuance of the policy. The beneficiary of a life insurance policy has a financial interest in the insured’s dying as soon as possible, not only because this minimizes the amount of premiums the beneficiary has to pay, so the requirement of consent protects the prospective insured; he is unlikely to consent to someone becoming the beneficiary if he suspects that person of wanting to shorten his life.

Although the defendants did not attempt to kill the insureds they targeted individuals who they thought would have short life expectancies. Despite the fact that purchasers of a life insurance policy as an investment also have a financial stake in the insured’s early death the law allows an investor to purchase the beneficial interest in an existing policy on the life of the insured. The owner of the policy may have a desperate need for money; the policy may be his only substantial asset; and if he’s elderly or in very poor health the present value of that asset may be substantial and he may have a pressing interest in being able to cash it in by selling the beneficial interest. And provided that the procurer of the policy has an insurable interest, he can designate as the beneficiary someone who does not have an insurable interest.

While a man who purchased insurance on his own life could validly assign or sell the policy to a person lacking an insurable interest in the insured’s life. Where a person having an interest lends himself to one without any, as a cloak to what is, in its inception, a wager, have no similarity to those where an honest contract is sold in good faith to a stranger.  Judge Posner concluded that the contracts were wagers rather than true insurance contracts.

The common law of Illinois has, for at least a century and a half, prohibits the purchase of an insurance policy by a person who has no interest in the survival of the insured. Arrangements like the defendants’ STOLI scheme are now prohibited by statute as well.

The district court found that Mavash Morady’s conduct constituted fraud and a breach of her contract with Ohio National. Such premium-financing arrangements were forbidden by her contract with Ohio National. Her signature appears on the forms, which moreover include information that she knew was false—for example, statements that she knew the insured persons. She knew none of them.

The defendants conspired to violate Illinois’ common law prohibition against insurance contracts procured by persons who don’t have an insurable interest. The defendants argue that they didn’t know that such contracts are illegal. That is hard to believe but in any event ignorance of the law is no defense to this case.

Ohio National was the target of the conspiracy. The net loss that the scheme ended up causing Ohio National (beyond the commissions paid to Mavash Morady) consisted of the more than $605,000 that the company incurred in litigation expenses to void the policies in order to thwart efforts by the investors to collect policy proceeds upon the death of the insureds (persons to whom Ohio National would never have sold policies at normal premiums had it known in whose hands the ownership of the policies would end up). The total death benefits specified in the illegal policies amounted to $2.8 million, and Ohio National faced the prospect of being sued for those benefits when the persons insured by the policies died. By voiding the policies the insurance company accelerated its defense against the claims that the investors were bound to make when the insureds died.

Ohio National is seeking reimbursement of the expenses it has incurred in this litigation in order to avoid future litigation over the death benefits in the policies that it was fraudulently induced to issue. Where the wrongful acts of a defendant involve the plaintiff in litigation with third parties or place him in such relation with others as to make it necessary to incur expense to protect his interest, the plaintiff can then recover damages against such wrongdoer, measured by the reasonable expenses of such litigation, including attorney fees.

Ohio National gets its attorney’s fees but also gets to keep the premiums paid by the defendants on the voided policies and as a result ends up with more money than if these contracts had never existed. Being to blame for the illegal contracts the defendants have no right to recoup the premiums they paid to obtain them; allowing recoupment would, by reducing the cost, increase the likelihood of more similar unlawful activity.

ZALMA OPINION

This case is a lesson to all life insurers who learn, even before paying a claim, that it is the victim of a fraudulent STOLI scheme. It should, as did Ohio National, seek to rescind or void he contracts before the insured die and it is faced with claims on fraudulently obtained policies. By allowing the insurer to keep the premium and obtain damages, including attorneys fees is appropriate and should be emulated by all life insurers faced with a STOLI fraud.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

No Cover For Sexual Assault

“Professional Services” Do Not Include Sexual Misconduct of a Doctor

There are certain types of misconduct that no insurer is willing to insure. Sexual assault is one type of conduct that an insurer, especially one insuring medical professionals, is unwilling to insure. Since such conduct can never be accidental or fortuitous exclusions for such conduct are usually enforced by the courts.

In Medicus Insurance Company v. Erx Group, LLC, Slip Copy, United States District Court, E.D. Tennessee,  2016 WL 3982470 (07/22/2016) Medicus Insurance Company moved the court for Judgment on the Pleadings because of claims of sexual misconduct by an employed doctor of Erx Group.

BACKGROUND

The USDC was asked by Medicus Insurance Company (“Medicus”) to require it to defend and/or indemnify The ERx Group, LLC (“ERx”) with respect to twenty-seven lawsuits (“Underlying Lawsuits”) that are pending in state court in West Virginia. The Underlying Lawsuits allege that Dr. Pellegrini engaged in sexual misconduct with each plaintiff and that ERx negligently hired, supervised, investigated and/or placed Dr. Pellegrini at The Hope Clinic. Medicus sued seeking a declaratory judgment to determine whether it must defend or indemnify ERx with respect to the Underlying Lawsuits.

By way of background, Medicus issued three Physicians and Surgeons Liability polices to ERx (“Policies”). The Policies were in effect from April 1, 2012, to April 15, 2015. The Policies provided that Medicus “will pay all sums for claims for which the insured as an Entity, … becomes legally obligated to pay as damages because of medical incidents arising from professional services rendered or which should have been rendered by its employees or additional insureds.” A “medical incident” is defined as “an event due to professional services, acts or omissions arising out of treatment to a patient which could or did result in bodily injury, sickness, disease, disability, or death to any person for which damages may reasonably be expected or should have known to be sought against the insured.”

The Policies define “professional services” as follows: “1) the rendering of or failure to render diagnosis, medical or surgical treatment or opinion necessary to the practice of the insured’s specialty as stated on the Declarations Page or by endorsement; or 2) any Peer Review Activities on behalf of the insured listed on the Declarations Page. However, such professional services shall not be deemed to include any act or omission which the insured knows, or reasonably should have known, may result in damages or a claim or suit.”

The Policies also include a provision regarding liability related to conduct as an owner.

However, limiting the coverages, the Policies state that they do not provide indemnification against claims arising from certain sexual conduct.  “[T]he Company will defend but not indemnify you against any claim or suit that includes 1 or 2 below but only if that claim or suit includes allegations of professional liability otherwise covered this policy: ¶ 2. Any claim resulting from sexual intimacy, sexual molestation, sexual harassment, sexual exploitation or sexual assault.” (emphasis in original)

POSITIONS OF THE PARTIES

Medicus asserts that it does not have a duty to defend or indemnify ERx because the Underlying Lawsuits do not allege liability because of “emergency medicine” as set forth in the Policies. Medicus argues that all of the Underlying Lawsuits allege that Dr. Pellegrini sexually assaulted, molested, and/or harassed the underlying claimants while they were patients at the The Hope Clinic.

ANALYSIS

An insurance policy is subject to the same basic rules of construction and enforcement as are used for contracts in general. The insurance policy will be interpreted as written, with the ordinary and natural meaning accorded to its terms. Ambiguous terms will be construed against the insurer and in favor of the insured.

With respect to the duty to defend, an insurer must defend its insured in an action unless it is plain from the face of the complaint that the allegations fail to state facts that bring the case within or potentially within the policy’s coverage. It is accepted in the overwhelming majority of jurisdictions that the obligations of a liability insurance company to defend an action brought against the insured by a third party is to be determined solely by the allegations contained in the complaint in that action.

With respect to the duty to indemnify, this question depends on the facts that are proven at trial, unless the allegations in the complaint could under no circumstances lead to a result which would trigger the duty to indemnify.

The Policies cover medical incidents arising from professional services. The Policies identify ERx and Dr. Pellegrini’s specialty as “Emergency Medicine.” The Underlying Lawsuits allege damages resulting from Dr. Pellegrini’s sexual misconduct at the The Hope Clinic. ERx conceded at the hearing that the definition of “professional services” does not include sexual misconduct. Furthermore, it is undisputed that The Hope Clinic does not provide emergency services and that Dr. Pellegrini was not providing emergency services while working at The Hope Clinic. Moreover, The Hope Clinic is not an insured under the Policies.

Even if the Underlying Lawsuits alleged misconduct with respect to Emergency Services, the Policies at issue state that Medicus has no duty to indemnify against claims resulting from sexual intimacy, sexual molestation, sexual harassment, sexual exploitation or sexual assault. While the Underlying Lawsuits allege that ERx negligently hired, retained, or investigated, supervised and/or placed Dr. Pellegrini at The Hope Clinic, Medicus has no duty to defend or indemnify with respect to these allegations.

The obligation of a liability insurance company to defend an action brought against the insured by a third party is to be determined solely by the allegations contained in the complaint in that action.

The Policies provide that Medicus will not indemnify with respect to allegations of sexual misconduct. In addition, ERx argues the Underlying Lawsuits also allege negligent hiring with respect to ERx. The Court agreed with Medicus that this argument misses the point because the Underlying Lawsuits do not allege that the claimants sought or received Emergency Medicine services, which is what the Policies specifically cover.

The parties agree that The Hope Clinic did not offer “Emergency Services” and Dr. Pellegrini was not engaging in “Emergency Services” while at The Hope Clinic. Accordingly, the Court found Medicus’s position well-taken.

ZALMA OPINION

The analysis should have been easy and take no more than two paragraphs stating that the policy clearly and unambiguously excluded claims of sexual assault and that since the doctor, acting outside the course and scope of his profession, assaulted more than 20 women, the duty to defend or indemnify just did not exist.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Leave a comment

Exclusive Remedy Applies to Subcontractors

There is no Reason why a General Contractor and a Subcontractor Would Enter an Agreement for Joint Coverage & Still Be Subject to Tort Damages

It is axiomatic that workers’ compensation is an exclusive remedy to an injured worker. Problems arise in major construction projects where the general contractor and all the subcontractors – and their employees – agree to be bound by workers’ compensation insurance acquired by the general contractor.

In Matthew Eric Kershner, Appellant v. Samsung Austin…, Court of Appeals of Texas, 2016 WL 3974783 (July 22, 2016) Matthew Eric Kershner appealed the trial court’s summary judgment on his premises-liability claim against Samsung Austin Semiconductor, LLC, for personal injuries that he sustained while performing electrical work for a subcontractor of Samsung at one of Samsung’s sites.

Kershner contends that summary judgment was improper because there was a material fact issue about whether he was employed by an independent contractor and, therefore, whether the “exclusive remedy provision” of the Texas Workers’ Compensation Act (TWCA) applies, providing Samsung immunity from Kershner’s tort claims.

DISCUSSION

The exclusive-remedy provision of the TWCA on which Samsung relied in its motion for summary judgment provides that, in exchange for guaranteeing that employees injured on the job are promptly covered for medical expenses, regardless of fault, a subscribing employer receives immunity from the tort claims of that employee, and the workers’ compensation benefit is the employee’s exclusive remedy. The so-called “exclusive remedy defense” immunizes employers not only against the tort claims of their direct employees but also immunizes those employers acting as general contractors who have expressly provided in writing for workers’ compensation coverage for subcontractors and their employees.

For the purpose of Texas workers’ compensation law the exclusive-remedy provision applies to all “tiers” of subcontractors.

It is undisputed that Samsung was acting as the general contractor of the construction project on its premises and that Kershner’s employer, Spur Electric, Inc. (Spur), was a subcontractor of the electrical contractor hired by Samsung for the project. The summary-judgment record also contains (1) an “enrollment worksheet” signed by Spur expressly stating that Spur “hereby acknowledges and agrees that worker’s compensation insurance coverage is being provided to [Spur] and its employees pursuant to an Owner/Contractor Controlled Insurance Program (‘CCIP’/ ‘OCIP’)” and that such document “serves to memorialize the parties’ agreement for purposes of Texas Labor Code sec. 406.123” and (2) a “Certificate of Insurance” showing that Spur had enrolled in Samsung’s OCIP.

Instead, Kershner relies on evidence that purportedly creates a fact issue about whether, in addition to being a subcontractor, Spur is also an “independent contractor” as defined in the TWCA, contending that a determination that Spur is an independent contractor prohibits application of the exclusive-remedy provision.

