Insured Contract & Indemnity

Difference Between Direct & Vicarious Liability

Indemnity agreements between commercial entities often result in litigation because they are not loved by courts, parties and legislatures. Most CGL’s agree to pay for damages resulting from an indemnity agreement in a contract that meets the definition of insured contract.

In Mid-Continent Cas. Co. v. True Oil Co., — F.3d —-, 2014 WL 4637956 (C.A.10 (Wyo.) Sept. 18, 2014), Mid–Continent Casualty Company (Mid–Continent) brought a declaratory judgment action to ascertain the applicability to True Oil Company (True Oil) of Mid–Continent’s commercial general liability (CGL) policy issued to Pennant Service Company (Pennant). The district court granted summary judgment to True Oil, determining Mid–Continent breached its duty to defend and indemnify True Oil in the underlying action against it by Pennant’s employee. As damages, the court awarded True Oil the amount it paid to settle the underlying suit and the attorney fees and costs incurred in defending itself. Mid–Continent appeals from the district court’s judgment.

THE INDEMNITY AGREEMENT

In 2001, True Oil, an owner and operator of oil and gas wells, entered into a master service contract (MSC) with Pennant for work on a well in Wyoming. The MSC included a provision whereby Pennant agreed to indemnify True Oil “from and against all claims, damages, losses, … causes of action, suits, judgments, penalties, fines and expenses, including attorney fees, of any nature, kind or description whatsoever” resulting from either Pennant or True Oil’s negligence.

THE POLICY

Pennant has a CGL policy with Mid–Continent. Under the policy, MidContinent agreed to insure Pennant against damages because of bodily injury “[a]ssumed in a contract or agreement that is an ‘insured contract,’ “ including “reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured” as long as “(a) [l]iability to such party for, or for the cost of, that party’s defense has also been assumed in the same ‘insured contract’; and (b) [s]uch attorney fees and litigation expenses are for defense of that party against a civil … proceeding in which damages to which this insurance applies are alleged.”

According to the policy, an “insured contract” includes: “[t]hat part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

FACTS

In July 2001, Christopher Van Norman, an employee of Pennant, was injured in an accident at True Oil’s well. On October 26, 2001, Mr. Van Norman filed a negligence suit against True Oil in Wyoming state court. In accordance with the MSC’s indemnity provision, counsel for True Oil wrote to Pennant on November 20, requesting indemnification for its defense costs, attorney fees, and any award that Van Norman might recover against it. MidContinent refused to defend or indemnify True Oil based on Wyoming’s AntiIndemnity Statute, Wyo. Stat. Ann. § 30–1–131, which invalidates agreements related to oil or gas wells that “indemnify the indemnitee against loss or liability for damages for … bodily injury to persons.”

In May 2002, True Oil brought a federal action against Mid–Continent for declaratory relief, breach of contract (CGL policy), and other related claims. In February 2005, the district court granted Mid–Continent summary judgment, determining that the MSC’s indemnity provision, when invoked with respect to claims of the indemnitee’s own negligence, violated § 30–1–131 and was thus unenforceable as a matter of public policy.

The court held that Mid–Continent was not required to defend or indemnify True Oil in the underlying suit as it then existed because “where an indemnification provision in a MSC is void and unenforceable, the insurer never actually assumed any of the indemnitee’s liabilities under the policy.”

Subsequently, on March 16, 2005, Mr. Van Norman amended his original state court complaint to include an allegation of vicarious liability against True Oil for negligence of Pennant that had caused injury to Mr. Van Norman. True Oil then filed a third-party complaint against Pennant for indemnification.

In September 2005, Mid–Continent agreed to provide True Oil a conditional defense to the vicarious liability claim in the state court action, under a reservation of rights. In November, unable to agree upon the terms of the defense, True Oil refused Mid–Continent’s offer to defend. The following month, just prior to the December scheduled trial date, True Oil settled with Mr. Van Norman for $500,000 for the claims alleged in the amended complaint. While Pennant did not participate in the negotiations, it did stipulate to the reasonableness of the settlement.

The court held that where a claim of vicarious liability exists, the Wyoming Anti–Indemnity Statute, § 30–1–131, does not render the agreement void or unenforceable with respect to that claim.  The court affirmed the breach of contract finding and the $500,000 damages award, and it also extended True Oil’s entitlement to attorney fees from the date Mr. Van Norman filed his original complaint.

In light of and consistent with the resolution of the state proceeding, the federal district court awarded True Oil $500,000, attorney fees from October 2001 to December 7, 2005, and pre- and postjudgment interest on both amounts. MidContinent appeals.

Res Judicata

In Wyoming, a final judgment on the merits in a prior action is conclusive and bars all subsequent action between the same parties, or their privies, as to all matters which were or might have been litigated in the prior action.  Wyoming also follows the general rule prohibiting splitting a cause of action. Wyoming courts view res judicata and the rule against claim splitting as closely related.

In the first case, True Oil sought a defense and indemnity for its alleged negligence, the only claim pending against it, whereas in the present litigation, it seeks a defense and indemnity for its alleged vicarious liability for the negligence of Pennant, the new claim brought by Mr. Van Norman. These causes of action contain different factual circumstances giving rise to distinct rights to maintain an action.

Indemnification for Vicarious Liability

Under its CGL policy, Mid–Continent agreed to cover Pennant’s liability for damages “[a]ssumed in a contract or agreement that is an ‘insured contract.’ Thus, although the CGL policy generally excluded contractual liability from coverage, it excepted damages assumed in an insured contract.

Mid–Continent contends the intervening state court decision in Pennant only resolved a contractual question, “whether … Pennant was liable to True contractually,” rather than a coverage question. It argues its policy does not provide coverage for breach of contract damages, and also contends True Oil voluntarily settled without being either legally liable or an insured.

When an intervening decision of a state’s highest court has resolved an issue of state law directly contrary to this circuit’s prediction of how the state would resolve the same issue, a federal court of appeal is bound by the later state ruling, not by our prior panel’s interpretation of state law.

First, we cannot follow Mid–Continent’s semantic gymnastics, which characterizes the settlement payment as breach of contract damages rather than indemnification damages in order to deny coverage. To the contrary, the Wyoming Supreme Court found that True Oil’s $500,000 settlement payment to Mr. Van Norman was indemnification damages for bodily injuries.

Where an indemnitor is given notice of settlement discussions and chooses not to participate, an indemnitee is only required to prove potential liability to the original plaintiff in order to support a claim against the indemnitor. Potential liability exists unless an indemnitee faced “no exposure to legal liability.

Finally, we are bound by the Wyoming Supreme Court’s holding that the indemnity agreement is a “valid and enforceable part of the MSC” to the extent that it indemnifies True Oil for its vicarious liability. As such, it is an “insured contract” under Mid–Continent’s CGL policy, and the damages assumed therein are covered by the policy.

While the Wyoming Supreme Court did not interpret Mid–Continent’s insurance policy per se, it interpreted what damages were assumed in the “insured contract” for which Mid–Continent provided coverage. Significantly, it held “Pennant was well aware of True Oil’s vicarious liability risk … and agreed … to indemnify True Oil for any damages resulting therefrom. The court held that Pennant assumed liability for the attorneys fees True Oil paid to defend itself against claims for which, as it turned out, Pennant was 100% responsible.

True Oil’s 2001–2005 attorney fees are covered by the MSC, which necessarily triggers Mid–Continent’s coverage for “damages” that it agreed to cover in its CGL policy and the court affirmed the district court’s determination that True Oil is entitled to recover its settlement payment, attorney fees from 2001 to 2005, and pre- and postjudgment interest.

ZALMA OPINION

Insurance companies that agree to take on the indemnity agreements of its insureds must review the wording of their policy, the language of the indemnity contract, and the facts of the case to determine its obligation to its insured. The insurer in this case failed to accept the fact that their was a potential or actual claim of vicarious liability that would call their policy into effect. By failing to do so they were bound by the settlement reached by the indemnitee when it could have achieved a different result had it agreed to defend and indemnify.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for Mr. Zalma’s new books: the 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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Chutzpah Redefined

Dr. Harron Loses Mississippi License

“Chutzpah” is a Yiddish word meaning unmitigated gall. It is often defined by example of a person who murdered his parents and at sentencing asked the court for mercy because he is an orphan.

Our readers will remember some of the work concerning fraudulent silicosis cases that I have written about here, here and in Zalma’s Insurance Fraud Letter.

In Mississippi State Bd. of Medical Licensure v. Harron, — So.3d —-, 2014 WL 4550162 (Miss.App., 9/16/2014) the Mississippi Court of Appeal was called upon to affirm or reverse the decision of the the Mississippi State Board of Medical Licensure (the Board) who had disciplined Dr. Ray A. Harron for his involvement in silicosis litigation in Texas, by ordering that he never attempt to renew his lapsed medical license. As part of the discipline, the Board notified a national physician’s data bank that Dr. Harron’s actions had the potential to harm patients.

Although Dr. Harron agreed to the discipline, he disagreed that his actions as an expert witness had the potential to harm patients. He therefore appealed the Board’s action to the Hinds County Chancery Court. The chancery court reversed the Board’s action, ruling that it had no jurisdiction, that its ruling lacked substantial evidence, and that its notification to the physician’s data bank was arbitrary and capricious. Dr. Harron redifined “chutzpah” by claiming that he could testify as an expert after being found to have wrongfully diagnosed people with silicosis and asbestosis without even looking at the x-rays. He gave up his license in Texas and wished to keep his license in Mississippi.

FACTS

The facts are egregious. Dr. Harron was issued a medical license in Mississippi in 1995. It lapsed in 2007. Dr. Harron stopped seeing patients in 1995, and started working for Netherland & Mason (N & M), a Mississippi company that screened potential plaintiffs for asbestosis and silicosis-related diseases. In 2001, Dr. Harron shifted focus to screening persons for potential silicosis claims.

The filing of silicosis cases involving thousands of claimants led to the creation of a multi-district litigation (MDL) proceeding in Texas, styled In re Silica Products Liability Litigation, 398 F.Supp.2d 563 (S.D.Tex.2005). This case, presided over by United States District Judge Janis Graham Jack, involved 111 cases totaling over 10,000 individual plaintiffs. A Daubert v. Merrell Dow Pharm. Inc., 509 U.S. 579 (1993) hearing was held in February 2005, at which Dr. Harron, and other witnesses, testified.

Dr. Harron was involved in performing “B-reads” or producing diagnosing reports on 6,700 of the claimants in the Texas litigation. He was listed as the diagnosing physician on 2,600 of these claims. Dr. Harron testified about his practices of letting medically untrained secretaries and typists interpret his reports, insert a diagnosis, stamp his signature on the reports, and send them out with no review by him. He testified that he “might” have given a copy of his signature stamp to N & M when he “got behind on typing.” He testified that “anybody” could have stamped his signature to reports. While being questioned about how he could diagnose a specific claimant with asbestosis and later diagnose the same claimant with silicosis based on reading the same x-ray, he asked for a lawyer to represent him, and all questioning of him was halted by the judge. Judge Jack noted during Dr. Harron’s testimony that N & M had a stack of blank reports pre-signed by Dr. Harron.

At the conclusion of the hearing, the court ruled that Dr. Harron’s proposed expert testimony (and that of some other doctors) was unreliable and excluded it. Specifically, the court found that Dr. Harron relied on medical histories performed by lawyers and nonmedical personnel, which were “so deficient as to not even merit the label. The court further found that Dr. Harron’s (and other doctors’) review of x-rays lacked quality-control measures, and produced results that were described by other experts as “staggering,” “implausibl[e],” “unsound,” and “stunning and not scientifically plausible.  Judge Jack found that Dr. Harron relied upon occupational/exposure histories and medical histories which fail to even merit the title, “history,” let alone meet the generally-accepted scientific methodology for diagnosing silicosis.

Perhaps even more stunning Dr. Harron did not read, review or even see any of the 99 diagnosing reports bearing his name. This “distressing” and “disgraceful” procedure does not remotely resemble reasonable medical practice.

In early 2007, the Texas Medical Board instituted disciplinary proceedings against Dr. Harron based upon his activities in relation to the silicosis litigation. As a result of those proceedings, Dr. Harron entered into an agreed order dated April 13, 2007, in which he surrendered his Texas medical license, and agreed not to seek its renewal.

In July 2007, the Board also instituted disciplinary proceedings against Dr. Harron. During these proceedings, Dr. Harron entered into an agreed order, approved by the Board in November 2007, in which he agreed to never seek renewal of his Mississippi medical license and to pay all costs of the investigation and disciplinary hearings up to $5,000. The agreed order expressly stated that the results of the proceeding would be reported to the National Practitioners Data Bank (NPDB), a data bank that monitors disciplinary actions involving doctors.

The Board submitted an Adverse Action Report to the NPDB. In the report a question was asked: “Is the Adverse Action Specified in This Report Based on the Subject’s Professional Competence or Conduct, Which Adversely Affected, or Could Have Adversely Affected, the Health or Welfare of the Patient?” The Board answered “Yes” to this question. Dr. Harron filed a written dispute with the NPDB, claiming that he acted only as an expert witness and not in a doctor-patient relationship, and that as a result, his actions could not have harmed a patient. Dr. Harron then refused to pay the $5,000 in costs.

In 2009, the Board held a hearing after which it concluded that Dr. Harron had violated Mississippi Code Annotated section 73–25–29(8)(d) and (13) (Rev.2012), as well as Mississippi Code Annotated section 73–25–83 (Rev.2012), and reaffirmed its report to the NPDB. Dr. Harron was again ordered to pay the $5,000 in costs.

At the hearing conducted in January 2012, Dr. Harron admitted his prior testimony at the Daubert hearing but defended his actions as not being the practice of medicine. He admitted that he had pleaded the Fifth Amendment in testifying before congressional hearings on the silicosis mass-tort litigation, and he volunteered that he was the target of an ongoing criminal grand-jury investigation in New York involving asbestosis.

At the conclusion of the hearing, the Board found Dr. Harron guilty of:
Count three—unprofessional conduct likely to deceive, defraud or harm the public, including but not limited to, pre-signing blank ILO forms and allowing them to be filled out at a later date (without further review):

Count four—unprofessional conduct likely to deceive, defraud or harm the public, including but not limited to, allowing or otherwise instructing non-medically trained, non-allied health care personnel to interpret medical records and render medical diagnosis under his signature or signature stamp;

Counts five and six—having restrictions imposed on his license to practice medicine in another state or jurisdiction while under disciplinary investigation by a state licensure board in response to allegations related to conduct in silica litigation.

By order dated January 19, 2012, the Board permanently barred Dr. Harron from renewing his medical license and ordered him to pay the costs of the investigation, up to $10,000. The Board’s order stated that its previous answer on the NPDB form that Dr. Harron’s actions could have adversely affected the health or welfare of the patient would remain unchanged.

The issues the appellate court considered on appeal are: (1) whether the Board had jurisdiction to discipline Dr. Harron for his activities as an expert witness in Texas, and whether its decision was based on substantial evidence, and (2) whether the Board’s findings were arbitrary and capricious.

DISCUSSION

Contrary to the chancellor’s ruling, the Board’s jurisdiction to discipline doctors is not limited to situations where the doctor is actually practicing medicine on a particular patient. For example, in Montalvo v. Mississippi State Board of Medical Licensure, 671 So.2d 53, 57–58 (Miss.1996), the Board’s action in refusing to reinstate the license of a physician who had been convicted in federal court of money laundering was upheld.

The relevant question is whether Dr. Harron’s activities in the Texas litigation were “likely to deceive, defraud or harm the public.” Although the statute is not limited to the “Mississippi public,” it bears noting that a great many of the patients targeted for Dr. Harron’s unprofessional diagnoses were from Mississippi. Section 73–25–29(8)(d) authorizes the Board to regulate any Mississippi-licensed physician whose conduct (medical, ethical, or otherwise) poses a threat of harm to the public.

The chancellor noted that “[t]he charges against Dr. Harron involve his work as an expert witness and not as a treating physician to any specific patient.” This ignores that Dr. Harron’s testimony was as a physician. He was the actual diagnosing physician on a great many of the claims. Even though Dr. Harron testified: “[I]t’s a legal standard and not a real diagnosis,” he was presented as the diagnosing physician on 2,600 claims. He specifically testified at the Daubert hearing that each diagnosis was based upon: “I feel within a reasonable degree of medical certainty that this individual has [the particular disease].”

He testified that he stood by his diagnoses. Under direct questioning from the district judge, referring to his reports claiming each person had silicosis, Dr. Harron was asked: “Is this the diagnosis to be relied upon by other medical people and the patient?” Dr. Harron answered: “Yes.” His participation in the Texas litigation included his diagnosing patients.

Although the Board has authority to discipline a doctor for his actions outside the actual practice of medicine, Dr. Harron was, in fact, providing medical services to 2,600 patients. He was not simply testifying as an outside consultant with no connection to a patient, as when a doctor testifies as an expert on the standard of care. He was testifying as the diagnosing physician for thousands of patients. He issued reports claiming that each patient whose x-rays he reviewed was suffering from silicosis.

The Board had jurisdiction to discipline Dr. Harron for his actions in diagnosing thousands of patients with silicosis.

The Board’s actions were based on substantial evidence. Dr. Harron admitted to the conduct the Board found to violate counts three and four of the charging affidavit. Although Dr. Harron attempts to distinguish a “legal” opinion from a “medical” opinion, he was not offered as a legal expert; he was offered as a medical expert. His medical license gave him the privilege of offering that opinion. That license comes with a responsibility to his profession and the public at large, which the Board is empowered to oversee.

Counts five and six involved discipline imposed by the Texas Medical Board. Dr. Harron did not deny counts five and six (having surrendered his license and having been disciplined by the Texas licensing authority). The chancellor acknowledged this. Concerning these counts, the chancellor stated: “This Court does not ignore the undisputed facts that Dr. Harron’s license was restricted in another state.” This alone gives the Board the power to discipline Dr. Harron.

ARBITRARY AND CAPRICIOUS FINDINGS

There can be no real dispute that misdiagnosing someone with having a deadly disease such as silicosis has the potential to harm that person. As Judge Jack noted: “Then there is the toll taken on the misdiagnosed Plaintiffs. If these Plaintiffs truly have abnormal x-rays, then the radiographic findings may be caused by a number of conditions other than silicosis. And when the diagnosing doctors fail to exclude these other conditions, it leaves the Plaintiffs at risk of having treatable conditions go undiagnosed and untreated. ¶ In the case of the Plaintiffs who are healthy, at least some of them can be expected to have taken their diagnoses seriously. They can be expected to have reported the diagnoses when applying for health insurance and life insurance—potentially resulting in higher premiums or even the denial of coverage altogether. They can be expected to report the diagnoses to their employers and to the Social Security Administration. And they can be expected to report the diagnoses of this incurable disease to their families and friends. ¶  These people have been told that they have a life-threatening condition…. When dealing with this MDL and its 10,000 Plaintiffs, it is easy to forget that ‘statistics are human beings with the tears wiped off.’ … But it should not be forgotten that a misdiagnosis potentially imposes an emotional cost on the Plaintiff and the Plaintiff’s family that no court can calculate.”

It is possible that some of the patients that Dr. Harron diagnosed with silicosis may actually have that disease. That does not excuse his unprofessional conduct in cranking out thousands of reports diagnosing the disease with no real attempt to differentiate those who actually have the disease from those with some remote possibility of having the disease. His actions attacked the integrity of the legal system, had at least the potential to harm his claimant/patients, and were a discredit to his profession, and to his Mississippi medical license.

The court of appeal found that the Chancery court erred in ruling that the Board lacked jurisdiction and further erred in ruling that the Board lacked substantial evidence to discipline Dr. Harron and that its ruling was arbitrary and capricious. Accordingly, the order was reversed and Dr. Harron’s license was permanently removed.

ZALMA OPINION

Dr. Harron participated in a massive fraud finding impossibilities like a single patient suffering from silicosis and asbestosis, after admitting to the fraud in a deposition before Judge Jack in Texas, decided he needed a lawyer; voluntarily gave up his license in Texas as a result, and then tried to keep his license in Mississippi. When that effort failed he continued to act as an expert witness – claiming with utmost chutzpah – that the testimony was not medical but was legal even though he was testifying to a diagnosis of a disease.

Litigation continues with regard to the silicosis cases and one can only wonder at the quality of a lawyer who, with his record, would retain the services of Dr. Harron as an expert witness since defense counsel would destroy his credibility with reference to the silicosis cases and the record from that case.

One can only wonder what the U.S. Attorneys in Texas are thinking to allow Dr. Harron to continue to provide expert testimony about any medical diagnosis.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for Mr. Zalma’s new books: the 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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

 

Posted in Zalma on Insurance | Leave a comment

Lead Paint Only Pollutant When It Leave Wall

Lead Paint Injury Always Excluded by Pollution Exclusion

Insurers have no interest in insuring against the risk of loss or injury by pollutants. They have drafted all-inclusive exclusions sometimes know as the absolute pollution exclusion. Regardless, insureds faced with claims of pollution seek to convince courts that the exclusion does not apply.  In State Farm Fire & Casualty Company v. Dantzler, — N.W.2d —-, 289 Neb. 1, 2014 WL 4477236 (Neb., September 12, 2014)  the Nebraska Supreme Court was called upon to deal with whether lead paint poisoning was excluded by a liability insurance policy.

FACTS

State Farm Fire & Casualty Company (State Farm) brought an action for declaratory judgment, claiming its rental dwelling policy issued to Jerry Dantzler excluded coverage for personal injuries allegedly sustained by Dantzler’s tenant as a result of exposure to lead-based paint. In cross-motions for summary judgment, State Farm and Dantzler requested a determination whether a policy exclusion precluded coverage for the tenant’s personal injury claim. The district court sustained State Farm’s motion for summary judgment and concluded as a matter of law that the pollution exclusion barred coverage under State Farm’s policy.

In State Farm Fire & Cas. Co. v. Dantzler, & Cas. Co. 564, 842 N.W.2d 117 (2013) the Nebraska Court of Appeals reversed the entry of summary judgment, concluding that in the absence of proof how the tenant was allegedly exposed to lead-based paint, it could not determine as a matter of law whether the pollution exclusion barred coverage. It reasoned that whether the alleged exposure to lead-based paint occurred through a “discharge, dispersal, spill, release or escape,” as specified in the exclusion, was a factual determination that depended upon the manner of exposure.

THE POLICY

Dantzler owned a rental property in Omaha, Nebraska. He maintained insurance on the rental property with a rental dwelling policy issued by State Farm. The policy excluded: “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants: ¶ (1) at or from premises owned, rented or occupied by the named insured; ¶ …. As used in this exclusion: ¶ …. ‘[P]ollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

David Chuol (David) and his minor child, Chuol Geit (Geit), were tenants of Dantzler’s rental property. In March 2011, David and Geit sued Dantzler in the Douglas County District Court, alleging that Geit was exposed to high levels of lead poisoning due to lead paint contamination within the rental property. Dantzler tendered the claim to State Farm. It retained counsel to represent Dantzler but reserved its right to deny coverage.
State Farm filed an action for declaratory judgment against Dantzler, David, and Geit. It asked the district court to determine whether its policy excluded coverage for the lead-based paint claim being brought against Dantzler. State Farm and Dantzler filed cross-motions for summary judgment.

The Court of Appeals concluded that lead found in paint was a pollutant within the meaning of the pollution exclusion but that there was a genuine issue of material fact whether there was a “discharge, dispersal, spill, release or escape,” which therefore prevented the entry of summary judgment in favor of State Farm. It reversed the district court’s entry of summary judgment and remanded the cause for further proceedings.

ANALYSIS

The Supreme Court was presented with the question whether the manner in which Geit was allegedly exposed to lead-based paint is an issue of material fact that prevents summary judgment in favor of State Farm. If a genuine issue of fact exists, summary judgment may not properly be entered. However, not all issues of fact preclude summary judgment, but only those that are material.

The outcome of the case depends upon whether Geit’s alleged injuries were caused by a “discharge, dispersal, spill, release or escape” of lead-based paint such that the pollution exclusion bars coverage.

The Nebraska Supreme Court found persuasive the reasoning of other courts that the terms “discharge,” “dispersal,” “spill,” “release,” and “escape” encompass all possible movements by which harmful exposure to lead-based paint occurs. Accordingly, the manner of exposure to lead-based paint is not a material fact that prevents summary judgment, because the manner of exposure does not affect whether there was a “discharge, dispersal, spill, release or escape” for purposes of the pollution exclusion.

Among state and federal courts, there are two general approaches to the application of pollution exclusions. Some courts interpret pollution exclusions as barring coverage for only those injuries allegedly caused by traditional environmental pollution, as understood historically. Other courts interpret pollution exclusions as excluding coverage for all injuries allegedly caused by pollutants, because the exclusions are unambiguous as a matter of law. Adoption of a limited, environmental approach cannot be dismissed as inconsequential.

The Nebraska Supreme Court specifically considered and rejected the limited, environmental approach.  It focused on the language of the exclusion and found as a matter of law that it unambiguously supported a broader interpretation. The language of the policy does not specifically limit excluded claims to traditional environmental damage; nor does the pollution exclusion purport to limit materials that qualify as pollutants to those that cause traditional environmental damage. The definition of “pollutant” includes substances that are harmful or toxic to persons, property or the environment.  By including “the environment” as a separate entity that could suffer harm from a pollutant, the pollution exclusion does not limit its scope of application to environmental pollution.

The broad interpretation given pollution exclusions is not compatible with the limited, environmental approach employed by the Supreme Court.  The two approaches cannot be reconciled. Therefore, in light of Nebraska case law, the Court of Appeals erred.

ALL MANNERS OF EXPOSURE TO LEAD-BASED PAINT INVOLVE DISCHARGE, DISPERSAL, SPILL, RELEASE, OR ESCAPE

Lead paint starts out as a liquid and becomes a solid after it is applied and dries. Over time, lead paint may chip and flake becoming solid “waste.” When it begins to deteriorate, it may give off fumes. When it begins to disintegrate, it becomes dust–fine, dry particles of matter which, like smoke and soot, can float in the air affecting human respiration until it eventually settles on the ground.

Based on this understanding of the movement in lead paint poisoning, the court did not view lead-based paint as always being a contaminant, but, rather, as having the potential to contaminate air, water, and the human body when it disperses. Lead paint that never leaves a wall or ceiling does not cause harm. Lead-based paint is an inchoate contaminant before it breaks down (unless it is directly discharged, say, into water); it becomes both an irritant and a contaminant after it breaks down into chips, flakes, dust, or fumes.
Because “discharge,” “disperse,” and “escape” could be either transitive or intransitive verbs, the pollution exclusion encompassed movement that was either intentional and purposeful or accidental and involuntary. Lead-based paint is not toxic to a person until it breaks down into a form that can be taken into the body and absorbed.

The separation of lead-based paint from a painted surface is inherent in every manner of exposure to lead-based paint. The terms “discharge,” “dispersal,” “spill,” “release,” and “escape” unambiguously encompass the process by which lead-based paint moves from a painted surface into a form that can be absorbed by a person’s body and cause lead poisoning. Because the separation of lead based paint that is inherent in every case of lead paint poisoning the pollution exclusion is not ambiguous as applied to lead-based paint and a determination of the specific process of exposure in any particular case is not material to application of the exclusion. Regardless of how the lead-based paint is separated from the painted surface or what form it takes once it is separated, an individual’s exposure to and absorption of that lead-based paint results from the “discharge, dispersal, spill, release or escape” of a pollutant. Thus, it is not necessary to differentiate between the processes by which exposure occurs. It is not material to application of the pollution exclusion to determine the manner in which the injured party was allegedly exposed to lead-based paint.

State Farm was entitled to judgment as a matter of law that coverage of the lead-based-paint claim against Dantzler was barred by the pollution exclusion in the policy. Once State Farm demonstrated the existence of a claim that alleged injury from lead-based paint, it could be concluded as a matter of law that the claim for which Dantzler sought coverage was one that involved an “alleged … discharge, dispersal, spill, release or escape” of a pollutant. Lead-based paint cannot cause injury unless it has separated from the painted surface. Regardless of the specific manner of exposure, an allegation that exposure to lead-based paint has caused injury necessarily contains an implicit claim that the paint separated from the original surface.

The pollution exclusion in Dantzler’s policy barred coverage of injury arising from an “alleged … discharge, dispersal, spill, release or escape” of a pollutant, such as lead-based paint. Therefore, because there was no factual question as to the existence of a claim that alleged injury from lead-based paint, the district court did not err in concluding as a matter of law that the pollution exclusion barred coverage of that claim.

ZALMA OPINION

The court of appeal tried to find some way to provide coverage for Dantzler by concluding it needed to know the method by which the lead was ingested. The Supreme Court reversed because there is no manner in which the lead could be ingested without it first flaking off the wall in flakes, fine particles or a gas. All were either a “discharge, dispersal, spill, release or escape of a pollutant.” Ingestion of lead from lead paint is always excluded by the type of exclusion in the State Farm policy regardless of the means by which it was ingested.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for Mr. Zalma’s new books: the 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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Excluded Driver Eliminates Coverage

Negligent Entrustment Does Not Create Coverage

Some families have a mix of good and bad drivers. One may have no accidents and citations while the other has several accidents and citations. An insurer is entitled to charge premium based upon the risk of loss presented by the proposed insured. The poor driver will invariably be charged a higher premium than the good driver.

Auto insurance policies, can, with the agreement of the insured and the insurer, exclude specific persons from coverage to allow the named insured to obtain insurance at a lower premium than would have been charged had a high risk driver remained a covered person.

In Normand v. Grayson, — So.3d —-, 2014 WL 4537486 (La.App. 1 Cir. 9/15/14), an excluded driver caused an accident. The insurer refused coverage because the driver was an excluded driver. The Plaintiff sought coverage based on the allegation that the named insured had negligently entrusted the excluded driver with the vehicle and was, therefore, covered for the injuries caused.

FACTS

Plaintiff, Lacey L. Normand, filed a petition for damages for the injuries she sustained in an automobile accident that occurred on October 16, 2004, with a vehicle owned by defendant, Cheri Grayson, and driven by her husband, Stephen. The Grayson vehicle was insured by a vehicle insurance policy issued to Cheri by USAgencies Casualty Insurance Company, Inc., (USAgencies) but Stephen was an expressly excluded driver. The trial court denied a motion for summary judgment filed by USAgencies, reasoning that Cheri was potentially liable to Normand for her negligent entrustment of her vehicle to Stephen. USAgencies appealed.

USAgencies filed a motion for summary judgment, urging entitlement to dismissal from the lawsuit since Stephen, a specifically excluded driver under the policy it issued to Cheri, was operating the vehicle at the time of the accident. The trial court granted summary judgment on this basis but also concluded that Normand could pursue her claims against USAgencies as a result of Cheri having negligently entrusted her vehicle to Stephen.

In this review, USAgencies contends the named-driver exclusion precludes coverage to the named insured for negligently entrusting a covered vehicle to an explicitly excluded driver. Normand asserts that as a separate independent tort arising out of ownership of a vehicle, USAgencies cannot exclude negligent entrustment claims from coverage under.

STATUTORY SCHEME

The statutory scheme provided by the Louisiana Motor Vehicle Safety Responsibility is intended to attach financial protection to the vehicle rather than the operator. Accordingly, Louisiana’s automobile insurance law requires omnibus coverage in favor of any person using an insured vehicle with the permission or consent of the name insured. In 1992, the legislature created an exception to the general rule of omnibus coverage which permits a named insured to exclude from coverage a resident of his household.
The statute provides, in pertinent part: “[A]n insurer and an insured may by written agreement exclude form coverage the named insured and the spouse of the named insured. … It shall not be necessary for the person being excluded from coverage to execute or be a party to the written agreement.”

The statute grants the automobile insurer and the insured the statutory authority to contractually exclude a resident of the insured’s household from coverage under the automobile policy. The purpose of the statute is to allow the named insured the option of paying a reduced premium in exchange for obtaining an insurance policy that affords no coverage for an accident while a covered vehicle is being operated by an excluded driver.

In this case, the insurance policy provided coverage to Cheri from May 1, 2004 to October 31, 2004. It is undisputed that her husband Stephen was a resident of Cheri’s household and was an excluded operator under the policy. Additionally, the policy provides that “Excluded Persons” are classified as “persons that live in my household and I request in writing to exclude these persons from any benefit of this policy, (i.e. repair of listed vehicle, any investigation of an accident, or any lawsuit brought against me or the excluded person) USAgencies Casualty Insurance Company will not be responsible for any damage caused by an excluded person or non-listed household resident not found on this application.”

ANALYSIS

The statutory language at issue clearly allows the insured and insurer to exclude from coverage any person the parties specifically name in the exclusion and does not limit or restrict the ability of the parties to the contract to exclude coverage for a named person based on the age of the driver. The sole purpose of this type of exclusion is premium reduction.  Therefore, an excluded driver endorsement can enable an insured, who would otherwise have difficulty obtaining insurance coverage for a vehicle, to obtain insurance at a reasonable rate.

As such, where an excluded driver endorsement has been validly executed, refusing to recognize the validity of the exclusion results in the imposition on the insurer of a coverage obligation not commensurate with the premium paid and, thus, defeats the purpose of the omnibus coverage exception provided for in the statute. Allowing coverage under the theory of negligent entrustment would unjustly deprive the insurer of the benefit of its bargain by allowing an insured to purchase a vehicle liability policy with an excluded driver endorsement, permit the excluded driver to drive the insured vehicle, and reap the benefits of the policy. By enacting the statute the legislature permitted the exclusion of high-risk drivers from coverage in exchange for a reduced premium. Accordingly, the policy issued to Cheri Grayson does not afford coverage for negligent entrustment of her insured vehicle to her husband Stephen, an explicitly excluded driver.

The trial court’s denial of USAgencies’s motion for summary judgment on the issue of Cheri Grayson’s alleged negligent entrustment of her vehicle to her husband, Stephen, could not withstand appellate review. Judgment was,  therefore, rendered in favor of USAgencies Casualty Insurance Company, Inc., granting summary judgment based on a finding that the named-driver exclusion in a vehicle liability insurance policy has the effect of also precluding coverage to the named insured for any claims of negligent entrustment of the covered vehicle to an explicitly excluded driver.

ZALMA OPINION

Sometimes, even the absolutely obvious exclusion, fails before a trial court where the best intentions of the trier of fact is to protect the injured. In this case plaintiff’s counsel had a creative argument that he was not suing for the negligent driving of the operator of the vehicle but was suing his wife for negligently entrusting her husband – a less than perfect driver – with the vehicle. The argument, although it might gain a tort judgment against the spouse who entrusted the vehicle, cannot create insurance coverage where none existed and would defeat the purpose of such an exclusion.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for Mr. Zalma’s new books: the 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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Arson Fraud Fails

Zalma’s Insurance Fraud Letter — September 15, 2014

In the 18th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on September 15, 2014, 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.

The current issue of ZIFL reports on:

1.    Aron & Insurance Fraud Fails
2.    New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.    Love Overcomes Murder Attempt but Defendant Still Gets 31 Years.
4.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

Zalma’s Insurance Fraud Letter

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

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

1.    TPA Is a Proper Bad Faith Defendant – September 10, 2014
2.    Agent Only Needs to Do What He Is Asked – September 9, 2014
3.    The Tiffany Kid – September 8, 2014
4.    Insurance Agent’s Duties to Insured – September 5, 2014
5.    Intentional Act Exclusion and Homicide – September 4, 2014
6.    Penny Wise, Dollar Foolish – September 3, 2014
7.    No Help – No Coverage –  September 2, 2014
8.    Fraud Proceeds Apace – September 1, 2014
9.    Policy Condition Rules – August 29, 2014
10.    Insurer’s Lose Right to Counsel in Washington – August 28, 2014
11.    False Imprisonment by Employer Excluded – August 27, 2014
12.    Policy Must Incorporate Statute Terms – August 26, 2014
13.    No Proof of Loss – No Coverage – August 25, 2014
14.    Not Disabled Enough – August 22, 2014
15.    UIM Limitation Acrues At Denial – August 21, 2014
16.    Good Intentions Abuse Basic Rights – August 20, 2014

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Leave a comment

The Mold Claims Coverage Guide

New from Barry Zalma

The Mold Claims Coverage Guide was written to help anyone faced with claims for property damage or bodily injury as a result of exposure to mold, fungi or bacterial infestations.

Although mold and fungi have received bad publicity of late—which brought about the publication of this book—molds and fungi are not all bad. In fact, most of them are healthy, delicious, and do no damage.

Articles abound concerning the types of organisms that fit under the common designation of mold and fungi. For example, one interesting article[1] explains how the organisms that are part of the fungal lineage include mushrooms, rusts, smuts, puffballs, truffles, morels, molds, and yeasts, as well as many less well-known organisms. Dr. Blackwell and her co-authors report that more than 70,000 species of fungi have been described.

The article also establishes that fungi “constitute an independent group equal in rank to that of plants and animals.” Since fungi are neither plant nor animal they are difficult to classify. Fungi share with animals and plants the ability to absorb various products for nutrition. Dr. Blackwell explains, however, that fungi, unlike plants and animals, live in their own food supply and simply grow into new food as they eat away the nutrients in their local environment.

Fungi move by extending filaments from the main body. When one of the filaments contacts a food supply, according to Dr. Blackwell “the entire colony mobilizes and reallocates resources to exploit the new food. Should all food become depleted the mold or fungi sends out spores. Although the fungal filaments and spores are microscopic, the colony can be very large with individuals of some species rivaling the mass of the largest animals or plants.”

Litigation seldom results from visible fungi like mushrooms. Rather, claims and litigation arise from fungal spores that are either actively or passively released for dispersal. In almost every square meter of the world, fungi or mold species are reproducing by dispersing spores through the air. Fungi that disperse their spores through the air do so in numbers that, if countable, would be in units numbering in billions. Some fungi, Dr. Blackwell teaches, are rain splash or flowing water dispersed.

Not all members of the family are harmful. Many molds and fungi are used as part of the human diet, notably in the processing and flavoring of foods (e.g., baker’s and brewer’s yeasts, Penicillia in cheese making) and in production of antibiotics and organic acids.

According to Dr. Blackwell’s article, the largest known “basidioma (mushroom or fruiting body) was that of a Rigidioporus Ulmarius hidden-away in a shady corner of the Royal Botanic Gardens, Kew, Richmond, Surrey, England. The weight of the fruiting body was estimated to be 284 kg (625 pounds). Unfortunately, it began to rot at the edges because the hyphal body of the fungus digested away its elm root substrate.” The fungi is the root of its own destruction if it digests its food supply. Many claims of property damage by fungi result when the structure collapses after the fungi digests all its food supply and destroys its structural integrity.

Molds are found wherever there is moisture, oxygen, and something to feed on. All molds require some form of moisture to grow, although the amount of moisture varies for different species. Molds also need an organic source of food. Although they appear to grow on glass, tile, stainless steel, cookware, etc., they are generally feeding off some organic source deposited on these surfaces (oils, film, dirt, skin cells, etc.).

Mold has made its way into people’s homes. The term “toxic mold” is misleading as it implies that certain molds are toxic. In fact, certain types of molds produce mycotoxins that can have an adverse effect on people whose immune systems are reduced due to illness or age.

One of the most effective means of eliminating an infestation of mold is to remove its source of moisture or the organic sources it uses for food. To destroy a mold infestation at least one of its three elements must be removed from the environment: moisture, oxygen, or something on which it can feed.

To buy the book note

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Posted in Zalma on Insurance | 2 Comments

Insurance Claims – A Comprehensive Guide

An Excerpt from A New Book

In my newly released book, Insurance Claims: A Comprehensive Guide, I discuss in two volumes what I believe is everything you need to know about property and liability insurance policies. The following is an excerpt from the book:

Property

Insurance policies are contracts. An insurer and an insured agree that the insurer will provide indemnity to the insured as a result of a contingent or unknown event that causes loss to the insured. The language of insurance contracts comes in multiple formats with an almost infinite variety of terms and conditions. It is recognized that an insurance contract can be written to contain nearly any terms that the parties to it choose. In State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 313 (Ala. 1999), the court stated that “insurance companies and their insureds are free to agree to any terms in a contract so long as they do not offend some rule of law or contravene public policy.”

In almost identical language, the Wisconsin Supreme Court said that “parties are at liberty to enter into insurance contracts which specify the coverage afforded as long as the contract terms do not contravene state law or public policy.”

Property insurance does not insure property. It insures people who have an interest in real or personal property and who face the risk of losing that property to unknown or contingent perils. Most property insurance policies insure against the risk of loss by perils like fire, lightning, windstorm, hail, earthquake, or flood. The risk of loss is spread among the customers of the insurer so that the cost of insurance is affordable. It is “first party” insurance against risks faced by property in which the insured (the first party to the contract of insurance) has an interest and by the loss of which the insured would be damaged. First party property insurance is a contract of personal indemnity. It does not follow title to the land.

The Contract of Personal Indemnity

The insurance claims adjuster (the adjuster) must always ascertain that the owner of the property is the person insured and that the person insured has an interest in the property. Failure to do so could result in the insurer paying the wrong person. Proceeds of a policy upon the interest of an insured are not subject to the claims of others who have an interest in the property.

For example, Mrs. Jones is allowed to live rent free in a home owned by her children. Mrs. Jones purchases, in her name alone, a policy of homeowners insurance, insuring her against the risks of loss to the structure and its contents. If a fire destroys the house, Mrs. Jones can recover because her interest in the house is an “insurable interest.” This means she has an interest in the property sufficient that she will suffer a loss if the property is lost or damaged. Mrs. Jones’s children, the owners of the home, also have an insurable interest in the home, but are not insured under Mrs. Jones’s policy and may not recover any proceeds from it.

In California, as in most states, “[i]n common parlance, we speak of a house as being insured, but, strictly speaking, it is not the house but the interest of the owner therein that is insured, and, whether that interest is founded upon a legal title, an equitable title, a lien, or such other lawful interest therein as will produce a direct and certain pecuniary loss to the insured by its destruction, he has an insurable interest therein.”[3]

Only a person who is both an insured and who has an insurable interest may obtain indemnity from a policy of first party property insurance. In Russell v. Williams, 58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (Cal. 10/04/1962), the California Supreme Court stated the rule:

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property.

As a contract of personal indemnity, the policy only insures the person named in the policy against certain risks of loss of property in which that person has an interest. A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

Liability

Like property insurance, liability insurance is protection provided to the insured against the risks of loss faced in every day living. Unlike the risks taken by property insurers, the risks of loss taken by liability insurers are those that are the result of acts or omissions of the person insured that will cause him or her to be sued or pay damages to third persons. Liability insurance is purchased to help protect against the risk of financial ruin from accidents or contingent or unknown events. An accident is an event that is neither expected nor intended by the person to whom it happens.

Liability insurance is known as third party insurance. The first party is the insured; the second party is the insurer; and the third party is the person making a claim against an insured. Third party insurance is insurance against risks faced by the individual insured for damages he or she may be required to pay as a result of an accident caused by his or her act or omission to act.

The California Insurance Code defines liability insurance as follows:

Liability insurance includes:

(a)  Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

* * *

(c)  Insurance covering injuries sustained by an insured resulting from a tort committed by a third party against which such third party is not himself covered by liability insurance;

(d)  Insurance coverage against the legal liability of the insured, and against loss, damage, or expense incident to a claim arising out of the death or injury of any person as the result of negligence or malpractice in rendering professional services by any person who holds a certificate or license. (California Insurance Code § 108)

This legislation is a rather detailed summary of years of common law defining the purpose and types of liability insurance that have evolved since the 13th century.

The book is available from National Underwriter Company. The listing below is the information you need to order the book.

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

In addition I wrote two other books that combined with the Insurance Claims: A Comprehensive Guide, National Underwriter has published:

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Posted in Zalma on Insurance | Leave a comment

New From Barry Zalma

I am proud to announce the publication by National Underwriter Company’s Summit Professional Networks publication of three of my books in what they have termed the Zalma Insurance Claims Library:

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Posted in Zalma on Insurance | Leave a comment

TPA Is a Proper Bad Faith Defendant

Insurance Expert May only Testify to Industry Standards

A disability claim requires proof of the existence of the policy, that there is a disability as defined by the policy, and if improperly denied, evidence of bad conduct.

BACKGROUND

Lisa McClain (“McClain”) worked as a third grade teacher at Logansport Community School District (“Logansport”) for approximately 13 years. In 2006, she suffered a stroke and was able to return to work the following year. She worked until 2010, but then McClain claimed that she was unable to work due to disability. McClain alleges that she had a long term disability benefits policy (“Policy”) issued by Madison National Life Insurance Company (“Madison”) and administered by Disability Reinsurance Management Services, Inc. (“DRMS”), under which Madison agreed to pay long term disability benefits in the event McClain became disabled. In McClain v. Madison Nat. Life Ins. Co., Slip Copy, 2014 WL 4377458 (N.D.Ind., Sept. 4, 2014) the District Court resolved some of the issues.

THE POLICY

The Policy was issued with an effective date of January 1, 2010. McClain alleges that she became totally disabled on January 22, 2010, but Madison has refused to pay her claim.

The Policy under which McClain seeks long-term disability benefits was issued to LCS with an effective date of January 1, 2010.  The Policy’s insuring clause states: “If you become disabled while insured under the Group Policy, we will pay LTD Benefits according to the terms of your Employer’s coverage under the Group Policy, after we receive satisfactory Proof of Loss.”  According to Defendants, the Policy’s definition of Disability or Disabled can be found in Amendment 1 and is as follows: “1. during the Elimination Period and your Own Occupation Period you are, as a result of Physical Disease, Injury, Mental Disorder, Substance Abuse or Pregnancy, unable to perform one or more of the Material Duties of your Own Occupation ….; or ¶ 2. during the Elimination Period and the first 24 months you are Disabled with Work Earnings, your Work Earnings are less than 99% of your Predisability Earnings as a result of Physical Disease, Injury, Mental Disorder, Substance Abuse or Pregnancy, and you are incapable of earning 85% or more of your Predisability Earnings….”

The Policy defines “Own Occupation” as “the occupation you routinely perform for the Employer at the time Disability begins.” Further, the Policy provides that, “[w]e will look at your occupation as it is normally performed in the national economy, instead of how the work tasks are performed for a specific employer or at a specific location.”

McClain has sued Defendants Madison and DRMS asserting that Madison breached their contract and the covenant of good faith and fair dealing. McClain further alleges that both Madison and DRMS breached their fiduciary duties owed to McClain.

DISCUSSION

A party who bears the burden of proof on a particular issue may not rest on its pleading, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact which requires trial. Therefore, if a party fails to establish the existence of an essential element on which the party bears the burden of proof at trial, summary judgment will be appropriate.

FACTS

McClain’s Employment with Logansport School Corporation

Mrs. McClain had instructional time well organized and paced to sustain the interest of students. She kept the discussion moving by encouraging students to voice their thoughts and opinions and ask questions. Transitions were smooth and student behavior was monitored. Mrs. McClain maintained a very pleasant learning environment for students. Her classroom has a warm and inviting atmosphere.

In October of 2006, McClain suffered a cerebrovascular accident (“CVA”) or stroke that left her with permanent brain damage. As a result, McClain spent four weeks in rehabilitative therapy. In February and March of 2007, McClain received neuropsychological testing from Theresa Strout, HSPP Ph.D. (“Dr.Strout”) to assess her cognitive function. Dr. Strout opined that McClain’s intellectual ability, executive functions, and attention/memory functions were all within “normal”—that is, low-to-high average—ranges. Dr. Strout concluded that “there is no evidence of loss of intellectual functioning.”

By March 13, 2007, Bradley Vossberg, McClain’s physician, opined that she could return to work. McClain returned to work at LCS as a teacher for the 2007 summer school term. McClain testified that she was at this time experiencing the same symptoms, in the same severity, as in 2010 when she first claimed disability.

During the 2008–09 term, McClain received numerous written criticisms of her job performance. After multiple warnings complaining about poor performance LCS escalated McClain from a “School Improvement Plan” to an “Intensive Assistance Plan” or “IAP”, which McClain characterized as a “last chance.”   McClain claims that she failed to meet some of the requirements because she “didn’t understand” what to do and just “didn’t get it.”

The school district tried everything they could think of to help McClain between the fall of 2007 and January of 2010, “but it became undeniable that she could not meet the responsibilities of her job.”

McClain’s Disability Claim

McClain filed a claim for benefits with Madison.  She indicated that she ceased work on January 22, 2010, but that her claim was related to her stroke in October of 2006. She indicated that she was still recovering from the stroke and that her symptoms were poor memory and difficulty processing new information.  McClain claims that the symptoms that made her unable to work in 2010 were the “same sort of symptoms” she complained of shortly after returning to work in 2007.  She indicated that the symptoms were “the same” when she stopped working in January of 2010 as they were when she returned to work in 2007.
One of her doctor’s opined that “disability started when the stroke happened, before she even went back to work.”  Dr. Dutter opined that she was not capable of performing all of the material duties of her job as a teacher at any point after the stroke. Although McClain’s neuropsychological testing looked “pretty normal,” Dr. Dutter speculated that McClain had concentration issues that might not show up on examination.

Madison’s Consideration of McClain’s Claim for Benefits

Upon receipt of McClain’s claim in 2010, one of the very first actions Madison National took was to inquire whether McClain had been insured under the school corporation’s prior disability policy. The Claim File shows McClain’s effective date of coverage under the Madison’s Policy.  McClain’s claim was considered by Senior Claims Analyst Lisa Caflisch (“Caflisch”).

McClain’s expert testified that the case involved going out and getting information that Madison National was aware of. It made a conscious decision not to go out and get that information. When “Madison National learned from the employer in its telephone call with the employer that there had been performance issues, when it learned that the employer had tried to make accommodations with the insured because of those performance issues, and then despite that knowledge it chose not to get that information, and it proceeded to evaluate the case strictly from a standpoint of what changes have occurred in her medical condition at the time she became disabled, that is so far below the standard of care.”

McClain Has Provided Sufficient Proof of Disability to Overcome Summary Judgment.

In short, while Dr. Trexler found McClain’s cognitive ability to be normal, he also found that McClain suffered a variety of impairments, and those findings were not based on subjective complaints alone. McClain points to other evidence of disability, but because Dr. Trexler’s report creates a genuine issue of fact on this issue, the Court elects not to consider the other evidence that McClain points to in her response.

Expert Testimony Is Admissible in Part.

The expert is precluded from offering his opinion on whether or not Defendants engaged in bad faith (the ultimate conclusion), his testimony regarding industry standards provides some evidence of bad faith and is admissible.

Negligence Insufficient to Prove Bad Faith

A plaintiff can demonstrate bad faith by showing that the insurer had knowledge that there was no legitimate basis for denying liability. As a general proposition, a finding of bad faith requires evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or

Mere negligence is insufficient to support a claim of bad faith. But, an insurer which denies liability knowing that there is no rational, principled basis for doing so has breached its duty.

With regard to third-party administrators of insurance, a non-contractual fiduciary duty has been found to arise in the limited context of a third-party administrator who “actually made the decisions” to deny a claim.

ZALMA OPINION

The evidence considered by the court clearly established disability. The real question was whether the investigation conducted by the insurer and its TPA was performed in good faith and violated industry standards. The expert testimony at deposition went too far by reaching the ultimate issue. The expert was not totally limited but only was allowed to testify concerning industry standards. What is key in this opinion is that a TPA stands in the shoes of the insurer it represents and can be held liable for bad faith conduct.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Agent Only Needs to Do What He Is Asked

Even With Rescission Agent’s Duty Fulfilled

FACTS

In 2008, defendant Castlepoint Insurance Company issued a homeowner’s policy to plaintiffs Linda Dauria and Thomas Dauria based on an application prepared and submitted on their behalf by defendant broker Frank Campo. After a fire in 2010, Castlepoint rescinded the policy based on its determination that the premises contained a basement apartment, which rendered it a “three family” dwelling as opposed to the “two family” designation listed on the insurance application.

In 2011, plaintiffs commenced this action against Castlepoint for breach of contract, and against Campo for his alleged negligence and breach of contract in failing to procure the proper insurance policy and to properly process plaintiffs’ application for insurance. Campo moved to dismiss for failure to state a cause of action and based on documentary evidence, claiming that he was never advised or had reason to believe that the premises was a three-family dwelling. In opposition, Mr. Dauria stated that in a conversation with Campo after the fire, Campo admitted that he had “messed up,” and that in 2002 an investigator for Allstate, the prior insurer of the premises, had advised Campo that the house was a three-family home. Plaintiffs also cross-moved for summary judgment against Castlepoint and Castlepoint cross-moved for summary judgment against plaintiffs dismissing the complaint.

The motion court granted Campo’s and plaintiffs’ motions for summary judgment, and denied Castlepoint’s motion on the ground that Campo fulfilled his duties to plaintiffs, and Castlepoint failed to meet its prima facie burden of showing its entitlement to rescission as a matter of law. In so ruling, the court found that Castlepoint did not establish that plaintiffs had made a material misrepresentation in the insurance application because three-family dwellings were not listed as an “unacceptable exposure” in Castlepoint’s underwriting guidelines, and the policy did not exclude three-family dwellings from coverage.

Castlepoint appealed. The appellate court reversed and granted Castlepoint summary judgment (104 AD3d 406 [1st Dept 2013] ), holding that the motion court erred in finding that Castlepoint failed to establish the materiality of the misrepresentation that the premises was a two-family dwelling, as opposed to a three family dwelling that did not fit within the policy definition of a “residence premises.”

Plaintiffs did not appeal from the grant of summary judgment as to Campo. However, after the appellate court’s decision in the Castlepoint appeal was issued, plaintiffs moved below to renew Campo’s motion to dismiss. Finding that plaintiffs’ failed to present any new and additional facts not available at time of Campo’s original motion to dismiss the complaint, the motion court deemed the motion to be an untimely motion to reargue based on the appellate court’s decision in the Castlepoint appeal, which did not address the unappealed dismissal of the complaint against Campo. The court further stated that even assuming arguendo that it could consider the motion, plaintiffs’ arguments were without merit.

ANALYSIS

Although the grant of a dismissal to a codefendant at the appellate level may form the basis of a renewal motion (in the court below) by a nonappealing defendant on the ground of “law of the case” this is not a case where two codefendants are so similarly situated that this Court’s order with respect to one defendant directly impacts the other defendant.

The issue of Campo’s liability is not identical to the issue of Castlepoint’s liability, and plaintiffs have not shown that the factual or legal basis for the order dismissing the claims against Campo has been overturned.

An insurance broker can be held liable in negligence if he or she does not exercise due care in an insurance brokerage transaction. In the order dismissing the claims against Campo, the motion court found that Campo had shown that “no significant dispute exists regarding his lack of duty to [p]laintiffs under the circumstances of this matter”. The court reasoned that Campo procured the requested insurance for plaintiffs, within a reasonable time, and had no continuing duty to advise plaintiffs to procure additional insurance once this was achieved. Significantly, in the appellate court’s decision in the Castlepoint appeal the court did not find that Campo was in fact responsible for a material misrepresentation in the insurance policy application, and plaintiffs have not shown that the motion court’s exoneration of Campo was based on its now-overturned holding that there was no misrepresentation.

ZALMA OPINION

The majority, and the motion court, according to the dissent, failed to explain how Campo could have fulfilled his duty as a matter of law if, in fact, he did not obtain the requested coverage. The dissent argued, incorrectly, that the issue of Campo’s liability is dependent upon whether or not plaintiffs are covered by the CastlePoint policy and whether Campo, as the broker, obtained coverage for them. The dissent claimed that if the CastlePoint policy covered the loss, then Campo unquestionably fulfilled his duty.  What the dissent failed to recognize was that the broker’s obligation is to acquire the policy the insured ordered and was not required to, nor could an agent be required, to get a policy that covers every loss presented. That the insured lied on the application sufficient to support a rescission was not due to the negligence of the agent who only provided the coverage ordered.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

 

 

Posted in Zalma on Insurance | 2 Comments

The Tiffany Kid

This is fiction and one of the stories to be found in my e-book, “Heads I Win, Tails You Lose” available at http://www.zalma.com/zalmabooks.ht.

The insured grew up with his wealthy parents on the shores of San Francisco Bay in Marin County. He wanted for nothing that money could buy. He was tall, blond, blue-eyed and handsome. Debutantes pulled their sister’s hair for the chance to dance with him. Life was good, but dull.

The insured tried drugs. The results disappointed him. He was brilliant, so college was no challenge. He felt he would die from the boredom. Nothing challenged his intelligence.

He found the cure for his boredom one summer vacation from college. On a dare he surreptitiously entered the home of a neighbor. He removed a single, solid brass and stained-glass dragonfly lamp made by Louis Comfort Tiffany in the 1920’s. From this single event he found more excitement, a greater “high” than he had ever had with drugs. The flow of adrenalin as he entered, his neighbor’s dwelling was delicious. He had found the excitement he wanted. He had finally found a way to relieve the boredom and lack of challenge in his life. He did not steal for profit. He stole for excitement. He did not need the lamp. He could have bought many similar lamps with the money in his trust fund.

