Arising Out of Use Required

The Need For a Causal Relationship

Uninsured and Underinsured motorist coverage protects against injuries arising out of the use of an automobile. Missouri, in Cindy Walden v. Kenneth Smith and American Family Mutual Insurance Company, Court of Appeals of Missouri Western District Division One,  Docket Number WD75982 (April 15, 2014) was faced with an issue of first impression whether an injury occurs from a dog poking its head out of a parked automobile and biting the plaintiff is an injury arising out of the use of the uninsured automobile.

Cindy Walden (“Walden”) appealed a trial court’s entry of summary judgment in favor of American Family Mutual Insurance Company (“American Family”) who found that Walden’s American Family automobile policies did not afford uninsured motorist coverage for injuries Walden sustained when a dog bit her through an open window of a vehicle because her injuries did not “arise out of the use” of the vehicle.

FACTUAL BACKGROUND

On September 28, 2006, Walden, an employee at a bar and grill in Gladstone, Missouri, was walking to her place of employment. She saw Kenneth Smith’s (“Smith”) pick-up truck in the parking lot. Smith was sitting in the parked vehicle and had two pit bull terriers in the cab of his truck. Walden approached the truck and stood outside the driver’s side door. One of Smith’s dogs lunged through the open driver’s side window and bit Walden on the upper lip. Smith did not have insurance. However, Walden had several automobile liability policies with American Family.

Walden’s petition sought a declaratory judgment that she was entitled to coverage under the uninsured motorist provision in her American Family policies. Walden alleged that Smith was an uninsured motorist and “was engaged in the operation and use of his motor vehicle, was in the process of transporting his dog, and failed to contain said dog” resulting in Walden’s injuries.

THE POLICIES

The American Family policies each provide:

“PART III–UNINSURED MOTORIST COVERAGE

“We will pay compensatory damages for bodily injury which an insured person is legally entitled to recover from the owner or operator of an uninsured motor vehicle. The bodily injury must be sustained by an insured person and must be caused by accident and arise out of the use of the uninsured motor vehicle.”

The policies do not define the phrase “arise out of.” The policies define “use” as “ownership, maintenance, or use.”

THE MOTIONS FOR SUMMARY JUDGMENT

American Family filed a motion for summary judgment on the declaratory judgment action. American Family argued that the uncontroverted facts established as a matter of law that Walden’s injuries did not “arise out of the use” of Smith’s uninsured vehicle and established only that Smith’s vehicle was the “situs” of the injury.

Walden admitted all of the uncontroverted facts asserted in American Family’s motion for summary judgment, and generally alleged that her injuries arose out of the use of Smith’s vehicle. The parties thus agreed that the uncontroverted facts permitted the entry of judgment as a matter of law on the issue of coverage. They disagreed, however, about the legal effect of the uncontroverted facts.

The trial court entered an order granting American Family’s motion for summary judgment and denying Walden’s motion for summary judgment.

Walden appealed.

ANALYSIS

The sole issue presented is whether the injuries arose out of the use of an uninsured vehicle. No Missouri court has addressed whether injuries caused by a dog when it is being transported in a motor vehicle “arise out of the use” of the vehicle as to support coverage under an automobile liability policy.

“Arising out of” requires a causal relationship but not proximate cause. The omnibus clause in the policy afforded coverage for bodily injuries “caused by accident and arising out of the ownership, maintenance, or use of the automobile.”

The words “arising out of” use of an automobile are very broad, general and comprehensive terms. There is nothing in the policy requiring that the ownership, maintenance, or use of the automobile shall be the direct and efficient cause of the injuries sustained.

Missouri courts consistently define the phrase “arising out of” to require a causal relationship, described as “originating from” or “having its origins in” or “growing out of” or “flowing from” the object or circumstance referenced in the policy or statute. Here, the referenced object or circumstance is the “use” of a vehicle.

Unless “use” is otherwise defined by the policy, “use” refers broadly to the employment of a vehicle for some purpose or object of the user and includes any act that assumes the ability to exercise supervisory control or guidance over the vehicle’s movement.

“Use” is defined in American Family’s policies (and in many automobile policies) as “ownership, maintenance, or use.” Defining “use” by reference to “use” has required Missouri courts to determine the “uses” of a vehicle other than “ownership” and “maintenance” which will support coverage.  “Use” and “operation” are not synonymous. “Use” of an automobile by an individual involves his employment for some purpose or object of the user while its “operation” by him involves his direction and control of its mechanism as its driver for the purpose of propelling it as a vehicle.

“Use” of a vehicle alone does not support coverage, however, under American Family’s policies. Coverage requires that an accident causing injury “arise out of the use” of a vehicle.

First, an accident causing injury does not “arise out of the use of a vehicle” when the vehicle is merely the “situs” or “locus” of an injury.  So long as a vehicle’s use bears a causal relationship with the accident causing injury, there will be coverage, even if the “accident” does not involve the vehicle itself or its operation.

“Use” of a vehicle, though broadly defined, nonetheless requires a use consistent with the inherent nature of a vehicle, including, but not limited to, driving, riding in, or operation of a vehicle. The requirement that an injury be related to an “inherent use” of a vehicle is  another way of saying that an injury must bear a causal relationship to a vehicle’s nature.

For an accident causing injury to “arise out of the use” of a vehicle, the purpose for which the vehicle is being employed must be consistent with the vehicle’s inherent nature, and must create a condition which contributes to cause the accident. Human conduct wholly independent of the operation or use of the vehicle without causal connection between the use of the automobile and the injury will not support coverage. Not every tortious act occurring inside a vehicle constitutes use of that vehicle for imposing liability under an automobile liability policy.

For an accident causing injury to “arise out of the use” of a vehicle, the use of a vehicle must be consistent with the vehicle’s nature as a vehicle, and must create a condition that contributes to cause the accident. If the uncontroverted facts establish only that an injury occurred while a vehicle was being used, then the injury does not arise out of the use of the vehicle as a matter of law.

Smith’s vehicle was merely the “situs” of Walden’s injuries.  The trial court found that the uncontroverted facts could not establish the required causal relationship between the accident causing Walden’s injury and Smith’s use of his vehicle. The uncontroverted facts do not establish that Smith’s use of his vehicle to transport his dogs created a condition that caused the dog to bite Walden.  At most, the uncontroverted facts established that Smith’s vehicle was the “situs” of Walden’s injuries.  Indeed, the uncontroverted facts established only that human conduct  – Smith’s negligence in failing to warn Walden or to restrain his dog – was wholly independent of the operation or use of the vehicle caused the dog to bite Walden.

ZALMA OPINION

There is no question that Mr. Smith was responsible for Ms. Walden’s injury. Unfortunately for her Mr. Smith was uninsured with an automobile or a homeowners’ policy that might have covered his exposure to liability for her injuries. The suit arose because he was basically judgment proof. By attempting to gain coverage from her uninsured motorist coverage she argued, unsuccessfully, to expand case law to allow coverage only if the injury results from the “use” of an automobile but is not causally related to or arising out of the use of the vehicle as a vehicle. Since it was standing still and not in operation and there was no relationship between its operation and Walden’s injury, she recovered nothing.

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.

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Catch-22 & Trucking

An “Independent Contractor” Is Not an Employee

Insurance of interstate trucking is different than insurance of intrastate trucking because of the requirements of federal law. Sometimes, federal and state law cause confusion over the application of the law and the interpretation of insurance of an interstate trucking firm.

Jerry Le was one of two truck drivers on a cross-country trip for V&H Transport (V&H), a trip for which he would be paid a lump sum of $1,100, with no deductions. Le was seriously injured when, while he was asleep, the other driver was involved in a one-vehicle accident. After the accident, V&H refused to pay Le the lump sum promised, telling him that he did not finish the trip. He was also told he was not an employee, and would not be eligible for worker’s compensation.

Le sued V&H and its owners for his injuries, who tendered defense to Global Hawk Insurance Company (Global Hawk), which insured V&H under a commercial auto truckers liability insurance policy. Global Hawk refused the defense, and filed an action for declaratory relief, contending that Le’s injuries were excluded from coverage because he was an employee. The trial court granted summary judgment in favor of Global Hawk and Le appealed.

In Global Hawk Insurance Company v. Jerry Le, (Court of Appeal of California First Appellate District Division Two,  A137976, April 14, 2014) the California Court of Appeal was called upon to resolve the dispute and determine if there were any issues of fact to be resolved at trial.

BACKGROUND

In late November or early December he spoke with Tuyet Vu, one of the co-owners of V&H. Vu took down some information from Le, and then told him she did not have any driving jobs available at that time but would have one in about a week. According to Le’s declaration, Vu said “that V&H would call me if it needed a driver for a particular job, I would be paid a lump sum for that job, I would not receive any benefits, no taxes, social security or other deductions would be taken out of my pay and I would receive a 1099 at the end of the year for taxes…. I was free to turn down a job if I wanted and I was free to perform driving services for other companies or individuals, neither of which would have prevented me from taking or receiving job assignments from V&H in the future.”

A few days later Vu told Le of a job driving with Quyen Cao on a cross-country trip. The job consisted of hauling goods to New York, then to Georgia, then back to New York, and finally returning to Los Angeles. The trip was expected to last 10 days. V&H would pay Le a lump sum of $1,100. Vu told Le that he would be receiving “a 1099,” and that no taxes, social security, or other deductions would be taken out of the lump sum, the same arrangements Le had with his other driving jobs.

With Cao driving and Le asleep, the truck was involved in a single vehicle accident. Le was ejected from the cab and suffered serious injuries, including a broken neck. Le sought relief for his injuries and Vu specifically told Le that he was not an employee and would not be entitled to worker’s compensation.

Le’s Complaint for Damages

Le filed a complaint for damages in Los Angeles Superior Court only to have no response and entry of default against all defendants.

Global Hawk’s Complaint in Declaratory Relief

Global Hawk filed a complaint naming six defendants: Le, the four defendants named in Le’s action.  The contention there was no coverage was based on two exclusions: that the policy did not cover bodily injury to an employee (exclusion 4) or “any obligation for which the insured … may be held liable under … workers’ compensation” (exclusion 3).

The only defendant to answer Global Hawk’s complaint was Le.  Le filed opposition to the motion, along with his response to the separate statement. That response went on to include “additional disputed facts,” one of which was that the Global Hawk policy “does not have an MCS-90 endorsement.”

The trial court granted summary judgment for plaintiff Global Hawk. The court rejected the argument that leased drivers would be left without compensation, finding that they can recover under worker’s compensation law. Judgment was thereafter entered, from which Le filed a timely notice of appeal.

DISCUSSION

The Court of Appeal concluded that there were triable issues of material fact whether Le was an employee of V&H and whether he was eligible for worker’s compensation-and therefore whether the exclusions applied.

The policy definitions section contained the following pertaining to the term “employee”:

“F. ‘Employee’ includes a ‘leased worker.’ ‘Employee’ does not include a ‘temporary worker.’ [¶]

“I. ‘Leased worker’ means a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business. ‘Leased worker’ does not include a ‘temporary worker.’ [¶] … [¶]

“R. ‘Temporary worker’ means a person who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

Thus, the issue is whether Le’s injuries are undisputedly excluded from coverage under the Golden Hawk policy because he was an employee of V&H and/or eligible for worker’s compensation.

The leading case of S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 [256 Cal. Rptr. 543, 769 P.2d 399] (Borello) involved the issue of whether growers had failed to secure worker’s compensation for 50 migrant harvesters of crops. The department ruled for the harvesters, finding that the workers were employees.  The California Supreme Court in an exhaustive discussion that the “determination of employee or independent-contractor status is one of fact if dependent upon the resolution of disputed evidence or inferences.”

As to “employee,” the Court of Appeal saw no need to make a detailed analysis since it easily found triable issues of fact that Le was not an employee, including that he was to be paid a lump sum; he was to be paid without any withholding for taxes; and he was to be provided a 1099 at the year end, a tax form provided to independent contractors. Le was told by Vu that he was “not an employee” and was not eligible for worker’s compensation. Those facts do not indicate, much less demonstrate, employee. They indicate independent contractor.

An independent contractor is not eligible for worker’s compensation.

The Court of Appeal concluded that there are, in short, triable issues of fact whether either of the exclusions Global Hawk relied on applies. Ignoring that, the trial court ruled as it did, relying on the language of the federal regulations. That reliance was misplaced.

The Federal Regulations and the MCS-90 Endorsement

Federal statutes mandate that every liability insurance policy covering a motor carrier contain a MCS-90 endorsement. That endorsement requires the insurer to pay any final judgment “recovered against the insured for public liability,” as a result of the negligent operation of any vehicle, regardless of whether the vehicle is specifically described in the policy and despite the insured’s failure to comply with policy conditions. (See 49 C.F.R. §§ 387.7(a), 387.9, 387.15 [containing form endorsement].) The endorsement prevents the possibility that, through inadvertence or otherwise, some vehicles may be left off of a policy to the detriment of the public stating that the primary purpose of the MCS-90 is to assure that injured members of the public are able to obtain judgment from negligent authorized interstate carriers.

The mandatory endorsement creates a duty on the part of the insurer to cover an insured carrier’s nondescribed vehicles despite a ‘covered auto’ limitation in the insurance policy itself. One of Le’s “additional disputed facts” was that there was no MCS-90 endorsement on the policy.

There is no principle of insurance law that something external to an insurance policy can be read to “inform” what the policy in fact provides. To the extent Global Hawk is trying to argue that the mere possibility that a policy could be augmented by an MCS-90 Endorsement, the law is otherwise. An insured cannot be held bound to a definition applicable to an endorsement not included in the policy. To be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be conspicuous, plain and clear.

The summary judgment is reversed. Le shall recover his costs on appeal.

ZALMA OPINION

Mr. Le was taken advantage of by the owner of the trucking company. He was made an independent contractor and had none of the indices of an employee. As such he was not entitled to Workers’ Compensation benefits. He was injured as a result of the negligence of the driver and obtained a judgment against the driver and the trucking company that he could not collect. The insurer, who insured the trucker, refused to pay him because they believed he was an employee. This is a classic Catch-22. The Court of Appeal has allowed Le to go to trial and prove he was not an employee and may, therefore, recover his judgment from the insurer.

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.

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Coverage Counsel Must Protect Privileges

The Attorney Client Privilege & Work Product Protection

Plaintiffs’ counsel who bring actions for the tort of bad faith attempt to gain the opinions of coverage counsel and the thought processes of coverage counsel on whose advise an insurer relied in denying a claim. Insurance coverage counsel, unlike lawyers retained by an insurer to defend its insured, represent only the insurer. It is incumbent on coverage counsel to protect its privileged communications on behalf of its client and the work product of the lawyers.

In State of West Virginia ex Rel. Montpelier Us Insurance Company and Charlston, Revich & Wollitz LLP v. Honorable Louis H. Bloom, Judge of the Circuit Court of Kanawha County, West Virginia; James M. Buckland; B&B Transit, Inc.; B&D Salvage, Inc.; and Tim’s Salvage, Inc., No. 13-1172 (Supreme Court of West Virginia, April 10, 2014) the Supreme Court of West Virginia was called upon, under the original jurisdiction of the Court, by Montpelier US Insurance Company and Charlston, Revich & Wollitz LLP (collectively “Petitioners”), seeking a writ of prohibition to prevent enforcement of a discovery order of the Circuit Court of Kanawha County. The circuit court’s order required the Petitioners to disclose allegedly privileged documents to the plaintiffs below: James M. Buckland’s B&B Transit, Inc.; B&D Salvage, Inc.; and Tim’s Salvage, Inc. (collectively “Respondents”). In this proceeding, the Petitioners contend that the documents in question are protected by the attorney-client privilege and the work product doctrine, and that they were not relevant to any issue in the case.

FACTUAL HISTORY

This case has its origins in an action for property damage brought by Jason and Gina Corrick (the “Corricks”) against B&B Transit. The Corricks filed their lawsuit in Logan County alleging that B&B Transit “negligently and unlawfully caused a landslide” that damaged their home. B&B Transit filed a notice and coverage claim with its insurer, Montpelier US Insurance Company (“Montpelier”). Montpelier’s national coverage counsel, Charlston, Revich & Wollitz (“CRW”), notified B&B Transit that the policy it purchased from Montpelier did not provide coverage for the Corricks’ claims. After denying the claim based on an earth movement exclusion, the Corricks amended their complaint by taking out the language which alleged the damage was caused by a “landslide.” Montpelier retained counsel for B&B Transit after the complaint was amended and provided a defense. Montpelier then settled the case against B&B Transit.

While the Corricks’ original complaint was still pending, the Respondents filed a first-party bad faith claim against the Petitioners. While the case was pending, the Respondents served discovery requests on the Petitioners. CRW opposed disclosure of certain requested documents based upon the attorney-client privilege, work product doctrine, and relevancy.

The discovery commissioner reviewed, in camera, the documents objected to by CRW and held a hearing on the matter. The discovery commissioner subsequently issued a recommended decision that required CRW to disclose (1) copies of any agreement or contract with Montpelier, including billing statements; (2) copies of any commercial liability coverage opinion letters provided to Montpelier prior to the claim by the Corricks; (3) copies of any coverage opinion letters provided to Montpelier finding coverage for an alleged claim; and (4) copies of any seminar or training materials prepared for any insurer or industry group related to coverage interpretation or extra-contractual liability.

APPLICATION OF THE ATTORNEY-CLIENT PRIVILEGE

The Petitioners argue that the attorney-client privilege prevented disclosure of the documents ordered by the trial court.

Confidential communications made by a client or an attorney to one another are protected by the attorney-client privilege. In order to assert an attorney-client privilege, three main elements must be present: (1) both parties must contemplate that the attorney-client relationship does or will exist; (2) the advice must be sought by the client from the attorney in his capacity as a legal adviser; (3) the communication between the attorney and client must be intended to be confidential.

Coverage Opinion Letters Provided to Montpelier by CRW.

It has been recognized that an insurance company’s retention of legal counsel to interpret the policy, investigate the details surrounding the damage, and to determine whether the insurance company is bound for all or some of the damage, is a classic example of a client seeking legal advice from an attorney.  The insured was not a joint client of the counsel since the counsel was retained to provide advice to the insurer only. The attorney-client privilege protects the coverage opinions outside counsel prepare for an insurer during the investigation of an insured’s claim.

An insurance company should be free to seek legal advice in cases where coverage is unclear without fearing that the communications necessary to obtain that advice will later become available to an insured who is dissatisfied with a decision to deny coverage. A contrary rule would have a chilling effect on an insurance company’s decision to seek legal advice regarding close coverage questions. To do otherwise would be a disservice to the primary purpose of the attorney-client privilege: to facilitate the uninhibited flow of information between a lawyer and client so as to lead to an accurate ascertainment and enforcement of rights.

The Supreme Court found the request for coverage opinion letters in this case is inappropriate and the attorney-client-privilege protected the coverage opinion letters from disclosure. It found that the critical work of CRW was a determination of whether the policy language, judicial decisions, and other applicable laws obligated Montpelier to recognize the claims filed.

Seminar and Training Materials.

The circuit court ordered CRW to disclose all seminar or training materials it prepared for any insurer or industry group involving coverage interpretation or extra-contractual liability. The Petitioners argue that these documents were prepared for non-parties and are protected by the attorney-client privilege.  The Supreme Court reviewed all of the documents submitted under this discovery request. All of the documents reflect CRW’s legal opinion on specific topics. The documents explain legal concepts and procedures and specific policy issues. These documents clearly demonstrate specific requests by CRW’s clients for legal opinions on specific subjects and it found these documents are protected by the attorney-client privilege.

APPLICATION OF WORK PRODUCT DOCTRINE

The circuit court ordered CRW to disclose its contract with Montpelier and its billing statements for the work performed on the coverage opinion letter for the claim filed by Respondents. The Petitioners contend that this material was protected from disclosure by the work product doctrine.

Factual work product refers to documents and tangible things that were prepared in anticipation of litigation or for trial.  When factual work product is involved, the party demanding production must show a substantial need for the material and establish that the same material or its equivalent cannot be obtained through other means without undue hardship.

Opinion work product consists of mental impressions, conclusions, opinions or legal theories that are contained in factual work product. Where opinion work product is involved, the showing required to obtain discovery is stronger than that for factual work product, because the rule states that the court shall protect against disclosure of mental impressions, conclusions, opinions or legal theories. Opinion work product enjoys a nearly absolute immunity and can be discovered in only very rare and extraordinary circumstances.

With respect to the fee agreement and billing statements, it has been held that documents such as time sheets and billing records can generally be categorized as routine office records that fall outside the definition of trial preparation records. To the extent that a particular description of services in one or more of the bills might contain substantive references to privileged attorney-client communications, these entries may be redacted by the motion judge.

Nothing contained in the CRW retention agreement would make either prong of the work product doctrine applicable. Therefore, the circuit court was correct in adopting the discovery commissioner’s recommendation that the work product doctrine did not prevent disclosure of the retention agreement and billing statements.

RELEVANCY

The Petitioners argue that if this Court finds the retention agreement and billing statements are not protected by the work product doctrine, those documents are still not discoverable because they were not relevant to any issue in the case and would not lead to the discovery of any relevant evidence. Discovery is not limited only to admissible evidence, but applies to information reasonably calculated to lead to the discovery of admissible evidence.

CONCLUSION

The requested writ of prohibition is granted in part. That part of the circuit court’s order which permits discovery of documents sought through Respondents’ Request for Production Nos. 11, 20, and 22 is prohibited from enforcement under the attorney-client privilege. That part of the circuit court’s order which permits discovery of documents sought under Respondents’ Request for Production No. 10 is not prohibited from enforcement subject to partial redaction.

ZALMA OPINION

Insurance coverage counsel’s opinions are clearly protected by the attorney-client privilege. Coverage counsel should be careful to draft their engagement letters and billing records to avoid statements of opinion or statements that might disclose counsel’s thought processes and research.

When attempts are made to obtain privileged documents every possible effort, including appeal to the state Supreme Court or the highest possible court available before giving up the privileged communications.

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

Limitation on ERISA

ERISA Has No Limitation of Suit Provision

Bridget Gordon (“Gordon”) appealed a district court’s summary judgment in favor of Deloitte & Touche, LLP Group Long Term Disability Plan (the “Plan”), which is insured by Metropolitan Life Insurance Company (“MetLife”). The summary judgment was granted based on Gordon’s failure to file the action within the applicable limitation period. In Bridget Gordon, Plaintiff v. Deloitte & Touche, LLP Group Long Term Disability Plan, No. 12–55114, United States Court of Appeals, Ninth Circuit (April 11, 2014) http://caselaw.findlaw.com/us-9th-circuit/1663208.html?DCMP=NWL-pro_insurance the Ninth Circuit Court of Appeal was called upon to determine what statute of limitation, if any, applies to an ERISA claim.

BACKGROUND

Deloitte & Touche USA LLP (“Deloitte”) offers employees long-term disability insurance through the Plan. The Plan’s claims administrator, MetLife, has broad discretionary authority to make eligibility determinations. Under the Plan, an employee is entitled to long-term disability benefits if she is otherwise qualified and meets the Plan’s definition of “disabled.” Benefit payments for disabilities due to mental illness are limited to twenty-four months under the Plan.

Gordon worked for Deloitte until October of 2000. Around that time, Gordon learned that she was HIV positive and claimed she could no longer work due to depression. MetLife determined that she was eligible for disability benefits under the Plan and began paying benefits effective March 3, 2001. MetLife paid benefits through December of 2002, but gave notice that it had terminated further payments in a January 2, 2003 letter.

Gordon failed to appeal. Indeed, she took no action for more than four years.

In April of 2009, MetLife received a letter from California’s Department of Insurance indicating that Gordon had filed a complaint on April 12, 2009. It asked MetLife to reevaluate the issues raised by Gordon in her complaint. MetLife informed Gordon that it would reopen her claim for further review and allowed Gordon to submit any additional information that she wanted MetLife to consider.

After reviewing Gordon’s file and the additional information available, MetLife informed Gordon in writing that it was upholding its original decision to terminate her benefits based on the Plan’s 24–month limitation for disabilities resulting from mental illness. The letter advised Gordon of her appeal rights, saying that she could appeal the decision within 180 days and that any appeal would be concluded within 45 days unless otherwise notified in writing. Of significance at this point, the letter also stated that if the administrative appeal were to be denied, Gordon would have the right to bring a civil action under § 502(a) of ERISA. Gordon filed a complaint pursuant to § 502(a) of ERISA in the district court.

ARGUMENT

The district court granted the Plan’s motion for summary judgment. It concluded that Gordon’s ERISA action was barred by the applicable four-year statute of limitation, as well as by the three-year contractual limitation period contained in the Plan itself. The trial court rejected Gordon’s arguments that the reopening of her file in 2009 reset the statute of limitation and that the Plan waived its limitation defense or was estopped from asserting it. The district court entered judgment in favor of the Plan. Gordon appealed.

DISCUSSION

There is no federal statute of limitation applicable to lawsuits seeking benefits under ERISA. Federal courts look to the most analogous state statute in the state where the claim for benefits arose.  Gordon’s case was in California and the most analogous statute is its four-year statute of limitation governing actions involving written contracts. The district court concluded that Gordon’s cause of action accrued on November 4, 2003 when her claim was denied, and thus that the four-year statute of limitation barred her suit.

While the statute of limitation is borrowed from state law, accrual of an ERISA cause of action is determined by federal law. Under federal law, an ERISA cause of action accrues either at the time benefits are actually denied or when the insured has reason to know that the claim has been denied.

Gordon’s claim was denied in the November 4, 2003.  The letter explicitly stated that the last payment was made in a full and final settlement of her claim for disability benefits under the Plan.

Gordon did not file the pending complaint until January 31, 2011. The Ninth Circuit found the denial was more than four years before the filing of her suit and the district court correctly concluded that Gordon’s ERISA action was barred by the four-year statute of limitation.

REVIVAL OF THE LIMITATIONS PERIOD

Gordon argued that the Ninth Circuit should apply California law regarding acknowledgment of debts to conclude that MetLife’s reconsideration of her claim in 2009 revived the statute of limitation. However, just as the accrual of an ERISA cause of action is determined by federal law, whether it can accrue a second time by virtue of a revived statute of limitation should also be determined by federal law.

Reviving a limitation period when an insurance company reconsiders a claim after the limitation period has run would discourage reconsideration by insurers even when reconsideration might be warranted. Therefore, giving Gordon what she requested would have serious consequences on other claims where reconsideration was requested since no insurer would reconsider if it had a statute of limitations defense.

ESTOPPEL

Gordon contended that the Ninth Circuit should hold that the Plan should be estopped from asserting a statute of limitation defense based on MetLife’s representation that she could bring an ERISA action. Here, nothing suggests that Gordon missed the statute of limitation deadline because she detrimentally relied on any representation by MetLife. It is true that MetLife represented in its December 8, 2009 letter that Gordon could bring an ERISA action, but by then the statute had already run, and so Gordon could not have relied on that statement to her detriment. She had the right to sue, in fact did sue, but she was not deceived into believing the court would agree with her position.

WAIVER

Waiver is often described as the intentional relinquishment of a known right. Under California law, an insurance company cannot waive the statute of limitations after the limitations period has run. [Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1163 (9th Cir.1995).]  The California Supreme Court has observed that if an insurer extends the expiration date of a one-year suit provision for a claim that the insured filed and it began investigating after the limitations period ran, the extension cannot, as a matter of law, amount to a waiver.

Even if waiver were possible after the limitation period has run, the availability of waiver in the insurance context is limited under California law. Typically, waiver analysis looks only at the acts of the waiving party to see if there was an intentional relinquishment of a known right, whereas estoppel looks at the actions of the other party as well to see if that party detrimentally relied on those acts.

There was no evidence of detrimental reliance by Gordon on the December 8, 2009 letter’s representation. Nor was any consideration provided to MetLife for a waiver of its defense. At most the Department of Insurance only asked MetLife to administratively reopen the file. It did not ask—much less require, assuming the unlikely proposition that it had such power—that MetLife waive its limitation defense.

The statute of limitation was never the basis for MetLife’s denial of Gordon’s claim. The basis was the Plan’s provision that limits benefits for disabilities stemming from mental health conditions, and that basis was clearly communicated to Gordon.

ZALMA OPINION

Insurance, whether governed by state law or by federal ERISA law, is nothing more than a contract. It cannot be changed simply to satisfy the desire of the insured for coverage that may not exist. In this case Ms. Gordon received everything to which she was entitled under the disability policy. After her claim was denied she let the private limitations of action provision in the policy and the four year California statute of limitations for breach of contract, before making an attempt to force the policy to pay her more.

The law does not honor sloth or those who sit on their rights. Statutes of limitations can be waived but such a waiver must be made knowingly, willfully and with knowledge of the effect of the action. There were no facts that supported waiver nor were there facts that allowed a finding of estoppel since Gordon did not delay her action based on anything said to her by the insurer. The insurer acted fairly and in good faith. Ms. Gordon recovered nothing because she sat on her rights until they were lost.

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.

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Zalma’s Insurance Fraud Letter – April 15, 2014

A Chance to Reduce Medicare Fraud

In the eighth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on April 15, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    Report of the Office of Inspector General, Department of Health & Human Services
2.    New E-Books From Barry Zalma.
3.    Crooked Agent Cannot Sue After Pleading Guilty
4.    Ecuadorian Fraud In Canada.
5.    News From Coalition Against Insurance Fraud About Maryland.
6.    Lawyer’s License Suspended After Guilty Plea of Insurance Fraud.

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:

Zalma on Insurance

•     Public Interest Outweighs Private Property Interest
•    Breach of Condition – Fatal or Not
•    Suspended License Not a “Disability”
•    Insured Held to Understand Policy
•    Lawyer Destroys Plaintiff’s Case
•    Preemption of State Law Defeats Suit
•    Easy, English, Passover Seder
•    Interrelated Wrongful Acts
•    Adjuster – Never Lie to Insured
•    A Taste of a New E-Book
•    Insured Friendly Law In Puerto Rico
•    Stranger Owned Life Insurance Risky Investment
•    Not April Fools – The Neverending Story Continues
•    Respondeat Superior
•    Don’t Buy a Pig in a Poke
•    Additional Insured Coverage Only For Vicarious Liability
•    The Need To Plead
•    To Stack or Not to Stack – That is the Question
•    Who’s On First?
•    I’ve Made Up My Mind – Don’t Confuse Me With Facts

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.

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.

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Public Interest Outweighs Private Property Interest

End Of Argument over Insolvency of RRG

The Supreme Court of Delaware was faced with challenges to multiple orders issued by the Court of Chancery, the detailed facts of which was discussed here at http://zalma.com/blog/fraud-punished-with-mercy. In Jeffrey B. Cohen, and Jeffrey B. Cohen, v.  State of Delaware, ex. rel. The Honorable Karen Weldin Stewart, CIR-ML, Insurance Commissioner of the State of Delaware, Petitioner-Below, Appellee, -and- Indemnity Insurance Corporation, RRG, Respondent Below, Appellee, In the Matter of the Rehabilitation of Indemnity Insurance Corporation, RRG, Delaware Supreme Court, (April 9, 2014) the Supreme Court dealt with a single issue: whether the delinquency proceedings for Indemnity Insurance Corporation, RRG (“Indemnity”) violated the constitutional due process rights of Appellant Jeffrey B. Cohen (“Cohen”) or Co-Appellant RB Entertainment Ventures (“RB Entertainment”).

RB Entertainment is one of a complicated web of at least seventeen different companies that Cohen allegedly owns and controls (the “Cohen-affiliated entities”). IDG Companies, LLC (“IDG”), Indemnity’s managing general agent, is also one of the Cohen-affiliated entities. After uncovering evidence that Cohen had committed fraud in his capacity as Indemnity’s CEO and that Indemnity might be insolvent, the Delaware Insurance Commissioner (the “Commissioner”) petitioned the Court of Chancery for a seizure order. The Delaware Uniform Insurers Liquidation Act (the “Insurers Liquidation Act”) authorizes the Commissioner to obtain a seizure order to protect the interests of policyholders and creditors and to prevent further depletion of the insurer’s assets. Based on the detailed allegations and supporting evidence presented by the Commissioner, the Court of Chancery granted that seizure order, which, among other things, prohibited anyone with notice of the proceedings from transacting the business of Indemnity, selling or destroying Indemnity’s assets, or asserting claims against Indemnity in other venues without permission from the Commissioner. The seizure order also prohibited anyone with notice of the proceedings from interfering with the Commissioner in the discharge of her duties.

Cohen argued that he was denied due process at several junctures during the Court of Chancery proceedings.

FACTUAL BACKGROUND

In addition to what is reported at http://zalma.com/blog/fraud-punished-with-mercy Indemnity is a Delaware-domiciled risk retention group that sells liability policies to restaurants and nightclubs, as well as insurance for special events. Indemnity insures approximately 4,100 policyholders and processes approximately 4,500 claims per year. Indemnity wrote over $35 million in hospitality premiums during the 2012 calendar year. Indemnity is subject to the regulatory authority of the Delaware Department of Insurance (the “Insurance Department”), which is charged with protecting insurance consumers, making sure that insurance companies are able to pay claims, and prosecuting insurance fraud.

Insurer insolvency is regulated by state law rather than the federal Bankruptcy Code. Many states, including Delaware, have adopted a form of the Uniform Insurers Liquidation Act to avoid the confusion inherent in the forced liquidation of a multistate insurance corporation, especially with regard to assets in foreign jurisdictions.

The Insurance Department filed the Seizure Petition because of its concerns about Indemnity’s financial viability and its suspicion that Cohen had engaged in fraud. The Seizure Order, tracing the language of the Insurers Liquidation Act, instructed the Commissioner to take immediate control of Indemnity and vested the Commissioner with all right, title and interest in, of or to, all of the property of Indemnity.

The Commissioner later determined that Indemnity was impaired, or insolvent or in unsound condition and that its further transaction of insurance was hazardous to its policyholders.

At the conclusion of an office conference, the Court of Chancery told the Commissioner to provide Cohen with a copy of the transcript, so that Cohen is clear what his obligations are. The full transcript is only 20 pages long. Unfortunately, counsel for the Commissioner did not comply with the Court of Chancery’s instructions, and Cohen did not receive a copy of the transcript until January 15, 2014. Nonetheless, the Amended Seizure Order – when read in context with Indemnity’s motion, the proposed order, and the supporting exhibits – provided Cohen with substantive knowledge of all the serious charges against him.

Cohen’s contumacious behavior followed every order issued by the court. He simply refused to follow the orders regardless of the number of sanctions orders issued against him.

ANALYSIS

To determine whether a challenged procedure satisfies due process, Delaware Courts have employed the analysis set out by the United States Supreme Court in Mathews v. Eldridge 424 U.S. 319 (1976).  The “Eldridge factors” instruct a Court to balance: “the private interest that will be affected by the official action; the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedures would entail.”

A balancing of the Eldridge factors again compels the conclusion that the Court of Chancery did not violate Cohen’s right to due process. Even if the court assumed that Cohen had some, albeit slight and vague, property interest in these entities that was impaired by the Sanctions Order, the Supreme Court found that the procedures used by the Court of Chancery already adequately protected against erroneous deprivation. Any impairment to Cohen’s property interests is decisively outweighed by the important public interest in ensuring that the Commissioner could exercise control over Indemnity and protect the interests that were the subject of the Insurers Liquidation Act.

The Supreme Court, less than pleased with Cohen’s actions, noted that “with brazenness,” RB Entertainment also argued that intervention is “particularly appropriate . . . where the principal of the equity holder is accused of fraud but not permitted an opportunity to challenge those allegations.”  If RB Entertainment or Cohen had truly never been given an opportunity to challenge the fraud allegations, then it concluded “that argument might have been advanced without a lack of grace.” However, the Court of Chancery asked whether RB Entertainment wanted to contest the fraud issue at the hearing on RB Entertainment’s original motion to intervene. At no time in the months that followed did RB Entertainment or Cohen contest the fraud claim. As a result, the record before the Court of Chancery consisted solely of strong evidence of fraud material to Indemnity’s solvency – evidence that those in the strongest position to refute chose not to dispute.

Even though the failure to provide the transcript was unfortunate and regrettable, the Supreme Court concluded that it did not constitute a due process violation.

Cohen was on abundant notice of the allegations against him and the transcript contained no new information that had not already been provided to Cohen.

Most importantly, there were strong public policy reasons justifying the Court of Chancery’s refusal to delay the entry of the Rehabilitation Order while intervention was briefed. Cohen’s own actions and violations of the Court of Chancery’s orders had created a situation of urgency. Indemnity’s identity had become public knowledge because of Cohen’s filing of the Maryland Lawsuits, and as policyholder concern over the undisputed allegations of fraud grew, Indemnity’s board feared a “run on the bank” that would further deplete Indemnity’s assets. The record evidence was overwhelming that Indemnity’s financial condition was precarious, and its own board had come to the belated realization that Indemnity was insolvent. There was also legitimate concern that delay would cause the potentially life-saving transaction with an insurer to fall apart, forcing Indemnity into liquidation instead of rehabilitation.

The Commissioner had an important interest in moving quickly to protect the interests of policyholders and creditors. Therefore, the Supreme Court found that on balance, the Commissioner’s interest in speed far outweighed RB Entertainment’s interest in further delaying the proceedings, and the Court of Chancery did not violate any due process right by denying RB Entertainment an opportunity to brief the intervention issue before entering the Rehabilitation Order.

ZALMA OPINION

This, and the underlying cases that it resolved, is an example of how a person can use the courts to delay the important work of courts and administrators. Rather than cooperate with the Department of Insurance and obey the orders of the court Cohen, and his related entities blatantly, with disdain for the orders of the court, continued in his efforts to delay and make difficult the work of the courts and the Department of Insurance when faced with the existence of a fraud and an insolvent insurer. The punishment placed on Cohen and his entities was – considering his contumacious conduct – mild as explained in my earlier post. The Supreme Court, in this extensive and detailed order, sustained the previous orders of the Chancery Court.

Hopefully, this final act of the Delaware Supreme Court, will stop the contumacious conduct. The Chancery Court gave mercy to Cohen. If he continues to disobey its orders it would appear to be time to punish him appropriately and without mercy.

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

Breach of Condition – Fatal or Not

Kansas Requires Proof Of Substantial Prejudice

First party property insurance policies universally contain conditions precedent requiring an insured to submit timely notice of claim and a timely sworn statement in proof of loss. Failure to do so is usually considered a breach of a material condition sufficient to deprive an insured of the right to indemnity. For example, in California, the failure to submit a sworn statement in proof of loss within 60 days of the loss or 60 days of the demand of the insurer for a proof of loss is fatal to a claim under the policy. For example White v. Home Mutual Ins. Co., 128 Cal. 131 [60 P. 666] and Marina Beasley v. Pacific Indemnity Co.,
200 Cal. App. 2d 207, 19 Cal. Rptr. 299 (Cal.App.Dist.1 02/13/1962). Federal flood insurance programs find failure to submit a sworn proof of loss in a timely fashion fatal to a claim.

However, in some jurisdictions, like Kansas, make it difficult to enforce such conditions by requiring an insurer to prove “substantial prejudice” before denying a claim.

Lyons Salt Company and its sole shareholder, B.S.C. Holding, Inc., own an underground salt mine in Kansas that suffered water intrusion. When told about the water intrusion, the insurer (Lexington Insurance Company) did not pay on the policy, and Lyons and B.S.C. Holding sued to obtain a declaratory judgment recognizing coverage for the damage and related expenses. Lexington moved for summary judgment, arguing that the Plaintiffs took too long to provide notice. The district court agreed and granted summary judgment to Lexington, prompting the Plaintiffs to appeal.

In BSC Holding, Inc. v. Lexington Insurance Company, Court of Appeals, 10th Circuit, No. 13-3142, March 11, 2014, was asked to overturn the summary judgment even though the policyholder had waited two-and-one-half years to notify the insurer and had spent $2.5 million dollars before doing so, BSC argued there the insurer failed to prove it was substantially prejudiced when it denied the claim.

THE POLICIES’ NOTICE PROVISIONS

Lexington insured Lyons and B.S.C. Holding through a series of “all-risk” policies covering a broad range of losses. These policies contain a substantially similar notice provision: “Notice of Loss. The Insured shall as soon as practicable report in writing to the Company or its agent every loss, damage or occurrence which may give rise to a claim under this policy and shall also file with the Company or its agent within ninety (90) days from date of discovery of such loss, damage or occurrence, a detailed sworn proof of loss.”

DISCOVERY OF THE WATER INFLOW AND NOTIFICATION

In January 2008, the Plaintiffs’ employees detected an inflow of water in the salt mine and feared dissolution of the salt or structural problems. As a result, the Plaintiffs tried to determine the cause and to devise a solution. In April 2010, the Plaintiffs attributed the inflow to an improperly sealed oil well and regarded the “future of the mine [as] dire.” In July 2010, the Plaintiffs notified Lexington of the water inflow.