There is no evidence that Spur chose not to participate in the workers’ compensation coverage provided by Samsung. Rather, the evidence conclusively establishes the opposite: that Spur explicitly agreed in writing to be bound by section 406.123 and enrolled in Samsung’s workers’ compensation insurance program.

Even assuming that Kershner’s summary-judgment evidence raised a material fact issue about whether Spur was an “independent contractor” under the TWCA, there can be no reasonable contention that parties such as those here (Spur and Samsung) would make a section 406.123 agreement but opt out of the statutory employment relationship it creates. It is unreasonable and unbelievable to believe there is any reason why a general contractor and a subcontractor would enter into an agreement under section 406.123 but disclaim whatever benefits and protections might ensue as a result. Therefore, the trial court decision was affirmed.

ZALMA OPINION

The state of Texas, and many states, allow general contractors to join together to save money by purchasing a single workers’ compensation policy that covers all of the workers at the job site whether employees of the general contractor or employees of any of the subcontractors or sub-subcontractors working on the job. The injured unsuccessfully tried to escape the exclusive remedy provision but failed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

Argument Must Be Tethered to Facts

Duty to Defend Even if Plaintiff Pays For Damage to Others

It is axiomatic that the duty to defend is broader than the duty to indemnify. This is especially so in a four corners state where the determination of coverage is based upon the allegations of the suit compared to the the policy wording rather than rely on extrinsic facts. As a result, regardless of the logic of a suits allegations, if it claims that some person suffered bodily injury to the detriment of the plaintiff who paid for the treatment of the injured person, a defense can be required.

In Cincinnati Insurance Company v. H.D. Smith, L.L.C., — F.3d —-, United States Court of Appeals, Seventh Circuit 2016 WL 3909558 (July 19, 2016) a Pharmaceutical distributor’s commercial general liability (CGL) insurer sued the distributor for declaratory judgment that it owed no duty to defend West Virginia’s suit alleging liability for contributing to the state’s epidemic of prescription drug abuse. The United States District Court for the Central District of Illinois entered summary judgment in favor of insurer. Distributor appealed.

BACKGROUND

According to West Virginia, it faces an “epidemic of prescription drug abuse” that costs it hundreds of millions of dollars every year. Seeking some relief, the state sued pharmaceutical distributors, asserting a variety of legal claims. One of the distributors, H.D. Smith, asked its insurer, Cincinnati Insurance Company, to defend the suit. Instead Cincinnati filed this suit seeking a declaration that its policy does not cover the suit filed by West Virginia. 

The complaint alleged that certain pharmacies—pejoratively called “pill mills”—knowingly provided citizens with hydrocodone, oxycodone, codeine, and other prescription drugs, not for legitimate medical uses but to fuel and profit from the citizens’ addictions. The pharmacies ordered the drugs from the defendant distributors in huge quantities—quantities so large that West Virginia contends the distributors should have known the drugs would be used for illicit and destructive purposes. West Virginia alleged that the defendant distributors “acted negligently, recklessly, and in contravention of West Virginia law,” and cost the state hundreds of millions of dollars every year. Among other things, that money was spent caring for drug-addicted West Virginians who suffer drug-related injuries and cannot pay for their own care.

At relevant times, H.D. Smith was covered by a general commercial liability insurance policy issued by Cincinnati Insurance Company. Under the policy, Cincinnati agreed to cover damages that H.D. Smith became legally obligated to pay “because of bodily injury.” Cincinnati also agreed to defend H.D. Smith against any suit seeking such damages. The policy defines “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” And “damages because of bodily injury” include “damages claimed by any person or organization for care, loss of services or death resulting at any time from the bodily injury.”

ANALYSIS

 An appellate court must, when applying Illinois law, compare the allegations in the underlying complaint to the policy language in order to determine whether the insurer’s duty to defend has arisen.  The language of the policy must be liberally construed in favor of the insured. Importantly, if several theories of recovery are alleged in the underlying complaint against the insured, the insurer’s duty to defend arises even if only one of several theories is within the potential coverage of the policy.

The policy that Cincinnati issued to H.D. Smith covers suits seeking damages “because of bodily injury.” Such a policy provides broader coverage than one that covers only damages “for bodily injury” by not limiting coverage to a person or persons who incurred the bodily injury.

West Virginia alleged that its citizens suffered bodily injuries and the state spent money caring for those injuries—money that the state seeks in damages. On its face, West Virginia’s suit is covered by Cincinnati’s policy because the state is seeking damages for bodily injuries incurred by its citizens that the treatment for which the state paid. Cincinnati argues to the contrary, stressing that West Virginia seeks its own damages, not damages on behalf of its citizens.

Cincinnati’s argument is untethered to any language in the policy.

West Virginia’s complaint is quite different. The state alleges that H.D. Smith negligently distributed drugs that were “consumed by persons then residing in West Virginia.” In so doing, H.D. Smith “interfered with the right of West Virginians to be free from unwarranted injuries, addictions, diseases and sicknesses.” H.D. Smith’s actions caused West Virginia to spend money “addressing and combating the prescription drug abuse epidemic.” West Virginia seeks reimbursement of such “damages and losses sustained as the proximate result” of H.D. Smith’s negligence.

Given West Virginia’s allegations the court concluded that Cincinnati has a duty to defend H.D. Smith.

ZALMA OPINION

The state of West Virginia is trying to make a drug manufacturer responsible for the state’s need to treat its drug addicts because they produced the drugs and supplied them to pharmacies the state believes were pill mills which fed the addition of its citizens. They should have sued the addicts to recover what was spent to treat them. Since the addicts have no money the state was able to hold the manufacturer of the drugs – good medicine if used properly – for selling the drugs manufactured. They could have, as easily, sued Ford, Toyota, General Motors, Nissan and Chrysler for manufacturing cars that they knew would be used negligently for the injuries suffered in auto accidents.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

New E-Books From Barry Zalma

E-Books Available From Barry Zalma

Random Thoughts on Insurance – Vol. IV

Since 2010 I have been writing a blog post at least five days a week. This e-book is a collection of those posts that reveal my interest in insurance case law from 2014 to 2016. Some of the cases reviewed were important. Some were of first impression. Others will be totally unimportant. All were interesting to me and I hope are interesting to the reader. This e-book is more than 700 pages of my review of interesting cases from 2013 through January 2014.

After you purchase please wait for the e-book to upload from PayPal. If it does not upload please e-mail zalma@zalma.com and I will personally send you a copy of the e-mail in pdf format.

Insurance Fraud & Weapons to Defeat Fraud

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

No one will ever be able to place an exact number on the amount lost to insurance fraud. Everyone who has looked at the issue knows – whether based on their heart, their gut or empirical fact determined from convictions for the crime of insurance fraud – that the number is enormous.

When insurers and governments put on a serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-government-based or funded insurers drops logarithmically.

The e-book contains the full text of the most important insurance fraud cases in over 2000 pages of material essential to every insurance fraud professional.

Getting the Whole Truth

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Equitable Mootness

Sit On Rights & You Lose Insurance Benefits

When a fire loss occurs during the negotiation for the sale of real property the sale can be completed by the seller assigning its rights to recover from the insurer the benefits of the fire insurance. In In Re: JMC Memphis, LLC, JMC Memphis, LLC,…, United States Court of Appeals, Eleventh Circuit, — Fed.Appx. —-, 2016 WL 3923833 (07/21/2016) an appeal came to the Eleventh Circuit from the bankruptcy court’s order approving a settlement agreement as part of the Chapter 7 bankruptcy proceedings of debtor Geoffrey Edelsten. JMC Memphis, LLC (“JMC”) — a non-party to the settlement agreement — appealed the bankruptcy court’s order to the district court. The district court dismissed JMC’s appeal as equitably moot.

FACTS

In August 2012, JMC entered into a contract to purchase an apartment complex (“Property”) from Investments Australia, LLC. The Property had been damaged badly by a number of fires, all but one of which occurred before JMC contracted to buy the Property. The last fire occurred, however, on 22 September 2012 after execution of the purchase contract but before closing. Following the 22 September fire, JMC and Investments Australia executed an amendment to the purchase agreement. In pertinent part, Investments Australia assigned to JMC its rights, title, and interest in insurance proceeds paid “in connection with the September 22, 2012 claim,” noting that JMC was “responsible for pursuing the claim, and retaining its own attorneys and/or adjusters.” In the event no insurance was recovered, Investments Australia agreed to pay JMC $85,000.

Investments Australia later filed a civil action against its insurer, International Hanover, Ltd. (“Hanover”), to recover on claims related to all fires on the Property. Hanover denied coverage, asserting several defenses.

In January 2014, Edelsten (a member of Investments Australia) filed for bankruptcy. As part of the bankruptcy proceedings, Edelsten and the other two members of Investments Australia (Levy and Mawardi) participated in mediation with Hanover to resolve the ongoing insurance dispute. The parties entered ultimately into a settlement agreement pursuant to which Hanover agreed to pay $750,000 to the bankruptcy trustee in exchange for a full release of all claims against Hanover under the insurance policy and an order barring future claims by any party against Hanover arising under the insurance policy.

The parties to the settlement moved the bankruptcy court to approve the settlement agreement and to issue a bar order. The bankruptcy court scheduled a non-evidentiary hearing on the motion. JMC appeared at the hearing and argued its objections to the settlement agreement. Briefly stated, JMC’s position is that it — and not the members of Investments Australia or the bankruptcy estate — is entitled to 100% of the insurance proceeds.

After considering JMC’s objections, the bankruptcy court approved the settlement agreement. The bankruptcy court, however, required the bankruptcy trustee to set aside $100,000 in escrow pending resolution of JMC’s claim. In doing so, the bankruptcy court found that JMC’s claim to the insurance proceeds was limited to proceeds connected to the 22 September fire. Moreover, in the light of the $85,000 valuation set forth in the amendment to the purchase agreement, the bankruptcy court reasoned that an escrow of $100,000 was sufficient to protect JMC’s interests.

JMC raised no contemporaneous objection to the bankruptcy court’s pronounced order and requested no stay of the bankruptcy court’s order. JMC appealed the bankruptcy court’s order to the district court. The district court dismissed JMC’s appeal as equitably moot.

ANALYSIS

Equitable mootness is a doctrine that permits courts sitting in bankruptcy appeals to dismiss challenges when effective relief would be impossible. The doctrine of equitable mootness reflects a court’s concern for striking the proper balance between the equitable considerations of finality and good faith reliance on a judgment and the competing interests that underlie the right of a party to seek review of a bankruptcy court order adversely affecting him.  Central to a finding of mootness is a determination by an appellate court that it cannot grant effective judicial relief.

As an initial matter, the appellate court noted that JMC failed to exercise due diligence in protecting its own financial interests. Despite having been assigned all Investments Australia’s rights, title, and interest in the insurance proceeds arising from the 22 September fire (including expressly the responsibility to pursue a claim for coverage), JMC made no attempt to seek insurance coverage from Hanover. And nothing evidences that JMC participated in or contributed in any way to Investments Australia’s efforts to recover payment from Hanover during the lengthy civil litigation or during the ultimate settlement negotiations.

JMC’s failed to request a stay of execution of the settlement agreement from either the bankruptcy court or the district court. In the absence of a stay order (or even a formal objection from JMC), the settling parties relied on the finality of the bankruptcy court’s order and began consummation of the settlement agreement.

JMC contends that effective judicial relief is still available because the bankruptcy trustee currently holds over $435,000 (58%) of the insurance proceeds and because the district court could easily require Levy and Mawardi to disgorge their settlement funds. JMC also contends that because JMC seeks no recovery of the funds already disbursed to the mediator and to Investments Australia’s lawyer, unwinding the settlement agreement would affect the rights of no third parties.

JMC’s argument, however, ignores the full consequences of unwinding the settlement agreement. Perhaps most important, unwinding the settlement agreement would also mean unwinding Hanover’s agreement to provide $750,000 in insurance coverage. Unwinding that portion of the settlement agreement would thus require all disbursement recipients — including both third parties — as well as the bankruptcy estate to disgorge all settlement funds received. Without payment from Hanover pursuant to the terms of settlement agreement, no monetary relief would be available to JMC.

In addition, granting JMC relief — thus allowing JMC to assert its own claim against Hanover under the insurance policy — would require an unwinding of the bar order: a central component of the settlement negotiations.