Like all addictions, burglary on a small scale continued. His burglaries occurred in Marin County and in the small college town where he went to school. He specialized in burglary limited to Tiffany lamps and objects of art. By careful, professional acts of burglary over three years the insured amassed a collection of considerable value.
Burglary, stopped being a challenge. It was too easy. The excitement of burglary had lost its glow. He needed a new challenge. He needed interaction. He needed to defeat another human being. Burglary, by definition, is a solitary activity.

The solution to his boredom was insurance fraud. He would obtain a policy of insurance protecting him against the loss of the Tiffany lamps his burglary efforts had gained him. To obtain the policy he first retained a fine arts appraiser to appraise the collection of Tiffany lamps he had gathered over the last five years of burglary. The results of the appraisal shocked him. He found the lamps had a retail value of over $500,000. With the appraisal in hand he acquired a personal articles floater (PAF) policy of insurance from a major surplus line insurer valuing each item as it was appraised. He waited until the policy was “ripe,” seven months from the date it was acquired before reporting the theft of his collection.

With his considerable expertise in burglary the insured staged a burglary at his residence. He made claim to his insurer for the loss of all of the scheduled Tiffany lamps he claimed were stolen.

When visited by the adjuster the insured found the challenge that he had sought when burglary became a bore. Sitting in his living room across from an experienced investigator, the insured reveled in what he believed to be a battle of wits.
Because of the amount involved, the insurer had retained the services of an independent adjuster and private investigator with more than thirty years experience. The insured knew he would not have a simple task in front of him. He had expected the insurer to send their usual twenty-two-year-old novice adjuster who had come to adjust an honest fender-bender claim two years before.

The insured made certain that he was in absolute emotional control when the silver haired adjuster placed his recorder between them and started taking a recorded statement about the loss. Since this was the first time for the insured, he did not know what to expect. He answered the questions posed to him glibly and with certainty, always looking the investigator directly in the eye. He kept complete physical control of his body. Neither his gestures nor physical appearance showed outward signs of the nervousness and flow of adrenalin that the interview caused him. His only difficulty came when the investigator asked for the ownership history of the Tiffany lamps.

Obviously, the insured could not tell him that he had gained possession of the lamps by burglary. Rather, he advised the adjuster that he had received the lamps as a gift from his grandparents shortly before they died in a tragic automobile accident. There was no record of the transfer. There was no one alive who could verify the means by which he acquired the lamps. The adjuster could not verify the insured’s acquisition of the lamps.

The insured had read Dostoevsky’s Crime and Punishment. He knew that the way to commit a perfect crime was to admit everything about his actions during the time of the commission of the crime, except the crime itself. If there are no witnesses, neither the investigating police officers nor the investigating insurer have leads. Disproving the statements made became impossible.

The insured showed the investigator the point of entry where he had broken out a small glass window in the rear door of the premises. It revealed easy entry to the house. He showed the adjuster where the lamps had been. He explained how they had been carefully removed from the premises. He speculated that the thief was a collector or working for a collector. Nothing else was stolen.

He admitted that this was his first PAF that scheduled the Tiffany lamps. He had a homeowner’s policy but never considered the lamps to be exceedingly valuable. The insured said that he had been reading an article in the New Yorker Magazine in his dentist’s office that said that stained glass bronze lamps made by Louis Comfort Tiffany had become the latest collector’s craze. The article caused him to believe that the values of his Tiffany lamps were appreciating with considerable speed. He explained to the adjuster that because of the article he retained the services of a fine arts appraiser. He needed to know the value of the gift made by his grandparents. He expressed shock and fear on learning their true value. Therefore, immediately after receiving the appraisal, the insured went to his local insurance agent and acquired a policy listing each lamp individually and purchased a burglar alarm system to protect the house.

He told the investigator that he had no idea who might wish to burglarize him. He was basically a loner with few friends. None of his friends knew of the value of his collection of lamps. He was totally distraught by their loss since they were the only ties to his dear departed grandparents. Near the end of the statement the insured’s eyes welled up with tears and he had to ask for a short break to get control of himself.
The investigator left the insured’s premises with a feeling engendered by his thirty years of experience that there was something wrong with the claim. He was certain that the insured had not told him the truth. The facts of the acquisition of the lamps, the method by which the insured decided to buy a personal articles floater and the tears all raised his suspicions. He did everything he could to find some facts to prove his suspicions. He checked public records and found that the insured had no criminal record. The insured was never a party in a civil lawsuit. He owned his home and his own business. No motive for insurance fraud existed. The insured was wealthy.  The investigator contacted a few friends that the insured advised him may have seen the Tiffany lamps. Each verified that the lamps were in the house. They had no information how the insured acquired the lamps. They reported that the insured had considerable wealth and would have no trouble in making such a purchase.

The investigator, faced with no leads and nothing but a “gut feeling” there was something wrong with the claim, informed the insurer of his conclusion. The investigator recommended that the insurer issue a proof of loss for the amount of the policy and pay the claim. The insurer followed his advice. The claim was paid in full. The insured successfully completed the fraud.

The insured found new meaning in his life. He thoroughly enjoyed the challenge of the interaction with an experienced investigator. The insured used the money he stole from the insurer to add to his collection of Tiffany lamps. Over the next fifteen years, since his first attempt, the insured perpetrated the same fraud on different insurers, waiting three years between each claimed loss. The delay, of course, so he could honestly report to the insurer, when he applied for the new policy that he had incurred no losses within the last three years.

Unlike the other stories in this book, this one, (like most insurance fraud) successfully separated an insurer from its money illegally. The insured received $500,000 for a burglary that did not occur. The insurer, faced with nothing more than “gut feeling” was forced to pay what it knew to be a fraudulent claim. If it did not pay the insurer knew it would find itself sued for the breach of the covenant of good faith and fair dealing. It might be required to pay punitive and exemplary damages.

The insurer, after the policy was issued had no chance to defeat this fraud. Its chance came, and went, at the time it accepted the insured’s application without first investigating the insured. The insurer failed to protect itself by accepting the insurance without requiring that the insured establish his ownership and legitimate possession of the lamps. It also did not protect itself by requiring the insured to warrant, before the issuance of the policy, facts concerning the insured, the acquisition of the lamps, their ownership and value. The insurer failed to require the maintenance of appropriate security systems that would have made the faking of a burglary more difficult. A monitored central station alarm with contacts on all doors and windows, and infrared detectors to detect motion throughout the dwelling connected to a computer that would record every entry and exit from the premises, would have made the fraud more difficult.

Warranties and security requirements do not always stop an attempt to defraud. By not having the security requirements, the insurer made the crime easy for the insured. It almost deprived the insured of the challenge he wanted. Perhaps, the ease of collection on the policy, is the reason why the insured continues to make claim for the loss of the same Tiffany lamps.

Insurers, if they wish to keep frauds like that described here must stop making the crime easy. Underwriters must understand that insured’s do not always treat their insurers with utmost good faith. Risks must be looked at with skepticism. If fraud is to be defeated insurers must make the crime more of a challenge. It is too easy. Honest insureds are tempted to commit fraud because it is too easy.

Twenty years after his first successful fraud the insured presented an identical claim to an insurer’s whose adjuster knew the adjuster on the first claim as a person who had worked for Lloyd’s of London in the past. The call asked who at Lloyd’s the new adjuster could call about a loss of Tiffany lamps. The response was to ask if the loss was incurred by the Insured by name. Records were pulled from storage and presented to the insured’s lawyer who convinced the insured to immediately withdraw the claim. His last attempt was a failure and he is due to try again shortly.

Regardless of the number of times the insured made claim for the loss of the same Tiffany lamps he has never been arrested or criminally investigated for insurance fraud.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

[contact-field label='Name' type='name' required='1'/][contact-field label='Email' type='email' required='1'/][contact-field label=’Websi

Posted in Zalma on Insurance | Leave a comment

Insurance Agent’s Duties to Insured

Special Relationship Required to Hold Agent Liable for Inadequate Limits

When insureds find, after a loss, that the insurance available to them is inadequate to fully replace the property they often sue their insurance agent for not forcing them to buy higher limits of liability. In Schweitzer v. American Family Mut. Ins. Co., — N.E.3d —-, 2014 WL 4210874 (Ind.App., Aug. 26, 2014) the Indiana Court of Appeal was called upon, among other things, to determine whether an insurance agent had the necessary special relationship required to hold the agent responsible.

FACTS

Daryl and Lynn Schweitzer appeal the trial court’s order granting summary judgment in favor of American Family Mutual Insurance Company (“American Family”) and Jennifer Gholson Insurance Agency (“Gholson”).

At some point prior to January 2008, the Schweitzers became interested in insuring their home, automobiles, and rental properties using one insurance company. Following conversations with Gholson, the Schweitzers purchased a homeowners insurance policy from American Family. The policy provided that it was effective from January 18, 2008, to January 18, 2009, and that the amount of the coverage limit for the dwelling was $261,000.

On December 19, 2008, a fire destroyed the Schweitzers’ house. The Schweitzers reported the loss to Gholson, and a representative for American Family visited the location of the house and discussed with the Schweitzers the coverage limits of their policy. The Schweitzers submitted various claims, and American Family made several payments to them totaling $326,040, which American Family indicated was the limit of its policy for the dwelling.

The Schweitzers sued the insurer and the agent.  As to Gholson, the Schweitzers asserted they totally relied upon the professional services and advice of Gholson and believed they had full and complete insurance coverage in the event of a total loss of their residence.

On August 6, 2012, Gholson filed a motion for summary judgment. On March 28, 2013, the court entered an order granting summary judgment in favor of Gholson and against the Schweitzers.

DISCUSSION

The Schweitzers assert that Gholson had a duty to exercise reasonable care, skill, and diligence in obtaining insurance for them, and that they did not identify the desired coverage, but relied solely on Gholson’s expertise to obtain insurance which would protect them in case of loss. The Schweitzers also claim that Gholson is a “captive” agent of American Family and as such had a duty to comply with a directive by American Family to provide full replacement cost to American Family’s insured.

Gholson maintains that insurance agents owe their customers a general duty of care and that, if a special relationship exists between the agent and the insured, the agent has a duty to advise. The Schwitzers countered that Gholson, as a captive agent of American Family, owed a duty to insure to full replacement cost. Gholson argued that Gholson obtained the insurance requested by the Schweitzers and that Gholson was an independent contractor, not an agent of American Family. Gholson also argued that  Schweitzers were aware of the limits from the declarations page of the policy, and that the mortgagee was also aware of the limits, having asked American Family to increase the amount of coverage in April of 2008.

Insurance agents potentially have both a general duty of care and a duty to advise their clients. Which duty governs in a particular case is a matter of law. The law in Indiana is settled: an insured must demonstrate some type of special relationship for a duty to advise to exist. An insurance agent’s duty does not extend to providing advice to the insured unless the insured can establish the existence of an intimate, long-term relationship with the agent or some other special circumstance. In other words, something more than the standard insurer-insured relationship is required to create a special relationship obligating the agent to advise the insured about coverage. The court of appeal noted that “Factors demonstrating the existence of a special relationship between the agent and insured include whether the agent: 1) exercised broad discretion in servicing the insured’s needs; 2) counseled the insured concerning specialized insurance coverage; 3) held himself out as a highly-skilled insurance expert; or 4) received compensation for the expert advice provided above the customary premium paid.” It also concluded that the burden of establishing an intimate long-term relationship or other special circumstance is on the insured.

Since the undisputed evidence demonstrated that no intimate, long-term relationship or other special relationship existed between the insured and the agent the court concluded that no special circumstances were present that justified imposing a duty on the insurer or agent to provide the advice as to the amount of homeowners insurance coverage that was needed.   The policy came after the first meeting between the Schweitzers and Gholson. The Schweitzers did not know anything about Gholson or her qualifications or experience.

Gholson obtained an insurance policy from American Family with an effective date of January 18, 2008, and the declarations page of the policy set forth the coverage limit for the dwelling as well as the fact the policy included certain supplemental coverage. The designated evidence shows that the Schweitzers received an appraisal in 2003 in connection with the refinancing of their home mortgage and were told at the time that “the house, the land, and all the buildings were $350,000,” and thus the Schweitzers were aware of the approximate value of the house. The Schweitzers did not object or raise any concern regarding the limits of the policies and did not request to increase the amount of coverage. Daryl believed the dwelling limit of the policy from American Family was about $267,000, did not know if this amount was higher or lower than his previous policy’s limit, and did not know whether the amount was enough to replace the house.

While Gholson assisted the Schweitzers with obtaining a homeowners policy from American Family, there is no evidence that Gholson exercised broad discretion in servicing the Schweitzers insurance needs, that the Schweitzers relied on Gholson for expert advice as to insurance coverage or that she counseled them concerning specialized coverage, that Gholson held herself out as a highly-skilled insurance expert, or that she received any compensation above that associated with the customary premium paid.  Based upon the record, we find the circumstances do not constitute a special relationship between Gholson and the Schweitzers and no special circumstances exist which would give rise to a duty to advise.

Gholson, therefore, was under no duty to advise the Schweitzers about the adequacy of the coverage or any alternative coverage which may have been available, and Gholson did not breach her general duty. Further, Gholson was under no duty to provide a replacement cost estimate, and an expectation of full replacement coverage does not in itself impose a duty on an agent to provide advice to an insured regarding the amount of coverage that should be purchased. The trial court did not err in granting summary judgment in favor of Gholson.

ZALMA OPINION

The Schweitzers could only hold their agent, Gholson, liable for not advising them to purchase higher limits if they could have proved a special relationship. Rather, they just ordered insurance which their lender found to be inadequate and requested an increase in the limits to those in effect at the time of the fire. They did not ask the agent if the limits were adequate even though they had an appraisal showing the market value of their property and did nothing to obtain proper coverage nor did they ask for further advice when the policy limit was increased. Gholson, and all insurance agents and brokers, should always document their files to show their communications with the prospective insured and whether a special relationship was requested or not and, as in this case, no special relationship existed and no advice was sought or given as to the amount of insurance required.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Intentional Act Exclusion and Homicide

When 5 Bullets In Chest May Not Be Intentional

Insurance, by definition, only provides coverage for injury caused by a contingent or unknown event. When one person fatally shoots his brother five times in the chest it is presumed to be an intentional act that is not covered by any liability insurance policy. The presumption, however, is rebuttable. In RAM Mut. Ins. Co. v. EMC Property & Cas. Co., Not Reported in N.W.2d, 2014 WL 4176131 (Minn.App., Aug. 25, 2014) the Minnesota Court of Appeal was called upon to determine whether there was sufficient evidence to support a motion for summary judgment based on the intentional act exclusion of a policy.

FACTS

On June 28, 2011, Rolland Fred Kruckow (Rolland) shot and killed his brother, C.K.  John Shriver, trustee for the next of kin of C.K., sued Kruckow for wrongful death. At the time of the shooting, Kruckow had a homeowner’s insurance policy with EMC Property & Casualty Company (EMC) and a farm-insurance policy with respondent RAM Mutual Insurance Company (RAM). Kruckow requested defense and indemnity from EMC and RAM. EMC denied Kruckow’s request, relying on an intentional-act exclusion in its policy.

RAM commenced a declaratory-judgment action seeking a declaration that it had no duty to defend or indemnify Kruckow, and that EMC is obligated to defend and indemnify Kruckow in the wrongful-death action and to contribute to any expenses that RAM incurred in defending and indemnifying Kruckow.  Kruckow filed a cross-claim against EMC seeking a determination that EMC is required to provide coverage under its insurance policy. Shriver filed a counterclaim against EMC seeking a declaration that EMC has a duty to defend and indemnify Kruckow in the wrongful-death action.

The parties engaged in discovery, which included Kruckow’s deposition. At the deposition, Kruckow asserted his Fifth Amendment privilege against self-incrimination and refused to answer any questions regarding his competency or the facts and circumstances surrounding C.K.’s death.

All parties moved for summary judgment.

As to Kruckow’s mental health, the district court received expert affidavits from two physicians who opined that, due to mental illness, Kruckow did not know the nature of the wrongfulness of his act when he shot C.K. and that at the time of the shooting, Kruckow was mentally ill and therefore unable to control his conduct, regardless of any moral understanding of the nature of the wrongfulness of his conduct.

The district court denied EMC’s motion for summary judgment and granted respondents’ motions, concluding that “Rolland Kruckow did not possess the intent necessary for the intentional act exclusion to apply.”

DECISION

We first review the district court’s denial of EMC’s request for summary judgment. EMC argues that the district court erred in concluding that Rolland Kruckow’s refusal to testify at his deposition should not result in dismissal of his claim.

When a plaintiff commences a suit and submits to the jurisdiction of the court the plaintiff is subjected to and must comply with the Rules of Civil Procedure. A court should not permit a plaintiff to use the judicial forum to make allegations only to later insulate himself by invoking the Fifth Amendment as a shield from cross-examination but that invocation of the Fifth Amendment by a civil defendant requires a different response because of the involuntary nature of a defendant’s participation in a lawsuit, and the appearance of compulsion.

A motion for summary judgment is not a proper method of challenging Kruckow’s refusal to answer questions at his deposition. Here, Kruckow is a defendant in the underlying declaratory-judgment action. Although he filed a cross-claim against EMC with his answer, he is unlike a plaintiff who voluntary became a plaintiff in the action and filed a cross-claim as a defensive maneuver.  The appellate court found that the district court did not abuse its discretion by refusing to dismiss Kruckow’s cross-claim against EMC.

RAM and Kruckow sought a “declaration of rights” under a “contract,” specifically, whether EMC was required to defend and indemnify Kruckow under the language of its policy. That issue was appropriately raised in a declaratory-judgment action. As to Shriver, when declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding. As trustee for C.K.’s next of kin and the party who initiated the wrongful-death suit, Shriver has an interest in the district court’s determination of EMC’s duties under the policy because its determination could affect Shriver’s recovery in the wrongful-death action.

The interpretation of an insurance policy, including whether an insurer has a legal duty to defend or indemnify its insured, is a question of law, which a court of appeal reviews as if it were the trial court. Where there is no coverage by reason of an exclusionary clause, there is no obligation to defend. Of course, the insurer generally bears the burden of proving that policy exclusions apply to bar coverage.

The intentional-act exclusion in EMC’s policy states that there is no coverage for bodily injury which is expected or intended by an insured. The law in Minnesota is well-settled that an intentional act exclusion applies only where the insured acts with the specific intent to cause bodily injury. Such an intention to inflict injury can be inferred as a matter of law. The inference arises when the nature and circumstances of the insured’s act were such that harm was substantially certain to result. Where there is no intent to injure, the intentional-act exclusion does not apply, even if the conduct itself was intentional.

In Minnesota, for the purposes of applying an intentional act exclusion contained in a liability insurance policy an insured’s acts are deemed unintentional where, because of mental illness or defect, the insured does not know the nature or wrongfulness of an act, or where, because of mental illness or defect, the insured is deprived of the ability to control his conduct regardless of any understanding of the nature of the act or its wrongfulness. Intent becomes a question for the trier of fact when the evidence suggests that the insured was not the master of his own will.

Where there is a genuine issue of material fact as to whether the insured’s acts were “unintentional” because of mental illness and therefore outside the scope of an insurance policy’s intentional act exclusion, the trial court must submit the issue to the jury and is not, as a matter of law, to infer the insured’s intent to cause injury.

The law presumes sanity. The appellate court, therefore, began with the presumption that Kruckow was sane when he shot C.K. It could be inferred that Kruckow intended to harm C.K. when he fired five bullets into C.K.’s chest. The general rule is that intent is inferred as a matter of law when the nature and circumstances of the insured’s act are such that harm is substantially certain to result. If Kruckow intended to harm C.K., the intentional-act exclusion would bar coverage under EMC’s policy.

However, the respondents submitted expert affidavits tending to rebut the presumption.  Respondents’ evidence creates genuine issues of material fact regarding Kruckow’s intent.

Determining whether the moving party has rebutted the presumption requires the weighing of available evidence against the presumption, which is not appropriately undertaken in summary-judgment proceedings. In this case, the law establishes a rebuttable presumption that Kruckow was sane when he shot C.K. Respondents’ affidavits in support of summary judgment create a genuine issue of material fact regarding whether the presumption can be overcome. Summary judgment is therefore inappropriate, and the district court erred by concluding that “Rolland Kruckow did not possess the intent necessary for the intentional act exclusion to apply.”

In sum, because there are genuine issues of material fact regarding whether Kruckow’s conduct was intentional and, therefore, whether the intentional-act exclusion in EMC’s policy applies, the district court erred by granting respondents summary judgment.

ZALMA OPINION

Even when the facts seem obvious – fatally shooting a person five times in the chest – was an intentional act rather than an accidental or contingent event, insurers must conduct a thorough investigation before making a decision to deny a claim. Since Kruckow is a defendant the insurers cannot compel him to testify in violation of his privilege against self-incrimination. Since the parties to this action presented expert evidence that Kruckow was not sane at the time he shot his brother to death. If the jury agrees with the experts opinions coverage will apply, if they do not, the exclusion will prevent defense and indemnity.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Penny Wise, Dollar Foolish

Good Claims Handling Avoids Unnecessary Litigation

Sometimes an attempt to take a position on the law is more expensive than the issue deserves. Even if the issue is important and one of first impression, good faith claims handling requires resolution of a minor claim by settlement rather than take a chance on compelling a court of appeal to make a legal interpretation that is against the best interest of the insurer or the policyholder.

In order to avoid a judgment of less than $4,000 in compensatory damages two insurers and an injured plaintiff went through a suit and appeal to the Georgia Court of Appeals. In Castellanos v. Travelers Home & Marine Ins. Co., 760 S.E.2d 226 (GA App, 7/2014) after a trial by jury a judgment was entered in for $3,731 in compensatory damages, $3,269 in punitive damages, and $135.50 in court costs. When the tortfeasor failed to appear for trial his insurer refused to pay the judgment for breach if the cooperation clause in its automobile policy.

FACTS

Luis Castellanos sued Travelers Home & Marine Insurance Company to recover uninsured motorist (UM) insurance benefits, statutory penalties for Travelers’ alleged bad faith in refusing to pay benefits, and attorney fees. The trial court granted Travelers’ motion for summary judgment and denied Castellanos’ motion. He appealed both rulings.

On September 22, 2009, Castellanos was injured in a wreck caused by the negligence of another driver, Jose Santiago. At the time of the wreck, Castellanos was a named insured under a UM policy Travelers issued to Lucrecia Arias, and he was driving a covered automobile.

Castellanos filed suit against Santiago for his injuries. Santiago’s liability insurance carrier, United Automobile Insurance Company, provided a defense. Castellanos also served the summons and complaint on Travelers as his UM carrier, and Travelers’ counsel participated in the suit through the end of the trial. After a trial which Santiago did not attend, a jury returned a verdict in favor of Castellanos, and, on February 1, 2012, the trial court entered judgment against Santiago for $3,731 in compensatory damages, $3,269 in punitive damages, and $135.50 in court costs.

Castellanos demanded payment of the judgment from United as Santiago’s liability carrier. After some communication between counsel, United formally denied any coverage, based on Santiago’s “lack of cooperation in the defense of [Castellanos'] lawsuit and [his] failure to attend the resulting trial.” Castellanos then demanded that Travelers pay the compensatory damages under Arias’ UM policy. Travelers failed to pay UM benefits within 60 days of Castellanos’ demand.

THE LITIGATION

Castellanos  alleged that Travelers’ refusal to pay UM benefits was made in bad faith. Castellanos filed a motion for summary judgment, and Travelers filed a cross-motion. Travelers argued that there was no evidence that United’s denial of coverage on the basis that Santiago failed to cooperate in the defense was a legal denial of coverage and, therefore, that Santiago was not an uninsured motorist as defined in Arias’ UM policy.

After a hearing, the trial court granted Travelers’ motion for summary judgment and denied Castellanos’ motion, finding that there was “no evidence that United reasonably requested Santiago’s cooperation, that Santiago willfully and intentionally failed to cooperate, that his failure to cooperate was prejudicial to United, and that [his] justification for failing to respond was insufficient.” Based on this determination, the trial court concluded that Castellanos “failed to present evidence that there was a ‘legal denial’ of coverage by United.”

Castellanos contended that the trial court’s ruling improperly shifted to him the burden of coming forward with evidence that supported United’s denial of coverage and that the trial court erred in granting Travelers’ motion for summary judgment.

ANALYSIS

One essential element of Castellanos’ action against Travelers was that Santiago was the owner or operator of an uninsured motor vehicle, as defined by Arias’ UM policy and Georgia law.

Under the applicable contractual and statutory definitions of an uninsured motor vehicle, an insured motor vehicle, such as the one Santiago was driving, could effectively become uninsured, retroactively to the date of an accident, when a driver’s liability carrier denies coverage, provided that such denial is, under applicable law, legally sustainable. When, on the other hand, a driver’s liability carrier denies coverage and such denial is not legally sustainable, the injured driver’s UM coverage generally will not apply, because the tortfeasor is not, technically, uninsured.

It is undisputed that Santiago’s liability policy required him to cooperate with United’s defense against Castellanos’ tort action and authorized United to withdraw coverage if Santiago failed to cooperate in the defense. Such cooperation clauses are enforceable under Georgia law. Under applicable law the tortfeasor’s failure to cooperate can, under certain circumstances, form the legally sustainable basis for his liability carrier’s denial of coverage.”  In addition, it is undisputed that Santiago failed to appear for trial in Castellanos’ tort action and that, after judgment, United denied coverage on the basis that Santiago breached that contractual duty to cooperate in the defense, in part by failing to attend the trial.

Travelers contends that it was nonetheless justified in failing to pay UM benefits, and the trial court agreed, finding that Castellanos failed to come forward with evidence that United’s denial of coverage was a legal denial. In casting upon Castellanos the burden of coming forward with evidence that United reasonably requested Santiago’s cooperation, that Santiago willfully and unjustifiably failed to cooperate, and that his failure to cooperate was prejudicial to United, the trial court required Castellanos to discharge a burden that United would have borne as a defendant in a suit.

Given the evidence that United denied coverage under Santiago’s liability policy based on his alleged failure to cooperate with the defense, a legal basis that falls squarely within the terms of the policy and is authorized under Georgia law, this is not a case where the court is asked to presume Santiago’s status as an uninsured motorist.

Because the undisputed evidence does not establish that Santiago’s absence from the trial was involuntary or excused or that his failure to cooperate with United did not prejudice the defense, the trial court erred in finding that Travelers is entitled to judgment as a matter of law.

The trial court’s order was reversed, in part, to the extent it entered summary judgment in Travelers’ favor.

ZALMA OPINION

The two insurers and the plaintiff in this case created a classic mountain out of a mole hill. For less than $4,000 [since punitive damages are not insurable] they went through two law suits. Had they resolved the suit before trial or worked together after the trial verdict this appeal, and its lengthy dissent, would not have been necessary. Both insurers, if they knew the defendant Santiago would not appear for trial, knew they would lose the suit and considering the amount of the verdict, could have easily settled before trial. Making a major case out of a minor case is not professional claims handling but two insurers taking a stand on a legal issue that should have been clear when the amount involved did not warrant the work.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

No Help – No Coverage

Insured’s Failure to Appear At Trial Prejudicial

It is common, if not universal, for automobile insurance policies to contain clauses that require an insured who is involved in an accident to cooperate with the company in the investigation and resolution of any claim made against the insured.  State Farm Insurance Company had insured Latricia Kirby, required Ms. Kirby, among other things, to “cooperate with us and, when asked, assist us in: a. making settlements; b. securing and giving evidence; [and] c. attending and getting witnesses to attend hearings and trials.”

Kirby was involved in an automobile accident and, eventually, two claims were made against her. Although she initially cooperated with the insurer, her cooperation was short-lived. As a direct consequence of her subsequent lack of cooperation, State Farm was precluded from defending the claims, and a judgment in the amount of $150,000 was entered against Kirby. Maryland Code, § 19-110 of the Insurance Article permits an insurer to disclaim coverage on the ground that the insured has breached the policy by failing to cooperate with the insurer only if the insurer establishes that the lack of cooperation has resulted in actual prejudice to the insurer. The Circuit Court for Prince George’s County found that State Farm was actually prejudiced, but only to the extent of half of the judgment, and that it could therefore disclaim only to that extent. The Court of Special Appeals concluded that, on the record in this case, State Farm was excused from paying the entire judgment. State Farm v. Gregorie, 131 Md.App. 317, 748 A.2d 1089 (2000). The parties appealed to the Maryland Supreme Court who resolved the dispute in Allstate Ins. Co. v. State Farm Mut. Auto. Ins. Co., 363 Md. 106, 767 A.2d 831.

BACKGROUND

The accident at issue occurred shortly after midnight. There was a dispute as to the precise condition of the Beltway. In a statement given to State Farm four days after the accident, Kirby said that she was traveling about 50-55 miles per hour and was “worried about the ice that was on the road,” when she was hit from the rear. The car that struck her was being driven by Mark Winston. Corazon Gregorie, the owner of that car, was in the front passenger seat. Because she did not like to drive in the snow, Gregorie had asked Winston, her boyfriend, to drive. Kirby said that she was watching the road and did not see the Gregorie vehicle prior to the collision. She assumed that Mr. Winston was going too fast.
Some of what Kirby said in her report was disputed by other witnesses, who were not in complete agreement with one another.

Winston, sued by his passenger, then sued Kirby. In his third-party complaint, he denied all allegations of wrongdoing and asserted that the accident was caused by the “sole and/or contributory negligence” on the part of Kirby. State Farm retained Richard McBurrows, Esq., to represent her as a defendant. McBurrows filed an answer on her behalf to the amended complaint and to Winston’s counterclaim, sent her a letter of representation.  After suit was filed Kirby got married, moved to Decatur, Georgia, and washed her hands entirely of the matter. State Farm and counsel sent multiple letters to Kirby explaining she could be found responsible for a judgment if she did not cooperate. She ignored State Farm and the lawyer retained to defend her.

When a disclaimer is based on a failure of the insured to appear for trial, at least the potential scope of the loss is ascertainable; it is the insured’s live testimony-the ability of the jury to hear the insured’s side of the story from his or her own lips.

Most courts, at least in recent times, have rejected a per se rule that mere absence from trial, even if willful and even if the insurer has done what it reasonably could do to produce the insured, suffices on its own to establish, or to create a presumption of, prejudice.

The Prejudice In This Case

The prejudice goes beyond merely the loss of Kirby’s testimony. By reason of her willful failure to cooperate in providing discovery-her refusal to attend her twice-scheduled deposition or cooperate in a further rescheduling of it, her refusal to assist in responding to properly filed interrogatories and demands for documents-and her refusal to attend trial, State Farm was precluded from offering any evidence in defense of the claim. It is not a question, then, of whether, with or without her intransigent conduct, State Farm may have been able to develop some other helpful evidence; even if it had been able to do so, State Farm would have been unable to present it.

The evidence lost to State Farm as a result of the preclusion order was (1) Kirby’s testimony that she was driving at a normal speed but was concerned about ice on the road, (2) Weiner’s testimony that she was able to see the Kirby car, that it had hazard lights on, and that she was able to avoid a collision, (3) a weather report indicating the cold temperature, which, in light of other evidence that the roadway was wet or damp, may have supported Kirby’s testimony that there was ice, and (4) photographs of the damage to the Kirby vehicle.

Kirby’s testimony, though contradicted in some important respects by that of the plaintiffs and Weiner, would have created a genuine issue with respect to how fast she was traveling. There is nothing in the record to suggest that her statement, though disputed, was inherently unreliable. If the jury had heard and credited that testimony, and heard and credited as well Weiner’s testimony that the Kirby car was visible and had on hazard lights, it could reasonably have found no negligence at all on Kirby’s part.

The prejudice lies in the fact that there was a credible defense to be presented and that Kirby’s non-cooperation precluded State Farm from even presenting that defense.

ZALMA OPINION

Insurance is, and has always been, a contract of the utmost good faith. Both the insured and insurer must treat each other in a way so as to not prevent them to lose the benefits of the contract. Modern policies include, as part of the covenant of good faith and fair dealing, a condition that the insured cooperate in the investigation and defense of any action brought against the insured. In this case State Farm and her counsel literally begged Kirby to cooperate and offered to pay all of her expenses to come to trial and testify. They were cruelly rebuffed. Because of her refusal sanctions were imposed and her counsel was unable to present any evidence on her behalf.  The Maryland court ruled based upon its common law and statutory law which confirmed that Kirby blatantly, willfully and intentionally breached the implied covenant of good faith and fair dealing. When faced with such refusal insurers should emulate State Farm and more often than not will not be faced with this type of litigation or a trial judge attempting to emulate Solomon by splitting the judgment.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Fraud Proceeds Apace

In the 17th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on September 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Workers’ Compensation Fraud Conviction Affirmed
2.    New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.    Lawyer Disbarred for Insurance Fraud.
4.    Fraud in the U.K.
5.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

Zalma’s Insurance Fraud Letter

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

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

•    Policy Condition Rules – August 29, 2014
•    Insurer’s Lose Right to Counsel in Washington – August 28, 2014
•    New From Barry Zalma – August 27, 2014
•    False Imprisonment by Employer Excluded – August 27, 2014
•    Policy Must Incorporate Statute Terms – August 26, 2014
•    No Proof of Loss – No Coverage – August 25, 2014
•    Not Disabled Enough – August 22, 2014
•    UIM Limitation Acrues At Denial – August 21, 2014
•    Good Intentions Abuse Basic Rights – August 20, 2014
•    No Good Deed Goes Unpunished – August 19, 2014
•    Contract Must Require Additional Insured – August 18, 2014
•    The Federal Government Is Not a “State.” – August 15, 2014
•    It’s Hard to Fight Fraud – August 15, 2014
•    Settlement Must Be In Writing –  August 14, 2014
•    Suit Against Tenant Not Subrogation – August 13, 2014
•    Ambiguity Saves Claim – August 12, 2014
•    IRS Exceeded Authority When It Tried to Change Statute – August 10, 2014
•    Privilege Weakened – August 8, 2014
•    Barry Zalma on WRIN.tv – August 7, 2014
•    Crime by Lawyer Does Not Pay – August 7, 2014

NEW! From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Leave a comment

Policy Condition Rules

It’s Not Nice to Lie To Your Insurance Company

Insurance companies that suspect a claim is fraudulent have the right to conduct a thorough investigation including a sworn examination under oath [EUO]. This has been the case in the United States since the U.S. Supreme Court ruled in Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 97 [28 L.Ed. 76, 82, 3 S.Ct. 507] (1884).  When an insured refuses to appear for an EUO he or she finds that the failure is fatal to a claim.

In Seaworthy, Ins. Co. v. Velaj, Not Reported in F.Supp.2d, 2014 WL 4205107 (D.Conn., August 25, 2014.) the insured refused to appear for EUO and threatened to sue. Rather than wait for the suit plaintiff Seaworthy Insurance Company (“Seaworthy”) instituted an action against him. The suit sought a judgment declaring that Seaworthy is not required to provide insurance coverage for damages to a vessel owned by Velaj and that Velaj is barred from taking legal action against Seaworthy, because he failed to comply with the terms of his insurance policy (the “Policy”) and failed to timely bring a suit within one year of the date of loss or damage.  Velaj neither appeared nor took any action in this case. Seaworthy then filed a motion for judgment.

STANDARD OF REVIEW

A party’s default is deemed to constitute a concession of all well pleaded allegations of liability. Thus, in ruling on a motion for default judgment, a district court must take all factual allegations in the complaint as true and draw all reasonable inferences in favor of the prevailing party.

FACTUAL BACKGROUND

Seaworthy, a marine insurance company, insured Velaj against the risk of loss to a twenty-nine foot Chris Craft motor boat (the “Vessel”) that was owned, operated and controlled by Velaj.  On or about October 29, 2012 the Vessel submerged in its slip at Seaview House Marina, a marina located in Stamford, Connecticut.

In the event of a loss, the Policy required Velaj to assume no obligation, admit no liability and incur no expense for which the insured or the Company may be liable without Seaworthy’s written permission, other than reasonable expenses to protect the property from further damage. Additionally, the Policy obligated Velaj to “cooperate with [Seaworthy] in the investigation, defense, or settlement of any loss,” and to “agree to be examined under oath if [Seaworthy] so request[ed].”

On November 4, 2012, Velaj notified Seaworthy that he was seeking reimbursement from Seaworthy in the amount of $8,881.00. This represented the alleged cost of having the Vessel towed to a boat ramp, pulled out of the water by two tow-trucks, and drained. Seaworthy was not invited to attend the recovery operation, which had occurred five days earlier, on October 31, 2012.

Velaj’s claim appeared “unreasonably high” to Seaworthy, in light of the work reportedly performed.  Moreover, there were “inconsistencies” in Velaj’s account with respect to both the time and equipment involved in the recovery. As a result, Seaworthy initiated an investigation into the legitimacy of Velaj’s claim.

In the course of the investigation, Seaworthy obtained photographs taken by an impartial witness, which showed only one tow truck hauling the Vessel out of the water, not two trucks as Velaj claimed. The investigation also revealed that the towing company Velaj used, Westport Auto Repair, was owned by Velaj’s cousin and was not in the marine-salvage business. Furthermore, the investigation uncovered information that led Seaworthy to conclude that Velaj had made material misrepresentations on his initial insurance application. Specifically, Velaj’s application grossly overstated the Vessel’s purchase price and omitted previous motor vehicle violations he was required to disclose. Finally, as part of the investigation, Seaworthy asked Velaj to substantiate his claim for reimbursement, but he refused or was unable to provide proof of payment or other documentation, such as a canceled check, credit card statement or bank statement.

Velaj initially told Seaworthy this was because he had paid his bill “in cash,” but could not confirm this.  He later stated, through counsel, that he had “incurred costs” in recovering the vessel.

Based on the above information, Seaworthy suspected Velaj’s claim was fraudulent, in violation of the Policy’s Fraud & Concealment clause.  By mutual agreement, the examination was supposed to occur on January 31, 2013, but Velaj’s attorney moved the date four times and then cancelled it altogether on April 4, 2013, an hour and a half before Velaj was scheduled to testify. On that date, Velaj’s attorney informed Seaworthy that Velaj refused to be examined under oath and would not appear at any future examination.
Thereafter Seaworthy issued a letter to Velaj explaining that it had denied coverage.

Seaworthy explained that Velaj’s refusal to participate in the examination was a breach of his duty under the Policy to cooperate with the investigation, and that Seaworthy’s investigation had revealed that Velaj had violated the Policy’s Fraud & Concealment clause.

On or about March 17, 2014, Seaworthy was contacted by a new attorney representing Velaj, who informed Seaworthy that Velaj planned to file suit against Seaworthy and that legal action against Seaworthy was imminent. A clause in the Policy provides: “No legal action may be brought against [Seaworthy] unless there has been full compliance with all terms of this policy.”  Additionally, the policy requires an action related to any claim or loss to the insured property, to be brought within one year of the date of loss or damage.

DISCUSSION

The Declaratory Judgment Act empowers district courts, in the case of an actual controversy within [their] jurisdiction, to declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.  Taking the well-pleaded allegations of the Complaint as true and drawing all reasonable inferences from those allegations, it was clear to the court that Seaworthy is entitled to the declaratory relief it seeks.

The Policy’s Fraud and Concealment Clause bars coverage where the insured has “omitted, concealed, misrepresented, sworn falsely, or attempted fraud in reference to any matter relating to this insurance, before or after any loss.”  The investigation uncovered inconsistences in Velaj’s claim—e.g., the photographic evidence indicated that only one tow truck was involved in the recovery of the Vessel, not two as Velaj claimed.

By the express terms of the Policy, in the event of a loss Velaj was required to cooperate with Seaworthy in the resulting investigation and submit to an examination under oath. Due to the suspected fraudulent claim and the apparent misrepresentations in Velaj’s insurance application, Seaworthy requested that Velaj submit to an examination under oath. By refusing to submit to the examination, Velaj breached his obligations under the Policy. As a result Seaworthy is not required to provide coverage.

Velaj is also barred from instituting an action against Seaworthy. The Policy prohibits the insured from taking legal action against Seaworthy with respect to the damaged Vessel unless: (1) the insured fully complied with all terms of the Policy; and (2) the action is commenced within one year of the date of loss or damage. Velaj met neither condition. Velaj has not complied with the terms of the Policy. Additionally, the Vessel was damaged on October 29, 2012, nearly two years ago. Therefore, by the terms of the Policy, Velaj cannot institute an action against Seaworthy now.

For the foregoing reasons, the Plaintiff’s Motion for Default Judgment was granted and a declaratory judgment was entered in favor of Seaworthy Insurance Company against Kenneth Velaj.

ZALMA OPINION

The EUO is a material condition of almost every insurance policy insuring against the risk of loss of property. Applying the clear and unambiguous condition that has been recognized as essential to any right to recover under an insurance policy since, at least 1884.  It is obvious why Velaj did not answer the Seaworthy complaint and allowed a default judgment to be entered. Active work to defeat the complaint could expose Velaj to criminal prosecution. If, as Seaworthy alleged, fraud was attempted, Mr. Velaj should have been arrested and charged with insurance fraud.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Insurer’s Lose Right to Counsel in Washington

Lawyer Just a Claims Handler In Washington State

In 1967 I became a claims adjuster and served in that capacity until 1972 when I started a 40 year career representing insurers as their lawyer in first party claims presented in the state of California. I have never practiced law in the state of Washington and never will. I understand the difference between an insurance adjuster and a lawyer, not the least being a license to practice law. Lawyers are not, in my opinion adjusters, and adjusters are not lawyers. Their duties and work product are different.

Insurers retain the services of a first party claims coverage counsel to assist them in the legal issues that arise as a result of a complex claim or a potentially fraudulent claim. They seek advice and counsel from the lawyer concerning the coverage issues, investigation required, and often take examinations under oath (EUO) of the insured to gather facts that will assist the lawyer in presenting advice to the insurer. Of course an adjuster can take an EUO but will not do so with the legal training and knowledge of an experienced lawyer.

In Anderson v. Country Mut. Ins. Co., Slip Copy, 2014 WL 4187205 (W.D.Wash., Aug. 25, 2014) the U.S. District Court for the Western District of Washington was called upon to apply Washington state law to a dispute over production of documents the insurer claimed were protected by the attorney client privilege and the insurer’s lawyer claim that his work product was protected by the work product protection.

Plaintiff Christopher Anderson argue that Country Mutual should be required to produce the documents pursuant to the Washington State Supreme Court’s decision in Cedell v. Farmers Insurance Co. of Washington, 295 P.3d 239 (Wash.2013).

BACKGROUND

Mr. Anderson owned a rental property in Seattle’s Seward Park neighborhood, and on December 26, 2012, the property caught fire.  The fire caused extensive damage, so Mr. Anderson made a claim on his insurance policy with Country Mutual.  Shortly thereafter, Country Mutual discovered evidence that there had been a marijuana grow operation located on the property. Consequently, Country Mutual undertook an extensive investigation of Mr. Anderson’s claim. Country Mutual retained outside counsel—the Thenell Law Group, P.C.—to assist with its investigation and coverage determination. Country Mutual eventually denied Mr. Anderson’s claim on October 14, 2013.

Country Mutual filed a motion for protective order. In the motion, Country Mutual asserted that certain documents that Mr. Anderson had requested in discovery were protected by the attorney-client privilege. Country Mutual requested that the court conduct an in camera review pursuant to the Washington State Supreme Court’s decision in Cedell.  Mr. Anderson opposed the motion.  The court reviewed Country Mutual’s amended privilege log and concluded that in camera review was necessary to determine which documents were privileged and which were not. Country Mutual submitted the documents that remain in dispute, and the court reviewed those documents before it ruled on the motion.

ANALYSIS

Standard on a Motion for Protective Order

District courts have broad authority to issue protective orders where appropriate.  The party seeking a protective order bears the burden, for each particular document it seeks to protect, of showing that specific prejudice or harm will result if no protective order is

Attorney–Client Privilege

The attorney-client privilege is a long standing doctrine established to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. When it applies, the privilege protects communications made in confidence by clients to their lawyers for the purpose of obtaining legal advice.

In Washington, the attorney-client privilege applies differently in certain insurance cases. In a first-party insurance bad faith action, the attorney-client privilege is presumptively inapplicable. The Washington State Supreme Court recently explained this in its opinion in Cedell. Cedell significantly altered application of the attorney-client privilege in the context of first-party bad faith claims. Most significantly, in such cases, Cedell creates a “presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client … privilege[ is] generally not relevant.”  Nonetheless, an insurer may overcome Cedell’s new “presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigation and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own liability: for example, whether or not coverage exists under the law.”

Where an attorney is acting as a de facto claims handler, the attorney’s communications likely will not be privileged. For example, in Cedell, the insurer’s attorney examined witnesses under oath. He also communicated directly with the insured, authored and signed the insurer’s denial letter, and initiated settlement negotiations with the insured. When an attorney became primary point of contact with insured regarding insured’s claim while, on the other hand, where the attorney is clearly acting as coverage counsel and advising the insurer of its potential for liability, the communications likely will be privileged.

In addition, even a showing that the privilege applies can be overcome. Even if an insurer demonstrates that an attorney was not serving in a quasi-fiduciary role, under Cedell, an insured may still be able to pierce the insurer’s assertion of attorney-client privilege. If the insured asserts that the insurer has engaged in an act of bad faith tantamount to civil fraud and makes a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred or that an insurer has engaged in a bad faith in attempt to defeat a meritorious claim, then the insurer will be deemed to have waived the privilege.

Something more than an honest disagreement between the insurer and the insured about coverage under the policy must be at play.

Documents Protected by Attorney–Client Privilege

For some documents, Country Mutual has not met its burden of overcoming Cedell’ s presumption that the attorney-client privilege does not apply. For each of these documents, the court’s review has revealed that either (1) the attorneys involved were engaged in the quasi-fiduciary process of investigating, evaluating, or processing the claim or (2) the attorney-client privilege is otherwise inapplicable. For most of these documents, the communications concern de facto claims handling. The communications involve, for example, conducting an examination under oath, making factual assessments and determinations, or being the direct point of contact with the insured.

For some documents, Country Mutual demonstrated that the attorney client privilege applies. In other words, Country Mutual has met its burden of overcoming the Cedell presumption, and there is no countervailing showing that there is bad faith tantamount to civil fraud. For these documents, the court’s review revealed that the attorney-client privilege applies and the attorneys involved were not engaged in the quasi-fiduciary process of investigating, evaluating, or processing the claim, but rather in providing coverage advice, or other legal advice, to Country Mutual. These documents do not need to be produced.

Work Product Doctrine

Federal law governs the court’s inquiry into whether the work product doctrine applies.

Trial Preparation: Materials.

The work product doctrine is not an evidentiary privilege, but rather a qualified immunity protecting from discovery documents and tangible things prepared by a party or his representative in anticipation of litigation. The primary purpose of the work product rule is to prevent exploitation of a party’s efforts in preparation for litigation. Thus, the party asserting the privilege must demonstrate the threat of litigation was impending.

The Ninth Circuit has stated that “a document should be deemed prepared in anticipation of litigation and thus eligible for work product protection under Rule 26(b)(3) if in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation.

Documents Protected by Work Product Doctrine

Country Mutual makes two assertions that the work product doctrine applies. The vast majority of the e-mail do not involve anything that could be remotely construed as having been produced in anticipation of litigation. Instead, they involve mostly routine claims-handling matters with no indication that anything outside the ordinary is being done in anticipation of litigation. In other words, these documents would have been produced in substantially similar form in the ordinary course of business

ZALMA OPINION

The courts of Washington state have created a situation where, like in George Orwell’s Animal Farm that litigants in Washington state are all equal but some are more equal than others. They have converted the work of a lawyer into the work of an insurance adjuster even though the work conducted by the lawyer is necessary to his or her duty to provide legal advice and counsel to the insurer. Insurer’s lawyers, in Washington, are different from every other lawyer and its privileged communications with clients are presumed to be claims handling and not privileged.  Interestingly, lawyers for policyholders are not presumed to be claims handlers and their communications appear to be privileged. As a result, insurers in Washington have no choice but to use adjusters to do what could be done better by a lawyer, like taking an EUO, and then presenting that information to the lawyer for advice. The Supreme Court of Washington, and this District Court following Washington law, have made lawyers who represent insurers less a lawyer than those who represent policyholders or any other person in any pre-litigation distpute. The Legislature of Washington should cure this problem or face the withdrawal of insurers from the state.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

New From Barry Zalma

The National Underwriter Company to Publish The Zalma Insurance Claims Library

Erlanger, KY, September 1, 2014 –National Underwriter today announced that it will be publishing the popular series of insurance resources known as the Zalma Insurance Claims Library.

As a result of changes in strategic focus at the previous publisher, Specialty Technical Publishers (STP), as well as the increasingly greater need for expert, analytic content within the community of claims professionals, National Underwriter is honored to now be publishing the complete Zalma Insurance Claims Library, which includes Insurance Claims: A Comprehensive Guide, Construction Defects Coverage Guide, and Mold Claims Coverage Guide.

“Not only are these three of the most respected titles in their respective areas, we now have the opportunity to leverage synergies with our other resources, expand the library, add online components, all with the goal of better serving the needs of professionals who rely on these expert resources,” says Kelly Maheu, Managing Director of Professional Publishing for National Underwriter.

The three titles in the Zalma Insurance Claims Library are written by nationally renowned expert Barry Zalma, Esq., CFE, an insurance coverage attorney, consultant, expert witness and popular blogger with a large following within the insurance industry.

“The Zalma Insurance Claims Library was created over my more than 47 years in the insurance business as a claims person and claims lawyer,” Mr. Zalma, said. “It began as a resource to help me in my practice and expanded over the years into a resource for working claims people, claims lawyers, and any person presenting a claim to an insurer. I am excited to join with National Underwriter.”

“Barry’s expertise fits perfectly with our own approach. The Zalma Insurance Claims Library is a natural addition to our current offerings,” says Kelly Maheu, Managing Director of Professional Publishing. “We are excited to be able to bring these resources to our customers.”

National Underwriter also announced that purchasers of any of the three titles will also receive, at no extra cost, a subscription to Mr. Zalma’s Monday Claims Report, a weekly e-newsletter featuring coverage and analysis of top insurance law court decisions from across the country (a $395 value on its own).

Anyone interested can review the titles in the Zalma Library risk-free for 30 days, with a 100% guarantee of complete satisfaction.

About National Underwriter

For over 110 years, National Underwriter has been the first in line with the targeted tax, insurance, and financial planning information you need to make critical business decisions.  With respected resources available in print, online, and in eBook formats, National Underwriter remains at the forefront of the evolving insurance industry, delivering the thorough and easy-to-use resources you rely on for success.

National Underwriter is a Summit Professional Network.

About Summit Professional Networks

Summit Professional Networks supports the growth and vitality of the insurance, financial services and legal communities by providing professionals with the knowledge and education they need to succeed at every stage of their careers. We provide face-to-face and digital events, websites, mobile sites and apps, online information services, and magazines giving professionals multi-platform access to our critical resources, including Professional Development; Education & Certification; Prospecting & Data Tools; Industry News & Analysis; Reference Tools and Services; and Community Networking Opportunities.

Using all of our resources across each community we serve, we deliver measurable ROI for our sponsors through a range of turnkey services, including Research, Content Development, Integrated Media, Creative & Design, and Lead Generation.

The National Underwriter Company
4157 Olympic Blvd, Suite 225
ERLANGER KY 41018
800-543-0874

For more information, go to http://www.SummitProfessionalNetworks.com.

Posted in Zalma on Insurance | Leave a comment

False Imprisonment by Employer Excluded

Policy Wording Concerning Employment Related Actions are Clear & Unambiguous

The insurance market makes available to businesses Employment Practices Liability Insurance (EPLI) to protect the employer against claims by employees for tortious conduct in the course of employment. Most Commercial General Liability Policies excluded employment practices liability unless the EPLI coverage is purchased. Failure to purchase EPLI coverage can be very expensive and must be borne by the employer for both the cost of defense and the payment of any judgment.

In Jon Davler, Inc. v. Arch Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 4185860 (Cal.App. 2 Dist., 8/25/2014) a group of employees brought an action against their employer, Jon Davler, Inc., for various employment claims, including sexual harassment, invasion of privacy, and false imprisonment. Jon Davler tendered the action to its insurer, Arch Insurance Company, which denied coverage based on an employment-related practices exclusion. After Jon Davler filed this insurance coverage action against Arch, the trial court sustained Arch’s demurrer to the complaint without leave to amend.

FACTUAL BACKGROUND

Three female employees of Jon Davler, a cosmetics company, sued their employer, individually and on behalf of all similarly situated employees, for sexual harassment, intentional infliction of emotional distress, and false imprisonment. The employees also named as a defendant Christina Yang, an owner, manager, or supervisor of Jon Davler.

The employees were “shocked and in a state of disbelief” at Yang’s instructions to remove their clothing so that the employer could ascertain that they were not menstruating. When they asked about the consequences of refusing to participate in the inspection, Yang said that anyone who refused would be fired. Yang then lined up the employees outside the bathroom. While a male supervisor waited with Yang outside the bathroom door, the designated female employee went into the bathroom with each employee, “stood a foot or two away” while the employees “had to pull down their pants and their panties, exposing their vaginal area, so that [the employee] could see if they were wearing a sanitary napkin and therefore on their period.”

The Policy

Arch issued Jon Davler a commercial general liability policy that, among other coverage, provided coverage for “those sums [Jon Davler] becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.” The policy defined “personal and advertising injury” as “injury, including consequential ‘bodily injury,’ arising out of” seven categories of offenses, one of which was “[f]alse arrest, detention or imprisonment….”

The policy contained an “Employment–Related Practices Exclusion,” which the parties refer to as an ERP exclusion. This exclusion stated that the coverage for personal and advertising injury did not apply to an injury arising out of any refusal to employ a person, termination of a person’s employment, or “[e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person….”

Jon Davler filed this action against Arch for breach of contract, breach of the covenant of good faith and fair dealing, and conversion.  Jon Davler alleged that Arch’s refusal to provide indemnity or a defense breached the terms of the policy and “was unreasonable and in bad faith.”

Arch demurred, arguing that all of the claims in the underlying action alleged “injury to persons ‘arising out of’ ‘[e]mployment-related practices, policies, acts or omissions,’” and that therefore the employment-related practices exclusion applied.

The trial court sustained Arch’s demurrer without leave to amend. The court noted that because all of the causes of action other than false imprisonment were “clearly the types of actions” covered by the employment-related practices exclusion, it was “really the false imprisonment that we are concentrating on here, and [Jon Davler] is alleging ambiguity as applied in this situation.” The court ruled that all of the claims in the underlying action “fall within [the] exclusion, and, therefore, the demurrer is sustained without leave to amend.” The trial court entered an order of dismissal. Jon Davler appealed.

DISCUSSION

In California, an insurer must defend its insured against claims that create a potential for indemnity under the policy. The duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered. This includes all facts, both disputed and undisputed, that the insurer knows or “becomes aware of” from any source if not at the inception of the third party lawsuit, then at the time of tender.

While the duty to defend is broad, it is not unlimited. The duty is measured by the nature and kinds of risks covered by the policy. In an action seeking declaratory relief concerning a duty to defend, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.

In determining intent, the rules governing policy interpretation require an appellate court to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. The court must consider the clear and explicit meaning of these provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage.

The Employment–Related Practices Exclusion Applies To The Underlying Claims

Jon Davler argues that the trial court erred in sustaining Arch’s demurrer without leave to amend because the employment-related practices exclusion is ambiguous. Jon Davler contends there is ambiguity in the exclusion’s use of the phrases “such as” and “arising out of,” and ambiguity created by the presence of “false imprisonment” in the coverage provision and its absence in the exclusion. The Court of Appeal found  no such ambiguities.

False imprisonment is similar with several of the matters specifically listed in the employment-related practices exclusion, such as coercion, discipline, and harassment. False imprisonment is the unlawful violation of the personal liberty of another, where the restraint required may be effectuated by means of physical force, threat of force, confinement by physical barriers, or by means of any other form of unreasonable duress. False imprisonment involves coercion, by force, threat, or otherwise. Even under Jon Davler’s theory, the exclusion applies to false imprisonment claims. The employment-related practices exclusion in Jon Davler’s policy is similarly unambiguous, even though it does not list false imprisonment as one of the examples of an employment-related practice, policy, act or omission.