Lexington then learned that the Plaintiffs had already spent over $2.5 million to find the cause of the water inflow and identify a solution to “prevent the physical loss of the mine.” The ultimate proof of loss was for $7.5 million, which included remediation measures that the Plaintiffs had undertaken before they notified Lexington of the inflow.

Even assuming that the Plaintiffs waited too long to notify Lexington the delay alone could only relieve Lexington of coverage if Lexington proved the breaches of condition substantially prejudiced Lexington’s rights.

Under Kansas law, an insurer can show prejudice by “presenting evidence that (1) its ability to investigate the claim has been lost; or (2) opportunities to negotiate settlement have been lost; or (3) opportunities to defend have been lost.” To demonstrate prejudice, the insurer must show that “it would have handled some aspect of the investigation, discovery or defense differently and that with this change, [the insurer] likely could have either defeated the underlying claims or settled the underlying claims for a lower sum than what the insureds settled. Application of this test ordinarily involves an issue of fact.

On this factual issue, Lexington advances three arguments for prejudice:

1.    It lost the opportunity to independently investigate the water inflow;
2.    it lost the opportunity to provide input on how to resolve the water inflow problem; and
3.    it suffered underwriting prejudice.

To justify summary judgment, Lexington had to support these assertions of prejudice by identifying the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believed would demonstrate the absence of a genuine issue of material fact.

Prejudice in the Investigation

Lexington urges prejudice from a lost opportunity to investigate before the Plaintiffs began remediation. But Lexington has independently inspected the mine and fails to prove how its investigation was hampered by the delay.

Instead, Lexington argues that witnesses’ memories are not as fresh. The problem is that Lexington does not identify the witnesses whose memories dimmed or explain how the stale memories impeded the investigation.

When asked whether Lexington’s investigation was hampered, its corporate representative (Ossian Cooney) answered rhetorically: “How could I know?”  With this rhetorical question, the fact-finder could reasonably conclude that Lexington has not proven actual prejudice in its investigation. Thus, Lexington was not entitled to summary judgment on this issue.

Prejudice in the Remediation

Lexington also alleges prejudice because it could not offer input to the Plaintiffs in their remediation efforts. But Lexington does not present evidence on how this input would have affected the remedial efforts. In the absence of this evidence, a reasonable jury could conclude that Lexington failed to prove prejudice from the inability to participate in the Plaintiffs’ remediation efforts.

Prejudice in the Underwriting Process

In addition, Lexington urges underwriting prejudice from the Plaintiffs’ late notice. According to Lexington, the delay prevented a meaningful evaluation of risk during underwriting of the renewal policies, adding that earlier notice could have led to cancellation, non-renewal, or amendment of the policies.

Lexington bears the burden to prove underwriting prejudice. But the record contains no evidence that Lexington would have done anything differently had the Plaintiffs provided timely notice.

CONCLUSION

To prevail on summary judgment based on late notice, Lexington must demonstrate substantial prejudice. The fact-finder could infer prejudice, but could also have found the opposite. Therefore, Lexington was not entitled to summary judgment based on delay in the notice. In these circumstances, we reverse and remand with instructions to vacate the summary judgment award to Lexington.

This order and judgment does not constitute binding precedent except under the doctrines of law of the case, res judicata, and collateral estoppel. But the order and judgment may be cited for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.

ZALMA OPINION

The Tenth Circuit ruled on what it described as “late notice.” It did not rule on the breach of condition. Not only was the insured, BSC, required to give prompt notice of the loss (2.5 years could not conceivably described as prompt) and submit a sworn proof of loss within 90 days of the insured’s discovery of the loss. BSC failed in both. Although Kansas law makes sense with regard to the notice provision of a third party liability policy it makes no sense with regard to a first party policy’s proof of loss condition and the additional condition that the insured may not sue the insurer until the policyholder fulfills all the policy conditions. In Shuford v. Fidelity National Property & Casualty Insurance Co., 508 F.3d 1337 (11th Cir. 12/10/2007), the 11th Circuit struck down Shuford’s claim because of the failure to file a timely proof of loss. Of course flood insurance is a federal program and its application trumps state law.

If the Tenth Circuit had considered the fact that the policyholder breached a material condition – failure to submit a timely proof of loss – prejudice must be presumed or it has taken a clear and unambiguous condition and by judicial fiat rewrote the policy.

Lexington should have presented evidence of the prejudice and should have argued breach of the material condition. I am sure they will do so when the case goes to trial.

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

Suspended License Not a “Disability”

Disability Must Be Real

Curtis Cich sued National Life Insurance Company (“National Life”) and Penn Mutual Life Insurance Company (“Penn Mutual”) after both companies denied his claims for disability benefits under insurance policies they had issued to him. The district court granted summary judgment for the insurance companies. The Eighth Circuit Court of Appeal was called upon, in Curtis L. Cich, Plaintiff v. National Life Insurance Company, a Vermont corporation; Penn Mutual Life Insurance Company, a Pennsylvania corporation, USCA Eighth Circuit, No. 12-3223, April 8, 2014, to determine if the insurer’s decision that Cich was not totally disabled as defined in their policies was appropriate.

FACTS

Cich obtained his license as a doctor of chiropractic in Minnesota in January 1987 and established a practice in Maple Grove, Minnesota, shortly thereafter. During the course of his practice, Cich purchased two disability income policies and three business overhead expense policies from National Life. He also purchased a disability income policy from Penn Mutual. The policies provide monthly payments of various amounts and for various periods of time in the event that the insured suffers a “total disability.”

The National Life disability income policies and one of the National Life business overhead expense policies define “total disability” as follows, with minor, immaterial deviations: “The Insured shall be deemed totally disabled only if the Insured . . . is unable to perform the material and substantial duties of the Insured’s occupation due to . . . accidental injury . . . or . . . sickness.” The other National Life business overhead expense policies similarly define “total disability” and “totally disabled” to mean “injury or sickness restricts your ability to perform the material and substantial duties of your regular occupation to an extent that prevents you from engaging in your regular occupation.” The Penn Mutual policy states that the insured will be considered totally disabled only if certain conditions are met, including (1) “You are unable to do the substantial and material duties of your regular occupation” and (2) “Your total disability results from sickness or injury.” The policies also require that to qualify as totally disabled, the insured must be receiving appropriate medical care for the condition, with variations not material here regarding what qualifies as appropriate.

Before suing his insurers Cich’s license to practice chiropractic was suspended In Bd. Of Chiropractic Examiners v. Cich, 788 NW 2d 515 – Minn: Court of Appeals at http://scholar.google.com/scholar_case?case=5467213665612235237&q=Curtis+L.+Cich&hl=en&as_sdt=2006; In Matter of Chiropractic License of Cich, Minn: Court of Appeals 2008 at http://scholar.google.com/scholar_case?case=17369176907168606404&q=Curtis+L.+Cich&hl=en&as_sdt=2006; and; Minnesota Board of Chiropractic Examiners v. Cich, Minn: Court of Appeals 2 at http://scholar.google.com/scholar_case?case=3099826903209598503&q=Curtis+L.+Cich&hl=en&as_sdt=2006.  Cich violated two statutory provisions for unprofessional conduct: (1) that he mislead patients into believing that insurance would cover their treatment costs or that they otherwise would not have to pay for treatment constituted unprofessional conduct; and (2) that relator failed to conform to minimum standards of practice by not providing statements of accounts on a regular basis. In support of these findings, the board noted that had the patients been properly and timely informed of the amount of the outstanding bills, they would not have continued treating and incurring debt. In addition, after his license was suspended Cich continued to practice chiropractic and hold himself out as a licensed chiropractor.

Between 1988 and 2006, the Minnesota Board of Chiropractic Examiners received numerous complaints that Cich misled patients about treatment costs and insurance coverage. On March 27, 2008, the Board suspended Cich’s chiropractic license for two years and ordered him to pay a $50,000 fine. The Minnesota courts upheld the two-year license suspension and reduced the fine to $30,000.

In April and May 2009, after his license was suspended, while he was practicing in violation of the orders of suspension and while he was unsuccessfully appealing his suspension, Cich submitted claims to Penn Mutual and National Life for disability benefits pursuant to his policies. Cich asserted that he was totally disabled as of February 5, 2009, because an “adjustment disorder with mixed emotional features” and symptoms including “extreme anxiety and stress” prevented him from operating his chiropractic practice. Cich reported that he last worked on March 27, 2008, and did not expect to return to practice.

Cich’s submissions also reported that he first received treatment for his disability on February 5, 2009. His treatment provider was Karen Kramer, a licensed social worker.  After collecting information about Cich’s condition, National Life and Penn Mutual rejected his claims. Cich sued the insurers. On the motion of the insurers the trial court first concluded that Cich failed to present sufficient evidence that his inability to work in his occupation was caused by a sickness or injury, as required by the policies, because his license suspension caused the inability to work. Second, the court determined that Cich was not disabled by an adjustment disorder as of March 2008 or thereafter, because he was not receiving appropriate medical care for a sickness as required by the policies.

ANALYSIS

Summary judgment is appropriate when there is no genuine issue of material fact for trial and the movant is entitled to judgment as a matter of law.

Challenging the district court’s grant of summary judgment for the insurance companies, Cich argued that even if his chiropractic license had not been suspended, his adjustment disorder prevented him from performing his occupation since the onset of the illness. Therefore, he contends, the district court erred by granting summary judgment for the insurers on the ground that the license suspension, rather than the adjustment disorder, caused his inability to work.

According to the policies issued by National Life and Penn Mutual, an insured is totally disabled if he is unable to perform his “occupation” or “regular occupation” due to injury or sickness. As of March 2008, Cich was unable to practice chiropractic because his license was suspended. An incapacity arising from license suspension is not a “sickness” or an “injury” that qualifies as a total disability under the policies.

Cich appears to contend, however, that there is a genuine issue of material fact as to whether he was disabled by the adjustment disorder before his license was suspended, so that he would qualify for benefits based on a disability caused by “sickness.” That argument fails because Cich did not seek treatment for his adjustment disorder until February 2009, nearly a year after his license was suspended in March 2008. The policies require that an insured must be receiving appropriate medical treatment to qualify as totally disabled.

Once Cich lost his chiropractic license in March 2008, the practice of chiropractic no longer was an occupation from which he could become disabled by virtue of sickness in February 2009. The Penn Mutual policy defines the insured’s “regular occupation” as his “usual work when total disability starts.” The National Life disability income policies and one business overhead expense policy excerpted in the record define “occupation” as “the specialized occupation of the Insured at the time . . . disability begins” or “the occupation of the Insured at the time . . . disability begins.” The ordinary meaning of the term “disability” and its use in the context of the onset of a disability lead us to conclude-absent contrary evidence from Cich – that it likewise means the insured’s usual work at the time disability begins. As of February 2009, when Cich sought treatment for an adjustment disorder, the practice of chiropractic was not his usual work, because his Minnesota license was suspended, and the potential for practice in other jurisdictions was speculative. The sickness for which he was treated in 2009 thus did not disable him from his occupation as a chiropractor. The Eighth Circuit affirmed the trial court.

ZALMA OPINION

In addition to his less than convincing disability claims after his suspension and before beginning treatment for his alleged disability, Cich’s chiropractic corporation saw approximately 180 patients per week causing the state to bring a new action against Cich and his corporation.

Dr. Cich cheated his patients and violated the law. He was suspended from practice as a result and ignored the order. When the state pressed him further he made a disability claim and failed to tell the insurers that the real reason why he was not practicing chiropractic was the court order suspending his license and their refusal to allow him to continue his practice through is corporate entity.

Nothing that happened to Cich was a compensable disability. What disabled him was that he was caught violating the law such that the state suspended his license.

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

Insured Held to Understand Policy

Cause of Action Accrues When the Insured Could Timely Discover Facts

Insurance agents and brokers recommend policy limits but insureds choose the limit of liability. Most policy limits are chosen to limit premium expenditure because most insureds believe they will never have a loss. When the insured chooses a limit of liability that is inadequate to replace their house after it is destroyed by fire they refuse to admit their own error and sue the agent or broker and the insurer.

In Groce v. American Family Mutual Insurance Company, Ind: Supreme Court 2014, http://scholar.google.com/scholar_case?case=16474633610967764719&q=CHRISTOPHER+GROCE&hl=en&as_sdt=2006 Plaintiffs, Christopher and Tracey Groce, who were insured under a homeowners policy issued by American Family Mutual Insurance Company and obtained through insurance agent Michael Meek, sued when the limits were inadequate to replace their dwelling. The trial court granted summary judgment for the defendants on various grounds including that the plaintiffs failed to commence the action within the applicable statute of limitations.

In 1997, the Groces purchased a home and obtained a homeowners insurance policy from American Family. On October 21, 2007, the home sustained substantial fire damage. Additional facts may be found in Groce v. American Family Ins. Co., 986 NE 2d 828 – Ind: Court of Appeals 2013 available at http://scholar.google.com/scholar_case?case=5717096396900342467&q=CHRISTOPHER+GROCE&hl=en&as_sdt=2006.

A dispute arose regarding the amount of insurance claim benefits payable under the policy, and on June 22, 2009, the Groces filed their complaint against the insurance company and Meek. The plaintiffs characterize this as a negligence action. They contend that “Meek negligently failed to obtain a fire insurance policy . . . which would have paid the entire cost of reconstructing their [r]esidence if it was damaged or destroyed by fire,” and that the insurance company is vicariously liable for Meek’s negligence.

Such tort actions are governed by statute that requires that they be commenced within two years “after the cause of action accrues.” In general, and in the context of claims of negligent procurement of insurance, the cause of action of a tort claim accrues, and the statute of limitations begins to run, when the plaintiff knew or, in the exercise of ordinary diligence, could have discovered that an injury had been sustained as a result of the tortious act of another.

ANALYSIS

In Filip v. Block, 879 N.E.2d 1076, 1082-84 (Ind.2008), the plaintiffs, owners of an apartment complex substantially damaged by fire, brought an action against an insurance agency and its agent from whom the plaintiffs had obtained their insurance policy. Because of the coverage limitations, a substantial part of the loss was uninsured. The plaintiffs claimed that because the agent told them that their property would “be covered,” they should have received replacement cost instead of actual value coverage, that the policy limit was less than replacement cost, that the policy failed to cover nonbusiness personal property, and that the policy failed to include business interruption coverage. The trial court granted summary judgment for the. The Supreme Court affirmed the trial court, but in the process presented detailed legal analysis relevant and helpful to our consideration of the present case.

The Filip Court began its analysis noting “that a claim against an agent for negligent procurement of the wrong coverage begins at the start of coverage if the breach was discoverable at the time through ordinary diligence.”  While the physical loss did not occur until the fire, a policyholder receives protection from risk of loss when the policy is issued, and thus any claim based on inadequacy of coverage generally occurs when the policy is issued. Because the Filip plaintiffs could have ascertained that “their policy lacked coverage of nonbusiness personal property and business interruption, and that the building and business personal property coverage had inadequate limits,” the limitations period began to run as to such claims “on or shortly after the activitation of the policy.”

In the present case, the Groces’ damage claim is predicated on their allegation that agent Meek failed to obtain a policy that would pay the entire cost of reconstruction in the event of fire. This claim is predicated on an exchange between Michael Meek and Tracey Groce more than four years before the fire.

Each of the policies issued to the Groces for their residence beginning in March of 1997 and continuing at least annually until after the fire, consisted of the same standard policy form, although the policy limits and special endorsements varied through the years. This policy form provides for replacement cost protection if the “amount of insurance” is a specified percentage or more “of the full replacement cost” and if the damaged building is repaired or replaced. The policy provided that the insurance company would pay “the full cost to repair or replace the damaged building, without deducting for depreciation, but not exceeding” repair costs and “the limit in this policy for the building, including any additional amount of insurance as provided by the Inflation Protection Coverage.”

In the present case, the payment from American Family to the Groces was not based on actual cash value but rather on a replacement cost calculation, without any deduction for depreciation. After the loss, the company calculated that the actual cash value of the damaged residence was $156,527.82 after depreciation, and that the estimates to rebuild and repair the home totaled $225,245.90. Because payment based on the policy’s replacement cost provision was limited to the amount of insurance, that is, the policy’s coverage limits, American Family paid the Groces the full policy limits, $191,500 (plus a payment under the policy’s coverage for debris removal). The Groces thus received “replacement cost” coverage, but in an amount capped by the policy limits.

They claimed that the alleged August 18, 2003 exchange between Meek and Tracey Groce operated to supersede the policy provisions regarding coverage limits and to require payment of any loss at full replacement cost in contravention of such limits. The Supreme Court concluded that the claim did not allege that Meek failed to obtain replacement cost coverage since all of their American Family homeowners policies for the ten years before the fire loss included replacement cost coverage.

The Groces purchased their single family residence in Knightstown, Indiana, in March of 1997 for $47,500 with dwelling loss policy limits of $50,000. These limits were increased over the years at the suggestion of their agents until, at the time of the fire, it had increased to the final limit of $191,500. During the ten years from 1997 to 2007, the Groces received at least fourteen notices from American Family when the policy was renewed or changed, advising them of the amount of their dwelling loss coverage limits, and each reminding them to “Please Read Your Policy.”

Each American Family homeowners policy issued to the Groces from 1997 to 2007 expressly limited its dwelling loss replacement cost liability to the applicable policy limits. Without question, the Groces could have discovered that their dwelling loss replacement coverage did not exceed the applicable policy limits.

The Groces, in the exercise of ordinary diligence in reviewing their homeowners insurance policy, could have timely discovered that the company’s replacement cost liability was capped at the dwelling loss coverage limit, contrary to their claim for negligent procurement of inadequate or wrong coverage. For this reason, the statute of limitations in this case began to run no later than the first policy renewal after the alleged statements of Meek to Tracey Groce on August 18, 2003. The trial court was correct to grant summary judgment on the basis of the applicable two-year statute of limitations.

ZALMA OPINION

In the last 47 years I have asked insureds if they had read and understood the terms and conditions of their policy. Only two answered “yes” and both of them lied. Every insured, however, could read the declarations page and admit, as did the Groces, that they knew the policy limits because that is the first thing they look at and then the premium bill.

In truth and fact insurance contracts are the easiest commercial contracts to read and understand. In this case, to avoid the problem, all Mr. and Mrs. Groce needed to do was ask their agent to increase the policy limit to the actual cost to replace the dwelling if it was destroyed by an insured against peril. They failed to do so and tried to compel their insurance agent and insurer to cure their error. The attempt failed and their suit was filed more than two years after the cause of action accrued when they chose a policy limit more than two years before they filed suit.

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

Lawyer Destroys Plaintiff’s Case

Bad Faith is a Two-Way Street

Some lawyers and the clients they represent believe insurance companies are evil. They believe that insurance companies only ask questions of people they insure or claimants because they are looking for a way to avoid paying a claim. They ignore the fact that more than 95% of all claims presented to insurers in the United States are settled to the satisfaction of both parties.

The parties and lawyers who believe all insurance companies are evil also believe that if they file a suit claiming breach of the covenant of good faith and fair dealing the courts will side with them and the insurer will fall over and throw money at them to settle rather than fight. They forget, or never knew, that the covenant of good faith and fair dealing, applies equally to the insured as to the insurer. Insureds, since the covenant was first described in 1766, must deal fairly and in good faith with their insurer as they expect the insurer to deal fairly and in good faith with the insured.

In Barrera v. Western United Insurance Company, Court of Appeals, 9th Circuit 2014, http://scholar.google.com/scholar_case?case=9399295241110499364&q=LYNDA+BARRERA&hl=en&as_sdt=2006  the Ninth Circuit Court of Appeal, in a not officially reported decision, disposed of such a case with alacrity because the insured and the insured’s lawyer failed to deal fairly and in good faith with the insurer.

FACTS

After Lynda Barrera was involved in a hit-and-run automobile collision, and warned her car insurer, AAA Nevada Insurance Company (AAA), that she would be receiving medical care, she failed to provide an authorization to review medical records for over a year, despite repeated telephone calls to her counsel. After she provided an authorization, but still failed to provide other requested medical information, her lawyer demanded an immediate response to his settlement offer. Barrera rejected AAA’s counter-offer and sued for breach of her insurance contract, violations of the Nevada Unfair Claims Practices Act, and bad faith.

SUMMARY JUDGMENT

After discovery, AAA moved for summary judgment. The district court granted summary judgment on the Unfair Claims Practice Act and bad faith claims, thus also resolving her claims for punitive and compensatory damages. The district court denied summary judgment on the contractual insurance claim, although it stated it was “a very close case,” given the long delays caused by Barrera’s attorney’s conduct. AAA filed a motion for attorneys’ fees under a Nevada statute that allows a court to grant fees to prevailing parties when the opposing party brought its claim “without reasonable ground or to harass the prevailing party,” and (2) Nevada rules that allow a court to grant attorneys’ fees after an offer of settlement was rejected by the offeree if the offeree fails to obtain a more favorable judgment.

ANALYSIS

Barrera appealed from the summary judgment. AAA cross-appealed from the denial of attorneys’ fees.

The Ninth Circuit affirmed the district court’s summary judgment on Barrera’s claims because, viewing the evidence in Barrera’s favor, there were no genuine issues of material fact to support her claims under the Nevada Unfair Claims Practices Act or bad faith. Barrera failed to provide any evidence or authority to support those claims.  Because Barrera has raised no issue of primary liability, the Ninth Circuit also affirmed the district court’s summary judgment on tort and punitive damages.

The district court correctly stated the applicable law to AAA’s motion for attorneys’ fees and correctly stated the four legal factors authorized by the Nevada Supreme Court in deciding whether to award fees against a losing party that rejected a settlement offer. Beattie v. Thomas, 668 P.2d 268, 274 (Nev. 1983). Given the conduct of Barrera’s attorney, the Ninth Circuit might have applied Nevada law differently than did the district court. However, an appellate court may not simply substitute its view for that of the district court unless the trial court’s application of the law was illogical, implausible, or without support in inferences that may be drawn from the facts in the record. Since there was support for the trial court decision the Ninth upheld its decision.

The district court’s award of costs to AAA was not an abuse of discretion. Barrera has not cited any evidence in the record to support her argument that costs were improperly calculated, so the Ninth Circuit rejected Barrera’s argument.

ZALMA OPINION

The tort of bad faith was created to solve perceived misconduct by insurers taking advantage of the people it insured who were unable to mount sufficient efforts to defeat breaches of contract. The tort of bad faith allowed in addition to contract damages traditional tort damages and punitive damages. It was hoped that the creation of the tort of bad faith would convince insurers to treat their insured’s and claimants fairly to avoid the tort damages.

Unfortunately, the law of unintended consequences came into effect. Some lawyers for policyholders decided that it was profitable to set up insurers for tort damages by making the investigation difficult, if not impossible, and then demand settlement that they knew would not be accepted – because of the incomplete investigation – and then, as did Barrera, file suit for bad faith.

The trial court was generous in this case since it left the “close call” breach of contract case to be tried even though the evidence clearly showed that the insured and her lawyer failed to comply with the cooperation clause of the policy and attempted to create a bad faith suit out of a simple uninsured motorist claim that could have been resolved quickly had the insured and her lawyer cooperated with the insurer’s 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 | 2 Comments

Preemption of State Law Defeats Suit

State Law Preemted by Risk Retention Act

The federal Liability Risk Retention Act of 1986, 15 U.S.C. § 3901, et seq. (“the LRRA” or “the Act”), contains sweeping preemption language that sharply limits the authority of states to regulate, directly or indirectly, the operation of risk retention groups chartered in another state. Id. § 3902(a). A provision of New York’s insurance law requires that any insurance policy issued in that state contain a provision permitting, under certain circumstances, an injured party with an unsatisfied judgment to maintain a direct action against her tortfeasor’s insurer for the satisfaction of that judgment. [N.Y. Ins. Law § 3420(a)(2).] Renata Wadsworth, v. Allied Professionals Insurance Company, A Risk Retention Group, Inc. United States Court of Appeals, Second Circuit – http://caselaw.findlaw.com/us-2nd-circuit/1662481.html?DCMP=NWL-pro_insurance (April 04, 2014) required the Second Circuit Court of Appeals to determine whether the LRRA preempts the application of § 3420(a)(2) to a risk retention group that is domiciled in Arizona, but issues insurance policies in New York.

BACKGROUND

In 2005, plaintiff-appellant Renata Wadsworth sought treatment from Dr. John Ziegler, an Ithaca, New York chiropractor. During her four visits with him, Ziegler repeatedly touched Wadsworth in an inappropriate, sexual manner without her consent. Wadsworth reported Ziegler’s conduct to local authorities, who arrested him. Ziegler later pled guilty to third-degree assault for his actions against Wadsworth.

Wadsworth subsequently filed a civil action against Ziegler seeking damagesstemming from the sexual assault. Following a bench trial a $101,175 judgment was entered in Wadsworth’s favor. Ziegler failed to satisfy the judgment, perhaps because he was in jail. Wadsworth then sued Allied Professionals Insurance Company (“APIC”), which was Ziegler’s insurance carrier at the time of the sexual assault. APIC is registered in New York as a federal risk retention group and is recognized as such by the New York Department of Financial Services. Domiciled in Arizona, APIC has over 4,000 insureds in New York, including acupuncturists, chiropractors, and massage therapists.

DISCUSSION

Rather than enacting comprehensive federal regulation of risk retention groups, Congress enacted a reticulated structure under which risk retention groups are subject to a tripartite scheme of concurrent federal and state regulation. First, at the federal level, the Act preempts “any State law, rule, regulation, or order to the extent that such law, rule, regulation or order would make unlawful, or regulate, directly or indirectly, the operation of a risk retention group,” [15 U.S.C. § 3902(a)(1)].

That preemption is not universal. The second part of the scheme secures the authority of the domiciliary, or chartering, state to “regulate the formation and operation” of risk retention groups. Federal preemption, therefore, functions not in aid of a comprehensive federal regulatory scheme, but rather to allow a risk retention group to be regulated by the state in which it is chartered, and to preempt most ordinary forms of regulation by the other states in which it operates. The Act provides for broad preemption of a non-domiciliary state’s licensing and regulatory laws.  Similarly, the Act prohibits states from enacting regulations of any kind that discriminate against risk retention groups or their members, but does not exempt risk retention groups from laws that are generally applicable to persons or corporations.

In particular, subject to the Act’s anti-discrimination provisions, nondomiciliary states have the authority to specify acceptable means for risk retention groups to demonstrate “financial responsibility” as a condition for granting a risk retention group a license or permit to undertake specified activities within the state’s borders. In short, as compared to the near plenary authority it reserves to the chartering state, the Act sharply limits the secondary regulatory authority of nondomiciliary states over risk retention groups to specified, if significant, spheres.

NEW YORK INSURANCE LAW

New York Insurance Law, as it pertains to risk retention groups, largely mirrors the structure of federal law.

The insolvency or bankruptcy of the person insured, or the insolvency of the insured’s estate, will not, by New York statute, release the insurer from the payment of damages for injury sustained or loss occasioned during the life of and within the coverage of such policy or contract. It also provides that in case judgment against the insured shall remain unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the attorney for the insured then an action may be maintained against the insurer.

Therefore, § 3420 grants an injured party a right to sue the tortfeasor’s insurer, but only under limited circumstances — the injured party must first obtain a judgment against the tortfeasor, serve the insurance company with a copy of the judgment, and await payment for 30 days. Compliance with those requirements is a condition precedent to a direct action against the insurance company.

The question presented by this appeal was whether the LRRA preempts application of § 3420(a)(2) to foreign risk retention groups.

PREEMPTIVE EFFECT OF THE LRRA

The Supremacy Clause provides that federal law “shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” [U.S. Const. art. VI, cl. 2.]

It is undisputed that APIC is a risk retention group formed and functioning under the LRRA and that it is domiciled in Arizona. Therefore, § 3902(a)(1), insofar as it relates to the powers of nondomiciliary states, governs the authority of New York to impose regulations on APIC’s operations in New York.

Section 3902(a)(4) expressly prohibits discrimination against risk retention groups. If the entire purpose of the preemption provision was solely to invalidate discriminatory state laws, Congress could have enacted a far less complex statute that simply adopted the language of subsection (a)(4) without more, and thus prohibited all state laws, and only those, that discriminate against risk retention groups. Instead, however, Congress specifically preempted “any” law, rule, or regulation by a nondomiciliary state that would “regulate, directly or indirectly, the operation of a risk retention group.”  A clearer prohibition would be hard to devise. The express preemption of any regulation simply cannot be read as preemption only of discriminatory regulation.

In enacting the LRRA, the Second Circuit has held in past cases that Congress desired to decrease insurance rates and increase the availability of coverage by promoting greater competition within the insurance industry. The effect of the statute is to give to the injured claimant a cause of action against an insurer for the same relief that would be due to a solvent principal seeking indemnity and reimbursement after the judgment had been satisfied. Although the statute does not increase the amount of the insurer’s liabilities, the rights of the injured party are independent of the rights of the insured, and in some circumstances, more favorable.  Application of those provisions to APIC or to any other foreign risk retention group would undoubtedly “regulate, directly or indirectly,” those groups by subjecting them to lawsuits filed in New York by claimants who are not parties to APIC’s contracts with insureds.

The LRRA is, without question, a federal statute that specifically relates to the business of insurance. Section 3420(a)(2), which, to reiterate, requires any insurance policy issued in the state of New York to contain a provision permitting a direct action against a tortfeasor’s insurer, was undoubtedly enacted to regulate the business of insurance. In sweeping preemption language, subject to certain limited exceptions, Congress chose to limit the power of nondomiciliary states to regulate risk retention groups.

ZALMA OPINION

The LRRA gives every Liability Risk Retention Group (LRRG) the ability to avoid most state regulations of states other that in which the LRRG is domiciled. By so doing the Congress gave the LRRG such wide discretion to make it possible for an LRRG to provide insurance protection to those who can’t obtain insurance in the open market. States, like New York, that attempt to limit by regulation or statute the powers of the LRRG outside the limitations allowed by the LRRA will be slapped down as was the state in this case.

The US Constitution and its preemption clause overrides even the most reasonable of state statutes if they impinge upon the federal law.

States must limit their regulation of LRRGs to those regulations allowed by the LRRA and no more. A prudent state regulator  will rule in favor of the LRRG and honor the power of the federal law’s preemption.

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.

 

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Easy, English, Passover Seder

Passover is Coming

The Passover Seder has become complex and difficult for American Jews, many of who have little or no use of the Hebrew language but still wish to fulfill the commandment to explain the Passover to their children and children’s children. My wife and I wrote a simple, English language version of the Haggadah. It is only twelve pages long and tells the entire story of the Passover. It explains the symbols needed for every Passover Seder, the foods that are eaten and why, and the meaning of the Exodus so that no Jew will ever forget how they were set free from slavery more than 3000 years ago.

If you want to share Seder with your family this is the easy, thorough and all English language method to tell the story without pain or boredom.

It is available at http://www.zalma.com/zalmabooks.htm for $5.95.  You may make as many copies as you need for your Seder or to explain to those not Jewish what the last supper was all about so they can understand Easter better.

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Interrelated Wrongful Acts

Multiple Breaches of Fiduciary Duty are Interrelated

Continental Casualty Company (Continental) appealed from the district court’s grant of summary judgment to Crystal Kilcher, Daniel Kilcher, and Anthony Muellenberg, individually and as trustee of the Troy Muellenberg revocable trust (collectively, Plaintiffs). The district court determined that the Plaintiffs had made more than one claim against their former financial adviser, who was insured by Continental under a professional liability insurance policy. Accordingly, the district court held that the insurance policy’s $1 million coverage limit for a single claim did not apply and that the Plaintiffs’ claims instead triggered the insurance policy’s aggregate coverage limit of $2 million.

In Crystal D. Kilcher; Daniel J. Kilcher; Anthony C. Muellenberg; Anthony C. Muellenberg, as Trustee of the Troy D. Muellenberg 2007 Revocable Trust v. Continental Casualty Company, Eighth Circuit, April 3, 2014 the Eighth Circuit was called upon to resolve the dispute as to the number of claims.

FACTS

Crystal Kilcher, Daniel Kilcher, Anthony Muellenberg, and Troy Muellenberg are siblings and members of the Shakopee Mdewakanton Sioux Community (Community). Members of the Community become eligible to share in the profits generated by the Community’s gaming enterprise when they turn eighteen years old. Anthony testified that he received an annual distribution of approximately $1 million in 2003 and that the distribution has decreased each year since then. Between 1999 and 2003, after each Plaintiff turned eighteen, their mother introduced them to Helen Dale, a financial adviser and registered agent of Transamerica Financial Advisors, Inc. (TFA). Crystal, the oldest sibling, began investing with Dale in 1999, followed by Daniel in 2000, and twins Anthony and Troy in 2003.

Dale gave similar advice to each Plaintiff, recommending the purchase of whole life insurance policies and fixed annuities. At age eighteen, each Plaintiff purchased a $10 million whole life insurance policy at Dale’s direction. The premiums for those policies ranged from $5,000 to $6,000 per month. Crystal and Daniel later purchased millions of dollars of whole life insurance on their spouses, as well as $1 million whole life insurance policies on each of their children. Heeding Dale’s advice, Crystal and Troy purchased supplemental insurance policies that covered living expenses in the event that they became unable to work due to sickness or injury. Dale recommended the supplemental insurance product, even though the Plaintiffs’ primary source of income was the distribution they received from the Community. Similarly, Dale recommended that Daniel purchase certain riders to his life insurance policy that provided benefits that the Community would have provided at no charge.

In December 2009, the Plaintiffs filed one lawsuit in Scott County District Court. They alleged six counts against Dale: breach of fiduciary duty, unsuitability, negligent misrepresentation, fraudulent misrepresentation, fraud, and violations of state securities laws.

Dale moved for summary judgment, and the Plaintiffs moved for partial summary judgment. In support of their motion, the Plaintiffs submitted expert evidence. Their expert opined that the investments recommended by Dale were unsuitable and that Dale had failed to act in the Plaintiffs’ best interests. The expert explained that the $10 million whole life insurance policies were inappropriate because the Plaintiffs had no dependents when they purchased the policies. The policies thus offered little benefit to the Plaintiffs and came at a substantial cost to them, by way of pricey premiums and fees. According to the expert, term life insurance policies would have been more suitable because such policies would have been less expensive and would have offered more flexibility. The sale of whole life insurance policies generated a higher commission for Dale, however, than the sale of term life insurance policies would have generated. The expert further testified that the annuities Dale sold to each Plaintiff had significant surrender charges and policy expenses. Moreover, Dale sold multiple contracts to each Plaintiff, rather than applying funds to their existing annuities, a practice that allowed Dale to generate additional commissions.

Plaintiffs’ accounting expert determined that the Plaintiffs had suffered distinct damages, together totaling almost $4 million.

The Scott County District held that Dale owed a fiduciary duty to the Plaintiffs, but it did not decide whether Dale had breached that duty. The parties thereafter entered into a settlement agreement. Continental agreed to pay $1 million under the policy, less Dale’s defense costs, and the Plaintiffs agreed to dismiss with prejudice the action against Dale that was pending in Scott County. The parties entered into an agreement, the terms of which provided that Continental had satisfied all claims that Plaintiffs had or may have had against Dale. The settlement agreement did not decide whether the Plaintiffs had submitted one claim under the insurance policy or more than one claim. The settlement agreement thus permitted the Plaintiffs to file a declaratory judgment action against Continental so that the federal district court could decide the issue, which the settlement agreement framed as follows:

“Whether Plaintiffs’ claims against Dale involve the same ‘Wrongful Acts’ and/or ‘Interrelated Wrongful Acts’ as defined by the Policy.”

If the Plaintiffs prevailed and the district court held that they had submitted more than one claim, Continental agreed that it would pay an additional $1 million, the aggregate policy limit.

THE POLICY

Dale was insured by Continental under a Life Agent/Broker Dealer Solutions Policy (the Policy). The Policy was a claims-made policy, meaning that it provided coverage for loss resulting from “a Claim” first made and reported during the Policy period for “a Wrongful Act” in the rendering or failing to render professional services.

Under the Policy, “Claim” means: “against an Insured for a Wrongful Act, including any appeal therefrom brought by or on behalf of or for the benefit of any Client.”

THE ISSUE

The only issue in this case is whether the Plaintiffs submitted more than one claim against Dale.  The district court held that the relevant policy language was not ambiguous and that the Plaintiffs had submitted more than one claim against Dale. The district court acknowledged that some of the Plaintiffs’ claims were similar, but ultimately determined that the “Plaintiffs’ claims are not ‘Interrelated Wrongful Acts’ as the Policy defines that term. . . . Plaintiffs have parallel claims which do not necessarily connect with each other.”

ANALYSIS

On appeal, Continental frames the issue as whether the Plaintiffs’ four claims-one for each Plaintiff-involve interrelated wrongful acts. Continental argues that we should group Dale’s wrongful acts by Plaintiff and then determine whether there exists a logical connection between the set of wrongful acts each Plaintiff has alleged. The Plaintiffs argue that Continental has ignored the Policy’s language that defines the term “Claim” to be “a Wrongful Act.” According to the Plaintiffs, one wrongful act constitutes one claim and each Plaintiff has alleged more than one wrongful act and thus has submitted more than one claim.

The Plaintiffs argue that they have submitted more than one claim because Dale committed more than one wrongful act. Although the Plaintiffs have not enumerated exactly how many different wrongful acts Dale committed, they set forth in their brief a table that lists claims based on $10 million whole life insurance policies, life insurance on children, life insurance on spouses, supplemental insurance policies, annuities, and churning.

The Policy’s language finds acts are interrelated if they are logically related “by reason of any common fact, circumstance, situation, transaction or event.” Plaintiffs’ claims share the fact that the wrongful acts were committed by Dale, whose motive was to generate commissions. Plaintiffs’ expert opined that Dale had breached her fiduciary duty to the Plaintiffs in the same way, emphasizing the Plaintiffs’ youth, lack of sophistication, and substantial annual income and net worth.

The Eighth Circuit noted that although Dale made different alleged misstatements, omissions, and promises on different dates to each Plaintiff, there nonetheless existed a logical connection between her wrongful acts. The Eighth Circuit recognized that its analysis brings about an unfavorable outcome for the Plaintiffs, who trusted Dale and to whom she owed a fiduciary duty. The Eighth Circuit found Dale’s conduct wrongful and, had it been called upon to deal with the case of Dale might have ruled differently, but it was not sitting in judgment of Dale but were charged instead with interpreting the language of Dale’s professional liability insurance policy. The policy defined the term “Interrelated Wrongful Acts” to mean acts that are “logically . . . connected by reason of any common fact [or] circumstance[.]” That Dale harmed each Plaintiff individually and uniquely is not enough to overcome the plain, clear, open, broad and understandable Policy language. There was, therefore, only one claim and the plaintiffs were limited to recover the one million dollar per claim limit.

ZALMA OPINION

This is another case where plaintiffs, with a good case against a defendant, decided it best to let the tortfeasor go free so that the plaintiffs could sue her insurer. In so doing they lost anywhere from one to three million dollars.

The opinion does not reflect Dales assets but since she had taken advantage of the plaintiffs and others she probably had enough to contribute to the settlement or her assets could have been subject to execution to satisfy a 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.

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.

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Adjuster – Never Lie to Insured

The Problem with a Demurrer

When a party files a demurrer it states that even if everything alleged in the complaint is proved to be true the defense will win. Defendants who succeed in such a pleading will often have it reversed on appeal because it is usually quite simple to allege – without being able to prove – a viable cause of action. Further, courts are expected to give the plaintiff the opportunity to amend the complaint until sufficient facts are alleged.

In Bock v. Hansen – filed April 2, 2014, California Court of Appeal First District, Div. Two, Cite as 2014 S.O.S.1719, Full text http://www.metnews.com/sos.cgi?0414//A136567 the California Court of Appeal was faced with a case where a demurrer was sustained without leave to amend.

BACKGROUND

The facts are those alleged by the Bocks in their suit, all of which are admitted for decision making purposes only by Hansen’s demurrer.

Early on the morning of September 9, 2010, a large limb-41 feet long, some two feet in diameter, and weighing 7,300 pounds-broke off from an oak tree in the Bocks’ front yard, “crashing into the chimney, the front of the house, and through the living room window.” The giant limb caused three other large limbs to fall, which came to rest on a portion of the Bocks’ chimney. The limbs “caused significant damage to the Bocks’ chimney, which had been in working condition prior to the incident and was used as the Bocks’ primary heating source for their home.” The limbs also broke three windows and caused damage to the interior of the home, the Bocks’ fence, and Mrs. Bock’s car.

Upon arrival, Travelers’ adjuster, Hansen, told Mrs. Bock that he only had a few minutes to review the damage, and in fact spent no more than ten to fifteen minutes at their home. Before Hansen took any pictures of the damage, he pushed several branches out of the living room window. When Mrs. Bock asked Hansen why he had not taken the pictures first, he ignored her, telling her to “clean up the mess,” and demanding she clean up the living room. Moving outside, Hansen also removed the limbs leaning against the chimney and the fence before taking any pictures, all the while making derogatory comments about PG&E, Mr. Bock’s employer, which Mrs. Bock found rude and upsetting.