To the extent JMC seeks only partial unwinding of the settlement agreement (leaving intact Hanover’s agreement to provide coverage for the fires), granting such relief would necessarily reform the settlement agreement to reflect an agreement that no party intended/contemplated. The settlement agreement was the result of lengthy and careful negotiations and reflected a global compromise among several parties with conflicting interests. It would be inappropriate at this stage — particularly in the light of JMC’s overall failure to exercise due diligence — for a court to unwind select portions of the settlement agreement to allow JMC to now pursue financial compensation.

ZALMA OPINION

People like JMC and its lawyers forget that the duty of good faith and fair dealing devolves on both the insured and the insurer to do nothing to deprive the other of the benefits of the contract of insurance. In this case, after others worked up a settlement of the multiple fire claims, JMC attempts to destroy the settlement properly and in good faith entered into by the parties and the insurance company, unwinding a settlement that had already been paid out was simply unfair and equitably moot.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

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Insurers Must Write Their Policies Carefully

All Risks Covers Everything Not Clearly and Unambiguously Excluded

All risk policies cover every possible risk of loss except those specifically and unambiguously excluded. It is difficult to write clear and unambiguous exclusions and when they are written a court can, and often does, find an ambiguity. As a result some insurers should prefer a named peril policy to avoid a court compelling payment of a claim the insurer did not intend to pay.

In Bologna v. Marnell, Slip Copy, United States District Court, E.D. Louisiana 2016 WL 3877975, CIVIL ACTION NO. 15-2329 (07/18/2016) Old Republic Insurance Company (“Old Republic”) moved the court for summary judgment.  Plaintiffs’, Francis O. Bologna and Advanced Technological Training, LLC (“ATT”) sought coverage.

FACTS

Bologna is the sole owner and member of ATT, the owner of a 1973 Piper Challenger, PA-28-180 (“the Aircraft”). ATT insured the Aircraft with Old Republic under an aviation insurance policy (“the Policy”) with an insured value of $80,000, effective from June 1, 2014 to June 1, 2015. In the “EXCLUSIONS” section of the Policy, Exclusion No. (2) states:This policy does not apply: ¶ … ¶  2. To any Insured while the aircraft is in flight ¶ (a) If piloted by other than the pilot or pilots designated in the Declarations; ¶ (b) If piloted by a pilot not properly certificated, qualified and rated under the current applicable Federal Aviation Regulations for the operation involved, whether or not said pilot is designated in the Declarations[.]” As stated in the “DECLARATIONS” section, “Pilots” is defined as follows: “When in flight, the aircraft will be piloted only by the following pilots, provided he/she has a valid pilot’s certificate and a valid medical certificate, each appropriate to the flight and the aircraft …”

On or about September 13, 2014, Bologna leased the Aircraft to Eamonn Marnell under an Aircraft Dry Lease Agreement. The next day, Marnell crashed the Aircraft in St. Petersburg, Florida.  At the time of the crash, Marnell had less than 300 total logged flying hours. Plaintiffs submitted proof of loss to Old Republic, but Old Republic did not pay the first party claim for physical damage to the Aircraft.

Defendant argues that the Policy is clear that all coverage is excluded under Exclusion No. (2) when the Aircraft is flown by an individual not defined as a pilot in the declarations section. Defendant further maintains that Marnell was not a pilot as defined in the declarations section of the Policy, as proven through Plaintiffs’ own complaint, as well as other discovery.

DISCUSSION

Interpretation of an insurance policy is a question of law. A federal court sitting in diversity applies local Louisiana rules of policy interpretation in this case.  Louisiana law is clear that the interpretation of insurance policy provisions is to be governed by the rules pertaining to the interpretation of other types of contracts.

The words of a contract must be given their generally prevailing meaning and when they are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. However, words susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract.

Interpreting the words of the Policy in light of their generally prevailing meanings, while remaining mindful of the Policy as a whole in assessing its phrases, the court found that the Policy does not unambiguously include or exclude physical damage coverage. In the Policy’s “DECLARATIONS” section, it is clear that an individual is not a pilot under the terms of the Policy so as to trigger coverage if he or she is neither Francis M. Bologna nor a pilot certified as having a minimum of 300 total logged flying hours.

Because Plaintiffs allege in their complaint that Marnell did not have 300 total logged hours, did not object to Defendants’ statement of the same, and did not dispute that Marnell crashed the Aircraft, it is clear that Marnell was operating the Aircraft but was not a pilot so as to trigger coverage of “any Insured.”

“All Risk” Insurance Policies

Principles relevant to the type of insurance coverage at issue favor a finding of coverage. Physical damage to the Aircraft is covered under the Policy’s Coverage F, which affords an “All Risk Basis” for coverage. Under Louisiana law courts have held that under an “all risk” policy all risks are covered unless clearly and specifically excluded. This is because a policy of insurance insuring against “all risks” creates a special type of coverage that extends to risks not usually covered under other insurance.

The Policy did not expressly exclude the loss from coverage for damage to the aircraft and is, at the very least, ambiguous so as to warrant construing it in favor of coverage. In the instant Policy, the “All Risk Basis” for Physical Damage Coverage under Coverage F states that it is “[t]o pay for any physical damage to or loss of the aircraft, including disappearance of the aircraft.” (emphasis added). Thus, all risks that result in physical damage or loss are covered unless clearly and specifically excluded or if they are the result of misconduct or fraud.

Exclusion No. (2) does not clearly and specifically state that the Policy is inapplicable to claims of damage or loss when the Aircraft is flown by a “non-pilot,” so as to expressly exclude the loss.

Though the Named Insured is defined with respect to Coverages F and G, this is further proof that Exclusion No. (2), and its reference only to “any Insured,” bars claims concerning persons – albeit natural or juridical –for liability coverage for bodily injury, property damage, or medical expenses.

First Party Physical Damage Coverage Disputes

While it is clear that coverage is barred as to claims concerning those defined under the Policy as Insureds (e.g., for bodily injury for pilot and passengers, property damage, and medical services), it is not clear that coverage is similarly excluded as to claims associated with the Aircraft (e.g., for physical damage or loss).

There is no question that Exclusion No. (2) bars liability coverage for bodily injury or property damage. However, the Policy does not expressly exclude coverage for physical damage to or loss of the aircraft.

Accordingly, the court concluded that the “language of the Policy seems to afford coverage for physical damage to or loss of the Aircraft under Coverage F as Exclusion No. (2) appears inapplicable. Although this Court is wary to conclusively state that this was the intent of the parties, it notes that Defendant had the burden of proving that the loss fell within Exclusion No. (2) and failed to do so.”

Exclusion No. (2), is at the very least ambiguous. The ambiguity must be construed against Defendant and in favor of coverage and therefore the insurer’s motion for summary judgment failed.

ZALMA OPINION

Writing insurance policies is difficult. This case revealed that although the insurer did not want to insure pilots with less than 300 hours experience it failed to make its policy clear enough for the USDC judge. Had the insurer wrote Exclusion No. 2, to read: “This policy does not apply to bodily injury, property damage, and damage to the aircraft if not operated by a person qualified as a pilot as defined.”

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Comments Off on Insurers Must Write Their Policies Carefully

Good Faith Requires Insured to Keep Promises

Breach of Condition Eliminates Coverage for Loss

Insurance policies are made of of mutual promises. In the Eastern United States, where winters can be severe, the basic insurance policy requires that the insured – if the home is to be unoccupied for a serious period of time – the temperature in the dwelling must be maintained to prevent freezing of plumbing and resulting damage. Failure to do so breaks the promise made by the insured and eliminates coverage.

In Micalis (Michael) Pazianas, M.D., et al. v. Allstate, United States District Court, E.D. Pennsylvania 2016 WL 3878185 (07/18/2016) the USDC for the Eastern District of Pennsylvania was faced with a suit against Allstate for refusing to pay for water damage caused by frozen plumbing in an unoccupied house and the claims of the insured that he tried to protect the property from freezing.

INTRODUCTION

Allstate Insurance Company (“Allstate”) moved the USDC for judgment on the pleadings where Plaintiff Michalis (Michael) Pazianas, M.D., sued claiming breach of contract claim against Allstate, for refusing to compensate him under the terms of his homeowners insurance policy for losses he incurred as the result of water damage from burst pipes.

Since both parties presented matters outside the pleadings the court treated this motion for judgment on the pleadings as a motion for summary judgment.

FACTUAL BACKGROUND

Allstate issued Pazianas a homeowners insurance policy that covered Pazianas’s house at 10 Hidden Springs Circle, Newtown Square, Pennsylvania (the “Property”). On or about February 5, 2015, the Property sustained water damage in excess of $50,000.00.  Pazianas promptly notified Allstate of the damage. Allstate has refused to pay Pazianas under the policy.

Allstate raised, as an affirmative defense, that it had no duty to pay Pazianas under the policy because at the time of the loss the Property was unoccupied, Pazianas had failed to use reasonable care to heat the building during his absence, and Pazianas did not shut off the water supply and drain the system and appliances before leaving the Property unoccupied during the winter months.

Pazianas left the Property for England on October 10, 2014 and did not return until February 5, 2015. No one was living at the Property from October of 2014 until Pazianas returned on February 5, 2015, and the house was unoccupied during that time. Prior to leaving, Pazianas did not shut off the water to the Property or drain the water from the system or appliances. Before he left, Pazianas set the Property’s thermostat at 55 degrees Fahrenheit and both the thermostat and furnace appeared to be working. Notwithstanding the instructions in the thermostat’s manual directing users to replace the batteries once a year or before leaving home for more than a month, Pazianas did not replace the batteries before departing for England nor had he replaced the batteries in more than a year when he left.  When Pazianas left for England, he thought he might return to the Property in December, but he remained in England through January of 2015.

When Pazianas returned to the Property on February 5, 2015, the heat was off, the thermostat screen was blank, and water was flowing from the ceilings in the laundry and living rooms. After Pazianas replaced the batteries in the thermostat, it turned back on. Pazianas’s plumber told him that the water damage was caused by pipes freezing in the garage and living room and then bursting.

According to Allstate’s independent forensic engineering report, the multiple bursting of several pipes in the Property could only have been caused by freezing. The Property has a gas-fired warm air furnace controlled by a battery-powered digital thermostat. The monthly gas bills indicated that no gas was used in the spring, summer, and fall of 2014, and monthly gas usage only rose to a very low level beginning in October of 2014.

A supplemental engineering report confirmed that without battery power the thermostat could not turn the heating system on. The report confirmed that, before departing for England, Pazianas did not (1) winterize the house by closing the main water valve and draining the pipes, (2) have a low-temperature sensor added to the house alarm system, or (3) replace the thermostat batteries.

Allstate denied Pazianas’s claim because its investigation concluded that Pazianas had failed to use reasonable care to maintain heat in the Property and therefore the loss was excluded under his policy.

DISCUSSION

In an insurance coverage dispute, the insured bears the initial burden of making a prima facie showing that a claim falls within the policy’s grant of coverage. If the insured meets that burden, then the insurer bears the burden of demonstrating that a policy exclusion excuses it from providing coverage.

Pazianas’s policy with Allstate excluded coverage for losses caused by “Freezing of plumbing, fire protective sprinkler systems, heating or air conditioning systems or household appliances, or discharge, leakage or overflow from within the systems or appliances caused by freezing, while the building structure is vacant, unoccupied or being constructed unless you have used reasonable care to: ¶ a) maintain heat in the building structure; or ¶ b) shut off the water supply and drain the system and appliances.”

The material facts are undisputed.  Pazianas admits, and it is not disputed, that the Property was unoccupied and that he did not shut off the water supply and drain the appliances before departing. In Pennsylvania, reasonableness is an objective standard reflecting the degree of care a person of ordinary intelligence and prudence would commonly exercise under similar circumstances.

There is a genuine issue of material fact only when there is sufficient evidence such that a reasonable juror could find for the party opposing the motion. Even accepting Pazianas’s allegations as true and granting him the benefit of all reasonable inferences, the undisputed material facts demonstrate that Pazianas (1) left the Property vacant for several months in the fall and winter, (2) made no provision for having the Property inspected during his trip to England after he learned that his daughter would be unable to inspect the Property, (3) took no steps to ensure that the battery-operated thermostat would continue to operate for the duration of his extended absence, and (4) did not shut off the water to the Property or drain the appliances.