The Employment–Related Practices Exclusion Is Plain and Clear

The employment-related exclusion is sufficiently plain and clear. An average layperson would understand that the exclusion applies a category of claims: those arising in the employment setting. An average person knows what employment is. Unlike technical legal or medical terms, “employment-related” and “arising out of employment” are not terms or phrases that average persons cannot understand.

ZALMA OPINION

This case is a failure of an employer to acquire insurance that protects it against the risk of being sued by employees for alleged wrongful acts. The conduct of Jon Davler’s management, if the allegations made by the employees is true, was an egregious abuse of the employment relationship. Forcing employees to go into the bathroom and expose themselves to management was beyond the pale. Had Jon Davler purchased EPLI coverage there would have been coverage for both defense and indemnity to the allegations of the employees. Since it did not purchase the coverage it was bound by the language of the exclusion that is basically the opposite of the EPLI coverage. To save the extra premium, Jon Davler must defend itself and resolve the claims of the employees.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Policy Must Incorporate Statute Terms

Statutory Language Trumps Policy Wording

Insurance is usually nothing more than a contract. If the policy’s terms and conditions are clear and unambiguous, those terms will be applied. However, legislatures have the power to, and in fact do, enact laws that effect how a policy of insurance is interpreted. Therefore, even when an insurer and its insured agree upon policy terms and conditions that are less than those required by law, they must still abide by the law.

Florida has a unique problem where, because much of the bedrock in Florida is limestone that can be washed away by water, it suffers from sinkholes. As a result Florida enacted statutes requiring that insurers writing insurance in the state must insure against the risk of loss by sinkhole collapse. The Eleventh Circuit Court of Appeal was called upon, in Shelton v. Liberty Mut. Fire Ins. Co., — Fed.Appx. —-, 2014 WL 4100426 (C.A.11 (Fla.), Aug. 21, 2014.) to resolve a dispute concerning damage allegedly caused by a sinkhole.

BACKGROUND

Insurance Coverage for Sinkhole Losses under Florida Law

Since 1981, Florida law requires property insurers to make sinkhole coverage available. From 1981 to 2004, Florida law defined the term “sinkhole loss” as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property only when such settlement or collapse results from subterranean voids created by the action of water on a limestone or similar rock formation.

In 2005, the Florida legislature redefined “sinkhole loss” as “structural damage to the building, including the foundation, caused by sinkhole activity.” 2005 Fla. Sess. Law. Serv. Ch.2005–111, § 17 (West). Although it limited the definition of “sinkhole loss” to cases where there was “structural damage” to a covered property, the 2005 amendment did not define the term “structural damage.” In May 2011, the Florida legislature amended § 627.706 again to supply a definition for the phrase “structural damage” “as used in connection with any policy providing coverage … for sinkhole losses.” Fla. Stat. § 627.706(2)(k) (2011) (emphasis added by the court). The legislature provided a technical, five-part definition: “Structural damage” occurs only when “a covered building … has experienced” one of the five events enumerated and defined in the statute.

The five events are:

  1. Interior floor displacement or deflection in excess of acceptable variances as defined in ACI 117–90 or the Florida Building Code, which results in settlement-related damage to the interior such that the interior building structure or members become unfit for service or represents a safety hazard as defined within the Florida Building Code;
  2. Foundation displacement or deflection in excess of acceptable variances as defined in ACI 318–95 or the Florida Building Code, which results in settlement-related damage to the primary structural members or primary structural systems that prevents those members or systems from supporting the loads and forces they were designed to support to the extent that stresses in those primary structural members or primary structural systems exceeds one and one-third the nominal strength allowed under the Florida Building Code for new buildings of similar structure, purpose, or location;
  3. Damage that results in listing, leaning, or buckling of the exterior load-bearing walls or other vertical primary structural members to such an extent that a plumb line passing through the center of gravity does not fall inside the middle one-third of the base as defined within the Florida Building Code;
  4. Damage that results in the building, or any portion of the building containing primary structural members or primary structural systems, being significantly likely to imminently collapse because of the movement or instability of the ground within the influence zone of the supporting ground within the sheer plane necessary for the purpose of supporting such building as defined within the Florida Building Code; or
  5. Damage occurring on or after October 15, 2005, that qualifies as “substantial structural damage” as defined in the Florida Building Code. [Fla. Stat. § 627.706(2)(k).]

Liberty Mutual’s Policy and the Sheltons’ Claim

After the May 2011 legislative change, Liberty Mutual issued a renewal homeowners insurance policy for the Sheltons’ property, effective from July 18, 2011 to July 18, 2012. In January 2012, the Sheltons made a claim under the policy for a “sinkhole loss” to their property. Liberty Mutual’s policy provides that “[s]inkhole loss means structural damage to the building, including the foundation, caused by sinkhole activity.” The policy does not define the key phrase “structural damage to the building.” The policy also does not reference any statutory or external definitions of this phrase.In response to the Sheltons’ January 2012 claim, Liberty Mutual sent an expert to examine the damage to the Sheltons’ property. Liberty Mutual’s expert found cosmetic damage to the Sheltons’ home but no “structural damage” within the meaning of § 627.706(2)(k). In other words, the damage to the Sheltons’ home did not fall within the five-part definition of “structural damage” outlined in the applicable statute regulating polices for sinkhole losses.

Based on this expert opinion, Liberty Mutual declined coverage for the Sheltons’ claim. Liberty Mutual maintained that its policy did not provide coverage for the Sheltons’ claim because (1) a “sinkhole loss” is defined to require “structural damage to the building,” (2) the applicable Florida statute, § 627.706(2)(k), defines what constitutes “structural damage,” and (3) the Sheltons’ home did not experience “structural damage” within that statutory definition.

The Sheltons’ Lawsuit

Unhappy with Liberty Mutual’s decision, the Sheltons brought suit alleging that Liberty Mutual’s denial of coverage breached the terms of the insurance policy. Liberty Mutual moved for summary judgment.  The district court disagreed, holding that the statutory definition of “structural damage” was inapplicable because the insurance policy did not reference the statute or incorporate the statutory language. The district court concluded that the phrase “structural damage to the building” in the policy should be given its plain meaning, which—according to the district court—is “damage to the structure.” The district court effectively read “structural damage to the building” to mean “any damage to the structure.”

A few months later, the Sheltons moved for summary judgment. In response, Liberty Mutual renewed its argument that the statutory definition of “structural damage” in § 627.706(2)(k) applies to the Sheltons’ policy. Liberty Mutual also proffered its expert’s finding that the damage to the Sheltons’ home does not meet the statutory definition of “structural damage.”

Granting the Sheltons’ motion, the district court reiterated its prior conclusion that the phrase “structural damage to the building” in the policy means “damage to the structure,” instead of the more restrictive statutory definition of “structural damage.”

DISCUSSION

The pivotal question brought to the Eleventh Circuit was whether the statutory definition of “structural damage” contained in § 627 .706(2)(k) applies to the phrase “structural damage” in the Sheltons’ policy.

A statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that statute.  It is well settled in Florida that the statute in effect at the time the insurance contract is executed governs any issues arising under that contract.

Applying Florida law the Eleventh Circuit concluded that the statutory definition of “structural damage” contained in § 627.706(2)(k) governs the construction of the phrase “structural damage” in the Sheltons’ policy. The Florida legislature expressly stated that the statutory definition applies when the term “structural damage” is used in connection with any policy providing coverage for sinkhole losses. As a result, under Florida law, the statutory definition of “structural damage” is a part of the Sheltons’ policy.

Under Florida law, the statutory definition must be read into the Sheltons’ policy just as if an express provision to that effect were inserted into the policy. [Northbrook Prop. & Cas. Ins. Co., 765 So.2d at 839.]

Under Florida law, the absence of an alternative definition means that the statutory definition fills the gap. There is no indication in the policy that the parties intended to depart from the statutory definition.

CONCLUSION

Given the conclusion that the statutory definition applies to the term “structural damage” in the Sheltons’ policy, the Eleventh Circuit reversed the district court’s grant of summary judgment in favor of the Sheltons and vacate the final judgment. Since Liberty Mutual did not appeal the denial of its motion for summary judgment the case was returned to the trial court to resolve the dispute with direction provided by the opinion of the Eleventh Circuit.

ZALMA OPINION

In Florida, and other states that enact statutes requiring insurers to include coverage in their policy that they don’t want to, or just fail to, include must be cautioned to not limit their coverage decisions to the wording of the policy. They must also research the applicable statutes to make sure the meaning of the policy was not changed by statute or that a normal definition of a term was not modified by statute.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

No Proof of Loss – No Coverage

Decomposing Body Not an “Explosion”

Most homeowners policies provide all risk of direct physical loss for structure and only named peril coverages for personal property. If not excluded a cause of loss is covered for the structure. Personal property coverage requires a named risk of loss like fire, lightning, windstorm, and explosion, among others. The Florida Court of Appeal, in Rodrigo v. State Farm Florida Ins. Co.— So.3d —-, 2014 WL 4083324 (Fla.App. 4 Dist., Aug. 20, 2014) [See previous blog post at http://zalma.com/blog/leaking-corpse-not-named-peril/] was faced with a simple coverage issue presented by the insurer and a very creative issue presented by the insured.

FACTS

The insured’s next door neighbor died. A great deal of  time passed before the body was discovered. During that time, the decomposed body leaked bodily fluids, which infiltrated the walls and the insured’s apartment causing damage. The fluids leaking from the dead body was the event that gave rise to the insured’s claim.

The insurance policy required the insured to file a sworn proof of loss within 60 days of the date of loss. While the insured sent invoices and lists of damages, no one disputes that she failed to file a sworn proof of loss.

The policy further provided: “Loss Payment. We will adjust all losses with you…. Loss will be payable 60 days after we receive your proof of loss and: ¶  a. reach agreement with you; ¶ b. there is an entry of a final judgment; or ¶ c. there is a filing of an appraisal award with us.”

None of these events occurred. However, the insurer’s adjuster contacted a contractor, who inspected the unit and signed an appraisal award. The insurer then tendered payment to the insured for that amount, but denied liability for personal property damage. The insured did not accept the payment.

The insured filed a two-count complaint against the insurer. The first count alleged that the appraisal was invalid, and requested the court to modify or vacate the award, or appoint new appraisers and a neutral umpire for a second appraisal. In the second count, the insured alleged that the insurer breached its contract by failing to pay the owner the amount necessary to repair and remediate her unit, to compensate her for damage to her personal property, and for living expenses.

In its amended answer, the insurer pled that the insured had : “(1) materially breached her duty to satisfy conditions precedent; …. (5) failed to satisfy all policy provisions before bringing legal action; and (6) otherwise failed to comply with her contractual obligations.”

The insurer moved for partial summary judgment on the issue of coverage for personal property damage. While acknowledging that the insured made a claim for personal property damage, the insurer argued the policy covered personal property damage only for named perils, and a decomposing body was not one of them. The insured responded that the claim resulted from an “explosion,” a named peril under the policy. She supplied an affidavit of a licensed physician, who attested that the deceased’s body “underwent advanced decomposition” and “the internal contents of her body explosively expanded and leaked.”

The insurer also moved for summary judgment on whether the insured failed to comply with a condition precedent—submitting a sworn proof of loss—constituting a material breach of the insurance policy. Because the insurer and insured never reached an agreement, no final judgment was entered, and no valid appraisal award existed, there was no coverage for the claims. The insured responded, in part, that the insurer had waived the “sworn proof of loss” requirement by tendering payment to the insured, and that other genuine issues of material fact precluded entry of a summary judgment.

The trial court entered a single final summary judgment for the insurer, finding that the insurer did not waive the condition precedent of a sworn proof of loss, there was no coverage, and the damage caused by the decomposing body did not constitute an “explosion” as a named peril. From this summary judgment, the insured now appeals.

ANALYSIS

The insured argues that the trial court erred by entering summary judgment because the insurer did not show that it was prejudiced by the insured’s failure to submit a sworn proof of loss.

In Florida “[A]n insurer need not show prejudice when the insured breaches a condition precedent to suit.” Goldman v. State Farm Fire Gen. Ins. Co., 660 So.2d 300, 303 (Fla. 4th DCA 1995). Proof of loss is a condition precedent to an insured’s suit against an insurer. Soronson v. State Farm Fla. Ins. Co., 96 So.3d 949, 952 (Fla. 4th DCA 2012); Kramer v. State Farm Fla. Ins. Co., 95 So.3d 303, 306 (Fla. 4th DCA 2012).

While the insured argued that she provided the insurer with bills, estimates, invoices, and other documents to prove her damages, she failed to file a sworn proof of loss. Therefore, the insured materially breached a condition precedent, and the insurer was not obligated to pay.

The trial court also correctly found that the insurer did not waive the sworn proof of loss requirement by tendering payment because “[i]nvestigating any loss or claim under any policy or engaging in negotiations looking toward a possible settlement of any such loss or claim” does not constitute a waiver of a “sworn proof of loss” requirement. § 627.426(1)(c), Fla. Stat. (2007) (emphasis added).

The wording of the policy places an affirmative duty on the insured to provide the sworn proof of loss with which affirmative duty the insured failed to fulfill.

The insured next argues that the trial court erred by entering partial summary judgment on the personal property claim because there was an issue of material fact as to whether there was an explosion under the policy’s terms.

The policy provided personal property coverage for named perils. Among those named perils was an “explosion.” That term was not defined. It was the insured’s burden to prove that the term “explosion” included the explosive expansion of a decomposing body.

Rather than stretching common sense, the trial court correctly gave the term “explosion” its “plain and unambiguous meaning as understood by the ‘man-on-the-street. The plain meaning of the term “explosion” does not include a decomposing body’s cells explosively expanding, causing leakage of bodily fluids. In short, although novel in her attempt to do so, the insured could not establish that the decomposing body was tantamount to an explosion.

ZALMA OPINION

Although the facts of this case are macabre the key to the opinion is not whether the insured’s neighbor’s body exploded but the fact that the insured failed to submit a sworn statement in proof of loss within the time required by the policy or at all. The requirement for a sworn proof of loss has been in every first party property policy of insurance since the 19th Century by statute enacted in the various states. The fact that failure to submit a timely proof of loss is fatal to a claim, even a legitimate and normally covered claim, has been the law of the various states for more than a century. Florida law on proof of loss agrees with that of various states although many require that the insurer prove it was prejudiced by the failure to submit a proof of loss. [See http://zalma.com/blog/no-sworn-proof-of-loss-insured-loses/; and http://zalma.com/blog/notice-prejudice-rule-applied-to-proof-of-loss-condition.]

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Not Disabled Enough

Able to Earn More than Benefits Defeats Claim

Disability claims are almost always contentious. It is much more comfortable to receive tax free benefits from an insurer when you are hurting than go to work and make more than the benefits when hurting.

In Deboard v. Liberty Life Assur. Co. of Boston, Slip Copy, 2014 WL 4064249 (E.D.Mich.) plaintiff Mae–Lyn DeBoard sued Liberty Life seeking judicial review of Defendant Liberty Life Assurance Company of Boston’s denial of longterm benefits under an employer-sponsored group disability insurance policy. T

STATEMENT OF FACTS

Plaintiff Mae–Lynn DeBoard began working for Comcast as an Event/Upgrade SFU—Direct Sales Representative on approximately August 10, 2009. In accordance with her employment benefits, DeBoard received disability insurance coverage through a group insurance policy (“the Plan”) provided by Defendant Liberty Life Insurance Company of Boston (“Liberty”).

In January 2010, Liberty received notice of a claim by DeBoard for Short Term Disability (“STD”) benefits under the Plan after falling at home and breaking her right elbow. Liberty sent a letter to DeBoard advising her that she had been approved for STD benefits under the Plan. The letter also advised that per the Comcast STD Plan, in order to receive ongoing benefits, DeBoard must provide proof of a disability within a required timeframe.

Over the early months of 2010, Liberty received various medical documents. Liberty began investigating the potential for DeBoard to receive Long Term Disability (“LTD”) under the Plan. In furtherance of its investigation, Liberty requested an occupational analysis from Cascade Management, a vocational rehabilitation consulting company. Cascade conducted and produced a report on August 11, 2010.  Cascade concluded that DeBoard “would not be precluded from this occupation as she would be able to complete this occupation as an inside sales representative”.

Under the Plan, “Disability” or “Disabled” with respect to Long Term Disability means: “1. For persons other than pilots, co-pilots, and crewmembers of an aircraft: ¶ a. if the Covered Person is eligible for the Maximum any Occupation benefit, “Disability” or “Disabled” means during the Elimination Period and until the Covered Person reaches the end of the Maximum Benefit Period, as a result of an Injury or Sickness, he is unable to perform the Material and Substantial Duties of Any Occupation.¶ b. (i) if the Covered Person is eligible for the 12 Month Own Occupation benefit, “Disability” or “Disabled” means that during the Elimination Period and the next 12 months of Disability the Covered Person, as a result of Injury or Sickness, is unable to perform the Material and Substantial Duties of his Own Occupation; and ¶ (ii) thereafter, the Covered Person is unable to perform, with reasonable continuity, the Material and Substantial Duties of Any Occupation.”

Further, “Own Occupation” under the Plan means: “the Covered Person’s occupation that he was performing when his Disability or Partial Disability began. If the Covered person is unable to earn 80% of his pre-disability earnings, he will be considered unable to perform his Own Occupation. For the purposes of determining Disability under this policy, Liberty will consider the Covered Person’s occupation as it is normally performed in the national economy.”

In January 2012, Liberty issued a letter to DeBoard indicating its decision to discontinue her benefits under LTD.  DeBoard’s counsel responded with the intent to appeal this decision.

On March 22, 2012, DeBoard underwent a procedure at Troy Hospital for “right sacroiliac joint injection.” Shortly after this procedure, on March 27, 2012, DeBoard was involved in an automobile accident.  As a result of this accident, she complained of neck pain, in addition to her history of back surgeries.  Although Liberty received noticed from DeBoard’s counsel of this accident, Liberty still issued their letter on April 6, 2012, indicating that they were upholding their previous decision of discontinuing DeBoard’s benefits.

ANALYSIS

Liberty Life’s administrative review procedure determined DeBoard was capable of returning to work full time in a sedentary work capacity.

DeBoard argues Liberty Life acted improperly by not conducting an independent medical examination of DeBoard. However, while the failure to conduct an in-person examination is a factor a reviewing court may take into account, there is nothing inherently objectionable about a file review by a qualified physician in the context of a benefits determination. Liberty Life’s review procescomports with similar Sixth Circuit cases.

A finding of disability by the Social Security Administration does not “automatically entitle[ ] [a claimant] to benefits under an ERISA plan, since the plan’s disability criteria may differ from the Social Security Administration’s.”   DeBoard’s argument that the Social Security Benefits award should have been a factor in her favor is unpersuasive.

Moreover, the SSA’s finding of disability predates Liberty Life’s final determination by nearly two years, in which DeBoard’s diagnosis shifted from the initial elbow injury to back ailments and procedures.

DeBoard argues the sedentary employment opportunities suggested by Liberty Life’s Occupational Analysis are unreasonable based on her education and experience. However, DeBoard failed to raise this argument during her administrative appeal. The Sixth Circuit requires that in an ERISA benefits action, a reviewing court should not consider arguments raised by plaintiff in litigation which were not made during the administrative review process.

DeBoard’s monthly gross benefit under the policy was $3,265.99 and almost all of the alternative occupations identified by the vocational report provide earnings higher than DeBoard’s gross benefit. Thus, based on Liberty’s Occupational Analysis and the protections built into the Plan, the alternative positions recommended by Liberty Life are consistent with DeBoard’s ability and physical restrictions.

ZALMA OPINION

Disability insurance is not designed to provide wealth to the insured. Rather, it is designed to carry the injured or partially disabled person funds to carry her over until she is able to work again – even if in a limited capacity – as long as the funds earned exceed the amounts that are payable under the policy. The District Court found DeBoard had the ability to earn more than the disability payments even if working in a limited capacity since, as a salesperson, there was no need to lift heavy objects.

She was not entitled, however, to receive the benefits of the policy and work nor was she able to avoid work she was capable of earning just because there was a disability policy available.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

UIM Limitation Acrues At Denial

Private Limitation Unenforceable

Underinsured Motorist Insurance (UIM) is different than most since it acts as if the insurer insured the underinsured motorist and is required to indemnify its insured as if the insured was seeking tort damages from a different insured. However, in fact, UIM coverage is not a policy indemnifying an insured against torts committed to a third party but is a contract action controlled by the terms and conditions of the policy rather than tort law.

In Hensley v. State Farm Mut. Auto. Ins. Co., — S.W.3d —-, 2014 WL 3973115 (Ky.App.) the Kentucky Court of Appeal, in a matter of first impression, was asked to determine when the statute of limitations or private limitation of action provision a UIM claim accrues and the limitation period begins to run.

In starting its analysis the court recognized that an insurer can shorten the limitations period by contract.

FACTUAL BACKGROUND

Amberee N. Hensley was involved in a motor vehicle accident with Awet Beyene. It is undisputed that Beyene negligently caused the accident. Beyene had liability coverage up to $50,000.00 with Nationwide Insurance (“Nationwide”). The automobile Hensley was driving was owned by Louisville Metro Government and did not have UIM coverage on it. However, Hensley had Under Insured Motorist (UIM) coverage through two policies of insurance she maintained with State Farm.

In February 2010, Nationwide accepted liability and offered to tender the $50,000.00 policy limits to Hensley in exchange for a settlement agreement releasing Beyene from any further liability. Thereafter, Hensley began negotiating with State Farm for UIM coverage under her policies. She made a formal demand for UIM benefits on November 4, 2011, which State Farm denied. On January 24, 2012, Hensley filed a breach of contract action against State Farm in Jefferson Circuit Court seeking UIM benefits under her policies.

After a period of discovery, State Farm moved for summary judgment based on the limitations provisions in its policies with Hensley. The policies provides a limitation that stated “under uninsured motorist vehicle coverage and underinsured motor vehicle coverage unless such action is commenced not later than two (2) years after the injury ….”

Relying on these provisions, State Farm maintained that because the accident occurred on August 7, 2009 Hensley was barred from pursuing any “right of action” against it after August 7, 2011. Since Hensley’s claim was not filed until January 24, 2012, State Farm argued that it was time-barred.

On December 18, 2012, the circuit court granted State Farm’s motion and entered summary judgment in its favor. The circuit court reasoned that the policy at issue provided Hensley with a “reasonable amount of time after the accident to establish that the tortfeasor was an underinsured [motorist] and subsequently file suit against State Farm.”

ANALYSIS

Interpretation and Construction of Insurance Contracts

Generally speaking, two parties of equal bargaining power are free to contract to any terms and conditions they negotiate with one another; with few exceptions, our courts will not endeavor to rewrite such contracts for the benefit of one party or the other. The Kentucky Supreme Court has recognized that insurance contracts with general consumers are “standard-form contracts without the option of arms’ length negotiations with the insureds.” Employers Ins. of Wausau v. Martinez, 54 S.W.3d 142, 145 (Ky.2001).

Kentucky has adopted four basic principles of insurance policy construction:

1) all exclusions are to be narrowly interpreted and all questions resolved in favor of the insured;

2) exceptions and exclusions are to be strictly construed so as to render the insurance effective;

3) any doubt as to the terms of the policy should be resolved in favor of the insured; and,

4) because the policy is drafted in all details by the insurance company, it must be held strictly accountable for the language employed.

While courts recognize that insurance carriers have the right to impose reasonable conditions and limitations on their insurance coverage even where coverage is required by law, nevertheless the question then becomes the reasonableness of the condition as a limitation on public policy as opposed to one of strict contract considerations between private parties where no public interest is involved.

Statute of Limitations for UIM Claims

A UIM suit sounds in contract, not tort. A UIM action is based in contract, any payment by a UIM insurer is necessarily made in performance of a contractual obligation and cannot be characterized as payment of legal damages pursuant to tort liability. Based on the rationale that UIM claims sound in contract, not tort, Kentucky courts apply the limitations period set forth in statute for written contracts when an insured is seeking recovery of UIM benefits from her insurer.

Nevertheless, our courts have been clear that insurance provisions may shorten this period so long as the shortened period is reasonable and not in violation of public policy. Hensley makes the additional argument that a UIM claim is contract-based and, therefore, does not accrue until there has been a breach of the contract of insurance. This contention is not only important it is fundamental to the court’s analysis.

Hensley is not asserting that a two-year limitations period is an unreasonable amount of time in which to pursue a UIM claim. Her argument is that the reasonableness of the period must be measured, not from the date of the accident, but rather, from the breach of the contract because this is the date of accrual. She argues that in her case the breach occurred on November 4, 2011, when State Farm denied her claim.

Accrual of UIM Claims

The court found three potential arguments for the accrual of a UIM breach of contract action:

(1) the date that the insurance company allegedly breaches the insurance contract by denying the insured’s UIM claim;

(2) the date of the accident; or

(3) the date that the insured settles with or obtains judgment against the tortfeasor, thereby exhausting the limits of the tortfeasor’s liability coverage.

The overwhelming majority of jurisdictions that have confronted this issue have concluded that a UIM claim accrues when the insurer breaches the insurance contract by denying the insured’s claim for benefits. The reasoning behind this theory is that because a claim for UIM benefits is a first-party claim, based in contract instead of tort, the limitations period begins to run on the date that the insurance contract is breached. Generally, these courts have determined that the insurer breaches the contract when it denies the insured’s claim for UIM benefits. After reviewing the decisions from other states, the court of appeal concluded that the majority approach is most consistent with Kentucky’s historical treatment of UIM claims as contract claims. Kentucky has consistently regarded UIM claims as distinct claims that are separate and apart from tort claims.

The court of appeal concluded that the defining event in a UIM claim is the date the UIM carrier denies the insured’s claim for benefits. This is the date upon which the insured’s breach of contract claim against its own insurer accrues.

It is a cardinal principle in the construction of statutes of limitation, which has been recognized from the beginning, that the statute does not begin to run against the plaintiff until his cause of action accrues. Until such time as the insured demands payment of UIM benefits under the policy and the insurer denies such demand, there has been no breach of the insurance contract by the insurer. Accordingly, under Kentucky law the statute of limitations for a UIM claim accrues on the date the insurer denies UIM coverage and communicates that denial to the insured.

The law is well-settled that a cause of action only accrued when each element giving rise to the cause of action had come to fruition. A cause of action accrues when a party has the right and capacity to sue. It would fundamentally distort the common law definition of “accrues” and the legislative intent behind the statutes to allow the insurer to define the accrual date for a UIM breach of contract claim to run from the date of the accident or injury.

ZALMA OPINION

Kentucky, by this case, follows the majority rule and adopts as the accrual date for a suit against an UIM insurer is when the contract is breached by the denial of the claim. To rule otherwise would be illogical considering the fact that it often takes a great deal of time to determine whether the tortfeasor is uninsured or underinsured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Good Intentions Abuse Basic Rights

Government May Not Prevent the “Free Exercise” of Religion

It has been said that the road to Hell is paved with good intentions. There is no question that the Patient Protection and Affordable Care Act of 2010, 124 Stat. 119 (“ACA” or “the Act”) was passed with good intentions to help the people of the United States obtain inexpensive health insurance. In the guise of Obamacare the ACA did not limit its purpose but gave unfettered discretion to the Internal Revenue Service and the Department of Health and Human Services to write regulations to enforce the ACA. The Regulations, as I pointed out earlier when discussing the Hobby Lobby case, exceeded the good intentions.

Attempting to protect their right to freely exercise their religion many have sued the government seeking judicial protection from what is believed to be overreach and a violation of federal law.. In Louisiana College v. Sebelius, Slip Copy, 2014 WL 3970038 (W.D.La., Aug. 13, 2014) the U.S. District Court for the Western District of Louisiana resolved the dispute in favor of the free exercise of religion.

BACKGROUND

Under the ACA non-exempt employment-based group health plans are required to provide cost-free coverage for all contraceptive methods approved by the Food and Drug Administration (“FDA”), four of which may prevent a fertilized egg from attaching to the uterine wall (“contraceptive mandate” or “mandate”). However, recently-promulgated regulations provide a mechanism for certain religious nonprofits to avoid providing coverage for contraceptive services they find religiously offensive by executing a required self-certification form (“challenged regulations”). This mechanism—known as the “accommodation”—requires an insurance issuer, upon receipt of the self-certification, to exclude contraceptive coverage from the employer’s plan and to provide plan participants with separate payments for contraceptives without imposing any cost-sharing requirements on the employer, its insurance plan, or the plan beneficiaries.

Plaintiff, Louisiana College (“LC”), is a nonprofit university affiliated with the Southern Baptist Convention (“SBC”). Plaintiff believes as a matter of faith that human life begins at the moment of conception, or when an egg becomes fertilized. It is therefore against Plaintiff’s religious beliefs to participate in or facilitate access to abortion or “abortifacient” drugs, which Plaintiff believes can end human life and are therefore sinful. Consistent with these beliefs, Plaintiff provides health care benefits to its employees through a group health plan sponsored by GuideStone Financial Resources (“GuideStone Plan”), and has excluded from coverage “contraceptive drugs or devices considered to be abortifacients.”

Plaintiff also maintains that choosing to follow the commands of its faith, and thereby failing to comply with the challenged regulations, would result in crippling financial penalties, which is a quintessential substantial burden on the free exercise of religion.

The Affordable Care Act

Specifically, if a covered employer offers group health insurance coverage, but its plan fails to comply with the ACA’s requirements for group health plans, the employer may be required to pay a regulatory tax of $100 per day for “each individual to whom such failure relates” (“regulatory tax”).  Likewise, if the employer fails to provide group health insurance coverage altogether, and at least one of its full-time employees enrolls in a health plan and qualifies for a subsidy on one of the government-facilitated exchanges, the employer must pay an annual assessable payment of $2000 per full-time employee, minus 30 (“assessable payment”).

The parties agree that Plaintiff is not eligible for the religious-employer exemption, and that Plaintiff’s employee health plan does not possess grandfathered status. The parties also agree that Plaintiff would qualify as an “eligible organization” entitled to the accommodation, provided that it fulfills the self-certification requirement.

According to Plaintiff, the challenged regulations substantially burden its religious exercise by forcing it to choose among the following options:

(1)  maintaining its current health insurance plan, which does not provide coverage for or facilitate access to the objectionable drugs and services;

(2)   dropping employee health insurance altogether to avoid facilitating access to emergency contraceptives; or

(3)   complying with the mandate, and thereby facilitating access to drugs and services that (according to Plaintiff) can destroy human life.

Plaintiff contends that the ACA makes the first and second options untenable because they result in crippling financial penalties, leaving Plaintiff without the option of fulfilling its religious convictions by providing health insurance coverage that does not facilitate access to emergency contraceptives.

Recent Free–Exercise Challenges to the Challenged Regulations

A number of courts have addressed similar free exercise claims by religious nonprofits that are eligible for the accommodation, but with varying results. While the Fifth Circuit has yet to weigh in on the issue definitively, at least three district courts in this circuit have considered whether to grant injunctive relief on such claims, and all three have ruled in favor of the nonprofit plaintiffs. On these facts, we join with the reasoning of our sister courts and concur in concluding that the challenged regulations offend RFRA by placing a substantial burden on Plaintiff to act in ways that (as Plaintiff sees it) involve it in the provision of emergency contraceptives, and thereby require Plaintiff to violate its sincerely-held religious beliefs. Therefore, we find the challenged regulations—26 C.F.R. § 54.9815–2713(a)(1)(iv); 26 C.F.R. § 54.9815–2713A(a); 29 C.F.R. § 2590.715–2713(a)(1)(iv); 29 C.F.R. § 2590.715–2713A(a); 45 C.F.R. § 147.130(a)(1)(iv); and 45 C.F.R. § 147.131(b)—cannot stand.

LAW & ANALYSIS

Religious Freedom Restoration Act

In Employment Division, Department of Human Services of Oregon v. Smith, 494 U.S. 872 (1990), the Supreme Court held that the First Amendment Free Exercise Clause does not prohibit the government from burdening the exercise of religion through facially neutral laws of general applicability. Congress responded by enacting the Religious Freedom Restoration Act of 1993, 42 U.S.C. § 2000bb, et seq. RFRA provides that the “[g]overnment shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability” unless it can show “that application of the burden to the person—(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.”

The impact of the compulsory law on the practice of religion is not only severe, but inescapable. When the law affirmatively compels them, under threat of criminal sanction, to perform acts undeniably at odds with fundamental tenets of their religious beliefs, such laws carry with them precisely the kind of objective danger to the free exercise of religion that the First Amendment was designed to prevent. The plaintiffs must either abandon belief and be assimilated into society at large, or be forced to leave the United States to some other and more tolerant region.

In the Fifth Circuit a challenged law substantially burdens religious exercise if it truly pressures the adherent to significantly modify his religious behavior and significantly violate his religious beliefs. The effect on religion is substantial when, for example, a law influences the adherent to act in a way that violates his religious beliefs or forces the adherent to choose between, on the one hand, enjoying some generally available, non-trivial benefit, and, on the other hand, following his religious beliefs.

As the Supreme Court noted in Hobby Lobby, the phrase “exercise of religion,” as it appears in RFRA. It necessarily follows that the “exercise of religion” under RFRA must be given broad meaning with courts concluding that a substantial burden on religious exercise if the challenged law: (1) compels the adherent to do something his religion forbids; (2) forbids the adherent from doing something his religion requires; or (3) indirectly pressures, but does not directly compel, the adherent to act in a manner forbidden by his religion, or to refrain from acting in a manner required by his religion. The contraception requirement is just as offensive as requiring a Muslim to fund a pig farm to feed its employees, require a Mormon to company to offer a weekly pint of whiskey to its employees, require a Seventh Day Adventists company to provide meat to its employees, or require a Jewish owned firm to keep its business open on Saturday.

The question here is not whether the government is directly compelling or putting substantial pressure on Plaintiff to act in a manner it finds inconsistent with the commands of its faith. Plaintiff believes this “Hobson’s choice” is a quintessential substantial burden under RFRA.

Even accepting that the government has succeeded in preventing any payment by the religious organization for the religiously offensive devices, there is a causal link between the acts the plaintiffs must do under the accommodation and the provision of contraceptive devices and products to employees on a no-cost-sharing basis.

Because both failing to comply with the mandate and failing to provide group health insurance coverage altogether will result in onerous financial penalties, the only option available to Plaintiff is to violate its religious beliefs, either by providing coverage for emergency contraceptive services via its own affiliated GuideStone Plan, or by facilitating free access to such services through a self-certification form. Accordingly, there is no genuine dispute of material fact that the challenged regulations substantially burden Plaintiff’s free exercise of religion under RFRA.

ZALMA OPINION

Obamacare’s good intentions when the ACA was passed has metastasized into a governmental imposition of one portion of the union’s beliefs upon others and attempts to deprive the people who follow the same religious beliefs as Louisiana College, to violate their religious beliefs in clear violation of the RFRA and the free exercise clause of the First Amendment. If Louisiana College can be compelled to pay for and support the use of “abortifacient” drugs Mormon’s can be compelled to buy liquor, Jews will have to open their stores on Saturday, Muslims can be compelled to buy pork for its employees and Seventh Day Adventists can be required to feed meat to their employees, all with the good intention of keeping the country helpful. This court, and others that have found the same offense, are protecting us from the good intentions. To paraphrase Ronald Reagan the most frightening words in the English Language are “I’m from the government and I’m here to help you.” Please, don’t help. It is better to do nothing than to do something with good intentions that deprives an American of his or her rights.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

No Good Deed Goes Unpunished

Negligence of Adjuster Not Basis for Bad Faith

Insurance adjusters are people knowledgeable in insurance retained by an insurer for the purpose of assisting the insured in proving a loss to the insurer. A person who expresses to the insured the fidelity and good faith of the insurer. The adjuster is not expected nor required to be perfect. In Murphy v. Patriot Ins. Co. — A.3d —-, 2014 WL 3965639 (Vt.), 2014 VT 96 (Supreme Court of Vermont, 8/14/14), the Supreme Court was asked to hold an insurer and its adjuster liable for bad faith tort damages because the adjuster failed to recognize all the losses incurred. The trial court entered judgment in favor of Patriot Insurance Company (Patriot), her homeowner’s insurer.

FACTS

In late July 2007, plaintiff reported to Patriot that a recent storm had caused damage to the flashing on her roof, allowing water to enter the house. Patriot engaged a claims adjuster to investigate the claim, who went to the property four days after the report. Plaintiff and the adjuster walked around the house inspecting the damage. The adjuster observed damage to the garage and ceiling of an enclosed porch and dampness in the finished portion of the basement. He went up on the roof, but observed “no exterior damage due to wind,” and no damage to the flashing on the roof around the rear chimney or holes in the roof.  In his claims report, the adjuster acknowledged that the insured showed him certain damage from the storm, including heavy rain that had purportedly “flooded the driveway and infiltrated the foundation causing water damage to [the] contents … of the basement.”  The real cause of plaintiff’s water infiltration is long-term deterioration around both the rear and front chimney, and the adjuster closely looked only at the rear chimney at the time of his original inspection.  There is no indication that the adjuster intentionally ignored plaintiff’s identification of her problem by looking at only the rear chimney.

After the initial claim payment Patriot, at the request of the insured, sent the adjuster back to deal with additional damages and agreed to pay more, including the $10,000 limit for damages due to mold. Even though the adjuster noted more than one incident that required an additional deductible the insurer refunded the $500 deductible to the insured.

An inspectors later report concluded that the cause of the damage was failed flashing near the chimneys that had allowed water to enter and produce structural damage, rot, and mold. The inspector also concluded that the water penetration was a long term problem that pre-existed the July 2007 storm. The inspector recommended demolition of a portion of the roof to determine the extent of structural damage and the possible replacement of the front chimney. Plaintiff provided a copy of the report to Patriot’s claims adjuster, who had planned—in response—to have an engineer inspect the front chimney, but plaintiff had it removed before the inspection could occur.

Patriot paid plaintiff for a subsequent claim and continued to negotiate with plaintiff over a repair estimate in excess of $56,000 which plaintiff maintained was necessary to remediate the substantial remaining rot and mold in the home. As part of the negotiation Patriot paid plaintiff an additional $15,865.44, for a total—the court found—of $32,653.40 in payments, including cashed and uncashed checks.

While the parties remained in discussion, plaintiff – adding insult to injury – filed a complaint for breach of contract. Patriot moved for partial summary judgment on the scope of coverage for remediation of the mold and rot and replacement of the chimney. In a November 2009 decision, the trial court ruled that the homeowner’s policy clearly and unambiguously limited damages relating to the fungi or rot to $10,000.

Plaintiff subsequently filed an amended complaint adding claims against Patriot for negligence “in inspecting and processing [the] claim and in retaining adjusters to investigate her claim,” and “bad faith” in denying the claims with “no reasonable basis.”  The trial court later issued a written decision granting Patriot’s motion. The court agreed that plaintiff had failed to “present[ ] a basis upon [which] to establish that [Patriot] owed a clear, non-contractual duty to her,” and further found on the facts alleged that Patriot “had a reasonable, if debatable, basis to deny [p]laintiff’s claims under the policy.” Accordingly, the court granted summary judgment for Patriot on both claims.

ANALYSIS

As agent for the insurer, the adjuster’s conduct is imputed to the insurer, which is subject to liability for the adjuster’s mishandling of claims in actions alleging breach of contract or bad faith. Therefore, subjecting adjusters to additional and potentially open-ended tort liability would be contrary to the law of agency, and disproportionate to their ability to control their potential risks.

The Supreme Court of Vermont’s rejection of an independent tort duty on the part of the insurer’s adjuster was predicated in part on a recognition that the relationship between insurer and insured is fundamentally contractual, defined and governed by the coverage provisions in the insurance policy and the covenant of good faith and fair dealing implied in every insurance policy. Recognizing that it had in the past held on numerous occasions that a negligence claim can exist only if there is a duty independent of any contractual obligations the Supreme Court concluded that Vermont case law prohibits a claimant from seeking damages for contractual losses through tort law. Indeed, it recognized the existence of a first-party bad faith action against an insurer in part because no alternative independent remedy was available.

Issuing a statement that should be obvious but that is often not honored, the Supreme Court stated that “the bad faith remedy would generally be superfluous if mere negligence in handling a claim would be sufficient for liability.”

Noting that most other courts have limited actions by insureds against their insurers to breach of contract or the implied covenant of good faith and fair dealing and have disallowed actions for negligence based upon an independent duty of care citing to cases from Alabama Arizona, California, Florida, and Texas. The insurance policy and the implied covenant of good faith and fair dealing defined plaintiff’s expectations for coverage and recovery in the event that benefits were wrongfully denied. Plaintiff did not advance, nor could the Supreme Court find, any compelling policy or other basis for imposition of an independent, extra-contractual negligence duty.

The question remains whether the court was also correct in dismissing plaintiff’s claim for “bad faith,” the general shorthand for breach of the covenant of good faith and fair dealing which the law implies in every insurance policy. To establish bad faith, the plaintiff must show that:

  1. the insurance company had no reasonable basis to deny benefits of the policy, and
  2. the company knew or recklessly disregarded the fact that no reasonable basis existed for denying the claim.

Where a claim is “fairly debatable,” the insurer is not guilty of bad faith even if it is ultimately determined to have been mistaken. The mistaken or erroneous withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability does not expose the insurer to bad faith.

Measured against the state’s bad faith standard the Supreme Court could find no basis to disturb the trial court’s ruling. At best, plaintiff might claim that the adjuster’s failure to find that the true cause of the water infiltration was through the front chimney. Such a claim would fall well short of the knowing or reckless conduct required for a finding of bad faith. Sloppy or negligent claims handling does not rise to the level of bad faith. In a first-party bad faith claim, an imperfect investigation, standing alone, is not sufficient cause for recovery if the insurer in fact has an objectively reasonable basis for denying the claim.

ZALMA OPINION

Patriot bent over backwards to resolve the claim with the insured. It paid the claim it observed as reported by the insured. When it was explained that there was further damage it paid more. Even though the loss was long term and maintenance related predating the loss notice, it continued to pay and even paid the full limit of its mold and fungi cover and continued to negotiate with the insured in an attempt to resolve the claim only to be sued, proving that the insurer’s good faith claims handling was not enough to avoid a suit for bad faith.

The Supreme Court of Vermont, faced with such unfair conduct by the insured, and the attempt to make the alleged negligence of the adjuster into a tort, was wrongful. The tort of bad faith was created to provide a remedy where none existed and was designed to be available only for limited purposes, not every disagreement between an insured and insured. It also made clear that if an adjuster acts in bad faith he or she is not personally responsible but only the insurer. To hold the adjuster liable he or she must commit an independent tort outside the obligation to investigate and adjust the claim.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Contract Must Require Additional Insured

Failure of Risk Management

New York appellate courts, as readers of Zalma on Insurance, are well aware are brilliant at writing opinions ins succinct and straightforward manner. General Motors, LLC v. B.J. Muirhead Co., Inc. — N.Y.S.2d —-, 2014 WL 3882573 (N.Y.A.D. 4 Dept.), 2014 N.Y. Slip Op. 05720 is a perfect example of an appellate decision that is clear and without surplusage.

FACTS

Plaintiff General Motors LLC (GM) and defendant entered into an agreement, as set forth in a purchase order, whereby defendant would provide certain maintenance services at a plant owned and operated by plaintiff. The agreement provided that defendant “shall maintain insurance coverage with carriers acceptable to [GM] and in the amounts set forth in the Special Terms,” which in turn required, that defendant obtain insurance for “liability arising from premises.” The parties agree that defendant obtained insurance protecting it from the specified risks. The contract did not, however, require that the defendant cause its insurer to name GM as an additional insured nor was it made an additional insured by the terms and conditions of the policy.

One of defendant’s employees commenced an action against GM alleging that he was injured by a dangerous condition on the premises. Defendant’s insurer declined to defend plaintiff on the ground that plaintiff was not a named insured or otherwise covered by the policy that the insurer issued to defendant.

GM commenced this breach of contract action, contending that defendant failed to comply with the contractual requirement that it obtain insurance protecting plaintiff. It contended that the agreement is reasonably susceptible of an interpretation requiring that defendant obtain insurance covering GM.

GM’s motion for summary judgment was granted and defendant appealed.

ANALYSIS

It is well settled that a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Furthermore, in determining whether an agreement is ambiguous, the court first must determine whether the agreement on its face is reasonably susceptible of more than one interpretation.  The appellate court noted that a provision in a construction contract cannot be interpreted as requiring the procurement of additional insured coverage unless such a requirement is expressly and specifically stated in the contract. In addition, contract language that merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.

Contrary to plaintiff’s contention, although the insurance rider in this case required defendant to obtain insurance on the premises, there was no requirement that plaintiff be named as an additional insured on the policy and, as a result, the defendant did not obtain additional insured coverage on behalf of General Motors.

In addition, contract language that, as here, merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.

As a result the insurer was correct in refusing to defend General Motors and the defendant did not breach its contract with General Motors because it did not promise to make it an additional insured.

ZALMA OPINION

This case is a clear failure of risk management. If GM wanted to be an additional insured of Muirhead all it needed to do was put that clause in the construction contract. It did not do so, Muirhead fulfilled the terms of the contract, and GM had no reason to bring the suit. When a company with the buying power of a major auto manufacturer fails to properly protect its rights by not requiring, as part of the contract, that it be made an additional insured of Muirhead’s policy.

Rather than file this suit GM, if it expected additional insured coverage, should have fired the person who made the contract for failing to do his or her duty. It should not have attempted to bludgeon a contractor into providing coverage it was not asked to provide.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

The Federal Government Is Not a “State.”

Because The US Government Created an Exchange for the State It is a “State Exchange”

In my summary of Halbig v. Burwell — F.3d —, 2014 WL 3579745 I tried to explain why  the Patient Protection and Affordable Care Act (ACA)  was not insurance. Because the ACA clearly and unambiguously held that only policies issued through state exchanges are eligible for tax credits and assistance paying premium. The Fourth Circuit, in King v. Burwell — F.3d —-, 2014 WL 3582800 (C.A.4 (Va.)), disagreed by finding the statute ambiguous and therefore found itself required to give deference to the IRS.

THE DISPUTE

Virginia residents who did not want to purchase comprehensive health insurance brought action challenging Internal Revenue Service (IRS) final rule, which implemented premium tax credit provision of Patient Protection and Affordable Care Act (ACA) by authorizing tax credits to individuals who purchased health insurance on both state-run and federally-facilitated insurance “Exchanges”. The final rule interprets the ACA as authorizing the IRS to grant tax credits to individuals who purchase health insurance on both state-run insurance “Exchanges” and federally-facilitated “Exchanges” created and operated by the Department of Health and Human Services (“HHS”).

The plaintiffs contended that the IRS’s interpretation is contrary to the language of the statute, which, they assert, authorizes tax credits only for individuals who purchase insurance on state-run Exchanges.

In March of 2010, Congress passed the ACA to “increase the number of Americans covered by health insurance and decrease the cost of health care. To increase the availability of affordable insurance plans, the Act provides for the establishment of “Exchanges,” through which individuals can purchase competitively-priced health care coverage. Critically, the Act provides a federal tax credit to millions of low- and middle-income Americans to offset the cost of insurance policies purchased on the Exchanges. The Exchanges facilitate this process by advancing an individual’s eligible tax credit dollars directly to health insurance providers as a means of reducing the upfront cost of plans to consumers. Of course, perhaps because no one in Congress who voted for the ACA read it, they did not realize that what they were enacting required insurers to issue contract that were not “insurance” because it required the insurers to agree to indemnify people for injuries and illnesses that were neither contingent nor unknown but were, in fact, known and ongoing.

In addition to the tax credits, the Act requires most Americans to obtain “minimum essential” coverage or pay a tax penalty imposed by the IRS. However, the Act includes an unaffordability exemption that excuses low-income individuals for whom the annual cost of health coverage exceeds eight percent of their projected household income.

THE REGULATIONS

The IRS promulgated regulations making the premium tax credits available to qualifying individuals who purchase health insurance on both state-run and federally-facilitated Exchanges.  The IRS Rule provides that the credits shall be available to anyone “enrolled in one or more qualified health plans through an Exchange,” and then adopts by cross-reference an HHS definition of “Exchange” that includes any Exchange, “regardless of whether the Exchange is established and operated by a State … or by HHS.” 26 C.F.R. § 1.36B–2; 45 C.F.R. § 155.20. The IRS issued a response to claims they violated the statute, as follows: “The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”

The plaintiffs’ complaint alleges that the IRS Rule exceeds the agency’s statutory authority, is arbitrary and capricious. The district court granted the defendants’ motion to dismiss, and the plaintiffs timely appealed.

ANALYSIS

When a court interprets a statute it must give effect to the unambiguously expressed intent of Congress. A statute is ambiguous only if the disputed language is “reasonably susceptible of different interpretations.”

In construing a statute’s meaning, the court begins, as always, with the language of the statute. The plaintiffs assert that the plain language of both relevant subsections in § 36B is determinative. They contend that in defining the terms “coverage months” and “premium assistance amount” by reference to Exchanges that are established by the State under § 1311.  Congress limited the availability of tax credits to individuals purchasing insurance on state Exchanges. Under the plaintiffs’ construction, the premium credit amount for individuals purchasing insurance through a federal Exchange would always be zero.

The plaintiffs’ primary rationale for their interpretation is that the language says what it says, and that it clearly mentions state-run Exchanges under § 1311. If Congress meant to include federally-run Exchanges, it would not have specifically chosen the word “state” or referenced § 1311. The federal government is not a “State.”

The Fourth Circuit noted that: “There can be no question that there is a certain sense to the plaintiffs’ position. If Congress did in fact intend to make the tax credits available to consumers on both state and federal Exchanges, it would have been easy to write in broader language, as it did in other places in the statute.” Not willing to rule based on the obvious sense of plaintiffs’ position, the Fourth Circuit continued its analysis and found that, regardless, when conducting statutory analysis, a reviewing court should not confine itself to examining a particular statutory provision in isolation. Rather, it found, the meaning—or ambiguity—of certain words or phrases may only become evident when placed in context.

Section 1311 provides that “[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”)[.]” It goes on to say that “[a]n Exchange shall be a governmental agency or nonprofit entity that is established by a State,” apparently narrowing the definition of “Exchange” to encompass only state-created Exchanges.

Section 1311’s directive that each State establish an Exchange cannot be understood literally in light of § 1321, which provides that a state may “elect” to do so. Section 1321(c) provides that if a state fails to establish an Exchange by January 1, 2014, the Secretary “shall … establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”  The defendants’ position is that the term “such Exchange” refers to a state Exchange that is set up and operated by HHS.  In the absence of state action, the federal government is required to step in and create, by definition, an American Health Benefit Exchange established under § 1311” on behalf of the state.

The Fourth Circuit concluded that the defendants have “the stronger position, although only slightly.” The court could not ignore the common-sense appeal of the plaintiffs’ argument; a literal reading of the statute undoubtedly accords more closely with their position. As such, based solely on the language and context of the most relevant statutory provisions, the court cannot say that Congress’s intent is so clear and unambiguous that it forecloses any other interpretation.

Noting that the Act’s legislative history is not particularly illuminating on the issue of tax credits. Congress, perhaps because they did not study and some did not read the ACA before it was enacted, did not expect the states to turn down federal funds and fail to create and run their own Exchanges.

Having examined the plain language and context of the most relevant statutory sections, the context and structure of related provisions, and the legislative history of the Act, the Fourth Circuit was unable to say definitively that Congress limited the premium tax credits to individuals living in states with state-run Exchanges.

Simply put, the statute is ambiguous and subject to at least two different interpretations. As a result, the court was unable to resolve the case in either party’s favor at the first step of the analysis.

The court could not discern whether Congress intended one way or another to make the tax credits available on HHS-facilitated Exchanges. The relevant statutory sections appear to conflict with one another, yielding different possible interpretations. In light of this uncertainty, it concluded that is dispute is a suitable case in which to apply the principles of deference.

When an agency interprets ambiguities in its organic statute, it is entirely appropriate for that agency to consider policy arguments that are rationally related to the statute’s goals. As long as the agency stays within Congress’ delegation, it is free to make policy choices in interpreting the statute, and such interpretations are entitled to deference.

Congress understood that one way to avoid such price increases was to require near-universal participation in the insurance marketplace via the individual mandate. In combination with the individual mandate, Congress authorized broad incentives—totaling hundreds of billions of dollars—to further increase market participation among low- and middle-income individuals. Insurers in States with federally-run Exchanges would still be required to comply with guaranteed-issue and community-rating rules, but, without premium tax subsidies to encourage broad participation, insurers would be deprived of the broad policy-holder base required to make those reforms viable. The statute provides that the Secretary “shall prescribe such regulations as may be necessary to carry out the provisions of this section”.

This clear delegation of authority to the IRS relieved the court, the Fourth Circuit concluded, of any possible doubt regarding the propriety of relying on one agency’s interpretation of a single piece of a jointly-administered statute.

The Fourth Circuit stated it was satisfied that the IRS Rule is a permissible construction of the statutory language and the trial court judgment was affirmed.

ZALMA OPINION

I felt it necessary to show both sides of this argument. Essentially the DC Circuit found that it was the clear and unambiguous language of the statute – enacted so that we can see what was in it – allowed for tax credits only to those persons who bought insurance through a state created exchange. The Fourth Circuit found that the IRS was to interpret the statute and regardless of the clear and unambiguous language of the statute; regardless of the Fourth Circuit’s conclusion that the policy is ambiguous it found there was no intent shown by Congress to give people who buy insurance from federal exchanges any tax credits to assist them to buy insurance; and found that what the Congress said in the law was not what Congress meant.

Contrary to the statement of the court and the Congress when it enacted the statute and the ACA itself has nothing to do with insurance. Insurance is, by definition, a contract where an insurer agrees to indemnify an insured, for payment of premium, against certain described risks of contingent or unknown causes of loss. The ACA requires contracts that pay for known and existing causes of injury, illness or loss. The ACA is an entitlement taking taxpayers money and giving it to the poor and middle class who claim they cannot afford to buy health insurance.

Hopefully, when the decision of the Fourth Circuit and the decision of the DC Circuit goes to the U.S. Supreme Court that the Supreme Court will opine that the ACA means what it says and concur with the finding of both courts of appeal that the federal government is not a “State.”

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

It’s Hard to Fight Fraud

Zalma’s Insurance Fraud Letter

August 15, 2014

In the 16th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on August 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Fraud Obvious but Summary Judgment Fails.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the ABA.
3.    137 Years In Prison for Insurance Fraud.
4.    Lawyer in Trouble for Fraud
5.    Barry Zalma is On World Risk and Insurance News

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

Zalma’s Insurance Fraud Letter

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

The “Zalma on Insurance” Blog

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

•    Settlement Must Be In Writing – August 14, 2014
•    Suit Against Tenant Not Subrogation – August 13, 2014
•    Ambiguity Saves Claim – August 12, 2014
•    IRS Exceeded Authority When It Tried to Change Statute – August 10, 2014
•    Privilege Weakened – August 8, 2014
•    Barry Zalma on WRIN.tv – August 7, 2014
•    Crime by Lawyer Does Not Pay – August 7, 2014
•    Personal Injury Offenses Must Be Alleged – August 6, 2014
•    No Right to Contribution in Florida – August 5, 2014
•    Can’t Make a Purse from a Sow’s Ear – August 3, 2014
•    Fraud Alerts – August 1, 2014
•    Claim Collapses Because of Lack of Maintenance – July 31, 2014
•    Fortuity and Standing – July 30, 2014
•    Just for Fun – July 29, 2014
•    False Swearing – A Defense to Fraudulent Claims – July 28, 2014
•    How Coinsurance Works – July 25, 2014
•    Courts Should Never Rewrite Insurance Policies – July 24, 2014
•    The Limits on An Insurance Agent’s Duty – July 23, 2014
•    Corporation and Sole Owner are Separate Entities – July 22, 2014
•    Judges Cannot Make Law – July 21, 2014

NEW! From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma.

Posted in Zalma on Insurance | Leave a comment

Settlement Must Be In Writing

Meeting of Minds Required to Enforce Settlement

Litigants understand that the best resolution of a lawsuit is a settlement. Most are entered into with the assistance of mediators and multiple contacts with counsel. Sometimes one party thinks there is a settlement and the other does not agree. In just such a situation, Akers v. Minnesota Life Ins. Co., Slip Copy, 2014 WL 3824189 (S.D.W.Va., 8/4/2014), a U.S. District Court was asked to determine if there was an enforceable settlement.

Background

Walter Akers, now deceased, worked for defendant Alpha Natural Resources, LLC (“Alpha”) before his death on January 25, 2011 at the age of 63. He died after being hospitalized almost continuously following an accident at home that occurred in late May of 2010.