Before leaving, Hansen wrote a check for $675.69. When Mrs. Bock said that the amount would not be enough to even clean up, let alone repair, the damage, Hansen told her that cleanup was not covered under the policy and that she should contact “friends and family members with chainsaws” to clean up the limbs and the mess in the house and backyard. The next day, September 11, Mrs. Bock sent an email to Travelers Property Field Manager Frank Blaha, reporting the chimney damage. She also requested that another adjuster be assigned to their claim because Hansen was “rude, disinterested, and rushed during his initial visit.”

On September 15, Hansen again came to the house, this time accompanied by Blaha. The Bocks were present, as was Ron Priest, a licensed general contractor who was there at the Bocks’ request. Hansen and Blaha were shown the significant cracks in the chimney, as well as gouges where the limbs had hit it, and Hansen took pictures of the damage to the chimney. Again, Hansen falsely told the Bocks that their policy did not cover the cost of clean up. Acting at the request of Travelers, Roy Anderson of Vertex Construction Services (Vertex) inspected the Bocks’ house.

Anderson sent Hansen a report detailing the results of his inspection and which concluded-falsely, the Bocks alleged-that “[n]o scarring, gouging, or scuff marks were noted on the siding or trim materials on the northeast corner of the residence.”  Hansen did not perform any tests to support his conclusion, and did not include in his report any statements from the Bocks or Priest.

By letter dated October 1, Hansen informed the Bocks that based on the Vertex report Travelers was denying coverage for the chimney damage.

The Proceedings Below

The Bocks filed a complaint naming Travelers, Hansen, and Vertex. The complaint asserted six causes of action, including five against Travelers.

DISCUSSION

It is beyond dispute that, in addition to breach of contract, various tort theories are available to insureds against their insurers. The most prominent, of course, is bad faith. There are others as well.  The insurer’s agents and employees may have committed some independent tort in the course of handling the third party claims; e.g., misrepresentation or deceit, invasion of privacy, intentional infliction of emotional distress, etc. In such event, they can be held personally liable, even though not parties to the insurance contract.

In Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, the Supreme Court recognized that while the relationship between the insurer and insured is not a true fiduciary one, it is nevertheless “special.” The insurer-insured relationship, however, is not a true “fiduciary relationship” in the same sense as the relationship between trustee and beneficiary, or attorney and client.  It is, rather, a relationship often characterized by unequal bargaining power in which the insured must depend on the good faith and performance of the insurer. The special relationship has led the courts to impose special and heightened duties, but while these special duties are akin to, and often resemble, duties which are also owed by fiduciaries, the fiduciary-like duties arise because of the unique nature of the insurance contract, not because the insurer is a fiduciary. Such special relationship leads to the conclusion that Hansen, the employee of the party in the special relationship, had a duty to the Bocks.

In sum, the court of appeal concluded that a cause of action for negligent misrepresentation can lie against an insurance adjuster and that one was adequately alleged by the plaintiffs.

It is a matter almost of common knowledge that a very small percentage of policy-holders are actually aware of the provisions of their policies.  In fact, it is common knowledge that most lawyers are unaware of the provisions of their clients policies or their own policies. This is because they believe policies are prepared by the experts of the companies, they are often highly technical in their phraseology, complicated and voluminous.  Courts, while zealous to uphold legal contracts should not sacrifice the spirit of a contract to the letter.

The Bocks contended at the trial court and on appeal that they can allege additional facts to support their claim that Hansen acted outrageously. According to them, these facts include that “Hansen deliberately withheld information from Vertex and Roy Anderson in order to ensure that the Vertex report would support Hansen’s pre-determined decision to deny the Bocks’ claim”; that Hansen sent Anderson his own conclusions as to why the chimney damage was not caused by the tree limbs before Anderson wrote his report; that Hansen subsequently edited Anderson’s report before it was finalized; and that Hansen’s supervisor took notes that acknowledged damage to the Bocks’ home, which were never put into the claim file and have since been destroyed.” The Bocks also claim that they could state facts that show Hansen abused a relationship of power over them and that he knew they were susceptible to injuries through mental distress, although they failed to actually name those facts.

Because of the Bock’s contentions, and the fact that the trial court did not even address their request, the court of appeal reversed the trial court and remanded the case to the trial court ordering it to allow the Bocks to amend their suit.

ZALMA OPINION

The person knowledgeable in insurance retained by an insurer for the
purpose of assisting the insured in proving a loss to the insurer is the adjuster. The adjuster is a person who expresses to the insured the fidelity and good faith of the insurer.

The adjuster is obligated to investigate the loss, interpret the policy wording, and apply the words of the policy contract to the facts discovered by the  investigation so that a well-reasoned decision can be made about the claim. Mr. Hansen and his supervisors at Travelers, if the Bocks can prove the allegations in their suit, acted viciously and breached the covenant of good faith and fair dealing. If they cannot their suit will fail.

The facts they allege are awful and a violation of every possible concept of good faith claims handling. Neither I nor the court have any way, when faced with a demurrer, whether the allegations are true or not. The insureds were properly given the opportunity to prove their case.

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.

 

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A Taste of a New E-Book

Mom & The Taipei Fraud

The Rescue Plan

The Following is Chapter II of my new e-book, “Mom & The Taipei Fraud” where claims investigator Marion Orpheus Montague (aka “MOM”) works to defeat a fraudulent $7 million dollar fraudulent theft claim. It should give you a taste of the novel.

This story is based on a real case involving real insurers, investigators, lawyers, police officers, immigration and customs agents, insurance brokers, jewelry appraisers, and fine arts appraisers. The names, descriptions, and identities of the people involved have been changed to protect both the guilty and the innocent.

Feng Bao Xiang who shortened his name to “BX” finished his breakfast at 10:50 dressed in dark blue slacks, a yellow dress shirt open at the neck and a red smoking jacket he had purchased at Nordstroms. He left the breakfast table walking casually wearing bright yellow socks and Bruno Magli loafers. He looked the part of the wealthy Beverly Hills Chinese immigrant.

As he sat himself comfortably in his favorite wing-back chair in the living room just as the doorbell rang.

Oscar answered the door and let in two men in black business suits that seemed one or two sizes too small. Both were large, well-muscled, and a good eight inches taller than BX.

“Boss, allow me to introduce Angelo and Massimo Schecter.”

“Gentlemen, welcome to my home.”

In unison, the two, nodded and sat heavily on the sofa opposite the wing-back chair where BX sat. Without speaking the two took in every piece of furniture, every clock, wall hanging, painting and sculpture in the room as if taking an inventory before Angelo spoke: “Oscar said you were in need of the special type of help we might be able to provide. What exactly do you need?”

“I need two things: I need cash to support my life style and I need my Visa extended.”

“Is that all,” Angelo responded.

“That is all, but I have no idea how to go about getting what I need.”

Angelo laughed. “That is what our family does for our friends. Oscar is a friend and member of the family. He vouched for you so we are ready to help.”

“How?”

“We have a U.S. Senator from Florida who owes us a favor. All we need do is ask and he will contact ICE and they will issue you a green card and allow you to be a legal permanent resident.”

“And this service will cost me how much?”

“Mr. Feng, it will cost you nothing. This is a favor for a friend. When we need a favor in return we will let you know, but now as a friend of Oscar we will help.”

“And my need for money?”

“We are cash thin, at the moment, but can still help.” Angelo replied while his companion Massimo continued to make a mental inventory and appraisal of the contents of the house.

“What do you need from me?”

“Answers to a few questions.”

“Ask.”

“Do you have insurance on the home and its contents?”

“No. Insurance on property isn’t done in Taiwan. The biggest risk is invasion from the mainland Chinese and no one would insure that risk.”

“Has any of your property ever been appraised?”

“No. But the contents are here to be viewed. I have sold all my diamonds.”

“Not a problem.” Angelo said, turning to Massimo he instructed: “Massimo, call Harold Glass, the diamond merchant and tell him we need an appraisal of $3 million in various items of jewelry with honest values and details that would satisfy a GIA gemologist. The call Dean Hallstrom, the fine arts appraiser and tell him you want him here tomorrow morning at 11 to appraise the contents of the house with values that equal no less than $3.5 million total.”

Massimo nodded, took an I-Phone from his inside coat pocket, rose, and walked out of the room onto the patio without saying a word.

“We will have an insurance agent visit you as soon as the appraisals are completed. Insurance is essential to our plan to recover your wealth. We also need appraisals of your contents and diamonds.”

“I don’t understand.” BX responded but I have confidence in you based upon the recommendations of Oscar.

“You helped our friend, Oscar, and we feel obliged to help you.”

“I cannot express my thanks well enough in English.”

“No need,” Angelo replied. Massimo returned to the room, nodded confidently to Angelo. “The art appraiser will be here tomorrow and we will have a jewelry appraisal available for you in two days.”

“Then what?”

“Then we meet with Wilson Schlemiel, the insurance agent and acquire policies of insurance for you protecting you against the theft of your property.”

“I live in Beverly Hills. I have a burglar alarm. For what reason do I need insurance?”

“To turn,” Angelo stated kindly, “the policy into the cash you need.”

The e-book is available for $9.95 at http://www.zalma.com/zalmabooks.htm.

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Insured Friendly Law In Puerto Rico

Defense Required If There is a “Remote” Possibility of Coverage

The interpretation of an insurer’s duty to defend varies by jurisdiction. Puerto Rico is a jurisdiction that is exceedingly favorable to insureds and directs its court, when deciding an issue of duty to defend, on the slightest possibility for the existence of coverage. Essentially, to avoid a duty to defend in Puerto Rico an insurer must prove that there is virtually no possibility that coverage would apply.

In W Holding Company, Inc. v. AIG Insurance Company, et. al., United States Court of Appeals for the First Circuit, March 31, 2014, based upon dozens of motions concerning everything from jurisdiction to the interest paid by banks across the world, a district judge issued an order requiring Chartis Insurance Company to advance defense costs to former directors and officers of Westernbank of Puerto Rico, who find themselves in the cross-hairs of the Federal Deposit Insurance Corporation (“FDIC,” for easy reading). Chartis appealed.

HOW THE CASE GOT TO THE FIRST CIRCUIT

Westernbank’s run as one of Puerto Rico’s leading banks came to an end in the late 2000s when local regulators ordered it closed and appointed a federal regulator – the FDIC – receiver. Jumping in with gusto, the FDIC investigated what had gone on there. It did not like what it found. Certain bank directors and officers had breached their “fiduciary duty” by jeopardizing the bank’s financial soundness. Concluding that these breaches had caused more than $367 million in losses to the bank, the FDIC demanded that the directors and officers pay that amount.

The directors and officers notified Chartis of the FDIC’s multimillion-dollar claim. They asked Chartis to confirm coverage under a directors’ and officers’ liability-insurance policy issued by Chartis to Westernbank’s owner, W Holding Company, Inc. Known in the insurance world as a “D&O” policy, this particular policy declares (in capital letters) that Chartis “MUST ADVANCE DEFENSE COSTS, EXCESS OF THE APPLICABLE RETENTION, PURSUANT TO THE TERMS HEREIN PRIOR TO THE FINAL DISPOSITION OF A CLAIM.”

Chartis denied coverage. It relied on the policy’s “insured versus insured” exclusion. A standard proviso in D&O policies, this exclusion says that Chartis “shall not be liable to make any payment for Loss in connection with any Claim made against an Insured . . . which is brought by, on behalf of or in the right of, an Organization or any Insured Person other than an Employee of an Organization, in any respect and whether or not collusive.”

Convinced that the FDIC, “[a]s receiver,” had stepped squarely into Westernbank’s “shoes,” Chartis also wrote that any claims that the FDIC had “against the directors and officers of Westernbank are ‘on behalf of’ or ‘in the right of’ Westernbank.” That triggered the insured-versus-insured exclusion. The directors and officers, together with W Holding, sued Chartis in Puerto Rico superior court, seeking a declaratory judgment of coverage and saying that “coverage includes all costs and expenses . . . incurred” in defending against the FDIC. They also alleged that the FDIC had asserted a claim against them on behalf of third-party creditors and depositors.

Believing that there is at least a “remote possibility” of coverage, the directors and officers also moved the judge to order Chartis to advance their defense costs. Taking up the cost-advancement matter first, the judge granted the directors and officers’ motion in an electronic docket entry that said: “ORDER GRANTING . . . Motion for Miscellaneous Relief (advance defense costs). PR law requires insurers to advance defense costs if there is even a remote possibility that a claim ultimately will be covered. This ruling is without prejudice of Chartis eventually being entitled to repayment.”

THE MERITS

Puerto Rico law holds that an insurance company must advance defense costs if a complaint against an insured alleges claims that create even a “remote possibility” of coverage. Think about that for a second. Not an “actuality” of coverage. Not even a “probability” of coverage. No, a mere “possibility” of coverage will do – regardless of how “remote” it may be. A pretty low standard, indeed. On top of that, courts must read the complaint’s allegations liberally when doing a remote-possibility check. Also, any doubt about an insurer’s advancement obligation “must be resolved in the insured’s favor.”

Looking at the cost-advancement issue through the prism of preliminary-injunction principles makes an already insured-friendly situation under Puerto Rico law friendlier still. At this stage, you see, the directors and officers need not show a “certainty” of a “remote possibility” of coverage. On the contrary, only a “likelihood” of a “remote possibility” of coverage is required.

The First Circuit noted that Chartis’ arguments ignore that the procedural posture of the case only requires a mere likelihood of a remote possibility of coverage to jump-start the cost-advancement duty. FDIC did more than allege that it had succeeded to Westernbank’s rights. It also alleged that it had succeeded to the rights of Westernbank’s depositors and account holders – rights that included the right to sue. It alleged, too, that it was suing to recover money the FDIC-insurance fund had shelled out after the bank had shut down. Eyeing that pleading liberally while knowing also that pleading perfection is not required, the First Circuit concluded that the allegations make it likely possible – even if only remotely so – that the FDIC is suing on these non-insureds’ behalf.

Nothing Chartis advanced by its appeal showed that there is no likelihood of even the remotest possibility that the FDIC sued on behalf of non-insureds. Ever persistent, both sides continue battling over the remote-possibility-of-coverage question, citing a corps of cases to support their competing positions on the effect an insured-versus insured exclusion has in circumstances like the present. The problem is the cases cited are not controlling nor and are contradictory creating, by citing them, a “remote” possibility of coverage.

With no controlling authority on whether an insured-versus-insured exclusion applies to the FDIC in a situation like this case, with non-binding cases pointing in different directions, and with the court’s obligation to resolve any doubts in the insured’s favor Chartis’s suggestion that there is zero likelihood of a remote possibility of coverage falls flat. The First Circuit stressed that the parties must keep in mind the likelihood – not certainty – is the name of the game, and possibility – not actuality or probability – suffices, no matter how remote that possibility is. And that standard was met by the directors and the trial court decision was affirmed.

ZALMA OPINION

In just about any jurisdiction Chartis’ argument that the insured v. insured exclusion applied and it would have no obligation to defend. The Insured friendly position taken by the courts of Puerto Rico the duty to defend is based not on actuality of coverage, not on the probability of coverage but only the possibility – no matter how remote – is required. The allegations of the suit raised the remote possibility and coverage existed.

Chartis, when it wrote the policy, should have known of the insured friendly law in Puerto Rico and could have written the D & O policy to remove the remote possibility of coverage for defense or could have written the policy with only an indemnity provision leaving defense costs to be borne by the directors and officers or a defense only insurer.

Chartis waged a law and motion war to avoid the duty to defend the Directors and Officers when it should have, before issuing the policy, calculated the risks faced by the very liberal and insured friendly law in Puerto Rico and written a policy to avoid the risk their litigation tactics tried, and failed, to avoid.

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.

 

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Stranger Owned Life Insurance Risky Investment

Lies on Life Application Void Coverage

Insurance is a business of utmost good faith requiring both the insured and the insurer to treat each other fairly and in good faith and to do nothing to hurt the right of the other to the benefits of the contract. When a person lies on an application for insurance that person is not acting in good faith but is, rather, trying to deceive the insurer into entering into the contract of insurance. If the deception is material to the decision of the insurer to issue the policy most states, including the state of Texas, will allow the insurer to rescind the policy after it returns the premium so that both parties are in the same position they were in before the policy was issued.

In Vasquez v. ReliaStar Life Insurance Co., Tex: Court of Appeals, 14th Dist., http://scholar.google.com/scholar_case?case=9433629629153926375&q=GIOVANNY+VASQUEZ&hl=en&as_sdt=2006, (2014) Giovanny Vasquez, Substitute Trustee of the Beatrice Ramon 2007 Irrevocable Trust (“the Trust”) appealed from a trial court finding a life insurance policy rescinded from its inception. Vasquez contends the evidence is legally insufficient to support the jury’s finding that certain material misrepresentations affected the risk assumed by ReliaStar Life Insurance Co.

BACKGROUND

In March 2008, Russell Mackert and Beatrice Ramon submitted an application with ReliaStar for insurance on the life of Ramon, seeking an initial term of ten years for an amount of $2.5 million. The application named the Trust as the proposed beneficiary and owner of the policy and Mackert as trustee. The asserted purpose of the Trust was “Estate Conservation.” Mackert and Ramon also represented in the application that Ramon’s total net worth was $2.4 million, her annual interest and other income was $150,000, and she had never declared bankruptcy. Mackert and Ramon signed the application, verifying that the information provided was true and correct to the best of their knowledge and acknowledging that ReliaStar may seek to rescind coverage due to material misrepresentations.

Shortly thereafter, ReliaStar issued a policy insuring the life of Ramon for $2.5 million and naming the Trust as the owner of the policy (“the Policy”). The Policy had an initial term of ten years, during which time the annual premium was $26,125. After the initial ten-year period, the annual premium greatly increased. The Policy also contained a contestability provision, allowing ReliaStar to “contest the validity of this Policy based on material misrepresentations made in the initial application for two years from the Issue Date, during which time the Insured was living.”

Ramon died in November 2008. In January 2009, Mackert notified ReliaStar about Ramon’s death. ReliaStar advised Mackert that, because Ramon’s death occurred within the two-year contestability period, ReliaStar would conduct an investigation to determine whether information provided in the application was correct. Additionally, at some point, Mackert resigned as trustee of the Trust and appointed Giovanny Vasquez as substitute trustee. Vasquez purchased the Trust for $500,000 as an investment on behalf of investors he represented.

In June 2009, the Trust filed suit against ReliaStar. While suit was pending, ReliaStar continued its contestability investigation. ReliaStar determined that neither Ramon nor Mackert made any misrepresentation regarding Ramon’s health or medical history. However, ReliaStar discovered that Ramon misrepresented her financial information because she had previously declared bankruptcy, had no assets, and did not receive any income except social security payments. Moreover, Ramon and Mackert misrepresented the purpose for the life insurance, stating it was for “Estate Conservation” when the actual purpose was to procure “Stranger Owned Life Insurance.” Based on these misrepresentations, ReliaStar rescinded the Policy and returned the premium paid by the Trust.

In April 2012, the trial court conducted a jury trial on the Trust’s suit. The jury charge contained a single question asking whether the insurance application contained material misrepresentations that affected the risk assumed by ReliaStar. The jury answered in the affirmative, and the trial court rendered a take nothing judgment against the Trust.

ANALYSIS

The sole question presented to the jury in the charge is as follows: “Did the Policy application contain misrepresentations that were:(1) of a material factand that(2) affected the risk assumed? A misrepresentation of fact is “material” if it induced [ReliaStar] to issue the Policy.” The jury answered “Yes”.

The Trust did not challenge the jury’s finding that Ramon’s financial misrepresentations were material. Instead, the Trust argues there is no evidence that Ramon’s misrepresentations “affected the risk assumed.” Specifically, the Trust argued Ramon’s false statements regarding her worth, income, bankruptcy history, and the purpose of the Trust did not affect the risk of Ramon dying because none of these statements had any bearing on her health or death.

Nothing in the plain language of Texas statutes require that a misrepresentation involve the insured’s health or life expectancy in order for the misrepresentation to affect the risks assumed by the insurer. If the meaning of the statutory language is unambiguous the court will always adopt the interpretation supported by the plain meaning of the provision’s words.

The purpose of a life insurance company is to secure risks on sound lives. It is interested in knowing that the applicant for insurance is not affected with infirmities that will hasten the event against which it insures. However, this is a risk to the insurer only because it triggers the insurer’s obligation to pay benefits. Hence, the risk assumed by ReliaStar was that it would have to pay $2.5 million if Ramon died. The amount of money contingently owed by the insurer is undeniably part of the risk of providing coverage.

At trial, ReliaStar’s underwriters testified that all information provided by an insurance applicant is considered when determining whether to provide coverage and how much coverage to provide. The underwriters further emphasized that ReliaStar determines “the amount of insurance that would be acceptable” based on the purpose for the insurance, such as whether the insurance is for estate preservation. ReliaStar does not want to provide more life insurance than what the insured and her beneficiary actually need. If ReliaStar issues a high-paying policy to a person with poor finances, there is an increased risk that the person will not be able to afford the premiums.

The underwriters also explained to the jury that ReliaStar does not want to provide “Stranger Owned Life Insurance” policies because the person who is the beneficiary of the policy has no interest in the continued life of the insured and is hoping the insured will die within the policy term. According to the underwriters, had Ramon been truthful about her financial standing, ReliaStar would not have issued her a $2.5 million policy and probably would not have provided any insurance because she did not need coverage.

One of the underlying principles of financial underwriting is that the beneficiaries of the policy should not benefit financially on the death of the insured more than they would have had the insured lived. The number of large multi-million dollar life insurance policies is limited. As a result, the effect of a few early claims on multi-million dollar life insurance policies may impact the company’s block of business significantly.

The Texas Court of Appeal concluded that Ramon’s financial misrepresentations affected the amount of coverage provided, and therefore the risk assumed, by ReliaStar. Clearly, Ramon and Mackert understood the correlation between financial information and the obtainable amount of life-insurance coverage because they misrepresented Ramon’s financial information on the insurance application.

The appellate court, therefore, held that the evidence is legally sufficient to support the jury’s affect-the-risk finding.

ZALMA OPINION

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant that it needs to make a reasoned decision. The insurer has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.

In this case Mr. Mackert and Ms. Ramon deceived ReliaStar who issued a policy based upon false information. They hoped Ramon would live past the two year contestability period so that payment would not be questioned. The fraud was defeated because she died shortly after the policy was issued and the investigation conducted by the insurer revealed the lies. Mackert, recognizing that the fraud was found out sold his rights – slim as they were – to Vasquez who filed suit. Mackert made $500,000; Vasquez lost his investment and the cost of the suit, and the insurer lost the cost of defending. The fraud perpetrator who obtained the policy for a single payment of premium was the only person who profited. Perhaps, after reading this decision the Texas Department of Insurance will investigate whether a crime was committed.

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.

 

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Not April Fools – The Neverending Story Continues

Zalma’s Insurance Fraud Letter April 1, 2014

Not April Fools – The Neverending Story Continues

In the seventh issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on April 1, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    The Neverending Story Continues.
2.    New E-Books From Barry Zalma.
3.    The Association of British Insurers Invests $19.423 Million for Fraud Fight
4.    SEC Settles Some Charges of Annuity & Life Insurance Fraud.
5.    New York Grand Jury Recommendations to Deter Workers’ Compensation Fraud.
6.    U.K. Motorists Think Fraud Acceptable.
7.    Fraud & Error Costs Global Healthcare Sector $487 Bill Per Year.

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:

Zalma on Insurance

•    Respondeat Superior
•    Don’t Buy a Pig in a Poke
•    Additional Insured Coverage Only For Vicarious Liability
•    The Need To Plead
•    To Stack or Not to Stack – That is the Question
•    Who’s On First?
•    I’ve Made Up My Mind – Don’t Confuse Me With Facts
•    Condition Precedent or Condition Subsequent
•    Claims Made Before Policy
•    Redundancy Does Not Create Ambiguity
•    No Coverage for Intentional Torts
•    Multi-Billion Dollar Fraud
•    Policy Must Say What Insurer Means
•    Conditions are Important
•    The Effect of the Tort of Bad Faith
•    Limited Duty of Insurance Broker
•    Policy Defenses Waived by Inaction
•    Standard Mortgage Clause
•    No Automatic Conflict if Insurer Appoints Lawyer
•    Insurer Fails To Assert Exclusions to its Detriment

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.

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 can be contacted at zalma@zalma.com or 310-390-4455310-390-4455.

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Respondeat Superior

Insurer Owes Nothing to Employee Not In Course & Scope of Employment

When automobile accidents occur plaintiffs seek to recover from people who have money, entities or insurers. If a potential defendant is judgment proof – has insufficient assets to pay a judgment – the plaintiffs seek to hold those with money or insurance liable. When the judgment proof defendant is employed the plaintiffs will seek to hold the defendant’s employer and employer’s insurer under the ancient doctrine of respondeat superior  where the law holds employers answerable for the damages occasioned by their employees in the exercise of the functions in which they are employed.

In Jessyca Portillo Versus Progressive Paloverde Insurance Company No. 13-ca-815, Court of Appeal of Louisiana Fifth Circuit 13 815, March 26, 2014, Plaintiffs, Jessica Portillo and Francisco Romero on behalf of the minor child Emely Romero, appeal the grant of summary judgment in favor of defendants, Walker Volkswagen, Inc. and Wausau Underwriters Insurance Company d/b/a Liberty Mutual Insurance Company.

FACTS

Plaintiffs sued the defendants for personal injuries sustained in a three-vehicle crash. In their petition, plaintiffs alleged that Jessica Portillo and the minor child Emely Romero were passengers in a vehicle, owned and operated by Francisco Romero. Immediately behind plaintiffs’ vehicle was a 2003 Volkswagen Jetta, owned and operated by defendant, Robert Masters. Mr. Masters struck the rear of plaintiffs’ vehicle, causing plaintiffs’ vehicle to strike the rear of a third vehicle.

The petition further alleged that Mr. Masters was in the course and scope of his employment with Walker Volkswagen when the accident occurred, thereby imputing to Walker Volkswagen the fault and negligence of Mr. Masters under the theory of respondeat superior. Consequently, in addition to Mr. Masters, plaintiffs brought suit against Walker Volkswagen and Walker’s insurance carrier, Wausau Underwriters Insurance Company d/b/a Liberty Mutual Insurance Company.

Defendants subsequently moved for summary judgment, which the district court granted on April 11, 2013.

ASSIGNMENT OF ERROR

A motion for summary judgment is a procedural device used when there is no genuine issue of material fact for all or part of the relief prayed for by a litigant. Any doubt as to a dispute regarding a genuine issue of material fact must be resolved against granting the motion and in favor of a trial on the merits.

Nevertheless, in Louisiana summary judgments are favored under the law and if there is no genuine issue as to material fact the mover is entitled to judgment as a matter of law.

RESPONDEAT SUPERIOR

In Louisiana, as elsewhere, employers are answerable for the damages occasioned by their employees (described in the state statutes as “servants and overseers”), in the exercise of the functions in which they are employed. Therefore, Walker Volkswagen will be held vicariously liable for the actions of Mr. Masters only if he was in the course and scope of his employment with Walker Volkswagen at the time of the accident.

Generally, an employee’s conduct is within the course and scope of his employment if the conduct is the kind that he is employed to perform.

Mr. Masters testified that he was employed by Walker Volkswagen as a shop foreman at the time of the accident. As a shop foreman, Mr. Masters worked on any vehicles that came to the dealership for repairs and assisted any technician in need of help. He further stated that it was customary that he test drive the vehicles following repairs to ensure that the vehicles were running properly. Mr. Masters confirmed that he worked on the day of the accident, arriving at approximately 7:15 a.m., but left at lunch time in his personally owned vehicle to run a personal errand.

Prior to that date, his Volkswagen Jetta did not run. Consequently, he had not yet registered or obtained insurance on the vehicle. On the date of the accident, the Jetta was running. Accordingly, Mr. Masters went to Capital One Bank on Williams Boulevard to withdraw cash so he could obtain the proper paperwork and insurance coverage on the vehicle. He also stated that he used this errand as an opportunity to test drive his vehicle. When Mr. Masters was returning to Walker Volkswagen from the bank, he rear-ended plaintiffs’ vehicle. Mr. Masters gave a Walker Volkswagen insurance card to the police following the accident. He explained that he routinely carried his employer’s insurance information should an accident occur while test driving repaired vehicles. He further stated that he made a mistake in giving the Walker Volkswagen insurance information to the police.

Mr. Masters explained that he created a ticket for each vehicle upon which he worked. Walker Volkswagen paid Mr. Masters on a ticket by ticket basis. Walker Volkswagen did not pay Mr. Masters for any time between tickets. Walker Volkswagen required Mr. Masters to clock in at the start of his work and clock out at the conclusion of his work for each ticket. This practice was also applied to test drives. Mr. Masters was working on a Walker Volkswagen customer vehicle prior to leaving the dealership to run his personal errand. He testified that he did clock off the ticket he was working on prior to running his personal errand. Therefore, Mr. Masters did not get paid for the time he spent going to the bank.

ANALYSIS

Generally, going to and from lunch ordinarily is not a function in which an employee is “employed,” for respondeat superior purposes. Once a motion for summary judgment has been properly supported by the moving party, the failure of the nonmoving party to produce evidence of a material factual dispute mandates the granting of the motion.

Mr. Masters’ deposition testimony clearly reflects that although he was a party to a motor vehicle accident during working hours, Mr. Masters was conducting a personal errand in his personal vehicle on his personal time. Mr. Masters testified that he was off the clock at the time of the accident, and was therefore not compensated by Walker Volkswagen. Since Mr. Masters was not in the course and scope of his employment at the time of the accident Walker Volkswagen and its insurer, Wausau Underwriters, may not be held liable for the alleged negligent acts of Mr. Masters.

Accordingly, the judgment of the trial court granting summary judgment in favor of defendants, Walker Volkswagen, Inc. and Wausau Underwriters Insurance Company d/b/a Liberty Mutual Insurance Company, was affirmed.

ZALMA OPINION

Mr. Masters, by handing the police an insurance card issued to his employer, even though he was not in the course and scope of his employment, bought a lawsuit for his employer and his employer’s insurer (since, in Louisiana the insurer can be sued along with its insured) and caused them to go to the expense of defending, obtaining a summary judgment and having that summary judgment affirmed on appeal.

Plaintiffs are not without a remedy. They can still sue Masters (who was uninsured but has some assets) and the others who may be responsible for the accident and the injuries suffered.

What is interesting is why, after obtaining the unquestioned facts from Mr. Masters deposition and having no evidence to counter it, that the plaintiffs argued against the motion for summary judgment and appealed that judgment without evidence that Masters was in the course and scope of his employment.

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.

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Don’t Buy a Pig in a Poke

Carbon Monoxide Is a Pollutant

Commercial General Liability (CGL) insurance provides extensive coverage to those insured by the CGL. However, it does not cover every possible event or injury. In Church Mutual Insurance Company v. Clay Center Christian Church, Defendant, Cheryl S. Green; Cheryl S. Green as Personal Representative of the Estate of John R. Green, No. 13-1613 (03/25/2014, USCA, Eighth Circuit) the Eighth Circuit dealt with death and injury caused by carbon monoxide poisoning.

Cheryl Green and the Estate of John Green (the Greens) appeal from the district court’s grant of summary judgment in favor of Church Mutual Insurance Company (Church Mutual). The district court concluded that coverage for the injuries the Greens suffered because of their exposure to carbon monoxide was precluded by pollution exclusions contained in the relevant policies.

FACTS

John Green was the pastor of Clay Center Christian Church (the Church). He and his wife, Cheryl, resided at the Church’s parsonage. On November 19, 2009, the parsonage’s heating system malfunctioned and released carbon monoxide throughout the residence. John died as a result of his exposure to the carbon monoxide. Cheryl suffered bodily injuries.

The Church had two policies issued by Church Mutual that are relevant to this appeal: a multi-peril policy and an umbrella policy. The multi-peril policy contained a pollution exclusion that excluded coverage for “‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants…” The umbrella policy included identical language.

“Pollutants” are defined under both policies as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.”

Church Mutual was notified of John’s death and Cheryl’s injuries on November 20, 2009. That same day, Church Mutual retained attorney Jerald Rauterkus. Church Mutual contended that Rauterkus’s role was limited to conducting a cause-and-origin investigation of the carbon monoxide leak and assisting the Church in matters of communication during the course of the investigation.

The parsonage’s heating system was inspected and tested on three separate occasions from November 2009 to April 2010. The results of the inspections were inconclusive. Although it was evident that the carbon monoxide had been emitted from the parsonage’s heating system, the exact source and cause of the carbon monoxide leak were not clear.

In March 2011, the parties resumed communicating when Rauterkus received requests for additional information from attorney Peter Wegman, who had been hired by the Greens to assist in their representation. After exchanging correspondence, Wegman sent Rauterkus a demand letter on August 19, 2011, seeking policy limits for John’s death and Cheryl’s bodily injuries. In response, Church Mutual filed a declaratory judgment action on September 7, 2011, seeking a determination that the policies’ pollution exclusions precluded any duty on its part to defend or indemnify the Church with respect to the Greens’ claims. Church Mutual also sent the Church a reservation of rights letter denying coverage on the basis of those exclusions.

THE CONSENT AGREEMENT

In February 2012, the Church and the Greens entered into a consent agreement in which the Greens agreed not to “pursue or collect on any of [the Church's] assets or assets of any members of the Church, except for any rights to indemnity under any insurance policies[.]” In exchange, the Church assigned to the Greens all rights it had under its insurance policies. By so doing the Greens limited their right to recover damages to damages from the Church’s insurance company, Church Mutual.

TRIAL COURT

As the declaratory judgment action progressed in the district court, the Greens disclosed their intent to have a chemist testify as an expert witness regarding whether carbon monoxide is an “irritant” or “contaminant.” Church Mutual moved in limine to exclude the chemist’s testimony and then later moved for summary judgment. The district court granted both motions, having concluded that the pollution exclusions were unambiguous, that carbon monoxide was a “pollutant” as defined by the policies, and that the Greens’ claims thus were not covered under the plain terms of the policies. Additionally, the district court rejected the Greens’ contention that Church Mutual was estopped from denying coverage because of its delay in reserving its rights.

ANALYSIS

The interpretation of an insurance policy is a question of law. Under Nebraska law, a court interpreting a contract, such as an insurance policy, must first determine, as a matter of law, whether the contract is ambiguous. The Greens argue that the terms “irritant” and “contaminant,” as used in the policies’ definition of “pollutants,” are ambiguous.

The Eighth Circuit recognized that the broad nature of the pollution exclusion may cause a commercial client to question the value of portions of its commercial general liability policy, but, as an appellate court reviewing terms of an insurance contract, it could not say that the language of the pollution exclusion is ambiguous in any way. In fact, it found that the language in the Church Mutual pollution exclusion is clear and susceptible of only one possible interpretation.

Because carbon monoxide is a gas that can render air “unfit for use” if introduced at high levels, it constitutes a “pollutant” as defined by the policies. As a result the Eighth Circuit also held that the Nebraska Supreme Court would conclude that carbon monoxide is a pollutant.

In contesting whether carbon monoxide constitutes a “pollutant,” the Greens assert that the district court erred in granting Church Mutual’s motion in limine to exclude the testimony of their expert witness regarding whether carbon monoxide is an “irritant” or “contaminant.”  The Eighth Circuit disagreed because the interpretation of an insurance policy is a question of law for the court, not a question of fact, and, therefore, expert testimony has no bearing on the court’s interpretation.

ZALMA OPINION

Carbon monoxide, in high levels, is a deadly gas and clearly fits within the definition of pollutant. Since the pollution exclusion is clear and unambiguous there is no potential for coverage under the CGL. This should have been obvious to the plaintiffs’ counsel as it was to Church Mutual, the church, and both the trial and appellate court.

If the heating system at the parsonage was defective there was a good probability that the Clay Center Christian Church would be held liable for the death of pastor Green and the injuries suffered by Mrs. Green. The Greens gave up their right to damages from the church in exchange to collect on the church’s slim rights to recover from the insurer although the church probably had assets that could have been used to satisfy a judgment.

The Clay Center Christian Church had a brilliant lawyer that eliminated the exposure faced by his client by getting the Greens to accept a “pig in a poke” in exchange for a sure win and a defendant with assets to satisfy a 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.

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.

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Additional Insured Coverage Only For Vicarious Liability

Duty To Defend Additional Insured Ends When Named Insured Dismissed

Additional insured endorsements to insurance policies are a method of transferring risk from one party’s insurer to the insurer of another. Owners and General Contractors on construction projects use the tool to limit their exposure. Most additional insured endorsements only apply to cases where the additional insured’s potential liability is vicariously due to the actions, in whole or in part of the named insured. Disputes arise when there is a question of the applicability of acts of the named insured to the claimed liability of additional insured.

In Maria Cruz Maldonado, et al vs. Kiewit Louisiana Co. et al. No. 2013 ca 0756 Consolidated with No. 2013 ca 0757 (Louisiana Court of Appeal, March 24, 2014) the Louisiana Court of Appeal was asked:

(1)  Does an insurer’s duty to defend an additional insured in an underlying tort suit terminate at some point after the original petition was filed?

(2)  If so, exactly when does the duty to defend end?

The trial court rendered judgment against the insurer finding that it owed a duty to defend the additional insured through the appeal process for the acts alleged in the petition in the underlying tort suit. The insurer appealed.

FACTS

Twin City Fire Insurance Company (Twin City) issued a comprehensive general liability policy (CGL) to JL Steel Reinforcing, LLC (JL Steel). JL Steel was a subcontractor to KMTC-JV, which was the general contractor on a Department of Transportation and Development (DOTD) construction project to widen the Huey P. Long Bridge. The subcontract between KMTC-JV and JL Steel required Twin City’s insured, JL Steel, to provide insurance coverage to KMTC-JV as an “additional insured.” JL Steel procured insurance from Twin City to comply with the subcontract and provide additional insured coverage for organizations with which JL Steel contracted.

During the bridge-widening project on June 12, 2009, a fatal accident occurred. JL Steel employees, Ulvaldo Soto Martinez and Martin Reyes, were killed when the steel cage where they were working on top of a bridge-column footing collapsed. Shortly thereafter plaintiffs, Maria C. Maldonado and Gilberto Soto Martinez filed a wrongful death and survival action, hereafter referred to as “the Maldonado matter”. Plaintiffs in the Maldonado matter sued twelve defendants, including KMTC-JV and its insurer, Zurich American Insurance Company (Zurich), alleging liability for causing Ulvaldo Soto Martinez’s death. Four supplemental and amending petitions were subsequently filed by plaintiffs in the Maldonado matter.

After several defendants named in the tort suit, including KMTC-JV and Zurich, demanded defense and indemnification from JL Steel pursuant to their respective subcontracts, Twin City filed a petition for declaratory judgment. Twin City sought a judgment declaring that its policy precluded additional insured coverage for the claims asserted against KMTC-JV in the Maldonado matter because on that date the plaintiffs in the Maldonado matter filed their third supplemental and amended petition, which:

(1)   removed JL Steel as a defendant;

(2)   withdrew all allegations of fault on the part of JL Steel; and

(3)   no longer alleged that KMTC-JV was vicariously liable for acts or omissions of JL Steel.

The Maldonado matter was tried before a jury who returned a verdict in favor of plaintiffs and against KMTC-JV, Keiwit Engineering Co. (KECO), and Modjeski & Masters, Inc. (M&M), for 80%, 10%, and 10% fault, respectively. The jury found 0% fault on the part of “any other persons.”  Defendants’ appeal of the adverse judgment in the Maldonado matter is currently pending before the Louisiana Court of Appeal.

KMTC-JV and Zurich filed a motion for partial summary judgment regarding outstanding defense costs against Twin City. The trial court ruled from the bench and ordered Twin City “to pay the defense costs to their insured.”  The judgment held that Twin City owed a duty to defend KMTC-JV under its policy. The judgment states that Twin City’s CGL insurance policy issued to JL Steel affords coverage to KMTC-JV as an “additional insured” under endorsement and Twin City has a duty to defend KMTC-JV “through the appeal process” in the Maldonado matter.

APPLICABLE LAW

An insurance policy is a contract between the parties and should be construed using the general rules of interpretation of contracts set forth in the Louisiana Civil Code. The judiciary’s role in interpreting insurance policies is to determine the common intent of the parties to the contract. Courts look first to the insurance policy itself in order to determine the parties’ intent. Words and phrases in an insurance policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. Interpretation of an insurance contract is a matter of law. To recover on an insurance policy, an insured must prove that its loss is covered by the policy. If the insured meets his burden, the insurer then has the burden of proving the applicability of policy exclusions.

DUTY TO DEFEND

The duty to defend is broader than the duty to indemnify. It is not an unlimited duty.