Even accepting as true Pazianas’s averments that he asked his daughter to inspect the Property in October, set the thermostat before departing, and did not intend to be away for more than two months, no reasonable juror could find that Pazianas used reasonable care to maintain heat in the Property during its vacancy. Further, although Pazianas states in a conclusory fashion that there are genuine issues of material fact to resolve at trial based upon oral testimony that is subject to a credibility determination, he does not indicate what these issues are, and the Court’s decision requires no credibility determination or weighing of the evidence in light of the undisputed facts.

Since there are no disputes of material fact to preclude summary judgment, and the undisputed material facts demonstrate that Pazianas’s policy with Allstate does not cover the losses for water damage.

ZALMA OPINION

Insurance relationships require promises to be paid. Since insurance is a contract of utmost good faith both parties must do nothing to deprive the other of the benefits of the insurance contract. By failing to keep the promise he made, Pazianas lost the right to make a claim for water damage caused by frozen pipes that burst because the house was not protected from freezing.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Good Faith Requires Insured to Keep Promises

When a Condition Precedent Is Not a Condition

Notice Prejudice Rule Defeats Clear & Unambiguous Condition

Courts are quick to claim that parties have the right to enter into any contract as long as its terms are not criminal or violate public policy. Insurance contracts  dealing with large commercial risks and the dangers of damages caused by pollution are negotiated between sophisticated parties. In a case where a simple, clear and unambiguous requirement that for coverage to apply notice must be given to the insurer no later than 60 days after the loss was challenged by an insured who did not comply with the condition and cured the problem before reporting the incident to its insurer.

In MarkWest Energy Partners, L.P. v. Zurich American Insurance Company, Colorado Court of Appeals, Court of Appeals No. 15CA0770, 2016 WL 3885262 (July 14, 2016) plaintiff, MarkWest Energy Partners, L.P. (MarkWest), appealed the district court’s entry of summary judgment in favor of defendant, Zurich American Insurance Company (Zurich).

The district court concluded, applying the terms of the contract, that, because MarkWest failed to comply with a condition precedent in a liability policy requiring it to timely report an “incident” to Zurich, it was barred from recovering anything from Zurich.

BACKGROUND

MarkWest, a natural gas company, procured from Zurich a commercial general liability policy (the Policy) with a limited pollution liability endorsement (the Endorsement), covering “incidents” occurring between November 1, 2012, and November 1, 2013.

On November 4, 2012, MarkWest was constructing a pipeline in Ohio when a chemical used in the drilling process escaped the drilling area, thereby contaminating the surrounding area. MarkWest immediately reported the incident to local environmental officials, who approved a chemical cleanup protocol weeks later and confirmed that cleanup had been successfully completed in February 2013.

 

On March 28, 2013, about five months after the loss, MarkWest notified Zurich of the contamination and filed an associated claim for over $3 million. Although the incident had occurred and Zurich had been notified well within the Policy’s coverage dates, Zurich denied the claim because MarkWest had failed to provide notice within sixty days of the “incident,” as required by the Endorsement.

MarkWest filed the present action to recover from Zurich $3 million-plus in damages with respect to the original insurance claim, as well as additional damages for bad-faith (common law and statutory) denial of coverage.

Zurich filed a motion for summary judgment and MarkWest responded with a motion for determination of a question of law.

The district court ruled in favor of Zurich, concluding that, by failing to report the pollution incident to Zurich within the sixty day notice period, “MarkWest did not comply with an express condition precedent in the insurance contract”; therefore, “MarkWest’s right to coverage under the Policy was never triggered”; and “the question of whether Zurich was prejudiced by MarkWest’s untimely notice is, therefore, irrelevant.”

ANALYSIS

MarkWest contends that the district court erred because “unless [Zurich] can show its ability to investigate the occurrence or defend against a claim was prejudiced by late notice, [the court] cannot deny a claim based solely on a failure to strictly comply with the notice provision.”

The Policy’s Meaning

In its main text, the Policy excluded from coverage losses due to pollutants; the Endorsement to the Policy, however, stated that “this exclusion does not apply to … ‘property damage’ caused by a ‘pollution incident’ provided that: … [t]he ‘pollution incident’ … [is] reported to [Zurich] in writing, within [sixty (60) ] days from the date of [its] commencement.” The Endorsement also added a “Duties In The Event of Pollution Incident” provision to the Policy which (1) repeated MarkWest’s obligation to report any pollution incident within sixty days of its commencement and (2) additionally required that MarkWest report any claim caused by a pollution incident “in writing as soon as practicable” and within five years after the policy’s expiration date.

A condition precedent is an act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. Consistent with the plain meaning of the term “provided that,” courts in other jurisdictions have recognized that use of that phrase will generally create a condition precedent. Under these ordinary contract principles, in and of itself, MarkWest’s failure to comply with the Endorsement’s notice requirement bars recovery here.

But the issues in this case go beyond simple “contract interpretation” and application. They also involve matters of public policy surrounding the enforcement of insurance policies.

Colorado’s “Notice-Prejudice” Rule

Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests. Under that rule, an insurer can deny benefits only where its ability to investigate or defend the insured’s claim was compromised by the insured’s failure to provide timely notice.

MarkWest contends that the notice-prejudice rule applies in this case; Zurich responds that the notice-prejudice rule is inapplicable. Each party’s position carries considerable force and is supported by various pronouncements in Colorado case law. And, each party’s position is supported by case law from other jurisdictions.

It was the purpose of (not the label attached to) the notice requirement in a claims-made policy that was critical to the court’s decision in earlier cases. Insurance contracts quite commonly make timely notice an express condition precedent to the insurer’s duty to defend or indemnify the insured; yet most jurisdictions require the insurer demonstrate that it was prejudiced by the delay in providing notice.

Where the function and purpose of the notice provision has not been frustrated by the insured — i.e., where there is no prejudice — the reason behind the notice condition in the policy is lacking. In these cases, the notice clause should not serve as a technical basis for the insurer to escape liability.

The court concluded that Colorado’s notice-prejudice rule applies even where, as here, the notice requirement is a condition precedent to coverage under an occurrence liability policy. Because the district court concluded otherwise, we must reverse its decision and remand the case for further proceedings.

ZALMA OPINION

The function and purpose of the notice provision exists to allow an insurer the opportunity and ability to investigate a claim presented to it. When the insured admits to state agencies that it has polluted the land, creates a plan to cure the pollution, and actually does the clean-up before reporting the loss to the insurer it should have been obvious to the court that the insurer was prejudiced.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

 

Posted in Zalma on Insurance | Comments Off on When a Condition Precedent Is Not a Condition

It’s Not Nice To Lie to Get Life Agency Appointment

Obtaining Life Insurance Agency Agreement by Misrepresentation is Criminal & Collection of Commission is Theft

Insurance companies involved in a business of utmost good faith believe applications presented to them by licensed insurance agents and brokers who wish to represent them in the sale of life insurance. They do not conduct an investigation of the applicant but, rather, rely on the applicants good faith in seeking the agency appointment.

In Young v. State, Court of Appeals of Indiana, No. 29A02–1508–CR–1240, 2016 WL 3763452 (July 14, 2016) Edward A. Young obtained an agency appointment with a life insurance company although he had no license by using the name and license number of a licensed agent who was an acquaintance.

FACTS

Irene Gentry is an independent insurance agent and, during the period of time relevant to this case, was licensed to sell life, accident, and health insurance.  Edward A. Young and  Gentry became friends and attended prayer meetings together. She was aware that he was also an independent insurance agent and occasionally referred customers to him.

Young’s family owned Liberty Insurance Agency, LLC. His wife and son were listed as Liberty Insurance’s officers on documents filed with the Indiana Secretary of State. In 2010, an employee of Liberty Insurance helped Gentry apply for life insurance for herself. She filled out an application containing information including her address, social security number, and date of birth. By 2012, Young and his wife had surrendered their licenses to sell insurance in Indiana, but Liberty Insurance continued to operate.

In early 2012, Fidelity Life Association, a life insurance company, received a “General Agent Application” that purported to have been signed by Irene Gentry on February 29, 2012. Gentry neither prepared nor signed the application and did not authorize anyone to prepare it or sign it on her behalf.

The applicant asked Fidelity Life to appoint Gentry to sell Fidelity Life’s policies. The applicant further asked Fidelity Life to pay Gentry’s commissions to Liberty Insurance. The application had several attachments, including an authorization for electronic fund transfers of commissions to Liberty Insurance’s bank account. In another attachment, Gentry was incorrectly identified as the Vice–President of Liberty Insurance. The application also included a federal W–9 form, entitled “Request for Taxpayer Identification Number and Certification.” The W–9 form was purportedly signed by Gentry on behalf of Liberty Insurance. On the W–9 form, an address was listed for Liberty Insurance that was, in reality, Young’s home address.

Fidelity Life accepted the application and authorized Gentry to sell its insurance policies as an independent agent. Fidelity Life paid commissions to Liberty Insurance’s employees, including Young, his son, and his daughter-in-law. The commissions were advance payments, based on a projection of the premiums the policyholders are expected to pay. In this case, policyholders failed to pay the premiums for several Fidelity Life policies sold by Liberty Insurance’s employees. Fidelity Life deemed Gentry, the person who allegedly signed the application, to be ultimately responsible for the debts.

Meanwhile, in December 2012, Gentry applied to Oxford Life to sell their insurance policies. She had not previously been an agent of that company. Oxford Life informed her she was already their appointed agent through Liberty Insurance and owed them money for advance commissions on premiums that were not paid. The company further informed Gentry that, due to her unpaid debt, it had listed her on Vector. Vector is a list of insurance agents who owe debts to insurance companies. After obtaining additional information from Oxford Life, Gentry contacted Young. When Gentry told Young that Oxford Life had placed her on Vector due to Liberty Insurance’s actions, he promised to resolve the situation “today.” He acknowledged writing policies in her name without her consent or permission.

An investigator employed by Oxford Life contacted Young, who acknowledged in a recorded phone conversation that he entered into an agreement with Oxford Life using Gentry’s name “without her consent or even her knowledge.”

The State charged Young with forgery (in relation to the false application submitted to Fidelity Life), insurance fraud (in relation to the false commission reports submitted to Fidelity Life), and theft (taking unearned funds from Fidelity Life). A jury determined Young was guilty as charged.

DISCUSSION AND DECISION

The purpose of voir dire is to determine whether potential jurors can render a fair and impartial verdict in accordance with the law and the evidence. Voir dire panelists may be asked questions to identify bias but not to condition them to be responsive to the questioner’s position. Proper examination may include questions designed to disclose the panelists’ attitudes about the type of offense charged.

The hypothetical used by the prosecutor in voir dire focused on core jury functions such as assigning responsibility for offenses and weighing witness credibility.  As a result, the hypothetical did not amount to prosecutorial misconduct as Young contends, much less fundamental error.

ADMISSION OF EVIDENCE

Young claims the trial court should not have admitted a recording of a phone conversation between Young and an investigator for Oxford Life.  The admission and exclusion of evidence falls within the sound discretion of the trial court and is reviewed only for an abuse of discretion. In this case, the jury heard Exhibit 9, a recording of a telephone conversation between Young and an investigator for Oxford Life. During the recording, Young admitted to the investigator that he entered into an agreement with Oxford Life using Gentry’s name “without her consent or even her knowledge.” He further stated, “I got her into this bit with your company, and it’s wrong.”

Finally, the trial court read a limiting instruction to the jury.  On appeal the appellate court presumed the jury obeyed the court’s instructions. As a result, any prejudice from the admission of Exhibit 9 did not substantially outweigh its probative value, and the trial court did not abuse its discretion.

SUFFICIENCY OF THE EVIDENCE

On a challenge to the sufficiency of the evidence, the court does not reweigh the evidence or judge the credibility of the witnesses. Instead, the court respects the jury’s exclusive province to weigh conflicting evidence.

In order to convict Young of forgery as a Class C felony, the State was required to prove beyond a reasonable doubt that: (1) Young (2) with the intent to defraud (3) made or uttered (4) a written instrument (5) in such a manner that it purported to have been made (6) by another person. Young claims he did not make or utter the false application that was submitted to Fidelity Life in Gentry’s name requesting her appointment as an independent agent.