At issue in this case is whether Judy Akers (“Akers” or “Ms. Akers”), Walter’s wife, is entitled to collect certain insurance benefits outlined in Alpha’s Welfare Benefit Plan (the “Plan” or the “Alpha Plan”). The Plan offered both Life and Accidental Death & Dismemberment (“AD & D”) insurance. Mr. Akers was enrolled in both basic (that is, employer-paid) and supplemental (employee-paid) forms of life insurance, and he was also enrolled for Basic AD & D insurance. According to Akers, she was and is entitled to collect $274,000 for each of the available coverages as a result of her husband’s death, but this has not been paid to her by Minnesota Life.

The dispute arises because Mr. Akers died after the the Policy terminated on December 31, 2010. Alpha chose to cancel the Minnesota Life Policy and go with a different insurance carrier. The employees had the right to convert the policy to an individual policy.

Mr. Akers was not employed by Alpha for five years prior to his death, but did die within 31 days of the cancellation of the policy. Ms. Akers and Alpha assert that Ms. Akers was entitled to collect the benefits under the conversion privilege.

Before the suit began, by letter dated August 10, 2011, Alpha agreed to pay Ms. Akers $548,000 for the Basic Life insurance benefit and the Basic AD & D benefit. Alpha did so “upon condition that it shall have the right to recover all sums paid to you [ (Akers) ] from the insurance carrier [ (Minnesota Life) ] under the Plan.” Their agreement also noted that the Plan Sponsor, Alpha, is pursuing payment of these benefits from the group insurance carrier under the Plan.

Akers’ original complaint in state court only named Minnesota Life as a defendant. Akers amended the complaint in this court to name Alpha as a defendant as well, seeking the Supplemental Life benefits from it. Alpha has filed a crossclaim against Minnesota Life to recover the $548,000 it paid Akers.

Akers also asserted that due to Defendant Minnesota Life Insurance Company’s unwarranted refusal to pay policy benefits to the Plaintiff. Plaintiff alleged she suffered damages in an amount equal to the Basic Life Coverage, AD & D Coverage and Employee Paid Basic Life coverage which is believed to be eight hundred and twenty two dollars [sic] ($822,000). Plaintiff has assigned her rights to Defendant Alpha.

The dispute is this: Minnesota Life believes the agreement was to settle and dismiss all of Akers’ claims in the Third Amended Complaint, while Akers believes the agreement was to settle and dismiss only the Supplemental Life claim in the Third Amended Complaint, or, that no agreement was ever reached.

Findings of Fact

In late 2012, several months before the filing of the Third Amended Complaint, Akers and Minnesota Life engaged in settlement discussions. Those discussions, and a succeeding mediation, were not fruitful and the parties did not settle. If the court accepts the plaintiff’s attorneys’ recollection of the call, Tiffey assented to a representation that the settlement was for the Supplemental Life claim only and that Alpha’s rights were not affected. But even if the court adopts Tiffey’s view—that he remained silent—the court nevertheless found that his silence was an expression of assent to Preston’s representation that the settlement was for the Supplemental Life claims only and it was not to affect Alpha. Through the entire pendency of this case, Akers never told Preston that he was permitted to settle any claim other than the Supplemental Life claim.

Conclusions of Law

A settlement agreement is considered to be a contract. Resolution of a motion to enforce a settlement agreement draws on standard contract principles, although it may be accomplished within the context of the underlying litigation without the need for a new complaint.

Authority to Settle

Minnesota Life argues that whether or not Preston had actual authority to settle all three coverages under the Policy, it was apparent when the settlement was allegedly reached on April 11 that Preston had that authority, and that the settlement agreement is enforceable because Minnesota Life is entitled to rely on Preston’s apparent authority. As a preliminary note, the court found that Preston did not have actual authority to settle the Basic Life and Basic AD & D claims.

It is generally accepted that when a client retains an attorney to represent him in litigation, absent an express agreement to the contrary, the attorney has implied authority to conduct the litigation and to negotiate its resolution. But the substantive decisions of whether to bring suit, to dismiss suit, or to settle are not by implication ones that the attorney is authorized to make. Apparent authority results from a principal’s manifestation of an agent’s authority to a third party, regardless of the actual understanding between the principal and agent Indeed, apparent authority is “entirely distinct” from—and sometimes conflicts with—both express and implied authority.

The authority to negotiate is far different from the authority to agree to a specific settlement. Our review of the record uncovered no manifestation by the plaintiff to the defendant or its attorneys from which the defendant could reasonably conclude that the plaintiff had authorized his attorney to consummate a settlement.

In this case, Minnesota Life has put forth no evidence that Akers herself—the principal—ever indicated to Tiffey-the third party—that Preston had the authority to settle the Basic Life and AD & D claims, nor does Tiffey identify any representation (or lack thereof) that he relied upon to form a belief that Preston had the authority to settle either of those claims. Indeed, Tiffey never indicated that he received any communication from Akers at all.

Mutual Assent

Minnesota Life argues that a meeting of the minds occurred on April 11, 2014, when Preston replied to Tiffey’s e-mail containing some terms with the statement

Akers and Minnesota Life did not form an agreement. All of the terms of the agreement were plainly not agreed upon. This was established by the parties’ near-constant negotiations over the wording of the release and their addition of extra terms after April 11.

The court concluded, therefore, that an agreement was not formed. Although Preston responded to Tiffey’s April 11 e-mail by stating that he agreed with Tiffey’s “summary of the settlement,” both knew that still other terms were meant to be included in a final writing and that Preston did not intend to be bound by the “summary” alone.

Accordingly, the preliminary agreement of April 11 is not binding as a matter of federal law.

The settlement needed a formal writing for complete expression. Tiffey indicated as much in the e-mail when he stated that a release would be forthcoming. The amount involved is large, at $274,000. The contract is unusual, inasmuch as Akers, as well as Alpha, believed that a writing that purported to settle claims that Akers did not own may adversely affect Alpha, the requirements of which may adversely affect Akers as well. The proposed settlements were very detailed. Numerous written drafts were proposed after the April 11, 2014 e-mail exchange. The court concluded that the parties intended to be bound by a final written agreement. However, they were eventually unable to agree upon the terms of the settlement agreement. Thus, there is no enforceable settlement under West Virginia law.

ZALMA OPINION

This case is clearly a failure of basic lawyering. If a suit or claim is to be settled there must be a meeting of minds of the parties and that meeting of the minds must be reduced to writing agreed to all parties. The parties were unable to create such a document. To try to enforce an oral settlement contract based on conflicting correspondence and emails is just not enough. The court did a careful and detailed analysis of the issue that should never have been brought.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Suit Against Tenant Not Subrogation

Owner May Sue Negligent Tenant for Uninsured Loss

Almost every commercial lease of multi-unit structures contain waivers of subrogation or an agreement that the building owner’s fire insurance is purchased for the benefit of both the owner and the tenants. Since it is improper for an insurer to sue its own insured courts across the country have decisions that prevent subrogation or indemnity if subrogation is waived or if the insurance is purchased for the mutual benefit of the owner and tenant.

In SFI Ltd. Partnership 8 v. Carroll — N.W.2d —-, 288 Neb. 698, 2014 WL 3766366 (Neb., 8/1/2014) the Nebraska Supreme Court was asked to deal with a claim that the antisubrogation rule adopted in Nebraska applied when the owner’s insurance was not involved in payment for fire damage allegedly caused by the tenant because of a large deductible.

In previous cases, the Nebraska Supreme Court has applied an antisubrogation rule to prohibit a landlord’s insurer from seeking reimbursement from the tenant of fire losses paid by insurance.

BACKGROUND

SFI Ltd. Partnership 8(SFI) owns an apartment complex containing approximately 200 apartments. Through its agent, SFI leased an apartment to Michelle Carroll. SFI’s agent and Carroll signed a residential lease agreement including various addenda. The lease employed a standard form used for all units in the complex. Tenants were not allowed to change any of the provisions of the lease or addenda.

The lease included provisions requiring Carroll to pay for repairs caused by her use of the unit and to maintain renter’s insurance including “a personal liability coverage to a minimum of $100,000.00.”

A fire occurred in the apartment rented to Carroll. Both the apartment and the surrounding building were damaged. SFI had $10 million of total insurance coverage on the apartment complex. The policy provided for a deductible of $250,000 per occurrence unless a specific deductible applied.

The parties stipulated that SFI sustained damages in excess of $100,000 resulting from the fire, which damages were not covered by its insurance policy. But neither the total amount of damages nor the amount of any insurance recovery by SFI was included in the evidence.

Carroll had renter’s insurance in place at that time, and she submitted a claim to her insurer. Carroll’s insurer paid her $1,500, representing only her damages under “Loss of Use Coverage.”

LAWSUIT

SFI sued Carroll and attached a copy of the lease to the complaint. SFI alleged that Carroll breached several provisions of the lease. SFI further alleged that Carroll was negligent in failing to properly dispose of cigarettes being smoked in the apartment and that this negligence proximately caused the damage to the apartment and surrounding building. Carroll filed an answer. She alleged that the fire was caused by someone else; that SFI’s claims were barred because she and SFI were considered coinsureds under SFI’s fire insurance policy, that several paragraphs of the lease were unconscionable and void as against public policy; and that SFI failed to mitigate any damages.

Carroll moved for summary judgment. SFI then moved for partial summary judgment on Carroll’s claim that several paragraphs of the lease were unconscionable and void as against public policy. The parties stipulated that SFI brought the claim in its own behalf. They also stipulated that it was not a subrogation claim.

DISTRICT COURT’S DECISION

Following a hearing, the district court granted Carroll’s motion for summary judgment, denied SFI’s motion for partial summary judgment, and dismissed the complaint. The court stated that the crux of the case revolved around paragraph 17 of the lease, which stated: “Resident’s personal property is not insured or covered by Landlord for loss of any kind, including without limitation, loss due to theft, fire, smoke, wind, rain, lightening [sic], seismic occurrence or water damage.”

SFI filed a timely appeal.

ANALYSIS

Carroll admits that “this is not a true subrogation claim, [but] is a claim by a landlord against a tenant for the uninsured portion that public policy still bars as a gross economic waste.”

Under the antisubrogation rule, no right of subrogation can arise in favor of an insurer against its own insured or coinsured for a risk covered by the policy, even if the insured is a negligent wrongdoer. The antisubrogation rule has been extended to “implied coinsureds.” To allow subrogation under such circumstances would permit an insurer, in effect, to avoid the very coverage which its insured purchased. In addition, the insurer should not be in a situation where there exists a potential conflict of interest which could affect the insurer’s incentive to provide its insured with the indemnity promised.

The antisubrogation rule in Nebraska comports with the reasonable expectations of tenants and accounts for modern commercial realities by preventing the economic waste that will undoubtedly occur if each tenant in a multiunit dwelling or multiunit rental complex is required to insure the entire building against his or her own negligence.

Carroll’s allegations regarding the conscionability of the lease provisions placed SFI on fair notice that the lease provisions imposing liability on Carroll for damages resulting from fire were being challenged.

The interpretation of a lease, the unconscionability of a contract provision, and the determination of whether a contract violates public policy are questions of law.

SFI argues that the antisubrogation rule is inapplicable to the instant case. SFI brought this action against Carroll to recover damages which were not covered by its insurance policy. This is not a subrogation action brought by SFI’s insurer to recover sums the insurer paid to SFI. Because this is not a subrogation action, the antisubrogation rule does not apply. Accordingly, the district court erred when it applied the rule. Carroll concedes that this is not a true subrogation claim. She argues, however, that the principles of the antisubrogation rule should be extended to the landlord’s uninsured loss.

The Nebraska Supreme Court cautioned that courts should be cautious in holding contracts void on the ground that the contract is contrary to public policy; to be void as against public policy, the contract should be quite clearly repugnant to the public conscience. The Supreme Court could find no such repugnancy. Further, the term “unconscionable” means manifestly unfair or inequitable. Nothing in paragraph 17 of the lease is manifestly unfair or inequitable.

The Uniform Residential Landlord and Tenant Act contemplates that a court may determine a lease provision to be unconscionable, but expressly upholds tenants’ liability for negligent fire damage. Where a court finds that a rental agreement or any provision thereof was unconscionable when made, the court may refuse to enforce the agreement, enforce the remainder of the agreement without the unconscionable provision, or limit the application of any unconscionable provision to avoid an unconscionable result. But the act treats fire damage caused by a tenant’s negligence differently. The statute provides that: “Notwithstanding the provisions of this section, the tenant is responsible for damage caused by his [or her] negligence.”

Because it concluded that the lease’s paragraph 17 is not void as against public policy or unconscionable, the district court erred in entering summary judgment for Carroll upon that basis. The summary judgment must be reversed, and the cause remanded for further proceedings consistent with this opinion.

ZALMA OPINION

The antisubrogation rule is still alive and well in Nebraska, as it is in most states. No insurer should be allowed to recover in subrogation for amounts it paid to one insured from another insured. What this case stands for is that you can’t apply the antisubrogation rule if there is no insurance payment and no right of an insurer to recover part of the tort damages sought by the owner of the multiunit building.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Ambiguity Saves Claim

 When Insurer and Insured Err Insured Wins

Malpractice policies contain language requiring notice of a claim within the policy period and that the tort must happen within the effective dates of the policy. States, like Maryland, by statute impose a prejudice requirement on late reports of a loss.

In Catlin Specialty Ins. Co. v. Aron, Not Reported in F.Supp.2d, 2014 WL 3889075 (D.Md.) Only the Westlaw citation is currently available the insurer brought a declaratory judgment action to U.S. District Court in the District of Maryland. The action dealt with a medical malpractice insurance coverage dispute.

Defendant Dr. Barry I. Aron (“Dr.Aron”) is an obstetrician/gynecologist who had purchased an insurance policy from Plaintiff Catlin Specialty Insurance Co. (“Catlin”). After becoming aware of a claim by Defendant Sherry Marie Pfenninger (“Ms.Pfenninger”) against Dr. Aron arising out of a 2010 surgery, Catlin filed this declaratory judgment action to determine the scope of its duty to defend and indemnify Dr. Aron and Barry I. Aron, M.D., P.C. (Dr. Aron’s professional corporation). Both parties filed motions for summary judgment.

BACKGROUND

The Insurance Policies

Dr. Aron purchased one-year insurance policies from Catlin Specialty Insurance Co. over the course of several years. The 2012 Policy ran from January 1, 2012 to January 1, 2013, while the 2013 Policy ran from January 1, 2013 to January 1, 2014. Both policies named Dr. Aron as the “named insured” and included Barry I. Aron, M.D., P.C.-Dr. Aron’s professional corporation-as an “additional named insured.”

The 2012 Policy required that a claim must “first made in writing during the policy period and reported to the Company in writing during the policy period or any applicable extended reporting period.”

Additionally, one of the conditions of the Policy was that the insured—i.e., Dr. Aron—had to provide Catlin Specialty Insurance with written notice of a claim by the expiration of the applicable policy.

The 2012 Policy also explains how the timing of the claim and the reporting of the claim are to be calculated. A claim is considered reported “on the date when [Catlin Specialty Insurance Co.] first receives written notice from a Named Insured, Additional Insured or Additional Named Insured that a claim has been made against an Insured as a result of an alleged loss event to which this Policy applies.”

Finally, the Policy identifies several coverage exclusions. Of particular import in this case is Exclusion 11(ii), which expressly excludes coverage for “claims, incidents or loss events which were first brought to the attention of the Insured or reported to another insurer prior to the inception date.”

Surgery on Ms. Pfenninger

Defendant Dr. Barry Aron (“Dr.Aron”) is an obstetrician/gynecologist practicing in Charles County, Maryland. This suit arises out of a surgery that Dr. Aron performed on Defendant Sherry Marie Pfenninger (“Ms.Pfenninger”) on December 30, 2010. The surgery—known as a pelvic laparotomy—required Dr. Aron to make an incision in the abdominal wall. Dr. Aron removed a cystic mass in the right pelvic area and tied off a number of vessels. Subsequently, a pathological examination revealed that Dr. Aron had removed a small segment of Ms. Pfenninger’s right ureter, which is a tubular structure that allows urine to drain from the kidney to the bladder. The pathologist who conducted the examination informed Dr. Aron of the issue on January 3, 2011.  Dr. Aron contacted Ms. Pfenninger—who had already been discharged—and informed her that she needed to return to the hospital so that a catheter could be inserted directly into her kidney and allow urine to drain into an external bag until her ureter could be surgically repaired.

Events Following the Surgery

As noted above, Dr. Aron renewed his policy with Catlin Specialty Insurance for the 2012 calendar year. The renewal application contained the following question: “Has any claim or suit for alleged malpractice ever been brought against you, or are you aware of circumstances that might reasonably lead to such a claim or suit?”  Dr. Aron responded to that question in the affirmative in his November 11, 2011, renewal application.

Dr. Aron did not include a “claims supplement” with respect to Ms. Pfenninger’s claim as the application directed. Regardless, Catlin Specialty Insurance renewed Dr. Aron’s policy, without demanding the claims supplement.

On November 26, 2012, Ms. Pfenninger’s counsel mailed Dr. Aron a demand letter which stated that Ms. Pfenninger intended to file a medical negligence claim against Dr. Aron and made a settlement demand of $725,000. Dr. Aron contacted Catlin Specialty Insurance Co. on January 7, 2013 and notified it of Ms. Pfenninger’s claim. On February 1, 2013, Catlin Specialty Insurance denied Dr. Aron’s claim. The denial notice stated that “[b]ecause you waited to report this claim past the expiration date of the applicable policy [i.e., December 31, 2012], Catlin has no obligation to defend or indemnify you in connection with this claim.”

ANALYSIS

The Aron Defendants contend that § 19–110 of the Insurance Article of the Maryland Code applies to the Policy in this case and, therefore, requires Plaintiff Catlin Specialty Insurance to demonstrate that Dr. Aron’s late reporting of Ms. Pfenninger’s claim somehow prejudiced Catlin. Section 19–110 provides: “An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.” (emphasis added)

The claim for which Dr. Aron seeks coverage was first made while the 2012 Policy was in effect. Thus, in this case, the operative fact is not the timing of the claim itself but the timing of the reporting of that claim. Essentially, Catlin argues that, while the first factor of coverage is present, the second is not, and therefore, there is no coverage. Notably, however, this second element for coverage is merely a notice requirement. Failure to provide timely notice constitutes a breach of the Policy, and a policy breach triggers the applicability of § 19–110. As such, Catlin Specialty Insurance’s denial of coverage was improper absent a showing of prejudice.

EFFECT OF EXCLUSION 11(ii)

The next issue is whether Exclusion 11(ii) of the 2012 Policy relieves Catlin Specialty Insurance of its duty to defend and indemnify Dr. Aron. Exclusion 11(ii) of the 2012 Policy states that “[t]his insurance does not provide coverage for or apply to … any liability of an Insured for all … claims, incidents or loss events which were first brought to the attention of the Insured or reported to another insurer prior to the inception date.” It is undisputed that the inception date of the 2012 Policy was January 1, 2012.

What is disputed, however, is whether there was an “incident” that would trigger the applicability of Exclusion 11(ii). The term “incident” is not expressly defined by the Policy. Maryland applies the general rule that if the policy language is ambiguous, then the language will be construed liberally in favor of the insured and against the insurer as drafter of the instrument.

In determining the meaning of the term “incident,” the Court must consider the contract as a whole. The Court construed the term in a claims-related fashion. This reading is buttressed by the fact that the Policy expressly defines “injury” in a way that significantly overlaps the suggested meaning of the undefined term “incident.”

Under this reading of the term, there was no “incident” triggering the coverage exclusion. Specifically, Dr. Aron’s receipt of the pathology report indicating that he had removed part of Ms. Pfenninger’s ureter was merely an “injury” under the terms of the Policy. It was not the type of “incident” indicating an impending claim against Dr. Aron that was necessary to trigger Exclusion 11(ii). Accordingly, Catlin has failed to show that coverage for Ms. Pfenninger’s claim is excluded, and therefore Catlin Motion for Summary Judgment will be denied and Dr. Aron’s Motion for Partial Summary Judgment will be granted.

ZALMA OPINION

Insurance policies, to be enforced, need clear and unambiguous language. Although Catlin believed its policy wording was not ambiguous it failed to convince the judge who saw a severely injured person and a doctor who hurt his patient and, if there was no insurance, might not be able to pay damages. Clearly Dr. Aron knew that he had injured Ms. Pfenninger before he signed the renewal application. That is why he answered the question in the affirmative. Catlin’s underwriter should have seen the affirmative answer and demanded the claim description form. That failure put the claim into the renewal policy that might not have been issued had Catlin known of the prior claim.

Of course Dr. Aron could have saved this litigation by reporting the loss and claim before the policy renewed.

Both the insurer and the insured made serious errors. When both err the court will usually rule in favor of the insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

IRS Exceeded Authority When It Tried to Change Statute

Congress, Not Courts, Must Cure Statute Problems

The DC Circuit Court of Appeals was asked, in  Halbig v. Burwell — F.3d —, 2014 WL 3579745 (C.A.D.C., July 22, 2014), to interpret a provision of the Patient Protection and Affordable Care Act (ACA) aka Obamacare. Suit was brought challenging the Internal Revenue Service (IRS) rule authorizing tax credits for insurance purchased on both state-run and federally-facilitated exchanges.

The United States District Court for the District of Columbia, Paul L. Friedman, J., — F.Supp.2d —, 2014 WL 129023, entered summary judgment in government’s favor, and the plaintiffs appealed.

Section 36B of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act (ACA or the Act), makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces — known as “American Health Benefit Exchanges,” or “Exchanges” for short — that are “established by the State under section 1311” of the Act. 26 U.S.C. § 36B(c)(2)(A)(i). On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under section 1321 of the Act.

Appellants are a group of individuals and employers residing in states that did not establish Exchanges. For reasons we explain more fully below, the IRS’s interpretation of section 36B makes them subject to certain penalties under the ACA that they would rather not face.

Congress enacted the ACA in 2010 “to increase the number of Americans covered by health insurance and decrease the cost of health care.” The ACA pursues these goals through a complex network of interconnected policies focused primarily on helping individuals who do not receive coverage through an employer or government program to purchase affordable insurance directly. Central to this effort are the Exchanges. Exchanges are governmental agencies or nonprofit entities that serve as both gatekeepers and gateways to health insurance coverage. Among their many functions as gatekeepers, Exchanges determine which health plans satisfy federal and state standards, and they operate websites that allow individuals and employers to enroll in those that do.

However, because Congress cannot require states to implement federal laws, [Printz v. United States, 521 U.S. 898, 904–05, 935, 117 S.Ct. 2365, 138 L.Ed.2d 914 (1997)] if a state refuses or is unable to set up an Exchange, section 1321 provides that the federal government, through the Secretary of Health and Human Services (HHS), “shall … establish and operate such Exchange within the State.” [42 U.S.C. § 18041(c)(1).] Only fourteen states and the District of Columbia have established Exchanges. The federal government has established Exchanges in the remaining thirty-six states, in some cases with state assistance but in most cases not. The “premium assistance amount” is based on the cost of a “qualified health plan … enrolled in through an Exchange established by the State under [section] 1311 of the [ACA].”  Likewise, a “coverage month” is a month for which, “as of the first day of such month the taxpayer … is covered by a qualified health plan … that was enrolled in through an Exchange established by the State under section 1311 of the [ACA].” 26 U.S.C. § 36B(c)(2)(A)(i).

The language of the statute, in other words, establishes that the tax credit is available only to subsidize the purchase of insurance on an “Exchange established by the State under section 1311 of the [ACA].”

In a regulation promulgated on May 23, 2012, the IRS interpreted section 36B to allow credits for insurance purchased on either a state- or federally-established Exchange. Specifically, the regulation provided that a taxpayer may receive a tax credit if he “is enrolled in one or more qualified health plans through an Exchange,” [26 C.F.R. § 1.36B–2(a)(l)], which the IRS defined as “an Exchange serving the individual market for qualified individuals …, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS. ” [45 C.F.R. § 155.20]

The IRS, when it created the rule, acknowledged that commentators disagreed on whether the language in section 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges. Regardless, the IRS asserted, without elaboration, that the statutory language of section 36B and other provisions of the ACA, supported its view. [Health Insurance Premium Tax Credit, 77 Fed.Reg. 30,377, 30,378 (May 23, 2012)].

This broader interpretation has major ramifications. By making credits more widely available, the IRS Rule gives the individual and employer mandates — key provisions of the ACA — broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed eight percent of their projected household income. By some estimates, credits will determine on which side of the eight-percent threshold millions of individuals fall. Thus, by making tax credits available in the 36 states with federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.

The IRS Rule affects the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers — defined as those with at least 50 employees — to provide their full-time employees with health insurance. Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees enrolls in a qualified health plan with respect to which an applicable tax credit is allowed or paid with respect to the employee. Even more than with the individual mandate, the employer mandate’s penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage. The IRS Rule has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.

THE ISSUE

The court was asked to determine whether the ACA permits the IRS to provide tax credits for insurance purchased through federal Exchanges.

A federal Exchange is not an “Exchange established by the State,” and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges. The DC Circuit Court of Appeal concluded that the statute plainly distinguishes Exchanges established by states from those established by the federal government.

A state is not required to establish an Exchange; the ACA merely encourages it to do so. The problem confronting the IRS Rule is that subsidies also turn on a third attribute of Exchanges: who established them.

ANALYSIS

The government argues that the DC Circuit should not adopt the plain meaning of section 36B, however, because doing so would render several other provisions of the ACA absurd. Our obligation to avoid adopting statutory constructions with absurd results is well-established.

The Constitution assigns the legislative power to Congress, and Congress alone and legislating often entails compromises that courts must respect. A provision thus “may seem odd” without being “absurd,” and in such instances it is up to Congress rather than the courts to fix it, even if it may have been an unintentional drafting gap.  A court’s role is not to “correct” the text so that it better serves the statute’s purposes. A court should not, and the DC Circuit refused to, ratify an interpretation that abrogates the enacted statutory text absent an extraordinarily convincing justification.

The DC Circuit concluded that the government’s arguments was tilting at windmills like old Don Quixote. The government assumed that when section 1312(a) states that “[a] qualified individual may enroll in any qualified health plan available to such individual and for which such individual is eligible,” [42 U.S.C. § 18032(a)(1)], means that only a qualified individual may enroll in such a plan. The obvious flaw in this interpretation is that the word “only” does not appear in the provision. The court repeatedly emphasized that it is not its role to engage in a statutory rewrite by inserting the word “only” here and there.

Giving the phrase “established by the State” its plain meaning creates no difficulty, let alone absurdity. Federal Exchanges might not have qualified individuals, but they would still have customers — namely, individuals who are not “qualified individuals.”

The government urged the DC Circuit to, in effect, to strike from section 36B the phrase “established by the State,” on the ground that giving force to its plain meaning renders other provisions of the Act absurd. But the court found that the government has failed to make the extraordinary showing required for such judicial rewriting of an act of Congress. Nothing in harmony with the rest of the ACA requires interpreting “established by the State” to mean anything other than what it plainly says.

As the Supreme Court explained an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate. And neither may the DC Circuit. The role of the court is to apply the statute as it is written — even if we think some other approach might accord with good policy.

The DC Circuit reported that it reached its conclusion with reluctance. At least until states that wish to can set up Exchanges, it understood that its ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides the court is higher still.

Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that the court’s duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges.

Thus, although the decision has major consequences, the court’s role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA. Having concluded it is not, the decision of the district court was reversed.

ZALMA OPINION

When Congress and governmental agencies get involved in matters dealing with insurance chaos often reigns. That is because they do not understand insurance or how it is to work. Although the intent of Congress was to increase the number of Americans covered by health insurance and decrease the cost of health care, it did so by means that had nothing to do with insurance. Instead of creating a statute that would allow insurers to compete for the business of the public to make insurance more affordable and tailored to the needs of the insureds the Congress set up a system to require specific types of coverage and make it affordable by giving each person who purchased through a state exchange a tax credit not reducing the cost of the insurance but, rather, the amount paid.

Because the statute was lengthy and not studied before it was enacted it included strange and odd provisions that did not fulfill the silent intent of its authors. The DC Circuit recognized that problem and resolved it by reading the statute as it was written and refused the request of the government to rewrite it. Another federal court of appeal ruled exactly opposite of the ruling made by the DC Circuit.  It will be up to the U.S. Supreme Court, that has already ruled, neither an agency, nor a court, may rewrite clear statutory terms to suit its own sense of how the statute should operate.

Insurance, unlike the mandate of the ACA, is a contract whereby the insurer promises to indemnify the insured against certain described risks of contingent or unknown losses. The ACA in attempting to make what it described as “health insurance” created a statute that was sufficiently odd that the IRS, the agency ordered to make it function, tried to rewrite the statute without involving Congress. In so doing the DC Circuit found it exceeded its authority.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Privilege Weakened

Insurance Lawyers’ Opinions Not Privileged Before Claim Denied

When an attorney states his or her opinion to a client it is privileged. When an attorney does work that includes his or her thought processes, it is protected from disclosure to others. In New York state, now, that privilege does not necessarily apply.

I have represented insurers in claims situations for more than 40 years. In all that time I acted as a lawyer for the insurer not a claims person. I provided advice and counsel to claims people so they could make a decision. That advice and counsel was, and should always be, privileged and protected from the probing eyes of those adverse to a lawyer’s client. In New York, that may no longer be true, and lawyers must carefully write everything to their insurer clients in a manner that they expect it to be read to a jury.

The Supreme Court, Appellate Division, First Department, New York, in one of its typical brief opinions, have shaken the meaning of the attorney client privilege for insurers who retain lawyers to advice them about claims and coverage issues before the insurer is sued.

In National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc. — N.Y.S.2d —, 2014 WL 3744446 (N.Y.A.D. 1 Dept., July 31, 2014), the Appellate Division dealt with the order of the Supreme Court, New York County (Barbara Jaffe, J.), entered August 19, 2013, which, inter alia, upon cross motions to confirm and to reject the special referee’s finding that any documents that pre-date the rejection by National Union Fire Insurance Company of Pittsburgh, Pennsylvania, ACE INA Insurance, Arch Insurance Company (the market insurers), and Factory Mutual Insurance Company (with the market insurers, the insurance companies) of TransCanada Energy USA, Inc., TC Ravenswood Services Corp., and TC Ravenswood, LLC’s (TransCanada) claims are not protected from disclosure, and a motion for a protective order, ordered the insurance companies to produce to TransCanada all the documents except certain specified ones, unanimously affirmed, with costs.

The motion court properly found that the majority of the documents sought to be withheld are not protected by the attorney-client privilege or the work product doctrine or as materials prepared in anticipation of litigation. Following an in camera review, the court determined that certain documents were privileged because they contained legal advice.

As for the remaining documents, the court found that the insurance companies had not met their burden of demonstrating privilege. The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. Further, the record shows that counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company.

Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so “‘merely because [the] investigation was conducted by an attorney’” (see Brooklyn Union Gas Co. v. American Home Assur. Co., 23 AD3d 190, 191 [1st Dept 2005] ).

We need not reach the question of whether the common interest exception to the attorney client privilege applies, because the documents at issue are not privileged.

The insurers’ argument that they actually denied TransCanada’s claims before the date identified in the motion court’s order, and that therefore any documents prepared after that date are protected attorney work product, is a factual argument improperly raised for the first time on appeal.

ZALMA  OPINION

I do not have access to the documents that the court reviewed in camera. I can only hope they are truly not privileged. The court found – and based its ruling upon – its conclusion that “counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company.”

In my opinion and experience insurance company lawyers retained to provide advice and counsel upon a claims situation are not “primarily engaged in claims handling” but are engaged in providing advice and counsel – the stock in trade of a lawyer – to claims handlers to allow the claims handlers to make a decision. If, in this case, the lawyers acted as claims handlers and not lawyers advising claims handlers then this decision has a very limited effect.

Regardless, from the first day I worked as a coverage lawyer for insurers, every opinion I wrote were written in a manner that I would be proud if they were read to a jury.

Contrary to what was published in the insurance trade journals, this case is not a major limitation on the attorney client privilege and the attorney work product protection, it is a lesson to insurance coverage counsel to limit their work to providing the advice and counsel that people and insurers retain lawyers to provide.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Barry Zalma on WRIN.tv

Personal Assistance Programs are the biggest health insurance fraud problem in the U.S. Medicaid system.

Barry Zalma returns to World Risk and Insurance News with another series of “Who Got Caught? programs looking at healthcare fraud. Here, the noted fraud and claims expert reviews a scam associated with a ‘personal assistance program’, the biggest fraud problem in the United States Medicaid system.

According to Mr. Zalma, these programs are vulnerable to fraud because they allow the Medicaid recipient to control the selection and payment of personal care attendants.  In a typical fraud scenario, explains Mr. Zalma, “the scam payments made by the state … are split between the Medicaid recipient and the ghost employee.”    The government is prosecuting these frauds in the hopes of deterring others   from defrauding the Medicaid system.

If you’d like more information on fraudulent insurance claims, consider Barry Zalma’s “Insurance Fraud Deskbook,” available through the American Bar Association, or at www.Zalma.com. And for more of Barry Zalma’s commentary on insurance fraud, visit our On Demand Library. the WRIN.tvOn Demand Library.

Posted in Zalma on Insurance | Leave a comment

Crime by Lawyer Does Not Pay

Lawyer Who Steals From Client Must Be Disbarred

When a lawyer does a criminal act he or she puts the license to practice law in jeopardy. The public believes that such a criminal act is sufficient to jail the lawyer and cause the lawyer to lose his or her license. The fact is that the Supreme Courts of the various states are loathe to totally disbar a lawyer, even after a felony conviction. However, when, as in In re Disciplinary Action against Brost — N.W.2d —-, 2014 WL 3610854 (Minn., July 23, 2014) the lawyer’s misconduct is egregious the court will overcome its reluctance and take the lawyer out of the stream of commerce and pull the license.

FACTS

On December 16, 2013, the Director of the Office of Lawyers Professional Responsibility (OLPR) filed a petition for disciplinary action against Linda A. Brost. The petition alleged that Brost engaged in professional misconduct when she committed theft by swindle and identity theft, stealing approximately $43,000 from a client. The petition also alleged that Brost failed to cooperate in the Director’s disciplinary investigation. Brost did not respond to the petition. By order filed on February 5, 2014, the Supreme Court of Minnesota deemed all allegations in the petition for disciplinary action admitted.

Respondent, Linda A. Brost, was admitted to practice law in Minnesota on October 12, 1987. Brost was indefinitely suspended on March 31, 2009, for using the expired notary stamp of a deceased notary to fraudulently notarize her own signature on a certificate of trust prepared for a client, submitting the fraudulent document to a bank, and failing to cooperate with the Director’s investigation, in violation of law. [In re Brost, 763 N.W.2d 637, 638 (Minn.2009). Brost remains suspended. The Director now seeks disbarment for Brost’s theft of $43,000, Brost’s identity theft, and Brost’s non-cooperation with the Director’s investigation.

ANALYSIS

Theft by Swindle and Identity Theft

Brost’s theft arose from her representation of A.F., which dates back to 1993 when Brost drafted a will for A.F. Two friends of A.F. were each to receive gifts of $10,000 upon A.F.’s death and A.F.’s remaining assets were to be evenly distributed to the Church of St. Francis De Sales of St. Paul and Shriners Hospital, Twin Cities Unit. A.F. died in September 2005.

When A.F. passed away, he owned two annuity policies he had purchased from Jackson National Life Insurance in 1997. His two friends were beneficiaries of one policy and his estate was the beneficiary of the other policy. Brost knowingly and intentionally devised a scheme to avoid reporting A.F.’s two annuities to A.F.’s estate during probate. Between March 31, 2011, and March 31, 2012, Brost cashed or collected monthly annuity payments from A.F.’s annuities. In early 2012, Brost, pretending to be A.F., surrendered one of the two annuities for a cash payment of $28,641.60. Brost stole a total of approximately $43,000.

Based on this conduct, Brost was charged with six felonies, including theft by swindle, identity theft, aggravated forgery, and insurance fraud. Brost pleaded guilty and was later convicted of one count of theft and one count of identity theft both felonies.

Non–Cooperation with the Director’s Investigation

After Brost pleaded guilty to the theft of A.F.’s annuity payments the Director continued his efforts only to find that Brost failed to respond.  Brost was personally served with the petition for disciplinary action on December 6, 2013. Brost failed to respond to the petition.

The purpose of discipline for professional misconduct is not to punish the attorney but rather to protect the public, to protect the judicial system, and to deter future misconduct by the disciplined attorney as well as by other attorneys. The four factors that guide this court’s imposition of discipline are:

(1)     the nature of the misconduct;
(2)     the cumulative weight of the disciplinary violations;
(3)     the harm to the public; and
(4)     the harm to the legal profession.

Aggravating and mitigating circumstances are also considered.

Nature of the Misconduct

An attorney’s felony conviction for theft, fraud, or embezzlement has long been treated as serious professional misconduct that warrants disbarment, particularly where the criminal conduct occurs within the practice of law. However, much to the surprise of the public, felony convictions do not result in automatic disbarment.

Brost’s theft of $43,000 through the collection of A.F.’s annuity payments was serious misconduct, and it occurred within the practice of law.  Her misconduct directly stemmed from her relationship with her former client, A.F. The presumptive discipline for misappropriation of client funds is disbarment, unless there are substantial mitigating circumstances. Minnesota has disbarred attorneys for misappropriating far less than $40,000 of client funds. Brost has not offered any mitigating factors.

Brost also failed to cooperate with the disciplinary investigation. The noncooperation with the disciplinary process, by itself, may warrant indefinite suspension and, when it exists in connection with other misconduct, noncooperation increases the severity of the disciplinary sanction.

Cumulative Weight of the Violations

The severity and cumulative weight of multiple disciplinary rule violations may compel severe discipline even when a single act standing alone would not have warranted such discipline. Misconduct that includes multiple rule violations and persists over time is more serious than single isolated incidents or brief lapses in judgment. In this case, Brost engaged in multiple acts of misconduct that individually warrant discipline and add cumulative weight to the misconduct. Brost’s theft shows serious misconduct that was repeated over time as she collected A.F.’s annuity payments over the course of an entire year.

Harm to the Public and the Legal Profession

The court must also consider the harm the attorney’s misconduct caused to the public and to the legal profession when determining the proper discipline to impose. This includes consideration of the number of clients harmed and the extent of the clients’ injuries. Although Brost stole from only one client, she defrauded the estate of her client and her client’s rightful heirs out of $43,000. Brost’s felony convictions for stealing from her client caused harm to the public’s regard for the legal profession and undermined the public’s confidence in the ability of attorneys to abide by the rule of law. Furthermore, the misuse of funds is a breach of trust that reflects poorly on the entire legal profession and erodes the public’s confidence in lawyers.

Aggravating and Mitigating Circumstances

Felony convictions reflect serious misconduct. Attorneys who have not been disbarred for convictions for theft, fraud, or embezzlement have presented substantial mitigating factors. In addition to the absence of mitigating factors, there are aggravating factors present with regard to Brost’s misconduct. For example permanently misappropriating client funds for personal use should aggravate the misconduct. Brost clearly demonstrated a selfish and dishonest motive because she had no intention of returning any of the stolen funds and meant to permanently deprive A.F.’s estate and heirs of the proceeds from the annuities.

Brost’s disciplinary history is also an aggravating factor. Brost is currently indefinitely suspended for similar serious misconduct. The rules Brost previously violated are similar to the rules that Brost violated in this matter, and both sets of violations involve dishonest and fraudulent misconduct.  Brost committed the current acts of misconduct while suspended. It is clear that Brost’s suspension for similar misconduct did not serve as a deterrent to Brost. In short, Brost’s misconduct is aggravated by several factors, and there is no evidence of mitigating circumstances in the record.

Based on the substantial amount of money stolen, the fact that Brost stole the identity of a client, the failure to cooperate with the disciplinary investigation, and aggravating factors including Brost’s selfish and dishonest motive and Brost’s disciplinary history, the Supreme Court concluded that disbarment is the appropriate discipline in this case.

ZALMA OPINION

Lawyers are expected to be honorable and honest, especially when dealing with clients. Lawyer Brost committed multiple felonies acting as a lawyer while suspended from the practice of law. What causes me concern over this decision is the fact that the Supreme Court appeared reluctant to disbar this admittedly criminal lawyer who had no concern for her clients, the state bar, the public or the Supreme Court. This decision should have been a single sentence: “The lawyer stole from her client, a felony, and is for that reason disbarred.”

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Personal Injury Offenses Must Be Alleged

No Coverage — No Duty to Defend

Business relationships are often contentious. When a contract to sell a product devolves into a dispute by selling the product under a slightly different name. Suits are filed. Insurance is designed to protect the party insured against certain enumerated causes or risks of loss. However, no policy provides coverage for EVERY potential risk of loss.

In Crum & Forster Specialty Ins. Co. v. Willowood USA, LLC, Slip Copy, 2014 WL 3797673 (D.Or., Aug. 1, 2014) the U.S. District Court for the District of Oregon was faced with a dispute by plaintiff, Crum & Forster Specialty Insurance Company (Crum), along with defendant insurance providers Allied World Assurance Company (Allied) and Colony Insurance Company (Colony), sought a legal declaration against defendant Willowood USA, LLC (Willowood) that they have no duty to defend Willowood in a companion case before this Court, Repar Corporation v. Willowood USA, LLC et al., Civ. No. 6:13–cv–01043–MC (underlying action).

FACTUAL BACKGROUND

This action arises out of an insurance coverage dispute. Because this action relies on the factual allegations in the underlying action, the District Court first looked to the First Amended Complaint (FAC).

Repar, a corporation in the business of distributing agricultural pesticides, began distributing an agricultural pesticide containing tebuconazole under the trade names TEBUCON 45 DF and TEBUCON 3.6F in 2008.

Willowood, also a corporation in the business of distributing agricultural pesticides, was formed in December 2009.  Willowood agreed to “maintain the confidentiality of any confidential or proprietary information,” to not use “the name TEBUCON except for sales authorized under the EPA Form 8570–5 agreement,” and to allow Repar to “be the exclusive supplier of technical grade tebuconazole for both products.”  As a result, Repar granted Willowood a “license to distribute and sell products in connection with the TEBUCON mark as an EPA subregistrant of Repar for the TEBUCON 45 DF and 3.6F products and subject to Repar’s quality control.”

After gaining chemistry information Willowood successfully refiled its EPA registration applications using product chemistry data from another supplier.  In its refiled EPA registration applications, Willowood identified its products as WILLOWOOD TEBUCON 45DF and WILLOWOOD TEBUCON 3.6 SC. Id. “Willowood subsequently began using Repar’s TEBUCON mark in connection with the sale and distribution of its own tebuconazole products.”

Repar sought damages and injunctive relief under theories of implied-in-fact contract, quasi-contract/unjust enrichment, Federal Trademark Infringement (15 U.S.C. § 1114), and Federal Unfair Competition (15 U.S.C. § 1125(a)).

The insurance providers contend that the claims and allegations in the underlying action are not covered under the respective policies and, to the extent that the claims and allegations are covered, the claims and allegations are excluded.

DISCUSSION

Policy Coverage

Willowood contends that all three insurance providers must defend because the allegations in the underlying action “fall squarely within the coverage for ‘personal and advertising injury’ provided by each of the policies.”

Oregon determines the intent of the parties to an insurance contract by looking first to the plain meaning of any disputed terms and then to the structure and context of the policy as a whole. If the parties’ intent cannot be determined by doing so, the policy is construed against the insurer, because any reasonable doubt as to the intended meaning of an ambiguous term will be resolved against the insurance company and in favor of extending coverage to the insured.

The Policies

Colony’s policy extends the “duty to defend the insured against any ‘suit’ seeking ‘damages’” for covered “personal and advertising injur [ies].” “[I]njury, including consequential ‘bodily injury’, arising out of one or more of the following offenses: ¶ … d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; ¶ … f. The use of another’s advertising idea in your “advertisement”; or g. Infringing upon another’s copyright, trade dress or slogan in your ‘advertisement’.”

Willowood argued, in reliance upon the definition of “personal and advertising injury” that Repar, in the underlying action, alleges “disparagement” under subsection “d” and “use of another’s advertising idea in your ‘advertisement’ “ under subsection “f.” Because the policies do not define either “disparagement” or “use of another’s advertising idea in your ‘advertisement,’ “ the Court first considered whether the phrases in question have a plain meaning, ie., whether they are susceptible to only one plausible interpretation.

“Disparagement”

As long as the complaint contains allegations that, without amendment, state a basis for a claim covered by the policy, the duty to defend arises. That question can be answered only by examining Repar’s complaint.

In assessing Repar’s allegations, the court should not be concerned with potential factual determinations.  Rather, the court looks to those torts identified by the parties, including: (1) trade libel, (2) defamation, and (3) quasi-contract/unjust enrichment.

To prevail on a state law trade libel claim, it must be established that the defendant published false allegations about the plaintiff with malice, and that the plaintiff suffered special damages or pecuniary harm as a result of the publication.

The elements of a claim for defamation are: (1) the making of a defamatory statement; (2) publication of the defamatory material; and (3) a resulting special harm, unless the statement is defamatory per se and therefore gives rise to presumptive special harm.

The factual allegations of Repar’s FAC do not state a claim for defamation or trade libel.

The term implied contract has also been used to refer to contracts that are implied-in-law or quasi-contracts.Unlike true contracts, quasi-contracts are not based on the apparent intention of the parties to undertake the performances in question, nor are they promises. They are obligations created by law for reason of justice. To establish a quasi-contract, a plaintiff must prove all three of the following: (1) a benefit was conferred; (2) the recipient was aware that a benefit was received and; (3) under the circumstances, it would be unjust to allow retention of the benefit without requiring the recipient to pay for it.

Repar does not allege that Willowood belittled or discredited Repar’s goods or products. Rather, Repar merely seeks to utilize a remedial device to prevent unjust enrichment. Accordingly, Repar’s claim for breach of a quasi-contract/unjust enrichment is not covered as “disparagement” under the policies.

The policies also define “personal and advertising injury” as “[t]he use of another’s advertising idea in your ‘advertisement.’ Repar’s use of the TEBUCON mark in lieu of the chemical name, tebuconazole, represents a thought or conception (“idea”). This “idea” also represents an “advertising idea” under the broad definition identified above, ie., a conception intended to attract public attention to a product. For example, Repar alleges that the TEBUCON mark immediately and inherently signified the quality, reputation, and source of these products. This allegation, in tandem with the paragraphs identified by Willowood, plausibly indicate that Repar used the TEBUCON mark to distinguish its product from the competition, ie., to attract public attention to the advantages of its own product vis-à-vis its competition. However, to extend coverage to the insured, this “advertising idea” must also be used in an “advertisement.”

To the extent that Willowood’s interpretation is plausible, ie., the TEBUCON mark communicates information about goods or products to the general public, the District Court declined to find it reasonable. The mere sale of a product bearing another’s mark does not constitute an advertisement.

Exclusion

The insurer has the burden of proof that a claim or action is excluded. Also, any ambiguity in an exclusionary clause is strictly construed against the insurer. Repar, in the underlying action, seeks “damages” under claims asserting: breach of implied-in-fact contract; quasi-contract/unjust enrichment; Federal Trademark Infringement (15 U.S.C. § 1114); and Federal Unfair Competition (15 U.S.C. § 1125(a)).

Breach of Contract Exclusion

The exception precludes exclusion if “personal and advertising injury” arises out of “an implied contract to use another’s advertising idea in your ‘advertisement.’ The District Court was unable to reasonably interpret the allegations to meet the definition of “advertisement.” Accordingly, the breach of contract exclusion applies to Repar’s claim for breach of implied-in-fact contract.

Trademark Exclusion

To prevail on a claim of trademark infringement under 15 U.S.C. § 1114, a party must prove that it has a protectable ownership interest in the mark; and that the defendant’s use of the mark is likely to cause consumer confusion.

Federal Unfair Competition

Repar also alleges a claim for Federal Unfair Competition under 15 U.S.C. § 1125(a). The elements of infringement and unfair competition claims are essentially the same; the rulings stand or fall together. As in Repar’s trademark infringement claim, the gravamen of Repar’s unfair competition claim is that Willowood used a “confusingly similar imitation” of Repar’s mark. Accordingly, this claim arises out of “trademark” and is excluded.

ZALMA OPINION

Litigants in Oregon who want the defendant’s insurance to protect them against the allegations of a claim for trade libel, defamation, or other personal injury coverages must draft their complaints to allege facts that bring the case within coverage. In this case they either failed to properly allege the causes of action or decided to punish the defendant by seeking liability for torts not covered by insurance. The failed in the former and succeeded in the latter.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

No Right to Contribution in Florida

Who’s On First Matters

When more than one liability insurer insures against the same risk there is always a dispute over which insurer should take the lead in the defense of the insured; whether the insurers should share in the costs of defense; and how that defense should be paid for and in what proportion. Sometimes only one of multiple available insurers will step up and provide the defense and seek contribution or subrogation from the other insurers. Courts in various jurisdictions deal with the issue differently.

In Amerisure Mut. Ins. Co. v. Crum & Forster Specialty Ins. Co., Slip Copy, 2014 WL 3809113 (United States District Court, M.D.Fla.,8/1/14) the United States District Court was called upon to resolve insurance coverage disputes for a lawsuit stemming from the development and construction of a condominium complex known as the Legends at St. John (the Complex).

Plaintiffs Amerisure Mutual Insurance Company and Amerisure Insurance Company (Plaintiffs or Amerisure) have filed a six-count First Amended Complaint against Defendants Crum & Forster Specialty Insurance Company (C & F) and Evanston Insurance Company (Evanston) seeking declaratory and equitable relief for Defendants’ alleged failure to defend the lawsuit as required by contract.

FACTS

Legends at SJ, LLC (Legends) served as the developer of the Complex and hired Hardaway Construction Corp. (Hardaway) and ContraVest Construction Group Inc. (ContraVest) as general contractors.  Construction began in 2003 and was completed in 2007. Legends and ContraVest obtained liability insurance to cover the construction period. Plaintiff Amerisure insured Legends and Defendants C & F and Evanston insured ContraVest. Following completion of construction, control of the Complex passed to the Legends at St. Johns Condominium Association (the Condo Association).

In 2009, the Condo Association filed suit against Legends, Hardaway, ContraVest, and others for damages related to the alleged defective construction of the Complex. On May 20, 2010, Legends notified Amerisure about the lawsuit and requested that Amerisure defend the suit pursuant to the parties’ insurance policies. Amerisure expressed certain reservations, but ultimately accepted the defense of Legends.

Legends also tendered defense requests to C & F and Evanston pursuant to their insurance policies with ContraVest.  Legends asserted that it was an “additional insured” under ContraVest’s insurance policies and, therefore, C & F and Evanston were obligated to defend Legends in the lawsuit as well. However, C & F and Evanston refused.

The underlying lawsuit was settled in 2011, but neither C & F nor Evanston defended Legends and neither contributed any money toward the settlement. Amerisure incurred in excess of $562,820 in defense costs and contributed $300,000 in indemnity payments—amounts which Amerisure argues should have been paid, in whole or in part, by C & F and Evanston. Accordingly, Amerisure brought the instant suit against C & F and Evanston seeking declaratory and equitable relief.

ANALYSIS

Declaratory Judgment – Count I

In Court I, Amerisure seeks a declaratory judgment that Legends qualified as an additional insured under the C & F policies and that C & F had an independent contractual obligation to defend Legends in the Condo Association lawsuit. Federal jurisdiction in this case is premised upon diversity of citizenship. Each claim must nonetheless be justiciable in order for a federal court to have jurisdiction over it. The U. S. Supreme Court has summarized the requirements for an actual controversy as follows: “Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genetech, Inc.,  549 U.S. 118, 126 (2007).

Plaintiffs allege that prior to the filing of this lawsuit C & F “acknowledged Legends as an additional insured under the C & F Policy” in a December 1, 2010 letter. C & F confirms the December 1, 2010 letter and its contents, agreeing that it “acknowledged that Legends was an additional insured under an endorsement to Crum & Forster Specialty’s policy.”  The same December 1, 2010 letter confirms that C & F has an independent contractual duty to provide a complete defense. Therefore, the court concluded that there is no actual controversy over the only two matters on which a declaratory judgment is sought.

C & F has not admitted that, at the time Legends first tendered their claim to C & F, Legends had already satisfied the insurance policies’ self-insured retention (SIR) obligations. Amerisure insists that this is a key point of contention because C & F was not obligated to defend Legends until Legends satisfied the SIR. Amerisure argues that there still exists a case or controversy as to Court I because the Court must determine precisely when C & F’s obligations began—that is, when the SIR was satisfied. The declaratory relief sought in Count I does not request a determination that the SIR was met at any specific point in time. Therefore, Count I was dismissed without prejudice.

Equitable Contribution – Count II

Amerisure sought equitable contribution from C & F for half of the costs Amerisure incurred in its defense of Legends. Amerisure argues that equitable contribution is necessary because, despite the fact that Amerisure and C & F were both co-insurers of Legends, C & F shirked its responsibilities by refusing to participate in Legends’s defense.

While Florida law recognizes causes of actions for equitable contribution generally, Florida courts have explicitly refused to extend this rule to co-insurers. To the contrary, Florida courts have held that to do so would be contrary to public policy.

It is well settled Florida law that there is no right to contribution between insurance companies as to legal fees and costs. This is the case even where, as here, there are allegations that a co-insurer shirked its duty to defend. Accordingly, Amerisure cannot maintain a cause of action for equitable contribution against C & F on the theory that the parties were co-insurers. Florida law is clear that Amerisure does not have a claim for equitable contribution.

ZALMA OPINION

Amerisure, being the first to the plate, providing a defense to the insured ran afoul of Florida Public policy that there is no right to contribution between insurance companies as to legal fees and costs. Florida is an outlier in so holding but the Federal court must follow local law when interpreting the rights between insurers.

When multiple insurers are obligated to defend and indemnify an insured it is incumbent on all the parties and insurers to work together to protect the insured. Because the other insurers were not on to the defense first and refused to defend their insured they walk free subject to a state court subrogation action for breach of contract not declaratory relief. If Amerisure has an assignment of the insured’s rights it can then pursue the other insurers, who admitted they had available coverage, subject to an SIR, they may succeed in getting some of their money back.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Can’t Make a Purse from a Sow’s Ear

Claims Handling Cannot Create Coverage Where None Existed

Under state law contractors whose work is defective are given the opportunity to cure their error before litigation by repairing and replacing the defective work. When a contractor exercises the option before being sued may find that there is not coverage available for the monies spent to avoid litigation and cure the defects while, had the contractor done nothing and been sued, it could assert an obligation on the part of an insurer to defend or indemnify the contractor.

In Mike Rovner Construction, Inc. v. Liberty Surplus Insurance Corporation; Not Reported in Cal.Rptr.3d, 2014 WL 3752106 (Cal.App. 2 Dist., 7/31/14) Only the Westlaw citation is currently available, Mike Rovner Construction, Inc., (Rovner) appeald from a summary judgment entered in favor of Liberty Surplus Insurance Company (Liberty). The trial court, faced with summary judgment motions from both parties, found (1) that Liberty had no obligation to indemnify or defend because a complaint had not been filed against Rovner by the owner of an apartment complex where Rovner’s subcontractors had improperly installed defective shower stalls; (2) the property damage produced by this occurrence began prior to the policy period in question and was specifically excluded; and (3) there is no stand alone cause of action for an alleged violation of the Fair Claims Settlement Practices Regulations.

FACTS

The Insuring Agreement

Liberty issued a policy of comprehensive general liability insurance that promised to pay sums Rovner “becomes legally obligated to pay as damages because of … property damage to which this insurance applies.” “Property damage” was defined as “physical injury to tangible property” and “loss of use of tangible property that is not physically injured.” Property damage was covered only if it occurred “during the policy period” from November 13, 2009 to November 13, 2010. An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Liberty agreed “to defend [Rovner] against any ‘suit’ seeking those damages.” A “suit” was defined as a civil proceeding alleging damages or an arbitration proceeding or other alternative dispute resolution proceeding in which damages are claimed.

Liberty explicitly excluded “Known Injury or Loss” because a claim or loss must be fortuitous to be insurable, the policy excluded property damage that “began prior to the inception date of this policy, and [that] is alleged to continue into the policy period.”

The Loss

Rovner was employed by LA Lakes at South Coast, L.P. to provide the labor and materials necessary to renovate the interior of apartments in Costa Mesa. Rovner in turn employed two subcontractors to provide and install shower enclosures in the individual apartments.

The shower enclosures were installed between October 2007 and March 2009. The shower units were defective and were improperly installed. They failed and began damaging the apartment units when they were first used before the inception date of the Liberty policy.
Complaints about the shower enclosures began in 2008 and continued through October 2009. Between April 2010 and April 2011, the owner of the apartment buildings spent $26,965 repairing 21 of the units. Rovner repaired the rest between August 2011 and December 2011 at a cost of $553,800. Insurers other than Liberty paid Rovner $367,533.34 to resolve its claims against them, perhaps because the policies they issued were not as detailed as the Liberty policy or they lacked the gumption to fight the claim.