The insurer’s duty to defend suits brought against its insured is determined by the factual allegations of the injured plaintiff’s petition with the insurer being obligated to furnish a defense unless it is clear from the petition that the policy unambiguously excludes coverage.

The plain wording of the Twin City policy’s endorsement shows that the policy applies when liability is sought to be imposed upon the additional insured (KMTC-JV) because of something the named insured (JL Steel) is alleged to have done or failed to do. Thus, applying the eight corners rule, in order for KMTC-JV to have a right to a defense under the policy, the petition in the Maldonado matter must allege that KMTC-JV’s liability is caused by JL Steel’s negligence, or, at least the allegations must not unambiguously exclude that possibility. This is so, because it is clear from the policy language that the parties only intended KMTC-JV to be covered if it could be cast in liability, vicariously, for the fault of JL Steel. Further, the policy language unambiguously precludes coverage for claims against KMTC-JV for its own negligence or intentional acts.

The clear and unambiguous language in Twin City’s additional insured policy provision issued to JL Steel expressly limits coverage to the additional insured’s vicarious liability for the fault of the named insured, JL Steel. In the original petition in the Maldonado matter, plaintiffs named JL Steel as a defendant, alleging that JL Steel was liable along with all other named defendants. Allegations in the petition did not unambiguously exclude coverage, and thus initially, Twin City owed KMTC-JV a defense. The inquiry does not end there. The duty to defend can be terminated when plaintiffs in the underlying suit revise allegations to sue additional an insured solely for its own negligence and the court granted a motion to dismiss the named insured from the underlying litigation.

In the Maldonado matter, the third and fourth supplemental and amended petitions do not allege fault on the part of JL Steel. Prior to filing their third supplemental and amended petition, plaintiffs in the Maldonado matter filed a motion to dismiss JL Steel.  “When an event occurs which shows that coverage is unambiguously excluded, the duty to defend the insured terminates.” (Emphasis added)

Twin City owed KMTC-JV a duty to defend through the date of the occurrence that eliminated any possibility that KMTC-JV could have been cast in liability, vicariously, for the fault of JL Steel. That date is March 11, 2011, the date on which the trial court signed a judgment dismissing JL Steel with prejudice from the underlying Maldonado matter.

CONCLUSION

Twin City owes KMTC-JV the cost of defense from the date of the first-filed petition in the underlying Maldonado matter through and including March 11, 2011, the date that JL Steel was dismissed, with prejudice, from the Maldonado matter. Clearly, Twin City owes no duty to defend KMTC-JV beyond that date.

ZALMA OPINION

Whether the four corners rule, the eight corners rule, or no rule at all, the interpretation of the additional insured endorsement clearly limits it to situations where there is a possibility that the additional insured is being held vicariously liable for the the acts of the named insured. When the named insured is eliminated from the case there is no possibility of vicarious liability and the duty to defend must end.

The duty to defend is greater than the duty to indemnify but it is not a limitless duty.

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.

 

 

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The Need To Plead

Contribution Requires Each Insurer Insures Same Risk

Danaher Corporation, v The Travelers Indemnity Company, USDC, SNY.0000387 (March 20, 2014) presented to the District Court, Southern District of New York, with a dispute about insurance coverage for silica-and asbestos-related claims against Chicago Pneumatic Tool Company (“Chicago Pneumatic”). The Court had previously held that Defendants The Travelers Indemnity Company (“Travelers Indemnity”) and Travelers Casualty and Surety Company (“Travelers C&S”) (collectively, “Travelers”) have a duty to defend such claims. Travelers subsequently impleaded six insurers seeking a declaration of their obligations to contribute.

The Impleaded Insurers moved to dismiss for failure to state a claim and Industria individually has moved to dismiss for lack of personal jurisdiction.

Background

Chicago Pneumatic, a tool company, sold products containing asbestos and silica for years. In 1986, the company was acquired by Danaher. On June 4, 1987, pursuant to a Stock Purchase Agreement (“Agreement”), Danaher conveyed 100% of the stock of Chicago Pneumatic to Atlas Copco. Under the terms of the Agreement, Danaher retained liability for products liability losses arising from products manufactured by Chicago Pneumatic prior to June 4, 1987, and obtained rights to receive the proceeds of insurance policies covering those losses.

Between January 1, 1936 and January 1, 1970, Travelers C&S issued primary comprehensive general liability policies to Chicago Pneumatic. Between January 1, 1970 and April 1, 1987, Travelers Indemnity issued such policies to Chicago Pneumatic and Danaher (collectively, “Travelers Policies”). North River Insurance Company (“North River”) also issued various umbrella and excess insurance policies to Chicago Pneumatic between April 1, 1979 and April 1, 1982. Nine additional insurers-not parties to the instant motions-issued various excess insurance policies to Chicago Pneumatic between 1972 and 1986 (“Additional Insurers”).

Chicago Pneumatic has been and is the defendant in silica- and asbestos-related products liability claims throughout the United States (“Underlying Claims”). As a result of these claims, Danaher has incurred defense and indemnity costs, without reimbursement from other insurers, and will continue to incur such costs in the future. Danaher has tendered timely claims for coverage of the Underlying Claims under the Travelers Policies and other policies, but has not received payment.

Motion to Dismiss

When a court considers a motion to dismiss for failure to state a claim, the court must accept all well-pleaded factual allegations as true and draw all reasonable inferences in the pleader’s favor. However, the court will not consider mere conclusory allegations lacking a factual basis, or threadbare recitals of the elements of a cause of action amounting to no more than legal conclusions.

Discussion

Resolution of a motion to dismiss for lack of personal jurisdiction made in the Southern District of New York requires a two-step analysis based upon New York law governing personal jurisdiction. First, the court must determine whether there is a statutory basis for jurisdiction. Second, if such a basis exists, the court must assess whether the exercise of jurisdiction would comport with the Due Process Clause of the Fourteenth Amendment.

Industria has submitted a declaration attesting to the following facts. Industria, a Swedish corporation with its sole place of business in Sweden, is a captive insurance company of Atlas Copco AB, meaning it was created for the purpose of procuring insurance for Atlas Copco AB and its worldwide operations. Industria sells insurance policies only to Atlas Copco AB in Sweden. As a subsidiary of Atlas Copco AB, Atlas Copco is insured under such policies. Atlas Copco is a Delaware limited liability company with its principal place of business located in New Jersey. Industria does not have a direct contractual relationship with Atlas Copco, nor does it own or operate any property, mailing address, or phone number in the United States. Industria also is not registered to do business in New York, does not maintain a registered agent in New York or any other state, and does not issue or deliver insurance policies in New York. It therefore asserts that the exercise of personal jurisdiction is improper.

Only once the defendant has contested personal jurisdiction does it become incumbent upon the plaintiff to make a prima facie showing of jurisdiction through its pleadings and affidavits. Thus, Travelers was not required to plead personal jurisdiction or facts in support thereof, and the Court’s analysis is not restricted to the allegations in its third-party complaint.

Travelers argues that this Court has jurisdiction over Industria because the latter issued insurance policies to Atlas Copco with the expectation that they could be claimed upon for events occurring within New York.  Here, there is no dispute that the Industria Policies were issued to Atlas Copco AB and its subsidiaries and affiliates, including Atlas Copco – an alleged successor in interest to Chicago Pneumatic and a New York resident. It also cannot be disputed that certain of the Underlying Claims for which Travelers seeks contribution of defense costs from Industria arose in or were filed in New York.

The cases cited by Travelers regarding an “expectation” that policies could be claimed in New York stand for the uncontroversial rule, codified in § 1213 of the Insurance Law, that an insurer who issues a policy to a corporation authorized to do business in New York is subject to jurisdiction in this state. In this obligation Travelers failed to allege the policy was issued to a corporation authorized to do business in New York.

The Impleaded Insurers’ 12(b)(6) Motions to Dismiss

The Impleaded Insurers identify various reasons why Travelers’ amended third-party complaint fails to state a claim. Apart from short paragraphs identifying each as a party, Travelers makes no reference to any of the Impleaded Insurers individually. Moreover, the sole allegation that Travelers makes regarding the liability of the Impleaded Insurers vaguely states that “certain of the Third-Party Defendant Insurers have previously made offers to participate financially in the defense of Chicago Pneumatic/Atlas Copco in connection with the Underlying Claims.”  Travelers does not state who those “certain” insurers are. Nor does it identify insurance contracts between the Impleaded Insurers and Danaher, Chicago Pneumatic, or Atlas Copco, identify the general terms of such policies, or allege that it may be forced to pay more than its equitable share as a result of this action.

The crux of Travelers’ counterargument is that the Impleaded Insurers are well aware of the factual bases for its claims given that this litigation has been ongoing for over three years and the parties have undertaken extensive discovery. Travelers asserts that it is telling, for instance, that none of the Impleaded Insurers denies issuing policies to any of the insureds. The Impleaded Insurers turn this argument on its head, noting that Travelers should therefore have no difficulty identifying the factual bases in its complaint. The Court agreed.

Without knowing the bases for Travelers’ claims, the Impleaded Insurers cannot identify potential defenses or state, on the record, their positions on the facts.  Indeed, the fact that none of the Impleaded Insurers has denied issuing policies to the insureds proves the point: because Travelers has not made such allegations, there is nothing to affirm or deny. While it is not necessary for Travelers to identify the precise contours of the policies, particularly if it does not have such information, it cannot ignore the pleading requirements simply because the parties may be familiar with the underlying facts. Those requirements exist not only to place the defendants on notice of the claims against them, but also to provide notice to the court and to facilitate litigation.

Given these omissions, Travelers has failed to state a claim for contribution, which requires allegations that the defendant is a co-insurer of the same risk.  Additionally, Travelers’ claims for equitable subrogation fail as a matter of law because the Second Circuit has recognized that a co-insurer may not bring such a claim against a co-insurer.  Finally, because Travelers’ claims underlying its declaratory relief claims have been dismissed, the latter also must be dismissed. The Court therefore grants the Impleaded Insurers’ motions to dismiss, with leave to amend the complaint within 30 days of this Order.

ZALMA OPINION

The decision in this case had nothing to do with insurance. It had everything to do with lawyering an insurance dispute. The trial court granted the motions to dismiss because Travelers, through its lawyers, failed to properly allege a case for contribution among the various insurers who insured the risk of loss of silicosis and asbestosis claims. Showing mercy to Travelers the court granted it 30 days to file an amended complaint that resolves the deficiencies pointed out by the court.

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.

 

 

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To Stack or Not to Stack – That is the Question

There Must Be Policies to Stack

A family had four vehicles and four liability insurance policies. When a member of the family had an automobile accident where her passenger was killed, the family of the deceased attempted to recover from all four policies claiming that Missouri law entitled them to “stack” the coverages and thereby quadruple the insurance available to compensate them for their loss.

In Farmers Insurance Co., Inc., and Mid-Century Insurance Co., vs. Robin Wilson and Donald Billingsley, Court of Appeals of Missouri Southern District Division Two, March 20, 2014, Robin Wilson and Donald Billingsley (“Claimants”) appealed the trial court’s denial of their motion for summary judgment and its grant of summary judgment in favor of Farmers Insurance Company, Inc., and Mid-Century Insurance Company (“Farmers” and “Mid-Century” individually, and “Insurance Companies” collectively).

FACTUAL BACKGROUND

Claimants are the parents of Wesley Billingsley. Wesley died as a result of an automobile accident involving a 2002 Dodge Intrepid (“Dodge”), which was driven by Hannah Thomas. Hannah is the daughter of Sheryl Thomas and John Thomas; all three were residing in the same household when the accident occurred.

At the time of the accident, Sheryl and John owned four vehicles and had separate insurance policies on each. (1) The Dodge involved in the accident protected by a Farmers insurance policy;  (2) a Chevrolet Tahoe protected by a Farmers insurance policy; (3) a Ford F-150 owned by Johan protected by a Mid-Century insurance policy. John was also the owner of a Harley-Davidson motorcycle protected by a Farmers insurance policy listing John as the named insured. The declarations pages of the Dodge, Chevrolet, and Ford policies each showed liability limits for bodily injury of $100,000 per person and $300,000 per occurrence, while the declarations page of the Motorcycle policy showed liability limits for bodily injury of $50,000 per person and $100,000 per occurrence.

Claimants filed suit against Hannah for the wrongful death of their son. During the course of litigation, Claimants took the position that they could “stack” the liability limits of all four policies and thus demanded $350,000 from Hannah. The suit was ultimately settled with Farmers paying Claimants $100,000 – the liability limit under the Dodge policy – in exchange for the protection of Hannah’s assets in any future judgment arising out of the accident, other than her rights under the Chevrolet, Ford, and Motorcycle policies. Claimants further agreed to participate in an action for declaratory judgment to determine whether the additional policies’ liability limits should be stacked on top of the $100,000 liability limit already paid.

ISSUES

Insurance Companies filed the underlying action for declaratory judgment claiming that exclusion number ten of the Chevrolet and Ford policies and exclusion number nine of the Motorcycle policy excluded the Dodge from coverage under each respective policy because the Dodge was a vehicle other than your insured car, as that term is defined by the policies, which was owned by or furnished or available for regular use by the insured or a family member. Insurance Companies further claimed that, even if those exclusions did not apply, the anti-stacking language in the “Other Insurance” provisions of the policies prevented Claimants from stacking the liability limits. In their answer, Claimants argued that the language in each of the policies was ambiguous, allowing them to recover the maximum liability limit from each policy. Both parties filed motions for summary judgment asserting their respective positions.

The trial court entered a judgment granting Insurance Companies’ motion for summary judgment, denying Claimants’ motion, and entering declaratory judgment in favor of Insurance Companies. This appeal followed.

DISCUSSION

Before stacking can be an issue, there must first be applicable coverages to stack. In construing the terms of an insurance policy, Missouri courts apply the meaning which would be attached by an ordinary person of average understanding if purchasing insurance, and resolves ambiguities in favor of the insured.

Motorcycle Policy Provides No Coverage

Nothing in the stipulated facts supports that the Dodge is a motorcycle. Claimants could not explain how a four-wheel vehicle like the Dodge is a motorcycle as defined in the Motorcycle policy. The Motorcycle policy only affords coverage arising out of the use of a motorcycle, as that term is defined in that policy. Therefore, because the Dodge is not a “two wheel land motor vehicle,” there is no coverage under the Motorcycle policy arising out of the use of the Dodge by Hannah at the time of the accident. The Motorcycle policy is not available to stack.

Chevrolet and Ford Policies Provide No Coverage

There are a number of provisions that are essential to an insurance policy. The policy must identify: the “insured,” the individual or entity with the interest at risk; the “coverage” or “insuring agreement,” the subject matter and the contingency insured against; the “period,” the dates prescribing the duration of the risk or contingency insured against; and the “limits,” the amount the insurer is liable to pay for any given risk up to a specified amount.  In determining whether ambiguities exist, all of these provisions must be read as a whole, rather than in isolation.

It is uncontroverted that Hannah was an “insured person” at the time of the accident and that the Dodge she was driving at the time of the accident was a “private passenger car.” Therefore, her use of the Dodge meets the conditions for inclusion in the broad general class of persons afforded liability coverage in the insuring agreement, unless otherwise excluded from coverage. Sheryl individually meets the definition of a family member in each policy because she is a person related by blood or marriage to both the named insured and the named insured’s spouse and she resides in the named insured’s and the named insured’s spouse’s household.

The Dodge falls within exclusion number ten (sometimes referred to as the “regular use exclusion”) of the Chevrolet and Ford policies because it is a vehicle other than your insured car, which is owned “by you or a family member.”  Claimants do not dispute the first part of the proposition, but contend that because the policy definition of “you” means “the ‘named insured’ shown in the Declarations and spouse if a resident of the same household,” the exclusion only applies to “vehicles other than your insured car” that are owned by both the named insured and spouse. Sheryl individually meets the definition of a family member in each policy because she is a person related by blood or marriage to both the named insured and the named insured’s spouse and she resides in the named insured’s and the named insured’s spouse’s household. Therefore, the exclusion applies.

Because the Dodge is excluded from coverage under the Chevrolet and Ford polices, there is no coverage to stack. Because neither policy affords coverage for the use of the Dodge by Hannah at the time of the accident, there is nothing to stack.

ZALMA OPINION

Regardless of the extent of injuries suffered at the hand of an insured the insured is only entitled to the coverages agreed to in the wording of the policy. In this case Farmers and Mid-Century protected their insured by paying the full policy limit of one policy and agreeing to submit to a declaratory relief action to resolve the stacking claim. In so doing they acted with the utmost good faith and put the interests of their insured over their own.

Stacking is an attempt by courts to find more insurance money for severely injured persons. In this case the court noted that before there can be stacking there must be policies providing the same coverage to an insured that can be stacked. Although there existed four policies only one provided coverage for the loss. The court wisely applied the law and avoided the temptation to stack the coverages to provide for the claimants whose child was killed.

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.

 

 

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Who’s On First?

Asbestos Litigation Create Notions About the Law

When some primary insurers exhaust their policy limits excess insurers must take over the defense and indemnity of the insured as their interests appear. When there are multiple primary and excess insurers the allocation of the costs of defense and indemnity become complicated and result in litigation when the multiple parties should work together to resolve the disputes.Who pays what and when requires an interpretation of the contract terms of each policy.

In MW Custom Papers LLC v. Allstate Insurance Co., 25430, 2014-Ohio-1112 (indeterminate 03/21/2014) MW Custom Papers, LLC appealed from a trial court judgment which granted the motions to dismiss for lack of justiciability filed by Associated International Insurance Company (“Associated”), Federal Insurance Company (“Federal”), Fireman’s Fund Insurance Company (“Fireman’s Fund”), Travelers Casualty and Surety Company (“Travelers”), OneBeacon American Insurance Company (“OneBeacon”), and Granite State Insurance Company, Lexington Insurance Company, and National Union Fire Insurance Company of Pittsburgh, PA (“the Chartis Defendants”).

FACTUAL HISTORY

From 1958 to 1985, The Mead Corporation purchased written primary, excess and/or umbrella general liability policies that provided insurance coverage for asbestos-related liabilities. Mead has been named as a defendant or third-party defendant in numerous lawsuits or claims for bodily injury, personal injury, or death resulting from exposure to certain asbestos-containing products. Mead believes that additional claims will be asserted against it in the future.

According to Mead, each insurer has an indivisible duty to provide Mead with a full defense and/or indemnification of defense costs, and full indemnification of settlements or judgments “in which any part of the continuous and/or progressive injury process is alleged to have existed during any part of a policy period of the Policy or Policies issued by the [Insurers], subject only to the applicable limit of liability, if any, contained in that Insurer’s Policy or Policies.” Mead alleged that it is “entitled to select which of the triggered Policies should respond to each Asbestos Bodily Injury Claim.”

Following exhaustion of primary policies Mead requested coverage for the Asbestos Bodily Injury Claims from certain of the Defendants [Insurers] under the terms of their respective umbrella and/or excess policies, and timely placed those Defendants on notice that they would be required under their respective Policies to pay for the investigation, defense and settlements or judgments in connection with the Asbestos Bodily Injury Claims.

It is a custom, practice and obligation of insurers to notify their policyholders of the alleged exhaustion of any allegedly-applicable limits of liability. This custom, practice and obligation stems from the fundamental duty of good faith and fair dealing.

OneBeacon and the Chartis Defendants moved to dismiss Mead’s complaint against them, alleging that no justiciable issues exist because the policies could not be triggered based upon current underlying damages. The insurers stated that they were “high level excess insurers who issued insurance policies which cannot be triggered until at least $270 million of underlying liability is exhausted through payment of claims. There is no damage threat that is remotely near that level of liability.”   Other insurers joined in the motion stating their lower limits had not yet been reached since their trigger points had not been reached by exhaustion of underlying limits by the payments of claims.

The trial court granted the motions to dismiss because Mead had never presented an asbestos liability claim to the high-level excess insurers with proof of how much was owed. By settling with its primary and umbrella insurers, GenCorp had made the choice to allocate its liability as broadly as possible, which meant that it has to demonstrate that its liabilities would exceed the cumulative limits of all the primary and umbrella policies before it could trigger the excess policies.

Justiciability of Mead’s Claims

A declaratory judgment may be either affirmative or negative in form and effect, and the declaration has the effect of a final judgment or decree. With the exception of actions brought by non-insureds against insurers (which does not apply here), a contract may be construed by a declaratory judgment or decree either before or after there has been a breach of the contract.

Nevertheless, it is the duty of every judicial tribunal to decide actual controversies between parties legitimately affected by specific facts and to render judgments which can be carried into effect. It has become settled judicial responsibility for courts to refrain from giving opinions on abstract propositions and to avoid the imposition by judgment of premature declarations or advice upon potential controversies.

To be justiciable, a controversy must be grounded on a present dispute, not on a possible future dispute.  The Declaratory Judgment Act expressly states that courts of record may refuse to render or enter a declaratory judgment or decree under if the judgment or decree would not terminate the uncertainty or controversy giving rise to the action or proceeding in which the declaratory relief is sought.

Here, the only evidence outside the complaint that was offered by the Dismissed Insurers was the declaration pages of their respective policies, which purportedly established the amount of underlying coverage that needed to be exhausted before their policies applied. Regardless of whether the trial court properly considered these documents, we do not find that it resolves whether Mead presented a justiciable controversy against the Dismissed Insurers.

In support of its assertion that the complaint adequately alleges justiciable claims against the Dismissed Insurers, Mead focuses on its allegations that (1) the asbestos bodily injury claims are claims covered under the policies; (2) each insurer has an indivisible duty to provide Mead with a full defense and/or indemnification, subject to the policies’ applicable limits of liability; (3) Mead is entitled to select which of the triggered policies should respond to each asbestos claim; (4) the action presents justiciable controversies; and (5) each insurer disputes or has asserted a conflicting position regarding one or more of the declarations requests by Mead and/or is an indispensable party.

On its face, these allegations in Mead’s complaint set forth justiciable claims against all of the insurers. Simply stated, the complaint alleges facts indicating that actual disputes exist between Mead and its insurers regarding the parties’ duties and obligations under the various policies and/or that the insurers have been joined as indispensable parties. Construing Mead’s complaint in the light most favorable to it, Mead did not allege that it allocated its asbestos liability horizontally across the primary polices. Rather, Mead alleged that the two companies with primary policies paid certain defense and indemnification costs and that those policies are now exhausted.

The complaint did not specify how Mead presented claims and exhausted its primary policies before turning to its excess/umbrella polices. Mead did not allege that it settled with any primary, umbrella, or excess insurers, nor has it alleged that the cost-sharing agreements between certain insurers and Mead constituted an election to allocate its liability horizontally among the various tiers of insurers. The cost-sharing agreements were not placed before the court, and it is in no position to speculate as to the nature of the agreements’ terms.

The Dismissed Insurers have not filed answers agreeing or disagreeing with any or all of Mead’s interpretation of the policies at issue. Rather, at this juncture, the court merely had Mead’s allegation that the defendant-insurers dispute or have asserted conflicting positions regarding the issues for which Mead has requested a declaratory judgment.

This litigation involves multi-year, multi-layered insurance policies issued by numerous insurers to Mead. The insurance dispute stems from numerous asbestos bodily injury lawsuits against Mead, for which Mead has incurred damages and will be required to expend substantial amounts of money in the future in defending current and future claims.

Although no claims have been filed by Mead against the Dismissed Insurers, Mead has a real and substantial present interest in determining how the various policies are triggered, how costs are allocated among the triggered policies, how many occurrences are involved under the terms of the policies, and how and when lower-layer policies exhaust and higher-layer policies attach, among other issues.

Insurance policies, let alone the litigation and judicial opinions sometimes arising from them, can generate foggy notions but under the procedural and factual circumstances of this case, the court of appeal concluded that the trial court erred in dismissing the high-level excess insurers for want of justiciability.

ZALMA OPINION

The insurers in this case obtained a Pyrrhic victory – they convinced the trial court but not the court of appeal. Mead’s victory is just as Pyrrhic – they can now litigate with the insurers to determine who’s on first and which of its excess and umbrella insurers must step up to defend and indemnify possible future asbestos suits.

The wording of each policy will govern and the court, faced with Mead’s request for declaratory relief, will analyze each and determine a schedule of who pays what and when.

Of course Mead is dealing with professional insurers who should avoid the litigation and work up an agreement between themselves.

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.

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I’ve Made Up My Mind – Don’t Confuse Me With Facts

Four Corners Rule Strikes Again

The Four Corners Rule, applied in Pennsylvania and several other states, limits the decision to defend and/or indemnify an insured to a review of the allegations of a complaint. As such, it ignores facts extrinsic from the the wording of the complaint, and provides an insured with coverage that would not exist if the court applied the facts rather than the allegations. In Lanigan v. T.H.E. Insurance Co., 646 WDA 2013 (Pa.Super. 03/14/2014) a Pennsylvania appellate court was asked to reverse a summary judgment in favor of an insurer by ignoring the facts and applying only the allegations of the complaint.

FACTS

William Michael Lanigan (“Mr. Lanigan”) filed the within declaratory judgment and bad faith action against T.H.E. Insurance Company (“Insurer”) seeking a declaration that the Insurer breached its duty to defend him under a commercial liability policy and acted in bad faith. Insurer filed a motion for summary judgment as to both claims; Mr. Lanigan filed a cross-motion for summary judgment solely on the duty to defend issue. The trial court granted summary judgment in favor of Insurer as to both counts contained in the complaint, and Mr. Lanigan appealed.

Mr. Lanigan was driving his car in a race at the Mercer Raceway Park in Mercer, Pennsylvania. The throttle stuck unexpectedly, Mr. Lanigan lost control on a turn, and he struck the catch-fence. Steven Guthrie, Jr. and Samuel Ketcham were standing behind the fence in the pit area when the impact occurred. Mr. Guthrie died as a result of his injuries, and Mr. Ketcham was seriously injured.

Mr. Lanigan was sued and tendered his defense to Insurer, which verbally denied him a defense on December 7, 2009.  Insurer responded in writing stating that the denial was based upon Exclusion 8 of the policy endorsement which excluded coverage for “Bodily injury . . . to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.”

Mr. Lanigan retained his own counsel to defend him in the underlying litigation. Prior to the filing of the within declaratory judgment action on August 18, 2010, he was dismissed from that litigation. All that remained was a claim for the costs of defense.

ANALYSIS

At issue is an insurance company’s duty to defend its insured. The courts of this Commonwealth have long held that the duty to defend is a distinct obligation, separate and apart from the insurer’s duty to provide coverage.  In making a determination whether there is a duty to defend in Pennsylvania, a court must compare the four corners of the insurance contract to the four corners of the complaint. An insurer may not justifiably refuse to defend a claim against its insured unless it is clear from an examination of the allegations in the complaint and the language of the policy that the claim does not potentially come within the coverage of the policy.

Mr. Lanigan contends that he is an insured under the commercial general liability policy at issue and that neither the factual allegations of the underlying complaints nor the complaints joining him as an additional defendant support Insurer’s denial of a defense. He continues that the complaints asserted negligence claims against him that potentially fell within the coverage and the “participant” exclusion relied upon by Insurer is to be strictly construed against it.

Mr. Lanigan was an insured for purposes of the policy. “Participant” was defined as individuals who have registered to and actually do engage in the racing activity provided under the raceways program – including drivers, mechanics, pitmen, race officials, flagmen, announcers, ambulance crews, newsmen, photographers, gate workers, and all other persons bearing duly and officially assigned credentials and/or guest pit passes for the program.

Insurer relied upon an exclusion that provided: “This insurance does not apply to any loss on any premises owned by, rented to, or controlled by any insured for any of the following: . . . . “(8) bodily injury or property damage to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.”

While Mr. Lanigan was an insured the exclusion prevented coverage if the injured party was also a participant. Insurer maintains that, immediately after the accident, it commenced an investigation, which “established that both accident victims were members of the Guthrie Motor Sports pit crew, had executed the Agreements granting them the right to be present in the restricted pit area, that both had been issued armbands allowing such access and that both were present in the pit area when the accident happened.”

The trial court defined the issue before it as, whether “Mr. Guthrie and Mr. Ketcham were ‘participants’ at the time of the accident.”  In making that determination, it expressly considered facts obtained during the discovery process in the underlying litigation. The issue, properly framed, is whether, examining only the underlying complaints and the insurance policy, the claims of negligence against Mr. Lanigan were potentially covered under the policy, giving rise to a duty to defend. The appellate court concluded the trial court erred when it considering the Insurer’s investigation and discovery in the underlying case in ascertaining whether there was a duty to defend.

Additionally, the complaint contained an allegation that the victims sustained their injuries while they were in the pit area. The complaint, however, contains no averments that they were registered to engage in racing activities or that they were actually engaged in such activities. It did not indicate that they were participants as defined in the policy.

In deciding that Insurer did not owe a duty to defend, the trial court applied the wrong legal standard. It looked beyond the policy and the allegations of the complaint to discovery and investigative reports. The facts that indicate that plaintiffs purchased a pit pass, signed a release form, and wore an armband, are not present in the complaint.

In essence, the court concluded that the policy exclusion applied to negate coverage, and absent coverage, there was no duty to defend. In so holding, the trial court was complicit in Insurer’s attempt to define its duty to defend based on the outcome of the coverage determination, an approach the Pennsylvania Supreme Court rejected. The appellate court found that the allegations of the underlying consolidated complaints could possibly have resulted in coverage under the endorsement. Based on the allegations in the complaints and the policy, Insurer was obligated to defend Mr. Lanigan in the underlying action until it was conclusively determined that the claims asserted were not covered. Hence, summary judgment on the duty to defend issue should have been entered in favor of Mr. Lanigan rather than Insurer.

Pennsylvania courts recognize that a bad faith claim is separate from the basic claim for coverage, and the success of the bad faith claim is not dependent upon the success of the underlying claim. Furthermore, the common law provides a remedy for bad faith breach of a duty to defend in addition to statute. Since it concluded that Insurer should have provided Mr. Lanigan with a defense in the underlying action, there is a material issue whether Insurer’s refusal to do so was made in bad faith.

In order to constitute bad faith, it is not necessary that the refusal to defend be fraudulent. However, mere negligence or bad judgment is not enough. Mr. Lanigan acknowledges that in order to prove bad faith, he must show by clear and convincing evidence that Insurer (1) did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim. The fact finder is charged with deciding whether the insurer recklessly disregarded its duty to defend against the claim, and if this disregard rose to the level of improper purpose and beyond gross negligence, which proves bad faith.

The case was remanded to the trial court for entry of summary judgment in favor of Mr. Lanigan on the duty to defend issue and for further proceedings in the bad faith action.

ZALMA OPINION

The four corners rule worked an injustice in this case. It found a duty to defend and potential bad faith because the insurer, whose investigation established facts that made it impossible for there to be coverage, because the lawyer who sued its insured failed to allege the facts that eliminated coverage. This is allowing a judge made rule overcome logic and justice. Many states allow insurers to use extrinsic evidence – not alleged in the complaint – to make a decision on coverage. Often that extrinsic evidence provides coverage that would have been eliminated by the allegations of the complaint as well as defeat coverage.

The problem with the four corners rule is it allows a plaintiffs’ counsel to plead a case that would prevent an insured from receiving defense to punish the defendant when if extrinsic facts were considered it would get coverage. The rule makes no sense and not only hurts insurers but those 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.

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

Condition Precedent or Condition Subsequent

Breach a Condition & Insurer Must Still Prove Prejudice

The Florida Supreme Court has, with regard to insurance disputes, imposed on insurers doing business in Florida, a requirement that when an insured breaches a condition the insurer, to defeat the claim, must plead and prove it was prejudiced by the breach regardless of the wording of the policy. In State Farm Mutual Automobile Ins. Co. v. Curran, SC12-157 (Fla. 03/13/2014) the case was presented to the Supreme Court for review of the decision of the Fifth District Court of Appeal, sitting en banc, in State Farm Automobile Insurance Co. v. Curran, 83 So.3d 793 (Fla. 5th DCA 2011). In its decision the district court ruled upon the following question, which the court certified to be of great public importance:

WHEN AN INSURED BREACHES A COMPULSORY MEDICAL EXAMINATION PROVISION IN AN UNINSURED MOTORIST CONTRACT, DOES THE INSURED FORFEIT BENEFITS UNDER THE CONTRACT WITHOUT REGARD TO PREJUDICE? IF PREJUDICE MUST BE CONSIDERED, WHO BEARS THE BURDEN OF PLEADING AND PROVING THAT ISSUE?

Since the contract prevents suit unless the conditions are met the question should have been simple to answer since it is admitted that the insured breached a condition.

BACKGROUND AND FACTS

This case arose as a result of a June 2006 traffic accident involving Robin Curran, insured by State Farm Automobile Insurance Company (State Farm), and the underinsured motorist who rear-ended Curran’s car. Subsequently, Curran and the underinsured motorist reached a settlement agreement, which was approved by State Farm. On July 19, 2007, through counsel, Curran requested her $100,000 underinsured motorist policy limits and offered to settle and release State Farm from an uninsured motorist (UM) lawsuit if it tendered the policy limits no later than August 18, 2007. In the letter to State Farm, Curran indicated that her damages were estimated to be $3.5 million because she suffered from reflex sympathetic dystrophy syndrome (RSD) type 1.

Ultimately, although State Farm demanded a Compulsory Medical Exam (CME) Curran refused to attend a CME.  Curran filed suit against State Farm. Curran’s complaint then proceeded to a jury trial, which culminated in an award of $4,650,589 in damages to Curran. The trial court entered a judgment against State Farm for the $100,000 UM policy limits and State Farm appealed the judgment to the Fifth District.

On appeal, the Fifth District sitting en banc concluded that under these undisputed facts, Curran did not act reasonably in insisting that State Farm abandon its contractual rights as a condition to an examination and, consequently, breached the contract when she failed to attend the CME. However, it found that State Farm failed to plead and prove that Curran’s breach caused it prejudice. State Farm contends that Curran’s failure to attend a CME is a breach of a condition precedent to both coverage and to suit, which constitutes a material breach of the policy resulting in forfeiture of coverage irrespective of any showing of prejudice to State Farm.

ANALYSIS

As was the case here, after an insured has been injured in an accident with an uninsured or underinsured motorist, an insured will generally settle a claim with the uninsured or underinsured motorist with approval from the insured’s UM coverage carrier. The insured then submits a claim for UM benefits to the insurer alleging legal entitlement to additional damages because the total loss was not covered by the underinsured motorist’s policy. Here, Curran sent a demand letter to State Farm requesting payment of the policy limits.

As a result of submitting the notice of a claim, the insured then typically has a duty under the insurance policy to provide medical bills, medical records, and any other information the insurer believes will help with processing the claim. If the UM insurer, after review of information compiled from medical bills, medical records, and other information that is provided to substantiate an insured’s claim, questions the severity of the injury, it may request a medical examination to aid its review of the insured’s claim. A CME is typically requested to provide the insurer additional information used to determine whether the insured is legally entitled to recover damages after an injury is sustained and a UM claim has been submitted.

The Florida Supreme Court decided that a condition precedent is one that is to be performed before the contract becomes effective. Conditions subsequent are those that pertain not to the attachment of the risk and the inception of the policy but to the contract of insurance after the risk has attached and during the existence thereof. A condition subsequent presupposes an absolute obligation under the policy and provides that the policy will become void, or its operation defeated or suspended, or the insurer relieved wholly or partially from liability, upon the happening of some event or the doing or omission of some act.

The “no action” language in the policy applies to every term of the policy, regardless of whether the insured’s duties are capable of being performed prior to filing an action against the insurer. Consequently, adherence to State Farm’s argument would turn every duty, including the duty to assist and cooperate, considered a condition subsequent into a condition precedent to coverage and suit.

A CME provision in the UM coverage context is not a condition precedent to coverage and an insured’s breach of this provision should not result in post-occurrence forfeiture of insurance coverage without regard to prejudice. Having concluded that prejudice is a necessary consideration when the insured breaches a CME provision, the Florida Supreme Court also held that the burden of pleading and proving that issue is on State Farm. State Farm raised this issue as an affirmative defense.

Although State Farm did not advance a specific argument that it was prejudiced below, the record demonstrates that Curran’s refusal to submit to a CME did not prejudice State Farm in any fashion. Shortly after filing suit, Curran offered to submit to a medical examination pursuant to Florida Rule of Civil Procedure 1.360. State Farm elected to defer the examination until after the trial court determined whether Curran had forfeited coverage under the policy.

After the trial court found that Curran had not unreasonably refused to attend the examination, Curran attended a CME with Dr. Uricchio, the same expert that State Farm requested Curran see prior to litigation. Dr. Uricchio was not called to testify as a trial witness and there is nothing in the record that indicates the delayed CME affected the integrity of the evaluation.

Chief Justice Polston, dissented. He concluded that the policy plainly conditions Curran’s right to sue to recover uninsured motorist (UM) benefits from State Farm on her pre-suit submission to a compulsory medical examination (CME). Under these facts the contract requires dismissal of Curran’s action because she had no right to bring it. The CME requirement at issue here is like the requirement for an examination under oath and is deemed a condition precedent to suit and to the recovery of benefits under the policy where the policy so provides through a no-action provision.

Therefore, under the plain language of the policy, any time before filing this suit, Curran could have submitted to the requested CME. Because the contract at issue specifies the consequences for Curran’s breach, the Chief Justice would rephrase the certified question as follows: Where an insurance policy requires the insured to submit to a CME prior to filing suit against the insurance company, does an insured who inexcusably failed to submit to a CME have a right of action for UM benefits against the insurance company? He would answer the rephrased question in the negative.

ZALMA OPINION

Bad facts often results in bad law. Ms. Curran was severely injured. The jury awarded her damages in excess of $4 million. Had she attended the CME as State Farm requested it would have paid its $100,000 limit. Instead, she refused, and found herself in a long, expensive trial and appeals to the Florida Supreme Court.

I presume, because of the extent of her injuries, the Supreme Court entered into a convoluted change in the law of conditions precedent making them only apply to the attachment of the policy rather than to duties after loss. In so doing they added to the insurer’s policy a requirement it did not agree to accept, a duty to prove prejudice.

Florida UM/UIM policies should be amended to include language that states clearly and unambiguously that the CME requirement and other conditions precedent are conditions precedent to the insured’s right to file suit and breach of any one condition will cause the policy to be void and unenforceable and all rights the insured might have under the policy are forfeited because such failure prejudices the rights of the insurer.

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

Claims Made Before Policy

Don’t Lie on Application for Insurance

When purchasing errors and omissions insurance the insured must be aware that the policy will only respond to claims that are made and reported during the policy period. Further, since the application becomes a part of the policy and is incorporated into the policy the insured is warranting the absolute truth of every statement made in the application.

In Personal Resource Management, Inc. v. Evanston Insurance Co., 84A01-1304-PL-157 (Ind.App. 03/12/2014) Personal Resource Management, Inc. (“PRM”) and Margaret A. Ditteon (collectively “the Insureds”) appeal the trial court’s entry of summary judgment in favor of Evanston Insurance Company on the Insureds’ complaint alleging breach of contract and seeking damages and a declaration that claims they submitted are covered under two professional liability policies issued by Evanston.

FACTS

The trial court entered extensive findings in this matter explaining the facts and issues, which were undisputed and are summarized briefly here. In 1990, Margaret A. Ditteon and her former partner Judy Eifert formed Personal Resource Management; Ditteon became the sole owner of PRM in 1995. The services provided by PRM to the elderly changed and expanded to include representation as a power of attorney, representation as a guardian, and if no other family member was available, representation as personal representative of an estate. PRM would serve as both a guardian of the person and a guardian of the person’s financial affairs.

In September of 2006, Ditteon contacted Valerie Kinnaman of Tatem & Associates, PRM’s insurance agent since at least 2002 to inquire about E & O [(Errors and Omissions)] coverage. Ditteon reported a potential claim involving the failure to pay insurance coverage with respect to an individual over whom they [sic] were appointed guardian. The carrier denied the claim, as the policy did not provide coverage for the loss.  PRM was appointed as guardian for Charles E. Mitchell and eventually was required to post a $2,000,000.00 bond. Ditteon assigned Jan Riddle to serve as the case manager for Mr. Mitchell until he died in April of 2008.

In May of 2008, Ditteon discovered that Riddle had engaged in wrongful acts and embezzled from Mr. Mitchell’s guardianship. An estate was opened on May 7, 2008, and the Court appointed Ditteon/PRM as the personal representative of the supervised Estate of Mitchell in Vigo County.

On September 9, 2008, Ditteon asked her insurance agent, Kinnaman, about adding employee dishonesty coverage to PRM’s policy. Kinnaman advised that, due to the existence of a pending claim, they would be unable to obtain coverage.  Ditteon also inquired about professional liability coverage. Kinnaman was unable to find coverage through any of Tatem’s insurance carriers. However, in December of 2008, Kinnaman was able to obtain a quote for professional liability insurance through JM Wilson, a surplus lines broker, who obtained a quote from Evanston, an authorized surplus lines company. Ditteon chose not to purchase the coverage at that time.