The evidence most favorable to the judgment reveals Young had access to Gentry’s personal information because she had applied for life insurance through Liberty Insurance. Young admitted to a Fidelity Life investigator that he had “created a debt” for Gentry “without her approval or consent.”  This is sufficient evidence from which the jury could have reasonably determined Young forged the application.

The record establishes that Young, who had surrendered his insurance agent license to the Indiana Department of Insurance, began an agency relationship with Fidelity Life in Gentry’s name, and he knew he did not have her “approval or consent.” Gentry had a valid insurance agent license. The jury could reasonably extrapolate from this evidence that Young intended to fool Fidelity Life into believing it had established a relationship with Gentry, with the plan of receiving commissions from Fidelity Life for selling its policies. This is ample evidence of intent to defraud.

INSURANCE FRAUD

In order to convict Young of insurance fraud as a Class C felony, the State was required to prove beyond a reasonable doubt that: (1) Young (2) knowingly and with intent to defraud (3) caused a statement containing false, incomplete or misleading information (4) to be presented to an insurer (5) and caused economic loss in an amount exceeding $2,500. Young claims the State failed to prove he caused any economic loss. As a result, Fidelity Life placed Gentry on Vector, an insurance industry blacklist “that pretty much paralyzes you.” If you are put on the list, “you can’t do business.” A jury could reasonably infer from this evidence that Gentry had experienced lost income and other costs greater than $2,500 as a result of Young filing false claims with Fidelity Life.

Young argued the State failed to present sufficient evidence of any intent to defraud. He admitted to Fidelity Life’s investigator that he wrote policies submitted to Fidelity Life in Gentry’s name, and advance commissions were “effectively, paid to [him].” Further, Young admitted that what he did was “wrong doing” for which he needed to make restitution.

ZALMA OPINION

The appeal was spurious. Young knew what he did to get an appointment with Fidelity Life was based upon false and fraudulent conduct and, that in so doing, he caused damage to his friend Gentry who was effectively put out of business by making her appear to be a scofflaw who did not repay debts owed to insurers she represented.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on It’s Not Nice To Lie to Get Life Agency Appointment

Zalma’s Insurance Fraud Letter July 15, 2016, Volume 20, No. 14

False Alarm Warranty Allows Insurer to Void Coverage

In this, the fourteenth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on July 15, 2016 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:

  • False Alarm Warranty Allows Insurer to Void Coverage
  • Barry Zalma
  • The Claims Commandments – 12-15
  • Proformative Academy Webinars
  • Richest Lawyers in U.S. Also a Fraudster & Ex-Con
  • Changes in False Claims Act
  • Good News from The Coalition Against Insurance Fraud – Convictions
  • Insurance Must Be a Profit Making Entity & Is Not an Entitlement
  • Books from Barry Zalma
  • Wisdom
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

VISIT ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

Learn About Insurance Publications by Barry Zalma

Zalma On Insurance – A Blog

 The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.  

Check in every day for a case summary at http://zalma.com/blog

Zalma’s Insurance 101 

I have also created a video blog called Zalma’s Insurance 101 which currently has over 697 three to four minute videos starting with “What is Insurance” and moving forward to the Release of All Claims explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101 where you can view some of the following as part of the 966 videos the latest of which include:

 

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library

zalma@zalma.com or bzalma@earthlink.net

Follow on Twitter at https://twitter.com/bzalma

Videoblog at http://www.zalma.com/videoblog

Blog at: http://zalma.com/blog

Regards,

Barry Zalma
Zalma Insurance Consultants4441 Sepulveda Boulevard
CULVER CITY CA 90230-4847
310-390-4455
Fax: 310-391-5614
E: zalma@zalma.com

 

Posted in Zalma on Insurance | 1 Comment

Claims Legend Award

Zalma Receives Claims Legend Award

Industry Icon Honored for a Lifetime of Education

Insurance consultant and recovering attorney Barry Zalma, was honored with the Claims magazine Legend Award at the recent America’s Claims Event (ACE) conference in Minneapolis, Minn. LEGEND-TROPHY-2

Zalma, who practiced law for four decades is the author of numerous books, articles, blogs, white papers and education courses on a myriad of topics impacting insurance practitioners. He also serves on the editorial advisory committee for Claims magazine.

“Being recognized by my peers for contributions to the insurance industry is very gratifying, to say the least,” said Zalma in his acceptance speech.

“For 48 years I have been actively involved with the insurance community as an insurance adjuster and then as an insurance coverage and defense lawyer,” he explained. “In that time I have seen many changes, some good and some bad.”

A huge proponent of insurance education, Zalma explained what motivated him to write his books, blogs and other materials. “I have felt a need to share my experiences to help claims personnel, SIU investigators and claims counsel learn how to properly handle claims and avoid accusations that they committed the tort of bad faith.”

He explained that any success he has had in the industry was due in large part to basic insurance education and training he received with his first employer, the old Fireman’s Fund Insurance Company, who made him recognize that to be an insurance professional requires continuous learning.

Zalma was made the recipient of the Legend Award because of significant contributions made to the claims sector of the insurance industry through education, professional development and perseverance.  The award was presented because he has made significant contributions to the claims sector of the insurance industry through education, professional development and perseverance. He has been involved in or supported the industry for much of his or her career. Understanding the premise that improving an industry for one group or segment of the population improves it for all, this person has shared knowledge, resources and expertise for the benefit of an entire industry.

Selection criteria met by Mr. Zalma included:

•    Education efforts – speaking at industry events, teaching courses, promoting the insurance profession across a wide variety of audiences;
•    Written contributions – submits articles, white papers, expertise to publications and news outlets to educate professionals and the public on the industry;
•    Professionalism – exhibits business and personal ethics, is an avid promoter and supporter of the industry, mentors other professionals; and
•    Making it better – contributes time and talents to community and industry events, offers pro bono services.

His books are available at the Zalma Insurance Claims Library, from the American Bar Association and from Zalma Books.

Posted in Zalma on Insurance | 1 Comment

No Fortuity No Coverage

Known Loss Defeats Claim

For an insured to recover for a loss it must be fortuitous, i.e., contingent or unknown at the time the policy was acquired. In Construction Contractors Employer Group, LLC v. Federal Insurance Company, United States Court of Appeals, Sixth Circuit, No. 15-4352, 2016 WL 3675572 (July 11, 2016) the Sixth Circuit Court of Appeal was faced with an insured who purchased employee-theft insurance after discovering the theft and attempted to recover under the policy.

FACTS

Construction Contractors Employer Group (“Construction Contractors”) discovered that an employee had misappropriated certain funds and that another $1 million was missing. It then purchased an employee-theft insurance policy with Federal Insurance Company (“Federal Insurance”). After Federal Insurance executed the policy, Construction Contractors determined that the same employee had misappropriated the missing $1 million.

Federal Insurance denied Construction Contractors’ claim for the $1 million, and Construction Contractors filed suit. The district court granted Federal Insurance’s motion for summary judgment, concluding that any loss caused by one employee is considered a “single loss” under the policy and that Construction Contractors had “discovered” the loss before the execution of the policy.

Associated General Contractors of Northwest Ohio (“Associated General”) is a non-profit corporation and trade organization for commercial construction contractors. In April 2002, Construction Contractors outsourced its daily operations to AlphaCare Services, Inc. (“AlphaCare”), which was owned and managed by William H. Cook, III, Gerald L. Tillman, and John E. Moon (“Moon”). After working together for a number of years Moon informed Construction Contractors’ president Kevin Smith that Construction Contractors did not have enough assets to meet its obligations even though the subscribers had paid Construction Contractors enough money to fulfill their respective obligations. Moon later, in a Perry Mason moment, explained that he had been falsifying Construction Contractors’ financial statements and that the company had substantial unpaid tax liabilities.

Construction Contractors terminated its agreement with AlphaCare. The next day, it hired Peter VanDenBerghe as interim Chief Financial Officer and Treasurer. VanDenBerghe began reviewing Construction Contractors’ accounts.

Because Moon was responsible for remitting and reporting taxes, VanDenBerghe suspected that Moon was the reason for the more than $1 million loss. Focusing his investigation on Moon, in October 2012, VanDenBerghe determined that Moon had committed wire fraud by transferring over $900,000 from Construction Contractors’ account to AlphaCare’s account between May 2009 and June 2012. In November 2012, the investigation further revealed that Moon had charged Construction Contractors for $30,000 worth of health care premiums and health savings account deposits for AlphaCare employees. VanDenBerghe continued his investigation, as approximately $1 million was still unaccounted for.

On or about January 10, 2013, Construction Contractors applied for a crime-coverage insurance policy, which included coverage for employee theft, from Federal Insurance. The application instructed Construction Contractors to list “all employee theft, forgery, computer fraud or other crime losses discovered … in the last five years, itemizing each loss separately.” Construction Contractors disclosed the following: “Since 2002, [Construction Contractors] was in contract with AlphaCare [ ] to provide specific management duties for [it]. Those duties included the direct management of the corporate bookkeeping and payroll processing. Effective July 31, 2012, [Construction Contractors] terminated its contract with [AlphaCare] for breach of contract. [AlphaCare] was contractually responsible for processing our participants’ payroll and remitting payroll taxes to the proper taxing authorities. A subsequent review of [AlphaCare’s] performance has indicated [its] failure to report, reconcile and remit certain payroll taxes. ¶ A subsequent review of [Construction Contractors’] accounting records indicated unauthorized transfers from [Construction Contractors] owned accounts to ACS owned accounts from 2009 to 2012. Further investigation is in process, and the potential for criminal prosecution is being evaluated by our company attorneys.”

Federal Insurance issued the policy to Construction Contractors, extending coverage from March 22, 2013, through July 1, 2013, and insuring up to $1 million in covered losses. Three provisions of the policy are relevant to this case. First, Construction Contractors purchased a “Loss Discovered” option, which excludes “any loss that an Insured is aware of prior to the inception date of [the] Policy.”

Second, under the “Limits of Liability” section, the policy stated the following: “All loss resulting from a single act or any number of acts of the same Employee or Third Party, and all loss whether such act or acts occurred before or during the Policy Period, will be treated as a single loss and the applicable Limit of Liability set forth in Item 2 of the Crime Declarations will apply, subject to Section X, Liability for Prior Losses.”

Third, the section entitled “Liability for Prior Losses” provided that, for the Loss Discovered option, “coverage will be available for loss sustained at any time and Discovered during the Policy Period.” After the execution of the policy, in May 2013, Construction Contractors detected the method by which Moon had misappropriated the missing $1 million. VanDenBerghe determined that from 2002 until May 2009, Moon had committed check theft by having subscribers write checks to Construction Contractors using AlphaCare’s account number.

Based on this discovery, Construction Contractors submitted a claim for the $1 million check theft to Federal Insurance, which denied the claim. Construction Contractors then filed suit in the district court, seeking declaratory and monetary relief for breach of contract. Both parties filed motions for summary judgment. The district court properly granted Federal Insurance’s motion, concluding that any loss caused by one employee was a single loss under the policy and that Construction Contractors was aware of the loss before the policy’s inception date. Construction Contractors appeals.

ANALYSIS

Ohio state law dictates that interpretations of insurance contracts are questions of law for a court to answer. Ohio courts examine the insurance contract as a whole and presume that the intent of the parties is reflected in the language used in the policy.

Discovery of loss does not occur until the insured discovered facts showing that dishonest acts occurred and appreciates the significance of those facts. Mere suspicion of loss is not sufficient to demonstrate that an insured discovered the loss.

Construction Contractors claims that if the policy is narrowly construed as required by Ohio law, the check-theft loss is a covered loss under its policy with Federal Insurance. First, it asserts that the check-theft loss is covered under the “Employee Theft Coverage” provision of the policy because Moon was a covered employee when he misappropriated funds. Second, it argues that the Loss-Discovered provision applies because it did not “discover” the check-theft loss until it determined that

Both the check-theft loss and the wire-fraud loss were the result of a single actor, Moon, and the provision provides that all actions of a single actor constitute a single loss for purposes of the policy. Federal Insurance contends that because Construction Contractors had already discovered the wire fraud before the inception of the policy, it derivatively “discovered” the check theft, as both constitute a single loss.