Trial Court Proceedings

The owner of the apartments never filed a lawsuit, never commenced an arbitration proceeding and never initiated an alternative dispute resolution process to establish Rovner’s legal obligation to pay for property damage that resulted from the improper installation of the defective shower enclosures.

Rovner sued its insurers even before it began making repairs to the units. He alleged that Liberty breached the implied covenant of good faith and fair dealing in its contract, and breached the terms of its insurance contract. Rovner sought declaratory relief to confirm coverage for the unpaid balance of the repairs voluntarily made by Rovner and also sued on the common counts.

After both parties filed motions for summary judgment the trial court’s issued a detailed, eight-page ruling, that denied Rovner’s motion and granted Liberty’s motion and dismissed the suit in its entirety. In explaining its reasons for granting the motion for summary judgment, the trial court observed that the insurance contract states Liberty “ha[s] no duty to defend or indemnify it unless a lawsuit was filed.” The court concluded that since the owner of the property did not file “suit” or commence arbitration or alternative dispute resolution proceedings against Rovner, Liberty had no obligation either to indemnify or to defend the company. As an alternative ground for granting Liberty’s motion, the trial court concluded the property damage asserted by Rovner was uninsured because the loss was a “Known Injury or Loss” that began prior to the inception date of the policy.

The trial court granted summary judgment on Rovner’s First Cause of Action based upon its conclusion that the Fair Claims Settlement Practices Regulations do not create or even address insurance coverage. The regulations simply deal with how insurance claims are to be managed. The court concluded that while section 2695.7 of the regulations requires an insurer to respond to a claim within 40 days, non-compliance does not create a cause of action for money damages.

DISCUSSION

Lack of Suit

The duty of Liberty to defend and to indemnify Rovner is expressly linked to damages sought in a “suit,” a term the policy explicitly states is limited to a complaint filed in court or an arbitration proceeding or an ADR process approved by Liberty. In the absence of a process designed to produce a determination of the damages Rovner is legally obligated to pay, Liberty was not obligated either to defend or to indemnify Rovner.

The Known Injury or Loss Exclusion

Even if Liberty were obligated to indemnify Rovner for the cost of repairing the substandard work of its subcontractors, the policy specifically excludes property damage that began before November 13, 2009 and continued into the policy period. It is undisputed that the defective installations damaged the apartments beginning with their first use after installation and that this too occurred before the inception date of the Liberty policy. Predictably, over time the defects continued to cause additional and progressive damage throughout the apartment project that was reported at different times by tenants.

The damage was such that Rovner determined it was obligated to make repairs to every one of the units to salvage a valuable business relationship with the owner. This is precisely the risk that Liberty sought to exclude and that Rovner accepted when the policy was issued. Progressive property damage that starts before the insurers’ policy period but that continues into the policy period does not trigger coverage.

Liability Based Upon a Claims Practices Regulation

If coverage exists for property damage that occurred within the policy period, then denying an insured a defense and indemnity may give the insured the right to settle with a claimant and expose the insurer to liability for the amount of the settlement. In this case Liberty had no duty to defend Rovner and no obligation to indemnify the company from the cost of the settlement it entered into with the owner of the apartment project.

Liberty’s failure to respond within 40 days to Rovner’s notice it was making a claim for the cost of repairing the shower enclosures does not create coverage where none existed before. The violation of any of the Regulations cannot expose Liberty to a claim for damages in an amount equal to the cost of its repairs to the apartment units or any claim at all. Violating section 2695.7, or any one of the Fair Claims Settlement Practices Regulations, does not create a cause of action for damages.

The judgment was affirmed.

ZALMA OPINION

Rovener was very lucky that he convinced some of his insurers to pay part of the cost to cure the defective construction. Since there was no suit, and since almost every CGL requires a suit before a duty to defend or indemnify arises, failure of a suit prevents coverage.

More importantly, however, to insurers is the fact that the Court of Appeal made it clear that there is no cause of action for violation of section 2695.7 or any one of the Fair Claims Settlement Practices Regulations.

Liberty had multiple defenses to this lawsuit and was granted its costs. The suit really had no chance and it might have been an abuse of the right to litigate to file a suit with such a small potential for success.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Fraud Alerts

Anti-Fraud Efforts Expand

In the 15th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on August 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.     Fraud Alert from the U.S. Department of Health and Human Services Office of Inspector General.
2.        New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.        Claimants and Counsel Must Repay BP for Fraudulent Claims.
4.       Report from NICB on New Anti-Fraud Legislation.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

Zalma’s Insurance Fraud Letter

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

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

•    Claim Collapses Because of Lack of Maintenance – July 31, 2014
•    Fortuity and Standing –  July 30, 2014
•    Just for Fun – July 29, 2014
•    False Swearing – A Defense to Fraudulent Claims – July 28, 2014
•    How Coinsurance Works – July 25, 2014
•    Courts Should Never Rewrite Insurance Policies – July 24, 2014
•    The Limits on An Insurance Agent’s Duty –  July 23, 2014
•    Corporation and Sole Owner are Separate Entities – July 22, 2014
•    Judges Cannot Make Law – July 21, 2014
•    Limits of Claim Made & Reported Policy – July 18, 2014
•    When Is a House “Wholly Destroyed?” – July 17, 2014
•    Resolve Disputes Informally & Avoid Litigation – July 16, 2014
•    Fraudsters Find Fraud Expensive – July 15, 2014
•    Contract Language Controls – July 14, 2014
•    Is Insurance an Asset of the Insured? – July 11, 2014
•    Must Insured First Prove Prima Facie Case? – July 10, 2014
•    Other Insurance Clause Raises Actual Controversy – July 9, 2014
•    Insurers Must Avoid the Gastonette – July 8, 2014
•    Facts Rule Coverage – July 7, 2014
•    The Insurance Fraud Deskbook – July 5, 2014

NEW! From the ABA:

The Insurance Fraud Deskbook
Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Claim Collapses Because of Lack of Maintenance

Ignore Warnings at Your Expense

When people fail to take care of their property, ignore advice from governmental authorities that the property is dangerous and use insurance money for work not included a loss to allow the property to deteriorate further, they have a difficult time explaining why a claim for collapse of the structure is a covered loss. In White v. Metropolitan Direct Property and Cas. Ins. Co., Slip Copy, 2014 WL 3732135 (E.D.Pa., 7/29/2014) the District Court for the Eastern District of Pennsylvania was asked to force an insurer to pay a loss it believed it did not owe. At the request of the parties it entered summary judgment based on the facts and the policy.

FACTUAL HISTORY

On or about March 5, 2011, Annette White and Charles Williams (“Plaintiffs”)’s residence, located at 1715 North 59th Street in Philadelphia, Pennsylvania, sustained “severe damage” due to what Plaintiffs initially claimed was “a sudden collapse that was the result of excessive rainfall.” Plaintiffs notified Defendant of the damage on March 8, 2011 and Defendant pursued an investigation of the claim. Plaintiffs “expended monies to repair the subject premises, [and incurred] other costs as a result of being unable to live in the subject premises after the collapse.”

The Policy

Defendant issued a Homeowner’s Policy to Plaintiffs that includes various exclusions including exclusions dealing with weather and defective construction.

The March 2011 Loss

On March 4, 2011, the day after the Policy took effect, the City of Philadelphia Licenses and Inspections issued a Violation Notice to Plaintiffs, designating the premises as “unsafe,” and stating that “[t]he indicated wall of the subject structure has loose and/or missing brickwork and is in danger of collapse.” On March 5, 2011, an exterior brick wall located at the rear of Plaintiffs’ home collapsed, which Plaintiffs originally alleged was “a sudden collapse that was the result of excessive rainfall.” On March 6, 2011, the City of Philadelphia Licenses and Inspections issued a second Violation Notice to Plaintiffs, again designating the premises as “unsafe.”

The Prior Loss in March 2010

In March 2010, Plaintiffs’ home sustained a water loss to the kitchen located in the rear of their home. Plaintiffs were insured under a homeowners’ policy of insurance issued by Liberty Mutual Insurance Company, and the claim was for “water from roof,” which caused “Structure Damage” to the “kitchen one wall molding around door and ceiling.”  Liberty Mutual paid Plaintiffs $1,944.90 for the loss.

Plaintiff Annette White testified at her deposition that “we ended up not fixing the water damage that was over the back door because we needed to fix—bring the door up. So he ended up fixing the front porch.”

The Exterior Rear Wall

Plaintiff testified that in the approximately thirty years prior to the wall collapse in March 2011, no maintenance or repairs were made to the rear wall other than repainting garage doors, repainting a steel I-beam that served as a header for the garage doors, and applying new tar to the roof, which was done approximately thirteen years ago. She testified further that missing mortar and spaces between bricks in the rear wall that collapsed, as well as a side wall that did not collapse, were visible.

Defendant’s Engineering Report

Mary K. McElroy, P.E., of Hudson International Consultants and Engineers, issued her expert report that concluded that within a reasonable degree of engineering certainty the loss was due to: “(1) Long-term and on-going water infiltration via deteriorated mortar joints, cracks in the brick work, roof leaks, and poorly maintained roof drainage controls. (2) Repeated exposure to freeze-thaw cycles resulting in additional cracking in the brick work and increased potential for further water infiltration. (3) Formation of additional, large cracks in the brick work due to the corrosion of the steel I-beam header and resultant physical forces exerted on the brick work due to the expansion of that material. (4) Overall poor maintenance of the steel header, brick work, mortar joints and roof covering and drainage.”

Her report noted that “[t]he failure was progressive in nature and did not result from the single storm event on March 6th [sic], 2011 but from long-term and on-going infiltration resulting from deferred or poor maintenance to the elements of the structure.”

Defendant’s Claims Handling and Denial

On March 10, 2011, Defendant issued a Reservation of Rights letter to Plaintiffs, notifying them of “a potential coverage problem,” specifically referencing Exclusion 3.A for “wear and tear, marring, scratching, aging, deterioration, corrosion, rust, mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage or destroy its [elf].” On May 2, 2011, Defendant denied coverage for Plaintiffs’ claim, stating in the denial letter that their claim is not a covered collapse. Defendant specifically denied coverage due to a non-sudden and accidental collapse.

Plaintiffs’ Engineering Report

Plaintiffs also submitted an engineering report, completed by John J. Hare. Mr. Hare concluded within a reasonable degree of engineering certainty that the collapse was because of this historical type of construction. The salmon bricks are not uniform in strength. The proximate cause of the collapse was the sudden and complete crushing of the salmon bricks supporting the floor joists and wood beam as the kitchen, which pushed the wall outward and brought it down.

DISCUSSION

Defendant moved for summary judgment on Plaintiffs’ claims for breach of contract and statutory bad faith, as well as for summary judgment on its counterclaim for a declaratory judgment. Defendant argued that Plaintiffs are not entitled to coverage under the Policy because (1) collapse and loss caused by weather are not covered under the Policy; (2) the collapse was not caused by a single rain event but rather by long-term, ongoing water infiltration behind the rear wall, a conclusion supported both by an engineer Defendant retained and by an estimate of repair that an independent contractor prepared for Plaintiffs; and (3) even without assessing exclusions of the Policy, Plaintiffs cannot overcome their burden of proving the loss was “sudden and accidental,” as required by the Policy.

Under Pennsylvania law, which governs interpretation of the present Insurance Policy, several well-established principles control. As a threshold matter, the task of interpreting a contract is generally performed by a court, rather than by a jury. The goal of that task is, of course, to ascertain the intent of the parties as manifested by the language of the written instrument. Where an insurance policy provision is ambiguous—such as where the questionable language is reasonably susceptible of different constructions and capable of being understood in more than one sense—it is to be construed against the insurer and in favor of the insured. Where the insurance policy language is clear and unambiguous, however, the court must enforce that language. A court must refrain from torturing the language of a policy to create ambiguities where none exist.

The Weather Conditions Exclusion

Put simply, the relevant provisions of the Policy dealing with the “weather conditions exclusion” state that sudden and accidental direct physical loss or damage to the property is not covered in the event of collapse where weather conditions contributed in any way with a collapse, which is an excluded event. The court found there is no ambiguity in the Policy regarding a collapse being excluded from coverage where the collapse was caused, or caused in part, by weather conditions. Accordingly if the collapse had been caused by excessive rainfall as Plaintiffs originally claimed, it would not have been covered under the language of the Policy and Defendant did not breach its contract with Plaintiffs by denying coverage for the March 2011 loss on that basis.

The Construction Defects Exclusion

Plaintiffs subsequently argued, relying on an expert report by Mr. Hare, that the collapse of the rear wall of their home occurred because of the historical construction practice of using salmon bricks, which are weak and can lead to collapse.

The District Court noted that physical damage to the property is not covered by the Policy in the event of a collapse where defective, faulty, or unsound design, specifications, workmanship, or construction contributed to the collapse. There is no ambiguity in the Policy regarding a collapse.  A collapse which occurs due to faulty or defective construction or design is not covered. Therefore Defendant did not breach its contract with Plaintiffs by denying coverage for the March 2011 loss based on the construction defects exclusion.

The Deterioration Exclusion and the Hidden Decay Exception

Defendants assert that the collapse was caused by decay and deterioration which was not hidden, and denied coverage on that basis.  As the decay was not hidden, the loss resulting from the collapse is not covered under the hidden decay exception to the collapse exclusions under the Policy.

Bad Faith

The current bad faith claim before the Court cannot get past the initial element: lack of a reasonable basis for denying benefits. Defendant’s denial of benefits was not only reasonable, but correct under the Policy language. Absent a showing of an unreasonable denial, Plaintiffs are not entitled to recover on their bad faith claim. Thus, the Court enters summary judgment in favor of Defendant on Count Two of the Complaint.

ZALMA OPINION

It is encouraging to see a trial judge who reads a policy of insurance as written and enforces the language of the policy. The Plaintiffs knew of the problem with their brick wall, were cited by the local authorities who found it unsafe, and did nothing. The wall fell because of old age, lack of maintenance and the sloth of the insureds. Suing for bad faith on such facts is an expression of unmitigated gall.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Fortuity and Standing

Allegations Trump Facts When Defense Sought

Insurance, by definition, only applies to a loss that is contingent or unknown at the time the policy is issued. However, in states like Connecticut, the determination of coverage is based upon the allegations of the underlying lawsuit. In Travelers Cas. and Sur. Co. of America v. Netherlands Ins. Co. — A.3d —-, 2014 WL 3720354 (Conn., 8/5/2014) the Connecticut Supreme Court was faced with a dispute between insurers as to who should pay for the defense of an insured faced with a major property damage claim.

FACTS

The plaintiffs, Travelers Casualty and Surety Company of America and Travelers Indemnity Company (collectively, Travelers), brought a declaratory judgment action against the defendants, who include The Netherlands Insurance Company (Netherlands) and Lombardo Brothers Mason Contractors, Inc. (Lombardo). Travelers sought and received a judgment from the trial court declaring that Netherlands was obligated to defend Lombardo, and pay to Travelers its pro rata share of the costs incurred in defending Lombardo in the civil action arising from Lombardo’s role in the construction of the leak prone library at the University of Connecticut School of Law (law library), chronicled in our recent decision in State v. Lombardo Bros. Mason Contractors, Inc., 307 Conn. 412, 420–21, 54 A.3d 1005 (2012) (underlying action). Netherlands appealed and raises a plethora of appellate issues.

In 1994, the state of Connecticut (state) contracted with Lombardo to perform masonry for the construction of the [law library], which was completed in 1996. In the underlying complaint, the state alleges that in the months and years following the completion of the project, the state began to experience problems with water intrusion in the [law] library. Over the years, the alleged water intrusion proved to be continuing and progressive, to the point where the state retained forensic engineers to investigate the full extent and likely cause of the problem. On February 14, 2008, the state initiated a lawsuit against Lombardo and other entities seeking to recover approximately $18 million that it alleged was necessary to repair defects in the law library. From 1994 to 2008, the following insurance carriers assumed Lombardo’s risk: September 30,1994 to August 31, 1998, Travelers, [CGL] Policies; August 31, 1998 to August 31, 2000, Lumbermens [Insurance Company (Lumbermens) ], [CGL] Policies; August 31, 2000 to June 30, 2006, Netherlands, [CGL] Policies and Peerless [Insurance Company (Peerless) ], umbrella general liability policies.

In late 2005, Lombardo notified its insurance carriers of the state’s potential claim against it and Travelers agreed to participate in the investigation and related defense. Lumbermens … and Netherlands refused, however, to participate in the investigation and defense. Prior to trial, Travelers spent over $482,855 defending

ALLEGATIONS

Netherlands pleaded that it had no obligation to reimburse defense costs because Lombardo had been on notice of problems with the law library on or before January, 2000, and, therefore, prior to the issuance of the first Netherlands CGL policy in August, 2000, meaning that the exclusion for prior known occurrences or claims applies and no coverage is available for Lombardo.

TRIAL COURT JUDGMENT

The matter proceeded to a one day court trial before the court. At trial, Travelers withdrew the second count of its complaint claiming a right to equitable subrogation. Shortly thereafter, Netherlands moved to dismiss this case for lack of subject matter jurisdiction, claiming that Travelers, which was not a party to Lombardo’s insurance contracts, now lacked standing to assert the remaining declaratory judgment claim in the complaint. The trial court denied that motion to dismiss, concluding that Travelers had standing to bring this declaratory judgment action.

The trial court then issued a memorandum of decision rendering judgment for Travelers, declaring that: “Netherlands had a duty to defend based on the underlying complaint.” In reaching this conclusion, the trial court first determined that the factual allegations in the underlying complaint “state that the damage potentially falls within the dates of Netherlands’ coverage.” The trial court held that the “occurrence which triggered the duty to defend was the water intrusion into the law library,” and rejected Netherlands’ reliance on the known injury or damage clause, noting that “the underlying complaint does not state with certainty when Lombardo was aware of the actual damage.”

ANALYSIS

A declaratory judgment action may be maintained if all of the following conditions have been met:

(1) The party seeking the declaratory judgment has an interest, legal or equitable, by reason of danger of loss or of uncertainty as to the party’s rights or other jural relations;

(2) There is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement between the parties; and

(3) In the event that there is another form of proceeding that can provide the party seeking the declaratory judgment immediate redress, the court is of the opinion that such party should be allowed to proceed with the claim for declaratory judgment despite the existence of such alternate procedure.

The purpose of a declaratory judgment action, as authorized by statute is to secure an adjudication of rights when there is a substantial question in dispute or a substantial uncertainty of legal relations between the parties.  The declaratory judgment statute provides a valuable tool by which litigants may resolve uncertainty of legal obligations.
The declaratory judgment procedure may not be utilized merely to secure advice on the law. It may, however, be employed in a justiciable controversy where the interests are adverse, where there is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement, and where all persons having an interest in the subject matter of the complaint are parties to the action or have reasonable notice thereof. One type of controversy to which the declaratory judgment statute often has been applied is a dispute over rights and liabilities under an insurance policy.

The Supreme Court concluded that the controversy is real and ongoing, with Travelers’ claim of injury more than colorable, given the nature of this coverage dispute and its averment that it is bearing more than its fair share of Lombardo’s defense because of Netherlands’ refusal to contribute to Lombardo’s defense.

Where more than one insurer has issued policies covering the same risk, a court of equity will exercise jurisdiction over the entire controversy to resolve the rights of all the interested parties, particularly where the issues between the insurers and the insured are similar.

KNOWN INJURY OR DAMAGE

Since the state alleges it gave Lombardo notice of the water intrusion and damage within months of January 31, 1996, it is clear that Lombardo knew about the property damage to the law library, at least in part, before Netherlands’ coverage began on August 31, 2000.  Netherlands argues that the trial court improperly relied on the common-law known loss doctrine, which is distinct from the express policy language.

By way of background, the court noted that the known loss doctrine is a common-law rule that derives from the implicit requirement read into every liability insurance policy that coverage will be provided only for fortuitous losses.  By definition, insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur. The known loss doctrine states that one may not insure against loss of a building after the building has burned down.

This appeal did not require the court to consider the contours of the common-law known loss doctrine in Connecticut because, as Netherlands points out, the “known injury or damage” exclusion in its CGL policy stands in distinction to that common-law principle; the contractual provision, when it exists, governs independently of the common-law rule, although they may have overlapping effects in certain cases.

The Supreme Court found that although the trial court’s analysis improperly conflated the common-law known loss doctrine with the Netherlands policies’ known injury or damage exclusion, nevertheless, it concluded that the trial court properly determined that the exclusion does not relieve Netherlands of its duty to defend in this case.

Although the allegations in the underlying complaint arguably permit a reasonable inference that Lombardo knew of the property damage in the law library prior to the inception of its policies with Netherlands, unlike in other cases with more detailed factual records, they do not compel that conclusion as a matter of law, especially given the well established maxim that, if an allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.

ZALMA OPINION

Netherlands had two methods by which it could have avoided paying a portion of Lombardo’s defense costs:

(1) It could claim that Lombardo concealed the ongoing claim about the law library which allowed it to rescind or declare the policy void; or

(2)  It could have presented sufficient evidence to establish that the loss occurred and was ongoing for years before its policy came into effect.

Rather, it concentrated on legalistic defenses and lost since the underlying complaint raised a potential for coverage under its policy.

No insurer should be obligated to pay for defense or indemnity of a loss that occurred before the inception of the policy. Although it was probable that the loss was not fortuitous as it relates to Netherlands the allegations of the complaint cost them.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Just for Fun

I Did It!

Recently, one of my investigators met with the property manager of an Insured to start the investigation of a fire claim believed to be arson. Since he was just starting his investigation with a walk through the burned out shell the investigator was making conversation with the property manager.

“Steve, how long have you managed this property?”

“About six months.”

“It seems the fire started here on the service porch where the damage is most severe; do you know how it started?”

“Sure,” the manager replied with confidence and no sign of concern “I pulled a mattress off one of the beds, stacked up against the wall by the service porch and lit it with Bic lighter. Once it was burning well, I left and drove four blocks away and came back in time to see the flames coming from the building. I heard sirens so I just drove home.”

“Why did you do that?” the investigator asked, trying to stay calm.

“The owner asked me to burn the building and said he would pay me 10% of whatever he got from the insurance company. When are you going to pay him? I sure could use the money.”

The investigator then asked for permission to record a statement. As the property manager repeated his story on the tape the investigator held his breath and tried not to look shocked. He had the statement transcribed and the next day the property manager, trying to be helpful, returned to the investigator’s office, read and signed, under penalty of perjury, the transcribed statement.

The most dangerous statement a fraud investigator will ever hear from an insured is: “I did it.” The professional fraud investigator knows that it is improbable that anyone would ever admit to a crime. When faced with such an unlikely occurrence, the prudent investigator will remain skeptical.

Insurance fraud is a stealthy crime. It is most often committed by intelligent people who plan their crime well. They know that the best means of hiding a fraudulent claim is to admit everything surrounding the claim except the fraud itself.

I worked as a fraud investigator and lawyer for 25 years before I obtained my first, unsolicited confession. That confession caused me to work doubly hard to verify the statement and determine that it was truthful.

An insurer, bound by the covenant of good faith and fair dealing, cannot safely use a confession of a person who reports he conspired with the insured to commit a fraudulent claim without first obtaining independent corroboration. Corroboration must take the form of statements of independent witnesses who lend credibility to the confession.

There are usually only four reasons why a person will confess to a crime:

1.    Guilt, and a need to cleanse one’s soul.

2.    Knowledge that the crime has been solved and a confession might result in a more lenient sentence.

3.    Spite. The confession is a method to cause harm (either financial or criminal prosecution) to a perceived enemy.

4.    Stupidity.

The investigator of the arson case was experienced. He knew better than to accept a confession, even one given under oath. The sworn statement was only usable to defeat the claim if it could be corroborated. Without corroboration it was useless. He explained the need for corroboration to Steve.

“Talk to Manny McGee” Steve replied, “he was with me when I started the fire and drove the car I used to leave the scene.”

When questioned, Manny McGee confirmed Steve’s story.

“Yes, I was there when Steve set the fire. I though he had gone nuts. He knew I was on parole and couldn’t get involved in any kind of crime. I was so upset with him I almost made him walk.”

“Did Steve tell you why he was setting the fire?”

“Yeah, he said the owner had promised to let him repair the house. He knew he could make more money if the house was damaged in a fire.”

“Did Steve tell you anything about the owner?”

“I know the owner. He’s a cheap son of a gun. That’s why I believed Steve when he told me the owner wanted him to rebuild. He knew Steve wasn’t a licensed contractor and would do the job a lot cheaper than a licensed contractor would.”

“Have any of the owner’s other buildings caught fire.”

“I don’t know of any. The owner is cheap, but he doesn’t seem to be dishonest.”

The investigator, after meeting with Manny was becoming more confident. He had certainly established, with an independent witness that the Insured’s property manager, Steve, committed the crime of arson. He had not established, however, that Steve set the fire at the request of the insured.

The investigator contacted the insurer and advised it of the obligation to report the confession to the fire department, the Bureau of Alcohol, Tobacco and Firearms (BATF), and the Fraud Division of the Department of Insurance. He requested permission to do further investigation and to retain counsel to examine the insured under oath. The insurer granted him permission and authorized him to cooperate fully with the fire department and the BATF.

The investigator was concerned that he only had the statement of an admitted arsonist and his co-conspirator, a convicted felon on parole. He needed hard evidence to either establish that a fraud had been attempted or that the insured had been falsely accused.
The first investigative technique used was to search, via computer, for information concerning the insured. A state wide real property search revealed that the insured owned over 40 pieces of real property in the state, all but one income producing single and multi-family dwellings. He had no criminal record and his civil litigation record was minimal for a person involved in business. He also owned and operated a chain of 14 drycleaning shops. He did not seem to have a motive to set fire to a small, single family dwelling.

It was time, therefore, to confront the insured with the information that was available to the investigator to give him the opportunity to refute Steve’s accusations. The insured, a busy professional, made the time for the investigator. In the living room of the insured’s luxurious 5,000 square foot house in the hills north of Upland, California the insured answered all questions posed to him honestly. He provided the investigator with all of his business records, copies of his tax returns, and his entire file concerning the involvement of Steve as a property manager for five small houses in Riverside County.

The Insured explained that he had recently been forced to fire Steve because his work was shoddy and some of the rent Steve collected never came to the Insured. Steve had threatened to cause harm to the insured and had almost succeeded.

The insured’s claim was paid in full. Steve, whose attempt to harm his ex-employer was blatantly stupid, faces two felony charges: (1) Arson; and/or ( 2 ) perjury. His case is presently being evaluated for possible prosecution. The insurer has also authorized counsel to sue Steve to recover the money it paid to the Insured or, if he is prosecuted and convicted, to seek the money as restitution as a condition of probation.

ZALMA OPINION

Many people believe that they must exaggerate their claim to receive what they are truly owed. That belief is unfounded and dangerous. As the Eighth Circuit explained in Young even submitting a list of damaged or destroyed personal property with minor exaggerations, regardless of the explanation, submitting a false claim under oath is grounds for the insurer to declare the policy void.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This story is one of more than 80 in my e-book, “Heads I Win, Tails You Lose,” stories of why even when it catches a fraudster, the insurer loses.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

False Swearing – A Defense to Fraudulent Claims

Swear Falsely & Policy Void

In common language the “false swearing” provision of an insurance policy merely relates to a lie under oath.

In Texas and Oklahoma, false swearing is explained this way: “Where an insured knowingly and willfully overestimates the value of property destroyed or damaged, the policy is voided and the insured’s right to recover is defeated.”[Summit Machine Tool Manufacturing Corp. v. Great Northern Insurance Co., 997 S.W.2d 840 (Tex. App. Dist. 3, 1999)].

The Mississippi Supreme Court explained the reason for the “false swearing” defense that “[i]t would be unjust to allow a claimant to misrepresent facts which might lead to a valid defense and then to allow him to escape the consequences of the falsehood simply because he had succeeded so well that the company was unable to establish the defense,” Edmiston v. Schellenger, 343 So. 2d 465, 467 (Miss. 1977), cited with approval in Duke v. Hartford Fire Insurance Co., 617 F.2d 509, 510 (8th Cir. 1980) (per curiam) (applying Arkansas law).

The Eighth Circuit upheld a “false swearing” defense when it stated:

The Willises also argue that State Farm made no showing that it had actually relied on Mr. Willis’s misstatements, or that it would have done anything different had Mr. Willis told the truth. The jury was not instructed, however, that a showing of reliance was necessary, and the Willises did not object to the jury instruction. We think, moreover, that the instruction was correct: Although reliance must be shown in a claim for fraud in the inducement, & An exception to this general rule exists, of course, if a statutory provision specifically makes a party’s reliance an element of the defense of fraud or false swearing, see, e.g., McCullough v. State Farm Fire and Casualty Co., 80 F.3d 269, 272 (8th Cir. 1996) (applying a Nebraska statute), but no such statutory provision currently exists in Arkansas. [Willis v. State Farm Fire and Casualty Company, 219 F.3d 715, 219 F.3d 715 (8th Cir. 08/14/2000)]

The New Jersey Legislature defined false swearing as existing when a person:

makes a false statement under oath or equivalent affirmation, or swears or affirms the truth of such a statement previously made, when he does not believe the statement to be true. [New Jersey Statute, NJSA 2C:28-2.]

In North Carolina, the Court of Appeal recognized that:

It is a basic principle of insurance law that the insurer may avoid his obligation under the insurance contract by a showing that the insured made representations in his application that were material and false. Pittman v. First Protection Life Insurance Co., 72 N.C. App. 428, 433, 325 S.E. 2d 287, 291 (1985).

Misrepresentations on an insurance application are material if the knowledge or ignorance of it would naturally influence the judgment of the insurer in making the contract and accepting the risk. Bryant v. Nationwide Mut. Fire Ins. Co., 67 N.C. App. 616, 621, 313 S.E.2d 803, 807 (1984), revd on other grounds, 313 N.C. 362, 329 S.E.2d 333 (1985).  In order to void the policy pursuant to G.S. 58-44-15, defendant must show that the insured made statements that were: (1) false; (2) knowingly and willfully made; and (3) material.  Bryant v. Nationwide Mut. Fire Ins. Co., 313 N.C. 362, 370, 329 S.E. 2d 333, 338 (1985). Bell v. Nationwide Insurance Co., No. COA00-1464 (N.C. App., 11/06/2001).

False swearing is a crime in all states if it amounts to perjury. If it does not amount to perjury it is still a defense to a false claim.  In Harmon v. Star Valley Medical Center— P.3d —-, 2014 WL 3508016 (Wyo.), 2014 WY 90  the Supreme Court of Wyoming held that the legislature required a claim to be executed under penalty of false swearing rather than under penalty of perjury for good reason. There is a legitimate question as to whether signing and presenting a false claim would constitute perjury.  On the other hand, the false swearing statute imposes criminal liability for making a false statement under oath or under penalty of false swearing “in a matter where an oath is authorized by law.” To establish that an insured intended to deceive an insurer under Missouri law, the insurer must show that the insured: (1) knew the representation was false, or did not know whether the representation was true or false, and (2) intended that the insurer rely on the representation.

In Young v. Allstate Ins. Co.— F.3d —-, 2014 WL 3445896 (C.A.8 (Mo.)) the Eighth Circuit, concluded that during an examination under oath, the Youngs admitted that the initial inventory listed many items that were not damaged or destroyed in the fire. They gave various explanations for the discrepancies. The Youngs both denied that they had intentionally overstated the claim to Allstate. The district court granted summary judgment for Allstate on the ground that the Youngs, by signing the initial inventory, were deemed to have knowledge of its contents, and that “no reasonable juror could conclude that [the Youngs] did not materially misrepresent their property claim.” The Eighth Circuit affirmed.

An insurer can assert false swearing as an affirmative defense to an action brought by an insured. To constitute such a defense, the false statement must have been made under oath with the knowledge that it is false and with the intent that the person to whom the statement is made will rely on it. Actual reliance is not necessary.

Almost every policy that insures against the risk of loss of property requires the insured to submit a sworn proof of loss. The proof of loss must provide complete details regarding the property insured, the origin of the loss, and the value of the property claimed destroyed. A policy usually also requires the insured to give the insurer access to books and records to prove the claim. Where fraud is suspected, the insurer may demand that the insured be examined under oath. Significant deviations between the sworn proof of loss and the facts developed at an examination under oath can be the basis of a defense of fraud or false swearing. If false swearing is found to exist, it will normally constitute a complete defense to any claim under a property insurance policy.

A false statement made under oath in an examination under oath or proof of loss must be knowingly false. The difference between fraud and false swearing is that since false swearing involves a false statement made under oath, it is more difficult for the person speaking to back off from it when confronted.

This is well illustrated by the case Parasco v. Pacific Indemnity, 920 F. Supp. 647 (D.D. Pa., 1996), where the insurer suspected arson and denied the insureds’ fire loss claim. Although the insurer could not prove arson by the insureds, there was a legitimate question as to whether the fire was incendiary in nature. The insurer also had clear proof of misrepresentations made by the insureds under oath regarding, among other things, their active attempt to sell the property at the time of the fire. The court held that the materiality of false statements is to be determined at the time of investigation. The court further held that the insurer’s investigation into the insureds possible motive to commit arson was entirely reasonable and prudent, and inquiries into the insureds financial condition were, therefore, material to the issue of motive.

The absence of a criminal conviction for arson, fraud, or false swearing does not deprive the insurer of the false swearing defense. The burdens of proof are different. The crime requires proof beyond a reasonable doubt: the defense only requires proof by a preponderance, i.e., 50 percent + 1.

As both the proof of loss and the testimony at examination under oath are sworn to by the insured, any material falsehood is sufficient to establish the defense of false swearing. The same is true of any difference between the facts testified to during the examination under oath or stated in the proof of loss, and the facts developed from an audit of the insureds books and records or an insurer’s investigation.

The U.S. Supreme Court stated the rule, as follows:

A false answer as to any matter of fact material to the inquiry, knowingly and willfully made, with an intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if failed, it would be a fraud attempted. 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; 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 Insurance Co., 110 U.S. 81, 3 S. Ct. 507, 28 L. Ed. 76 (1884).

The standard fire policy language voids coverage as follows:

Concealment, fraud

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.

The language is not only clear and unambiguous it is mandated by statute. If the insured swears falsely the “entire policy shall be void.”  Insurers should not avoid the use of this important tool when they establish that an insured has sworn falsely.

ZALMA OPINION

Many people believe that they must exaggerate their claim to receive what they are truly owed. That belief is unfounded and dangerous. As the Eighth Circuit explained in Young even submitting a list of damaged or destroyed personal property with minor exaggerations, regardless of the explanation, submitting a false claim under oath is grounds for the insurer to declare the policy void.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

How Coinsurance Works

COINSURANCE

Coinsurance is an often misunderstood term and one that causes frequent dissatisfaction with insureds over claim settlements.

Most losses are partial losses.  It is rare that the entire building or amount of Covered Property is totally destroyed.  Knowing this, many individuals when insuring their business property seek limits for only part of its value.  The insured reasons, if one is more likely to have a partial loss than a total loss, why spend premium on complete insurance?

This reasoning by insureds, of course, defeats the concept that insurance is the sharing of risk.  The insured that does not insure total values is not sharing risk equally with other insureds.  If most insureds chose to insure only part of the value of their property, the insurance industry would still have approximately the same number of claims to pay; however, the premiums that it collected to pay those claims would be vastly reduced.  In order to have enough money to pay the losses, insurers would charge more for the lower values that insureds chose to insure.  Those insureds who chose to insure the full value of their property would pay even more than they now pay for the same amount of coverage.  Encouraging insureds to carry full insurance on their property allows premium levels to be fair.

The authors of the coverage forms were aware that expecting individuals and businesses to carry 100% of the value of their property is unrealistic.  They allowed the choice (and the corresponding premium level) of a percentage of the value of the property.

The percentage that they choose is called the “Coinsurance Percentage”.  The insured and the insurance company are co-insuring the property because the percentage that the insured chooses not to insure represents the amount of coverage that the insured is insuring himself.

In order to encourage insureds to insure a reasonably high percentage of their property’s value, the coverage form provides the incentive of the Coverage Extensions to those insureds who choose at least an 80% coinsurance Percentage.

The first Additional Condition explains how coinsurance works:

    1.    Coinsurance
    If a coinsurance percentage is shown, in the Declarations, the following condition applies.
        a.    We will not pay the full amount of any loss if the value of covered property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property.

The limit of insurance has to satisfy the coinsurance percentage in order for the full amount of any covered loss to be paid.

As an example consider the insured who chose an 80% coinsurance percentage and a coverage limit of $220,000.  After a loss the company adjuster determined that the full ACV of the property was $250,000.  Did the insured meet the coinsurance requirement?

ANSWER:  Yes.

80% of $250,000 is $200,000.  The insured’s limit was $220,000.

If the insured carried only $100,000 coverage would he have met his coinsurance requirement?

ANSWER:  No.

Obviously, $100,000 is less than $200,000.

The first paragraph of the Additional Condition on Coinsurance told us that unless the insured complied with the chosen coinsurance requirement, a loss will not be fully paid.  The second paragraph of the Coinsurance Condition tells us how much of such a loss will be paid.  It provides the formula in 4 steps:

The insurer determines the most it will pay using the following steps:

(1)    Multiply the value of covered property at the time of loss by the Coinsurance percentage:   $250,000 x 80% = $200,000.

(2)    Divide the Limit of Insurance of the property by the figure determined in step (1) $100,000/200,000 = .50

(3)    Multiply the total amount of the covered loss, before the application of any deductible, by the figure determined in step (2); and

If the covered loss amounted to $40,000, then step (3) would be: $40,000 x .50 = $20,000.

(4)    Subtract the deductible from the figure determined in step (3). If the insured’s deductible was $250.00, then step (4) would be: $20,000 – $250 = $19,750.

The amount determined in step (4) is the most the insurer will pay.  For the remainder, the insured will either have to rely on other insurance or absorb the loss himself/herself/itself.

The authors of the ISO form wanted to make the coinsurance methodology very clear so they put in the form three coinsurance examples.  I just used the first one.  The examples in the coverage form also follow:

Notice that the deductible is subtracted from the adjusted loss.  The deductible subtraction is the last step in the Coinsurance process.  This is somewhat different from forms that were in use earlier.  The new methodology is less advantageous to the insured and so is more reason to make sure that the coverage limit satisfies the Coinsurance requirement.

When an insured, usually with the assistance of an insurance agent or broker, determines the coverage limit of a policy they are almost always thinking in terms of current values.  A building that has an actual cash value today of $500,000 must be insured to $450,000 in order to meet a 90% coinsurance requirement and have losses fully covered (minus the deductible, of course).  If a covered loss occurs in the latter part of the coverage term, it is possible that the ACV of the building may have risen.  It might be $550,000 by then.  Similarly, the value may have reduced.  Regardless, the coinsurance clause is applied at the “time of loss”.

The insured will not profit nor will the insured obtain a reduced premium if his building’s value is reduced.  He will, however, recover more his full loss.

The coinsurance clause does not always cause a penalty.  in a situation where the loss is severe, or total, the insured may recover the full policy limit even after application of the policy limit.  Consider the following example:

For example:

When:
    The value of the property is                           $250,000
    The Coinsurance percentage for it is            80%
    The Limit of Insurance for it is                    $100,000
    The deductible is                                            $      250
    The amount of loss is                                    $250,000

Step (1):    $250,000 x 80% = $200,000 (the minimum amount of insurance to meet your Coinsurance requirements)
    Step (2):    $100,000 / $200,000 = .50
    Step (3):    $250,000 x. .50 = $125,000.
    Step (4):    $125,000 – $250 = $124,750.

The insurer will pay the $100,000 limit of liability of the policy. Regardless of the application of the coinsurance clause the amount recoverable is still more than the policy limit and the insured collects the limit. The insured, however, must make up the difference between the limit and the amount of loss.

Note, not only does the insured recover the entire policy limit but also is not required to pay the deductible because the adjusted loss less the deductible still exceeds the policy limit.

ZALMA OPINION

Coinsurance clauses have two purposes. They give the insured an incentive to insure property up to its true value by causing the insured to self-insure a part of the risk if proper limits are not acquired. It protects insurers against insureds who attempt to avoid appropriate premium. Insurance is a business of utmost good faith. The self insurance created by a coinsurance clause is not a penalty it is a way of enforcing the promise made by the insured at the time the policy was acquired that insurance equal to the true value of the policy was acquired.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | 1 Comment

Courts Should Never Rewrite Insurance Policies

Tort Claim Is Against Defendant Not Defendant’s Insurer

Insurers and insureds, when a loss occurs, try to increase or limit the coverages available to their benefit when the policy’s wording does not support their position. When a permissive user, insured, injures the named insured it would seem logical that the named insured should not be able to collect under the policy. However, if the policy does not say the insured may not recover, a court should be loathe to rewrite the policy.

In Blasing v. Zurich American Ins. Co. — N.W.2d —-, 2014 WL 3512861 (Wis., 7/17/2014), 2014 WI 73 the Wisconsin Supreme Court was faced with just such a situation and, in a lengthy decision resolved the dispute.

This is a review of a published decision of the court of appeals reversing an order of the circuit court for Jefferson County, William F. Hue, Judge, and remanding the cause for further proceedings [Blasing v. Zurich Am. Ins. Co., 2013 WI App 27, 346 Wis.2d 30, 827 N.W.2d 909]. The circuit court granted American Family Insurance Company’s motion for summary judgment, ruling that American Family had no duty to defend or indemnify under its automobile liability insurance policy. The court of appeals reversed the order of the circuit court, holding against American Family.

FACTS

Vicki Blasing, the plaintiff, was injured when lumber that was being loaded into her pickup truck by an employee of Menard, Inc. fell on her foot. Vicki Blasing is the named insured in the American Family policy.

The facts surrounding the alleged incident and injuries are undisputed. On September 16, 2008, the named insured-plaintiff, Vicki Blasing, visited a store owned and operated by Menard, Inc. in the Village of Johnson Creek, Jefferson County, Wisconsin, to pick up lumber she had purchased at Menard. She drove her 1990 Chevrolet pickup truck to the store and parked it in a lumberyard area.

An employee of Menard used a forklift to place the purchased lumber into the plaintiff’s pickup truck, which was insured by the American Family policy. The plaintiff stood near the rear passenger side of her truck. While the employee was attempting to place the lumber into the pickup truck, some of the lumber fell and hit the plaintiff’s foot.

The plaintiff, a named insured, brought a tort action for personal injury damages against Menard and Zurich American Insurance Company. The plaintiff did not sue the Menard employee. Menard’s potential liability is vicarious liability for the torts of its employee. Menard claims its employee is an insured under the American Family policy, as a permissive user of the plaintiff’s pickup truck. Menard is insured under a separate general liability insurance policy issued by Zurich Insurance to Menard.

ISSUES

The ultimate question before the court is whether American Family has a duty to defend and indemnify Menard when the injury was to the named insured under the American Family policy and the alleged tortfeasor (a Menard employee) was a permissive user of the vehicle insured under the American Family policy.

The issue presented in the present case, simply stated, is whether American Family is obliged under the policy it sold to the named insured-plaintiff in the present case to defend and indemnify an alleged tortfeasor when the tortfeasor is a permissive user of the insured vehicle and the plaintiff-injured victim is the named insured.

The court of appeals answered the first two questions in the affirmative and answered the third question by stating, “[P]ermissive user coverage is required in this case by the omnibus statute.”

The policy promises to cover any insured for liability for damages to any person. It does not exclude recovery by an injured victim who happens to be the named insured or who happens to be another insured under the policy.

ANALYSIS

Wisconsin case law has followed what appears to be the majority rule recognizing that the named insured under an automobile liability insurance policy may recover from the insurer when injured by another insured under the policy. In the greater number of cases, the courts have sustained the right of the named insured to recover under an automobile liability policy for an injury to such insured.

This case required the Supreme Court to interpret and apply an insurance policy and a statute to undisputed facts. The interpretation of a statute and insurance policy and their application to undisputed facts ordinarily present questions of law that an appellate court decides independently of the analysis of trial courts or other courts of appeal.

Is Loading a Pick-Up a “Use” of the Pick-Up?

The Supreme Court first sought to determine whether the tortfeasor’s actions constituted a “use” of the pickup truck under the American Family automobile liability insurance policy.

The policy defines “insured person” or “insured persons” to mean the named insured (i.e., the policyholder), the named insured’s relatives, or persons using the insured car with the named insured’s permission, as follows:

The policy defines “use” to mean “ownership, maintenance, or use” and provides that American Family will indemnify and defend an insured person for “bodily injury and property damage due to the use of a car or utility trailer.”  Use of a vehicle is not limited to the driving of the vehicle.

Wisconsin courts have interpreted “use” of a vehicle to include a wide range of non-driving activities, including: unloading a rifle from the vehicle, loading and unloading a vehicle; gesturing to a child to assist her in crossing a road; shooting game from the insured vehicle; and loading a scrapped dump truck tailgate into a pickup truck under uninsured motorist coverage.

Loading an insured pickup truck with lumber is reasonably contemplated by the insured and insurer because it is consistent with the ordinary transportation of persons and goods inherent in the purpose of the pickup truck. Therefore, the Wisconsin Supreme Court concluded that under the American Family policy, the Menard employee was a permissive user and as such was an insured under the American Family policy.

Does American Family’s policy require American Family to defend and indemnify a permissive user tortfeasor when the injured victim is a named insured under the policy?

American Family relies solely on the argument that if the court requires American Family to defend and indemnify Menard, the result would be absurd, thus violating a cardinal rule of interpretation: A court’s interpretation should avoid absurd or unreasonable results.

In this case the named insured plaintiff is not making a claim against American Family for her injuries. The plaintiff is suing Menard and Zurich Insurance for her injuries as a third-party victim of Menard’s tort, not as an insured under the American Family policy.

The plaintiff’s claim against Menard depends on Menard’s liability to her as the third-party victim of Menard’s tort. American Family is defending its insured, the Menard employee, against liability for injury to a person who for purposes of this lawsuit is a third party to the policy, not a named insured.

The American Family policy treats all insureds alike, including a named insured and the permissive user, covering all of them for liability for injury to another, regardless of whether the victim is also an insured. Several Wisconsin cases have held that the named insured under an automobile liability insurance policy is not precluded from recovering on the policy when an additional insured inflicts injury upon the named insured while using the vehicle within the terms of the policy.

In several cases, an automobile liability insurance company has been required to defend and indemnify a permissive user tortfeasor who injured an insured while loading or unloading a covered vehicle. The fact pattern is similar in a number of cases. Coverage is not based on the identity of the victim absent language in the policy stating otherwise.

American Family asked the Supreme Court to reverse the court of appeals and hold that the American Family policy does not cover the liability of a permissive user tortfeasor who injures a named insured. Wisconsin case law makes no distinction between injured parties who are named insureds and other insureds. Accordingly the decision of the court of appeals was affirmed.

ZALMA OPINION

Automobile policies, to prevent fraud and collusion, exclude injuries to members of the insured’s family. They do not exclude injuries to a named insured by a permissive user not a member of the family. The argument that the result is “absurd” did not fly because if the insurer wanted to avoid what it called an absurd result it could simply have expanded the family exclusion to cover any injury to any insured while any other insured operates the vehicle.

Courts are required to interpret insurance policies not to rewrite them to avoid what one party may consider an absurd result. If the result was absurd it was so because of the manner in which the policy was written.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

The Limits on An Insurance Agent’s Duty

Broker’s or Agent’s Duty Not Unlimited

When a person demands a particular amount of insurance coverage, when the agent obtains the coverage demanded, and then there is a loss where coverage is inadequate buyer’s remorse sets in and litigation is commenced. In Duffy v. Certain Underwriters at Lloyd’s of London Subscribing to Policy Number 09ASC185004, Not Reported in A.3d, 2014 WL 3557861 (N.J.Super.A.D. 2014) a New Jersey appellate court was faced with a need to resolve a dispute between a dissapointed insured and her broker.

FACTS

Plaintiff owned three residential dwellings: her primary home in Trenton; a small beach bungalow in Seaside Park; and a three-story Victorian home in Ocean Grove. The Ocean Grove property suffered an electrical fire and is the subject of the litigation (the property). Plaintiff procured a homeowner’s policy issued by Lloyd’s of London (the policy), insuring the home against property and casualty losses. The amount of coverage available through the policy was $150,000. The amount of fire damage exceeded the policy limits. Plaintiff filed her complaint alleging defendant’s procurement of inadequate insurance coverage constituted professional negligence and caused her loss.

Defendant began as plaintiff’s insurance broker in 1996, when it acquired another insurance agency that had been servicing plaintiff’s needs. In 2002, plaintiff received a notice from Newark Insurance Company (Newark) that her homeowner’s insurance would not be renewed effective March 10, 2003. Plaintiff contacted defendant and spoke to Patricia Browne, a licensed insurance producer and defendant’s Eatontown office manager, who ultimately placed plaintiff’s new coverage.

During her deposition, Browne testified the policy with Lloyd’s, that she never met plaintiff, but spoke to her approximately three or four times regarding the property and the desired coverage.

Plaintiff expressed she “wanted those homes to remain covered under the amount that was on the policy at that time [,]” that is, under the Newark policy, because they were second homes and unencumbered by mortgages.

Regarding the property, Browne testified she asked plaintiff for the total square footage of the dwelling, the age of the property, the number of rooms, its distance from a fire hydrant and from a fire department. Browne stated plaintiff told her the property totaled 900 square feet (it was actually closer to 1900 square feet) and advised the home was built in 1955 (when it was constructed in approximately 1875). Brown used a calculator provided by another insurer to determine that $150,000 was adequate for a 900 square foot dwelling.

Browne sent plaintiff the drafted homeowner’s application and requested she correct any errors. Plaintiff signed and returned her application for insurance. Browne advised the company may ask plaintiff to confirm the adequacy of the coverage each year.

The policy with Lloyd’s included: (1) dwelling in the amount of $150,000; (2) other structures in the amount of $15,000; (3) personal property in the amount of $25,000; and (4) loss of use in the amount of $30,000. The annual premium was $833.27. The policy was renewed each year thereafter, utilizing the same coverage limits and was in place when the fire loss occurred.

After the fire plaintiff obtained an estimate, which reported the property’s repair and restoration cost at approximately $460,000. Plaintiff filed her professional negligence action against Lloyd’s and defendant. Ultimately, Lloyd’s tendered the policy limits, with accrued interest, in satisfaction of plaintiff’s claim. The action proceeded against defendant.

TRIAL COURT DECISION

Plaintiff alleged defendant breached its fiduciary duty to protect her interests. Plaintiff believed Browne confused the square footage of the beach bungalow, which is 936 square feet, and suggested this error resulted in the inadequate protection for the property. Defendant moved for summary judgment. Focusing on whether defendant had a duty that was breached and proximately cause plaintiff’s loss, the judge concluded that although an insurance broker has a duty to act with reasonable skill and diligence, the duty is not unlimited, and did not include an obligation “to advise an insured to consider higher amounts of homeowner’s insurance.”

ANALYSIS

In this matter, plaintiff identifies the defense expert’s deposition as the only discovery not completed. The expert’s opinion as to the duty defendant owed plaintiff had already been articulated in his written report, which offered no independent information related to the facts surrounding the amount of homeowner’s insurance sought by plaintiff. The motion judge properly found plaintiff could not identify any facts expected to be obtained during the expert’s deposition that would obviate consideration of summary judgment.

It is well-settled that to render a person liable on the theory of negligence there must be some breach of duty, by action or inaction, on the part of the defendant to the individual complaining, the observance of which duty would have averted or avoided the injury. Determination of whether a duty exists turns on questions of fairness and policy. A court must weigh the relationship of the parties, the nature of the risk, and the public interest in the proposed solutions. The existence of a duty to exercise reasonable care to avoid a risk of harm to another is always a question of law left to the court not one of fact.

Insurance intermediaries in this State must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. The fiduciary relationship gives rise to a duty owed by the broker to the client to exercise good faith and reasonable skill in advising insureds.

One who holds himself or herself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him or her to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He or she is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available in the area in which his or her principal seeks to be protected. If he or she neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he or she undertook to supply, because of his or her failure to exercise the requisite skill or diligence, he or she becomes liable to his or her principal for the loss sustained thereby.

The scope of an insurance broker’s obligations to a prospective insured, is to procure the insurance; secure a policy that is neither void nor materially deficient; and provide the coverage he or she undertook to supply. However, the duty of a broker or agent is not unlimited.

The claim asserted is based on the broker’s negligent failure to procure the appropriate coverage. However, there is no evidence presented by the plaintiff showing plaintiff requested a replacement policy. In fact, there is no evidence at odds with Browne’s testimony plaintiff sought coverage similar to her Newark policy; advised the $150,000 coverage was adequate because the home was unencumbered; or expressed a concern to avoid possible modifications in coverage because of the concomitant increase in premiums. In addition, when plaintiff received the policy, which stated the total coverage, she did not object when it was first issued or at the time of subsequent renewals. The amount of coverage is clearly and prominently stated and easily understood. If plaintiff was dissatisfied with the extent of coverage, she failed to exercise the opportunity to raise such concerns with each annual renewal.

Absent a special relationship, there is no common law duty of a carrier or its agents to advise an insured concerning the possible need for higher policy limits upon renewal.

The appellate court refused to enlarge the scope of duty requested by the plaintiff.  A broker’s liability is not unbounded and in the area of homeowner’s insurance the Legislature should construct the parameters of responsibility, not the courts.  Agents and brokers are not required to inform clients their present coverage is inadequate or calculate the replacement value of the home in circumstances where the insured does not request or desire such service.

ZALMA OPINION

Insurance agents and brokers are not clairvoyant.  They have no duty to place insurance that may be needed in the future without a request or information from the insured. In this case the insured insisted on only $150,000 coverage for the dwelling to avoid an increase in premium. It was only after the fire and receipt of a repair estimate that the plaintiff decided she needed more coverage. Buyer’s remorse is not sufficient to hold an agent responsible for the error of the insured who blatantly lied to the insurer about the age of the dwelling and its size.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Corporation and Sole Owner are Separate Entities

A Court May Not Draft a Better Insurance Policy Than The One Purchased

As the U.S. Supreme Court has recently affirmed in Burwell v. Hobby Lobby Stores, Inc., — S.Ct. —-, 2014 WL 2921709 (U.S.), 123 Fair Empl.Prac.Cas. (BNA) 621, a corporation is a “person” standing alone and separate from its individual owners. Insurance issued to a corporation insures the corporation and not the individual owners of the corporation for their individual torts.

In Harleysville Ins. Co. of New Jersey v. Burnett, Not Reported in A.3d, 2014 WL 3557692 (N.J.Super.A.D., 7-2014) a New Jersey appellate court was asked to rule that a corporate policy provided insurance for a risk the policy did not take. Plaintiff Harleysville Insurance Company of New Jersey (Harleysville) appealed from the trial court order denying its motion for summary judgment and granting the cross-motions of defendants Penn National Mutual Casualty Insurance Company (Penn) and Rochdale Insurance Company (Rochdale), dismissing its complaint with prejudice.

FACTS

Harleysville provided homeowners’ insurance to defendants William and Anita Burnett for their residential property located in Monmouth Junction. William also operated a truck rental and asphalt paving business, WR Burnett, Inc. (WR Burnett) on the property. William was the sole owner of this business. The Burnetts entered into a lease agreement with WR Burnett for its use of a portion of their property, but that lease agreement did not become effective until January 1, 2010.

On June 24, 2009, defendant Jeffrey Casey, an employee of WR Burnett, sustained injuries when a tree fell on him as he was taking a cigarette break. At the time the tree fell on Jeffrey, William and his cousin, Philip Jackson, who was not a WR Burnett employee, were cutting down dead trees on the property to allow for additional space to store trucks.
Jeffrey and his wife, Sarah, commenced a personal injury action against the Burnetts asserting that their negligence caused the resulting injuries they each sustained. The complaint did not name the corporation, WR Burnett. In October 2009 Harleysville offered to defend the Burnetts in this action, but reserved its right to deny coverage under the business pursuits exclusion.

In December 2010, while this action was pending, Jeffrey filed a worker’s compensation petition with WR Burnett’s employer’s liability insurer, Rochdale. Under that policy, Rochdale agreed that it would pay damages to its insured “because of bodily injury to your employee that arises out of and in the course of employment, claimed against you in a capacity other than as employer.” Rochdale answered the petition, admitting that “a compensable accident took place” but denied that Jeffrey suffered permanent disability and put him to his proofs.