On July 15, 2009, Ditteon reviewed and signed an updated application for insurance coverage. The application represented that the only professional services performed by PRM were as follows: “Case Managers-paying bills. They are individual guardians for people. The owner Marge is the only person  that signs checks and is the case manager. Percent of Gross Revenues-100%”

The claims history section of the application reported, contrary to historical fact, no professional liability claims during the last five years. In addition the application claimed no one was aware of any fact, circumstance or situation which might afford grounds for any claim, such as would fall under the proposed insurance.

ISSUANCE OF EVANSTON 2009 POLICY AND 2010 RENEWAL POLICY.

Evanston issued a policy of insurance to PRM for the policy period covering July 15, 2009, to July 15, 2010, with a retroactive date of July 15, 2009 (the “2009 Policy”). Kinnaman forwarded the policy and in her transmittal letter emphasized “your policy may contain certain conditions, exclusions or limitations, so it is important for you to read it.”  The application signed by Ditteon was attached to and made a part of the policy. The 2009 Policy was thereafter renewed. The July 15, 2009 application also was attached and made a part of this policy.

The 2009 Policy and 2010 Policy were issued on a “Claims Made and Reported” basis with liability limits of $500,000.00 per claim and $1,000,000.00 in aggregate.

DISCUSSION AND DECISION

The issues on appeal require construction of the professional liability insurance policies issued by Evanston. The goal of contract interpretation is to ascertain and enforce the parties’ intent as manifested in the contract. The insurance policy at issue in this case is a “claims made” policy. Whereas an occurrence policy protects the insured against the financial consequences of an accident or other liability-creating event that occurs during the policy period, no matter when the claim is made-it might be many years later-a claims-made policy protects the insured against the financial consequences of a legal claim asserted against him during the policy period.

Scope of Coverage

PRM’s application for insurance is part of the policy and defines “professional services” more broadly than the Declarations page. The Insureds are correct that the application for each policy is “incorporated into and constitut[es] a part” of each policy. And on the application for each policy, Ditteon, as president of PRM, described the company’s professional services as quoted above. But, while the Policies incorporate the application, they do not state that the application modifies or supersedes the terms or definitions in the Policies. The Policies provide that statements in the application are “material to the acceptance of the risk or hazard assumed by [Evanston, ]” not material to the definitions or other terms of the Policies.

When the meaning of the text is clear, recourse to other provisions of the contract is unnecessary, and a court may not forage through the contract looking for other provisions. Here, the Policies clearly and unambiguously limit the scope of coverage to the Insureds’ conduct as court-appointed guardians.

The Policies unambiguously provide that the scope of coverage is limited to court appointed guardianships, as stated on the Declaration Pages. Therefore, the trial court correctly entered summary judgment in favor of Evanston when it declared that Evanston owed no coverage to the Insureds under the Policies with regard to the non-guardianship claims.

Because the Insureds submitted the claims after the expiration of the 2009 Policy reporting period, and because the 2009 Policy requires claims to be made during the policy period or extended reporting period, none of the three claims that the Insureds submitted to Evanston were timely. Therefore, the trial court correctly determined as a matter of law that the Insureds were not entitled to coverage under the 2009 Policy for any of the three claims.

Each of the three complaints tendered to Evanston for coverage include allegations of misfeasance and malfeasance by the Insureds on particular dates alleged to have occurred prior to the effective date of the 2010 Policy. Thus, as a matter of law, the conduct alleged to have occurred on particular dates did not occur within the policy period and, therefore, is not subject to coverage under the 2010 Policy.

The evidence shows clearly and unambiguously that the Policies provide coverage only for the Insureds’ conduct as Mitchell’s court-appointed guardian. Thus, as a matter of law, the Policies provide no coverage for the allegations pertaining to the Insureds’ conduct as the personal representative of Mitchell’s estate.

As a matter of law the allegations in the three complaints pertaining to guardianship duties pertain to conduct that did not occur during the policy period of the Policies. The dated conduct in the complaints precedes the effective date of the policies, and the undated, generalized conduct pertains to acts the Insureds took or should have taken prior to the Policies’ effective date. The Insureds are not entitled to a defense, coverage, or indemnity under the Policies for the three complaints against them arising from their performance as Mitchell’s guardian.

ZALMA OPINION

The Indiana Court of Appeal chose the easy route to resolve this dispute – it found the claims were not made within the policy or were for acts that did not fit within the definition of “professional services.” It ignored, the more difficult but obvious defense, that the policies were acquired as a result of misrepresentation of material facts, that there were no prior losses and that the insured knew of no potential claims. These facts allowed the insurer to declare the policy void based on the standard fraud, misrepresentation or concealment condition or to rescind the policy from its inception since it was acquired as a result of fraud or material misrepresentation since every statement of fact in the application was agreed by both to be material.

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

Redundancy Does Not Create Ambiguity

Manufacturing Defect v. Latent Defect

Insurance policies, in an attempt to be clear and unambiguous, often use terms with similar or identical meanings believing that redundancy helps clarity and avoids ambiguity. In  Ardente v. The Standard Fire Insurance Co., 13-2000 (1st Cir. 03/12/2014) Standard Fire Insurance Company appealed from a district court order awarding Evan Ardente summary judgment on his claim for breach of a yacht insurance policy. Standard claimed that the defect in the yacht was a manufacturing defect while Ardente claimed it was a “latent defect” which eliminated the operation of the manufacturing defect exclusion in the policy finding an ambiguity because of redundancies in the policy.

BACKGROUND

Standard Fire insured Ardente’s yacht. At some point after purchasing the boat, Ardente noticed that its top speed had decreased and that it was not navigating properly. The parties agree that these were symptoms of water damage to the yacht’s hull. They also agree about how water was getting into the hull. A ship’s hull has holes for the installation of fixtures, such as port lights. Normally, the material surrounding these so-called “installation holes” is solid laminate, which is waterproof. But in Ardente’s yacht, the installation holes are surrounded by balsa wood, which is not waterproof. Water seeping into the balsa wood around the installation holes then spread throughout the hull.

Ardente presented a claim to Standard Fire. Standard denied coverage on the ground that the claim fell within an exclusion for manufacturing defects. Ardente sued and eventually the parties then filed cross motions for summary judgment.

The district court granted summary judgment in favor of Standard Fire on all of Ardente’s claims except for the breach of contract allegation. On that claim, the district court granted Ardente summary judgment with respect to liability.  Standard Fire appealed.

DISCUSSION

Summary judgment is appropriate when the record, viewed in the light most favorable to the nonmovant, reveals no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. No factual issues existed and the only issue is whether Ardente’s loss is covered by the policy, a legal question properly resolved by summary judgment.

To determine whether ambiguity exists, the policy must be viewed in its entirety and the language must be given its plain, everyday meaning. Where a policy is ambiguous, it will be construed against the insurer.  A policy is not to be described as ambiguous because a word is viewed in isolation or a phrase is taken out of context. A court should not, through an effort to seek out ambiguity when there is no ambiguity nor make an insurer assume a liability not imposed by the policy.

Ardente’s policy explicitly disclaims coverage for “loss or damage caused by or resulting from . . . [d]efects in manufacture, including defects in construction, workmanship and design other than latent defects as defined in the policy”. This provision is referred to as the “manufacture-defect exclusion.”  The parties agreed that use of balsa wood instead of solid laminate constitutes a manufacturing defect. They disagreed over whether the defect falls within the latent-defect exception to the exclusion.

The policy defines “latent defect” as “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.” The parties agree that the use of balsa wood was a flaw that existed at the time of the original building of the yacht and that it was not discoverable by ordinary observation or methods of testing. The only dispute is whether the balsa wood constitutes “a hidden flaw inherent in the material.” Standard Fire claims that the material, in this case the balsa wood, was not flawed in any way; that it was perfectly good balsa wood, and that it did what balsa wood does – absorb water.

In an attempt to express the reasonable expectations of the insured, the district court interpreted “latent defect” to include the flawed use of unflawed material concluding that the use of balsa wood in these areas was a flaw in the construction of the Yacht, even if it was not a flaw in the underlying material itself.

The policy’s definition of “latent defect” is not self-contradictory. Viewing the definition in its entirety and giving the language its plain, everyday meaning, the First Circuit found that the gist was clear: The phrase refers to flaws in the material used to build the boat that were not noticeable.

The definition could be criticized, but not as self-contradictory, but as redundant. It mentions flaws that are “hidden” but goes on to add that they must be “not discoverable by ordinary observation or methods of testing,” which is another way of saying “hidden.” Indeed, the word “inherent” is yet a third means of emphasizing this same quality.  While “inherent” may not have been the best choice of words, and reiterated an already redundant aspect of the definition, the district court failed to give that term its everyday meaning by reading it to require that the flaw inhere in every piece of the type of material under consideration.

The First Circuit acknowledged that redundancy may itself be a form of ambiguity; indeed, one canon of interpretation urges courts to give each word meaning, thereby avoiding surplusage. The First Circuit noted a general point about redundancy in insurance policies the label “redundancy” surely is not a fatal one when it comes to insurance contracts a place where redundancies abound. As in so many insurance contracts, iteration is afoot throughout. All of this helps to reveal the limits of the interpretive rule of construction that courts must avoid interpreting contracts to contain superfluous words. The rule is one among many tools for dealing with ambiguity, not a tool for creating ambiguity in the first place. Accepting that the word “inherent” in the policy’s definition is redundant, the First Circuit could not see how this redundancy invites the reading adopted by the district court and urged by Ardente.

Granting that ambiguity should be interpreted against the insurer and in light of the reasonable expectations of the insured, if ambiguity lives in the phrase “inherent flaw,” that phrase, and not another, should be so construed. That remedy, rewriting the policy, might, for example, entail striking the word “inherent” so that the definition would read, “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.”

The policy expressly excludes from coverage damage caused by “[d]efects in manufacture, including defects in construction, workmanship, and design other than latent defects.” To say that “material” in the definition of “latent defect” refers not to an individual raw ingredient used in constructing the yacht, but rather to a composite of various raw ingredients that appear in close proximity in a particular area of the ship, yields the an different and contrary result.

Because the damage to Ardente’s yacht does not fall within the latent-defect exception to the manufacture-defect exclusion, Standard Fire – not Ardente – was entitled to summary judgment on the breach of contract claim.

ZALMA OPINION

Courts, over the years, have made the writing of an insurance policy a difficult, and sometimes apparently impossible task. This has become more difficult since state laws require that policies be written in Sesame Street English – simple words of no more than two syllables.

Ambiguities often exist in insurance policies and are rightfully interpreted against insurers to provide coverage they did not intend to accept. Redundancies are included in many policies, like the one issued by Standard to Ardente, are attempts by those who write insurance policies to avoid ambiguity. Here, the First Circuit, with the assistance of a retired U.S. Supreme Court justice, refused to allow the trial court to create an ambiguity out of the redundancy and read the policy as a whole.

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.

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No Coverage for Intentional Torts

Creative Pleading Not Enough To Get Coverage

Evil acts of molestation of children and adults by those in a position of trust cause serious and long lasting injuries, both physical and mental. Victims of such acts seek redress from the actors who caused them harm. Both the actor and the victims seek insurance to pay for those damages recognizing that almost every third party liability insurance policy excludes coverage for such intentional evil acts. Any person with a modicum of humanity is sympathetic to those individuals and the injuries they suffered. Suits are filed hoping that sympathy for serious injuries will cause a court to interpret an insurance policy to pay for their injuries.

In Kolbek v. Truck Insurance Exchange & Farmers Insurance Exchange, CV-13-356 (Ark. 03/13/2014) Desiree Kolbeck, Amy Eddy, Jeanette Orlando, Nicole Farr, Summer Hagan, Jamie Rodriguez, Pebbles Rodriguez, Spencer Ondrisek, Seth Calagna, Jeanne Estates Apartments, Inc., Tony Alamo a/k/a Bernie LaZar Hoffman, Steven Johnson, Cherry Hill Printing Company, Inc., Angela Morales, Jim Myers, David Romero, Nina Romero, Jennifer Kolbek, Joni Johnson, Suzanne Streit, Marty Moan, Anna Moan, Rob Walker, June Walker, Twenty-First Century Holiness Tabernacle Church, Inc., Music Square Church, Inc., SJ Distributing, Inc., Action Distributors, Inc., Advantage Sales, LLC, Rite Way Roofing, Inc., Donn Wolfe, Steve Lovellette, Sally Demoulin, Terri White, Sandford White, Tommy Scarcello, Ron Decker, Douglas “Sonny” Brubach, and Sharon Alamo (“appellants) appeal from an order granting summary judgment in favor of appellees Truck Insurance Exchange (TIE) and Farmers Insurance Exchange (FIE).

FACTS

The relevant facts are these. TIE issued an apartment-owners insurance policy to appellant Jeanne Estates Apartments (JEA) that became effective on July 2, 1998. From the policy period beginning August 7, 2006, FIE renewed the policy and continued to provide coverage through the 2008-2009 policy year. In 2008 and 2010, due to its connection to Tony Alamo and the Tony Alamo Christian Ministries, JEA became involved in three underlying lawsuits. Claims for coverage were submitted by JEA to TIE/FIE in regard to those cases.

On May 20, 2011, TIE/FIE filed a complaint for declaratory judgment seeking that the circuit court find that TIE/FIE owed no coverage to any person for any of the alleged misconduct that formed the basis of the claims in the underlying three lawsuits. They sought a declaration that TIE/FIE owed no coverage for any person upon any refiling or renewal of said claims under a new docket number or in a new lawsuit; that TIE/FIE had no duty to provide a defense to any person who was a defendant in the underlying lawsuits;  and for all other proper relief to which they may be entitled.

The plaintiffs in the three underlying cases asserted that when they were teenage members of the Alamo religious organization, they suffered several beatings administered by either Tony Alamo or John Kolbek, acting at Alamo’s direction. Their complaint asserted causes of action for battery, false imprisonment, outrage, and conspiracy. Plaintiffs specifically asserted that the damage they sustained was in the form of physical pain and suffering, emotional distress, and scarring/disfigurement, and was caused by the defendants “intentionally” and “with malice.”

A third suit claimed plaintiffs, minor female members of the Alamo organization were married to Tony Alamo at young ages and were transported across state lines for immoral purposes.

TIE/FIE, after much pleading, filed a motion for summary judgment asking the trial court declare that they owed no coverage to any person for any of the alleged misconduct which formed the basis of the claims in the underlying lawsuits. An order granting summary judgment in favor of TIE/FIE was entered.

ANALYSIS

As a general rule, when determining a liability carrier’s duty to defend, the pleadings against the insured determine the insurer’s duty to defend. The duty to defend is broader than the duty to indemnify; the duty to defend arises when there is a possibility that the injury or damage my fall within the policy coverage. Where there is no possibility that the damage alleged in the complaint may fall within the policy coverage, there is no duty to defend.

The insured in the instant case was JEA. Before reviewing the allegations against JEA in the underlying complaints, it is important to note that the circuit court found that the inception of coverage of the applicable insurance policy began in July 1998. The judgment received by the plaintiff in the first case was entered on September 14, 1995. Therefore, the allegations against JEA in that case occurred prior to the inception of coverage and it is clear that no genuine issue of material fact exists as to coverage of those claims.

No genuine issue of material fact exists as to TIE/FIE’s coverage of the second underlying claim. JEA was not a named defendant in that claim. JEA made a demand for the defense of Tony Alamo in that case.  Tony Alamo was not acting as an officer or director for JEA, nor with respect to any liability as a stockholder of JEA, nor as an employee performing duties related to the conduct of the business of JEA when he caused harm to the plaintiffs in Ondrisek. Finally, all allegations were comprised of intentional tortious acts. Even if the court assumed that Tony Alamo could have been considered an insured under the policy, the policy coverage was not applicable to the actions that Alamo was accused of in the Ondrisek complaint.

In the third underlying case seven young women initiated a lawsuit against a number of persons and entities affiliated with Tony Alamo, including JEA. The women were all minor members of the Alamo organization who were married to Tony Alamo at young ages. The complaint’s initial allegations against JEA asserted that JEA (1) was negligent in hiring Tony Alamo; (2) was negligent in supervising and retaining Tony Alamo; (3) was vicariously liable as the employer of Tony Alamo for Alamo’s acts “in the course and scope of his employment”; (4) was negligent in allegedly maintaining property that housed the plaintiffs; (5) violated 18 U.S.C. § 1585, which involves the interstate transportation of minors for immoral purposes; (6) was responsible on a theory of premises liability; and (7) was involved with all other Alamo Christian Ministries’ entities in a joint venture.

While this court has not interpreted the “arising out of” language in a liability policy of an apartment complex, we have done so in other types of liability policies. Even if the court found that a causal connection existed here between the allegations and the business operations of JEA such that the insurance policy provided coverage, there are several exclusions in the policy that also apply to a majority of the allegations in the instant case. The injuries and damages in the third case truly all stem from the abuse suffered by the plaintiffs below. No court could help but be sympathetic to those individuals and the injuries they suffered. However, the apartment-liability contract issued by TIE/FIE simply does not exist to provide an insured coverage for this type of alleged harm.

ZALMA OPINION

Like the Arkansas Court of Appeal it is impossible to be anything but sympathetic to those individuals and the injuries they suffered. They were victimized by an a person under the guise of religion and did not deserve to suffer. However, liability insurance does not provide protection for every possible harm. Since insurance can, by definition, only cover contingent or unknown events it cannot cover intentional acts regardless of how brilliantly worded are the allegations of a suit to try to make the intentional acts appear to be an act of negligence that might require an insurer to defend a suit arising from such evil 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.

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.

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Multi-Billion Dollar Fraud

In the sixth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on March 15, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    No Need for Proof of Arson When Policy Obtained by Fraud.
2.    New E-Books From Barry Zalma.
3.    A Multi-Billion Dollar Fraud
4.    Insurance Fraud in U.K. Increases

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 the 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:

Zalma on Insurance

•    Policy Must Say What Insurer Means
•     Conditions are Important
•    The Effect of the Tort of Bad Faith
•    Limited Duty of Insurance Broker
•    Policy Defenses Waived by Inaction
•    Standard Mortgage Clause
•    No Automatic Conflict if Insurer Appoints Lawyer
•    Insurer Fails To Assert Exclusions to its Detriment
•    Politics Must be Funny
•    Words of Policy Control over Secret Intent of Insurer
•    Federal Court Defers to Arbitration
•    You Get What You Pay For
•    Guilty of Making Same Claim Twice
•     Contract of Personal Indemnity
•    Death Penalty for Murder for Insurance
•    Bad Deal Worse Than No Deal
•    Plain Language of Policy Controls
•    Estoppel Cannot Create Coverage
•     Subrogation Available for Separate & Distinct Coverage
•    Man Bites Dog Story – Court Admits It Was Wrong

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.

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.

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Policy Must Say What Insurer Means

Insurer Denied Claim on Language Not in Policy

Insurance policies are interpreted based upon the wording of the policy rather than the unwritten intent of the underwriter who wrote the policy. When the language of a policy is clear and unambiguous it will always be applied as written.

Certain Underwriters at Lloyd’s, London Subscribing to Policy Number FINFR0901509 appeal the trial court’s determination that Underwriters’ insured, Cardtronics, Inc., suffered a covered loss under the policy that had to be paid without Cardtronics first exhausting its claims against responsible third parties. In Certain Underwriters At Lloyd’s of London Subscribing to Policy Number FINFR0901509 v. Cardtronics, Inc., 01-13-00165-CV (Tex.App. Dist.14 03/11/2014) a Texas appellate court was called upon to resolve the issue.

BACKGROUND

This commercial insurance coverage dispute arose from a theft of over $16 million from Cardtronics, which owns and operates automated teller machines (ATMs). The theft was committed by the former president of Mount Vernon Money Center (Mount Vernon), an armored car company. Under an “Armored Carrier Agreement, ” Cardtronics leased currency from Bank of America, N.A. (BOA), and made the currency available to Mount Vernon. Pursuant to an “ATM Management Service Agreement” between Mount Vernon and Cardtronics, Mount Vernon provided cash replenishment services to Cardtronics’ ATMs. Mount Vernon was charged with picking up the currency from BOA, storing it in its vaults, and transporting it as needed to ATMs owned and operated by Cardtronics.

THE POLICY

An insurance policy styled as “Automated Teller Machine and Contingent Cash in Transit” insurance provided that Underwriters “will pay for loss of ‘money’ and ‘securities’ outside the ‘premises’ in the care and custody of a ‘messenger’ or an armored motor vehicle company resulting directly from ‘theft’, disappearance or destruction.” The policy also covers additional risks, such as the risks of employee theft, forgery or alteration of checks and other instruments, theft of money from Cardtronics’ premises, safe robberies, computer fraud, funds transfer fraud, fraudulent money orders, and counterfeit paper currency.

A condition in the policy limits Underwriters obligation to pay only for the amount of loss for contingent cash in transit that Cardtronics “cannot recover” under its agreement with an armored motor vehicle company or under any insurance carried either by that company or on behalf of its customers.

FACTS

Mount Vernon’s president was charged with bank fraud and conspiracy to commit bank and wire fraud. Upon discovery of the theft, Cardtronics quickly notified Underwriters of its loss. The Federal Bureau of Investigation seized over $19 million from two Mount Vernon locations, and a receiver was appointed to oversee Mount Vernon’s operations. The receiver filed a report showing that almost $50 million belonging to Mount Vernon’s customers was missing from either Mount Vernon’s vaults or its customers’ ATMs.

In June, Cardtronics timely tendered proof of loss to Underwriters for over $16 million and requested payment. Nearly one year after Cardtronics’ first request for payment, Underwriters notified Cardtronics in writing that the policy would not be paid until the completion of proceedings against Mount Vernon and its insurance carriers so that “any shortfall in recovery” could be “conclusively determined.” A few months later, Underwriters denied coverage.

A few months before the date it was contractually required to file suit, Cardtronics sued Underwriters under its insurance policy for breach of the policy, breach of the Texas Insurance Code, breach of the Prompt Payment Act, and breach of the duty of good faith and fair dealing. Both filed motions for summary judgment and the trial court granted Cardtronics’ motion. After the trial court’s ruling, Underwriters paid Cardtronics $13,348,826.69, representing the $16,177,510 in cash stolen by the armored car company less the $5000 deductible and the $2,823,683.31 distribution received by Cardtronics from the FBI–seized cash. Pursuant to Underwriters’ subrogation rights under the policy, Underwriters requested that Cardtronics transfer to them “all [of its] rights of recovery against any person or organization for any loss [it] sustained and for which [Underwriters] have paid or settled.” Cardtronics complied.

ANALYSIS

The legal issue in this case is whether the terms of the insurance policy require the insured or the insurer to bear the loss caused by inevitable delays that occur when a potentially liable third party does not accept responsibility for a loss suffered by the insured and covered by its policy, as well as the costs and risks of pursuing such claims.

Underwriters contend that this provision “clearly” requires Cardtronics to exhaust its remedies against those specified third parties before Underwriters are required to pay any covered loss.  Underwriters denied coverage based on subparagraph E.4.A of the policy, which provides that Underwriters will only pay “the amount of loss you cannot recover” from Mount Vernon or its insurers.

Texas courts interpret insurance policies according to the rules of contract interpretation. The court decides whether an ambiguity exists by looking at the contract as a whole in light of the circumstances present when the contract was entered into and by applying proper canons of construction.

The policy does not actually contain the word “exhaust” or any derivative thereof, although the parties agree that it could have been drafted to contain such an explicit requirement.  The policy does not require Cardtronics to carry any additional coverage for losses incurred in connection with an armored car company. Nor does it require Cardtronics to mandate that its motor carriers are insured.

By the policy’s plain terms, Cardtronics was required to submit a proof of loss within 120 days of learning of the facts underlying that arrest. The policy then required Underwriters to accept or reject the claim within 45 days and pay it within five days of that decision. When Underwriters failed to do so, Cardtronics was obligated to bring suit within two years of learning of the facts leading to the arrest, if it was unable to recover its loss before that time.

Underwriters argue that the policy’s use of the word “contingent” mandates the interpretation that Underwriters’ liability under the policy is contingent on the ultimate inability of Cardtronics to recover some amount of its loss.  All insurance is, by definition, contingent on the occurrence of some event.

The only duties expressly imposed on the policyholder in the event of a loss are those set forth in subparagraph E.1.G of the policy, entitled “Duties In The Event Of Loss.” Nowhere in the policy-not even in this section setting forth the insured’s duties in the event of a loss-does it state that Underwriters need not pay the loss unless there has been a final adjudication concerning the responsibility of specified third parties to pay for the insured’s loss. Nor does the policy require the policyholder to institute suit or make a claim against a potentially responsible third party, nor does it contain any terms governing the recovery of expenses relating to seeking payment from a third party. It only requires that the policyholder notify Underwriters of the loss; submit to an examination under oath if requested; provide a detailed, sworn proof of loss within 120 days of learning of the loss; and cooperate with Underwriters in the investigation and settlement of any claim.

Underwriter’s alternative interpretation, that the policy’s coverage will not be triggered until the amount of the loss is conclusively determined, is not reasonable. The policy does not require Cardtronics to exhaust its remedies against third parties such as Mount Vernon before filing suit against Underwriters or obtaining a recovery in such a suit. In the event that Underwriters must pay a claim before any third party claims are resolved, Underwriters retain their subrogation rights and would be entitled to pursue such claims, subject to the distribution scheme set forth in the policy for any recovery.

Because the time limits contained in the policy cannot be reconciled with a policy construction requiring Cardtronics to determine conclusively what it “cannot recover” from Mount Vernon and its insurers, the trial court did not err in concluding that Cardtronics had no duty to exhaust its remedies. Because coverage was triggered immediately and Underwriters do not dispute that Cardtronics suffered a covered loss, Cardtronics’ claim is immediately payable.

ZALMA OPINION

This is a lawsuit that could, and should, have been avoided. The insurer knew that its insured incurred a covered loss. It knew that the insured had exercised diligence in obtaining money from available sources. It knew that the thief was in jail and his corporation was in bankruptcy and that claims had been made to the bankruptcy court. It took the unusual position that it had no duty to pay until all possible sources of recovery had been exhausted without the word appearing in the policy. It knew if it paid that it would receive an assignment of all rights of recovery and could get back its money if possible. The policy wording used by the Underwriters need to be rewritten if exhaustion is what was intended.

 

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

Conditions are Important

Testify at Examination Under Oath or Lose Your Claim

Insurance policies, as a matter of course, contain conditions that must be fulfilled before it is obligated to pay a claim. The conditions require cooperation, submission of a sworn proof of loss, attendance at examination under oath (EUO), etc. There are excellent reasons for each. When an insured refuses to appear for an EUO the policy allows the insurer to deny a claim.

In Lester v. Allstate Property and Casualty Insurance Co., 13-6070 (6th Cir. 02/24/2014) after a fire damaged her house in 2012, Amelia Lester filed a claim with Allstate, her insurance company. In investigating the fire, the company asked Lester and her husband to answer questions about the claim under oath. Lester responded that she and her husband would submit to examinations only if Allstate first showed them its investigative files.

Allstate refused to turn over the files, explaining that doing so “could jeopardize the integrity” of its inquiry. After two months of back and forth, the company gave Lester ten days to schedule an examination. It warned her that, in accordance with the conditions of the policy of insurance, if she did not submit to an examination, the company would deny the claim.

Lester never responded to Allstate’s last letter, at least not directly. She sued the company, seeking payment of her claim before Allstate actually denied her claim. The district court granted summary judgment to Allstate.

The terms of the insurance policy and the laws of Tennessee governed the dispute. The policy required Lester to “submit to examinations under oath” at Allstate’s request. It adds that Allstate has “no duty to provide coverage” if she “fail[s] to comply” with this rule (or several others) if “the failure to comply is prejudicial to [Allstate].” Tennessee law confirms that an insurance company may deny a claim when the policyholder refuses to participate in an examination under oath concluding that such a failure is presumptively prejudicial. Taken together, the words of the policy and the law of Tennessee resolve this case.

Lester proposes another way of looking at it. Even if the terms of the policy do not give her the right to see the files, she claims that Allstate’s implied duty of good faith does. In one sense, she is right. Tennessee law reads a duty of good faith into every contract, requiring each party to honor the parties’ reasonable contractual expectations.  But the application of these principles to this contract does not supply Lester with the traction she needs. It is unreasonable to expect an insurance company to share its investigative files with a policyholder before examining her. The point of an examination is to allow insurance companies to sort out fraudulent claims from honest ones, exorbitant claims from accurate ones. Telling the policyholder what the investigation has already uncovered undermines that purpose, as it would allow the policyholder to tailor her answers to the facts already discovered by the company. Suppose the insurance investigator suspects arson. And suppose his investigation uncovered a potential source of the arson or disclosed that the policyholder had moved some items out of the house shortly before the fire.

The purpose of examinations under oath was first described in Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 94-95 (1884):

The object of the provisions in the policies of insurance,requiring the assured to submit himself to an examination under oath . . . was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true
answer to it was of the substance of the obligation of the assured.

In order to avoid collusion, an insurance company may require a husband and a wife to participate in separate examinations about a claim for coverage. If avoiding fraud justifies preventing a policyholder from learning what her husband has said in his examination, so too does it justify preventing a policyholder from learning what the company has already uncovered in the investigation.

Lester refused to participate in an examination, even after she knew that the company insisted on keeping its investigative files private.

Lester’s response to all of this-that Allstate could deny her claim only after scheduling an examination where she failed to show up-is long on formalism and short on merit. Why would Allstate schedule an examination when Lester said she would not participate unless given the files first? After the initial resistance to participating in the examination, Allstate reasonably gave Lester ten days to schedule an examination.

Lester never did so and, consistent with the terms of the policy and Tennessee law, Allstate denied the claim. Lester had no right to insist on anything more.

Lester persists that Allstate must pay her claim because her failure to submit to an examination did not harm the company. The insurance policy, Lester correctly observes, permits Allstate to deny coverage if her failure to cooperate with the investigation “is prejudicial to” the company. Tennessee presumes that a failure to participate in an examination results in prejudice to the insurance company, and makes it the policyholder’s burden to demonstrate that the company suffered no harm. Lester never introduced any evidence to rebut the presumption.

ZALMA OPINION

The use of an EUO is one of the most important and effective tool in the attempt to defeat fraud. There is no excuse – other than the Fifth Amendment because of a pending criminal charge or illness – for failing to attend an EUO.

The importance of this case, however, which follows the importance of EUOs, holds that an insured has no right to see an insurer’s investigation files before attending an EUO.

 

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 Effect of the Tort of Bad Faith

In the 1960’s and 70’s the insurance industry abused some insureds to avoid paying legitimate claims. Without a factual basis, insureds were accused of arson or other variations on insurance fraud. Indemnity payments were refused on the flimsiest of excuses. People were found to have diseases that only horses could catch. Disability payments were refused because an insured was wheeled in her wheelchair to church one day and, therefore, was not totally house-confined. Insureds were driven into bankruptcy when reasonable demands within policy limits were refused.

To stop this abuse, the courts of the state of California invented a tort of bad faith breach of an insurance contract. Many other states have followed the lead. Until the invention of the tort of bad faith all that an insured could collect from an insurer that wrongfully denied a claim were the benefits due under the policy. In the tort of bad faith, the courts allowed the insureds to collect, in addition, the entire panoply of tort damages, including punitive damages.

It worked. Insurers treated the insureds better. The threat of punitive damages made insurers wary of rejecting any claim. The creation of the tort of bad faith was in many ways a good thing for insurers and insureds. What the courts that created the tort of bad faith did not recognize was that it was also the key to Pandora’s box. The law of unintended consequences came in play and lawyers began to take advantage of the new tort. The “Law” can be defined as the understanding that actions of people — and especially of government or the courts — always have effects that are unanticipated or unintended. Insurance is controlled by the courts, through appellate decisions, and by governmental agencies through statute and regulation. Compliance with the appellate decisions, statutes and regulations – different in the various states – is exceedingly difficult and expensive.
As Justice Kaus of the California Supreme Court noted:

        The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

The logarithmic growth of insurance fraud in the state of California, and other states that have allowed tort damages for bad faith breach of insurance contracts, may be directly traced, in part, to the judicial creation of the tort of bad faith. Before the tort of bad faith, insurers with a reasonable belief that an insured was presenting a fraudulent claim would refuse to pay it. Persons perpetrating the fraud did, in most cases, accept the refusal as a cost of doing business and went on to the next fraudulent claim. After the recognition of the tort of bad faith, those who perpetrated fraudulent insurance claims that were denied went to lawyers instead. Suits for bad faith popped up like wild flowers in the desert after a rainstorm.

Juries, angered by insurers accusing their insureds of fraud, punished the insurers with multimillion dollar judgments. After each judgment, hundreds of cases settled (even though no monies were owed) for fear of being painted with the same brush. Fraud units that had been instituted in the 70’s were disbanded in the late 80’s because of fear of punitive damage judgments.

The courts, legislatures and the insurance departments of the various states must recognize that an insurer with the best of all possible fraud investigation units will err. A company with a highly trained and motivated fraud investigation unit made up of professional investigators and attorneys will err. The public, and those who serve on juries, must understand that an aggressive fraud investigation, even if it reaches an incorrect result, is not malicious.

Today, if a jury believes the insurer was wrong in its decision, it will award punitive damages, regardless of the instructions read to it by the judge. Insurers are not liked. The bad publicity that was given to insurers by the early bad faith cases has poisoned the public image of insurers. Insurers are often prejudged. Some defense lawyers contend that before the first witness is sworn in three jurors are lost and counsel must convince the remaining nine while the plaintiff only needs to convince six of the jurors without anti-insurer prejudice.

As a business necessity, insurers must have the confidence of the public that they are financially sound, secure and have an overabundance of funds available to pay claims. The need to show the security of the company to the public has the effect of convincing juries that a multimillion dollar verdict against the insurer will not hurt it. Plaintiffs’ lawyers disingenuously tell juries that they don’t want to harm the insurance company, all they want to do is get its attention. They argue that a $10 million verdict might cause an itch in the corporate pocketbook sufficient to cause management to scratch away the need to reject claims. The argument is hard for a jury of working people to withstand.

The tort of bad faith, and the punitive damages that seem to go with it, have served their purpose. Insurers now have professional claims departments. Insureds are almost universally treated with courtesy and respect. Legitimate claims are paid with alacrity. Insurance fraud continues to grow. The fear of punitive damages has made the fight against fraud almost impossible.

In my practice I must contend daily with the insurer who wants to fight fraud but who must decide to pay rather than face the exposure of a punitive damage judgment. I can, as my mentors taught me 45 years ago, opinion that an insurer should spend millions for defense and not a dime for tribute. However, practical insurance professionals have a need to resolve litigation as inexpensively as possible and will make a business decision to pay the fraud rather than take a chance on an adverse verdict.

However, as with all things in insurance, the attitudes of insurers move in cycles. More often than not, I am now called upon to testify in bad faith cases that the insurer insists on taking to trial by jury rather than pay off a scofflaw. I can only hope that this cycle continues and more attempts at fraud are defeated.

Insurance Contract Law

In a typical contract, one party has a duty to perform (construct a building, deliver goods, convey real estate, pay indemnity) and the other party has a duty to pay money.  Breach by the performer may take the form of nonperformance, defective performance, or delay in performance.  The primary purpose of damages for breach of a contract is to protect the promisee’s expectation interest in the promisor’s performance.  Damages should put the plaintiff in as good a position as if the defendant had fully performed as required by the contract.

Insurance, like all parts of modern society, is subject to the deprivations of the law of unintended consequences. In the USA alone people pay to insurers more than 700 billion dollars in premiums and insurers pay out in claims as much or more than they take in. Profit margins are small because competition is fierce and a year’s profits can be lost to a single firestorm, earthquake,  hurricane or a flood.

Neither the courts nor the governmental agencies seem to be aware that in a modern, capitalistic society, insurance is a necessity.  No person would take the risk of starting a business, buying a home or driving a car without insurance. The risk of losing everything would be too great. By using insurance to spread the risk among all the costs of taking the risk to start a business, buy a home or drive a car becomes possible. The persons insured are dependent on their insurer to take the risk the insureds are not willing to take alone.
Insurance contracts can be simple or exceedingly complex, depending upon the risks taken by the insurer. Regardless, insurance is only a contract whose terms are agreed to by the parties to the contract. Over the last few centuries almost every word and phrase used in insurance contracts have been interpreted and applied by one court or another. Ambiguity in contract language became certain. However, the average person saw the insurance contract as incomprehensible and impossible to understand. Ostensibly to protect the public insurance regulators decided to require that insurers write their policies in “easy to read” language. Because they were required to do so by law insurers changed the words in their contracts into language that people with a Fourth Grade education could understand. Precise language interpreted by hundreds of years of court decisions were disposed of and replaced with imprecise, easy to read language.

The law of unintended consequences came into play and instead of protecting the consumer with easy to read policy language, an attempt to force insurers to deal “fairly” with the insureds, resulted in thousands of lawsuits determined to impose penalties on insurers for attempting to enforce ambiguous “easy to read” language. The multiple lawsuits cost insurers and their insureds millions (if not billions) of dollars to get court opinions that interpret the language and reword their “easy to read” policies to comply with the court decisions. For more than thirty years the unintended consequence of a law designed to avoid litigation has done exactly the opposite.

The attempts by the Regulators and Courts to control insurers and protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent against what they perceived to be the rich and powerful insurers.
In 1958 the California Supreme Court created a tort new to U.S. jurisprudence when it decided Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 658-659, 328 P.2d 198 (1958).

A tort is a civil wrong from which one person can receive damages from another for injuries. The new tort was called the “Tort of Bad Faith” and was created because an insurer failed to treat an insured fairly and the court felt that the traditional contract damages were insufficient to properly compensate the insured. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the contract had the insurer treated the insured fairly, damages for emotional distress and punitive damages to punish the insurer for its wrongful acts.
Insureds, lawyers for insureds, regulators and courts across the U.S. cheered the action of the California Supreme Court and most of the states eventually adopted the tort created by the California Supreme Court.

In construction contracts, for example, damages for defective or incomplete construction generally are measured by the cost of repair or the cost of completion. In contracts for the sale of goods, on the other hand, damages for nonconformity with the contract generally are measured by the diminution in value of the defective goods. The purpose of both measures is to place the plaintiff in as good a position as if the defendant had performed the contract according to its specifications.

The general rule of damages in tort is that the injured party may recover for all detriment caused whether it could have been anticipated or not while contract damages are limited to that anticipated by the contract.

In more than 60 years of application across the U.S. the tort of bad faith has not, in my opinion, had a salutary effect on the insurance business. Insurance costs more than is reasonable or necessary so that sufficient funds exist to pay claims and tort damages from those insureds who believed they were done wrong. Suits relating to claims presented for the 1994 Northridge earthquake in California are still pending seeking tort and punitive damages for failure to pay what the insureds’ believed they were owed. In Louisiana and Mississippi multiple millions were paid to settle claims that flood damage was covered as a result of hurricane Katrina although the policies excluded flood and the plaintiff insureds failed to buy flood insurance. Abuse of insurers is so rampant and so successful that lawyers obtain multimillion dollar fees and have even attempted to (or successfully) bribed judges to increase their recovery.

The tort of bad faith is like the mythical Vampire.  It hides in the dark. The truth about the tort of bad faith will die only if it is put into the light of day. It does not solve the problem anticipated. Rather it makes a few lawyers very rich, a few insureds receive indemnity for which they did not bargain and makes the cost of insurance to those who wish only to receive the benefits of the contract prohibitive.

In New York, for example, the courts were unwilling to adopt the widely-accepted tort cause of action for “bad faith” in the context of a first-party claim, because they recognized that to do so would constitute an extreme change in the law of this State. New York accepted the more conservative approach adopted by the minority of jurisdictions that the duties and obligations of the parties [to an insurance policy] “are contractual rather than fiduciary” [Beck v Farmers Ins. Exch., 701 P2d 795, 798-799 [Utah 1985]].