The “Liability for Prior Losses” section includes the “Loss Discovered” option — i.e., the coverage option for losses “sustained at any time and Discovered during the Policy Period.”  Thus, if a loss arises under the “Loss Discovered” option, the single-loss provision applies.

The undisputed facts demonstrate that Construction Contractors knew of the wire-fraud loss before executing the insurance policy with Federal Insurance. Because Construction Contractors discovered the wire fraud prior to the policy’s execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy.

ZALMA OPINION

In addition to the conclusion that the loss occurred before the policy was acquired and partially disclosed to Federal. To attempt to say that the theft, which they knew had occurred before acquiring the policy, was a different loss because they learned it was committed by using checks, did not change the fact of theft by a single employee. Buying the policy and attempting the claim was the result of a serious misrepresentation or concealment of a material fact.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | 1 Comment

General Damages Prohibited

Operating a Motor Vehicle Without Insurance in California Eliminates Right to General Damages

The state of California enacted a statute to encourage people to carry automobile liability insurance by prohibiting a person injured in an automobile accident from recovering general damages (pain, suffering and inconvenience) if the injured person is not insured at the time of the accident. The statute was designed to protect the public from uninsured people.

In Keegan Valentich and Penny Valentich v. United States Of America, United States District Court, E.D. California 2016 WL 3650094, No. 2:14-cv-01902-MCE-CMK (07/08/2016) was faced with a claim by one plaintiff for bodily injury and a second for property damage. The defendant moved for summary judgment because the bodily injury plaintiff was not insured nor was the motor vehicle (a dirt bike) and the owner of the dirt bike answered an interrogatory admitting the the US employee was not negligent.

FACTS

Plaintiffs Keegan Valentich (“Keegan”) and Penny Valentich (“Penny”) jointly filed this suit against the United States (“Defendant”) alleging negligence on the part of a Lassen National Forest Service Employee during a vehicle accident on a Forest Service road. The accident injured Keegan and totaled Penny’s dirt bike. Penny seeks to recover for the damage to her dirt bike while Keegan requests compensation for his medical bills and the pain and suffering he endured as a result of the accident.

On June 6, 2012 a motor vehicle accident occurred between Keegan and a Forest Service employee, Shannon Williams (“Williams”). Keegan was driving a dirt bike on Service Road 43N26 (“Road”) in Lassen National Forest, near Susanville. As he traveled around a curve, he collided head-on with Williams’ pick-up truck, suffering injuries to his wrist and knee. The dirt bike, owned by Penny, was totaled.

The Road is made of gravel and is narrow with sharp curves. Neither Williams, a Service employee for over 20 years, nor Keegan, a frequent dirt bike rider, had time to avoid the collision. Although the Road may be used by the public, it is only open to motor vehicles “licensed under state law for general operation on all public roads within the state.” Individuals operating motor vehicles on the Road must abide by “State traffic law, including State requirements for licensing, registration, and operation of the vehicle.”

Plaintiffs filed this suit against the United States alleging that Williams negligently drove the Service vehicle on the Road when the accident occurred. Besides payment for medical bills, Keegan seeks non-economic compensation for pain and suffering in the amount of $600,000. He has never had a license to operate a motorcycle in California, and the dirt bike was uninsured at the time of the accident. Moreover, a post-accident police report recommended that Keegan be charged with driving without a license and without insurance.

Penny seeks to recover for the value of the dirt bike, which was totaled in the accident. On December 23, 2014, Defendant submitted interrogatories to Penny. The fourth interrogatory read: “State all facts on which you base your claim that Williams negligently operated his vehicle by failing to be attentive to his driving and by failure to maintain a safe speed for this curvy mountain road.”  Plaintiff Penny answered, “I do not claim that Mr. Williams was negligent and I do not believe my son was negligent.”  Penny never amended this response, and discovery closed on October 16, 2015.

ANALYSIS

In its motion for summary judgment against Penny, Defendant argues that Penny’s undisputed interrogatory response disproves an essential element of her claim for negligence. Defendant further argues that because Keegan failed to comply with California’s financial responsibility laws, he cannot recover non-economic damages.

Penny’s Negligence Claim

To succeed in her claim for negligence, Penny must demonstrate that Williams breached his duty to exercise reasonable care while driving the pick-up truck when the accident occurred. Interrogatory responses are admissible for summary judgment purposes. In her response to “Interrogatory Number 4,” Penny avers that Williams was not negligent during the accident. In other words, Penny admits that Williams did not breach his duty of care. Her concession must be accepted as the truth, and thus, no genuine dispute of material fact exists on the question of breach.

Keegan’s Claim for Non-Economic Damages

California Vehicle Code § 16020 states that “[a]ll drivers and all owners of a motor vehicle shall at all times” maintain insurance coverage for the purpose of establishing financial responsibility. In 1996, California passed Proposition 213, commonly referred to as the “Limitations on Recovery to Felons, Uninsured Motorists, and Drunk Drivers Initiative.” Codified as California Civil Code § 3333.4, it states: “(a) Except as provided in subdivision (c), in any action to recover damages arising out of the operation or use of a motor vehicle, a person shall not recover non-economic losses to compensate for pain, suffering, inconvenience, physical impairment, disfigurement, and other non pecuniary damages if any of the following applies: ¶ (1) The injured person was at the time of the accident operating the vehicle in violation of Section 23152 or 23153 of the Vehicle Code, and was convicted of that offense. * * * ¶ (3) The injured person was the operator of a vehicle involved in the accident and the operator can not establish his or her financial responsibility as required by the financial responsibility laws of this state.” (emphasis added by the court). Therefore, if the driver of a motor vehicle is uninsured and involved in an accident, he cannot recover non-economic damages.

Dirt bikes are motor vehicles.  The USDC concluded it was faced with a simple issue: Keegan was riding an uninsured dirt bike when the accident occurred. Thus, he may “not recover non-economic losses to compensate for pain, suffering, inconvenience, physical impairment, disfigurement, and other non pecuniary damages.”

ZALMA OPINION

Operating a motor vehicle in California without insurance will cause the operator to lose all right to recover general damages – described as non pecuniary damages – and is limited to recover only special damages such as medical bills. Further, it was silly to claim the defendant was not negligent in a sworn answer to interrogatory since that eliminates any chance of proving negligence.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | 1 Comment

Body Shop – Not an Insured – Can’t Sue On Anti-Steering Statute

Only Parties to Insurance Contracts Can Sue Based on Anti-Steering Statutes

Legislatures, with the odd belief that insurers are in business to take advantage of those they insure have enacted statutes to protect insurance consumers from wrongful conduct by their insurer. In Louisiana such a statute allows an insured to bring an action to collect fines and damages if the insurer breaches the intent of the statute.

In Medine’s Collision Center, LLC v. Progressive Direct Ins. Co. Court of Appeal of Louisiana, — So.3d —- 2015-1661, 2016 WL 3688418 (La.App. 1 Cir. 7/12/16) the Court of Appeal of Louisiana granted certiorari to determine whether the statute, La. R.S. 22:1892(D)(1,) provides a right of action for body shops to seek a fine or injunctive relief from insurers.

FACTS

The plaintiff, Medine’s Collision Center, LLC, is a body shop that, inter alia, repairs automobiles covered by insurance policies that have been involved in motor vehicle accidents. According to Medine’s, a substantial portion of its revenue and income derives from insurance payments. In August 2015, Medine’s filed suit against Progressive Direct Insurance Company and Progressive Security Insurance Company, alleging that the two insurers were acting in concert with one another to steer customers away from Medine’s business.

Medine’s specifically pled the application of La. R.S. 22:1892, an insurance penalty statute that contains the following anti-steering provision: “D. (1) When making a payment incident to a claim, no insurer shall require that as a condition to such payment, repairs be made to a motor vehicle, including window glass repairs or replacement, in a particular place or shop or by a particular entity. Any insurer violating the provisions of this Subsection shall be fined not more than five hundred dollars for each offense.”

Pursuant to La. R.S. 22:1892(D)(1), Medine’s requested injunctive relief, the imposition of a fine on the insurers, and damages.

Defendants responded to the petition by filing two exceptions. Defendants first raised the peremptory exception asserting the objection of no right of action, claiming Medine’s had no right of action under La. R.S. 22:1892(D)(1) because it was neither an insured nor a third-party claimant asserting a claim under an insurance policy. Defendants alternatively raised the dilatory exception raising the objections of vagueness and ambiguity, claiming that the petition failed to provide the specificity and detail necessary to put the defendants on notice of Medine’s claim against them.

When the matter came on for hearing, the trial court denied the defendants’ exception raising the objection of no right of action and granted the defendants’ exception raising the objections of vagueness and ambiguity. The ruling was memorialized in a judgment signed November 9, 2015. Defendants contend that La. R.S. 22:1892(D)(1) can only be interpreted as establishing rights for insureds and third-party claimants with claims brought under an insurance policy—not for third-party body shops—when the statute is read as a whole, jurisprudence interpreting the statute is taken into account, and the legislative history of the anti-steering provision is considered.

The Text of La. R.S. 22:1892

 The text of a law is the best evidence of legislative intent. Where part of an act is to be interpreted, it should be read in connection with the rest of the act and all other related laws on the same subject.

Although Subsection D of La. R.S, 22:1892 does not specify to whom the cause of action belongs, a full reading of the statute shows that the right of action for “steering” is exclusive to insureds or third-party claimants who claim their insurer, or the insurer of a tortfeasor, steered them to a particular body shop. After all, Subsection A of La. R.S. 22:1892 addresses the insurer’s deadlines with respect to certain actions it must take when adjusting insurance claims of first-party insureds and third-party claimants. Subsection B addresses the penalties that may be assessed against an insurer that fails to comply with the duties it owes to first-party insureds and third-party claimants under Subsection A; it also establishes additional duties the insurer owes to third-party claimants. Subsection C sets forth the manner in which the claims of first-party insureds and third-party claimants must be paid. Each of these sections governs the relations between insurers, insureds, and third-party claimants regarding claims brought under insurance policies.

Subsection D, under which Medine’s asserts the underlying action, provides that an insurer cannot condition the payment of a claim upon the requirement that the repairs be made at a particular place or shop or by a particular entity. Logic suggests that Subsection D would likewise govern the insurer’s relations with its insureds or third-party claimants bringing claims under an insurance policy. In this case, Medine’s has not presented a claim under any insurance policy; it is a third-party with no contractual relationship to the defendants.

Jurisprudence Interpreting La. R.S. 22:1892

 Section 1892 is penal in nature and, therefore, must be strictly construed. Strict construction requires that every doubt must be resolved against the imposition of a penalty. Additionally, recovery under Section 1892 requires a plaintiff to first have a valid, underlying, substantive claim upon which insurance coverage is based; the statute does not provide a cause of action against an insurer absent a valid, underlying, insurance claim.

The legislative history reveals an absence of any evidence suggesting that the anti-steering provision was ever intended to create a right in favor of claimants like Medine’s. The plain reading of La. R.S. 22:1892, jurisprudence, and the legislative history of the anti-steering provision of La. R.S. 22:1892, taken together, convince us that Subsection D of La. R.S. 22:1892 fails to create a right of action in favor of Medine’s, a body shop possessing no contractual relationship with the defendants.

Based on the foregoing, the court found that Medine’s lacks the right to recover a fine or seek injunctive relief pursuant to La. R.S. 22:1892(D)(1).

The court dismissed Medine’s claims premised on that statute. Costs arising from review of this matter are assessed to the respondent, Medine’s Collision Center, LLC.

ZALMA OPINION

When a statute is designed to protect insured’s from wrongful actions of their insurer it applies only to the insured and the insurer. In Louisiana insureds can sue. In other states only the department of insurance can enforce the statute. Regardless, in this case, the body shop had no contractual relationship with the insurer and, as a result, had no right to sue.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | 1 Comment

Policy Limits Irrelevant in UIM Trial

Jury Should Not Hear Available Limits When Deciding Bodily Injuries

Underinsured Motorist (UIM) coverage is designed to protect its insured and provide indemnity over and above the insurance available from the underinsured motorist. It reacts as if the underinsured tortfeasor had the extra insurance provided by UIM policy.