On January 20, 2011, Harleysville filed a motion for summary judgment in the Caseys’ personal injury action, arguing that the cause of action was barred by the exclusivity provisions of the Worker’s Compensation Act. Judge John J. Coyle, Jr. denied the motion, finding an issue of fact existed as to whether William removed the trees in his capacity as a business owner or a landowner. That factual dispute, however, was never resolved because the Caseys and the Burnetts entered into a settlement agreement on May 24, 2011. The agreement did not preclude Jeffrey from continuing to pursue his worker’s compensation claim. In addition, the agreement did not preclude Harleysville from continuing to pursue its declaratory judgment action it instituted against Rochdale and Penn in January 2011. The Burnetts, under the agreement, assigned to Harleysville all of their rights and claims, “whether contractual, contribution, indemnity, or in tort, that the Burnetts had, currently have, or will have, against any current or future parties to the Coverage Action, including but not limited to [Rochdale] and [Penn]….”

Harleysville subsequently filed a summary judgment motion. Penn and Rochdale filed cross-motions for summary judgment. Rochdale argued the insured under its policy was WR Burnett, not the Burnetts, who were sued in their individual capacities in the underlying action; consequently, it had no obligation to defend them. Penn argued it was entitled to summary judgment because Jeffrey contended he was acting within the scope of his employment at the time he sustained his injuries and its policy expressly excluded coverage for bodily injuries sustained during the course of employment.

The trial judge explained that the parties framed the issue before the court as whether William, when removing trees on his property, was acting as a homeowner or business owner. The judge concluded this question was irrelevant because Harleysville was not entitled to recover in either instance. If William had been acting within his capacity as a landowner, Harleysville would not be entitled to summary judgment and would be responsible for bearing the defense costs the Burnetts incurred, as their homeowner’s insurer. Also the Caseys sued William individually and not in his corporate capacity; however, even if William were acting in his corporate capacity, Rochdale would have a complete defense in the form of the worker’s compensation statute’s exclusivity bar.

ANALYSIS

An ambiguous insurance policy is ordinarily resolved as a question of law, in favor of the insured. The policy is interpreted liberally to afford coverage to the “fullest extent that fair interpretation will allow.” When the language of an insurance policy is clear, we must enforce its terms as written. A court may not draft a better insurance policy than the one purchased, regardless of concern for the inured parties.

Where a corporation is the named insured in an insurance policy, New Jersey courts have found that the individual owners of the corporation are not implicitly insured. A professional corporation and its sole owner are separate entities and the immunity of the workers’ compensation laws that shields the corporation from tort liability to employees does not extend to the owner of the corporation. A corporation is an entity which is also separate from its stockholders and in the absence of fraud or injustice, courts generally will not pierce the corporate veil to impose liability on the corporate principals.

In reviewing and interpreting the plain language of the Rochdale policy, the terms of the policy are not ambiguous. The named insured is WR Burnett. Although Burnett is the sole owner of WR Burnett, the corporation is an entity separate and distinct from William, who Jeffrey sued in his individual capacity.  No reading of the Rochdale policy could lead to the conclusion that its terms were intended to apply to principals, shareholders, and employees of WR Burnett.

The appellate court found no merit in Harleysville’s contention the trial court erred in failing to give credence to its business risk exclusion, which precludes coverage for the benefit of its insured for personal injuries sustained which arise out of  “or in connection with a ‘business’ engaged in by an ‘insured.’ This exclusion applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the ‘business[.]’”

The Rochdale policy insured the corporation, not William. In short, Rochdale was under no obligation to defend and indemnify the Burnetts. In light of this conclusion, the trial court properly determined Rochdale was under no duty to reimburse Harleysville for legal fees and costs it incurred in defending the Burnetts in the underlying action.

ZALMA OPINION

The injured person and his counsel were intelligent and prudent. Since he was injured by a falling tree cut down by the individual defendant who was the sole owner of the corporation for which he worked, he sued the individual and separately demanded benefits from his employer’s workers’ compensation insurer. He recognized, as the insurers did not, that he was dealing with two different entities. His employer was a corporation and he was injured in the course and scope of his employment. The individuals, cutting down the tree, were negligent and he sued them in their individual capacity.

The insurers imprudently sought to change the wording of the insurance policies to obtain indemnity from another insurer that did not insure the risks claimed. The court, recognizing the difference between an individual and a corporation, produced justice and made the insurers pay for the risks they agreed to pay and nothing more.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Judges Cannot Make Law

Failure to Submit Proof of Loss

Fatal to Claim

Since the beginning of first party property insurance insureds were required to submit to their insurer a sworn statement in proof of loss before they had any entitlement to the benefits of the insurance. The standard fire insurance policy, over a century old and adopted in almost every state, requires the insured to submit a sworn proof of loss no later than 60 days after the fire. When the federal government established the national flood insurance program it adopted language similar to that provided by the standard fire policy.

Many states, after finding the proof of loss requirement to be draconian, have by statute and court decision, provided excuses for the failure to submit a proof of loss within the 60 day limit. Those cases require that the failure prejudice the rights of the insurer. Further, insurers, seeking to make it easier for an insured to present a claim, have modified their insurance policies to only require the proof of loss within 60 days after the insurer requires the submission of a proof of loss.

The Eighth Circuit Court of Appeal was called upon to deal with a flood insurance claim where the insured, whose home of more than 50 years, was destroyed by flood. In Stoner v. Southern Farm Bureau Cas. Ins. Co. — F.3d —-, 2014 WL 3398377 (C.A.8 (Ark.)) Mrs. Stone suffered serious damage to her home but she did not submit the one-page proof of loss form required by the federal standard flood insurance policy. See 44 C.F.R. pt. 61, app. A(1), art. VII(J)(4); Federal Emergency Management Agency (FEMA), Proof of Loss, Form No. 086–0–9 (Oct.2010).  [See the Flood Handbook here.] The handbook provides, in part:

Your official claim for damages is called a Proof of Loss.This must be fully completed and signed and in the hands of your insurance company within 60 days after the loss occurs. The Proof of Loss includes a detailed estimate to replace or repair the damaged property. In most cases, the adjuster, as a courtesy, will provide you with a suggested Proof of Loss. However, you are responsible for making sure that it is complete, accurate and filed in a timely manner.

When people seek benefits from a taxpayer-funded program, it is fair to require them to fill out the correct form. As Judge Richard S. Arnold said in his elegantly straightforward way, judges cannot “make law because we think a certain rule of law is a good thing.” Richard S. Arnold, Address at the Eighth Circuit Judicial Conference: The Art of Judging (Aug. 8, 2002).

Despite the court’s sympathy for Mrs. Jennie Stoner’s loss, whose home of 50 years suffered significant damage from flooding of the White River in Phillips County, Arkansas, we must follow the law.

In accordance with explicit federal law governing the National Flood Insurance Program, the Eighth Circuit reversed and remanded the case for entry of judgment in favor of Farm Bureau. Exercising the discretion provided to the court under Federal Rule of Appellate Procedure 39(a), it declined to tax Farm Bureau’s costs against Mrs. Stoner.

ZALMA OPINION

Because judges are lawyers they often tend to write lengthy opinions that confuse more than elucidate. Chief Judge William J. Riley, sitting in Omaha, Nebraska, who wrote this opinion, said everything that was needed in this case in a few paragraphs.

Judges interpret, they do not make, law. The National Flood Insurance Program requires an insured to produce a sworn statement in proof of loss within 60 days of damage by flood. Mrs. Stoner failed to submit the required form. As a result she gets nothing.

It is important for every person with flood insurance, every lawyer and public adjuster who represents an insured with a flood loss, to comply with the requirements of the policy or face an unhappy insured who can never recover for the loss. If Mrs. Stoner was represented by a lawyer or public adjuster who failed to help her submit her proof of loss, she is not without a remedy. She can sue her lawyer or public adjuster. If not she is out of luck. She will recover nothing and has no remedy other than free money from FEMA as a victim of a flood. She should have read the conditions of her flood insurance policy and would have avoided this problem.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Limits of Claim Made & Reported Policy

Failure to Report Claim Promptly Fatal

It does not take a brain surgeon to understand that when a policy requires a claim to be made against the insured and reported to the insurer within the policy period waiting years to report the claim will defeat coverage.

FACTS

In LeCuyer v. West Bend Mut. Ins. Co., Not Reported in N.W.2d, 2014 WL 3396491 (Minn.App, July 14, 2014),  Samantha LeCuyer obtained a money judgment against her former employer for sexual-harassment retaliation but did not collect. She informed the employer’s former insurer, West Bend Mutual Insurance Company, of the judgment nearly two years after the employer’s policy expired, and she sought a declaratory judgment that would require West Bend to pay her the judgment amount. The district court granted summary judgment in favor of West Bend.

Samantha LeCuyer worked as a security guard for Wolf Protective Services beginning in August 2008. LeCuyer felt that two of her coworkers sexually harassed her. She complained to supervisors in September and October, and the company terminated her employment in December. LeCuyer sent a letter to the company on January 13, 2009, outlining her claims. Wolf’s counsel responded by letter stating that Wolf would review its insurance policies and consider whether to submit a claim to its insurer. Wolf never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims. LeCuyer sued in April, alleging the company violated the Minnesota Human Rights Act. Wolf retained new counsel but still never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims.

Wolf filed an answer to LeCuyer’s suit. Wolf’s new counsel withdrew soon afterward, and Wolf did not retain another attorney. The district court conducted a bench trial in 2010. Wolf did not appear. The district court entered a default judgment against Wolf for $520,693.

LeCuyer eventually discovered that an affiliate of West Bend Mutual Insurance had issued Wolf an insurance policy covering employment practices. The policy commenced on July 25, 2008 and ended on July 25, 2009. She wrote to West Bend on June 2, 2011, informing it of the default judgment against Wolf and requesting a copy of the policy. West Bend responded that it had received no previous notice of the claim or the judgment and that it had cancelled Wolf’s policy in October 2008 because Wolf had stopped paying premiums. It informed LeCuyer that Wolf’s policy had been a claims-made policy, which covered only claims made during the coverage period.

DECISION

LeCuyer argues that she satisfied the notice provision of the insurance policy, making insurance coverage available to pay the damages ascribed to Wolf, because she reported the claim of harassment to Wolf. The parties agree that Wolf’s insurance policy with West Bend controls the primary question in this appeal. The policy disclaims any obligation to provide coverage beyond its specific terms. It promises to “pay on behalf of the insured for ‘damages’ … arising out of any ‘employment practices’ to which this insurance applies,” but it states that West Bend will cover an employee’s damages claim against Wolf “only if … [a] ‘claim’ is both … made against any insured, in accordance with paragraph 3 below, during the policy period … and [r]eported to us … during the policy period or within thirty … days thereafter.” (Emphasis added).

The policy explains that a claim is made “[w]hen notice of such ‘claim’ is received and recorded by [Wolf] or by [West Bend], whichever comes first.” West Bend is therefore liable to pay the judgment against Wolf only if West Bend received notice of LeCuyer’s claim according to the policy’s preconditions.

LeCuyer must carry the burden. She must convince the court after it reads the policy as a whole while giving effect to the plain and ordinary meaning of its terms, that coverage applies. To do so, LeCuyer, as the party asserting coverage, must establish a prima facie case that the policy applies. The Minnesota court concluded that LeCuyer did not meet this burden. It noted that the policy was written to be effective for one year beginning July 25, 2008. West Bend asserts that it cancelled Wolf’s policy October 16, 2008, for nonpayment of premiums. LeCuyer did not report her sexual harassment claim to West Bend until her June 2011 letter. The claim was therefore not “reported to” West Bend until almost two years after the policy ended on its own terms. Because the policy covers only claims made and reported to West Bend “during the policy period or within thirty … days thereafter,” the June 2011 notice was too little and too late to trigger coverage.

The policy requires both a claim and a report to the insurer before coverage can apply. The policy clearly does not cover any claims not reported to West Bend within the policy period. Because neither Wolf nor LeCuyer reported the claim to West Bend within the period mandated under the policy, the policy unambiguously provides no coverage.

LeCuyer’s, grasping at straws, presented as a final argument that Minnesota law requires West Bend to cover the judgment against Wolf because Wolf is bankrupt, insolvent, or dissolved. She bases this argument solely on Minnesota Statutes section 60A.08, subdivision 6 (2012), which specifies that all Minnesota insurance policies: “shall, notwithstanding anything in the policy to the contrary, be deemed to contain the following condition: ¶ The bankruptcy, insolvency, or dissolution of the insured shall not relieve the insurer of any of its obligations under this policy, and in case an execution against the insured on a final judgment is returned unsatisfied, then such judgment creditor shall have a right of action on this policy against the company to the same extent that the insured would have, had the insured paid the final judgment.”

LeCuyer urges that this statute embodies a public policy of guaranteeing insurance coverage to individuals with claims against insolvent entities. West Bend’s insurance contract contains a provision substantially similar to the statutory clause. Wolf’s insurance policy adheres to Minnesota law. Neither the policy nor the statute require coverage. The statute and Wolf’s insurance policy provide only that bankruptcy or insolvency will not relieve West Bend of its obligations “under this policy.” It does not create any new obligations beyond those required under the policy.

Even if LeCuyer had presented evidence that Wolf was bankrupt or insolvent when LeCuyer filed her lawsuit, the policy does not impose coverage simply if Wolf is bankrupt or insolvent. For coverage to apply Wolf or LeCuyer must first report the claim to West Bend during the policy period and establish that the tort occurred during the policy period. This LeCuyer could not do and, as a result, her claim, suit and appeal failed.

ZALMA OPINION

Claims made and reported policies are less expensive than other policies because their exposure is limited to a specified period of time for a claim to be both made and reported. LeCuyer had the ability to report the claim promptly to West Bend had she, through her lawyers, while Wolf actively participated in the lawsuit, or in a judgment debtor exam after she obtained a judgment, learned the identity of the West Bend and its policy. She did not learn of its existence for more than two years. Her judgment can be framed and put on a wall but its value against a bankrupt defendant is nil.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

When Is a House “Wholly Destroyed?”

Valued Policy Law Problems

Valued policy laws require an insurer to pay the limits of liability of a policy regardless of the actual cash value, actual cost to repair or actual replacement value of a property. As a result it provides an incentive to an insured to have the property, after a covered loss, declared a total loss. Many states have refused to enact valued policy laws to avoid the temptation to buy a distressed property, buy excessive insurance, and then cause a total loss recognizing that the valued policy laws create a moral or morale hazard to increase the risk of loss.

In Behrndt v. Austin Mut. Ins. Co., Slip Copy, 2014 WL 3407305 (Wis.App.) the Wisconsin Court of Appeal was called upon to resolve a dispute over the application of the Wisconsin valued policy law.

FACTS

After their home was damaged by a fire, Cole and Ashley Behrndt sued Austin Mutual Insurance Company, alleging they were entitled to the face value of their homeowners insurance policy because their property was a total loss under the valued policy law.  The circuit court granted summary judgment in favor of Austin Mutual. On appeal, the Behrndts argue Austin Mutual is not entitled to summary judgment because their house was a total loss and because Austin Mutual should be equitably estopped from arguing their property was not a total loss.

BACKGROUND

In July 2008, the Behrndts purchased a home prior to a foreclosure for $132,000. Believing they purchased the house below market value, the Behrndts wanted to insure the house for $150,000 or $175,000, and they purchased a homeowners insurance policy from Austin Mutual. In late 2008, after determining the replacement cost of the Behrndts’ home was greater than their current policy, Austin Mutual increased the value of the Behrndts’ policy. The Behrndts accepted this increase and paid the increased premiums accordingly.

A fire damaged the Behrndts’ home on November 25, 2011. At the time of the fire, the homeowners insurance policy issued by Austin Mutual had a face value of $263,500. le, Austin Mutual hired: adjustor Michael Heck, to adjust the Behrndts’ loss; structural engineer Geoffrey Jillson, to inspect and evaluate the structural integrity of the Behrndts’ home and any building code issues; and licensed contractor Rene Bockart, to evaluate the scope of and damage to the Behrndts’ house.

Heck averred that, from the outside of the home, there was no indication that a fire had occurred other than some smoking of the windows. The fire damage was not apparent until he entered the structure. Heck opined, “The foundation, roof and outer walls did not sustain any damage. There was some fire damage on the interior of the dwelling, but the majority of the repairs will be for remediation due to smoke damage.” Jillson reached similar conclusions as did Bockart. Bockart estimated that the actual cash value of repair was $120,275.11 and the replacement value was $147,579.55.

Based on the opinions of Heck, Jillson, and Bockart, Austin Mutual appealed the Town’s raze order. A special board meeting was held on January 19, 2012. After viewing the structure and hearing the evidence presented by Austin Mutual and the Behrndts, the Town overturned the raze order. Austin Mutual tendered a check to the Behrndts in the amount of $120,257.11. The Behrndts continued to dispute the amount of the loss. Austin Mutual invoked the appraisal provisions of the Behrndts’ insurance policy.  The appraisal panel determined the property could be repaired and determined the actual cash value of the repairs was $100,476.35 and the replacement cost value was $154,579.

The Behrndts then brought the present suit against Austin Mutual, alleging they were entitled to the face value of the policy, or $263,500, because their house was a “total loss.” The Behrndts contended their house was a total loss because the cost of repair exceeded the house’s pre-fire value.

Austin Mutual moved for summary judgment. It argued the cost of repair compared to the property’s pre-fire value is not the standard for determining a “total loss” in Wisconsin. Austin Mutual asserted a property is considered a total loss only if it is “wholly destroyed.” Since the Behrndts’ house was not “wholly destroyed” because the property’s specific character as a house was still recognizable and the evidence showed the house was repairable, it refused to pay the policy limit. The circuit court granted summary judgment in favor of Austin Mutual.

DISCUSSION

Valued Policy Law

Originally enacted in 1874, the valued policy law requires insurers to pay the policy limits, not the actual amount of a loss, to an insured if the property has been “wholly destroyed.” The law was designed to discourage owners from over-insuring property while simultaneously thwarting insurers from collecting excessive premiums. The valued policy law provides: “Total loss. Whenever any policy insures real property that is owned and occupied by the insured primarily as a dwelling and the property is wholly destroyed, without criminal fault on the part of the insured or the insured’s assigns, the amount of the loss shall be taken conclusively to be the policy limits of the policy insuring the property.”

“Wholly destroyed” under the valued policy law does not mean that the material of which the building is composed shall be annihilated or reduced to a shapeless mass, rather, when its specific character as a structure no longer remains and there is nothing left but the cellar walls and a dilapidated foundation, the loss is total within the meaning of the statute.

Wholly destroyed does not mean an absolute extinction of the building; that the test is whether the building has lost its identity and specific character, so that it can be no longer called a building. There cannot be a total loss so long as the remnant of the structure standing is reasonably adapted for use as a basis upon which to restore the building to the condition in which it was before the fire and whether a reasonably prudent owner, uninsured, desiring such a structure as the one in question was before the fire, would in proceeding to restore it to its original condition utilize such remnant as such basis.

The Wisconsin statute does not independently establish that the cost of repair compared to the property’s value determines whether the property is “wholly destroyed.”  In this case, although the Town of Crystal Lake building inspector issued a raze order, the town board overturned that order following a hearing in which the board visited the Behrndts’ property and Austin Mutual presented evidence showing the property was repairable.  Because the town did not prevent the Behrndts from repairing the property, the Behrndts cannot argue they suffered a constructive total loss.

Pursuant to Wisconsin jurisprudence a property is “wholly destroyed” under the statute if the identity of the structure as a building is destroyed so that its specific character as such no longer remains.  The cost of repair compared to the property’s pre-fire value is irrelevant when determining whether a property is “wholly destroyed.”

Equitable Estoppel

The Behrndts also argue Austin Mutual should be equitably estopped from arguing “the home is not wholly destroyed.” Austin Mutual acted to increase the amount of insurance coverage based on its replacement cost analysis; the Behrndts relied on Austin Mutual’s assessment and paid the corresponding increased premium amount; and their reliance was to the Behrndts’ detriment because Austin Mutual is now arguing “it should not pay the face value of the policy despite that the home is wholly destroyed and costs double its value to repair.” They assert Austin Mutual should be equitably estopped from arguing “that because the house can be fixed for less than the amount of coverage, the house cannot be deemed wholly destroyed[.]”Austin Mutual, contrary to the Behrndts argument, is arguing the valued policy law is inapplicable because the structure and the identity of the house remains and therefore the house is not “wholly destroyed.”

More importantly, the Behrndts have not proven they paid the premiums to their detriment. They contracted for, and received the benefit of, an insurance policy in an amount sufficient to compensate them had there been a total loss to their property. They were then compensated for the cost of repairing their home. As Austin Mutual points out, “the fact that the cost to repair the home, the structure of which is still intact, was $154,579 shows that had the policy limit not been increased, the amount would not be adequate if the home was actually totally destroyed or more extensively damaged.” Since the Behrndts have not established by clear, satisfactory, and convincing evidence that Austin Mutual the court concluded it should not be equitably estopped from arguing the property is not a total loss.

ZALMA OPINION

The Behrndts’ policy provided sufficient funds to rebuild their home new for old. Its fair market value, once rebuilt, would increase. The valued policy law in this case tempted the Behrndts to seek to profit from their insurance since, if they could collect the full limit of the policy, they would have had sufficient funds to totally rebuild the house, new for old, and collect a bonus of over $100,000. In so doing the purpose of the law would have been thwarted. The court recognized that fact and prevented the abuse of the insurer and the valued policy law.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Resolve Disputes Informally & Avoid Litigation

Best to Limit Demands for Defense to Those Insurers Who Name You as an Insured or Additional Insured

When lawsuits are filed the parties attempt to get as much insurance protection as is possible. Sometimes they even seek coverage from the insurer of the plaintiff thereby putting the insurer on both sides of a lawsuit. As a result confusion often reigns, courts are confused, orders are issued, and appeals filed. No one is happy with the results. The Supreme Court, Appellate Division, Second Department, New York, was drawn into such a dispute, and as is the wont of New York appellate decisions, resolved the issues with a brief that was actually brief.

FACTS

The New York State Thruway Authority (“NYTA”) sued Ketco, Inc. for a judgment declaring that  Ketco, Inc. is obligated to defend and indemnify the NYTA in four underlying actions pending in the Court of Claims. St. Paul Travelers and Travelers Property & Casualty Co., formerly known as Travelers Indemnity Company of Illinois (Collectively “Travelers”), appeal from so much of an order of the Supreme Court, Orange County as denied their motion to dismiss the amended third-party complaint insofar as asserted against them and granted that branch of the cross motion of the Ketco, Inc., which was for summary judgment declaring that they were obligated to defend and indemnify it in this action pursuant to certain insurance policies issued by them to the NYTA and to Ketco, Inc. and pursuant to the commercial general liability policy which they issued to Conrad Geoscience Corp.

ANALYSIS

The party claiming insurance coverage bears the burden of proving entitlement. Here Ketco, Inc. (hereinafter Ketco), met its burden with respect to the policies issued to it by Travelers and for “umbrella” coverage. However, a party is not entitled to coverage if it is not named as an insured or additional insured on the face of the policy as of the date of the accident for which coverage is sought.  The appellate court agreed with the Travelers insurers’ contention that the Supreme Court erred in determining that they were obligated to defend and indemnify Ketco in this action pursuant to the terms of the Travelers policy issued to the NYTA (hereinafter the Thruway Policy). As Ketco itself correctly concedes it is neither an insured nor an additional insured under the Thruway Policy. Accordingly, the Supreme Court incorrectly determined that Travelers were obligated to defend and indemnify Ketco under the Thruway Policy in this action.

The trial court also erred in granting that branch of Ketco’s cross motion which was for summary judgment declaring that the Travelers insurers were obligated to defend and indemnify it in this action pursuant to a commercial general liability policy issued to Conrad Geoscience Corp., which names Ketco as an additional insured under specified conditions. Under the circumstances of this case, triable issues of fact exist as to whether Ketco qualifies as an additional insured under that policy.

In New York State Thruway Authority v. Ketco, Inc. — N.Y.S.2d —-, 2014 WL 3265718 (N.Y.A.D. 2 Dept.), 2014 N.Y. Slip Op. 05164 the Supreme Court, Appellate Division, Second Department, New York resolved the dispute. In so doing the appellate court deleted the provision of the trial court order  denying that branch of the motion of Travelers to dismiss so much of the amended third-party complaint as sought a judgment declaring that they are obligated to defend and indemnify Ketco, Inc. pursuant to the insurance policy they issued to the NYTA and substituting therefor a provision granting that branch of the motion. In addition  by deleting the provision thereof granting those branches of the cross motion of Ketco, Inc. declaring pursuant to an insurance policy which they issued to the NYTA and an insurance policy they issued to Conrad Geoscience Corp. and substituting therefor a provision denying those branches of the cross motion.

Travelers are not obligated to defend or indemnify NYTA in this action pursuant to the insurance policy they issued to Ketco, Inc. and are obligated to defend and indemnify plaintiff, Ketco, Inc., in this action, pursuant to the insurance policies they issued to Ketco, Inc.

Since the action is, in part, a declaratory judgment action, the appellate court sent the matter back to the Supreme Court, Orange County, for the entry of a judgment declaring that the Travelers insurers are not obligated to defend and indemnify Ketco in this action under the terms of the Thruway Policy and are obligated to defend and indemnify Ketco in the main action under the terms of the policies issued to Ketco including that where they were named an additional insured to the policy issued to Conrad Geoscience Corp.

ZALMA OPINION

Insurance is nothing more than a contract where the insurer makes certain promises to people or entities the insurer agrees to defend and indemnify. When an insurer issues a third-party liability insurance policy it promises to defend and indemnify those people or entities it names on the policy to certain described risks of loss. In this case Ketco asked the insurer of the plaintiff to defend and indemnify it against the risks of loss created by the NYTA’s suit against Ketco. It convinced the trial court only to find the decision reversed because it was not named on the policy and because Travelers, in the policy it issued to NYTA, did not name Ketco. However, Travelers, in a different policy it issued to Conrad Geoscience Corp. that named Ketco as an additional insured, had to defend Ketco. Travelers won one and lost one in this case.

Based on the facts recited by the appellate court it would have been been in the best interest of the parties and the insurers to sit down together, or with a mediator, read the policies and the facts of the lawsuits, and agreed to the solution that the appellate court reached. Litigation resolves disputes that cannot be resolved amicably. It is expensive and often unnecessary. Insurers and parties claiming under insurance policies should not be quick to pull the litigation trigger, speak to each other like adults, and save enormous litigation expenses. I know I sound like Pollyanna, but if more people and counsel follow this simple advice money will be saved and the clients will appreciate their lawyers for saving expense and use the lawyers more often.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | 2 Comments

Fraudsters Find Fraud Expensive

In the fourteenth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on July 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Use of Cappers Can Be Expensive.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.    More About Ecuadorian Judgment & Fraud.
4.    UK Find Insurance Fraud at a Record High.
5.    Who do you Trust?
6.    The End of Indemnity Insurance Corporation, RRG
7.    California Commissioner Sued by UnitedHealth Over Fine

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

Zalma’s Insurance Fraud Letter

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

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

•    Contract Language Controls
•    Is Insurance an Asset of the Insured?
•    Must Insured First Prove Prima Facie Case?
•    Other Insurance Clause Raises Actual Controversy
•    Insurers Must Avoid the Gastonette
•    Facts Rule Coverage
•    The Insurance Fraud Deskbook
•    Hobby Lobby & Quasi-Insurance
•    Direct Action Statute Does Not Mandate Coverage
•    Use Of Cappers Can Be Expensive
•    Some Success for Fraud Fighters
•    Again the Supreme Court Fails to Note that the ACA is not Insurance
•    The Art of the Interview
•    Conflict Needed for Independent Counsel
•    Creative Pleading Fails to Convince
•    Health Insurance Fraud Conviction Stands
•    Builder’s Risk Policy Covers Damage only to Structure as Built
•    You Must Comply With California Regulations by September 1
•    Not Nice To Lie to Your Insurer
•    MCS 90 and Interstate Commerce

NEW! From the ABA:

The Insurance Fraud Deskbook
Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

 

Posted in Zalma on Insurance | Leave a comment

Contract Language Controls

Fire Insurance Is a Contract of Personal Indemnity

First party property insurance does not insure the property but insures a person or entity against certain defined risks of loss to identified property. Strangers to the contract of insurance, regardless of their interest in the property that is the subject of the insurance, usually have no rights against the insurance policy.

Appellant Wallace Debes lost his suit against General Star Indemnity Company (“General Star”) because, among other things, he was not named in the policy.

FACTUAL BACKGROUND

Debes owns commercial property located in Beaumont, Texas. In February 2004, Debes entered into a written lease with Cahoots Entertainment, Inc. (“Cahoots”), wherein Cahoots agreed to lease the property from Debes. Debes signed the lease as the landlord, and Brian O’Quinn, in his capacity as the president of Cahoots, signed the lease as the tenant. In addition, Brian O’Quinn and his father, Jeffrey O’Quinn, each executed a personal guaranty of the lease.

With the exception of a two-week period during which the building on the property was closed for renovations, Cahoots operated “Alibi’s” night club on the property continuously from June 7, 2004 until July 4, 2011. On July 4, 2011, a fire occurred in the building on the property, causing substantial damage to the building and its contents.

Danna O’Quinn, the wife of Brian O’Quinn, purchased a commercial property insurance policy from General Star, which covered the premises when the fire occurred. Danna is neither an officer nor director of Cahoots. She is also not a party to or a guarantor of the lease. The policy identifies “DANNA O’QUINN DBA: ALIBI’S” as the “Named Insured.” No other person or entity is identified as a named insured or additional insured in the policy or in any endorsement to the policy.

After the fire, Danna made a claim under the policy for certain losses to improvements to the building and for the loss of personal property. General Star adjusted the claim and paid Danna $429,211.93 in damages. Debes also made a claim under the policy for damages to the building from the fire and demanded payment from General Star, but General Star denied coverage on his claim.

Debes subsequently filed suit against General Star for breach of contract, alleging that General Star failed to compensate him under the policy for his property losses due to the fire. Debes also asserted breach of contract claims against Cahoots, Brian O’Quinn, Danna O’Quinn, and Jeffrey O’Quinn.

Issue Presented

In one two-part issue, Debes argues that the trial court erred in granting summary judgment in favor of General Star on his breach of contract claim because Debes is an intended third-party beneficiary under the insurance contract between General Star and Danna O’Quinn.

Discussion

In Texas, “standing” denotes the presence of a real controversy between the parties that will actually be determined by the judicial declaration sought. Standing is a necessary component of subject matter jurisdiction, without which a court lacks authority to hear a case. To establish standing to assert a claim for breach of contract, a party must prove its privity to the agreement or that it is a third-party beneficiary.

Privity under the Insurance Policy

Privity is established by proving that the defendant was a party to an enforceable contract with either the plaintiff or a party who assigned its cause of action to the plaintiff. The summary judgment evidence establishes that Debes is not a party to the insurance contract. Generally, a property-insurance policy is a personal contract between the insured and the insurer. Debes is not identified in the policy or in any endorsement to the policy as a named insured or an additional insured, and Debes has not presented any argument or evidence to otherwise support a finding that he is a named or additional insured under the policy.

During its investigation of Danna’s insurance claim, General Star examined Danna under oath. General Star attached the transcript of the examination as an exhibit to its motion for summary judgment. Danna’s testimony during the examination establishes that she has never entered into a contract with Debes.

Third–Party Beneficiary Status

In Texas, a third party may enforce a contract made between other parties only if the parties to the contract intended to secure some benefit to the third party, and only if the contracting parties entered into the contract directly for the third party’s benefit. In determining whether a third party can enforce a contract, the intention of the contracting parties is controlling. A court will not create a third-party beneficiary contract by implication.

In the present case, Debes argues that he is a creditor beneficiary to the insurance policy. A creditor beneficiary is one to whom the performance promised will come in satisfaction of a legal duty owed to him by the promisee of the agreement.  The legal duty owed to the third party may be an indebtedness, a contractual obligation, or other legally enforceable commitment. To qualify as a creditor beneficiary, the maker of the contract must not only have intended to confer a benefit upon the third party but it also must have intended for the third-party to have the right to enforce the agreement. Unless both intents are clearly and fully exhibited in the four corners of contract, the third party remains no more than an incidental beneficiary to the contract.

Reviewing the insurance policy as a whole the court concluded that the policy does not contain any language that clearly and fully spells out an intent on behalf of General Star and Danna to confer a direct benefit on Debes. In this respect, the insurer reserves the right — but assumes no obligation — to adjust losses with and pay an owner of covered property who is not a named insured. Rather, the provision confers a right on the insurer by giving the insurer the option of paying the owners of covered property, even if the owners are not named insureds, and providing that such payments will satisfy the named insured’s claim for the owner’s property.

Debes failed to identify or present evidence of a legal obligation owed by Danna to Debes. Danna is neither a party nor a guarantor to the lease. The lease, therefore, does not impose any contractual obligation, including an obligation to purchase insurance coverage, on Danna. Further, General Star presented summary judgment evidence establishing that Danna has never entered into a contractual relationship with Debes at any time.

General Star has established as a matter of law that Debes was not in contractual privity with General Star and was not a third-party beneficiary to the insurance policy. Debes, therefore, lacked standing to bring a claim against General Star for breach of the insurance contract. The appellate court concluded that the trial court properly granted summary judgment in favor of General Star on Debes’s breach of contract claim and affirmed the trial court’s order.

ZALMA OPINION

Commercial leases require that the people who enter into the lease agreements understand insurance. In this case Debes only required that Cahoots maintain fire insurance. He did not require that the insurance obtained by Cahoots name him as an insured or an additional insured to protect his interest in the property. Perhaps, ignorant of insurance, he believed the policy obtained covered his building. Whatever his secret belief Debes was not an insured or an additional insured. Debes probably has a case on the lease agreement against Cahoots but not against General Star.

Since insurance is a contract of personal indemnity the only person with a right to recover under the policy was Danna O’Quinn dba Cahoots. Why, after an examination under oath, General Star paid her is beyond me since she did not do business as Cahoots but it was owned an operated by a contract.  In addition to a the need to be named as an insured, the insured must have an insurable interest in the property. Since Cahoots is a corporation in which Danna O’Quinn is not a shareholder, officer or director, the court could have found that she had no insurable interest in the property. I can only assume that the EUO showed some interest that required General Star to pay but it makes no sense to name a corporate insured in the name of an individual doing business as something that is truly a corporation.

 

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Is Insurance an Asset of the Insured?

Make A Claim or Lose All Rights

Banks become insolvent for many reasons. Most common reason for failure is incompetence. A corollary to incompetence is allowing an employee to steal money from the bank over a period of time. That type of loss is usually insurable by a bankers blanket bond or similar employee theft insurance.

In  Summerhaze Co., L.C. v. Federal Deposit Ins. Corp., — P.3d —-, 2014 WL 3057301 (Utah), 2014 UT 28, the Utah Supreme Court dealt with an issue relating to a suit against a failed bank that was in charge of the Federal Deposit Insurance Corporation (FDIC) who claimed the court had no jurisdiction because the plaintiffs failed to make claim timely.

FACTS

Plaintiffs Summerhaze Company, L.C; Antion Financial, L.C; Mr. Douglas M. Durbano; Durbano Development, L.C; Durbano Law Firm, P.C.; and, Durbano Properties, L.C. (collectively Plaintiffs) appeal from the entry of summary judgment in favor of the FDIC, successor to America West Bank, L.C. (Bank). The Supreme Court of Utah was asked to decide whether the district court erred when it concluded that it lacked subject matter jurisdiction over the Plaintiffs’ claims after determining that Plaintiffs failed to exhaust the administrative claims review process made available to them by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Additionally, Plaintiffs claim that the district court’s dismissal for lack of subject matter jurisdiction denied them due process of the law under both the United States and Utah Constitutions.

The Bank was insured by BancInsure, Inc. under a Financial Institution Bond (Bond). The Bond was an indemnity policy. Under its terms, the Bank would be indemnified in the event of losses occasioned by employee dishonesty, forgery or alteration of negotiable instruments, unauthorized signatures and endorsements, and claims expenses, among other things. The maximum coverage under the Bond was $2,000,000. Plaintiffs filed their complaint “in order to trigger the bond coverage of [the Bank's] bonding company, BancInsure, Inc.”

On January 9, 2009, before the Plaintiffs filed their complaint, the Bank filed a declaratory judgment action against BancInsure seeking to establish that the Bank was entitled to coverage under the Bond for the losses claimed by the Plaintiffs. On May 1, 2009, the Utah Department of Financial Institutions (UDFI) closed the Bank and appointed the FDIC as receiver, because the UDFI determined the Bank had failed and was operating in an unsafe manner.

Several weeks after the plaintiffs sued, the FDIC filed a motion to dismiss alleging that the district court lacked subject matter jurisdiction because the Plaintiffs had failed to comply with FIRREA. The district court granted the FDIC’s motion to dismiss and ruled that the court was deprived of subject matter jurisdiction because the Plaintiffs failed to file a timely proof of claim, as mandated by FIRREA. Plaintiffs filed a timely notice of appeal.
ANALYSIS

FIRREA was passed in response to the financial crisis of the 1980s. To aid in the winding up of and disposal of claims against a failed financial institution, FIRREA created an administrative claims review process for institutions in receivership.

Failure to Exhaust FIRREA’s Administrative Claims Process Divests a Court of Jurisdiction Over Prereceivership Claims.

Plaintiffs argued that, under 12 U.S.C. § 1821(d)(13)(D), the Bond is not an asset of the Bank or the FDIC, and thus FIRREA is inapplicable to their claim. The threshold question is not whether Plaintiffs would ultimately collect from the Bond; rather, it is whether the Bond is an asset of the Bank. FIRREA states that no court has jurisdiction over any claim to or action against the assets of a bank in receivership. The term “asset” is not defined in the statute. However, the ordinary meaning of “asset” is broad. It is defined as an item that is owned and has value or all the property of a person available for paying debts or for distribution.

Insurance policies that a bank purchased and under which it is an insured fall neatly within the definition of assets. An insurance policy is valuable to the owner of the policy even though the owner of the policy may never be entitled to recover under the policy. Additionally, the broad meaning of “asset” can include liability insurance, as one purpose of liability insurance is to protect other assets against tort claims. For these reasons, the Supreme Court concluded that the plain meaning of “asset” contained in section 1821(d)(13)(D)(i) includes the insurance policy purchased by the Bank from BancInsure.

The statute applies to creditors’ claims, consumer protection claims, and “claims which are or should be covered by insurance. This provision also distinguishes claims on their factual bases and does not make any distinction based on the identity of the party from whom relief is sought.

Plaintiffs filed claims against the Bank. The claims included allegations of improper acceptance of unauthorized signatures, negligence, and liability under a theory of respondeat superior. These claims stemmed from losses suffered due to embezzlement by a Bank employee. Thus, the claims relate to an “act or omission” of the Bank—an institution for which the FDIC was appointed receiver—or the Bank’s employee. The fact that Plaintiffs sought payment from the Bond is irrelevant. The Plaintiffs’ claims are squarely within the ambit of FIRREA.

The Supreme Court concluded that because the bond was an asset of the bank compliance with FIRREA’s administrative claims review process is mandatory to vest the district court with subject matter jurisdiction.

Since plaintiffs’ claims were subject to FIRREA’s administrative claims review, the plaintiffs’ were required to exhaust their administrative remedies, and no exception applied. Plaintiffs failed to comply with the administrative exhaustion requirements of the statute, failed to file a claim at all within the time required after receipt of notice, and failed to comply with the statute. Therefore, the plaintiffs’ failure deprived the district court of subject matter jurisdiction.

ZALMA OPINION

Insurance against torts – like the claims the plaintiffs’ made against the bank – are assets of the bank because they protect the banks assets that would necessarily be exhausted if it had to pay from its own funds to defend a tort lawsuit or pay damages to a plaintiff alleging tort damages as a result of an action of the bank. The plaintiffs pursued their claim properly but were caught in their own sloth when, during the pendency of the claim process the state of Utah declared the bank insolvent.  That put them under the control of FIRREA and its requirement for administrative claim review. They failed to comply and as a result they lost the right to seek funds from the bank and the insurer who became an asset of the FDIC.

The non-lawyer plaintiffs are not without a remedy. Their lawyers knew, or should have known, of the requirements for administrative remedies.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Must Insured First Prove Prima Facie Case?

An LLC is not an Employee

When an insured acquires an  insurance policy the insured promises, among other things, to first prove that when presenting a claim for indemnity the Insured will establish a prima facie (on its face) case that coverage is available. In Network F.O.B., Inc. v. Great American Ins. Co. of New York, Slip Copy, 2014 WL 3048369 (D.Minn.) the District Court for the District of Minnesota was asked to rule upon the motion for summary judgment by defendant Great American Insurance Company of New York (Great American) who claimed there were no facts that would support the claim.

BACKGROUND

This suit arose out of the theft of funds by non-party Laura Schwartz from her employer, plaintiff Network F.O .B., Inc. (Network). Schwartz worked for Network as a billing and bookkeeping clerk and, at all times relevant to the instant dispute, was classified as an independent contractor for tax purposes.

Schwartz’s employment was initially governed by an Independent Contractor Agreement (2006 Agreement), which was signed by Network and Schwartz in her individual capacity. Schwartz established an LLC, LM ENT Services (LM ENT), which executed a new Independent Contractor Agreement (2009 Agreement) with Network. Schwartz engaged in numerous fraudulent transactions and stole approximately $183,000 from Network.  Eventually Schwartz was convicted of six counts of theft by swindle.

Great American provided insurance coverage to Network for business, property and commercial operations pursuant to an insurance contract (Policy). The Policy provided coverage for “loss of or damage to money, securities and other property resulting directly from theft committed by an employee.” Network tendered a claim to Great American for its losses resulting from the theft by Schwartz. Great American informed Network that the claim was not covered by the Policy because Schwartz was not an “employee” of Network within the meaning of the Policy.

DISCUSSION

Insurance Coverage

State law governs the interpretation of insurance policies. The parties agreed that Minnesota law governs this action. In Minnesota, the interpretation of an insurance policy is a question of law. Under Minnesota law, the insured has the initial burden of establishing a prima facie case of coverage.

The policy defines the key term, “employee” since only theft by an employee is covered. It states that “‘Employee’ means: (1) any natural person: (a) while in your service and for the first 30 days immediately after termination of service …; (b) who you compensate directly by salary, wages or commissions; and (c) who you have the right to direct and control while performing services for you … ¶ (b) ‘Employee’ does not mean any agent, broker, factor, commission merchant, consignee, independent contractor or representative of the same general character not specified in paragraph 5.a.”

Network argues that because Schwartz, a natural person, committed and was convicted of the underlying theft, the court need not consider the fact that her employment relationship with Network flowed through a corporate entity. It was undisputed that Schwartz established LM ENT as an LLC. Thereafter, Network and LM ENT executed the 2009 Agreement, which detailed their relationship and identified LM ENT as an independent contractor. Thus, the proper analysis is whether LM ENT— not Schwartz — was an employee of Network as defined by the Policy since the theft was by Schwartz acting as LM ENT.

The Policy provides coverage only for the activities of those workers who are natural persons. If all potential “employees” were natural persons, however, such a provision would be superfluous. The provision contemplates and rejects a definition of “employee” that includes non-natural entities, such as an LLC. As a result, LM ENT — as an LLC rather than a natural person — was not an employee within the scope of the Policy at issue in this case. Therefore, Network cannot establish a prima facie case of coverage. Neither  LM ENT is not, nor can it be, a natural person. Summary judgment is warranted.

ZALMA OPINION

If Network wanted coverage for the actions of Schwartz acting as LM ENT it needed a different policy than the one it purchased. It needed one that insured against theft by employees or by independent contractors retained to deal with the funds of the insured. It bought a limited coverage and could not convince the trial court to stretch the meaning of the policy from “employee” to any person or entity that steals from it.

It took a certain amount of chutzpah (Yiddish for unmitigated gall) to argue that a limited liability company is a natural person and was intended to be insured by the insurer. The District Court simply refused to fall for the argument and simply read the policy as written.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Other Insurance Clause Raises Actual Controversy

Self Insured & Insurer “Other Insurance Clause”

When two or more insurers agree to insure against the same risk of loss disputes often arise as to which insurer must pay on a primary basis, which is excess or whether they must share the liability of the insured on a pro rata basis. In Cinoman v. University of North Carolina — S.E.2d —-, 2014 WL 2937050 (N.C.App.) the North Carolina Court of Appeal was called upon to resolve the dispute, not once but twice. In its final review of the case the court made its final order.

FACTS

Plaintiffs Michael I. Cinoman, M.D. and Medical Mutual Insurance Company of North Carolina (“MMIC”) appeal from an order granting UNC defendants’ motion to stay this declaratory action pending a final resolution of the underlying malpractice action.

In February 1999, Dr. Cinoman served as a temporary attending physician for full-time rotations in the University of North Carolina Hospitals at Chapel Hill Pediatric Intensive Care Unit (“UNC–PICU”) as part of an agreement to assist UNC defendants with a staffing shortage in the UNC–PICU. On 21 June 2007, Thomas M. Stern, as guardian ad litem for Armani Wakefall, initiated a medical malpractice action against Dr. Cinoman and others for damages allegedly incurred by Wakefall as a result of negligent treatment she received at the UNC–PICU in February 1999 (“underlying malpractice action”).

Dr. Cinoman is insured under a professional liability insurance policy issued by MMIC, which has treated its coverage as broad enough to cover the claims asserted against Dr. Cinoman in the underlying malpractice action. UNC defendants maintained that Dr. Cinoman is not entitled to coverage under the University of North Carolina Liability Insurance Trust Fund (“UNC–LITF”), which provides coverage for claims against employees and agents of UNC defendants, because he was not a full-time employee of UNC defendants at the time of the events giving rise to the underlying malpractice action.

In the absence of coverage by the UNC–LITF, the damages demanded in the underlying malpractice action allegedly exceed Dr. Cinoman’s professional liability insurance coverage.

Dr. Cinoman and MMIC filed this declaratory judgment action to determine whether he is entitled to coverage under the UNC–LITF, in addition to his coverage under the MMIC policy, and the relative liabilities of MMIC and the UNC–LITF. Plaintiffs and UNC defendants moved for summary judgment, and the trial court granted summary judgment in favor of UNC defendants. After the trial court decision was reversed the UNC defendants moved to stay further proceedings in the declaratory relief action pending the final resolution of the underlying malpractice action.

On appeal, it was claimed that the trial court erred by granting the stay based on its determination that no actual controversy exists as to the UNC–LITF’s duty to indemnify until the underlying malpractice action is finally resolved.

ANALYSIS

An actual controversy between adverse parties is a jurisdictional prerequisite for a declaratory judgment. An actual controversy exists where an insurer seeks a determination that primary coverage is not provided under its policy and is instead provided under policies issued by other insurers. No such controversy exists, however, in a declaratory judgment action to determine whether coverage is provided under an excess insurance policy where the underlying liability action has not yet been resolved.

When more than one insurance policy affords coverage for a loss, the “other insurance” clauses in the competing policies must be examined to determine which policy provides primary coverage and which policy provides excess coverage. An excess clause is a type of “other insurance” clause which “generally provides that if other valid and collectible insurance covers the occurrence in question, the excess policy will provide coverage only for liability above the maximum coverage of the primary policy or policies. An excess clause is distinguishable from a pro rata “other insurance” clause. Where a pro rata clause in one policy competes with an excess clause in another policy, the policy with the pro rata clause provides primary coverage, and the policy with the excess clause provides secondary coverage which will only be triggered if the limits of the policy containing the pro rata clause are first exhausted.

In general, there is no primary versus excess insurance policy relationship where a self-insurance program is at issue because self-insurance does not constitute other collectible insurance within the meaning of an insurance policy’s “other insurance” clause. Self-insurance is equivalent to a primary insurance policy, however, when the self-insurance expressly provides that it is primary to other insurance.

The UNC–LITF is a self-insurance program for professional liability, authorized by state statute. The plain language of the following “other insurance” clause in the UNC–LITF Memorandum of Coverage is controlling:

“When this agreement and other collectible insurance both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for a greater proportion of the loss than that stated in the applicable contribution provision below:

A. Contribution by Equal Shares. If all such other valid and collectible insurance provides for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than would be payable if each insurance company contributes an equal share until the share of each company equals the lowest applicable limit of liability under any one policy or the full amount of the loss is paid. With respect to any amount of loss not so paid, the remaining companies shall continue to contribute equal shares of the remaining amount of the loss until each such company has paid its limit in full or the full amount of the loss is paid.

B. Contribution by Limits. If any of such other insurance does not provide for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than the applicable limit of liability under this agreement for such loss bears to the total applicable limit of liability of all valid and collectible insurance against such loss.”

Nothing in this provision indicates that the UNC–LITF’s liability arises only after the limits of other collectible insurance policies have been exhausted. Rather, the provision provides that the UNC–LITF shares liability with other collectible insurance according to their respective limits. The pro rata clause means that the UNC–LITF provides primary coverage regardless of the terms of the MMIC policy.

Because the UNC–LITF affords primary coverage, an actual controversy exists as to the UNC–LITF’s duty to indemnify, and the trial court erred by granting the stay based on its determination that no such controversy exists pending a final resolution in the underlying malpractice action.

ZALMA OPINION

Other insurance clauses are important to every dispute between insurers. Although a self insured program like UNC–LITF is not insurance, when they write into their operational agreement an other insurance clause that requires UNC–LITF to share with other collectible insurance on a pro rata basis it creates a situation where it becomes “insurance” for the purpose of sharing the costs to defend or indemnify the insured. Therefore, hoist on its own petard, UNC–LITF created an actual controversy that must be tried to determine if it owes a share of Dr. Cinoman’s defense.

UNC–LITF could have avoided this decision and problem, if that is what it intended, by rewriting the other insurance clause to read:

When this agreement (which is not insurance) and collectible insurance, both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for any costs of defense or indemnity until the other collectible insurance is exhausted.

UNC–LITF wrote their self-insurance program as if it was insurance and must, therefore, if coverage applies, share with MMIC on a pro rata basis.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Insurers Must Avoid the Gastonette

Insurer’s Duty is to the Insured

Insurance policies of all types have contribution or excess clauses. Sometimes the clauses conflict and when two insurers insure the same risk both will claim that the responsibility lies with the other. In Central States, Southeast and Southwest Areas Health and Welfare Fund v. First Agency, Inc. — F.3d —-, 2014 WL 2933225 (C.A.6 (Mich.)) Central States and Guarantee Trust both issued insurance coverage for the same claims.

Central States’ contract says that it will pay only if Guarantee Trust does not. Guarantee Trust’s contract insists that it will pay only if Central States does not. The Third Circuit Court of Appeal was called upon to break this “you first” paradox. The paradox has been called a gastonette [which can be defined as a dilatory “dance” in which each of two responsible parties waits until the other party acts – so that the delay seems interminable; esp., a standoff occurring when two courts simultaneously hear related claims arising from the same bases and delay acting while each court waits  for the other to act first. The term was coined by Judge Jon O. Newman in In re McLean Industries, Inc., 857 F.2d 88, 90 (2d Cir. 1988), on the model of  “After you, my dear Alphonse.” “No, after you, Gaston. Black's Law Dictionary 795 (10th ed.2014)].

BACKGROUND

Central States, an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA), provides health insurance for Teamsters and their families. Guarantee Trust, an insurance company, provides sports injury insurance for student athletes. This case involves thirteen high school and college students, all athletes and all children of Teamsters. Each of them holds general health insurance from Central States and sports injury insurance from Guarantee Trust. Each suffered an injury while playing sports (most often football) between 2006 and 2009, after which they sought insurance coverage from both insurance companies. Each time Guarantee Trust refused to pay the athlete’s medical expenses. Each time Central States picked up the bill under protest.

Invoking one of ERISA’s civil enforcement provisions, 29 U.S.C. § 1132(a)(3)(B), Central States sued Guarantee Trust and First Agency (a company that administers Guarantee Trust’s insurance policies).

TRIAL COURT RULING

The district court ruled that, when Central States’ and Guarantee Trust’s coverage of student athletes overlap, Guarantee Trust must pay. It entered a declaratory judgment to that effect, ordered Guarantee Trust to reimburse Central States for the payouts to the thirteen students, and awarded Central States attorneys’ fees.

ANALYSIS

Which company should pay for the students’ medical expenses? Central States’ contract answers the question one way. In a provision captioned “Coordination of Benefits,” the contract lists rules that determine which insurer has “primary responsibility” when plans overlap. Under one of these rules, whichever insurer covers the insured “other than as a Dependent” has primary responsibility. Central States covers the thirteen students as dependents. The students have insurance because they are children of Teamsters. Guarantee Trust, by contrast, covers the thirteen students “other than as … [d]ependent[s].”  The students have insurance in their own names. So under Central States’ contract, Guarantee Trust must pay for the students’ medical expenses up to its maximum before Central States will contribute anything.

Guarantee Trust’s contract answers the question another way. The contract contains a blanket coordination-of-benefits rule. If insurance provided by Guarantee Trust overlaps with insurance provided by anyone else, the other insurer always has primary responsibility. So under Guarantee Trust’s contract, Central States must pay for the students’ medical expenses up to its maximum before Guarantee Trust will contribute anything. Therefore, the two insurers dance a gastonette with one insurance company saying: “You first, Central States.” To which the other responded: “After you, Guarantee Trust.”

If an ERISA plan and an insurance policy “contain conflicting coordination of benefits clauses,” as a matter of federal common law “the terms of the ERISA plan, including its [coordination of benefits] clause, must be given full effect.” [Auto Owners Ins. Co. v. Thorn Apple Valley, Inc., 31 F.3d 371, 374 (6th Cir.1994)]. In this case, the terms of the ERISA plan — Central States’ plan — say that Guarantee Trust has primary responsibility for the students’ expenses.

Guarantee Trust’s policy does not provide excess insurance, at least not pure excess insurance. An excess policy has a fixed threshold below which it never applies. If the insured has no other policy, Guarantee Trust’s policy covers all of his losses, however small.

ERISA’s byzantine system of employee benefits would not work unless courts respect the written terms of ERISA plans. The importance of enforcing the plan’s terms, its coordination clauses included, does not shrink when the other insurance policy in the picture provides excess coverage in this way.

The next worst thing to having no insurance at all is having two insurance companies cover the same claim. Coverage overlaps often prompt years of fighting about who must pay, a battle that can delay payment to the insured or the hospital. The Third Circuit concluded that it is best to keep rules about coordinating insurance benefits as simple as possible.

EHere, in the absence of Central States’ plan, Guarantee Trust’s policy would cover the sports injuries at hand without question. The ERISA plan insists that the policy keep doing in that plan’s presence what it would do in that plan’s absence.  The district court got it right when it held that primary responsibility for the sports injuries in this case falls on Guarantee Trust, not Central States.

As for the merits, Central States filed this lawsuit under a provision of ERISA that allows it “to obtain … appropriate equitable relief … to enforce any provisions of this [Act] or the terms of the plan.” [29 U.S.C. § 1132(a)(3)(B).] The judgment directing Guarantee Trust to pay Central States can thus stand only if it provides “equitable relief” as opposed to legal relief.

The district court’s money judgment, ordering Guarantee Trust to pay Central States around $112,000, looks by all appearances like an award of money damages. And money damages, the paradigm of legal relief, lie beyond the radius the statute.

The court ordered Guarantee Trust to pay money, and Guarantee Trust can satisfy that obligation by dipping into any pot it chooses. That means Central States sought legal rather than equitable restitution.

The Act says nothing either way about coordinating benefits, and purposes and policies have their place when filling the gap. The Act by contrast says something about what relief a plaintiff can get in lawsuits under the statute: He can get only equitable relief.

Under the Act, the district court in its discretion may allow a reasonable attorney’s fee to either party. The statute gives district courts more leeway to shift fees than the American Rule, the common-law principle that allows fee awards only in rare cases. The district court addressed all of the relevant factors with care. Its conclusion does not amount to an abuse of discretion.

Declaratory relief was affirmed, Guarantee Trust is primarily responsible for the expenses of the injured students and the attorneys fees ordered were also affirmed. The money judgment was reversed because the ERISA plan did not have the right to legal remedies. Both of the dancers lost and in the future Guarantee Trust will be compelled to pay for such injuries as if the Central States ERISA plan did not exist.

ZALMA OPINION

The prudent insurer will never dance the gastonette. When a dispute arises between two insurers, both of whom believe the other is primary and it is excess, should enter into a prompt agreement to share in the cost of protecting the insured without waiving the right to dispute who owes what to whom in a separate litigation. Central States, without such an agreement, paid the expenses because Guarantee Trust wrongfully refused. This suit resulted. Had they agreed they could have submitted the dispute to a District Court or an impartial arbitrator who could have decided who was on first and that either Gaston or Alphonse must pay.