        Therefore, in order to ensure the availability of an appropriate and sufficient remedy, we adopt the reasoning of the Beck court that there is no reason to limit damages recoverable for breach of a duty to investigate, bargain, and settle claims in good faith to the amount specified in the insurance policy. Nothing inherent in the contract law approach mandates this narrow definition of recoverable damages. Although the policy limits define the amount for which the insurer may be held responsible in performing the contract, they do not define the amount for which it may be liable upon a breach. [Acquista v. New York Life Insurance Company, No. 2277,2001 NYSlipOp 06087,  (N.Y.App.Div. 07/05/2001)]

New York refused to allow a tort to be created out of a breach of contract. [Batas v. Prudential Insurance Company Of America, 281 A.D.2d 260, 724 N.Y.S.2d 3 (N.Y.App.Div. 03/20/2001)

In California, and most states that allow a breach of an insurance contract to support a tort cause of action only allow it to go in one direction.  Insurance litigants are not equal. An insured can obtain tort damages for bad faith breach of the insurance contract but an insurer may not receive tort damages for bad faith breach of an insurance contract.
The inequality of treatment of insurers and insureds resulted in a distinction between tort and contract liabilities that convinced one state supreme court to reject comparative bad faith as a defense in a bad faith action against an insurer because “the [insurer’s] tort cannot be offset comparatively by the [insureds’] contract breach.” It characterized the differing legal concepts as “apples and oranges.” [Stephens v. Safeco Ins. Co. of America (Mont. 1993) 852 P.2d 565, 568-569]. In addition a different court rejected a comparative bad faith defense for an insured’s misperformance of its contractual duties in a bad faith action against the insurer for refusal to defend. [First Bank v. Fidelity and Deposit Ins. (Okla. 1996) 928 P.2d 298, 306-309]

In California, the decision in Agricultural Ins. Co. v. Superior Court (1999) 70 Cal.App.4th 385 agreed. Agricultural involved a bad faith action arising out of an insurance claim for earthquake damage. After the insurer paid the claim in part controversies arose, ultimately leading to the insured’s suit for breach of contract and bad faith. The trial court stayed the action to allow the insurer to complete its investigation. The insurer did, and then cross-complained, contending that the insured’s claim was in significant part falsified. A false claim is a ground usually sufficient to allow the insurer to declare the policy void and deny all payments since an insured can no more commit a little fraud than be a little dead.
The insurer pleaded various contract theories, and also the tort theories of fraud and so-called reverse bad faith, i.e., tortious breach of the covenant of good faith and fair dealing by the insured. The insured demurred to the tort theories, and the trial court sustained the demurrers without leave to amend. The decision made the following amazing conclusion:

        Although there is an implied covenant of good faith and fair dealing in every contract, although each party is bound by it, and although this principle applies to insurance contracts (see, e.g., Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 797), the potential liability for breach is different for insurers and insureds. In summary, an insured may be held liable in contract for breaching the covenant, but cannot be held liable in tort. (Emphasis added)

The Fourteenth Amendment to the U.S. Constitution provides, in part:

        No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

If the law allows an insured to sue for tort damages as a result of a breach of the covenant of good faith and fair dealing equal protection should allow an insurer to sue the insured for tort damages as a result of the breach of the same covenant. Some litigants cannot, under our system of constitutional law, be more equal than others. Yet, until a court agrees, insureds are more equal than their insurer.

Although the courts may think so, the insured’s breach of the covenant of good faith and fair dealing is also separately actionable as a contract claim and that some forms of misconduct by an insured will void coverage under the insurance policy. (Imperial Cas. & Indem. Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 182.  The court in Agricultural believed that contract remedies “adequately serve to protect an insurer from the insured’s misconduct without creating the logical inconsistencies and troublesome complexities of a defense of comparative bad faith.” In so doing it ignores the logical inconsistencies and troublesome complexities of the tort of bad faith. What is good for the insured should be good for the insurer.

In Kransco v. American Empire Surplus Lines Insurance Company, 23 Cal.4th 390, 2 P.3d 1, 23 Cal.4th 951, 97 Cal.Rptr.2d 151 (Cal. 06/22/2000) the California Supreme Court agreed with Agricultural and held that “[A]n insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of ‘insurance bad faith.’”

An insurer can commit the tort and is obliged to pay tort and punitive damages. An insured, who is totally evil, whose only interest in the insurance agreement is to defraud the insurer, who refuses to cooperate with the insurers investigation, who does everything possible to harm the insurer, cannot commit the tort. This decision is as logical as stating that men can commit a battery while women, cannot commit the tort of battery, regardless of how viciously the victim is battered. It is a statement that equal protection applies to all citizens of the U.S. except insurers since they can only be the tortfeasor and never the victim. Because of the lack of equal protection, plaintiffs’ lawyers and their clients take advantage of insurers and use their wits and energies to set up the insurer for bad faith.

In Wade v. Emcasco Insurance Co., 483 F.3d 657 (10th Cir. 04/10/2007) the Tenth Circuit recognized that the undisputed evidence in the record showed that Plaintiff’s counsel’s sole reason for rejecting the insurer’s offer of settlement made after the running of an arbitrary deadline was his hope to pursue a bad faith claim against the insurer. As a result it refused to allow the plaintiff to pursue the bad faith case. The Tenth Circuit also noted that although the impetus for insurance bad faith claims derives from the idea that the insured must be treated fairly and his legitimate interests protected, it is designed as a shield for insureds – not as a sword. “Courts should not permit bad faith in the insurance milieu to become a game of cat-and-mouse between claimants and insurer, letting claimants induce damages that they then seek to recover, while relegating the insured to the sidelines as if only a mildly curious spectator.”

Logically, insureds who are wronged by their insurer should limit their recovery to contract damages. They should be compelled to waive the tort and sue in assumsit. If the tort of bad faith must exist it must be applied equally. The abuse of the tort of bad faith has become so extreme that the tort must be eliminated or otherwise made fair.

If there is a tort of bad faith – as the courts seem to believe – the Fourteenth Amendment to the U.S. Constitution requires equal protection. An insurer who is wronged by its insured should have the same right to tort damages and punitive damages for breach of the covenant as can the insured. Americans do not live on George Orwell’s “Animal Farm”. No litigant should ever be more equal than another.

Proposal

Insurance fraud is not a local problem. It is a depletion of the wealth of the entire country. The lawyer for the Department of Insurance of each state is the State Attorney General or States Attorney. A special unit could be established in the office of the Attorney General, funded with the monies taken from the insurance industry to support the war against insurance fraud. This unit should be given a simple mandate:

•    File and prosecute every insurance fraud brought to the unit by the Fraud Division that has a better than 50% chance of success.

•    The unit should not concentrate its efforts on major insurance frauds. Those can best be prosecuted by major fraud units already existing in the District Attorney’s offices and in offices of the US Attorney.

To Stop Fraud File and Prosecute Every Insurance Fraud Brought to the Unit by the Fraud Division

The state’s unit should concentrate on prosecuting every-day-insurance fraud, the frauds of opportunity that take 90% of the money paid to fraud perpetrators, in the range of $5,000 to $50,000. Single counts should be prosecuted. When prosecutors file multiple charges against individual defendants the case becomes a major action requiring a great deal of time to prosecute. Judges and juries do not want to be involved in a prosecution that takes months to prosecute. If there are multiple counts available, the prosecutor should charge only the one where the evidence of fraud is overwhelming. If the jury finds for the defendant the prosecutor can charge the next count immediately as a new charge until the statute of limitation runs. If all available are charged in one case the prosecutor will offend the judge and jury and the defendant will get mercy from the jury.

Overcharging a criminal defendant is almost as bad as not charging at all. The arrest gets the prosecutor great publicity but the convictions in such cases – except those frightened enough to plead guilty – are slim.

Teeth must be put in the posters that say “commit insurance fraud, go to jail.” Departments of Insurance are receiving reports from insurers of thousands of potential fraudulent claims a month. They do not have the staff, the ability or the desire to investigate and prosecute every case brought to them. If only 5 percent of those claims are investigated and prosecuted to conviction, the deterrent effect will be enormous. The Department of Insurance should issue a press release concerning every arrest and conviction. Newspapers should report daily that insurance criminals have been arrested and are going to trial or were convicted and are going to jail. Jail sentences should be made mandatory and remove from local judges the right to grant convicted insurance felons probation and restitution only. Sentences across the state must be consistent and true punishment. I have seen cases where after conviction sentences that ranged from 24 hours to 24 years.

It is not enough for the state to say that the insurance companies must investigate and work to fight fraud. The state must also aggressively and vigorously fight insurance fraud. Today, a person perpetrating an insurance fraud need only be concerned that an aggressive fraud investigation might delay, or reduce, the amount he might recover from his crime. Criminal prosecution for the crime of insurance fraud is so minuscule, in relation to the amount of fraud as to be nonexistent. It certainly does not act as a deterrent. In conjunction with the formation of a special insurance fraud prosecution unit in the attorney general’s office, if we lived in the best of all possible worlds, the legislatures will enact the following statutes:

1.    As of the effective date of this statute there is no tort of bad faith in this state.

2.    Punitive damages may not be awarded in this state for breach of an insurance contract.

3.    Any insurer that, without malice, reports to the Fraud Division, Department of Insurance that it has rejected a claim because of fraud may not be sued in any court of this state, for any tort cause of action.

4.      This section is not intended to eliminate the right of any insured to sue its insurer for breach of the insurance contract.

If the legislatures really want insurers to fight insurance fraud; if the legislatures wish to keep strong and viable this important industry; if the legislatures want to reduce the insurance premiums paid by their constituents, they must make practical the war on insurance fraud. As long as the tort of bad faith and the exposure of punitive damages hangs over insurance companies, the war will be one of attrition where no one will win.
The stories that follow were written to show how insurance fraud is taking money out of the pockets of innocent and honest people who buy insurance. For every dollar taken by a fraud perpetrator an insurer must collect two dollars in premiums. Every person in the US who does not commit fraud is paying to support those who do. A minimum of $20.00 for every $100.00 every person insured pays in premiums goes into the pockets of insurance criminals.

If these stories make you angry write to your local District Attorney, States Attorney, Attorney General or US Attorney and let them know of your anger. If enough people complain perhaps, the prosecution levels will increase. Although each of the stories that follow is based in fact, the names, locations and facts of the claims have been changed to protect the guilty. No resemblance to any person is intended and any resemblance is purely coincidental.

ZALMA-INS-CONSULT

© 2014 – Barry Zalma

This article was adapted from the introduction to Barry Zalma’s e-book, “Heads I Win, Tails You Lose” published by ClaimSchool, Inc. and available at http://www.zalma.com/zalmabooks.htm.

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.

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Limited Duty of Insurance Broker

Insurance Broker Not A Fiduciary

People think insurance is expensive. They will grasp at alternatives that appear to save them money. Avoiding payment of apparently egregiously expensive insurance premiums a person or entity will accept the lower cost alternative without reading the fine print of such an agreement any more than they read insurance policies. When the alternative to insurance fails those who bought into the program will always look to the person who sold the program for redress rather than admit they gambled and lost.

Compensation Risk Managers of California, LLC (CRM) administered a self-insured workers compensation program for contractors, Contractors Access Program of California (CAP) that served those seeking relief from high premiums. HUB International Insurance Services, Inc. (HUB) predecessor, marketed and sold CAP to plaintiffs Mark Tanner Construction, Inc., and Mt. Lincoln Construction, Inc.

CAP failed. The failure left plaintiffs exposed to considerable liability. Plaintiffs sued HUB for professional negligence. While a defense motion for summary judgment was pending, plaintiffs obtained a copy of a Regional Field Consultant Agreement (Agreement) between CRM and Diversified that had not been provided to plaintiffs in discovery. Plaintiffs believed the Agreement “significantly alter[ed] the legal landscape in this action.” They argued the Agreement established that rather than acting as broker for them, Diversified instead was acting as the broker for CAP. Further, Plaintiffs argued that the Agreement revealed Diversified was part of a joint venture with CRM. These relationships had not been disclosed to plaintiffs.

The trial court granted HUB’s motion for summary judgment. In In Mark Tanner Construction, Inc. v. HUB International Insurance Services, Inc., C071176 (Cal.App. Dist.3 03/10/2014) the California Court of Appeal was called upon to resolve the dispute.

FACTUAL BACKGROUND

The Department of Industrial Relations (the Department) regulates self-insured workers compensation programs. The Department granted CAP a Certificate of Consent to Self-Insure in 2004. CRM administers CAP and contracted with HUB to market CAP.

California contractors were able to fulfill their obligation to obtain workers compensation insurance by joining CAP. Membership in CAP required an agreement to be jointly and severally liable for the workers compensation liability of all other members for that year of membership. Approximately 250 employers became members of CAP.

On December 31, 2009, CAP was terminated. The Director of the Department revoked CAP’s certificate to self-insure and CAP was placed into conservatorship. CAP’s estimated exposure for unfunded liabilities was over $20 million. In the spring of 2010, members were sent assessments for the anticipated exposure. Tanner was assessed $150,258 and Mt. Lincoln was assessed $42,784. Later that year, CAP defaulted on payment of benefits for its workers compensation liabilities.

The Lawsuit

The first amended complaint (FAC) alleged that CAP was marketed through insurance brokers, including HUB’s predecessor, as a less expensive and more effective means of handling workers compensation insurance claims. Diversified did not disclose to Tanner or Mt. Lincoln its exclusive broker relationship with CRM. Diversified did not inform plaintiffs of the following facts concerning the financial stability of CAP:

(1)   beginning in 2006, CAP incurred losses of over $28 million and then over $60 million;

(2)   CRM was involved in a multimillion-dollar lawsuit in New York over similar self-insured insurance programs;

(3)   CAP’s security bond was not renewed after 2008 and plaintiffs were unprotected if claims exceeded reserves; and

(4)   at least five other self-insured insurance programs administered by CRM in California had failed.

The Motion for Summary Judgment

In December 2011, HUB moved for summary judgment or summary adjudication. HUB argued, “Plaintiffs cannot demonstrate breach of a duty owed to them, because in California an insurance broker has no duty to investigate the financial condition of an insurer before placing insurance with it on the client’s behalf.

The Regional Field Consultant Agreement

Plaintiffs’ counsel took the depositions of representatives of HUB in early February 2012 while the summary judgment motion was pending. Under the Agreement, Diversified was to develop and implement a marketing plan for CAP, use its best efforts to generate new members, and submit to CRM all necessary underwriting data.

The Rulings

The trial court denied plaintiffs’ request for a continuance. It found plaintiffs were dilatory in initiating discovery and that because the Agreement added little to the case, additional discovery based on this agreement was not necessary. The trial court granted HUB’s motion for summary judgment. The court found that HUB was entitled to summary judgment on the professional negligence claim because insurance brokers had no duty to investigate the financial condition of the insurer, and “no facts were presented demonstrating that Defendants knew or should have known of the financial condition of CAP.”

DISCUSSION

Plaintiffs, as appellants, have the burden to show error. In California an insurance broker is a person who, for compensation and on behalf of another person, transacts insurance with, but not on behalf of, an insurer. Generally, an insurance agent acts only as the agent for the insured in procuring a policy of insurance. An insurance broker may, however, act in a dual capacity, in which he serves as the insured’s broker in procuring insurance but also acts as the insurer’s agent by collecting the premium and delivering the policy to the insured.

Insurance brokers owe a limited duty to their clients, which is only to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless the broker misrepresents the nature, extent or scope of the coverage being offered or provided, there is a request or inquiry by the insured for a particular type or extent of coverage, or  the broker assumes an additional duty by either express agreement or by holding himself out as having expertise in a given field of insurance being sought by the insured.

An insurance broker owes no duty to its clients to investigate the financial condition of an insurer before placing insurance with it on their behalf. (Wilson v. All Service Ins. Corp. (1979) 91 Cal.App.3d 793, 798 (Wilson).) The Wilson court reasoned that the Insurance Code prescribes the financial requirements for an insurer and the Insurance Commissioner has the continuing duty to oversee that financial condition, thus it would be “superfluous” and “would create a conflict with the regulatory scheme” to impose on the broker “a similar duty to ascertain the financial soundness of an insurer.”

Other than when handling an insured’s money, a broker’s duty – whether or not phrased as a fiduciary duty – is no greater than the duty to use reasonable care and diligence in procuring insurance.

The first cause of action in the First Amended Complaint (FAC) alleged that Diversified breached its duty to use reasonable care by failing “to investigate, engage in reasonable inquiry, discover and inform Plaintiffs” of information, including the failures of CRM-managed self-insured workers compensation programs in New York and California, CAP’s deficit, the falsity of promises regarding price, and Diversified’s relationship as an exclusive broker for CAP. Tellingly, the FAC did not allege that Diversified knew or should have known that representations it made about CAP were false.

HUB argued Diversified had no additional duty to investigate the financial condition of the insurer. In support, HUB offered as undisputed facts that its predecessor was the insurance broker for Tanner and Mt. Lincoln, who became members of CAP. To establish that Diversified was the broker for plaintiffs, HUB offered the allegations of the FAC which expressly so stated. In opposition, plaintiffs disputed these facts, citing as evidence the Agreement.

Plaintiffs’ opposition was insufficient to create a triable issue of fact. First, plaintiffs are bound by their allegations in the FAC.  The Agreement did not constitute evidence that Diversified was not the broker for plaintiffs. The Agreement was a marketing agreement. Nothing in it refuted Diversified’s role as insurance broker for plaintiffs. Since an insurance broker may act in a dual capacity and since there was no evidence to refute the claims of HUB’s motion for summary judgment, the judgment was affirmed.

ZALMA OPINION

When it comes to insurance, or a self-insurance plan like CAP, the ancient doctrine of caveat emptor applies. Unless the insurance buyer can get the broker to assume a fiduciary relationship and take on the obligations of a fiduciary, the broker need only acquire for the insured the insurance requested.

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

Policy Defenses Waived by Inaction

Insurer – Protect Thyself

Insurance companies rely heavily on insurance coverage counsel before making a decision on a potential coverage dispute. Unfortunately, coverage counsel is not always called in early nor are coverage counsel noted for prompt responses to coverage inquiries. Insurers, fulfilling the covenant of good faith and fair dealing, must make their decisions on coverage promptly. Failure to do so can cause difficulties for both the insured and the insurer. Failure to take a position while waiting to hear from coverage counsel can destroy any defense that might exist.

THE DISPUTE

This appeal arises out of a declaratory judgment action involving an insurance dispute between plaintiff, Rosalind Franklin University of Medicine and Science (Rosalind), and two of its insurers, Lexington Insurance Company (Lexington) and Landmark American Insurance Company (Landmark).

In Rosalind Franklin University of Medicine and Science v. Lexington Insurance Co., 1-11-3755, 1-11-3756 (Ill.App. Dist.1 03/07/2014) Rosalind claimed coverage for a settlement it paid in an underlying lawsuit brought by former patients who sought compensation for Rosalind’s decision to discontinue an experimental breast cancer vaccine program.

The trial court granted summary judgment for Rosalind and against Lexington and Landmark, finding that both insurers had a duty to indemnify Rosalind for the settlement in the underlying suit.

BACKGROUND

Rosalind is a not-for-profit medical school. Between 1989 and 2004, Rosalind administered a research study of a breast cancer vaccine developed by the late Dr. Georg Springer. The purpose of the study, entitled “Treatment of Carcinoma Patients with T/Tn Antigen,” was to evaluate whether stimulating a person’s immune system was effective in fighting breast cancer. Dr. Springer funded the study through a gift agreement that provided a donation of common stock valued at $2.5 million.

Following this decision, in July 2004, approximately 50 of the former Springer vaccine patients filed suit against Rosalind, claiming that the decision to discontinue the vaccine program put their lives at risk. (“the Pollack suit” or “the underlying suit.”) The Pollack suit was prefaced with a preliminary statement alleging that the Springer vaccine treatments “have helped save and prolong the patients’ lives, and, as a result, the termination of the vaccine program has caused these patients to suffer incalculable damage.”

The parties reached a settlement. The agreement provided for payments by the university of: (1) $2.5 million to be placed in a trust for the plaintiffs to resume the vaccine study; (2) $1 million if the plaintiffs successfully resumed the study; and (3) $500,000 “to compensate the plaintiffs for pain and suffering.” The underlying plaintiffs did not succeed in restarting the vaccine program and, therefore, Rosalind’s total settlement payment was $3 million.

The Insurance Policies

At all times relevant to this lawsuit, Lexington had issued primary and excess healthcare liability policies to Rosalind, while Landmark had issued a directors and officers liability policy to Rosalind.

The Coverage Dispute

In its complaint, Rosalind alleged that immediately after the underlying plaintiffs filed the Pollack suit Rosalind notified Lexington and Landmark of the suit. Landmark denied coverage to Rosalind under the Landmark Policy. Lexington, however, did not provide written notice to Rosalind that it was or was not providing Rosalind a defense through the Lexington Primary Policy. Lexington later sent a letter to Rosalind denying coverage to Rosalind for its defense and indemnity costs, including the settlement to the underlying plaintiffs.

ANALYSIS

The question presented to the appellate court was whether the trial court was correct in finding that Lexington was estopped from raising coverage defenses under the Lexington Primary Policy because of its actions with respect to the defense of Rosalind in the underlying suit?

Rosalind contends, as it did before the trial court, that Lexington is estopped from asserting coverage defenses under the Lexington Primary Policy because it undertook Rosalind’s defense for several months before disclosing coverage issues, thereby prejudicing Rosalind. Under Illinois law, an insurer is estopped from asserting coverage defenses if it undertakes the defense of its insured, inducing the insured to surrender control of its defense and thereby causing prejudice to the insured.  Rosalind did not surrender control of its defense to Lexington, so as to trigger estoppel. It was Vogt’s uncontroverted testimony that Rosalind helped “to control and direct” the defense because of the superior knowledge of the factual situation.  It is apparent that Rosalind did not rely exclusively upon Vogt.

Coverage Issues

The duty to indemnify only arises where the insured’s activity and the resulting damages actually fall within the coverage of the policy. When an insured settles an underlying claim, it must show that the settlement was made in reasonable anticipation of liability for an otherwise covered loss. In cases where an insured enters into a settlement that disposes of both covered and non-covered claims, the insurer’s duty to indemnify encompasses the entire settlement if the covered claims were “a primary focus of the litigation.”

The parties did not dispute that Rosalind settled the Pollack suit in reasonable anticipation of liability. Although the underlying plaintiffs alleged many different causes of action, the genesis of all of those claims was the decision by Rosalind’s IRB to shut down the Springer vaccine program. In making this decision, the IRB purported to be acting upon its specialized medical knowledge, citing safety concerns and a lack of demonstrable efficacy of the treatment. This is consistent with the general function of an IRB of a medical institution such as Rosalind. An IRB is responsible for ensuring the safety of human subjects and for establishing informed consent protocols.

A health care provider’s violation of professional responsibilities is an error that is inherent in the practice of medicine, not a mere administrative action.  When determining liability under professional liability policies, courts do not rely upon ancillary allegations but consider the genesis from which the claims arose. The appellate court concluded, based on the uncontroverted evidence, that the “primary focus” of the underlying complaint consists of activity involving specialized medical knowledge. As a result the Pollack suit was within the ambit of Lexington’s professional liability policies, as well as the medical malpractice exclusion in Landmark’s policy.

Lexington’s next contention is that it has no duty to indemnify Rosalind because Rosalind failed to obtain Lexington’s consent for the underlying settlement. Rosalind contends that Lexington waived this defense to coverage because it was aware that settlement negotiations were ongoing in the Pollack suit but failed to raise the issue of consent to settle until after Rosalind had executed a final settlement agreement.

As a general rule, absent a breach of the duty to defend, an insured must obtain the consent of its insurer before settling with an injured plaintiff and the policies so state.

After it learned that settlement negotiations were ongoing in the Pollack action, Lexington had multiple opportunities to raise the issue of consent to settle or a voluntary payment defense, but it declined to do so until after Rosalind had executed the final settlement agreement. In particular, in its reservation of rights letter sent on October 29, 2004, although Lexington mentioned various potential defenses to coverage, it never mentioned a voluntary payment defense and never told Rosalind not to settle the case.

For the foregoing reasons, the appellate court affirmed the trial court’s grant of summary judgment for Rosalind and against Lexington on counts I and VI of the complaint, finding that Lexington owes a duty to pay for Rosalind’s defense and settlement costs under the Lexington Primary Policy and the Lexington Excess Policy. It reversed the trial court’s grant of summary judgment for Rosalind and against Lexington on count III, which is Rosalind’s estoppel claim and additionally reversed the trial court’s grant of summary judgment for Rosalind and against Landmark on count VII, and directed the court to enter summary judgment for Landmark on that count. Concomitantly, the appellate court reversed the trial court’s denial of summary judgment for Landmark on Lexington’s cross-claim against Landmark and directed the court to enter summary judgment for Landmark. Finally, it affirmed the trial court’s grant of summary judgment on count V, Rosalind’s bad faith claim.

ZALMA OPINION

While waiting for coverage counsel to advise it Landmark allowed its insured to enter into a settlement of the Pollack suit without its approval. Because it did not reserve its rights and did not act when the settlement was being negotiated – with Lexington’s full knowledge – the court properly found it waived its right to assert its otherwise enforceable 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.

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

Standard Mortgage Clause

Mortgagee Must Fulfill Policy Conditions

The standard or union mortgage clause effects a separate contract between the insurer and a mortgagee that requires payment to the mortgagee even when, due to error or malfeasance on the part of the insured, the insured cannot recover. Once an insurer determines it need not pay the named insured it must give notice to the mortgagee advising it of its right and obligation to prove its loss.

In Wells Fargo Bank, N.A. v. Null, 312485 (Mich.App. 03/06/2014) In this insurance dispute, plaintiff Wells Fargo Bank, N.A. (“Wells Fargo”) appealed an order of the trial court granting summary disposition in favor of defendants Elizabeth A. Null (“Elizabeth”) and Auto-Owners Insurance Company (“Auto-Owners”). Specifically, the trial court found that Wells Fargo, the mortgagee, was not entitled to coverage under an insurance policy issued by Auto-Owners to the mortgagor, Lonnie Null (“Lonnie), Elizabeth’s brother-in-law.

PERTINENT FACTS

The underlying insurance dispute in this case arose from an April 11, 2009 fire that destroyed a residence located in Cassopolis, Michigan. In 1994, Lonnie purchased the residence and obtained from Auto-Owners a homeowners insurance policy covering the residence (hereinafter “the policy”). Wells Fargo held the note on the residence. Accordingly, Lonnie was the mortgagor of record and Wells Fargo the mortgagee. When the fire occurred in April 2009 Lonnie had not lived in the residence for several years. In fact, evidence of record indicates that Lonnie was incarcerated in 2008 and had not resided or stayed in the home since that time.

Auto-Owners denied Elizabeth’s insurance claim for damage to the residence and her personal property on the ground that Lonnie, who was the named insured, did not reside there, which was a requirement under the policy.

THE COMPANION CASE

Elizabeth sued Auto-Owners for breach of contract. The trial court entered an order granting summary disposition in favor of defendant Wells Fargo. Although it had been dismissed from the litigation, Wells Fargo moved to intervene as a counterplaintiff. After a bench trial, the trial court granted summary disposition in favor of Auto-Owners, denying coverage.

ANALYSIS

There is no ambiguity in the policy language at issue.The record confirms that Lonnie did not reside in the home at the time of the fire. Nothing in the record indicates that Lonnie resided in the home after 2005. Accordingly, the home did not fall within the policy definition of covered property, and Auto Owners properly denied coverage.

Auto-Owners acknowledged that the policy at issue contained a mortgage clause that gave rise to a separate contract with the mortgagee, and that the clause would afford coverage to the mortgagee, even where coverage would not be afforded to the insured, in cases of fraud or arson. Auto-Owners argued, based upon the trial court’s ruling in the companion case, that the policy here did not cover the residence because Lonnie did not reside there at the time of the fire. Since the residence was not a “residence premises” under the policy, it was not “covered property, ” and there accordingly was no coverage under the policy in the first instance.

WELLS FARGO WAS COVERED UNDER THE STANDARD MORTGAGE CLAUSE OF THE POLICY

It is well settled that a policy’s standard mortgage clause constitutes a separate and distinct contract between a mortgagee and an insurance company for payment on the mortgage. In sum, under a standard mortgage clause, the lienholder’s interest in the insured’s property will not be avoided by any acts, representations, or omissions of the insured. Thus, a standard mortgage clause effects a new and independent insurance which protects the mortgagee as stipulated, and which cannot be destroyed or impaired by the mortgagor’s acts or by those of any person other than the mortgagee or someone authorized to act for him and in his behalf.

The policy provides that the mortgagee will be protected from loss even if coverage is denied to the insured, consistent with the requirements for a standard mortgage clause. Lonnie’s act or neglect did not operate to avoid coverage for Wells Fargo under the separate contract of the standard mortgage clause. The appellate court found that the trial court erred in granting summary disposition to Auto-Owners. The standard mortgage clause in this case is a separate contract between Wells Fargo and Auto-Owners that by its plain language affords coverage to the mortgagee in the circumstances presented.

There are, therefore, two contracts of insurance involved in this case. One covers risk and outlines exclusions for the insured and the insurer. The other operates as an independent contract for the limited purpose of preventing the loss of coverage by any act or neglect between the insurer and the insured. The prevention of recovery under the contract between the insured and the insurer does not prohibit the recovery by the lienholder under its separate contract of insurance with the insurer.

The mortgagee is protected in the event that any act or neglect by the insured, either before, during, or after the application process, causes the insured to be denied coverage under the policy. It matters not whether that act or neglect by the insured falls within a policy exclusion or causes there to be no coverage under the policy in the first instance. In either event, the standard mortgage clause affords protection to the mortgagee.

Where the issue has been squarely presented, the modern decisions are unanimous, and the earlier decisions virtually so, in holding that a mortgagee under a standard mortgage clause may (where not guilty himself of any breaches of policy conditions) recover from the insurer for a loss sustained by the mortgaged property, even though the risk be excluded from the policy coverage.

The standard mortgage clause of the policy unambiguously provides coverage for Wells Fargo in the circumstances presented.

THE NEED TO COMPLY WITH POLICY CONDITIONS

In its motion for summary disposition before the trial court, Auto-Owners alternatively argued that, even if coverage was afforded to Wells Fargo under the mortgage clause, Wells Fargo had failed to comply with the requirement that it submit, within 60 days after receiving notice from Auto-Owners, a proof of loss signed and sworn by the mortgagee. Auto-Owners alleged that it informed Wells Fargo in correspondence dated August 17, 2009 that it was required to submit a sworn proof of loss within 60 days, and that Wells Fargo failed to do so. Thus, it argued, Auto-Owners properly denied Wells Fargo’s claim.

The trial court erred in granting summary disposition to Auto-Owners on the issue of Wells Fargo’s coverage under the policy. As a matter of law that the policy’s standard mortgage clause afforded coverage to Wells Fargo, the mortgagee, despite the lack of coverage for the insured.

On remand, the trial court should determine whether, in light our decision that the policy provides for coverage for Wells Fargo and Wells Fargo’s claims are not barred by the companion case, a genuine issue of material fact exists regarding Wells Fargo’s compliance with the requirements of the policy.

ZALMA OPINION

Wells Fargo gained a Pyrrhic victory. They obtained a ruling that coverage applied. A victory and reversal of an incorrect decision by the trial court. However, if the evidence is as the insurer presented, and Wells Fargo failed to submit a sworn proof of loss within 60 days of receiving a demand for a proof of loss, Wells Fargo’s claim is forfeit.

In general, failure to file the proof within the time limited by the policy is fatal to an action upon it (White v. Home Mutual Ins. Co.,128 Cal. 131 [60 P. 666] ).

Whenever a mortgagee is advised that a claim by its insured is denied it should immediately, but in no event later than 60-days after receiving such notice, submit a sworn statement in proof of loss to the insurer. Although the contract between the insurer and the mortgagee is separate from that between the insurer and the insured, the conditions to recover indemnity applies to the mortgagee.

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

No Automatic Conflict if Insurer Appoints Lawyer

Insurer Need not Submit to Extortion

Lawyers who are retained by insurers to defend an insured person in a third party liability suit, owe a duty to both the insured and the insurer. The lawyer needs to protect his clients but cannot force the insurer client to do what the insured wants or settle a claim that the insurer does not believe it owes.

Plaintiffs, a lawyer and his firm, brought this legal malpractice claim against the lawyer who defended him in a legal malpractice claim brought by a former client. In the original case, plaintiffs’ professional liability insurer retained defendants Ian Brenson and the Law Offices of Ian Brenson (collectively, Brenson) to represent plaintiffs John Z. Huang and his firm John Z. Huang, P.C. (collectively, Huang). The former client prevailed against Huang although that judgment was reversed on appeal. Huang’s legal malpractice case against Brenson was dismissed. In Huang v. Brenson, 1-12-3231 (Ill.App. Dist.1 03/05/2014), the Illinois Court of Appeal resolved the dispute..

BACKGROUND

Yongping Zhou, a Chinese citizen, was convicted in 1998 of domestic violence. He received a one-year suspended sentence. As a result, in early 2001, the Immigration and Naturalization Service (INS) detained Zhou and served him with a notice of intent to deport to China, giving 10 days to rebut the charges and contest the deportation. Huang represented Zhou from February 2001 until June 2001, when Zhou terminated the relationship and retained another attorney.

The new attorney represented Zhou in the INS proceedings. After hearing Zhou’s testimony, the judge denied Zhou’s request for asylum and rejected his torture and persecution claims.  Zhou sued Huang for legal malpractice. Zhou’s amended complaint alleged that Huang acted negligently, and he sought damages for emotional distress, physical abuse, isolation, humiliation, pain and suffering, loss of education, and loss of income. Huang’s professional liability insurer retained Brenson to represent Huang.

Five years later, after trial, the jury awarded Zhou $4 million.

On appeal the appellate court reversed and remanded with instructions to enter judgment in favor of Huang and his firm. Huang then filed this case in the circuit court, alleging Brenson committed legal malpractice while defending the Zhou malpractice case.  Huang also filed claims for breach of fiduciary duty. In count V, Huang alleged that Brenson concurrently represented Huang and the professional liability insurance company, and, as a result, failed to relay several of Zhou’s settlement offers to Huang. Similarly, in count VI, Huang alleged that Brenson breached his fiduciary duty of loyalty by failing to relay Zhou’s settlement offers. He sought damages of $154, 855 for attorney fees paid to the posttrial and appellate counsel.

ANALYSIS

The elements of a cause of action for legal malpractice are: (i) the defendant attorney owed the plaintiff client a duty of due care arising from an attorney-client relationship; (ii) the attorney breached that duty; (iii) the client suffered an injury in the form of actual damages; and (iv) the actual damages resulted as a proximate cause of the breach.

Huang was unable to attribute damages to Brenson’s failure at trial. In malpractice cases like this one, which turn on the attorney’s conduct during litigation, a plaintiff must generally prove a case-within-a-case to establish proximate cause. For the case-within-a-case, as a matter of law, in Zhou v Huang, the trial court should have granted Huang summary judgment or a directed verdict on all of Zhou’s claims for damages.  Brenson in no way contributed to the trial court’s error.

The appellate court concluded the trial court was correct when it decided Brenson did not proximately cause Huang’s damages as a matter of law.

BREACH OF FIDUCIARY DUTY

Huang argues that the trial court erred in holding that he failed to plead facts showing a conflict of interest. Huang notes that Brenson’s affidavit attached to the motion to dismiss stated, “I was retained by [plaintiffs] and their liability insurance carrier to defend them in [Zhou's] lawsuit.” Huang contends this statement was a judicial or evidentiary admission that Brenson had a conflict of interest. To establish a claim for breach of fiduciary duty, the plaintiff must allege: (i) the existence of a fiduciary duty; (ii) the breach of that duty; and (iii) damages proximately caused by the breach. Attorneys have a fiduciary duty to their clients. The fiduciary duty owed by an attorney to a client encompasses the obligations of fidelity, honesty, and good faith.

When an insurance company pays for an attorney to defend its insured, that does not automatically create a conflict of interest. An attorney hired by an insurance company to defend the company’s insured owes a fiduciary duty to both the insurance company and the insured. While the court might assume that the attorney’s loyalty may follow the purse strings it recognizes that the attorney owes the insured the same professional obligations as he or she would to any client.

Conflicts of interests only arise in these situations where the attorney puts the interests of the insurance company before those of the client. For example, where the insurance company and insured disagree about whether to settle a case, a conflict arises, and the attorney cannot continue to represent both without a full and frank disclosure of the circumstances to his or her clients. However, the existence of an undisclosed conflict of interest only satisfies the breach element, but not the causation element, of a breach of fiduciary duty claim.

In his fourth amended complaint, Huang alleged that Brenson failed to communicate several settlement offers from Zhou, and failed to advise him of the risk of going to trial. Failure to properly communicate a settlement offer to a client is typically considered a breach of fiduciary duty. Plaintiffs, therefore, properly pleaded the existence of a fiduciary duty and its breach. However, Huang still fails to allege facts showing proximate cause. Huang alleges that, if Brenson had notified him of Zhou’s settlement offers, he would have accepted and demanded that their insurance company accept it because it was within their policy limits, which was $500,000. Huang also alleges that the insurance company offered to settle the case for $50,000. Huang alleges in the fourth amended complaint that the insurance company had offered to settle Zhou’s case for $100,000. Huang essentially alleges that, if Brenson had properly communicated Zhou’s settlement demands to him, the case would have settled and not proceeded to trial, or the costly posttrial, and appeal.

There are three possibilities where a settlement would have precluded the trial: (i) if plaintiffs could force their insurance company to settle, (ii) if plaintiffs could settle using their own assets, or (iii) if plaintiffs could use a combination of insurance company funds and their own assets to settle the case. Huang does not allege that he was willing or able to use his own assets to settle the case, foreclosing on the second and third possibilities. Nor does Huang allege facts showing that the professional liability insurer would have accepted Zhou’s settlement offers.

An insurance company need not always cede to the demands of its insured to settle. If an opportunity appears to settle within the policy limits, thereby protecting the insured from excess liability, the insurer must faithfully consider it, giving the insured’s interests at least as much respect as its own. The insurer need not submit to extortion; it may reject a bad deal without waiving the protection the policy limit gives it against the vagaries of lawsuits. But if the honest and prudent course is to settle, the insurer must follow that route.

Huang does not allege facts that show the insurer would have or should have, in good faith, accepted Zhou’s settlement demands. While, on several occasions, Zhou demanded that Huang settle the case for $400,000, $500,000, $2 million, or $3 million, Huang does not allege or assert facts showing that these demands were reasonable. It is not clear that, even if Brenson had properly informed Huang of Zhou’s demands, Huang could have convinced or forced the insurance company to settle and avoid going to trial. Accordingly, Huang failed to plead that defendants’ breach of fiduciary duty-failing to relay Zhou’s settlement demands-proximately caused his damages.

ZALMA OPINION

Many believe that no good deed goes unpunished. Here, Brenson did everything possible to protect Huang from the allegations of legal malpractice. He filed appropriate motions that were wrongfully rejected by the trial court. He was sued because he lost as a result of incorrect decisions of the trial court. Huang lost because he could not allege that there was a breach of Brenson’s duty to him that caused Huang damages.

Working in the tripartite relationship between an insurer/insured/defense lawyer is often difficult and without proper appreciation of the difficulty. No lawyer wins every case. Appellate courts exist because no court is perfect. The multiple suits that arose because Mr. Zhou was violent should never have happened.

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.

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 recently published the e-books, “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.

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 Fails To Assert Exclusions to its Detriment

Hoist on Its Own Petard

When seeking court approval of a refusal to defend an insurer should assert all policy defenses, conditions and exclusions. Simplifying litigation by relying on one defense over another can make the work of the lawyers easier but may not assist the client.

In Blackstone International Ltd. v. Maryland Casualty Co., 2302 (Md.Sp.App. 02/28/2014) the problem of a simple declaratory relief action caused a result not anticipated by the insurer.

FACTS

Maryland Casualty Company and Northern Insurance Company of New York, (collectively, “the Insurers”), brought a complaint for declaratory judgment against Blackstone International, Ltd., and John R. Black (collectively, “Blackstone”). The complaint asked the circuit court to declare that the parties’ insurance policy did not cover a lawsuit brought against Blackstone by RMG Direct, Inc. (“RMG”), and that the Insurers had no duty to defend Blackstone in that suit. Blackstone counter-claimed for opposite declarations and asked the court to order the Insurers to pay the costs of litigation in the RMG case and in the present case, as well as to indemnify Blackstone for any damages arising from that case.

Blackstone moved for partial summary judgment on the duty to defend in the underlying litigation, and the Insurers moved for summary judgment as to both their duty to defend and their duty to indemnify. The circuit court granted the Insurers’ motion and entered summary judgment in their favor.

Blackstone designs and manufactures lighting products, including those that mimic natural light, which are known as “full spectrum” lights. In February 2010, Blackstone was sued by RMG, whose complaint claimed, in part, that the two parties had agreed to a “joint venture to develop plans for the design, marketing and sale of low vision lighting products to retailers.”

Blackstone has been insured by the Insurers for commercial general liability since 2001. The parties’ agreement places upon the Insurers the duty to defend Blackstone against any suit seeking damages from an “advertising injury,” which the policy defines as injuries arising out of the use of another’s advertising idea in Blackstone’s advertisement, or out of infringement upon another’s copyright, trade dress, or slogan.

Blackstone gave the Insurers notice of RMG’s suit in a timely fashion, but the Insurers denied that RMG’s claims fell within the scope of the policy’s “advertising injury” clause. Blackstone eventually settled with RMG, but only after incurring an alleged $1,056,008.63 in attorney’s fees, which the Insurers refused to pay.