In Darren T. Lucca v. GEICO Ins. Co., United States District Court, E.D. Pennsylvania 2016 WL 3632717 (07/07/2016) the USDC was asked  to keep mention of the available policy limits from the evidence presented to – applying unusual Pennsylvania law – the jury charged with determining the value of Lucca’s injuries.

BACKGROUND

Darren Lucca sued his insurer Geico Insurance Company (“Geico”) for refusing to provide underinsured motorist benefits after he was injured in an April, 2011 car accident. The only issue before the court is the extent of the damages attributable to the accident. Geico moved in limine to exclude any testimony or other evidence relating to the underinsured motorist policy limits and the amount of premiums paid for the policy, arguing that those facts are not relevant to the limited issue to be decided by the jury. Mr. Lucca opposes the motion, contending that the case is one for breach of contract and the details of the contract provide relevant background information for the jury

On April 8, 2011, Plaintiff Darren Lucca was involved in a car accident due to the negligence of another motorist, causing him to suffer various personal injuries. At the time, his car was insured by Defendant Geico. As part of his policy, Mr. Lucca had underinsured motorist benefits. The other motorist had $100,000 in coverage through his insurance carrier, which Mr. Lucca alleges was insufficient to cover his injuries.

On January 8, 2015, Mr. Lucca sought Geico’s consent to settle his claim with the other motorist’s insurer for $75,000. He also sought underinsured motorist benefits from Geico. Geico denied his claim, believing that Mr. Lucca had received $75,000 from the other motorist’s insurance as an award in binding arbitration, not in settlement, and that therefore the other motorist was not underinsured.

The parties’ dispute is solely about the value of Mr. Lucca’s claim because liability will not be contested. Mr. Lucca outlines various items of damages in his pretrial memo, including wage loss, loss of future earning capacity, co-pays and prescriptions, and other medical bills.  Mr. Lucca opposed the motion.

DISCUSSION

The Supreme Court of Pennsylvania allows jury trials for underinsured motorist claims. Geico, by its motion in limine, presents one of the previously unaddressed issues: whether information about an insured’s coverage limits and paid premiums is relevant, non-prejudicial evidence that may be introduced when the jury’s only task is to determine the amount of damages incurred by the insured.

Geico argues that although this is technically a breach of contract action, what is left to decide is much like a tort action, in that although the insured is making a “first party” claim, the value of the claim is based on “third party” principles of liability, causation, and damages. Geico contends that neither the amount of coverage nor the amount paid in premiums have any bearing on how severe Mr. Lucca’s injuries were. Geico also argues, in the alternative, that if this evidence comes in, then Geico should be allowed to offer evidence as to the underinsured tortfeasor’s coverage and the amount of that settlement.

Case law regarding this issue in Pennsylvania is almost nonexistent.  The one reported federal decision on the issue permitted the evidence to be introduced. In that case, evidence of the coverage limits for both the tortfeasor’s and the plaintiff’s insurance policy was permitted, as well as evidence of the amount the plaintiff received from the tortfeasor and the amount the plaintiff paid in premiums for the plaintiff’s own insurance.

The Court acknowledged that the bar for relevance is low. However, the amounts of the policy limits and paid premiums, facts that are undisputed and therefore not for the jury to decide, do not even reach that low bar.

The only issue for the jury to decide in this matter is the extent of Mr. Lucca’s injuries from the accident. That Mr. Lucca’s policy includes a $900,000 underinsured motorist limit or that his stepfather paid a certain amount in premiums for the policy does not have any tendency to make any fact at issue in this case more or less probable than it would be without the evidence.

Indeed, not only is the policy limit irrelevant in this case, introducing evidence of the policy limit may very well serve to prejudice Geico by giving the jury an anchor number that has no bearing on Mr. Lucca’s damages. For these reasons, the Court excluded at trial any mention of the policy limits or the amount of premiums paid.

Once a verdict has been rendered by the jury on the amount of damages suffered by Mr. Lucca, the Court can mold the verdict appropriately to reflect the limits of both Mr. Lucca’s policy and the third party tortfeasor’s policy.

ZALMA OPINION

It has been recognized for more than a century that disclosing to a jury called upon to decide the value of bodily injuries incurred as a result of an automobile accident should never be told about the limits of insurance available to the tortfeasor so as not influence the decision of the insurer. The availability of insurance is irrelevant to the issue of damages and if disclosed to the jury can prejudice the defendant by by giving the jury an anchor number that has no bearing on the extent of the injuries.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | Comments Off on Policy Limits Irrelevant in UIM Trial

Known Loss Defense Fails

Failure to Seek Appropriate Jury Instruction Defeats Insurer’s Defense

The North Dakota Supreme Court was faced with a jury verdict against an insurer and its agent for damages resulting from, what appeared to be, a known loss since the insured reported its additional values while the fire was burning. What should have been an absolute defense failed because of the failure of defense counsel to properly present the facts and law to the jury.

In Bjorneby v. Nodak Mut. Ins. Co., Supreme Court of North Dakota, — N.W.2d —-, 2016 ND 142, 2016 WL 3632915 (July 7, 2016) Nodak Mutual Insurance Company (“Nodak Mutual”) and Bryan Hurst (together referred to as “Nodak”) appealed from the district court’s denial of their motion for judgment as a matter of law and their alternative motion for a new trial.

FACTS

The Bjornebys are farmers. They insured their farming operation with a Nodak Mutual insurance policy. Hurst was their insurance agent. During potato harvest, a fire started in the break room of the Bjornebys’ potato washing facility. The fire spread and caused substantial damage. The Bjornebys filed an insurance claim, and Nodak Mutual covered a number of losses. Nodak Mutual, however, refused to cover certain potatoes because the Bjornebys, who were insured under a reporting form requiring reports of values at risk, reported the potatoes after they became aware of the fire. The Bjornebys sued alleging Nodak Mutual breached their insurance contract and Hurst was negligent. A jury returned a general verdict in the Bjornebys’ favor; the verdict did not allocate liability between Nodak Mutual and Hurst. Nodak Mutual and Hurst moved for judgment as a matter of law or, in the alternative, a new trial.

Hurst had been the Bjornebys’ insurance agent for about four years prior to the fire. He testified he met with the Bjornebys every year and gave them advice on insuring their farming operation. Bjorneby claimed he instructed Hurst to insure all of their harvested potatoes at all times. At the time of the fire, and prior to it, the Bjornebys were insuring their potatoes by periodically reporting the harvested potato count to Hurst. As potatoes were harvested and placed in storage, Chris Bjorneby would call Hurst and update him on the potato count. Hurst would then report the new count to Nodak Mutual. In mid-September 2011, Chris Bjorneby called Hurst and reported the potato count. The fire started on October 7, 2011.

Chris Bjorneby testified that when he first saw the break room fire, he did not think it would result in damage to the potatoes. Nonetheless, he quickly called Hurst and reported additional potatoes had been stored since their last call.

Soon after they hung up, the local fire department decided to ventilate the fire; it then became uncontrollable. The washing facility, where the fire started, was in a building separate from the potato storehouse. However, the two buildings were connected by underground water flumes used to move the potatoes from one building to another. The flumes had seals, and the Bjornebys believed they were sealed while the fire was occurring. The fire was ultimately brought under control, but subsequent flare-ups occurred days after it had started. The additional potatoes Chris Bjorneby had reported on the date of the fire were ruined by smoke.

ANALYSIS

Nodak argues the additional potatoes were uninsurable as a matter of law because Chris Bjorneby was aware of the fire when he reported the potatoes to Hurst. Thus, Nodak contends the district court erred when it denied their motion for judgment as a matter of law because the known loss doctrine precluded coverage of the potatoes. The jury was instructed on the known loss doctrine:

The Supreme Court acknowledged the general rule that insurance cannot be issued for a known loss. Once the loss has occurred, there is no longer any “risk.” Thus, if an insured has actual knowledge that a loss has occurred or is occurring, or that the loss is substantially certain to occur, there can be no insurance coverage.

Nodak argued that N.D.C.C. § 26.1–29–11 codifies the known loss doctrine and “expressly bars the purchase of insurance coverage when a ‘known event’ has occurred or is occurring when the insurance is requested.” Section 26.1–29–11, N.D.C.C., states: “Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest or create a liability against the person may be insured against, subject to this title….”

Neither Nodak Mutual nor Hurst objected to the district court’s known loss instruction.

Although Chris Bjorneby knew a fire was occurring, the trial judge determined the jury had heard evidence from which it had to be determined whether damage to the potatoes was “substantially certain to occur.” The court found: “In terms of the known event, the situation, there’s no question that their fire was in existence at the time of the call. … The Jury, I don’t know, they could have determined that because of the separate location of the potatoes, separate building that’s supposedly sealed building, the circumstances I have just gone through that it was not—that it was a fortuitous situation. That it wasn’t a known loss or event to use that term now.”

Nodak’s argument that Hurst was not negligent as a matter of law is without merit. Nodak argues the evidence presented at trial leaves no factual dispute concerning whether Hurst was negligent; it contends he did not breach his duty of care, as a matter of law, because he acted in good faith and followed the Bjornebys’ instructions. Insurance agents have a duty to “exercise the skill and care which a reasonably prudent person engaged in the insurance business would use under similar circumstances.

With the unobjected-to general verdict, it is impossible to determine on which basis the jury assigned liability – the negligence of the agent or the wrongful denial by Nodak. Because it cannot be held that neither basis would support the jury’s verdict, the district court’s decision not to grant judgment as a matter of law was correct.

Again, it is not clear which theory of liability the jury based its decision on because the jury was issued a general verdict form.

The jury may have concluded Nodak breached a contract to insure the potatoes. Or it may have decided Hurst was negligent by not ensuring the potatoes in storage were insured. In any case, conflicting evidence concerning both theories of liability was presented.

ZALMA OPINION

There is no question that you cannot insure against a known loss. The failure here was a failure of proof and the poor choice of a jury verdict form. Allowing the jury to place the appellate courts in the position of trying to make a decision from a jury verdict form that allowed more than one theory of liability. As a result of that failure the know loss was payable because the jury could have found it was a fortuitous loss or that the loss was due to the negligence of the agent.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | 1 Comment

Genuine Dispute Defeats Bad Faith Claim

Argument Over Scope of Loss not Bad Faith

Sometimes, when adjusting a property claim, no good deed goes unpunished. Insurers are obligated, under the terms and conditions of a first party property insurance policy to pay indemnity for the losses the policy promised to pay for and to refuse to pay for losses not agreed to be paid by the policy. When a loss occurs common sense seems to disappear, the insurer becomes an adversary, and the insured sues because the insured did not receive everything they asked the insurer to pay.

In Paslay v. State Farm General Insurance Company, — Cal.Rptr.3d —– , 2016 WL 3524086, 16 Cal. Daily Op. Serv. 6896, Court of Appeal, (June 27, 2016) the California Court of Appeal, was faced with a claim that adjustment of the claim presented by the Paslays was bad faith conduct allowing the Paslays to recover damages not covered by the policy and tort damages, including punitive damages, because the Paslays were not satisfied with the insurer’s adjustment of their claim.

Clayton and Traute Paslay asserted claims for breach of insurance contract, bad faith, and elder abuse against State Farm General Insurance Company (State Farm), and requested an award of punitive damages. The trial court granted summary adjudication in State Farm’s favor on each claim and on the request for punitive damages.

RELEVANT FACTUAL BACKGROUND

In December 2010, the Paslays’ house in Pacific Palisades was insured under a homeowners policy issued by State Farm. On December 17, 2010, during a period of heavy rain, a roof drain failed, causing water to enter the house’s master bedroom through the ceiling, and damage other parts of the house. The Paslays reported the incident to State Farm, which arranged for them to live in a rented residence while their house was being repaired. At the end of October 2011, the Paslays resumed living in their house. State Farm made payments under the policy exceeding $248,000, including $122,770.98 for repairs to the house, but denied coverage for certain items, including work undertaken in the master bathroom, replacement of drywall ceilings, and installation of a new electrical panel.