This case should never have happened. Central States and Guarantee Trust should have worked together and avoided the litigation. No one wins, and the insured often loses, when insurers dance the gastonette.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Facts Rule Coverage

Pollution Exclusion Effective

Insurers do not want to cover pollution under a basic automobile insurance policy. In their generosity they take on the liability of their insureds if, as a result of a collision or upset of an insured vehicle, some pollution occurs. That does not, however give coverage for  every incident of pollution related to a vehicle.

The plaintiffs, Frank Izdebski, doing business as the sole proprietor of United Energy Oil Company (United), and National Equity Properties, Inc. (National), appealed summary judgments entered against them in their consolidated cases seeking a declaration that United’s policy with Hanover Insurance Company (insurer) covered damage from an oil spill. In Izdebski v. Hanover Ins. Group, Inc., Slip Copy, 2014 WL 2973681 (Mass.App.Ct.) the Massachusetts Court of Appeal resolved the dispute.

BACKGROUND

Izdebski delivered 1,000 gallons of heating oil from his oil truck to a commercial building owned by National in New Bedford. The oil was transferred from the truck to the oil storage tank by a pump. In the process of the transfer, Izdebski overfilled the oil storage tank, and oil seeped out through a vent pipe from the oil storage tank onto the ground behind the building.

At the time of the spill, United’s oil truck was covered under a business auto insurance policy issued by the insurer, Hanover, whose claims adjuster determined that its responsibility for damage caused by the spill was limited to the $5,000 required by the Massachusetts mandatory endorsement, and otherwise was foreclosed under the pollution exclusion clause in the policy. The insurer issued a check to United for $5,000.

United filed a complaint seeking a declaratory judgment, alleging that the policy provided liability coverage of one million dollars and that it was entitled to recover for the clean-up of the oil spill and property damage payment to National. National also filed an amended complaint for declaratory judgment and other relief against the insurer. The insurer counterclaimed for declaratory judgment, asserting that any coverage was limited to the $5,000 that had already been paid; the insurer later moved for summary judgment in both cases, arguing that the policy contained an exclusion for pollution damage such as the oil spill and that none of the exceptions to that exclusion applied.

The judge allowed the insurer’s motions for summary judgment on the basis of the pollution exclusion clause. The policy’s pollution exclusion clause (paragraph 11) provides that coverage does not extend to any property damage: “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants': ¶ “a. That are, or that are contained in any property that is: ¶ (1) Being transported or towed by, handled, or handled for movement into, onto or from, the covered ‘auto’; ¶ (2) Otherwise in the course of transit by or on behalf of the ‘insured’; or ¶ (3) Being stored, disposed of treated or processed in or upon the covered ‘auto’; ¶ … [or] ¶ “c. After the ‘pollutants’ or any property in which the ‘pollutants’ are contained are moved from the covered ‘auto’ to the place where they are finally delivered, disposed of or abandoned by the ‘insured.’”

DISCUSSION

Language in an insurance policy must be given its ordinary meaning and construed in the sense that the insured will reasonably understand to be the scope of his coverage. Exclusionary clauses must be strictly construed against the insurer so as not to defeat any intended coverage or diminish the protection purchased by the insured.

It is undisputed that United’s truck is the covered “auto” under the policy and that the heating oil is a pollutant. It is also agreed that the spilled oil did not leak from the truck or from the pump attached to the truck while the oil was being transferred into National’s oil storage tank during delivery.

The Massachusetts court of appeal agreed with the motion judge that the polluting accident in this case comes under paragraph (a) of the pollution exclusion, because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination. The oil was therefore, being “handled for movement … from, the covered “auto.” The plaintiffs’ argument that paragraph (a) does not apply because the oil had reached its final destination—or that the oil that was displaced was the oil already in the tank before Izdebski began to fill it ignores that the expression “arising out of,” both in coverage and exclusionary clauses, must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. The phrase “arising out of” must be read expansively and has a broad meaning analogous to “but for” causation.

Paragraph 11c. Of the Pollution Exclusion

Paragraph (c) of the pollution exclusion provides that the policy will not cover “‘property damage’ arising out of the actual … discharge, … release or escape of ‘pollutants’” once they have been “finally delivered.” This paragraph applies because the oil spill occurred after the oil had been moved from the covered auto to the place [National's oil storage tank] where it was finally delivered by United. In fact, the plaintiffs concede that the oil spilled had been finally delivered by the insured to the customer and the release of oil occurred after delivery. They therefore agree that this exclusion may be applicable to the release of pollutants in this case.

However, the plaintiffs also argue that the exception to the paragraph (c) exclusion applies here. That exception provides that the exclusion does not apply:  “to ‘accidents’ that occur away from premises owned by or rented to an insured with respect to pollutants not in or upon a covered auto if: “(1) The ‘pollutants’ or any property in which the ‘pollutants’ are contained are upset, overturned or damage[d] as a result of the maintenance or use of a covered ‘auto’; and ¶ (2) The discharge, dispersal, seepage, migration, release or escape of the ‘pollutants’ is caused directly by such upset, overturn, or damage.’” (Emphases deleted)

It follows that a fair reading of the exception is that it is intended to provide coverage for an accidental oil spill in the event that United’s truck, the covered auto, is “upset, overturned or damaged” while away from United’s premises. Here, National’s property damage occurred as a result of oil seeping out of its oil tank vent pipe after the oil, or the “pollutant,” was delivered into National’s storage tank. It was not caused by oil “upset” or “overturned” or even “damaged” by the maintenance or use of United’s delivery truck. It was caused because the tank was overfilled. The plaintiffs’ argument that the oil in National’s storage tank was “upset” by the pumping in of new oil from United’s truck strains the wording and would force the court to rewrite a policy previously agreed to by the insured and Hannover.

CONCLUSION

The appellate court ordered the trial court, therefore, to modify its judgment to include a declaration that the business auto insurance policy issued by Hanover to United does not provide coverage to United or National for the property damage claims from the oil spill that occurred from Izdebski’s delivery beyond the $5,000 required by the Massachusetts mandatory endorsement.

ZALMA OPINION

Insurance policy wording must be interpreted to provide the coverages that the words of the policy indicate was the intent of the parties. In this case it was clear that Hanover only agreed to insure pollution that resulted from an overturn, collision or other accidental damage to the coverage “auto,” the oil tanker, that was the insured auto. Since the facts were agreed that there was no damage to the tanker and the only cause of damage was the fact that Izdebski overfilled the storage tank, the pollution exclusion applied and the exceptions did not. Izdebski was entitled only to the $5,000 mandatory coverage and would have to pay out of his pocket for any costs in excess as a result of negligent acts for which his insurer did not agree to indemnify him.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

The Insurance Fraud Deskbook

 

large image

The Insurance Fraud Deskbook
Author(s):
Barry Zalma
Sponsor(s):
Tort Trial and Insurance Practice Section
Publisher(s):
ABA Book Publishing

ISBN: 978-1-62722-676-9
Product Code: 5190506
2014, 638 pages, 7 x 10

This book is written for individuals who are focused on the effort to reduce expensive and pervasive occurrences of insurance fraud. Lawyers who represent insurers, claims personnel, prosecutors and their investigators can all benefit from this exhaustive resource.

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers, so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allows claims personnel and their lawyers to understand what errors would cause a defeat or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit, and insurance company management to attain the information needed to deal with state investigators and prosecutors.

Available from the American Bar Association at: http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Posted in Zalma on Insurance | Leave a comment

Hobby Lobby & Quasi-Insurance

 The ACA Is Not A Law About Insurance

It is commonly recognized that an insurance company has the unquestioned right to determine who it would insure and what risks it agreed to take. Similarly, people who are insured have the right to decide what insurance protection they wish to acquire, the coverages they decide they need and the insurer with whom they wish to contract. That was the case until the enactment of the Patient Protection and Affordable Care Act of 2010 (ACA), 124 Stat. 119. The ACA granted the Department of Health and Human Services (HHS) the right to require businesses to purchase health insurance in the amounts, and covering the risks, required by the HHS thereby inserting HHS into the personal negotiations between the insured and insurer.

Insurance is a contract where a person agrees to indemnify another for consideration against certain described risks of loss that are either contingent or unknown at the time the insurance contract is agreed. Insurance contracts vary with the needs of the parties. I have  in my office over 17 linear feet of insurance policy forms that I have collected over the last 47 years. Insurance is not, nor should it be, cookie cutter identical. It should meet the needs of the person seeking insurance and the insurer.

One of those regulations required employers to purchase insurance that covered 20 different categories of birth control, four of which are abortifacients that would destroy a fertilized egg. To do so violates the deeply held religious beliefs of those who consider a human life to start at conception.

In Burwell v. Hobby Lobby Stores, Inc., — S.Ct. —-, 2014 WL 2921709 (U.S.), 123 Fair Empl.Prac.Cas. (BNA) 621 the US Supreme Court was called upon to make the ACA and the Religious Freedom Restoration Act of 1993 (RFRA), 107 Stat. 1488, 42 U.S.C. § 2000bb et seq., work without one violating the other.

The Holding

The Supreme Court, Justice Alito, held that:

(1)           “person,” within meaning of RFRA’s protection of a person’s exercise of religion, includes for-profit corporations;

(2)           the HHS contraceptives mandate, as applied to for-profit closely held corporations, substantially burdened the exercise of religion, for purposes of RFRA; and

(3)           the HHS contraceptives mandate did not satisfy RFRA’s least-restrictive-means requirement.

The RFRA does not permit the United States Department of Health and Human Services (HHS) to demand that three closely held corporations provide health-insurance coverage for methods of contraception that violate the sincerely held religious beliefs of the companies’ owners. The Supreme Court held that the regulations that imposing this obligation violate RFRA, which prohibits the Federal Government from taking any action that substantially burdens the exercise of religion unless that action constitutes the least restrictive means of serving a compelling government interest.

Analysis by Supreme Court

The court rejected HHS’s argument that the owners of the companies forfeited all RFRA protection when they decided to organize their businesses as corporations rather than sole proprietorships or general partnerships. The plain terms of RFRA make it perfectly clear that Congress did not discriminate in this way against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs.

The owners of the businesses have religious objections to abortion, and according to their religious beliefs the four contraceptive methods at issue are abortifacients. If the owners comply with the HHS mandate, they believe they will be facilitating abortions, and if they do not comply, they will pay a very heavy price—as much as $1.3 million per day, or about $475 million per year, in the case of one of the companies. If these consequences do not amount to a substantial burden, it is hard to see what would.

Under RFRA, a Government action that imposes a substantial burden on religious exercise must serve a compelling government interest, and we assume that the HHS regulations satisfy this requirement. But in order for the HHS mandate to be sustained, it must also constitute the least restrictive means of serving that interest, and the mandate plainly fails that test. There are other ways in which Congress or HHS could equally ensure that every woman has cost-free access to the particular contraceptives at issue here and, indeed, to all FDA-approved contraceptives.

The Supreme Court did not hold that for-profit corporations and other commercial enterprises can opt out of any law (saving only tax laws) they judge incompatible with their sincerely held religious beliefs.

Congress enacted RFRA in 1993 in order to provide very broad protection for religious liberty.

At issue in these cases are HHS regulations promulgated under the ACA. ACA generally requires employers with 50 or more full-time employees to offer “a group health plan or group health insurance coverage” that provides “minimum essential coverage.” 26 U.S.C. § 5000A(f)(2); §§ 4980H(a), (c)(2). Any covered employer that does not provide such coverage must pay a substantial price. Specifically, if a covered employer provides group health insurance but its plan fails to comply with ACA’s group-health-plan requirements, the employer may be required to pay $100 per day for each affected “individual.” §§ 4980D(a)-(b). And if the employer decides to stop providing health insurance altogether and at least one full-time employee enrolls in a health plan and qualifies for a subsidy on one of the government-run ACA exchanges, the employer must pay $2,000 per year for each of its full-time employees. §§ 4980H(a), (c)(1).

Unless an exception applies, ACA requires an employer’s group health plan or group-health-insurance coverage to furnish “preventive care and screenings” for women without “any cost sharing requirements.” 42 U.S.C. § 300gg–13(a)(4). Congress itself, however, did not specify what types of preventive care must be covered. Instead, Congress authorized the Health Resources and Services Administration (HRSA), a component of HHS, to make that important and sensitive decision. The HRSA applied Guidelines that nonexempt employers are generally required to provide “coverage, without cost sharing” for “[a]ll Food and Drug Administration [ (FDA) ] approved contraceptive methods, sterilization procedures, and patient education and counseling.” 77 Fed.Reg. 8725 (internal quotation marks omitted). Although many of the required, FDA-approved methods of contraception work by preventing the fertilization of an egg, four of those methods (those specifically at issue in these cases) may have the effect of preventing an already fertilized egg from developing any further by inhibiting its attachment to the uterus.

The Hahns and Conestoga sued HHS and other federal officials and agencies under RFRA and the Free Exercise Clause of the First Amendment, seeking to enjoin application of ACA’s contraceptive mandate insofar as it requires them to provide health-insurance coverage for four FDA-approved contraceptives that may operate after the fertilization of an egg. In opposing the requirement to provide coverage for the contraceptives to which they object, the Hahns argued that “it is immoral and sinful for [them] to intentionally participate in, pay for, facilitate, or otherwise support these drugs.”

RFRA prohibits the “Government [from] substantially burden[ing] a person’s exercise of religion even if the burden results from a rule of general applicability” unless the Government “demonstrates that application of the burden to the person—(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.” 42 U.S.C. §§ 2000bb–1(a), (b) (emphasis added). The first question that we must address is whether this provision applies to regulations that govern the activities of for-profit corporations like Hobby Lobby, Conestoga, and Mardel.

Congress provided protection for people like the Hahns and Greens by employing a familiar legal fiction: It included corporations within RFRA’s definition of “persons.” But it is important to keep in mind that the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends.

RFRA applies to “a person’s” exercise of religion, 42 U.S.C. §§ 2000bb–1(a), (b), and RFRA itself does not define the term “person.” The Supreme Court, therefore looked to the Dictionary Act, to determine the meaning of “any Act of Congress, unless the context indicates otherwise.” 1 U.S.C. § 1. Under the Dictionary Act, “the wor[d] ‘person’ … include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.”; see FCC v. AT & T Inc., 562 U.S. ––––, –––– (2011) (slip op., at 6)

According to HHS these corporations are not protected by RFRA because they cannot exercise religion. Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations § 4:1, p. 224 (3d ed.2010) (emphasis added); see 1A W. Fletcher, Cyclopedia of the Law of Corporations § 102 (rev. ed.2010). While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.

It is quite a stretch to argue that RFRA, a law enacted to provide very broad protection for religious liberty, left for-profit corporations unprotected simply because a majority of the Justices did not find it necessary to decide whether the kosher market’s corporate status barred it from raising a free-exercise claim. The Supreme Court concluded that a federal regulation’s restriction on the activities of a for-profit closely held corporation must comply with RFRA.

The Hahns and Greens believe that providing the coverage demanded by the HHS regulations is connected to the destruction of an embryo in a way that is sufficient to make it immoral for them to provide the coverage. Repeatedly and in many different contexts, the Supreme Court has warned that courts must not presume to determine the plausibility of a religious claim.

The contraceptive mandate, as applied to closely held corporations, violates RFRA. Our decision on that statutory question makes it unnecessary to reach the First Amendment claim raised by Conestoga and the Hahns.

 ZALMA OPINION

This is obviously a serious and important decision regarding religious freedom. What it fails to do is to recognize that the ACA forces insurers and buyers of insurance to buy insurance compelled by the HHS.

Insurance is a product. When an insurance contract is agreed by the insured and the insurer promises are made that effect the finances and property of the person insured and the insurer. Compelling, by statute, a person to buy a particular kind of insurance appears to deprive both the insurer and the insured of “property, without due process of law; nor shall private property be taken for public use, without just compensation.” If, as I believe, insurance is property, taking away the insurance policy held by Hobby Lobby before the enactment of the ACA and requiring it to buy a different policy, without just compensation is a violation of the Fifth Amendment to the U.S. Constitution not considered by the parties or the court.

In addition, since the ACA requires the insurers to provide insurance for people suffering from medical conditions that existed before the insurance came into effect, is changing the meaning of the term insurance. A pre-existing condition cannot be fortuitous, it cannot be contingent or unknown at the time the policy was acquired, and therefore what the ACA requires is not insurance. It is a law that makes commercial entities provide a governmentally mandated entitlement to certain members of the public. Insurance companies are not agents of nor are they part of the U.S. government and should not be required by law to issue quasi insurance to individuals who were not actuarially viable for  insurance any more than it would be proper to require insurers to issue fire insurance for, and to pay for fire losses, after the fire destroyed a building.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

 

 

 

 

 

 

Posted in Zalma on Insurance | Leave a comment

Direct Action Statute Does Not Mandate Coverage

Claims Made & Reported Not Changed by Direct Action Statute

Louisiana has a direct action statute that allows plaintiffs to make an insurer as well as its insured the defendant in a tort law suit. The statute was called into play by a plaintiff whose defendant failed to give notice to its insurer by amending its suit to include the insurer on a date after the claim was made and after the policy expired. The plaintiff convinced an appellate court that the direct action statute emasculated the claims made and reported provisions of the policy. In Gorman v. City Of Opelousas, — So.3d —-, 2014 WL 2937129 (La.), 2013-1734 (La. 7/1/14) the Louisiana Supreme Court resolved the dispute.

FACTS AND PROCEDURAL HISTORY

On September 28, 2009, Brian Armstrong (Armstrong) was incarcerated at the city jail in Opelousas when he was allegedly beaten by two other inmates. He later died. On September 27, 2010, Armstrong’s mother, Joyce Gorman (Gorman), filed a survival action and a wrongful death action against the city of Opelousas and its police department (collectively the City). After being served with the petition, the City filed an answer.

In December 2010 (more than a year after filing suit), Gorman directed discovery to the City seeking the identity of its insurer and requesting a copy of any applicable insurance policy. The City, only after being ordered to do so, identified Lexington Insurance Company (Lexington) as its insurer. Gorman then filed an amended petition on September 7, 2011, naming Lexington as an additional defendant. Lexington filed a motion for summary judgment, seeking to have Gorman’s direct action claim against it dismissed based on lack of coverage because her claim had not been reported to Lexington within the policy’s stated time limit.

The Lexington policy provided:

NOTICE: THIS IS A CLAIMS MADE POLICY. COVERAGE IS LIMITED GENERALLY TO LIABILITY FOR CLAIMS FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO U.S. WHILE THE COVERAGE IS IN FORCE. PLEASE REVIEW THE POLICY CAREFULLY AND DISCUSS POLICY COVERAGE WITH YOUR INSURANCE AGENT OR BROKER.

In relevant part, the policy further stated:
SECTION I. INSURING AGREEMENT
A. We shall pay those amounts that the Insured becomes legally obligated to pay to compensate others for bodily injury, property damage, or personal injury arising out of the Insured’s wrongful act. The wrongful act shall take place on or after the retroactive date, but before the end of the policy period, and shall arise solely in your capacity as a law enforcement agency. A claim for a wrongful act shall be first made against the Insured and reported to us in writing during the policy period or any extended reporting period we provide under this policy. (emphasis omitted)

The pertinent policy period was 12:01 A.M., standard time at the address of the Named Insured as stated herein from 04/17/2010 to 04/17/2011.

DISCUSSION

An insurance policy is a contract between the insured and insurer and has the effect of law between them. The role of the judiciary in interpreting an insurance contract is to ascertain the common intent of the insured and insurer as reflected by the words in the policy. When the words of an insurance contract are clear and explicit and lead to no absurd consequences, courts must enforce the contract as written and may make no further interpretation in search of the parties’ intent. Where a policy unambiguously and clearly limits coverage to claims made and reported during the policy period, such limitation of liability is not per se impermissible.

Lexington agreed to pay claims on behalf of the City if three conditions occur:

1) the wrongful act occurs on or after the retroactive date of the policy, but before the end of the policy period;

2) the claim for the wrongful act is first made against the City during the policy period; and

3) the claim is reported to Lexington in writing during the policy period.

Satisfaction of all three conditions is required for coverage under the Lexington policy. The City was undisputedly informed that Lexington’s liability is limited by these terms.
Coverage under the Lexington policy was effective only if Gorman’s claim was both made and reported within the applicable policy period. Under this type of policy, the risk of a claim incurred but not made, as well as a claim made but not reported, is shifted to the insured. The purpose of the reporting requirement in a claims-made policy is to define the scope of coverage purchased by the insured by providing a certain date after which an insurer knows it is no longer liable under the policy.

Although the September 28, 2009 wrongful act occurred after April 17, 2005 and before April 17, 2011, and Gorman’s September 27, 2010 claim was made between April 17, 2010 and April 17, 2011, as required, Gorman’s claim was not reported to Lexington until September 22, 2011, which is after the policy period expired on April 17, 2011. The occurrence of only the first two of the policy’s required conditions was insufficient to trigger coverage. Absent a timely reporting, one of the conditions needed to trigger coverage under the applicable Lexington policy did not occur. Therefore, the Lexington policy did not provide coverage to the City for the wrongful act alleged by Gorman.

Gorman’s right to sue Lexington arises out of the Direct Action Statute, which provides that an injured person, at his or her option, “shall have a right of direct action against the insurer within the terms and limits of the policy.” La. R.S. 22:1269(B)(1). Louisiana R.S. 22:1269(D) further provides: “It is also the intent of this Section that all liability policies within their terms and limits are executed for the benefit of all injured persons and their survivors or heirs to whom the insured is liable; and, that it is the purpose of all liability policies to give protection and coverage to all insureds, whether they are named insured or additional insureds under the omnibus clause, for any legal liability the insured may have as or for a tortfeasor within the terms and limits of the policy.”

In effect, the insured received what he paid for by the present policy, with premiums presumably reduced to reflect the limited coverage. The direct action statute does not mandate coverage. Rather, it prohibits any condition, stipulation or agreement in an insurance contract from limiting a right of action against the insurer to a period of less than one year from the time when the cause of action accrues. The statute was not violated as the claims-made coverage provision did not impermissibly limit plaintiff’s cause of action.

Gorman was not deprived of her rights under the Direct Action Statute, as that statute does not extend any greater right to the injured third party who was damaged by the insured. Gorman asked the Supreme Court to convert the City’s claims-made-and-reported policy into an occurrence policy, resulting in the judicial modification of the bargained-for exchange between the insurer and insured. The Supreme Court refused.

The court could think of no logical reason why the City would not report a claim for which it apparently purchased insurance coverage, it refused under the facts of this case to hold the insurer liable for the City’s failure to report the claim as required by the Lexington policy. A contrary finding would, where there is no evidence of fraud or collusion, punish the insurer for the inactions of its insured.

Although insurance policies “are executed for the benefit of all injured persons,” such protection is limited by the “terms and limits of the policy.”

CONCLUSION

The Supreme Court concluded that the provisions of the Lexington policy are undisputedly clear and unambiguous. Provisions on the making and reporting of claims in a claims-made-and-reported policy are not impermissible as against public policy. Under the City’s policy, the event and peril insured against is based on making and reporting of the claim within the period specified by the policy. The City’s failure to report Gorman’s claim to Lexington during the applicable policy period as required precludes coverage. Absent coverage, Gorman was not deprived of a right under the Direct Action Statute. Therefore, the trial court correctly granted summary judgment in favor of Lexington as to the City and Gorman, and the appellate court erred in reversing summary judgment relative to Gorman.

ZALMA OPINION

Although it empathized with Ms. Gorman’s inability to fund a judgment against the city with an insurance policy, and although it could not understand the stupidity of the city in not reporting the claim to its insurer, the Supreme Court of Louisiana refused to rewrite an insurance policy. Insurers have the right to choose who it will insure and for what risks. Courts do not have the right to change contracts made by the parties.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Use Of Cappers Can Be Expensive

Drug Companies Should Not Use Cappers to Sell Prescription Drugs

Successful writs of mandate are as rare as snow fall in the Sahara. When they are granted a serious error of law was found necessary to be cured. The California Court of Appeal bucked tradition and granted a writ of mandate to compel trial on damages available against those who use cappers and runners.

A petition for a writ of mandate arose out of a qui tam action against Bristol–Myers Squibb Co. (BMS) to impose civil penalties for violation of the California Insurance Fraud Prevention Act (IFPA), Insurance Code section 1871 et seq. The relators alleged that Bristol–Myers employed runners and cappers to induce physicians to prescribe its drugs to their patients. The trial court concluded that proof of liability under Insurance Code section 1871.7, a part of the IFPA, requires: (1) that a claim for payment be presented to an insurer; (2) that the claim must itself be fraudulent, containing express misstatements of fact; and (3) that the claim would not have been presented but for Bristol–Myers’ unlawful conduct. Petitioners contend that the order unduly limits the application of section 1871.7

In State ex rel. Wilson v. Superior Court, — Cal.Rptr.3d —-, 2014 WL 2918872 (Cal.App. 2 Dist.) Michael Wilson, a former Bristol–Meyers Squibb Co. sales representative, on behalf of the People of the State of California, filed the underlying qui tam action against BMS. Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which means he “who pursues this action on our Lord the King’s behalf as well as his own.”

The lawsuit alleges, in a factually detailed pleading, that in marketing its drugs, BMS engaged in a course of illegal and fraudulent conduct aimed at doctors, health care providers, pharmacists, and insurance companies. The suit alleges BMS specifically targeted these benefits to physicians who had large numbers of patients enrolled in private health insurance plans, and instructed its sales representatives to hold the targeted physicians responsible for increased prescriptions—expressly characterizing this as “shaking the doctors down.”

The IFPA

This petition concerns the proof required to establish a violation of subdivision (a) of Insurance Code section 1871.7, a portion of the IFPA that relates to health insurance and workers’ compensation insurance fraud.  Subdivision (a) makes it unlawful to knowingly employ runners or cappers to procure clients or patients to obtain insurance benefits.  Subdivision (b) prescribes civil penalties and other remedies for violation of either subdivision (a) or Penal Code sections 549, 550, or 551, which target insurance and workers’ compensation fraud.

The Summary Adjudication Ruling

The trial court looked to subdivision (b)’s final sentence, which states that “[t]he penalty prescribed in [subdivision (b)] shall be assessed for each fraudulent claim presented to an insurance company … and not for each violation.” (Italics added.) The court held that under that language it is not enough to prove that the unlawful conduct was a substantial factor resulting in the prescription. The court held this language permits the assessment of penalties only if the prescription would not have been written but for the unlawful conduct; that the prescriptions must be shown on a prescription-by-prescription and claim-by-claim basis to have been a quid pro quo for value provided by BMS; and that the resulting claim must be independently fraudulent and not merely unlawful, containing on its face an express misstatement of fact.

DISCUSSION

For the assessment of civil penalties subdivision (b) requires proof of claims that are in some manner deceitful.

The final sentence of subdivision (b) limits the assessment of its penalties to something less than “every person” who is guilty of the unlawful conduct. Under it, the “penalty prescribed in this paragraph” may be assessed only “for each fraudulent claim presented to an insurance company,” and not for each act that violates subdivision (a) or the incorporated penal provisions. The “penalty prescribed in this paragraph” is the “civil penalty of not less than five thousand dollars ($5,000) nor more than ten thousand dollars ($10,000),” and the “assessment of not more than three times the amount of each claim for compensation….” But it does not encompass the “other equitable relief” that is authorized by subdivision (b), including injunction, disgorgement, costs, and attorneys fees, nor the “other penalties that may be prescribed by law.” In adding the final sentence to subdivision (b), the Legislature could (and presumably did) conclude that the employment of runners and cappers that does not result in claims, or that results only in non-fraudulent claims, may appropriately be remedied by equitable devices, but that when the result is the presentation of fraudulent claims, the additional consequence of subdivision (b)’s monetary penalties is justified.

The Court of Appeal concluded that the words “fraudulent claim” in subdivision (b) do not justify the trial court’s narrow interpretation, which limits actionable claims to those that contain express misstatements of fact. Where words of common usage have more than one meaning, the one which will best attain the purposes of the statute should be adopted.

Subdivision (a) identifies certain running and capping activities as unlawful without regard to whether the resulting services are competently rendered. Running and capping activities are disfavored and unlawful not just because they may often result in services that are excessive or unnecessary, but also because their purpose is to obtain the benefits that otherwise might have gone to others who did not use the prohibited methods.

Upon proof of a cause of action for deceit, the plaintiffs would be entitled to the damages resulting from the defendant’s wrongful conduct. Subdivision (b) is not a substitute for a civil tort action for deceit. It provides civil penalties for conduct that is made unlawful by other provisions of law.

The plaintiffs in an action for its penalties are not direct victims. They did not rely on any misstatements or nondisclosures. They suffered no resulting harm—apart from that suffered by insurance policyholders and society as a whole.

California law recognizes many circumstances in which the proof required to show fraud requires far less than would be required to establish a civil cause of action for fraud. The “fraudulent claim” requirement does not limit the availability of the equitable and other remedies available under subdivision (b); but it does limit the imposition of subdivision (b)’s civil penalties to proof of claims that have a causal relationship to the unlawful conduct, and that are in some manner deceitful.

While the plaintiffs are required to show a causal relationship between the unlawful conduct and the resulting claims, at this stage of the case—before the defendants have filed an answer, before discovery, and before the identification of the evidence—it would be premature to conclude that proof of causation necessarily requires proof that the prescriptions would not have been written in the absence of the unlawful conduct. Causation may in many instances be inferred from evidence that does not itself constitute direct evidence of reliance on an individual basis.

The court of appeal concluded, therefore, that the trial court erred by concluding:

(1) that in no case can conduct be actionable under subdivision (b) without proof that a prescription was written and a fraudulent claim presented to an insurer as a result of the unlawful conduct;

(2) that in order to justify assessment of monetary penalties under subdivision (b) the proof must necessarily establish that the prescription for which payment is claimed would not have been written and the claim for payment would not have been presented but for BMS’s unlawful conduct; and

(3) that in order to justify assessment of monetary penalties under subdivision (b) the proof must necessarily establish that the claim contains on its face an affirmative misstatement of fact.

The Court of Appeal granted the petition for writ of mandate and instructed the trial court to set aside its ruling on the motion for summary adjudication and to enter a modified ruling that comports with this opinion.

ZALMA OPINION

The IFPA was enacted because the state of California recognized how seriously insurance fraud acted to cause damage to the people of the state. In this case it is alleged that a major drug company was involved in a scheme to defraud insurers by bribing or otherwise compensating doctors to prescribe BMS drugs to multiple patients who did not require treatment with the drugs. If proved, when the case finally goes to trial, BMS will be subject to hundreds of fines between $5,000 and $10,000 for each fraudulently prescribed drug.

The trial court attempted to make it more difficult to proceed against the drug company and the Court of Appeal, therefore, found it necessary to issue a rare writ of mandate, to compel the trial court to allow the parties present the appropriate evidence and determine the appropriate fines for such wrongful conduct.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Some Success for Fraud Fighters

Zalma’s Insurance Fraud Letter –

July 1, 2014

FLAG-US

 

 

 

 

 

Happy Independence Day

In the lucky thirteenth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on July 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Arson for Profit Results in a 30 Year Sentence.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.    Insurance Fraud Conviction Affirmed.
4.    Virginia SIU Investigator of the Year
5.    An Insurance Criminal Taught to Seek More

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

•    The Art of the Interview
•    Conflict Needed for Independent Counsel
•    Creative Pleading Fails to Convince
•    Health Insurance Fraud Conviction Stands
•    Builder’s Risk Policy Covers Damage only to Structure as Built
•    You Must Comply With California Regulations by September 1
•    Not Nice To Lie to Your Insurer
•    MCS 90 and Interstate Commerce
•    The Insurance Fraud Deskbook
•    Sex Offender Can’t Get Insurance for Erectile Disfunction
•    Resident of Household Exclusion
•    Outlaw Loses
•    Only Coverage for Insured Person
•    Diminution in Value & Insurance
•    Insurance Fraud & Weapons to Fight Fraud
•    Knowledge of Insurance is Required to Adequately Investigate Insurance Fraud
•     For Fun June 16, 2014
•     “Insurance Fraud Deskbook” Now Available
•    Use of Vehicle
•    Medical Services True Value

Zalma on Insurance

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

NEW! From the ABA:

The Insurance Fraud Deskbook
Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available sometime in June 2014 from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Leave a comment

Again the Supreme Court Fails to Note that the ACA is not Insurance

No Right To Compel Purchase of Insurance That Violates Religious Belief

Justice Alito wrote the opinion for the majority concerning the regulations written as part of the Affordable Care Act or Obama care. Some quotes from the opinion follow. You can read the entire opinion at http://www.supremecourt.gov/opinions/13pdf/13-354_olp1.pdf

Because the contraceptive mandate forces them to pay an enormous sum of money—as much as $475 million per year in the case of Hobby Lobby—if they insist on providing insurance coverage in accordance with their religious beliefs, the mandate clearly imposes a substantial burden on those beliefs.
* * *
Since the HHS contraceptive mandate imposes a substantial
burden on the exercise of religion, we must move
on and decide whether HHS has shown that the mandate
both “(1) is in furtherance of a compelling governmental
interest; and (2) is the least restrictive means of furthering
that compelling governmental interest.”
* * *
As we explain, see infra, at 43-44, the Government can readily arrange for other methods of providing contraceptives, without cost sharing, to employees who are unable to obtain them under their health-insurance plans due to their employers’ religious objections.

* * *

It is HHS’s apparent belief that no insurance-coverage
mandate would violate RFRA—no matter how significantly
it impinges on the religious liberties of employers—that
would lead to intolerable consequences.

* * *

ACA does not create a large national pool of tax revenue for use in purchasing healthcare coverage. Rather, individual employers like the plaintiffs purchase insurance for their own employees. And contrary to the principal dissent’s characterization, the employers’ contributions do not necessarily funnel into “undifferentiated funds.”

* * *

The contraceptive mandate, as applied to closely held
corporations, violates RFRA.

Justice Kennedy, concurring:

As to RFRA’s first requirement, the Department of Health and Human Services (HHS) makes the case that the mandate serves the Government’s compelling interest in providing insurance coverage that is necessary to protect the health of female employees, coverage that is significantly more costly than for a male employee. Ante, at39; see, e.g., Brief for HHS in No. 13-354, pp. 14-15.There are many medical conditions for which pregnancy is contraindicated. See, e.g., id., at 47. It is important to confirm that a premise of the Court’s opinion is its assumption
that the HHS regulation here at issue furthers al egitimate and compelling interest in the health of female employees.

* * *

On this record and as explained by the Court, the Government has not met its burden of showing that it cannot accommodate the plaintiffs’ similar religious objections under this established framework. RFRA is inconsistent with the insistence of an agency such as HHS on distinguishing between different religious believers—burdening one while accommodating the other—when it may treat both equally by offering both of them the same accommodation.

* * *

Among the reasons the United States is so open, so tolerant, and so free is that no person may be restricted or demeaned by government in exercising his or her religion. Yet neither may that same exercise unduly restrict other persons, such as employees, in protecting their own interests, interests the law deems compelling.In these cases the means to reconcile those two priorities are at hand in the existing accommodation the Government has designed, identified, and used for circumstances
closely parallel to those presented here. RFRA requires the Government to use this less restrictive means. As the Court explains, this existing model, designed precisely for this problem, might well suffice to distinguish the instant cases from many others in which it is more difficult and expensive to accommodate a governmental program to countless religious claims based on an alleged statutory right of free exercise.

ZALMA OPINION

Although I have no question that the majority was correct in protecting the religious freedom of the owners of Hobby Lobby in accordance with the mandate of the First Amendment to the U.S. Constitution, I continue to be upset that no one has argued to the Supreme Court that the ACA is not a law creating an insurance system but is rather an entitlement to what the ACA calls “insurance”. In fact, the ACA has nothing to do with insurance and, by definition, prevents insurance from acting as insurance. Insurance requires that it provides indemnity for a contingent or unknown event. The ACA requires, on the other hand, that insurers provide indemnity to people with known problems that preexisted the issuance of the policy. By so doing they are making insurance companies an agency of the government requiring them to do something that is not insurance.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

The Art of the Interview

The Interview Is an Essential Part of Every Insurance Claim

Every insurance claim begins with the interview of the person insured to learn who was involved, what happened, when it happened, where it happened, why it happened and how it happened. Every person involved in the claim process recognizes the need to conduct a thorough and informative interview.

Interviewing is an art because the interviewer creates, with words, a situation where the person being interviewed is unaware that he or she is the subject of an interview. The appealing picture drawn by the interviewer encourages the subject to provide the information needed by the interviewer.

To accomplish the task and get to the truth, the person gathering information must do as much as possible to make the setting ideal for an interview. When provided with a comfortable environment, the person who has the information will be much more amenable to be forthcoming with the needed facts.

The room where the interview is to take place would be best decorated in warm colors or neutral pastels, and furnished with comfortable and ‘friendly’ chairs or sofas. In a non-criminal context, as often as possible, the professional will conduct the interview in the home of the person interviewed. The professional should take care not to place physical restrictions on the interview setting. The interviewer will never:

o    Require a man to wear a tie

o    Require a woman to wear heels.

o    Require a desk or other ‘barrier’ be placed between the participants.

o    Require a darkened room or harsh lighting.

o    Require the room temperature to be uncomfortably high or low.

In a manner directly opposite to that of a police interrogation, the interviewer should always have coffee, water or soft drinks available to person being interviewed. Any chair provided should always be a comfortable one. The attitude and demeanor of the person gathering the information should, likewise, always be friendly, calm, conciliatory, flattering, inoffensive, congenial, and curious.

Establish Rapport

The interviewer should convince subject, by both words and appearance, that he or she has an all consuming desire for information. Ideally, the subject should be made to feel the need to slake the interviewer’s thirst for knowledge, as if bringing water to a person lost in the desert.

Professionals must do more than gather information. A professional uses the interview as a scientist might use an experiment: to observe and classify facts. The chalk board in Edward Lloyd’s coffee shop would have been useless unless the information posted there was classified into a format that was useful to his customers, the Underwriters who needed the information to decide whether or not to undertake risks on shipments by sea.

The professional gathers the information gained through the interview, collates and classifies it until it can be used to evaluate risk, make a business decision or otherwise order the processes of life.

The professional must remember that the most important aspect of any profession is gathering sufficient information to make an intelligent decision with regard to a risk. The mother who wants to know where her child has been is gaining information to make decisions about risks the child faces. The insurance underwriter who asks a prospective insured about the materials used in the construction of a building is gathering information to decide whether to accept or reject a risk. The businessman who interviews his sales staff is gathering information to decide whether to take a risk on a new product. And the manufacturer who interviews his suppliers is gathering information on whether to take a risk on a new manufacturing plant.

Learn Effective Interview Techniques, Then Practice Them

When it comes to interviewing, experience, by itself, is not enough. The interviewer must first know the fundamentals and principles that form the art. An interviewer needs to understand the techniques of interviewing before starting an interview as much a surgeon needs to know anatomy before beginning surgery. Trial-and-error learning will not teach surgery. An untrained person with a scalpel can never perform an adequate appendectomy no matter how often he tries. Without a thorough knowledge of anatomy he will not even find the appendix.

Practice, without applied knowledge, then, will cause more harm than good. Professionals can rarely learn to gather information by experience alone. As the study of anatomy is to the student surgeon, so the fundamentals of the art of the interview are to the professional. The professional must first understand the anatomy of the interview.

If the professional does not know the fundamentals and principles of interviewing – and when to apply them – he or she will not advance beyond the level of a novice. The information gathered will be inadequate. The information gathered will be incomplete. The information gathered will be untrustworthy.

Many interviewers are novices at gathering information without realizing it. If they have even a few random instances of success they can come to feel they are good interviewers. But it is only through the application of the fundamentals, and a realization of the cause-and-effect relationship of the fundamentals with the resulting information, that the professional can truly realize his or her potential as an interviewer.

Beware the “Expert System”

For centuries insurers have attempted to make the work of their personnel easy. Insurance agents are provided blank applications and proposal forms. Adjusters are supplied with lists of questions to ask insureds and claimants. Underwriters are given manuals to help them collate the information they have. More recently, software programs called “expert systems,” have been introduced. The software consists of the combined input of several experienced insurance underwriters and professionals in other businesses.

The person using the software merely keys in the facts, and the software makes a decision concerning suitability of risk and premiums to be charged, based on the experience of many underwriters.

The “expert systems” have a fatal flaw: they assume the information keyed into the computer is correct. Because the convenience of the new expert systems allows insurers to hire less experienced underwriters, there is a tendency to ask fewer questions, and the underwriter is not taking risk but just operating software. Using expert systems change the profession of underwriting to nothing more data processing.

The user of an “expert system” is not even called upon to gather information, let alone to make a decision. The thinking, risk taking, human underwriter is replaced by a calculator. Information not included in the “expert system” is simply ignored to the detriment of the insurer when using the so-called “expert system.”

Individual information gathering and critical judgment are not exercised. Successful concealment and misrepresentation by an insured becomes simple. Insurance fraud is encouraged. Judgment is replaced by calculation. Facts are replaced by uncorroborated representations.

How far the professional advances in the art of interviewing depends on the effort the professional puts into conducting the interview and the person interviewed. To become a professional one must cultivate an insatiable curiosity. The interviewer should constantly study and experiment with various techniques that may not have been tried before. Most importantly the interviewer must understand that he or she must listen and never interrupt a narrative.

It may take more time to create rapport and gain the confidence of the subject than it will to obtain the information you’re seeking

The most important role in any interview is the role of the interviewer. Unless the interviewer can genuinely convince people that he or she is interested in their welfare and that it is to their advantage to confide in the interviewer, poor results will follow. The interviewer will be unable to complete a competent interview unless the person being interviewed is convinced that the professional is sincerely attempting to arrive at the truth.
The interviewer must keep his or her emotions in check. Even if the interviewer is empathetic to the unfortunate plight of the subject, controlling emotions is absolutely necessary to achieving a successful interview. The interviewer’s positive empathy for the person interviewed should never be over-extended such that it could be misread as a sign of sympathy.

Anyone, when interacting with any other person, is sharing information, but when two individuals are comfortable with these interviewing techniques, neither person feels the need to press for information. A wealth of detailed information is allowed to pass between them, resulting in a satisfying communication, and more importantly, a successful interview.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Conflict Needed for Independent Counsel

Reservation Of Rights Is Not Enough for Independent Counsel

Ever since the California Court of Appeal decided San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis) insureds who received a reservation of rights letter from their insurer have demanded that their insurer pay an attorney of their choice claiming the reservation created a conflict of interest between the lawyer appointed and his two clients, the insured and the insurer. They have found, much to the shock of the independent lawyer who will not be paid by the insurer, that the insurer will not always agree to pay for independent counsel.

In William Graper  v. Mid-continent Casualty Company, No. 13-20099, USCA Fifth, (June 24, 2014), William Graper and Ben B. Floyd (the “Insureds”) appealed a district court’s grant of summary judgment in favor of Mid-Continent Casualty Company (“Mid-Continent). The Insureds filed suit against Mid-Continent alleging that it failed in its obligation to defend them when it refused to pay the fees of the Insureds’ chosen attorney who represented them in an underlying lawsuit brought against them by Kipp Flores Architects (“KFA”). Mid-Continent argued that it fulfilled its duty to defend the Insureds by tendering its selected counsel to defend the suit. The Insureds argued that a disqualifying conflict of interest arose between them and Mid-Continent, entitling them to their choice of counsel at Mid-Continent’s expense.

KFA filed a lawsuit against Hallmark, Mid-Continent’s insured, and Joe Partain, as a principal of the company, alleging that Hallmark had violated several of its copyright rights in several architectural designs. KFA’s complaint alleged that Hallmark used KFA’s copyrighted designs when constructing homes and used those same designs in promotional materials. It further alleged that once KFA discovered Hallmark’s infringing conduct, it sent a cease and desist letter to Hallmark; notwithstanding this letter, Hallmark’s infringing conduct continued.

Following KFA’s filing of its complaint, the Insureds tendered the claim to Mid-Continent. After a preliminary investigation, Mid-Continent agreed to defend the Insureds subject to a reservation of rights.  Two of the potential bases for exclusion included: (1) that the injury may not have occurred during policy coverage dates and (2) that the infringing conduct may have been intentional or willful.

After receiving this reservation of rights, the Insureds notified Mid-Continent that they would select their own counsel because they believed there was a disqualifying conflict of interest between them and any counsel Mid-Continent chose. Mid-Continent offered its own counsel to defend the Insureds but refused to fund their defense if they insisted on hiring their own counsel.

The Insureds refused Mid-Continent’s tender and elected to continue defending the KFA suit with their own counsel. They later filed a declaratory action in Texas state court seeking a determination of their rights and powers under the successive insurance policies. The district court held that no disqualifying conflict of interest existed between the Insureds and Mid-Continent, and that Mid-Continent had fulfilled its duty to defend when it tendered its chosen counsel to represent the Insureds.

The Fifth Circuit observed that it recently upheld an award of 3.2 million dollars in favor of KFA in its underlying suit against the Insureds. The only issue in this appeal is whether Mid-Continent was obligated to pay for the Insureds’ selected counsel to defend the KFA claims.

When an insured is sued and the petition contains allegations which, when fairly and reasonably construed, state a cause of action that is potentially covered by the policy, then the insurer has a duty to defend the insured in the underlying lawsuit. Because, in Texas, the duty to defend is based solely upon allegations in the pleadings, it is broader than the duty to indemnify and, in certain cases, an insurer may have had a duty to defend even when it is later found that coverage (the duty to indemnify) does not exist.  Ordinarily, however, if the duty to defend arises, liability insurance policies grant the insurer complete, exclusive control of the defense. This authority includes the right to select counsel to defend the lawsuit.

Texas law is controlling. The principal case on such conflicts of interest as are raised in this appeal is N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004). Davalos recognizes that an insurer’s issuance of a reservation of rights can “create[] a potential conflict of interest.”  The reservation of rights, however, “does not, by itself, create a conflict between the insured and insurer; it only recognizes the possibility that such a conflict may arise in the future.”

Mid-Continent, the insurer, reserved the right to deny coverage of the underlying copyright infringement claims on grounds that the alleged acts of infringement against the Insureds “occurred” outside the time the policy was in effect; the Insureds are defending KFA’s copyright claims on grounds that the claims “accrued” outside the applicable time provided by the statute of limitations. The Insureds argue that the timing related to coverage of the claims and timing relating to accrual of the claims run on the same factual track, which creates a disqualifiable conflict because adjudication of many of the same facts will determine both the Insureds’ liability and the Insureds’ coverage. Closer scrutiny of the Insureds’ argument shows that it misconceives which facts are necessary to adjudicate the Insureds’ defense that the statute of limitations bars KFA’s claims.

Davalos explicitly rejects the notion that an insured is entitled to select its own counsel merely because the potential for a conflict of interest exists. Here, as between occurrence and accrual, we have two different concepts; an occurrence determines the date of the actual injury and accrual determines the date of the discovery of the injury. The only common fact between the timing of these two determinations is that the occurrence inevitably occurred before the discovery. Under the Davalos same facts test, there is no disqualifiable conflict of interest between the Insureds and Mid-Continent in litigating the statute of limitations defense.

There is a second “same” fact that the Insureds argue creates a disqualifying conflict of interest; that is the willfulness of the Insureds’ conduct. The question of willfulness arises under the policy exclusion for knowing conduct that violates the rights of another. In this respect, KFA alternatively pled for statutory damages under 17 U.S.C. § 504(c). Section 504(c) allows a copyright owner to receive an award of “not less than $750 or more than $30,000″ for each incident of infringement.

It is significant, however, that the exclusionary provision in Mid-Continent’s policy extends only to knowing violations of the rights of another. A finding of willfulness in the underlying suit would not adjudicate the fact of whether the infringement was knowing because a finding of willfulness under the Copyright Act does not require proof of knowing conduct.

An application of the Davalos “same facts” standard evidences no conflict here. The underlying trial court’s determination that there was a willful violation of KFA’s copyright under § 504(c)(2) would not settle the issue of whether that violation was knowing; a violation can amount to reckless conduct and still be willful under the statute. Because the infringement could be willful conduct under § 504(c)(2), entitling KFA to enhanced damages, without a finding of knowing infringement thereby excluding coverage, there is no disqualifying conflict of interest under Davalos.

A finding that there was no disqualifying conflict of interest entitled Mid-Continent to summary judgment on both the Insureds’ breach of contract claim and its claim under the Texas Insurance Code. Accordingly, the district court’s final judgment granting Mid-Continent’s motion for summary judgment was affirmed.

ZALMA OPINION

The Cumis decision was a landmark case allowing insured’s to protect themselves, at the expense of their insurer, from insurers taking advantage of the insured’s rights by hiring counsel who could possibly direct the litigation to facts that would deprive the insured of coverage. Of course, in so doing, it needed to conclude that lawyers hired by insurers to defend their insured, had no ethics and would work to deprive the lawyer’s client of his, her or its right to defense and indemnity.

This case found there was no real conflict and is a reasonable limitation on the Cumis doctrine which was, in California until a limiting statute was enacted, abused by so-called independent counsel.

If there is a real conflict independent counsel can be appointed and watched over by appointed counsel but this should be done sparingly and only when the conflict is obvious.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Creative Pleading Fails to Convince

Demand for Money Not an Equitable Remedy

Before the founding of the United States courts in Britain were divided into law courts (that dealt with money damages) and courts of equity (usually operated by clerics, that dealt with fairness). As time progressed the two courts were combined and modern judges sit in both law and equity cases. However, the remedies available in equity are different than the remedies available in a law court. Courts of equity usually never enter judgments awarding money damages.

ERISA is a federal statute that controls health insurance plans that fulfill the requirements of the ERISA statute. In Central States, Southeast and Southwest Areas Health and Welfare Fund, an Employee Welfare Benefit Plan, by Arthur H. Bunte, Jr., a Trustee thereof, in his representative capacity v. Health Special Risk, Incorporated; Markel Insurance Company; Federal Insurance Company; Ace American Insurance Company, No. 13-10705 (June 23, 2014) Plaintiff, a large ERISA provider, seeks a declaration that Defendants, three independent, non-ERISA insurance providers are bound by the terms of the ERISA plan and primarily liable for injuries sustained by individuals covered by the parties. Because ERISA only allows the plan to sue in equity, and since the district court fond all of the plaintiff’s claims were claims for money damages, granted Defendants’ motion to dismiss for failing to seek equitable relief under ERISA § 502(a)(3).

FACTS

Eleven individuals insured by Central States (the “insureds”) were injured while participating in various activities. In addition to having insurance from Central States, all eleven members were also covered by insurance policies from either Markel Insurance Company, Federal Insurance Company, or Ace American Insurance Company, none of which policies are an ERISA plan. Defendant Health Special Risk, Inc. (“HRS”) is the third-party administrator for each of the independent insurance companies (collectively with HRS, “Defendants”) and is responsible for administering the claims under their various policies.

Central States and the Insurer Defendants can’t agree on which is primarily responsible for the medical bills that resulted from their insureds’ injuries. At the time of their injury, the insureds were covered both as dependents of Central States plan members and by Defendants. Central States paid the claims directly to the medical care providers and sought reimbursement from the Defendants, who refused payment on the grounds that their policies only provided “excess accidental injury coverage,” making them only secondarily liable once the insureds’ primary coverage was exhausted.

APPEAL

Central States essentially raises three issues on appeal.

First, Central States asks this court to find that § 502(a)(3) allows the type of equitable relief requested in the amended complaint.

Second, Central States requests that this court recognize a federal common law cause of action for unjust enrichment to fill the gap in ERISA’s statutory scheme.

Thired, Central States argues that it successfully stated a claim for declaratory judgment-without a request for money-under § 502 and is entitled to a determination of liability.

DISCUSSION

Central States failed to state a claim for equitable relief as required by ERISA § 502(a)(3). Central States seeks to bind Defendants-with whom it has no contractual or business relationship to its ERISA Plan’s COB provisions, which provide that Defendants are primarily responsible for paying the insureds’ medical bills.

As the Plan fiduciary, Central States is entitled to bring an action to “enforce . . . the terms of the plan.” However, the text of ERISA makes it clear that the relief sought must be “appropriate equitable relief,” not legal relief. Ever since its decision in Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993), the U.S. Supreme Court has repeatedly defined “appropriate equitable relief” as “those categories of relief that were typically available in equity.” Equitable relief is contrasted with “legal relief,” which constitutes claims seeking nothing other than compensatory damages. The classic form of purely legal relief is money damages.

To comply with the requirements of § 502(a)(3), the six counts of Central States’ amended complaint are framed as equitable relief. Despite this, each count actually requests monetary damages. For example each seek money damages in counts labeled with words of equity: Count 1, Unpaid and Future Expenses; Count 2, requesting an “injunction requiring the Defendants to pay covered medical expenses”; Count 3, Restitution of Payments Made; Count 4, Equitable Lien / Constructive Trust to enforce Central States’ equitable liens in the identifiable” amounts claimed owed by each Insurer Defendant; Count 5, Subrogation; Count 6, Unjust Enrichment requesting a grant of money judgment.

The Fifth Circuit made clear that simply framing a claim as equitable relief is insufficient to escape a determination that the relief sought is legal.  An injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation, was not typically available in equity. Attempts to recharacterize a desired § 502(a)(3) remedy as a purely equitable form of relief, like an injunction, have been consistently rejected.

Central States’ claims for monetary relief will be considered equitable only if they fit into one of the few categories of “typical equitable relief” that allow for money damages.

Plaintiff’s injunctive relief argument, framed as defendant’s failure to reimburse the plan, was perfunctorily dismissed by the trial court, which held that an injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation, was not typically available in equity.

Typically, equitable restitution was sought in the form of a constructive trust or equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.

ERISA § 502(a)(3) only allows claims for the types of equitable relief typically available in equity. Money damages are not typically available in equity. .

CENTRAL STATES’ CLAIMS REQUEST RELIEF NOT TYPICALLY AVAILABLE IN EQUITY

Because Central States requests money damages, it must demonstrate that its claims fall within those categories of relief that were typically available in equity. Defendants argue that all six counts should be dismissed for requesting impermissible legal relief.

Central States argues that the Court has established that Plan rules should be enforced against Defendants – who are not parties to the ERISA Plan – because the plan’s rights would not be diminished by equitable defenses and when the express contract term contradicts the equitable rule, the agreement must govern. ERISA-plan provisions do not create constructive trusts and equitable liens by the mere fact of their existence. Liens and trusts are created by the agreement between the parties to deliver assets. There was no such agreement.

Central States describes Defendants as “constructive trustees,” defined as those who “hold[] property in constructive trust for the benefit of the beneficiary and [are] under a duty to account for the funds [they] hold in constructive trust.”

Central States argues that Defendants exercised discretion over the Plan’s assets by refusing to reimburse Central States for its medical bills, thereby forcing Central States to expend funds to pay medical bills which were not its responsibility to pay. The Defendants cannot be said to exercise “the power of free decision-making” over Central States’ assets.

Defendants have no say in the management of the Plan, its administration, or its assets, as they could no more have ordered the claims paid than ordered them denied. Further, they have no duties or responsibilities to the Plan: there is no evidence that they maintain records for Central States, disclose information on its behalf, check for conflicts of interest, or have any say in the investment of assets. It cannot even be said that Defendants “forced” Central States to pay these claims; that decision was made without consulting Defendants.

Because Central States cannot establish that the basis of their claim is equitable, the Fifth Circuit affirmed the district court’s dismissal of Counts II-IV for failure to state a claim.

THE LIMITATION SET BY CONGRESS

Congress, in drafting § 502(a)(3)(B) to allow only “equitable relief,” specifically contemplated the possibility of extending to plan fiduciaries a right to sue a participant for money damages and chose instead to limit fiduciaries’ remedies to those typically available in equity. Central States’ objection that it will be left without a remedy is unavailing. It has whatever “appropriate equitable relief” it can bring to enforce the provisions of the Plan. The only limitation is that they have to be equitable, which is Congress’s intent, not a gap.

ZALMA OPINION

The plaintiff, tried to change the law by creative pleading. It sought money damages from each of the insurance companies by claiming that each claim it was making was actually a claim for equitable relief. The Fifth Circuit refused to accept the plaintiffs arguments, read through the creative pleading, and affirmed the dismissal.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Health Insurance Fraud Conviction Stands

Jail for False Health Insurance Claims

Because Medicare and Medicaid pay health care providers promptly and without any inquiry into the probity of the claim health insurance fraud is a fairly easy crime to commit with little chance of being arrested or convicted. Perhaps that is the reason why the extent of health insurance fraud is counted in billions of dollars.

In United States of America v. Eddie Wayne Louthian, No. 13-4231 (4th DCA, June 23, 2014) the Fourth Circuit Court of Appeal was faced with an attempt by a convicted health insurance criminal to avoid a 48 month sentence of forfeiture of nearly $1 million of his assets.