DISCUSSION

The Insurers’ Duty to Defend Blackstone in the Underlying Litigation Depended on the Character of RMG’s Claims:

In the present case, all claims remained viable until Blackstone and RMG reached a settlement. Therefore, Blackstone is entitled to have the Insurers reimburse all of its defense costs if they had a duty to defend at least one count of RMG’s complaint.

Use of RMG’s Advertising Ideas in Blackstone’s Advertisements

An insurer may not use extrinsic evidence to contest coverage under an insurance policy if the tort suit complaint establishes a potentiality of coverage and an allegation that is “contested” or in “doubt” is nonetheless sufficient to show its potential truth.

The Insurers contended that even if Blackstone’s product packaging was designed to “attract customers or supporters,” it did so on an individual basis as a “solicitation,” rather than as “a notice that is broadcast or published to the general public or specific market segments”.  Its argument overemphasized the customer’s immediate perception and ignores the fact that Blackstone distributed advertising ideas on standardized packaging, with the evident intent to reach and attract a wide audience of shoppers at the product’s point of sale. This brings Blackstone’s alleged conduct within at least one of the ordinary meanings ascribed to “publish,” i.e., “to disseminate to the public” or “to produce or release for distribution.” Moreover, the Insurers’ definition of “advertisement” would turn any content viewed by isolated customers into an individual solicitation, which would create the absurd result of turning a wide array of advertisements-on television, in magazines, and on the internet-into “personal solicitations.” Therefore, the court concluded, that Blackstone’s product packaging could be an “advertisement” under the present insurance agreement.

Advertising Injury

The Insurers argue that RMG’s claims did not allege any “advertising injury” to defend against. The Insurers contended that “the gravamen” of RMG’s complaint “is not damages caused by Blackstone’s advertisements but rather damages caused by Blackstone’s failure to abide by an agreement to pay RMG commissions,” and that the complaint is “replete” with references to that agreement for commissions.

The policy’s duty to defend is not determined by the “gravamen of the complaint;” rather, Maryland Law imposes a duty to defend if there exists even a single claim that could potentially be covered. And although a court may look to the “gravamen” of particular causes of action to determine whether they could be construed in favor of the insured as covered claims, the court must nonetheless consider each one individually, according to the insurance policy’s language.

The Insurers’ offered an argument that they intended their policy to cover only Blackstone’s “tortious, negligent conduct,” the policy does not do so by defining “advertising injury” that way. The policy contains express exclusions that have that effect. However, the Insurers deliberately waived them at trial. In a proposed statement of undisputed fact the Insurers stated that their defense does “not rel[y] on the breach of contract exclusion,” which they deemed “irrelevant” to the instant case thereby giving away a defense that the court might accept.

The Insurers urged the trial court not to “get bogged down” in the contractual language and to construe the agreement in their favor because “[t]he intent of a general liability policy is to provide coverage, and perhaps indemnity in certain cases, for alleged unintentional tortious actions”.

Contrary to the argument of the insurers the language of an insurance policy is a tool that can be used-even if only imperfectly-to memorialize an agreement between two parties, helping them plan their future conduct and resolve disputes, should they arise.

The Insurers limited the present dispute to the plain meaning of “advertising injury” in the parties’ agreement, even though the exclusions belie the Insurers’ contentions. They argue that wherever an insurance agreement defines “advertising injury” as “any injury arising out of the use of another’s advertising idea in your advertisement,” this definition excludes-by default-all injuries arising from intentional conduct or breach of contract. But the Insurers carved exactly those kinds of injuries out of “advertising injury” by drafting express exclusions to that term’s definition. This implies that, had intentional conduct and breaches of contract not been excluded, they would fall within the agreement’s broad and unambiguous definition of “advertising injury.” And this broad and unambiguous definition is all that is left for the Insurers to use in their defense, having expressly stated to the trial court that they would not rely on those exclusions to argue against their duty to defend Blackstone.

The Insurers’ duty to defend Blackstone depends, because of the waiver, only on whether RMG’s claims “arose out of” the use of RMG’s advertising ideas in Blackstone’s advertisements, without regard to whether the acts were intentional or rooted in breach of contract. In Maryland, the phrase “arising out of” in an insurance contract triggers a causation analysis requiring a “direct or substantial” relationship between cause and effect. Having waived at trial the policy’s exclusions, the general definition of “advertising injury” bound the Insurers to defend Blackstone against RMG’s unjust enrichment claim, even if their intent was to exclude that cause of action as an “intentional” act or breach of contract. Because that covered claim survived throughout the proceedings in RMG’s suit against Blackstone, Maryland law obligated the Insurers to defend Blackstone against all of RMG’s concurrent claims.

ZALMA OPINION

Sometimes it is not intelligent to be too smart by half. The insurers had viable and provable exclusions that would have supported its refusal to defend. In an attempt to convince the trial court to grant their motion for summary judgment the Insurers simplified their argument and told the court not to “get bogged down” with the wording of the policy and its exclusions.

Insurance companies write the words in an insurance policy to express the risks that they are willing to take and the risks they refuse to take. The policy contract must be read as a complete document and eliminating part of the contract is a disservice to the people who wrote the contract. By limiting the argument and waiving the exclusions the Insurers will pay more than one million dollars they probably did not owe.

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.

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 recently published the e-books, “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.

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

Politics Must be Funny

This has nothing to do with insurance. It is, however, very interesting.

I am reading an Amicus Brief filed by the Cato Institute in the U.S. Supreme Court in a case entitled, SUSAN B. ANTHONY LIST, ET AL., v. STEVEN DRIEHAUS, ET AL

Some parts of the brief require wide publication and I quote them below:

This case concerns amici because the law at issueundermines the First Amendment’s protection of the serious business of making politics funny.

* * *

The campaign promise (and itssubsequent violation), as well as  disparagingstatements about one’s opponent (whether true,mostly true, mostly not true, or entirely fantastic), are cornerstones of American democracy. Indeed, mocking and satire are as old as America, and if this Court doesn’t believe amici, it can ask Thomas Jefferson, “the son of a half-breed squaw, sired by a Virginia mulatto father.”

* * *

Where would we be without theknowledge that Democrats are pinko-communist flag-burners who want to tax churches and use themoney to fund abortions so they can use the fetalstem cells to create pot-smoking lesbian ATF agents who will steal all the guns and invite the UN to takeover America? Voters have to decide whether we’d bebetter off electing Republicans, those hateful,assault-weapon-wielding maniacs who believe that George Washington and Jesus Christ incorporated the nation after a Gettysburg reenactment and thatthe only thing wrong with the death penalty is that itisn’t administered quickly enough to secularhumanist professors of Chicano studies.

* * *

This case began when Rep. Steven Driehausresponded to an advocacy group’s political attack byfiling a complaint with the OEC. Cert. Pet. at 2.Resources that could have been spent responding to the petitioner’s truthiness were thus redirected to abizarre legal fight. And this caused a ripple effect:The Coalition Opposed to Additional Spending and Taxes felt sufficiently chilled by Driehaus’s actions to refrain from engaging in the campaign at all. 

* * *

Many campaign statements cannot easily becategorized as simply “true” or “false.” According to Politifact.com, President Obama’s claim that “if youlike your health-care plan you can keep it” was true five years before it was named the “Lie of the Year.” 

* * *

The law also stifles, chills, and criminalizespolitical satire. For example, it is a crime in Ohio for a late-night talk-show host to say: “Candidate Smith is a drug-addled maniac who escaped from a mental institution.” Even satirists and speakers that areclearly attempting primarily to entertain their audiences are subject to prosecution if they intend or expect their statements to impact how the audience perceives a candidate. A publication like The
Onion—which regularly puts words in politicalfigures’ mouths, or makes up outlandish stories about them—could be violating Ohio law by makingpeople think at the same time it makes them laugh.

* * *

This country has a long and estimable history ofpundits and satirists, including amici, exposing the exaggerations and prevarications of political rhetoric. Even in the absence of the First Amendment, no government agency could do a better job policing political honesty than the myriad personalities and
entities who expose charlatans, mock liars, lambastearrogance, and unmask truthiness for a living.

* * *

Driehaus voted for Obamacare, which the Susan B. Anthony List said was the equivalent of voting for taxpayer- funded abortion.  Amici are unsure how true the allegation is given that the  healthcare law seems to change daily, but it certainly isn’t as  truthy as calling a mandate a tax.

There is no lie that can be told about a politician that will not be more damaging to the liar once the truth is revealed.

Dickens once said “the law is an ass.” The Ohio law making political speech a crime seems to fit his definition. P. J. O’Rourke and the other Amici deserve commendation for explaining that it is a clear violation of the First Amendment to criminalize speech and to do so with humor as well as serious legal analysis is refreshing. Whether the Amici brief is taken seriously by the justices I cannot predict. I can only hope it will be.

Insurance cases, where I direct my intention, is seldom so weighty as the First Amendment so I usually don’t get to write about it. I think it is time that insurance cases lend themselves to humor. Some arguments I have summarized here were hilarious and still some of them succeeded because no one was brave enough to tell the court that the arguments were jokes.

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.

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 recently published the e-books, “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.

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

Words of Policy Control over Secret Intent of Insurer

Policy Must Be Read as a Whole

Cheerleading is, by some measures, the second most dangerous college sport in the country. Cheerleading trails only football in terms of the total dollar value of catastrophic injury insurance claims submitted to the NCAA’s insurers.  The injuries result from both competition and practice sessions.

Much of this danger is attributable to the incorporation of acrobatic and gymnastic moves into cheerleading routines. Cheerleaders are charged with being launched high into the air, performing a series of flips and twists, and landing gracefully back into the arms of their teammates, all without pads.Wesley Patterson, a student cheerleader at Prairie View A&M University (Prairie View), was paralyzed while practicing a tumbling maneuver during gymnastics class.

Patterson sued Mutual of Omaha Insurance Company (Mutual), seeking coverage under the insurance policy that Mutual had issued to Prairie View as a member of the NCAA. Mutual’s policy covers student cheerleaders who are injured during cheerleading practice sessions. The district court denied Mutual’s motion for summary judgment and granted Patterson’s motion for summary judgment after concluding that the term “practice session” in Mutual’s policy included the gymnastics class Patterson was attending when he was injured.

FACTS

As a cheerleader, Patterson was required to attend cheerleading practice from 5:30 p.m. to 8:30 p.m. every Monday through Thursday. Price also taught Gymnastics II, a one-credit physical education class held from 1:00 p.m. to 1:50 p.m. every Monday and Wednesday. Although Patterson was not enrolled in Gymnastics II, he began attending the class in the fall of 2007 to practice tumbling, a form of gymnastics used in cheerleading.  On January 23, 2008, Patterson was attempting to perform a round-off back-handspring back tuck as part of a graded skills exam in Gymnastics II when he fell and injured his spinal cord, rendering him an incomplete quadriplegic. In Patterson v. Mutual of Omaha Insurance Co., 12-3838 (8th Cir. 02/28/2014) the Eighth Circuit was called upon to interpret THE policy covering injuries from cheerleading.

Mutual’s policy covers student cheerleaders participating in certain “Covered Event[s].”

Covered Event means, for Student cheerleaders:

a. activities performed as part of the cheer unit for a Qualifying Intercollegiate Sport team competition scheduled by the Insured Person’s Participating School; or b. practice sessions and pep rallies both of which must be authorized by, organized by and directly supervised by a safety-certified official coach or advisor of the Insured Person’s Participating School, other than a member of the cheer unit or other undergraduate Student, and in preparation for a Qualifying Intercollegiate Sport team competition. . . .

For Student cheerleaders, Covered Event does not include any activities not directly associated with the activities of a Qualifying Intercollegiate Sport team, such as camps, clinics, national competitions, fund-raisers, alumni events and other events not conducted by the Insured Person’s Participating School.

Patterson sued Mutual seeking a declaration that the Policy covered his injury.

ANALYSIS

Courts interpret terms in an insurance policy from the perspective of an ordinary policyholder of average intelligence. When language in an insurance policy is clear and unambiguous, a court must give it its plain and ordinary meaning. The Policy contemplates four basic requirements for coverage relevant to this appeal: (1) the student must be injured during a practice session; (2) the practice session must be authorized, organized, and supervised by the coach; (3) the practice session must take place in preparation for a Qualifying Intercollegiate Sport team competition; and (4) the practice session must be directly related to the activities of a Qualifying Intercollegiate Sport team.

The Eighth Circuit concluded that Gymnastics II can be considered a “practice session” under the Policy. The Policy itself does not define the term “practice session, ” so we must do so ourselves from the perspective of an ordinary policyholder.  For student cheerleaders like Patterson, Gymnastics II was a “meeting or period devoted to” the “systematic exercise for proficiency” of gymnastic skills used in cheerleading.

Mutual claimed that the Gymnastics II class was not a class cheerleaders were required to attend although they were required to attend after-school practice. Students had to try out for cheerleading, while Gymnastics II was open to all students according to Mutual and cheerleading practice and Gymnastics II were held at different times and at different places.

Practice sessions need not be homogenous: they may take place at different times and at different places, they may involve different members of a team, they may cover different skills, and they may be optional or mandatory. Moreover, the fact that Gymnastics II is a class does not mean it cannot also be a practice session. On the day Patterson was injured, there were six cheerleaders and six Gymnastics II students in the gym.  Gymnastics II and cheerleading practice were taking place simultaneously and that some students (including Patterson) were participating in both a class and a cheerleading practice.

Case law includes examples of similar overlaps between academics and interscholastic athletics.  Given the close relationship between modern interscholastic athletics and academics, the court found Mutual’s proffered definition of “practice session, ” which draws a bright line between the two spheres, to be too rigid.

An ordinary policyholder who walked into the gym between 1:00 p.m. and 1:50 p.m. on a Monday or Wednesday would probably believe that he was witnessing a cheerleading practice session. To exclude these activities from coverage simply because the students were earning academic credit would impose a limitation that reflects neither the language of the Policy nor the reality of the class.

Mutual tried to impose additional requirements not stated in the policy like a requirement that Price (the instructor) authorize, supervise, and organize the cheerleading activities during Gymnastics II.  Although the class had a syllabus, Price frequently departed from the syllabus and tailored instruction to the abilities and needs of the class, providing considerable one-on-one instruction to each student. Moreover, Price permitted cheerleaders who were not enrolled in Gymnastics II to attend the class. Price thus had authority over who attended the class and who did not. Prairie View may have decided to offer Gymnastics II as a class and to schedule it from 1:00 p.m. to 1:50 p.m, but it was Price who decided to turn the class into a cheerleading practice session by teaching tumbling routines used in cheerleading, allowing non-enrolled cheerleaders to attend, and discussing cheerleading business during class.

There was nothing in the record that allows a conclusion that Patterson intended to use the round-off back-handspring back tuck he was practicing in Gymnastics II at a specific football or basketball game in the future. It is undisputed that Prairie View cheerleaders used tumbling routines during football and basketball games and that Patterson was performing a tumbling maneuver when he injured himself.   It is enough to interpret the policy to note that Patterson was practicing tumbling during the basketball season and that Prairie View cheerleaders performed tumbling routines during home basketball games.

As examples of activities not directly associated with sport team competitions, the Policy lists “camps, clinics, national competitions, fund-raisers, alumni events and other events not conducted by the Insured Person’s Participating School.” Patterson’s activities during Gymnastics II do not fall into any of these categories.

The court concluded, therefore, that the relationship between what Patterson was practicing when he was injured and why he was practicing it was sufficiently close to establish that the activities during Gymnastics II were “directly associated” with a Qualifying Intercollegiate Sport team competition and affirmed the trial court decision.

ZALMA OPINION

Insurance policies are contracts. Insurers should never attempt to refuse to pay a claim, as did Mutual, for exclusions that were not written in the policy wording. If Mutual was really concerned about the hazard of receiving an injury during a scheduled class, it need only exclude it as it excluded injuries at camps and clinics.

The Eighth Circuit wisely read the policy as a 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.

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 recently published the e-books, “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.

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

Federal Court Defers to Arbitration

Arbitrator Must Decide Dispute

Arbitration agreements are important to the courts. They provide a means to reduce the case load of the federal and state courts and allow the parties a quick and efficient means of resolving complex disputes. Reinsurance agreements, for example, are often considered complex and so arcane that it is difficult to present to a jury of laymen. Reinsurance arbitrations are usually presented to reinsurance professionals who have the knowledge and experience to understand the disputes.

Some parties believe they have a better opportunity to succeed in a reinsurance dispute with a judge and jury and try to find a way around arbitration agreements. In one such attempt Plaintiffs National Casualty Company (“National Casualty”) and Employers Insurance Company of Wausau (“Wausau”) filed a petition for declaratory relief regarding the preclusive effect of a prior arbitration. Defendants OneBeacon American Insurance Company, Employers Commercial Union Insurance Company, American Employers Insurance Company, Employers’ Fire Insurance Company, Northern Assurance Company of America, and Employers Liability Assurance Corporation (collectively “OneBeacon”) filed a motion to dismiss Plaintiffs’ collateral estoppel claim and a cross-petition to compel arbitration. The district court granted OneBeacon’s motion to dismiss and Wausau appealed.

In Employers Insurance Co. of Wausau v. Onebeacon American Insurance Co., 13-1913 (1st Cir. 02/26/2014) the First Circuit Court of Appeal was asked, as a case of first impression, to decide whether effect of prior arbitration must be decided by the arbitrator rather than the federal court.

FACTS

Between 1966 and 1986, OneBeacon had a program known as “Multiple Line Excess Cover” (“MLEC Program”) under which it annually entered into reinsurance contracts (“MLEC Agreements”) with various reinsurers. National Casualty, Wausau, and Swiss Reinsurance America Corporation (“Swiss Re”) participated as reinsurers in the MLEC Program. Wausau entered into MLEC Agreements with OneBeacon in 1973 and 1974 that are identical in all relevant respects to OneBeacon’s MLEC Agreements with Swiss Re from 1975 through 1980.

In December 2007, OneBeacon demanded arbitration under its contracts with Swiss Re seeking reinsurance recovery for losses arising out of claims against OneBeacon by several policyholders. The arbitration panel decided in favor of Swiss Re, and the District Court of Massachusetts confirmed the award. In April 2012, OneBeacon demanded arbitration with Wausau and National Casualty under MLEC Agreements from 1971–74 and 1980–85 seeking coverage for a number of claims. According to Wausau, “[t]he demand included billings of approximately $100,000 to Wausau under the 1973–74 [MLEC Agreements] for the very same . . . claims OneBeacon arbitrated and lost against Swiss Re.”

Following the demand for arbitration, OneBeacon, Wausau, and National Casualty entered into an “Agreement for the Consolidation of Arbitration,” which combined the parties’ arbitrations into a single proceeding. Subsequently, Wausau and National Casualty petitioned the District Court of Massachusetts for a declaratory judgment that the prior arbitration award between OneBeacon and Swiss Re had preclusive effect on the arbitration pending between OneBeacon and Wausau. The district court denied the petition, holding that the preclusive effect of a prior arbitration is a matter for the arbitrator to decide.

ANALYSIS

The single issue on appeal is whether a dispute over the preclusive effect of a prior arbitration is arbitrable. Wausau offers two arguments against arbitrability.

First, it argues that federal courts have the exclusive authority to determine the preclusive effects of their judgments, so an arbitrator lacks the authority to determine the preclusive effect of a prior arbitration once it has been confirmed by a federal court.

Second, that when the parties negotiated their arbitration agreement in the early seventies, the applicable case law did not hold that preclusion was an arbitrable issue. Thus, the parties could not have intended for the scope of their arbitration agreement to cover the preclusive effect of prior arbitrations.

Enforcement of Court Orders Confirming Arbitration Awards

Section 2 of the Federal Arbitration Act (“FAA”) provides that written agreements to submit disputes to arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The arbitration agreements in this case are broadly worded. They cover any irreconcilable dispute between the parties in connection with the MLEC Agreements. Thus, by their plain terms they would appear to include disputes over the preclusive effect of prior arbitrations.

Wausau’s argument rests entirely on the fact that in this case there is a federal court order confirming the prior arbitration award. The First Circuit found a flaw in Wausau’s logic because a federal judgment confirming an arbitration award is distinct from the arbitration award itself. The First Circuit recognized that a federal judgment very rarely considers the merits of the arbitrator’s decision. The district court’s review of arbitral awards must be extremely narrow and exceedingly deferential. Courts have no business weighing the merits of the grievance or considering whether there is equity in a particular claim. The arbitration statute requires the court to enter judgment upon a confirmed arbitration award, without reviewing either the merits of the award or the legal basis upon which it was reached.

A collateral estoppel analysis requires the court to determine whether:

(1)     the issues raised in the two actions are the same;

(2)     the issue was actually litigated in the earlier action;

(3)     the issue was determined by a valid and binding final judgment; and

(4)     the determination of the issue was necessary to that judgment.

That inquiry inherently involves an examination of the details of the prior arbitration; the arbitrator’s path to reaching the decision on the merits determines the preclusive effect of the arbitration. A federal judgment confirming the arbitration award generally does not address the steps leading to the decision on the merits at all. Since these matters are outside of the purview of the court order confirming the arbitration decision, there is no reason why that order should give the federal court the exclusive power to determine the preclusive effect of the arbitration.

A federal court has the prerogative to protect its own judgments. That prerogative need not extend beyond the scope of the judgment. If a federal court has nothing to say about the merits of the arbitration decision that it confirms (which is almost always the case), then a subsequent arbitrator does not infringe on the prerogatives of the federal court by determining the preclusive effect of that arbitration decision. Therefore, the general rule requires that the preclusive effect of a prior arbitration is an arbitrable issue.

Doctrine at the Time of Contracting

Wausau did not raise this argument before the district court. It is an ironclad rule that a party may not advance for the first time on appeal either a new argument or an old argument that depends on a new factual predicate. By failing to raise the argument below, Wausau waived it so the court gave it no consideration. Even if it did give it consideration it appears the First Circuit would have ruled the same way.

ZALMA OPINION

Arbitration is the favorite child of the federal courts who will seldom infringe on an agreement to arbitrate or reverse an arbitration award. Arbitration awards are only set aside for fraud or undisclosed conflicts of interest.

In this case there was no serious reason to bring a federal court in to deal with an issue that clearly belonged to the arbitration.

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.

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 recently published the e-books, “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.

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.

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You Get What You Pay For

Courts Cannot Write a Better policy Than the one Purchased

Some people purchase insurance based on the lowest price available. Prudent people buy insurance to protect them against the risks of loss faced by their property. The lowest price is not always the best bargain. Wholesale is often – in the long run – more expensive than retail.

Plaintiff Michael Lubik appeals from an order granting summary judgment to defendant Harleysville Insurance Company of New Jersey (Harleysville) and dismissing his complaint for insurance coverage. The entire case revolved, in Lubik v. Harleysville Insurance Co. of New Jersey, A-1120-12T2 (N.J.Super.App.Div. 02/27/2014), revolved about whether a named peril policy could be forced to provide all risks coverage.

FACTS

Plaintiff owned Unit 800 of a condominium complex situated in Ventnor, New Jersey. On October 5, 2010, water leaked into plaintiff’s condominium unit from a water line located in Unit 1000, two floors above plaintiff’s unit, causing approximately $60,000 in damages. Plaintiff had a “Dwelling 89 Fire” policy, also called a “Perils Insured Against” policy, with Harleysville, which covered specified property damage for his residence. The declaration page lists the “Location Address” as “4800 [Boardwalk], Unit 800.” The policy provided coverage for direct physical loss by perils listed in the policy, including: “12. Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protection sprinkler system or from a household appliance. . . . ¶This peril does not include loss: ¶  . . . .  e. on the Described Location caused by accidental discharge or overflow which occurs off the Described Location.”

The policy frequently used the term “Described Location, ” but did not specifically define it. References simply are made throughout the policy to the owner of the Described Location, a tenant of the Described Location, and an owner and family member of the Described Location.

The appellate court averred that the appeal primarily concerns the meaning of Described Location in the policy. The trial judge, after providing time to respond, granted Harleysville’s motion for summary judgment.

As the water from Unit 1000 originated off the Described Location, the judge reasoned, it was not a covered peril under the straightforward policy terms. To hold otherwise, the judge concluded, would require her to construe the Described Location in plaintiff’s insurance policy as “the entire condominium building,” which unrealistically suggested that plaintiff was “providing insurance for the entire building.” The judge determined such a reading was contrary to the plain meaning of the words of the policy.

ARGUMENT

On appeal, plaintiff again claims that the Described Location means the entire condominium building. Hence, he submits, the water originating from Unit 1000 did not come from off the Described Location, but from the Described Location itself, which makes the damage a peril covered by the policy. Additionally, plaintiff argues that the term Described Location is ambiguous, as it could mean the dwelling unit or the entire building, and this ambiguity must be resolved in his favor. Moreover, plaintiff contends that the portion of the policy in question is an exclusionary clause, which warrants additional scrutiny.

ANALYSIS

An insurance policy should be interpreted in accordance with the plain and ordinary meaning of its terms. Any genuine ambiguities must be resolved in favor of the insured. However, language in a contract is not rendered ambiguous simply because different wording could possibly make a provision more clear. When considering ambiguities and construing a policy, courts cannot write for the insured a better policy of insurance than the one purchased. In general, the insured has the burden to bring the claim within the basic terms of the policy. If the clause being evaluated is an exclusionary clause, such clauses must be construed narrowly, and the burden is on the insurer to bring the case within the exclusion.

As a preliminary matter, Clause 12(e) is not an exclusionary provision, and thus does not require additional scrutiny. It is contained in the “Perils Insured Against” section, which lists the policy coverage parameters.  Furthermore, if it were an exclusionary provision, it would nonetheless be enforceable because it is specific, plain, clear, prominent, and not contrary to public policy.

Plaintiff’s policy does not define the term Described Location. Rather, it refers to the Location Address as plaintiff’s specific unit, Unit 800.

Looking at the plain and ordinary meaning of the term Described Location, the only reasonable conclusion is that the Described Location is the location set forth as the Location Address in the declaration page.  Moreover, plaintiff’s hypothesis that the “dwelling” is Unit 800 and the Described Location is the entire building, is patently unreasonable. This supposition suggests that plaintiff thought he had purchased insurance to cover the entire condominium building. Plaintiff proffered no evidence that he received any information from defendant about the policy that would have given rise to a reasonable expectation that the Described Location was the entire building.

Plaintiff is attempting to rewrite his policy to afford him more coverage than he bargained for. As defendant points out, plaintiff chose to purchase a limited “Perils Insured Against” policy as opposed to a policy that covers all risks. Since plaintiff failed to demonstrate that the damage caused by water from another unit in the building was covered under the basic terms of his policy, defendant was entitled to a judgment as a matter of law. Plaintiff has failed to show any “exceptional circumstances” that would warrant interpreting the provisions of the policy contrary to their plain meaning.

Plaintiff asked the appellate court to torture the language in his policy to afford him coverage that he did not purchase. The court refused.  As the objective reasonableness of a clause is a question of law, summary judgment was appropriate. The insurance contract was not ambiguous and met the objectively reasonable expectations of the insured. The insurance contract clearly and straightforwardly stated that water damage from outside of plaintiff’s unit was not a covered peril.

ZALMA OPINION

The plaintiff sought a bargain. He saved a few dollars in premium and found he was obligated to pay for $60,000 in damages out of his own pocket. By litigation he attempted to get an appellate court to rewrite the policy he purchased to provide coverages for which he did not bargain. What he wanted was a Rolls Royce valued policy but paid for a Ford Fiesta valued policy. Both types of policies were designed to provide the plaintiff with indemnity for certain risks of loss. The policy he purchased provided him with protection against limited risks of loss. If he had purchased an “all risks” policy which might has cost him a few dollars more the plaintiff would have recovered the $60,000 in damages.

Courts interpret insurance policies; they do not rewrite them to provide coverages not promised.

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.

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 recently published the e-books, “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.

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.

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Guilty of Making Same Claim Twice

Zalma’s Insurance Fraud Letter

March 1, 2014

In the fifth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on March 1, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    Firing for Charge of Insurance Fraud by TDI Employee Affirmed.
2.    New E-Books From Barry Zalma.
3.    Fraud Fight Grows in Some States
4.    Guilty of Making the Same Claim Twice

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 the 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:

Zalma on Insurance

•     Contract of Personal Indemnity
•    Death Penalty for Murder for Insurance
•    Bad Deal Worse Than No Deal
•    Plain Language of Policy Controls
•    Estoppel Cannot Create Coverage
•    Subrogation Available for Separate & Distinct Coverage
•    Man Bites Dog Story – Court Admits It Was Wrong
•    Cancellation & Premium Finance
•    Insurer May Dispute Amount of Loss
•    Read Policy Obtained by Others Or Else
•    Murder & Insurance Fraud
•    Divorce Doesn’t Pay
•    Insured Must Be Made Whole
•    Reinsurer Sues IRS
•    Nonrenewal Effective
•    Jurors Assessment of Punitive Damages is Not Unbridled
•    Just for Fun
•    No Agreement No Contract
•    Risk Transfer Device Works
•    Court Should Never Rewrite Policy

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.

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.

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Contract of Personal Indemnity

Not an Insured — Not Covered

First party property insurance is a contract of personal indemnity. It does not follow the ownership of the property. It is a personal contract between the insurer and the persons named in the policy.

FACTS

In Priore v. State Farm Fire & Casualty Co., 99692, 2014-Ohio-696 (indeterminate 02/27/2014) the Ohio Court of Appeal, Michael A. Priore appealed the trial court’s order granting summary judgment in favor of State Farm Fire and Casualty Company (“State Farm”). MPDS Memphis, Ltd. (“MPDS Memphis”) is a limited liability corporation that was formed for the specific purpose of owning a 120-unit apartment building known as the Emerald Overlook Apartments (“the Property”). The Property is owned by MPDS Memphis. Priore is a 50 percent owner and the managing member of MPDS Memphis. A mortgage on the Property was issued in the amount of 17 million and was secured by the Property. To ensure that MPDS Memphis could obtain financing from the bank, Priore personally guaranteed the loan making him personally liable to the lender.

Beginning in 2000, State Farm insurance agent, Rocky Robinson, began serving as an insurance agent for properties in which Priore had some involvement. In 2004, Robinson procured the insurance policy that is the subject of the instant case (“the Policy”). The Named Insured on the Declarations Page of the Policy lists MPDS Memphis. Section I of the Policy governs “Property Coverages.” Section II governs “Comprehensive Business Liability.”

On February 29, 2008, the roof on the Property failed due to excessive weight of accumulating snow and ice. As a result, some of the apartment units flooded. On March 1, 2008, MPDS Memphis filed an insurance claim with State Farm seeking coverage for the roof, for internal property damage, and for lost rental income.

Dissatisfied with State Farm’s handling of its insurance claim, MPDS Memphis and its property manager, Windsor Realty and Management, Inc., filed suit against State Farm on February 19, 2010, in the Cuyahoga County Court of Common Pleas. The complaint alleged breach of contract, breach of the covenant of good faith, breach of fiduciary duty, negligent misrepresentation, and simple negligence. State Farm removed the case to federal court on the basis of diversity jurisdiction (“the federal case”).

In the federal case, the district court granted summary judgment to State Farm on all claims. MPDS Memphis appealed to the Sixth Circuit arguing that the district court erred in granting summary judgment on its claims for breach of contract and breach of the covenant of good faith. The Sixth Circuit affirmed the district court on MPDS’s bad faith claim. MPDSMemphis, Ltd. v. State Farm Fire & Cas. Co., 6th Cir. No. 11-4416, 2013 U.S. App. LEXIS 8501 (Apr. 24, 2013). After determining that the record was too muddled on the breach of contract claim, the Sixth Circuit reversed summary judgment on that claim and instructed the district court to afford “MPDS Memphis an opportunity to present its remaining breach of contract claims and then determine whether these claims are supported by evidence sufficient to withstand summary judgment.”

ANALYSIS

An insurance policy is a contract. When interpreting an insurance contract, the court must honor the intent of the parties.  A court presumes that the parties’ intent is reflected in the language that is found in the policy.  The court’s inquiry begins and ends by looking to the plain and ordinary meaning of the language used in the policy unless another meaning is clearly apparent from the contents of the policy.  If the court determines that the language in the policy is clear, it may look no further than the writing itself to find the intent of the parties. If the language is clear, then there are no genuine issues of material fact to be determined, and the trial court should order summary judgment.

The Policy is clear. Priore is not insured under the Property Coverages section of the Policy. As a Named Insured on the Declarations Page, MPDS Memphis is covered under the entire Policy. Because the plain and ordinary meaning of the Policy demonstrates that Priore is not covered under the Property Coverages section of the Policy, the trial court correctly granted summary judgment in favor of State Farm on the declaratory judgment action.

Reformation

Priore argues in the alternative that if he is not covered under the Property Coverages section of the Policy, then the Policy should be reformed in such a way so that he is covered under that section of the Policy. Although unambiguous insurance policies are usually enforced as written, where there is clear and convincing evidence of a mutual mistake in the policy, we may employ the equitable tool of reformation to deviate from the terms of the written instrument and to correct the mistake.  A court may also reform a policy in the case of a unilateral mistake that affects the insurance policy to such an extent that the contract is not ‘a correct integration of the agreement of the parties.

Generally, a court should not reform an insurance policy where the party seeking reformation has failed to fulfill his duty to read the policy.  Reformation is an equitable principle, and equity only aids the vigilant.  Priore asserts that the Policy should be reformed because both Priore and State Farm had understood and intended that State Farm would issue a policy that covered Priore under the Property Coverages section of the Policy. Priore argues that, contrary to this intention and understanding, State Farm failed to list Priore as a Named Insured under the Policy. Priore admits he never read the Policy.

Because Priore is not covered under the Property Coverages section of the Policy, Priore cannot demonstrate that State Farm breached any obligation to Priore. Because Priore is not covered under the Property Coverages section of the Policy, State Farm could not owe a fiduciary duty to Priore with regard to that section of the Policy, and so Priore could not prevail on a bad faith claim against State Farm.

Priore argued that the agent, Robinson, was a fiduciary and that, as such, he owed Priore a higher duty of care – a duty not only to provide the specific coverage that Priore requested, but also to advise Priore of the various types of coverage that Priore might need. Although the law recognizes a public interest in fostering certain professional relationships, such as the doctor-patient and attorney-client relationships, courts have determined that the relationship between an insurance agent and client does not rise to the same level of importance. Although a fiduciary relationship may be created out of an informal relationship where both parties mutually understand that they have entered into a special trust or confidence, the situation in this case is nothing more than an ordinary business relationship between insurance agent and client, and that the insured was in the best position to know how much coverage it needed.

Viewing the evidence in the light most favorable to Priore, the court concluded that Priore requested personal coverage for liability and that Robinson obtained such coverage for Priore. The record further establishes that Priore did not ask Robinson that he be personally covered for the Property, nor did he ask Robinson any questions about personal coverage on the Property. In fact, Priore never asked Robinson for general advice about the scope of his personal coverage under the Policy. In other words, Priore and Robinson’s relationship was a typical client and insurance agent relationship. Robinson was not a fiduciary and did not owe a heightened duty to probe Priore about obtaining additional personal coverage under the Policy. Priore’s negligence claim against Robinson fails as a matter of law.

ZALMA OPINION

Priore, as an 50% owner of MPDS Memphis insurance existed to protect the property against covered losses. MPDS Memphis is a “person” in the eyes of the law and the only insured. That a shareholder of MPDS Memphis had an interest in the property – because of his co-signing a loan – did not make him an insured. He had an insurable interest that was not insured. He could have purchased a separate policy to cover his interest. He did not. When MPDS Memphis bought insurance to protect its interest in the property, which was 100%, it did not ask to separately insure Priore and Priore did not ask that he be insured.

When multiple interests in real property insure the property they should all ascertain that their interests are protected by asking the insurer to name them as an insured. They also have the right to purchase separate insurance to protect their interest. Priore did neither and attempted to get a coverage that did not exist by making multiple arguments and accusing the insurer of bad faith. His ploy failed. If the federal court finds coverage his interest will be protected.

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.

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 recently published the e-books, “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.

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

Death Penalty for Murder for Insurance

Insurance Fraud Is NOT A Victimless Crime

The plaintiffs’ bar, many members of the public, the courts, police and prosecutors believe that insurance fraud is a victimless crime since only an impersonal, rich and disliked corporation is harmed. The California Supreme Court, in a 51 page opinion, found otherwise in People v. Rodriguez, S122123 (Cal. 02/20/2014).

A jury convicted defendant Angelina Rodriguez of the first degree murder of her husband, Jose Francisco Rodriguez, under the special circumstances of murder by administering poison and murder for financial gain, and of one count of attempting to dissuade a witness. After a penalty trial, at which the prosecution presented evidence that defendant had also murdered her infant daughter several years previously to collect on an insurance policy, the jury returned a verdict of death.

THE FACTS

The evidence showed that in September 2000, on her second attempt, defendant fatally poisoned her husband, Jose Francisco Rodriguez, by giving him drinks containing oleander and antifreeze in order to collect on a life insurance policy she had insisted the two take out a few months earlier.

Montebello Police Officer Stephen Sharpe, responding to a call from defendant’s home at 837 Marconi Street, found Frank’s body lying facedown on the carpet in the bedroom.

At 10:17 a.m., the morning Frank died, defendant called Marracino, the life insurance agent, and left a message for him to call her back. When he returned her call a short time later, she reported her husband’s death and inquired about getting the $250,000 payment on the policy on Frank’s life.

On September 14, the case was referred to the Los Angeles County Sheriff’s Department and assigned to Detective Brian Steinwand and Sergeant Joe Holmes. Detective Steinwand testified that defendant had been a suspect in Frank’s death from the beginning, but they did not tell her that. They pretended to believe her story that someone at Angel Gate Academy had poisoned Frank in order to try to get her to talk and provide information. Dr. Richard Clark, a toxicologist with the poison center at the University of California, San Diego, testified that ethylene glycol is poisonous but tends to taste sweet and can easily be mixed with Gatorade. Oleander, commonly found along Southern California freeways, is also poisonous. It can be served as a tea and mixed with another liquid to disguise its bitter taste.

After examining documents in the case, Dr. Clark opined that Frank had died of ethylene glycol poisoning. Specimens from his body contained five and six times as much of the chemical as is needed to kill. After defendant’s arrest, the investigators searched her Paso Robles home pursuant to a search warrant. They found in her purse a piece of paper containing numbers and computations, apparently calculations regarding how she would spend the insurance money plus accumulated interest that she expected to receive, and a napkin on which was written the sheriff’s fax number, the number to which the anonymous fax received by Sergeant Holmes had been sent.

On September 18, 1993, defendant’s 13-month-old daughter Alicia F. (Autumn’s younger sister) choked to death on a pacifier manufactured by the Gerber Products Company (Gerber) in her crib in the family’s home in Lompoc. Defendant’s husband at the time, Thomas F. (Thomas), Alicia’s father, was on a business trip, and defendant was the only adult in the house when Alicia died.

Two months before the baby died by choking on a pacifier, defendant had insured the baby’s life for $50,000, and named herself as the primary beneficiary. Defendant did not name Thomas as a beneficiary and did not tell him about the policy until after the baby had died. On October 22, 1993, the insurance company paid the $50,000, plus interest. The defendant also sued the manufacturer of the pacifier and received a report from an expert, never disclosed to the manufacturer, that the fracture he observed between the two pieces could not have been caused either by a baby chewing through the pacifier or a baby’s repeated sucking action. Based on his visual and microscopic examination of the pacifier, he believed that “some external trauma or tool was responsible for failing this nipple.” Keeping that report secret the defendant sued the manufacturer and eventually received a settlement of approximately $750,000.00.

ANALYSIS

Defendant contended the presentation of the technical evidence violated her confrontation rights. Specifically, she challenges the testimony that the victim’s body contained oleander and ethylene glycol, and Dr. Clark’s opinion testimony. The California Supreme Court concluded that the contention lacked merit. Indeed, it is not clear exactly what confrontation defendant claims she was denied. Defendant contends the evidence was insufficient for the jury to find beyond a reasonable doubt that she murdered her daughter. Because the question concerns the admissibility of evidence, it also comes within the trial court’s discretion and the Supreme Court found the discretion was not abused.

The Supreme Court noted that there was ample evidence that defendant murdered her daughter. About two months before Alicia died, defendant took out life insurance on the baby without telling her then husband, the baby’s father, and named only herself the primary beneficiary. This circumstance alone strongly suggests she murdered her daughter to collect the life insurance proceeds, just as she later murdered her husband to collect on a life insurance policy that she insisted he take out.

The trial court cited defendant’s actions, rather than mere words. After defendant tried to kill her husband by loosening the gas valves, she tried a second time, giving him enough oleander to send him to the emergency room. Her husband became very ill but did not die. Rather than feel remorse for what she put him through, she tried a third time, this time giving him several times the amount of poison (both oleander and antifreeze) needed to kill him. These actions overtly showed this was truly a remorseless murder or, as the court put it, among the “coldest” of killings. These were relevant aggravating circumstances of the crime.