In December 2012, the Paslays sued State Farm. Their second amended complaint (SAC), filed January 15, 2014, contained claims for breach of an insurance contract and bad faith, alleging that State Farm had violated the policy in numerous ways, including refusing to pay for repairs to the master bathroom, refusing to pay for replacement of certain drywall ceilings and the electrical panel, and “[p]rematurely forcing [the Paslays] to move out of temporary rental housing.” The SAC also contained a claim by Traute for elder abuse predicated on allegations that she was 80 years old when the house suffered water damage.

Granting State Farm’s summary judgment motion the trial court concluded that summary adjudication was proper with respect to each claim in the SAC and the request for punitive damages because there were no triable issues whether State Farm failed to pay benefits owed under the policy and forced the Paslays to move prematurely back to their house. On May 19, 2015, the court entered a judgment in favor of State Farm dismissing the entire action with prejudice.

DISCUSSION

In seeking summary adjudication on the Paslays’ claims, State Farm submitted evidence supporting the following version of the underlying events: On December 17, 2010, when rain water leaked through the ceiling of the house’s master bedroom, Traute contacted Clayton, who was then in Texas. After reporting the loss to State Farm and arranging for temporary repairs, Clayton told State Farm that his general contractor would prepare a damage estimate. State Farm assigned a field adjuster to the claim and hired Andrew Gillespie, a general contractor, to assist with its investigation.

On May 9, 2011, State Farm informed the Paslays that it disputed coverage for the demolition and reconstruction of the master bathroom, the proposed new electrical panel, and the replacement of undamaged ceiling drywall. State Farm later set forth its coverage positions relating to the disputed scope-of-repair issues.

In opposing the motion for summary adjudication or judgment, the Paslays maintained there were triable issues regarding numerous aspects of State Farm’s conduct with respect to their claim. 

ANALYSIS

In view of the evidence presented by the insureds there are triable issues regarding coverage for replacement of the removed drywall ceilings. Clayton’s and MacDonald’s testimony, if credited by the fact finder, establish that only removal and replacement of the ceilings (including their undamaged portions) would result in code-compliant ceilings of a “similar construction.”

 The Paslays contend there are triable issues whether State Farm was obliged to pay the costs of replacing their 100 amp electrical panel with a 200 amp panel, even though the former was not damaged by the leak in the master bedroom. The panel’s replacement was not due to repair-related enforcement of the building code, and thus constituted an independent upgrade to the house.

State Farm submitted evidence that in January 2011, it paid for a six-month lease for a residence through Klein, its housing vendor. After July 2011, when the initial six-month lease expired, State Farm authorized payment of the Paslays’ rent on a monthly basis. Although State Farm authorized payment of the rent through the end of November 2011, the landlord rented the residence to a new tenant, effective October 31, 2011.

Under the policy State Farm was obliged to pay “the reasonable and necessary cost to repair” subject to policy coverage, not the actual costs of repair the Paslays incurred. As insurers may properly rely on independent experts to assist in determining repair benefits due under an insurance policy State Farm did not breach the contract merely by relying on Gillespie’s repair estimates.

As there are triable issues regarding unpaid policy benefits due the Paslays related to the work in the master bathroom and the replacement of drywall ceilings summary adjudication was improperly granted with respect to the claim for breach of insurance contract.

BAD FAITH

To establish bad faith, the Paslays must demonstrate misconduct by State Farm more egregious than an incorrect denial of policy benefits. Under this standard, an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith, even though it might be liable for breach of contract.

The genuine dispute doctrine does not relieve an insurer of its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. A genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Those grounds include reasonable reliance on experts hired to estimate repair benefits owed under the policy.  The application of the genuine dispute doctrine becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.

The Paslays’ bad faith claim fails under the genuine dispute doctrine. The only triable issues relating to unpaid policy benefits concern the work in the master bathroom and the replacement of drywall ceilings. Regarding those benefits, the record discloses only a genuine dispute regarding the extent of the damage and required repairs. Where the parties rely on expert opinions, even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.

On this record, there are no triable issues regarding the adequacy of State Farm’s investigation, as the Paslays removed the damaged property before State Farm had an opportunity to conduct a full assessment of the Paslays’ proposals and contentions. The record shows only that State Farm did what it could to assess the claimed losses before denying them. In the court’s view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith. Summary adjudication was therefore proper on the bad faith claim.

Notwithstanding the existence of triable issues regarding policy benefits due the Paslays, there is no evidence that State Farm acted in subjective bad faith or unreasonably in denying additional benefits. Traute’s elder abuse claim thus fails in light of the evidence supporting the application of the genuine dispute doctrine to the Paslays’ bad faith claim.

Punitive damages are thus unavailable in connection with the Paslays’ breach of insurance policy claim, notwithstanding the existence of triable issues regarding unpaid policy benefits due the Paslays.

Furthermore, as the claims for bad faith and elder abuse fail for want of a triable issue of fact, the Pasleys have asserted no tort cause of action capable of supporting an award of punitive damages. Accordingly, summary adjudication was properly granted with respect to the Paslays’ request for punitive damages.

ZALMA OPINION

Bad faith does not exist when the only dispute is over the extent of damage when both sides rely on experts whose opinions are diverse. It is not bad faith for an insurer to disagree with an insured over the extent of coverage or the extent of the loss. That dispute could have been resolved by appraisal but the insureds preferred, rather than resolve the dispute, to file suit and hope for the windfall of tort and punitive damages. The genuine dispute doctrine trashed their hopes of turning an insured loss into a profit making exercise.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Genuine Dispute Defeats Bad Faith Claim

Vague Conclusory Statements Not Sufficient to Plead

No Right to Sue Lender on Force Placed Insurance if Placed in Compliance With Contract

Mortgage holders require, as a matter of course, that borrowers insured the property that is the security for the loan, against certain risks of loss, and if the borrower does not place the insurance the mortgage contract gives the lender to place the required insurance itself at the expense of the borrower. In George P. Klika, v. Capital One Bank, N.A., United States District Court Civil Case No. C15-0107 RSL, 2016 WL 3551812 (06/30/2016) the USDC was called upon to deal with a proposed class action suit for wrongfully placing force placed insurance.

Plaintiff alleges that Capital One participated in a scheme to charge him and similarly-situated mortgagors excessive insurance premiums for unnecessary, unauthorized, or duplicative coverage. Plaintiff asserts that Capital One breached the mortgage agreement, breached the implied covenant of good faith and fair dealing, violated the Real Estate Settlement Procedures Act, violated Hawaii’s Deceptive Practices Act, and was unjustly enriched. Capital One seeks dismissal of all claims asserted against it, arguing that the allegations are insufficient to state a claim upon which relief could be granted and that, given the number of times plaintiff has asserted similar claims in the past, leave to amend should be denied.

In the context of a motion to dismiss, the Court’s review is generally limited to the contents of the complaint. The documents attached to plaintiff’s complaint, including the 2006 mortgage agreement, form the basis of his claims and have been considered in determining whether plaintiff has stated a viable cause of action.

A claim is facially plausible when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Plausibility requires pleading facts, as opposed to conclusory allegations or the formulaic recitation of elements of a cause of action, and must rise above the mere conceivability or possibility of unlawful conduct that entitles the pleader to relief. Nor is it enough that the complaint is factually neutral; rather, it must be factually suggestive.

 BREACH OF CONTRACT

Paragraph 5 of the mortgage contract states in relevant part: “Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards, including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires.”

The contract also required: “If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower.”

The mortgage agreement does not limit the lender to a policy in an amount that is equal to or less than the outstanding loan amount and that it grants the lender the right to require continuous coverage. Plaintiff’s claims of breach involving actions that were permitted by the contract fail as a matter of law. The lender’s right to act is not as broad as Capital One’s argument suggests, however: under the terms of the mortgage agreement, the lender cannot force-place insurance if the borrower already has in place all that the lender required.

At oral argument, plaintiff attempted to fit his claim into this box by asserting that he had in place a hazards policy that covered all of the risks that are specifically required by the policy and that were previously disclosed by the lender (including coverage for wind, perils of wind, and windstorm). Plaintiff stated that it was not until July 18, 2013, that Capital One first notified him that it was requiring hurricane insurance, by which time Capital One had already force-placed the insurance. If that were the state of affairs, a plausible breach of contract claim might be in the offing.

The facts alleged in the complaint and the documents attached thereto defeat such a claim, however. Whatever confusion may have arisen regarding Capital One’s insurance requirements prior to July 18, 2013, Capital One gave clear and unambiguous notice that it was requiring hurricane insurance – covering winds of 75 mph or more – on that date and provided plaintiff an opportunity to purchase the coverage himself. When he did not do so, Capital One purchased hurricane coverage, placing the charge on plaintiff’s escrow account on August 23, 2013, and notifying plaintiff of the purchase by letter dated August 29, 2013. Plaintiff had notice that hurricane insurance was required and failed to maintain the required coverage. In such circumstance, Paragraph 5 gave Capital One the right to act.

Plaintiff has not alleged a viable contract claim, nor has he proposed an amendment that is consistent with the facts of record. In the absence of any indication that the identified deficiencies can be remedied, leave to amend this claim was denied.

BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Plaintiff alleges that Capital One exercised its discretion to force-place insurance capriciously and in bad faith because it acted to maximize its own gain at the borrower’s expense. It is clear that plaintiff’s entire complaint rests on the various provisions of Paragraph 5 of the mortgage agreement. A reasonable person reading Paragraph 5 would understand that if the lender were forced to place coverage, the borrower would have to pay for that coverage.

Plausibility requires pleading facts, as opposed to conclusory allegations. Although it seems unlikely given plaintiff’s statements at oral argument, it is possible that he has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a fee, commission, kickback, or some other direct financial benefit.

Leave to amend this claim is therefore GRANTED.

HAWAII’S DECEPTIVE PRACTICES ACT (“DPA”)

Plaintiff identifies twelve “unfair or deceptive acts or practices in the conduct of any trade or commerce” in which Capital One is alleged to have engaged in violation of statute. In particular, plaintiff alleges that the pre-arranged secret deals between Voyager and/or Assurant and Capital One to provide inadequate and/or unnecessary force-placed insurance at premium rates for the borrower and secret kickbacks, commissions, or fees for the lender are unfair and deceptive.

To the extent Capital One turned the purchase of insurance into a profit-making activity for itself, however, that information was not disclosed and theoretically gives rise to a cause of action.

On the chance that plaintiff has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a direct financial benefit, such as the alleged fee, commission, or kickback, leave to amend this claim is GRANTED.

UNJUST ENRICHMENT

Plaintiff’s unjust enrichment theory is the same one that underlies his potentially viable breach of the implied covenant of good faith and DPA claims. Plaintiff has not, however, alleged non-conclusory facts in support of this claim.

DECLARATORY JUDGMENT/INJUNCTIVE RELIEF

All of plaintiff’s claims are deficient and will be dismissed, including his claim for declaratory and/or injunctive relief. If plaintiff is able to allege facts giving rise to a plausible substantive claim for relief, he may be entitled to equitable protection from future harms of the same sort.

CLASS ACTION ALLEGATIONS

For all of the foregoing reasons, Capital One’s motion to dismiss is granted. Plaintiff’s RICO, fraud, breach of contract and RESPA claims are hereby DISMISSED with prejudice and the class allegations are stricken. If plaintiff believes he can, consistent with his Rule 11 obligations, amend his breach of the implied covenant, DPA, unjust enrichment, and declaratory judgment/injunctive relief claims to allege non-conclusory facts in support of his theory that Capital One received a kickback, fee, commission, or some other direct financial benefit when it force-placed hurricane coverage on plaintiff’s property in August 2013, he may do so within fourteen days of the date of this Order.

If an adequate amendment is not timely filed, judgment will be entered with prejudice in favor of Capital One and against plaintiff. Capital One’s request for judicial notice is granted. Defense counsel shall, within seven days of the date of this date.

ZALMA OPINION

The court in this case generously allowed the plaintiff the opportunity to amend the complaint to find real facts, rather than conclusory statements which the court did not believe exist. Force placed insurance is appropriate if the mortgage contract allows it and although the cost is extreme, it is not more than a means for a mortgagor to protect its interests when the borrower fails to buy the required insurance.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Libraryat www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

Mr. Zalma’s new e-books  are available at http://www.zalma.com/zalmabooks.htm

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | 1 Comment