Eddie Wayne Louthian, Sr., was convicted in the Western District of Virginia of multiple offenses arising from a health care fraud scheme. On appeal, Louthian challenged each of his convictions, as well as the district court’s forty-eight-month sentence and forfeiture order.

Between 2005 and 2011, Louthian was President and Business Manager of the Saltville Rescue Squad, Inc. (the “Squad”), headquartered in Saltville, Virginia. The Squad provided ambulance transport for medical emergencies and non-emergency transportation for dialysis patients. The Squad billed Medicare and certain private insurers, including Anthem Blue Cross/Blue Shield (“Anthem”), for its services.

The Medicare system provides insurance coverage for ambulance transportation to and from dialysis centers when conveyance by other means would endanger a patient’s health. Before authorizing payments for recurring, non-emergency transports, Medicare requires the issuance of a physician certification statement, also known as a Certificate of Medical Necessity (“CMN”).

The Medicare system is administered to ensure that claims for dialysis transports are paid to providers as quickly as possible. When such a claim is filed electronically, it must be paid within fifteen days of receipt. If a claim is filed on paper, it must be paid within twenty-nine days. Because of the large volume of such claims for Medicare payments, little or no inquiry is made into the validity of claims as they are received. If a paid claim is ultimately suspected of having been fraudulently submitted, the authorities will investigate and pursue an appropriate reimbursement, in addition to potential criminal charges.

In April 2008, the Medicare Fraud Control Unit of the Virginia Attorney General’s Office (the “Fraud Unit” or the “Unit”) began investigating the Squad’s activities. The Fraud Unit suspected that the Squad was engaged in a scheme to falsely bill Medicare and private insurers for services that were not medically necessary. The Unit’s investigation focused on the Squad’s billings for services to three dialysis patients. The Squad provided round-trip ambulance transportation for those patients, up to three times per week, between their Saltville homes and a dialysis center in Abingdon, Virginia, about twenty miles away. For each such transport, the Squad billed Medicare approximately $1,200 to $1,500. The Squad would also bill Anthem, which was a secondary insurer for each of the three patients.

The Unit, working with the United States Attorney unearthed evidence that Louthian and other Squad employees had forged, altered, and lied about the three patients’ medical conditions on documents submitted to support the Squad’s requests for payments.

On January 17, 2012, Louthian, Squad employee Monica Hicks, and the Squad itself were indicted by the grand jury. The jury trial of Louthian and the Squad, which began in Abingdon on September 10, 2012, lasted for about ten days.

The jury was presented evidence that at Louthian’s direction Squad employees and volunteers engaged in a pattern of forging and altering CMNs, recording false information on call sheets, and making other material misrepresentations that Louthian hoped would get the transports paid.

Several Squad employees testified that they were instructed by Louthian to embellish call sheets with fabricated details. Squad employees were instructed to use words like “non-ambulatory,” even when the patients could walk, and that Louthian told her to report that one patient was “partially blind,” even though the employee had seen the patient driving her own vehicle.

Louthian was convicted on seven counts. A sentencing hearing was based on a presentence report (“PSR”) that grouped his seven convictions and calculated a total offense level of 32 with a criminal history category of I. As a result, Louthian’s advisory Guidelines range was 121 to 151 months of imprisonment. Louthian objected to most of the findings. The district court rejected each of Louthian’s objections and adopted the PSR.

The court varied downward from the advisory Guidelines range and imposed seven concurrent prison terms of forty-eight months each. On March 21, 2013, the court entered its criminal judgment, incorporating the preliminary order of forfeiture.

ANALYSIS

An appellate court will sustain a guilty verdict if there is substantial evidence, taking the view most favorable to the Government, to support it. Substantial evidence exists if there is evidence that a reasonable finder of fact could accept as adequate and sufficient to support a conclusion of a defendant’s guilt beyond a reasonable doubt. The appellate court always defers to the jury’s determinations of credibility and resolutions of conflicts in the evidence, as they are within the sole province of the jury and are not susceptible to judicial review.

In order to prove the conspiracy to commit health care fraud the government was required to show an unlawful agreement between Louthian and at least one other person to commit health care fraud. The substantive health care fraud offense required proof that Louthian had knowingly and willfully executed a scheme to defraud any health care benefit program; or to obtain, by means of false or fraudulent representations any of the money of any health care benefit program in connection with the delivery of or payment for health care benefits, items, or services. Finally, the four false statement charges required proof that Louthian knowingly and willfully made materially false or fraudulent statements in connection with the delivery of or payment for health care benefits, items, or services.

Louthian was not convicted of providing services to individuals who did not qualify for insurance reimbursements. His convictions were based upon false and fraudulent statements to Medicare and Anthem to secure payments for the dialysis transports. Louthian and those under his supervision falsely advised Medicare and Anthem that at least three patients needed ambulance transportation because they were bedridden. The trial evidence was more than sufficient to support the jury’s finding that such representations were untrue. The prosecution presented video, photographic, and testimonial evidence illustrating that the Squad’s dialysis transport patients were able to stand, walk, drive, shop, garden, and perform manual labor, among other things.

Louthian also challenged his below-Guidelines sentence of forty-eight months as being excessive, in view of his age, poor health, and lack of a criminal history. The trial court considered Louthian’s request for a downward departure under the Guidelines, but concluded that none was appropriate. Because the court understood its authority, but declined to exercise it on the facts of this case, Louthian cannot contest on appeal the court’s failure to depart downward.

To the extent that Louthian challenged his sentence as otherwise unreasonable, the appellate court was unmoved. A criminal forfeiture of tainted assets in a health care fraud proceeding is mandatory. See 18 U.S.C. § 982(a)(7) that provides that “[T]he court . . . shall order the person to forfeit property, real or personal, that constitutes, or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense.”  In this situation, it is apparent that the prosecution and the court adhered to the applicable procedures.

ZALMA OPINION

Health insurance fraud is rampant across the United States. Prosecutors are underfunded and limit their investigations of health insurance, Medicare and Medicaid fraud to major cities with less populous areas being free of investigation and prosecution.

Since the convictions and $1 million forfeiture only related to three patients Louthian there is a high probability that more patients were fraudulently transported and the amount stolen was a great deal greater than the amount taken and Louthian had sufficient assets to pay counsel to go forward with this appeal.

This case is evidence that Medicare, Medicaid and insurers should not pay all claims presented promptly without some investigation or, before accepting a person or entity as a provider, a thorough investigation of the provider. If not, the crime will continue successfully until the government programs and insurance companies run out of money to pay them.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Builder’s Risk Policy Covers Damage only to Structure as Built

No Bad Faith If Actions of Insurer is Fairly Debatable

Glacier Construction Co. (Glacier) appealed a district court’s order on summary judgment limiting its recovery under a builder’s risk insurance policy (Policy) issued by Travelers Property Casualty Co. (Travelers). Glacier also appealed the grant of summary judgment in favor of Travelers on its claim for bad-faith denial of insurance coverage, as well as the court’s jury instruction on the nature and scope of damages recoverable under the Policy. Travelers filed a cross appeal asserting that none of Glacier’s claimed damages were covered by the Policy. In Glacier Construction Company, a Colorado corporation v. Travelers Property Casualty Company of America, Nos. 12-1503 & 12-1514 (USCA 10th, June 20, 2014) the Tenth Circuit Court of Appeal resolved the dispute.

BACKGROUND

In early 2009, Glacier contracted with the City of Aurora, Colorado, to construct a new wastewater pumping facility. Before construction could begin, excess water had to be removed from the site by a process called “dewatering.” To accomplish the necessary dewatering, Glacier installed four submersible wells and pumps which performed as designed and expected until May and June 2009, when above-average rainfall caused them to fail. Soil got into the original wells/pumps due to the type of soil and the amount of erosion and sediment. As a result, Glacier developed a second dewatering plan that included replacement wells/pumps, and added shoring, engineering tie-backs, and a well-point system. Glacier made a claim on the Policy for the additional costs it incurred to dewater the site, which Travelers denied.

The relevant Policy terms provided coverage for direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.

Glacier filed suit to recover from Travelers all of the costs for the second dewatering plan. The parties eventually filed cross-motions for summary judgment. Travelers argued that the Policy did not cover any of the expenses Glacier incurred due to the failure of the original wells/pumps. The district court rejected that argument, however, and ruled that the Policy covered the “cost of repairing and reworking [the original] four wells and pumps.” It also concluded that Glacier’s claim is limited to those costs.  Based on that ruling, Travelers asserted that the covered costs totaled $9,142.25, while Glacier claimed that its covered costs were $473,884.31.

In a separate order, the district court granted summary judgment to Travelers on Glacier’s claim that Travelers denied coverage in bad faith. The case proceeded to a jury trial to determine the amount of the covered costs. The jury returned a verdict in Glacier’s favor in the amount of $9,142.25 plus post-judgment interest and costs.

POLICY COVERAGE

Travelers relies on the policy language providing coverage for “direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.” Travelers contended that the district court erred in concluding that the original wells/pumps were Covered Property, that they sustained physical damage, and that the damage was from a Covered Cause of Loss.

“Covered Property” refers to “[b]uildings or structures including temporary structures while being constructed, erected, or fabricated at the ‘job site,’ [and] “[p]roperty that will become a permanent part of the buildings or structures at the ‘job site.'” The Policy covered “temporary structures” and the original wells/pumps did not fall within the Policy exclusions. Consequently, the Tenth Circuit agreed with the district court that the original wells/pumps “were temporary structures constituting covered property.”

Travelers next asserts that the original wells/pumps did not sustain physical damage from a covered cause of loss. According to Travelers, to be covered the loss had to be caused by a “casualty, catastrophe, or disaster.” Travelers contends that the rainfall did not qualify because for the period May through August the rains were only 10% above average. But Glacier presented evidence that the damage was caused by above-average rain that fell in surges, so averaging the rainfall over a several-month period was not relevant. The Tenth Circuit concluded that heavy rains were within the Policy coverage. An “occurrence sufficient to trigger coverage … need not be sudden, but must be a specific accident or happening … A long term exposure to a harmful condition that results in damage or injury may be an occurrence.” [Hoang v. Assurance Co. of Am., 149 P.3d 798, 802 (Colo. 2007)] (en banc) (citation omitted) (construing an “occurrence” policy).

The evidence showed that it was the surging rain that caused the soil to erode and get into the original wells/pumps, causing them to fail. The heavy rains were within the Policy coverage.

Travelers further argues that the original wells/pumps did not require repair due to a covered event, but rather, they required only maintenance due to normal wear and tear, an expense not covered by the Policy. But the witnesses, including Travelers’ expert witness, discussed the necessary repairs to the original wells/pumps caused by the surging rains and eroding soil.

Lastly, Travelers asserts that the damage to the original wells/pumps was caused by the faulty or negligent soils report. Glacier stated that part of the need for repairs to the original wells/pumps was caused by the discovery of soils different from those identified in the soils report. Therefore, Travelers argues that the soils report, not the rains or other events, was responsible for the damage. Travelers invokes a Policy exclusion for loss or damage caused by “[o]mission in, or faulty, inadequate or defective . . . [p]lanning, zoning, development, surveying, siting, design or specifications.”  Unfortunately, for Travelers, the Tenth Circuity concluded that the mere assumption that the soils report was faulty or negligent, without evidence to support this assumption, is insufficient to carry its burden to establish the applicability of the exclusion from coverage. It might have succeeded if it presented the testimony of an expert that the soils report was faulty or negligent, why it was, and what it should have shown Glacier before it began work.

The relevant Policy clause covered costs necessary to re-excavate the site, re-prepare the site, re-grade the land, or re-perform similar work. The ordinary and accepted sense of the Policy terms limited coverage to correction of work previously done.

The Policy did not cover the expense of a new dewatering design and the costs to implement that design. To read the Policy as Glacier advocates would encourage a builder to economize on an initial dewatering plan and later require the insurer to pay for a more elaborate plan. To do so would misallocate the construction expense between the construction company and the insurer. First party property insurance, like builders risk, only exists to indemnify not to create something new and different after the loss. Therefore, as a matter of law, the Policy coverage was limited to the repair and reworking of the original wells/pumps, as determined by the district court.

CLAIM OF BAD-FAITH DENIAL OF COVERAGE

Finally, the Tenth Circuit dealt with Glacier’s claim that Travelers denied its claim for Policy coverage in bad faith.

In a first-party insurance contract, to establish a bad-faith claim, the insured must prove that the insurer acted unreasonably under the circumstances and that the insurer either knowingly or recklessly disregarded the validity of the insured’s claim. The insurer’s conduct is evaluated objectively to determine whether a reasonable person would find that the insurer’s justification for denying or delaying payment of a claim was “fairly debatable” (i.e., if reasonable minds could disagree as to the coverage-determining facts or law.) Resort to a judicial forum does not necessarily evince bad faith or unfair dealing, regardless of the outcome of the proceeding.  Even a mistaken belief about whether a claim is compensable can be within the scope of permissible challenge.

Applying the appropriate standards, the Tenth Circuit concluded that no reasonable jury could have found on the evidence presented that Travelers’ claim-denial conduct unreasonably delayed or denied Glacier’s claim. This determination is fatal to both the statutory and common law claims. Summary judgment in Travelers’ favor was therefore appropriate on Glacier’s bad-faith claims.

ZALMA OPINION

Insurance is a contract of indemnity. No one should be able to profit from a first party property insurance policy. At most, after a covered loss, the insurer need only pay to indemnify the insured – that is – place the insured in the same position it was in before the loss. It was overreaching for Glacier to seek more than the actual damage to what it constructed but to pay for a new plan and addition work.

As to the claim of bad faith it was essential that Glacier prove wrongdoing on the part of Travelers. Merely taking a colorable position in denying the claim is evidence of good faith and that the issues raised were fairly debatable or that there was a genuine dispute between Travelers and Glacier.

Travelers could have avoided the claim in its entirety if it retained an appropriate soils engineering expert to prove that the true cause of the loss was the poor soils report. Of course, the cost of such an expert might have exceeded the amount of the judgment.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

You Must Comply With California Regulations by September 1

California Fair Claims And SIU Regulations Require Annual Training

Fair Claims Settlement Practices Regulations

All insurers doing business in California must comply with the requirements of California Fair Claims Settlement Practices Regulations (the “Regulations”) or face the ire of, and attempts at financial punishment from the California Department of Insurance (“CDOI”). That punishment is now in question because some courageous insurers fought the CDOI and succeeded before an administrative law judge.

Regardless of difficulties in assessing punishment the state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath or that the claims person has read and understood the Regulations.
It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should be familiar with the Regulations since they set a minimum standard for claims handling.

Whether the insurer fulfilled the requirements or not can assist the lawyer in evaluating the exposure faced by an insurer or policyholder client. The existence of compliance with the Regulations is important to the evaluation of a claim for breach of the covenant of good faith and fair dealing and evaluation of a claim of damages resulting from the tort of bad faith.

In 1993, the California Department of Insurance started the regulatory process to control, through regulatory micromanagement, claims handling in the state of California. The first version of what was then called the “Unfair Claims Settlement Practices Regulations” were issued to comply with the direction of the California Supreme Court made as part of the ruling in a case known as Moradi Shalal that concluded: “Neither section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).” The Supreme Court concluded that enforcement was the obligation of the CDOI.

The CDOI, five years after receiving instruction from the Supreme Court, issued the first version of the Regulations in 1993 and modified the Regulations in 1996, 1997, 2004, 2007 and 2009. The 1997 changes renamed the Regulations the “California Fair Claims Settlement Practices Regulations,” which name remains.

The Regulations imposed on all insurance personnel a detailed laundry list of actions the CDOI considered wrongful or in violation of the Fair Claims Practices Act, California Insurance Code Section 790.03(h).

The Regulations impose on all insurance claims personnel the requirement that they read and understand the Regulations or attend an annual training program no later than September 1 of each year. They require that insurers ascertain that every employee involved in any way in the claims process is trained about the Regulations or has submitted a sworn statement that he or she has read and understands the Regulations. The Regulations even require that the insurance claims managing executive attest, under oath, that each employee has been trained with regard to and/or understands the Regulations. This requirement must be complied with in order to avoid the possibility of administrative penalties upon the insurer or prosecution of the officer for perjury.

The Insurance Code, contrary to the statement in the Regulations, does not hold that a single act is a violation of Insurance Code Section 790.03(h). Rather, the Code requires that the wrongful acts be committed with such frequency as to indicate a general business practice.

This Preamble is a statement by the CDOI to broaden the effect of the Insurance Code, to give the CDOI power to enforce the mandate, and to allow it to punish insurers for single wrongful acts. The Regulations, by changing the meaning of the California Insurance Code for the purposes of enforcement, was designed to force insurers to be more careful than the Legislature mandated. Under the Regulations, therefore, a single violation is enough to require punishment of the insurer or the licensee by the CDOI. Whether an insurer is willing to challenge enforcement of this requirement that is more stringent than the Insurance Code requirement is yet to be seen. One insurer challenged the requirement and won.

The Administrative Law Judge ruled, in part:

All allegations seeking civil penalties pursuant to the authority of Insurance Code sections 790.03, subdivision (h) and 790.035, based exclusively upon alleged violations of the Fair Settlement Practices Regulations … are dismissed with prejudice. … [the] Regulation, section 2695.1, subdivision (a) …  seeks … to add all the acts, omissions and practices set forth in the Fair Settlement Practices Regulations to the 16 actionable unlawful settlement practices detailed by the Legislature in Insurance Code section 790.03, subdivision (h), without following the exclusive process for doing so set forth in Insurance Code section 790.06.  [T]he Fair Settlement Practices Regulations impermissibly seek to establish new standards and duties constituting unfair methods of competition and unfair and deceptive acts or practices in the business of insurance within the meaning of Insurance Code section 790.03, subdivision (h), and then seek to penalize respondents for failure to meet the standards, all in derogation of the precedent process required by Insurance Code section 790.06. (Emphasis added)

Details for compliance with the Regulations and how to fight impermissible punishment see Zalma on California Fair Claims Settlement Practices Regulations – 2013 available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.

The California SIU Regulations

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state.

The SIU Regulations

The CDOI enacted a set of emergency regulations, as amended in 2003, 2004, and 2005, requiring all insurers who do business in the state of California to maintain or retain a special fraud investigation unit (SIU) and a plan to defeat fraudulent insurance claims (the SIU Regulations). The SIU Regulations were approved in their final form in October 2005. The SIU Regulations attempt to micro manage the work of insurance company efforts against insurance fraud.

The CDOI has audited hundreds of insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can result in a fine from $500,000 to $1 million.

By following the training recommendations in Zalma On California SIU insurers can inoculate themselves against the potential for paying enormous fines to the CDOI. In addition, a recent ruling by an adminstrative law judge may provide insurers with weapons sufficient to reduce if not totally avoid payment of fines for violation of the SIU Regulations.

The majority of California licensed insurers are required by California Insurance Code Sections 1875.20-24 and California Code of Regulations, Title 10, Section 2698.30-43 to establish and maintain Special Investigative Units (SIU).

All insurers admitted to practice insurance business in California must recognize that by the SIU Regulations the California Department of Insurance (CDOI) has made almost every employee part of what it considers the insurer’s integral anti-fraud personnel. The CDOI requires that the insurer, or its Special Investigation Unit (SIU), train all of the insurer’s integral anti-fraud personnel annually and train all new hires within 90 days of employment. The purpose of this chapter is to assist California insurers to fulfill the obligations to comply with the SIU Regulations.

When deciding who needs to be trained California Insurers should recognize that the SIU Regulations, originally enacted as Emergency Regulations in 2003 had been renewed for three consecutive years as emergency regulations. All insurers are obligated to comply. Insurers, their lawyers, and all independent claims handlers must understand that the SIU Regulations define the term “Integral Anti-Fraud Personnel” as follows:

        “Integral anti-fraud personnel” includes insurer personnel who the insurer has not identified as being directly assigned to its SIU but whose duties may include the processing, investigating, or litigation pertaining to payment or denial of a claim or application for adjudication or claim or application for insurance. The personnel may include claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff, and other insurer employee classifications that perform similar duties. (Emphasis added.) [SIU Regulations, Section 2698.30 (k).]

If the insurer has not trained its integral anti-fraud personnel and if the insurer does not have a training program in force the insurer is subject to a finding it is in violation of the SIU Regulations. If there is no training program that can train all employees who fit within the definition of “integral anti-fraud personnel” within ninety (90) days of their employment the insurer will be in violation of the SIU Regulations.

The methods to train, and an outline of a training course for integral anti-fraud personnel, are available in my e-book Zalma on California SIU Regulations available from ClaimSchool at http://www.zalma.com/zalmabooks.htm.

Training and compliance must be completed by September 1, 2014 and September 1 of each year thereafter.

If you comply with the California Regulations you will probably be found to have complied with the Regulations of other states.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Not Nice To Lie to Your Insurer

Misrepresentation Of Material Fact Ground for Claim Denial

After an alleged jewelry theft Allstate Property and Casualty Insurance Company (Allstate) denied a claim, filed a complaint for declaratory relief and then filed a motion for partial summary judgment. In Allstate Property and Casualty Insurance Company vs. Kiarash Mirkia, Poupak Ziaei, et al, 2:12-cv-01288-RCJ-PAL (USDC, Nevada, June 19, 2014) Defendant/Counterclaimants Kiarash Mirkia and Poupak Ziaei’s were before the District Court on its counterclaims for bad faith, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair claims practices.

BACKGROUND

In July 2012, Allstate Property and Casualty Insurance Company (“Allstate”) filed a declaratory relief action in this Court based on diversity jurisdiction against Kiarash Mirkia (“Mirkia”) and Poupak Ziaei (“Ziaei”), husband and wife (collectively, “Defendants”).

In early December 2011, Defendants contacted Allstate agent Walid Khuraibet (“Khuraibet”) to procure a homeowner’s policy (the “Policy”) to provide building and content coverage for the Property.  The application for insurance stated that “[t]o the best of my knowledge the statements made on this application . . . are true . . . . The Company may recomputed [sic] the premium shown if the statements made herein are not true. In the event of any material misrepresentation or concealment made by me or with my knowledge in connection with this application, the Company may deem this binder and any policy issued pursuant to this application, void.”  Shortly thereafter, Allstate issued Defendants a homeowner’s.  The Policy included personal property limits of $1,038,104 and included extended coverage for scheduled personal property with limits of $142,200 for “jewelry.”

Mirkia reported the theft of jewelry and expensive sunglasses, which apparently occurred on January 30, 2012, to Allstate.  Prior to the theft, Defendants terminated their au pair after only two weeks of employment.  They discovered the theft an hour after the au pair left the premises. Allstate took Mirkia’s examination under oath.  Based on its investigation, Allstate determined that Mirkia had misrepresented and concealed the true facts and circumstances surrounding his ownership of the Property and denied coverage.

The following facts were also undisputed: (1) the “alleged loss occurred on the same day in which the alleged thief called the police indicating she was being held against her will by Dr. Mirkia and asked the police to search her bags”; (2) the “alleged loss is not the first time that Dr. Mirkia or his wife have alleged that either their nannies or house-keepers have stolen from them”; (3) the “alleged loss occurred when over $180,000 worth of jewelry was left in an unlocked drawer where an unsupervised nanny had full access”; (4) the “alleged loss occurred just 23 days after the last piece of expensive jewelry was scheduled”; and (5) the “[police detective] assigned to this loss had suspicions that the loss never actually occurred and suspended his investigation.”

Allstate asserted two causes of action: First that it is entitled to rescission of the insurance contract because it issued the policy in reliance on material false statements, factual misrepresentations, and omissions, which deceived Allstate into accepting the risk at a certain premium.  Allstate established that if it had known the true facts, it would not have issued the Policy.  Instead, it claims, a properly issued renter’s policy would have included different terms, including a different premium and mandatory lower coverage limits for the jewelry.  Accordingly, Allstate contends, it is entitled to rescission of the policy ab initio, and it therefore has no contractual duty to indemnify Defendants for the January 30, 2012 theft claim.

In November 2012, Defendants filed an answer to the complaint, a counterclaim against Allstate. The counterclaim and third-party complaint alleged that Allstate and Legacy were vicariously liable for Khuraibet’s conduct and that Khuraibet was the alter ego of Legacy.

After a short period of work the insureds claimed that the au pair left Defendant’s employment and took some of their jewelry with her. Within an hour of the au pair leaving, Ziaei discovered the theft, and the couple called the police and filed a report.

After several months of “investigation,” Allstate informed Defendants that it was denying their claim “based on a purported misrepresentation on [their] insurance policy and/or personal property floater.”  Allstate sent a denial letter to Defendants on July 19, 2012, and initiated this lawsuit on the same day.

Defendants assert nine causes of action: that Allstate denied their claim in bad faith; a claim for breach of contract against Allstate, Khuraibet, and Legacy; breach of the implied covenant of good faith and fair dealing; unjust enrichment; gross negligence; negligent misrepresentation; fraudulent misrepresentation; alter ego liability against Khuraibet as the owner of Legacy; and a claim under Nevada’s Unfair Claims Practices Act.  Defendants further allege that Allstate and Legacy are vicariously liable for Khuraibet’s conduct.

ANALYSIS

An insurer fails to act in good faith when it refuses without proper cause to compensate the insured for a loss covered by the policy. Such conduct is a breach of the covenant of good faith and fair dealing, and constitutes actionable bad faith.

To establish a prima facie case of bad-faith refusal to pay an insurance claim, the plaintiff must establish that the insurer had no reasonable basis for disputing coverage, and that the insurer knew or recklessly disregarded the fact that there was no reasonable basis for disputing coverage. The vital element is the insurance company’s wrongful conduct, not merely in denying a claim incorrectly and, therefore, without proper cause, but in denying the claim wrongfully, without any reasonable basis or with the knowledge that it is denying a rightful claim.

In order to defeat Allstate’s motion as to the bad faith claims, Defendants must show that there is, in fact, a genuine dispute as to whether Allstate knowingly or recklessly denied coverage without any reasonable basis. Defendants failed to carry this burden.

Faced with such undisputed facts, no reasonable jury could conclude that Allstate lacked any reasonable basis for disputing coverage. Furthermore the decision to deny coverage was plainly reasonable under the controlling Nevada statutes, including that: “All statements and descriptions in any application for an insurance policy or annuity contract, by or in behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy or contract unless either: 1. Fraudulent; 2. Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or 3. The insurer in good faith would either not have issued the policy or contract, or would not have issued it at the same premium rate, or would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.”

Allstate has shown that if it had known that Defendants were renters, rather than homeowners, its own risk management policy would have required issuing its renters policy, under which scheduled personal property is subject to a $15,000, per-item coverage limit. Under these underwriting guidelines, Allstate could not have insured the expensive jewelry presently at issue.

The factual disputes Defendants describe are almost certainly material to the breach of contract claim; however, Allstate has not moved for summary judgment on that claim, and the disputed facts are irrelevant to the bad faith claim presently at issue. Allstate is therefore entitled to summary judgment as to the bad faith claims.

Unfair Claims Practices

Nevada’s unfair trade practices statute designates certain insurance company activities as unfair practices and permits a private right of action by an insured against an insurer. The protections of the statute are broader than the tort of bad faith and extend to the processing of the claim.

When determining if a genuine factual issue exists a trial judge must bear in mind the actual quantum and quality of proof necessary to support liability. A scintilla of evidence, or evidence that is merely colorable or not significantly probative, is not sufficient to present a genuine issue as to a material fact. A court cannot conclude that the mere existence of an expert report or deposition operates as a per se bar to summary judgment. Instead, the court must consider whether the evidence presented in the affidavits is of sufficient caliber and quantity to support a jury verdict for the nonmovant. The Court concluded, therefore, that Defendants have failed to demonstrate the existence of a genuine dispute as to their claim for unfair claims practices and Allstate is therefore entitled to summary judgment.

As a result of its analysis the District Court ordered that Allstate’s partial motion for summary judgment is granted. The Court entered summary judgment in favor of Allstate, Khuraibet, and Legacy on the following counterclaims: (1) bad faith; (3) breach of the implied covenant of good faith and fair dealing; (4) unjust enrichment; and (8) unfair claims practices. The remaining issues are to be tried or subject to a new motion for summary judgment.

ZALMA OPINION

The evidence presented to the court established that the insureds misrepresented material facts at the time they applied for the insurance. That would have been sufficient evidence, had it been the subject of the motion for summary judgment, to declare the policy void from its inception and eliminated all of the other causes of action. Regardless, by its successful motion Allstate has taken the guts out of the insured’s case and limited the case to breach of contract. I expect a new motion for summary judgment on the rescission ground or a quick settlement for the cost of bringing the next motion.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

MCS 90 and Interstate Commerce

Running a Personal Errand is Not Operating “For Hire”

Trucks operating in interstate commerce are required to maintain federally mandated minimum insurance coverage to protect the public whether the vehicle is identified in the policy or not.  An MCS-90 endorsement is a standard endorsement required to be included in a commercial motor carrier’s insurance policy by the Motor Carrier Act of 1980 (MCA), 49 U.S.C. § 10101 et seq., and the regulations promulgated thereunder, 49 C.F.R. § 387.15 et seq. Disputes arise often over whether an MCS-90 endorsement applies when the vehicle is engaged in activities other than interstate commerce or for hire.

In Renee Martinez v. Empire Fire and Marine Insurance Company,  2014.CT.0000709, (June 24, 2014) Martinez filed an action to recover proceeds allegedly due under an automobile liability insurance issued by Empire Fire and Marine Insurance Company (“Empire”), and for other relief, brought to the Superior Court who granted the defendant’s motion for summary judgment from which the plaintiff appealed.

THE DISPUTE

The plaintiff, Renee Martinez, appeals from the summary judgment rendered by the trial court in favor of the defendant. The plaintiff sought to recover under an insurance policy that Empire  had issued to Tony’s Long Wharf Transport, LLC (Tony’s), a towing company registered as an interstate motor carrier. The plaintiff previously had obtained a judgment against Tony’s for personal injuries she sustained in a motor vehicle accident involving her vehicle and a truck owned by Tony’s and driven by one of its employees. At issue before the trial court on summary judgment was whether the federally mandated MCS-90 endorsement attached to the insurance policy was triggered, so as to obligate the Empire to pay the judgment rendered against its insured.  The trial court found the MCS-90 endorsement did not apply. The plaintiff also argues that the public policy of protecting innocent motorists from negligent motor carriers mandates the enforcement of the MCS-90 endorsement in this case.

FACTS

On April 11, 2006, the plaintiff was involved in an automobile collision with a 2000 Ford F-450 Dynamic Wrecker (truck) owned by Tony’s. The truck was being operated by Edward Reynolds, who at the time was employed by Tony’s as a heavy-duty truck mechanic. At the time of the collision, Reynolds was retrieving motor vehicle parts from a facility in Hamden, which he then was to transport to Tony’s facility in New Haven. Reynolds was to use those motor vehicle parts to repair other vehicles owned by Tony’s at the New Haven facility.

On May 5, 2010, the court rendered judgment against Tony’s and awarded to the plaintiff damages in the amount of $693,025.69, plus costs. The judgment was not satisfied within thirty days of the date it was rendered because, in a letter to Tony’s dated April 26, 2006, Empire had denied liability coverage under an insurance policy that it had issued to Tony’s prior to the collision.

The insurance policy at issue in this appeal is a Commercial Lines Policy, effective April 27, 2005 through April 27, 2006. Although the truck originally was listed on the schedule of covered vehicles of the policy, it later had been removed, at the request of Tony’s, by way of an endorsement. The effective date of the truck’s removal from the policy was more than six months before the collision. Nevertheless, a federally mandated MCS-90 endorsement was attached to the policy. The MCS-90 endorsement provides that: “[Empire] . . . agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of [the MCA]….”

The plaintiff brought the underlying action, as a judgment creditor, against Empire, as an insurer, pursuant to Connecticut statutes.  The plaintiff concluded that she was subrogated to the rights of Tony’s as against Empire for its failure to pay the underlying judgment, and that Empire, therefore, is liable to her for the unpaid balance.

Empire moved for summary judgment, asserting that the truck had been removed from the insurance policy as a covered vehicle prior to the collision. She argued that the MCS-90 endorsement attached to the policy was triggered. The trial court found that because there was no genuine issue of material fact that Tony’s was not transporting goods in interstate commerce at the time of the accident the MCS-90 endorsement was not triggered so as to obligate Empire to pay the judgment rendered against its insured.

DISCUSSION

Federal law applies to the operation and effect of the MCS-90 endorsement. Congress enacted the MCA to deregulate the trucking industry, increase competition, reduce entry barriers, and improve quality of service. To that end, the MCA provides that a commercial motor carrier may operate only if registered to do so.

The MCS-90 endorsement is intended to impose a surety obligation on the motor carrier’s insurer. The MCS-90 provides a broad guaranty that the insurer will pay certain judgments regardless of whether the motor vehicle involved is specifically described in the policy or whether the loss was otherwise excluded by the terms of the policy.

The great weight of authority throughout the country is that the analysis must consider whether the vehicle was presently engaged in the transportation of property in interstate commerce. The weight of authority supports the conclusion that the MCS-90 does not cover vehicles when they are not presently transporting property in interstate commerce.

An insurer’s obligation to pay a judgment recovered against its insured pursuant to an MCS-90 endorsement is triggered only when two elements are satisfied when: (1) the underlying insurance policy to which the endorsement is attached does not otherwise provide coverage, and (2) either no other insurer is available to satisfy the judgment against the motor carrier, or the motor carrier’s insurance coverage is insufficient to satisfy the federally-prescribed minimum levels of financial responsibility.

The sole issue before the appellate court was whether there is a disputed issue of material fact that the truck was operating as a for-hire motor carrier transporting property in interstate commerce at the time of the collision. The appellate court agreed with Empire that the court improperly found that Tony’s was operating the vehicle “for-hire” at the time of the accident. To be considered a “for-hire carriage,” the insured had to be in the “business of transporting, for compensation, the goods or property of another” at the time of the accident.

The appellate court concluded that in the present case the trial court correctly noted that undisputed evidence indicated Tony’s employee was being compensated to transport the motor vehicle parts. There is no dispute, however, that Tony’s, as the actual insured, was not being compensated for the transport of the motor vehicle parts. That is, the insured, through its employee, was transporting its own property, for its own benefit, without being compensated by any third party. Tony’s was neither transporting goods for the general public, nor was it transporting goods in fulfillment of a contract at the time the collision occurred. Empire’s insured, through its employee, simply retrieved motor vehicle parts in Hamden, to be delivered to New Haven, where they ultimately were to be used for repairing other vehicles owned by the insured.

Under these circumstances, where the insured effectively was undertaking a personal errand, the appellate court could not construe Tony’s to have been operating its vehicle “for-hire” at the time the collision occurred.

The MCS-90 endorsement was intended to ensure that the public be adequately protected when a licensed carrier uses a vehicle to transport goods.  However, the purpose of the MCS-90 endorsement is to protect the public from negligent motor carriers while they are engaged in the transportation of property, for-hire, in interstate commerce. Tony’s was not operating for-hire at the time the accident occurred, and, therefore, this is not an instance in which Congress intended that the MCS-90 endorsement provide coverage.

Congress and the appropriate regulatory agencies could broaden and clarify the relevant language now in place to provide coverage in factual scenarios similar to the one in this matter, it did not.

In light of our conclusion that the truck in question was not operating for-hire when the collision occurred, the MCS-90 endorsement attached to the policy was not triggered and Empire, as a matter of law and in the absence of any genuine issue of material fact, was not required to pay the judgment rendered against its insured.

ZALMA OPINION

Ms. Martinez is not without a remedy. She can execute her judgment against the assets of Tony’s. She cannot recover from Empire because the risk of loss that resulted in the injury causing event was not a risk that was taken by Empire. Had Tony’s not removed the vehicle from coverage it would have existed at the time of the accident. It did not and since the accident happened in the course of a personal errand there was no coverage under the MCS-90 endorsement.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

The Insurance Fraud Deskbook

I am pleased to report that the American Bar Association, Tort & Insurance Section has published my newest book: “The Insurance Fraud Deskbook”.

The Insurance Fraud Deskbook
Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available sometime in June 2014 and for pre-order from http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Posted in Zalma on Insurance | Leave a comment

Sex Offender Can’t Get Insurance for Erectile Disfunction

Insurance is Not a Constitutional Right

Insurance is a contract between an insurer and insured. It is a commercial agreement based upon the utmost good faith between the parties to the contract. No one is compelled to buy insurance. No insurer is compelled by law to insure a person or entity it does not wish to insure. The insurer has an unquestioned right to choose who it will insure and at what price.

Statutes are enacted to protect the public. Some are clear and unambiguous. Some are not. Some statutes are fair and some are not. When a person is convicted of a crime he or she loses some of their rights. When a person enters into a plea agreement with a court to avoid jail he or she agrees, as a condition of probation to limit some activities that non-criminal citizens may engage in at their own discretion.

In John Doe v. Andrew Cuomo, as Governor of the State of New York, in his official and individual capacity, M. Sean Byrne, as Acting Commissioner of the State of New York Division of Criminal Justice Services, in his official and individual capacity, Defendants-Appellees, Docket No. (June 16, 2014) the fictitiously named John Doe tried to limit the restrictions place on his probation agreement and deem unconstitutional a New York state statute.

THE APPEAL

John Doe appealed from a judgment of the United States District Court for the Eastern District of New York (Amon, C.J.) granting summary judgment in favor of defendants New York State Governor Andrew Cuomo and Acting Commissioner of the State of New York Division of Criminal Justice Services M. Sean Byrne. Doe brought an as-applied constitutional challenge to the enforcement of amendments to the notification and registration requirements of the New York State Sex Offender Registration Act (“SORA”). The amendments post-dated Doe’s plea of guilty to misdemeanor attempted possession of a sexual performance by a child, for which he was classified as a level-one sex offender under SORA.

BACKGROUND

In 1999, after he was arrested for downloading six images depicting child pornography, Doe pleaded guilty in Queens County Criminal Court to one count of attempted possession of a sexual performance by a child, a class A misdemeanor.

For a full decade, Doe complied with the conditions of his probation and his obligations under SORA. Then, in 2009, he petitioned the Queens County Criminal Court pursuant to the amended § 168-o to relieve him of his registration requirements, to strike his name from the sex offender registry maintained by DCJS, and to enjoin DCJS from publishing his identity to other government entities or the public.

He claimed his right of privacy was violated because the SORA provisions precluded him, as a registered offender, from obtaining insurance coverage or health benefits for erectile dysfunction, an understandable restriction on a sex offender.

DISCUSSION

The Second Circuit was unpersuaded by Doe’s efforts to characterize SORA’s registration provisions as punitive. Initially, “the legislature enacted the registration provisions primarily to serve the nonpunitive purpose of enhancing future law enforcement efforts.” Doe’s complaint alleged that, just prior to entering the plea, Doe was assured by the court that he would be permitted to petition for release from registration as the statute explicitly permitted at that time.  However, the court could not construe the State court’s comment during the plea and sentencing proceedings that it would allow Doe to petition the court as to registration, reporting requirements and release relief at some future point as a representation that SORA would never be amended.

Equal Protection and Fourth Amendment Challenges

As a self-described “demonstrably non-dangerous offender,” Doe contends that his continued inclusion in the New York sex offender registry beyond ten years violates his right to equal protection because it is not rationally related to the Act’s aims of protecting the public.

Doe argues that the District Court erred in holding that he lacked standing to mount a substantive due process challenge to those SORA provisions he contends infringed his rights to privacy and to travel. Even assuming, without deciding, that the SORA provisions precluding registered offenders from obtaining insurance coverage or health benefits for erectile dysfunction implicate Doe’s privacy rights in intimate affairs, Doe failed to allege any injury as a result of those provisions, and no injury may reasonably be inferred. Nor did Doe allege that SORA prevented him from changing residence, obtaining employment, or using public facilities in violation of his right to travel.

Lastly, Doe argues that the registration requirements violate his Fourth Amendment right to be free from unreasonable searches and seizures. Even if it is assumed, for argument, that SORA’s requirements subject Doe to a search or seizure for Fourth Amendment purposes, there is no evidence that any such search or seizure is unreasonable. Here, any searches or seizures required by SORA serve special needs-such as the protection of potential future victims and the solving of crimes in the future-and purport neither to facilitate the investigation of any specific crime nor primarily to serve a general interest in crime control. Moreover, the degree of intrusion on convicted sex offenders is reasonable in relation to the interests advanced by SORA.

ZALMA OPINION

As much as insurance practitioners and insurers would like insurance to be a constitutional right compelling every person to buy insurance and add to the profits of the shareholders of insurers, it is not. Insurance is nothing more than a contract between the parties. For that reason, Doe’s claim that he had a right – as a sex offender – to insurance for erectile dysfunction failed.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Resident of Household Exclusion

Objectively Reasonable Conclusion Establishes Good Faith Claim Handling

Eddlee Peet obtained a wrongful death judgment against his brother-in-law, Mark Doyle, who had caused the death of plaintiff’s two-year-old son, Anthony. At the time of Anthony’s death, plaintiff and Anthony’s mother were both incarcerated, and Anthony was living at Doyle’s residence.

After obtaining the wrongful death judgment against Doyle, plaintiff sought recovery from State Farm General Insurance Company (State Farm), which had provided Doyle with a homeowner’s insurance policy at the time of Anthony’s death. Citing the insurance policy’s resident relative exclusion provision, State Farm denied coverage for Anthony’s death.
Plaintiff then filed a complaint against State Farm, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. State Farm subsequently moved for summary judgment, arguing that as a matter of law Anthony’s death was not covered because of the resident relative exclusion provision of the insurance policy. The trial court granted summary judgment in favor of State Farm. In Peet v. State Farm General Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 2738355 (June 17, 2014,  Cal.App. 6 Dist.)  the California Court of Appeal resolved the dispute.

BACKGROUND

Anthony Cardinale–Peet was the son of plaintiff and Joselyn Cardinale.  Sometime around July of 2002, Joselyn kicked plaintiff out of her house. At the time, Joselyn had a restraining order against plaintiff. For the next few months, Anthony lived exclusively with Joselyn, although no custody order was ever issued.
Anthony Begins Living With the Doyles

In late October of 2002, Anthony was living with Joselyn at a house owned by her parents. On or about October 26, 2002, Joselyn was arrested. Plaintiff was present during the arrest. Joselyn told plaintiff to take Anthony and not give him “to nobody.”  Plaintiff packed some of Anthony’s clothes and took Anthony to stay with him at the home of Joyce Peet, who was plaintiff’s mother and Anthony’s grandmother. In preparing to have Anthony stay with him and his mother, plaintiff packed “a few things” for “a few nights.”  At Joyce’s house, Anthony slept on a couch.

At the Doyles’ home, Anthony had his own bed in a bedroom that he shared with the Doyles’ sons. He had his own playpen and toys there. The Doyles provided Anthony with food, clothing, and baths. They were Anthony’s sole financial support and considered him a part of their household. On December 1, 2002, Maria took Anthony for medical treatment of a possible ear infection. The Doyles brought Anthony to visit Joselyn in jail twice, and they brought him to court for Joselyn’s sentencing hearing on December 6, 2002.

Joselyn and plaintiff planned to leave Anthony with the Doyles until one of them was out of jail. They had an understanding that “whoever got out first was going to get Anthony.” They both remained incarcerated through January of 2003.

Anthony’s Death

On the morning of January 10, 2003, Doyle and Anthony fell asleep on a bed. Maria spoke to Doyle at about 11:45 a.m. and then drove home. She arrived home at about 12:05 p.m. and saw Doyle and Anthony on the bed. Anthony was lying on his back, with a pillow over his face. Doyle’s arm was across the pillow. When Maria moved the pillow, she realized that Anthony was not breathing. She screamed. Doyle woke up and realized he had rolled on top of Anthony. Joselyn was interviewed by the police following Anthony’s death. Joselyn indicated she had been worried about Anthony staying with the Doyles because of the amount of medications that Doyle took. However, she acknowledged that she had not done anything to stop Anthony from staying with the Doyles.

The Insurance Policy and Claim Investigation

At the time of Anthony’s death, Doyle had a homeowner’s insurance policy through State Farm. The policy defined “ ‘insured’ “ as “you and, if residents of your household: [¶] a. your relatives; and [¶] b. any other person under the age of 21 who is in the care of a person described above.” The policy excluded coverage for “bodily injury to you or any insured within the meaning of part a. or b. of the definition of insured.” (Emphasis omitted.) State Farm claims representative Stephanie Pastor was assigned to investigate the claim.

Pastor first spoke with Maria Cardinale–Doyle, who stated that she and her husband had been “taking care” of Anthony at the time of his death, while Anthony’s mother was incarcerated. Based on the police reports and her conversations with the Doyles, Pastor recommended that State Farm deny coverage based on the resident relative exclusion provision of the Doyles’ policy. State Farm notified plaintiff, through his attorney, of that decision.

LEGAL PROCEEDINGS

On July 23, 2009, plaintiff obtained a default judgment of $750,000 in the wrongful death action against Doyle. Plaintiff subsequently sent a demand letter to State Farm. State Farm reviewed the file again, then informed plaintiff that it still maintained that Doyle’s homeowner’s policy did not cover Anthony’s death.

State Farm filed a motion for summary judgment that the trial court granted. In its order granting summary judgment, the trial court found that State Farm had no duty to defend or indemnify Doyle because of the insurance policy’s resident relative exclusion clause. The court found that “the objective facts regarding Anthony’s physical living arrangements” were undisputed and showed that Anthony resided “exclusively and continuously” with the Doyles from the end of October 2002 until the date of his death.

DISCUSSION — INTERPRETATION OF INSURANCE POLICIES

The rules on interpretation of insurance agreements are well-established. In general, interpretation of an insurance policy is a question of law. The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation.  Such intent is to be inferred, if possible, solely from the written provisions of the contract.  The “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage controls judicial interpretation.

Resident Relative Exclusion Clauses

A number of California cases have considered the meaning of the term “resident” in the context of an insurance policy’s resident relative exclusion clause. California courts have held that the term “resident” is not “inherently ambiguous” although it may be ambiguous in a particular context.  The meaning of the term resident varies according to the circumstances and facts of the case.

The evidence presented in support of State Farm’s motion for summary judgment showed that Anthony “‘regularly spen[t] time in the household in question.’”  Indeed, Anthony did not spend time in any other household from late October or early November of 2002 until his death on January 10, 2003. After plaintiff’s arrest in the middle of November 2002, the Doyle household was the only place Anthony lived and the Doyles were his only caregivers. The Doyles’ household was not merely “‘a place of infrequent and irregular visits [.]’”

Although the Doyles’ household may not have been Anthony’s “permanent residence,” it was his residence prior to and at the time of his death. The determination of a child’s residence depends on objective factors such as the amount of time spent in a particular household and the regularity and frequency of the child’s visits to the household. The record did not support plaintiff’s claims that Anthony was “abduct [ed]” by the Doyles and that it would lead to “absurd results” if “kidnappers could abduct and hold a child” but not be insured for their negligence that results in the child’s death. There is no evidence that this was a kidnapping or abduction.

The undisputed evidence demonstrates that plaintiff explicitly agreed that the Doyles could take Anthony for the weekend and that he implicitly agreed to allow them to keep Anthony, since he did not demand Anthony’s return or take any legal action to require the Doyles to return Anthony to him. Plaintiff even told the police, following Anthony’s death, that it was “alright with him” that the Doyles had kept Anthony at their residence.

The trial court did not err by granting summary judgment as to plaintiff’s claim that State Farm breached its contract by failing to provide insurance coverage for Anthony’s death.

BAD FAITH CLAIM

Plaintiff contends the trial court erred by granting summary judgment as to his claim that State Farm breached the implied covenant of good faith and fair dealing.
An insurer cannot be liable for bad faith if its coverage decision under the applicable polices is subsequently determined to be objectively reasonable.  At most, State Farm would have determined whether plaintiff and Joselyn wanted Anthony to reside somewhere other than with the Doyles while they were incarcerated. As explained above, such evidence of the parents’ wishes or intent would not have been sufficient to overcome the objective facts establishing that Anthony actually resided with the Doyles.

Since State Farm’s coverage decision was objectively reasonable, there is no triable issue of material fact concerning its alleged breach of the implied covenant of good faith and fair dealing.

ZALMA OPINION

Insurance policies must be interpreted logically and based on the commonly understood meaning of the words. When the court found that two-year-old Anthony resided with the Doyles the objectively reasonable decision of State Farm to deny coverage was a logical and fair interpretation of the contract. The wild allegation of kidnapping made by the  incarcerated birth parents was unbelievable and not supported by the evidence.

Simply denying a claim does not support a bad faith claim. There can never be bad faith when the objectively reasonable decision was based on a thorough investigation and the admissions of the parties.

Every insurer faced with a claim of bad faith must first conduct a thorough investigation before making a decision to deny a claim. State Farm avoided the bad faith suit by conducting a thorough investigation.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Posted in Zalma on Insurance | Leave a comment

Outlaw Loses

Not Insurance — But Interesting Jurisdiction Case

In Outlaw v. United States – Fed.Cl. – –, 2014 WL 2767277 (Fed.Cl.), the United States Court of Federal Claims, dealt with a breach of contract claim based on the alleged breach of a July 27, 2011 Negotiated Settlement Agreement (July 27, 2011 NSA) between James F. Outlaw (plaintiff or Mr. Outlaw) and the U.S. Department of the Army (defendant or the Army).

Defendant moved for dismissal for lack of subject matter jurisdiction, alleging that because the July 27, 2011 NSA does not provide for money damages as a remedy for an asserted breach, Mr. Outlaw cannot meet the jurisdictional requirement that his claim must be money mandating.

Mr. Outlaw responds that several provisions in the NSA provide for the payment of monies to him, and thus, the jurisdictional requirement is satisfied. Alternatively, Mr. Outlaw alleges that the July 27, 2011 NSA is invalid due to fraud.

Background

Plaintiff filed his complaint in the court of claims on October 23, 2013. Plaintiff brings his claim without the assistance of counsel. Mr. Outlaw filed five exhibits with his Complaint. Mr. Outlaw also filed five exhibits with his opposition.

Mr. Outlaw and the Army entered into the July 27, 2011 NSA to settle a discrimination complaint filed by Mr. Outlaw with the United States Equal Employment Opportunity Commission (EEOC). The July 27, 2011 NSA provided that the Army would make a lump sum payment to Mr. Outlaw, reverse his February 18, 2011 removal from Federal Service, and purge certain paperwork from his official personnel file regarding his absence without leave from November 2, 2010 to February 18, 2011.

In return, Mr. Outlaw agreed to withdraw his EEOC complaint and to voluntarily retire from Federal Service effective November 1, 2010. The July 27, 2011 NSA also set forth a process by which Mr. Outlaw could complain of any alleged breach by the Army. In fact, the parties agreed that Mr. Outlaw’s sole remedy for an alleged agency breach of this Settlement Agreement is to request that the terms of the Settlement Agreement allegedly breached be implemented.

Legal Standards

Complaints filed by pro se plaintiffs are held to less stringent standards than formal pleadings drafted by lawyers. Nevertheless, the leniency afforded to a pro se litigant with respect to mere formalities does not relieve his burden to meet jurisdictional requirements. The court may question its own subject-matter jurisdiction at any time.

Discussion

Mr. Outlaw’s allegations in his complaint vary somewhat from the assertions he made in his opposition to defendant’s motion to dismiss, and from the statements he made during a telephonic status conference conducted by the court regarding what claim he intended to bring. Construing Mr. Outlaw’s allegations in his complaint liberally, as the court is obliged to do for a pro se plaintiff,  the court understands Mr. Outlaw to be asking for: (1) review of a Merit Systems Protection Board Final Order, as well as the two preceding Initial Decisions, and a finding that they were in error; (2) review of the July 27, 2011 NSA and a finding that it is invalid and/or fraudulent; and (3) review of the July 27, 2011 NSA and a finding that the Army breached it.

Yet in his opposition. Mr. Outlaw states that he does “not allege ‘breach of a settlement agreement’ in this case, thus Defendant’s arguments referenc[ing] settlement [agreement] breach are moot.”  Mr. Outlaw further states that he opposes defendant’s motion to dismiss, “because [his claim] is based on a Settlement Agreement which is ‘Invalid/fraudulent and Unenforceable.” ’ He “now ask[s] the Court to review” that settlement agreement.

Mr. Outlaw agree[s] that his complaint is effectively a challenge to the July 27, 2011 Negotiated Settlement Agreement (NSA) he executed with defendant. But he asserts that the settlement agreement is invalid, and further, that this court has jurisdiction to consider his claim because the NSA contains several provisions directing the payment of money.

The court has no jurisdiction to review the October 19, 2012 MSPB Final Order, the March 7, 2012 Initial Decision,  or the April 6, 2012 Initial Decision. To the extent that Mr. Outlaw requests that this court review a decision or order issued by either the Merit Systems Protection Board or a MSPB Administrative Judge, the claim is dismissed for lack of subject matter jurisdiction.

Review of the July 27, 2011 NSA to Determine Whether It Is Invalid and/or Fraudulent
The claims of fraud, invalidity, and coercion that Mr. Outlaw now makes in this court are the same allegations that Mr. Outlaw made in one of his two appeals before the MSPB, which was the subject of the April 6, 2012 Initial Decision issued by an Administrative Judge.

To the extent that Mr. Outlaw alleges a breach of contract claim for the July 27, 2011 NSA, the claim is dismissed for lack of subject matter jurisdiction.

ZALMA OPINION

The unfortunately named Mr. Outlaw made the classic error of representing himself and proving that he had a fool for a client. The court, because he was a pro se plaintiff, gave Mr. Outlaw the benefit of every doubt but could not find how it had jurisdiction after he entered into a contract with the Army that eliminated that right.

He got the settlement he wanted and changed his mind after executing the agreement. There was just no reason for the court to consider his action or take jurisdiction that it did not have, even if it sympathized with Mr. Outlaw’s position.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. 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.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

 

Posted in Zalma on Insurance | Leave a comment

Only Coverage for Insured Person

Permissive User Not Intended Insured of Umbrella Policy

On October 10, 2010, Levina Rice suffered significant injuries as a passenger in a one-vehicle automobile accident in Bates County, Missouri. Rice’s son-in-law, Howard Wiebe, drove the vehicle, which was owned by Rice’s daughter and son-in-law, Sherry and Timothy Underwood. Both Wiebe and the Underwoods were covered by auto liability policies in effect at the time of the accident. The insurers for each of those policies paid Rice their respective policy limits, a total of $350,000.

The Underwoods also had purchased a personal umbrella insurance policy issued by Allstate Indemnity Company (Allstate Indemnity). Pursuant to a settlement agreement among Allstate Indemnity, Rice, Wiebe, and the two primary auto liability insurers, Allstate Indemnity sought a declaratory judgment in the district court delineating its duties under the umbrella policy, if any, to Wiebe. Allstate Indemnity and Rice both moved for summary judgment. The district court granted Allstate Indemnity’s motion and denied Rice’s motion, concluding Wiebe was not an “insured person” under the umbrella policy. Rice appealed.

BACKGROUND

At the time of Rice’s accident, the Underwoods were the named insureds of an auto policy (auto policy) issued by Allstate Fire and Casualty Insurance Company (Allstate Fire and Casualty), a distinct entity from Allstate Indemnity. The auto policy’s bodily injury coverage was limited to $250,000 per person. Wiebe was the named insured of a Farmers Insurance Company (Farmers) auto liability policy with coverage limited to $100,000 per person. Pursuant to these policies, Allstate Fire and Casualty paid Rice $250,000, and Farmers paid Rice $100,000.

At the time of the accident, the Underwoods also were the named insureds of a “Personal Umbrella Policy” (umbrella policy) issued by Allstate Indemnity. The umbrella policy required underlying auto bodily injury insurance coverage of $250,000 per person and limited excess liability to $1,000,000 for each occurrence. The umbrella policy “provides only excess insurance. It does not contribute with any Required Underlying Insurance or other insurance which applies to an occurrence.” Under the umbrella policy, Allstate Indemnity was required to pay only that amount of damages which exceeds the sum of: “1. the limits of liability of any Required Underlying Insurance which apply to the occurrence; plus  ¶2. the limits of any other liability insurance available to an insured person which apply to the occurrence.”

DISCUSSION

Interpretation of an insurance policy is a matter of state law. The parties agree Missouri law controls this diversity case. When interpreting the terms of an insurance policy, the Supreme Court of Missouri applies the meaning that would be understood by an ordinary person of average understanding purchasing the insurance. Clear and unambiguous language in an insurance policy should be given its plain meaning. If the policy is ambiguous, it will be construed against the insurer. An ambiguity exists when there is duplicity, indistinctness, or uncertainty in the meaning of the language in the policy. Lang