ZALMA OPINION

I have preached until I was blue in the face that insurance fraud is not a victimless crime. Insurers are victims as, in this case, was the insurer that paid $50,000 for the death of the child and the insurer who paid $750,000 for the same death in a wrongful death case because the defendant concealed the report of the expert that showed the pacifier was cut with a tool and was not the result of a product defect. The defendant killed her child and her second husband solely to obtain the benefits of the insurance that she acquired. She even attempted to kill a witness who was to testified against her.

Ms. Rodriguez was a cold blooded killer. The victims of her crimes were her child, her husband, and two or more insurers. She was properly sentenced to death and to make it clear it took the California Supreme Court more than 50 pages to defeat all of her arguments.

It is time that the various states and the federal government take insurance fraud seriously and make it more difficult to succeed. Ms. Rodriguez’ husband might have survived if there was a serious and thorough investigation into the death of the child and Ms. Rodriguez was prosecuted for that crime rather than allowing her to recover $800,000 for the murder of the child.

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.

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 recently published the e-books, “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.

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

Bad Deal Worse Than No Deal

Don’t Jump Out of a Perfectly Good Airplane

People severely injured believe that the only possible recourse is the insurance available to the tortfeasor. The injured party, if the insurer refuses to cover the tortfeasor, will enter into an agreement with the tortfeasor as to a judgment that they promised to only collect from the insurer and, by so doing, protect the assets of the tortfeasor in hope of getting major damages and bad faith damages from an insurer. As my readers are aware this is not always a wise decision. In McGirk v. Certain Underwriters at Lloyd’s, Civil Action  3:13CV00020 (W.D.Va. 02/21/2014) a Mr. McGirk attempted to profit from his injuries by going after the insurer for the tortfeasor.

FACTUAL BACKGROUND

On June 13, 2009, plaintiff Sage McGirk participated in a group skydive offered by Skydive Factory. Robert Mehl, an agent of Skydive Factory, piloted the airplane carrying the group, which took off from the Orange County Airport in Orange, Virginia. After the jumpers exited the plane upon reaching the proper altitude and position, Mehl turned and made a low pass over the landing area.  In doing so, the aircraft struck McGirk’s parachute in mid-air, which caused him to fall to the ground and suffer serious injuries.

At the time of the incident, Skydive Factory had a liability insurance policy issued by Lloyd’s (“the Policy”). The Policy insured Skydive Factory  against certain liability and property damage arising from Skydive Factory’s use of a DeHavilland DHC-6 Twin Otter operated on the day of the incident.

The policy stated that it was written “To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages, including damages for care and loss of services, because of bodily injury, sickness or disease, including death at any time resulting therefrom, sustained by any person, excluding any passenger, and for damages because of injury to or destruction of property, including the loss of use thereof, caused by an occurrence and arising out of the ownership, maintenance or use of the Aircraft.”

An endorsement to the Policy contains the following exclusion (“the Exclusion”): “Combined Single Limit (Bodily Injury/ Property Damage) excluding Passenger Legal Liability, excluding Liability to Occupants and excluding Liability to and of the jumpers after descending from aircraft and whilst attempting to exit the Aircraft.”

McGirk filed a personal injury suit against Mehl and Skydive Factory. Lloyd’s denied coverage and refused to defend Mehl. Mehl ultimately agreed to the entry of a judgment against him in the amount of $975,000.00. By separate agreement, McGirk agreed not to enforce the judgment against Mehl in excess of $3,000.00, and to accept from Mehl an assignment of his rights to pursue redress from Lloyd’s.

McGirk sued Lloyd’s requesting a judgment declaring that Lloyd’s was obligated to defend and indemnify Mehl and is liable for the consent judgment. Lloyd’s moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Relying on the Exclusion because the Policy plainly excludes coverage for any liability to skydivers like McGirk.

DISCUSSION
The interpretation of an insurance policy, including the determination and resolution of ambiguities, is a question of law for the court to decide. The policy is to be considered as a whole and each provision is to be given effect and interpreted so as to harmonize with the others.

Lloyd’s argues that the exclusion is capable of only one reasonable interpretation, namely that the Policy excludes coverage for liability to skydivers: (1) while they are in, on, or boarding the aircraft as passengers; (2) while they are attempting to exit the aircraft; and (3) after they have descended or jumped from the aircraft. Lloyd’s interpretation of the Exclusion is supported by the United States Court of Appeals for the Fifth Circuit’s decision in Willingham v. Life & Casualty Ins. Co., 216 F.2d 226 (5th Cir. 1954). In Willingham, the beneficiary of a life insurance policy, whose husband jumped or was thrown from a private airplane, sought to avoid an accidental death benefit exclusion for “death resulting from operating, riding in, or descending from any kind of aircraft . . . .”   The Fifth Circuit held that the exclusion was “unambiguous and its meaning clear,” and that the district court properly held that the plaintiff was not entitled to recover the accidental death benefit.  The Fifth Circuit found it “too clear for serious argument that . . . ‘descending from’ included . . . jumping from the airplane” and otherwise leaving or exiting the airplane in any manner.

Since “descending” from the aircraft plainly means getting down, alighting, or “jump[ing] from” the aircraft, as Willingham holds, once that act occurs, anything that happens subsequent to that act is logically “after” the act. Additionally, McGirk’s suggested interpretation – that “after descending from aircraft” refers only to the point in time when the jumper has finally reached the ground and, thus, that coverage was not excluded for the period of time in which McGirk was in the air – is inconsistent with the remaining portions of the Exclusion. Given the clear intent of the Exclusion, McGirk’s suggested reading, which would create a small window of coverage for jumpers after they have jumped from the aircraft but before they have reached the ground, is unreasonable.

Every insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy and as amplified, extended, or modified by any rider, endorsement, or application made a part of the policy. The court found no ambiguity in the use of the term “jumpers,” and concluded that the term unquestionably includes skydivers like McGirk, who jump from aircraft. This conclusion is supported by McGirk’s own pleadings, in which he repeatedly refers to himself as a “jumper.”

COVERAGE IS NOT MANDATED BY STATUTE

In his final argument, which was the subject of supplemental briefing by the parties, McGirk maintains that coverage for his injuries is required by Georgia statute.  McGirk’s statutory argument is based on § 33-7-9 of the Georgia Code, which defines “vehicle insurance” as follows: “Vehicle insurance is insurance against loss of or damage to any land vehicle or aircraft, … from any hazard or cause, and against any loss, liability, or expense resulting from or incident to ownership, maintenance, or use of any such … aircraft …”

The court agreed with Lloyd’s that § 33-7-9 itself does nothing more than provide a definition of the term “vehicle insurance.” On its face, the statute does not mandate coverage, much less use any words suggesting an affirmative obligation, such as “shall,” “must,” or “require.”

The court agreed with Lloyd’s that in the absence of any statutory provision setting forth mandatory minimum requirements for aircraft liability insurance, or prohibiting insurers from excluding coverage for liability to jumpers, McGirk’s statutory argument was rejected.

CONCLUSION

In sum, after considering the Policy in its entirety, the court concludes that the Exclusion is unambiguous and subject to only one reasonable interpretation: that the Policy excludes coverage for liability arising during any phase of skydiving, including the phase in which jumpers are in the air after jumping or descending from aircraft. Because McGirk was a jumper, and since he was injured after descending from the airplane piloted by Mehl, the court concluded that the Policy excludes coverage for liability to McGirk.

The court dismissed the suit.

ZALMA OPINION

The tortfeasor, Skydive Factory, avoided a serious bodily injury lawsuit for a payment of no more than $3,000. McGirk received a judgment for almost a million dollars that is noncollectable. The tort judgment is worth nothing more than a piece of paper that can be framed and hung on the wall. Skydive Factory owned, according to the policy, more than one aircraft. It had assets to defend itself and make a one-sided deal with McGirk.

McGirk allowed greed to overturn reason. He gave up a bird in hand for a hoped for two in the bush only to see them, and his judgment, fly away.

Before entering into such a deal McGirk and his counsel should have sought the advice of competent insurance coverage counsel, determined the value of all of the assets of Skydive Factory and Mehl. They clearly did not do or the result would have been different.

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.

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 recently published the e-books, “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.

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

Plain Language of Policy Controls

Contingent Business Interruption

Insurance is a contractual relationship. Insurers have the right to choose the risks they are willing to take and, by clear language of the policy, avoid the risks the insurers are unwilling to take. In Millennium Inorganic Chemicals Ltd. v. National Union Fire Insurance Co. of Pittsburgh, P.A., 13-1194 (4th Cir. 02/20/2014) the Fourth Circuit Court of Appeal was asked to interpret an insurance policy and apply the language of the policy to limit the risks the insurers agreed to take.

FACTS

National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) and ACE American Insurance Co. (“ACE” and together with National Union, the “Insurers”) appeal from the district court’s grant of partial summary judgment in favor of Millennium Inorganic Chemicals Ltd. and Cristal Inorganic Chemicals Ltd. (collectively, “Millennium”). Millennium sued the Insurers in the United States District Court for the District of Maryland, contending that the Insurers had wrongfully denied Millennium’s claim for coverage under contingent business interruption provisions of commercial liability insurance policies issued by the Insurers. The district court granted partial summary judgment in favor of Millennium after concluding that certain terms in the policies were ambiguous and that the doctrine of contra proferentem therefore applied requiring the court to interpret the language in favor of the insured and against the insurers.

The Insurance Policy Provisions

In 2008, Millennium enlisted the help of Marsh USA, Inc. (“Marsh”), an insurance brokerage firm, to secure a commercial liability insurance policy including contingent business interruption (“CBI”) insurance coverage. Millennium chose to purchase its commercial coverage, including the CBI endorsement, from National Union and ACE, each of which would bear responsibility for 50% of Millennium’s covered losses, up to specified limits. Shortly after issuing the Binders, National Union and ACE separately issued policies to Millennium (the “Policies”) with essentially identical terms. Each policy included an Endorsement titled “CONTINGENT BUSINESS INTERRUPTION CONTRIBUTING PROPERTY(IES) ENDORSEMENT” (the “Endorsements”). The Endorsements insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain “contributing properties.” Specifically, Section C of the Endorsements defined events of coverage as insurance only against:

loss directly resulting from necessary interruption of business conducted on premises occupied by [Millennium], caused by damage to or destruction of any of the real or personal property described above and referred to as CONTRIBUTING PROPERTY(IES) and which is not operated by [Millennium], by the peril(s) insured against during the term of this Policy, which wholly or partially prevents the delivery of materials to [Millennium] or to others for the account of [Millennium] and results directly in a necessary interruption of [Millennium's] business.

Millennium’s Claim

Millennium was in the business of processing titanium dioxide at its processing facility in Western Australia. The energy source for Millennium’s titanium dioxide processing operation was natural gas received through the Dampier-to-Bunbury Natural Gas Pipeline (the “DB Pipeline”), Western Australia’s principal gas transmission pipeline. Millennium purchased from a number of natural gas producers, one of which was Apache Corporation (“Apache”).

Once Apache processed the natural gas, it would inject the gas into the DB Pipeline, at which point custody, title, and risk passed from Apache to Alinta. The natural gas received from Apache’s facility then commingled with that obtained from other producers, resulting in an amorphous mix of gas in a single pipeline. Apache has no ownership interest in the DB Pipeline and does not own any downstream gas transmission or distribution facilities. Apache. At the time period relevant to this appeal, Apache produced about 20% of the natural gas that Alinta sold.

On June 3, 2008, an explosion occurred at Apache’s Varanus Island facility, causing its natural gas production to cease. Apache notified Alinta that the explosion caused it to shut down its operations and that there would be no gas supply from Varanus Island until further notice. Alinta, in turn, sent a notice of force majeure to Millennium and other customers. The Australian government quickly intervened and imposed controls prioritizing delivery of natural gas to domestic customers and essential services. As a result, Millennium’s gas supply was curtailed, and it was forced to shut down its titanium dioxide manufacturing operations for a number of months.

Two days after the explosion, on June 5, 2008, Millennium sent notice of claim letters to National Union and ACE, seeking CBI coverage for its losses incurred when the titanium dioxide facility closed. The Insurers concluded that Apache was not a direct supplier to Millennium. As a consequence, the Insurers determined there was no coverage under the Policies for Millennium’s claim, but invited Millennium to provide evidence of a direct relationship between Millennium and Apache sufficient to establish policy coverage.

Proceedings in the District Court

The district court entered an order granting Millennium’s motion for partial summary judgment, denying the Insurers’ motion for summary judgment with respect to Millennium’s declaratory judgment claim, and granting the Insurers’ motion with respect to Millennium’s bad faith claim. The district court concluded that “the physical relationship between the properties is as or more important than the legal relationship between the properties’ owners.”

In order to resolve the ambiguity, the district court applied the doctrine of contra proferentem in favor of Millennium. Accordingly, the district court held that Apache qualified as a “direct” supplier to Millennium and that Apache’s natural gas production facility was a “direct contributing property” within the meaning of the Policies “because Apache’s facility physically provided a direct supply of natural gas to Millennium’s premises, despite the fact that Apache and Millennium had no direct contractual relationship.”

After the district court granted Millennium’s motion for partial summary judgment, the parties stipulated and agreed to the entry of judgment in favor of Millennium in the amount of $10,850,000, inclusive of pre-judgment interest, with the Insurers expressly preserving their right to appeal the judgment.

ANALYSIS

When interpreting insurance contracts, courts first look to the plain language of the provision at issue. If the plain language of the provision is clear, “that is the end of the inquiry.” Beginning with the plain language of the Policies, as the district court found and Millennium concedes, the Endorsements provided coverage only with respect to “direct contributing properties.” Millennium argues that the term “direct” is ambiguous because it could refer either to the legal relationship between the contributing property and the insured or the physical relationship between those parties. We find the term “direct” to be clear as used in the Policies and without ambiguity.

The term “direct” is defined as “proceeding from one point to another in time or space without deviation or interruption,” “transmitted back and forth without an intermediary, “or”operating or guided without digression or obstruction.” Webster’s Third New International Dictionary 640. Thus, for Apache to be considered a direct contributing property to Millennium, it must have supplied Millennium with materials necessary to the operation of its business “without deviation or interruption” from “an intermediary.”

On the undisputed facts of this case, neither Apache nor Apache’s facilities on Varanus Island can be considered a “direct contributing property” of Millennium.

Whatever the relationship between Apache and Millennium, it was clearly interrupted by “an intermediary,” Alinta, who took full physical control of Apache’s gas before delivering indistinguishable commingled gas to Millennium. That relationship was also interrupted by an intervening step, the physical insertion of the gas into the DB Pipeline, at which point Apache relinquished all physical control over that gas.

Under the plain language of the Policies, coverage is triggered only by damage to or destruction of direct contributing properties. Because Apache is at most an indirect supplier to Millennium, there can be no coverage under any reading of the “for the account of” clause.

 ZALMA OPINION

The majority applied the plain language of the policy by referring to the dictionary. The dissenting justice, attempting to counter the decision, claimed the same dictionary definition of “direct” when applied to the policy language and the facts of the loss, would provide coverage. The dissent’s reading seemed to stretch the meaning beyond reason. Simply put, the cause of the loss was the explosion on the island that reduced the available gas to be sent to the plaintiff’s property. Apache, the producer of the natural gas, was not directly related to the plaintiff. Rather, it provided approximately 20% of the gas that went into the pipeline that serviced the plaintiff’s manufacturing facility.

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.

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 recently published the e-books, “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.

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

Estoppel Cannot Create Coverage

No Coverage No Bad Faith

Lawyers with a weak case get creative when attempting to obtain coverage for a person insured whose claim was denied. In Lewis Holding Company, Inc. v. Forsberg Engerman Co., S-13-0093 (Wyo. 02/21/2014) the Supreme Court of Wyoming was called upon to resolve an insurance coverage dispute where the insured claimed payment of a previous claim estopped the insurer from denying a subsequent claim. The trial court granted summary judgment in favor of defendants Lexington Insurance Company, NTA, Inc., and Forsberg Engerman Company, and against plaintiff Lewis Holding Company, Inc.

FACTS

Lewis Holding is a Wyoming corporation engaged in the trucking business. Lexington is an insurance company, and NTA provides insurance adjusting services to Lexington. Forsberg is the insurance agency that helped Lewis Holding purchase insurance from Lexington.

In October, 2010, one of Lewis Holding’s side-dump trailers was damaged while unloading. Details of the incident are unclear, but it is undisputed that the trailer partially turned over and its back wheels were lifted off the ground. Lewis Holding filed an insurance claim, which Lexington paid.

In April, 2011, another of Lewis Holding’s side-dump trailers was damaged. Again, details are unclear, but it is undisputed that this trailer did not turn over and its wheels never left the ground. As before, Lewis Holding filed an insurance claim. NTA’s adjuster examined the trailer. Based on his report, NTA issued a reservation of rights letter on Lexington’s behalf, indicating that the damage may not be covered by the policy because it was due to mechanical failure or wear and tear. After the trailer was inspected a second time, Lexington denied the insurance claim on the basis that the damages were not the result of an upset or collision, but rather “the result of improper welding from previous repairs.”

Lexington and NTA moved for summary judgment, pointing out that the insurance policy covered loss or damage caused by “upset,” but excluded coverage for loss or damage “resulting from wear and tear” or “mechanical . . . failure.” They explained that Lexington paid the 2010 claim because the wheels of the trailer were off the ground, which constituted an “upset.” They asserted that coverage was properly denied for the 2011 incident because the damage was due to “wear and tear” and “mechanical breakdown.” Forsberg also moved for summary judgment on the basis that it was not a party to the insurance contract between Lewis Holding and Lexington. Forsberg asserted that it could not be liable for the insurance claim because it was only an agent, not the insurer.

DISCUSSION

In support of their motion for summary judgment, Lexington and NTA submitted a copy of the insurance agreement between Lewis Holding and Lexington. Two of the policy’s provisions were highlighted. The portion entitled “PERILS COVERED” included the following language:

“Section A. Collision or Upset.

“This Section covers loss of or damage to vehicle caused by accidental collision of the vehicle with another object, or by upset, provided always that the deductible specified in the Schedule shall be deducted from the amount of each loss or damage to each vehicle.” (Emphasis added)

The portion entitled “EXCLUSION” provided that coverage under the policy did not apply to loss or damage “resulting from wear and tear, freezing or over-heating, mechanical or electrical breakdown or failure, unless such damage is [a] direct result of perils covered under this policy.”

Paul Lewis, a former stockholder, director, and officer of Lewis Holding, testified in his deposition that the trailer almost tipped over in the 2010 incident, and the rear wheels were off the ground. Because this incident involved an “upset,” which is covered under the insurance agreement, Lexington paid the claim. Mr. Lewis also testified that, in the 2011 incident, the wheels of the trailer remained on the ground, and during normal operations, some part of the trailer broke. There was no “upset,” as had occurred in the earlier incident. Lexington provided the report of an expert in the inspection, examination, and investigation of mechanical systems, who concluded that the trailer involved in the 2011 incident had been “compromised due to improper welding techniques,” and the damage was due to mechanical failure. Because the insurance agreement excludes damages resulting from mechanical failure, Lexington declined to pay the insurance claim for the 2011 incident.

Lewis claimed that because Lexington paid the first claim it is estopped from arguing the exclusion. Estoppel is an equitable remedy. Equitable estoppel is the effect of the voluntary conduct of a party whereby he is absolutely precluded from asserting rights which might otherwise have existed as against another person who has in good faith relied upon such conduct and has been led thereby to change his position for the worse.

However, the coverage of an insurance policy may not be extended by waiver or estoppel. This is in accord with general law and Wyoming law. In the case of Sowers v. Iowa Home Mutual Casualty Insurance Company, 359 P.2d 488 (Wyo. 1961), the insured made estoppel and waiver arguments against the insurer on the basis of representations that had been made by the insurer’s agent. In that case the Supreme Court of Wyoming held, citing extensive authority, that conditions going to coverage could not be extended by acts of the insurer or its agent under the doctrines of estoppel and waiver.

The doctrines of waiver and estoppel cannot be used to extend the coverage of an insurance policy or create a primary liability, but may only affect rights reserved by the policy. Under no conditions can the coverage or restrictions on coverage be extended by waiver or estoppel. While a forfeiture of benefits contracted for in an insurance policy may be waived, the doctrine of waiver or estoppel cannot create a liability for benefits for which the parties did not contract.

The insurance agreement between Lewis Holding and Lexington plainly and unambiguously excludes coverage for damages due to mechanical failure. The doctrine of estoppel cannot be used to extend the insurance coverage to include risks that are expressly excluded by the policy.

Claim against Forsberg Engerman Company

While acknowledging that Lexington issued the insurance policy at issue, Lewis Holding contends that it had no direct dealings with Lexington. Forsberg was only the agent who helped Lewis Holding obtain its insurance. It is not a party to that insurance policy. There is no theory or facts that can bind the agent to pay a claim.

Covenant of Good Faith and Fair Dealing

Lewis Holding also asserted claims against Lexington, NTA, and Forsberg for breach of the covenant of good faith and fair dealing.

In the insurance context, Wyoming requires that to prove a claim for bad faith, a plaintiff must demonstrate the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Since the Supreme Court concluded that Lexington, NTA, and Forsberg were not liable to Lewis Holding under the insurance policy that alone was sufficient to establish that these parties had reasonable bases for denying Lewis Holding’s claim and did not breach the covenant of good faith and fair dealing.

ZALMA OPINION

Although the claim of estoppel was creative it certainly did not require bringing the case to the Supreme Court of Wyoming. The two events were different. The trailer in the claim was paid lifted off the ground and almost upset. The insurer, as an expression of good faith, paid that claim since it appeared to fit the coverage. The second incident was not even close to an upset. Its wheels stayed on the ground and it just failed. An expert testified that the failure was due to a bad weld. Estoppel requires that the insurer act in some way that unfairly causes the insured to believe coverage exists for a loss that is clearly and unambiguously excluded. That didn’t happen here.

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.

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 recently published the e-books, “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.

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.

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Subrogation Available for Separate & Distinct Coverage

Once Insured Made Whole Subrogation May Proceed

The language of insurance policies provide the insurer with a right of subrogation so it can recover from a tortfeasor the amount it paid to its insured. Courts have changed the application of the subrogation language by announcing the “Made Whole Doctrine” which requires the insured to be made whole before the insurer can recover in subrogation. For example, if an insured suffers $50,000 in property damage and only recovers $25,000 from its property insurer and $25,000 from the tortfeasor, the insured is made whole and the insurer may not subrogate against the tortfeasor.

THE CERTIFIED QUESTION

Does Montana law prohibit an insurer from exercising its rights of subrogation to seek payment from the separate property damage coverage of the liable third-party’s automobile insurance for the discrete amounts paid by the insurer for property damage where:

(a) the insured has suffered both bodily injury and property damage in an accident;

(b) the insurer’s property damage payments were made under separate, optional collision coverage for physical damage to the insured’s vehicle;

(c) the amounts sought from the liable third-party’s automobile insurance are covered by separate property damage liability coverage that is not exhausted by the amounts sought by subrogation;

(d) the insured has been fully compensated by payment from his insurer for the property damage loss-including all costs associated with the property damage loss-and made whole as to the property damage loss that he insured as a result of the accident; and

(e) the insured contends he has not been made whole from the separate personal injury liability coverage of the liable third-party’s automobile insurance and the underinsured motorist coverage of his own automobile insurance policy?

FACTUAL BACKGROUND

On October 26, 2009, Robert Van Orden (Van Orden) was involved in a motor vehicle accident caused by another driver. Van Orden carried an automobile insurance policy (the USAA Policy) through United Services Automobile Association General Indemnity Company (USAA). The USAA Policy included separate, optional collision coverage (Part D). Part D applied to losses suffered by Van Orden’s vehicle as a result of a collision. It covered the actual cash value of the loss minus a $500 deductible.

The at-fault driver maintained automobile insurance coverage at the time of the accident through Alpha Property & Casualty Insurance Company (the Alpha Policy) which was underwritten by Unitrin Specialty Insurance (Unitrin). The Alpha Policy included liability limits of $25,000 per person for bodily injuries and a separate limit of $25,000 for property damage per accident.

As a result of the accident, Van Orden sustained both bodily injury and property damage. His property damage included $12,261.75 in vehicle repair costs and $720 for the use of a rental car. The parties agree that this $12,981.75 is the total amount of property damage incurred by Van Orden as a result of the accident. USAA paid the vehicle repair and car rental costs directly to the merchants who supplied those services for Van Orden. Because the at-fault driver carried an active insurance policy, USAA waived Van Orden’s $500 deductible; Van Orden incurred no out-of-pocket expenses for his property damage.

For the bodily injuries suffered because of the accident, Van Orden recovered $24,430.19 from Unitrin under the bodily injury liability limits of the Alpha Policy and $50,000 from USAA under the UIM coverage of the USAA Policy. Van Orden claims that his bodily injury damages and costs to recover those damages exceed both the payments he has received and the limits of the bodily injury liability coverage of the Alpha Policy and the UIM coverage of his Policy.

USAA sought subrogation only for the property damage expenses from Unitrin on November 24, 2009. On December 8, 2009, Unitrin paid USAA $12,981.75 out of the property damage liability limits of the Alpha Policy.

Van Orden filed an action in Montana’s Eighth Judicial District Court, Cascade County, on behalf of himself and a putative class of plaintiffs. He alleged that USAA violated Montana law by seeking subrogation for property damage loss from a tortfeasor’s automobile liability insurer before its insured had been made whole with respect to related personal injuries.

DISCUSSION

Subrogation is the substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor. An insurer’s right to subrogation is limited, however, by the recognition that an insured is entitled to be fully compensated for his or her damages. Known as the “made whole doctrine,” when the insured has sustained a loss in excess of the reimbursement by the insurer, the insured is entitled to be made whole for his entire loss and any costs of recovery, including attorney’s fees, before the insurer can assert its right of legal subrogation against the insured or the tort-feasor. The made whole doctrine is consistent with the equitable principles underlying subrogation because plaintiffs who are not yet compensated for their loss are not unjustly enriched by recovering from both parties, and third-party tortfeasors are not relieved of their legal obligation for the loss.

Montana has affirmed application of the made whole doctrine in numerous decisions. The equitable subrogation principles control an insurer’s subrogation rights over standard insurance policy language mandating repayment of all money paid out under the policy.

Under the conditions set forth in the certified question, there is no need for speculation as to whether Van Orden is fully covered for the loss USAA seeks to recover. It is undisputed that Van Orden sustained $12,981.75 in total property damage, USAA paid that full amount under a separate and optional property damage portion of his policy, and USAA received that amount from a separate property damage liability limit of the at-fault driver’s insurance policy. The Supreme Court concluded that the insured was made whole for the element of damage for which he purchased property damage insurance.

Van Orden argues that because he has not yet recovered all of his personal injury damages, the amount USAA recovered under the tortfeasor’s property liability limit must go toward making him whole for those damages. Even assuming that Van Orden’s damages exceeded the combined payouts from USAA and Unitrin, under no circumstances would the remaining money available under the property damage coverage of the Alpha Policy spill over into the bodily injury pool of money, or be subject to attachment for the payment of attorney’s fees or costs. Since the property damage insurance money would not be available to Van Orden whatever the situation, USAA is clearly not asserting an interest in sums that Van Orden otherwise would be able to recover from the tortfeasor’s policy. USAA is not taking any money out of Van Orden’s pocket and is entitled to take from Unitrin’s pocket.

When,  as here, damages are discrete, readily-ascertainable, and completely covered under a separate policy or portion of the policy for which a separate premium has been paid, subrogation may proceed as to that element of loss only.

Based on the foregoing, the Supreme Court answered the certified question “no”: Montana law does not prevent an insurer from exercising its right to subrogation under the limited, specific circumstances presented in the certified question.

ZALMA OPINION

Although limited to the specific facts of this case the decision importantly protects the right of the insurer to subrogate without impinging on the right of the insured to be made whole. Since the insured received 100% of his property damage loss he could not tap into the tortfeasor’s property damage coverage and apply it to his bodily injury claim.

Automobile insurance coverage is not omnibus. It provides specific liability coverage for specific losses: bodily injury and property damage. One cannot be used to pay for the other.

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.

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 recently published the e-books, “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.

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.

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Man Bites Dog Story – Court Admits It Was Wrong

Insurer Who Wrongfully Refuses Defense May Still Assert Exclusions

American Guarantee & Liability Insurance Company asked the highest court in New York to consider its reargument that its prior decision in K2 Inv. Group, LLC v Am. Guar. & Liab. Ins. Co. (21 N.Y.3d 384) (K2-I), was erroneous because it failed to take account of a controlling precedent, Servidone Const. Corp. v Security Ins. Co. of Hartford (64 N.Y.2d 419 [1985]).

In K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 2014-01102 (N.Y. 02/18/2014) the court submitted a brief summary of the case: Claims for legal malpractice were brought against American Guarantee’s insured, Jeffrey Daniels, which American Guarantee – wrongly, it is now conceded – refused to defend. Daniels suffered a default judgment, and then assigned his rights against American Guarantee to the plaintiffs in the suit against him. Those plaintiffs brought the present case, seeking to enforce American Guarantee’s duty to indemnify Daniels for the judgment. In defense, American Guarantee asserted that the loss was not covered, relying on two exclusions in the policy.

In K2-I, we affirmed an order granting plaintiffs summary judgment, holding that American Guarantee’s breach of its duty to defend barred it from relying on policy exclusions. We later granted reargument.

In Servidone – we stated the question as follows: “Where an insurer breaches a contractual duty to defend its insured in a personal injury action, and the insured thereafter concludes a reasonable settlement with the injured party, is the insurer liable to indemnify the insured even if coverage is disputed?”  Security responded that, pursuant to an exclusion in the policy, a loss based upon any obligation the insured had assumed by contact was outside coverage. Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.

When the highest court in the state decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.

Having decided that American Guarantee is not barred from relying on policy exclusions as a defense to this lawsuit, we must also decide whether the applicability of the exclusions it relies on presents an issue of fact sufficient to defeat summary judgment. We conclude that it does. The exclusions in question are the so-called “insured’s status” and “business enterprise” exclusions, contained in the following policy language:

The malpractice claims brought against Daniels, American Guarantee’s insured, were based on the allegation that he represented plaintiffs as lenders in a transaction with a borrower known as Goldan. The alleged malpractice consisted of Daniels’s failure to record mortgages that Goldan had given to plaintiffs. Daniels was one of two principals of Goldan; it is fair to infer that he was at least a “manager” of Goldan, and had a “Controlling Interest” in it, within the meaning of the policy. The court was unable to say, as a matter of law, that the malpractice claims did not arise “in whole or in part” out of his status as a manager; nor could it say that they did not arise out of any of his “acts or omissions” on Goldan’s behalf. Therefore, the court, concluded that plaintiffs’ motion for summary judgment should have been denied.

The Appellate Division majority’s rationale for granting summary judgment was, essentially, that a case arising out of the alleged attorney-client relationship between plaintiffs and Daniels could not also arise out of Daniels’s managerial status with, or acts or omissions for, Goldan. But the claims could arise out of both.

Because the malpractice case was resolved on default, the record tells little about the substance of the claims; it is at least possible, however, that the alleged malpractice occurred because Daniels was serving two masters – plaintiffs, his clients, and Goldan, the company of which he was a principal. If that is the case, it can fairly be said that the malpractice claims arose partly out of Daniels’s law practice and partly out of his status with or activity for Goldan – precisely the situation that the insured’s status and business enterprise exclusions contemplate.

Accordingly, upon reargument, the prior decision was vacated, the remittitur recalled, the order of the Appellate Division reversed, with costs, and plaintiffs’ motion for summary judgment on their first and second causes of action seeking to enforce the default judgment in the underlying action denied.

ZALMA OPINION

This is an important and unusual decision where a high court, after publishing an opinion that was facially correct and had much to commend it, admitted that in so doing it violated an earlier decision of the same court.

Stare decisis has been given lip service by courts across the country. The original decision in this case ignored stare decisis.  With honor and skill the New York Court of Appeal acknowledged its error, reexamined its decision, and changed its decision.

The Court, therefore, concluded that an insurer who wrongfully refused to defend its insured may be obligated to pay for that error but cannot be made to lose all of the rights provided to it by the policy wording. If the exclusions apply then it does not owe the amount of the judgment the plaintiffs obtained by default. The insurer, by its error, did not rewrite the policy of insurance. It is still entitled to defend based upon exclusions existing in the policy of 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.

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 recently published the e-books, “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.

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.

 

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Cancellation & Premium Finance

Premium Financed Belongs to Lender on Cancellation

When a policy is financed the premium finance company obtains promises from the borrower/insured and the insurer:

First: That the loan will be repaid by the borrower.

Second: That if the policy is cancelled the insurer will return all unearned premium to the premium finance company.

Third: If there is insufficient unearned premium to pay off the loan the borrower/insured will pay the difference.

In  Burke v. Prime Rate Premium Finance Corp., A13A2301 (Ga.App. 02/18/2014) Thomas Burke d/b/a American Transport (“Burke”) appealed from the trial court’s denial of his motion for summary judgment, and the grant of summary judgment in favor of Prime Rate Premium Finance Corporation (“Prime”) on Prime’s claim for the remaining balance owed under a finance agreement.

FACTS

The record revealed that Burke entered into a finance agreement with Prime for the purpose of financing the insurance premiums for his commercial transportation company. The agreement listed Truck Insurance Group LLC (“TIG”) as the “Agent/Broker/Producer, ” Nova Casualty Company (“Nova”) as the insurance company, Prime as the creditor, and Burke as the insured. An individual named “Jacoway” signed the agreement on behalf of TIG. The agreement provided that the “insurance agent or broker named in this Agreement is the Insured’s agent, not [Prime's], and [Prime] is not legally bound by anything the agent or broker represented to the Insured. . . .”

The finance agreement was signed by Burke on September 29, 2010, and the effective date of the insurance policy was October 1, 2010. The total premium for the policy was $54,692. Burke financed $43,753 after paying a $10,939 deposit, and was required to make nine payments of $5,017.51 on the first day of each month beginning on November 1, 2010.

On December 19, 2010, however, the policy was canceled. While not clear from the record which of the parties involved canceled the policy or the reason for cancellation, Burke asserts that TIG canceled the policy. On September 13, 2011, Prime filed suit to recover the remaining balance of $36,421.91 under the finance agreement. Neither Nova nor TIG was added as a party to this action.

ANALYSIS

In order to prevail on a motion for summary judgment the moving party must show that there exists no genuine issue of material fact, and that the undisputed facts, viewed in the light most favorable to the nonmoving party, demand judgment as a matter of law. Moreover, on appeal from the denial or grant of summary judgment the appellate court is to conduct a review of the evidence to determine whether there exists a genuine issue of material fact, and whether the undisputed facts, viewed in the light most favorable to the nonmoving party, warrant judgment as a matter of law.

A Georgia statute provides that whenever “an insurance policy is canceled and the premiums have been paid by an insurance premium finance company on behalf of the insured, if the insurer has been notified of the existence of the insurance premium finance agreement as required in Code Section 33-22-12, the insurer shall return whatever unearned premiums are due to the insurance premium finance company for the account of the insured.”

This Code section does not create an exclusive remedy for a premium finance company for a claim against an insured pursuant to the finance agreement; rather it “creates a chose in action or statutory lien right in the unearned premiums in favor of the premium finance company.” The premium financing agreement with the insured constitutes an account receivable entitling the finance company to recapture its principal one way or the other, as well as any fees and penalties.

As the trial court found no unearned premiums were returned to Prime. Under the finance agreement, Burke agreed to pay the amount financed, and pay the unpaid balance due to Prime immediately upon default and cancellation of the policy. Therefore, pursuant to the terms of the finance agreement, Burke was obligated to pay Prime the balance remaining once the policy was canceled.

There is no evidence that Prime received unearned premiums. Had the legislature intended to require an insurance premium finance company to first obtain unearned premiums and offset it against the balance owed before filing suit against the insured, it could have done so. Burke did not seek to add Nova, the insurer, to this action to recover his losses from its alleged failure to remit any unearned premium directly to Prime, nor did he file a third-party action against TIG for its alleged unlawful retention of any unearned premium.

Because there is no genuine issue of material fact concerning Burke’s obligation under the finance agreement, we must affirm the trial court’s rulings on the motions for summary judgment.

ZALMA OPINION

Premium financing in hard economic times is a necessity. The premium finance agreement is a loan secured by nothing more than the premiums paid to the insurer and the financial ability of the borrower. Usually, and by statute in Georgia, when the policy is cancelled the insurer will return all unearned premium to the premium finance company and credit the borrowers account. If the amount returned is inadequate the borrower is obligated to pay the lender the difference, plus interest earned on the loan.

The lesson taught by this case is to avoid unneeded litigation and when suit becomes necessary to bring everyone into the action. By failing to bring in the insurer who may, or may not, hold unearned premium to determine who owed what to whom. By not doing so the borrower found that he owed the entire loan. Perhaps he can still sue the insurer, if it did not return unearned premium, for it.

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.

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 recently published the e-books, “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.

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.

 

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Insurer May Dispute Amount of Loss

Appraisal Award Ends Dispute

First party property policies contain a condition that, if the parties can’t agree on the amount of loss, that the dispute be resolved by a panel of appraisers appointed by the insured and an umpire selected by the two appraisers or, if they can’t agree, a court. Usually an appraisal results in a claim solution and the insurer and insured accept resolution of the dispute. Infrequently, the award isn’t enough.

In Poling v. Property Owners Insurance Co., 27A02-1307-PL-585 (Ind.App. 02/13/2014) January of 2009, the Indiana Court of Appeal dealt with the difficulties that arose after Charles Poling’s home was damaged by a fire. Poling filed an insurance claim with Property Owners Insurance Company (“Property Owners”). An umpire was appointed, an award was rendered and Property Owners paid the award. Poling insisted on suing Property Owners.

FACTS

The insurance policy provided that if the parties were unable to agree on a settlement amount, each party could retain its own appraiser to assess the value of the loss. If the parties were still unable to agree on a settlement amount after receiving the appraisers’ assessments, the parties could then request that an Umpire be appointed to consider the assessments of each appraiser and to issue an appraisal award, by which the parties would then be bound. The insurance policy further provided that if the parties were unable to agree on an Umpire, the parties could initiate court proceedings seeking the appointment of an Umpire.

In support of its motion to dismiss Property Owners claimed that an Umpire had been appointed, the Umpire had reviewed the materials submitted by the appraisers chosen by the parties, and the Umpire had issued an appraisal award setting forth the amount owed to Poling by Property Owners. Property Owners also claimed that it had satisfied the Umpire’s appraisal award and had paid the full sum of the award as determined by the Umpire. Thus, Property Owners argued that there were no remaining claims by Poling against Property Owners and, as a result, the case should be dismissed with prejudice.

Poling did not dispute Property Owners’s assertion that it had satisfied the Umpire’s appraisal award, but argued that the case should not be dismissed because the first amended complaint also included the claim that Property Owners had committed a tortious breach of its duty to deal with him in good faith.

The trial court issued an order granting Property Owners motion to dismiss. The trial court also denied Poling’s request for permission to file a second amended complaint.

DISCUSSION AND DECISION

Whether the Trial Court Erred in Granting Property Owners’ Motion to Dismiss

In this case, the record demonstrates that Poling was given a reasonable opportunity to respond to Property Owners’s motion. Poling was also given a reasonable opportunity to present material external to the pleadings in opposition to the motion.

In support of its motion, Property Owners claimed that an Umpire had been appointed, the Umpire had reviewed the materials submitted by the appraisers chosen by the parties, and the Umpire had issued an appraisal award setting forth the amount owed to Poling by Property Owners. Property Owners also claimed that it had satisfied the Umpire’s appraisal award and had paid the full sum of the award as determined by the Umpire. Poling did not dispute Property Owners’s assertion that it had satisfied the Umpire’s appraisal award, but argued that the case should not be dismissed because the first amended complaint also included the claim that Property Owners had committed a tortious breach of its duty to deal with him in good faith.

In Indiana, the courts apply notice pleading rules that require a pleading contain the operative facts so as to place the defendant on notice as to the evidence to be presented at trial. Therefore, the issue of whether a complaint sufficiently pleads a certain claim turns on whether the opposing party has been sufficiently notified concerning the claim so as to be able to prepare to meet. Poling argued that paragraph ten of the first amended complaint and the second paragraph of his prayer for relief put Property Owners on notice of the alleged tort claim. Contrary to Poling’s contention, paragraph ten of the first amended complaint failed to give notice of a tort claim. It simply said: “as a result of the intentional actions of Property Owners, contrary to the [insurance policy] terms and its duty to reasonably pay insurance claims presented by its insured, it has been necessary for [Poling] to employ the services of an attorney and an independent public appraiser to process and prosecute a claim for amounts he is clearly owed as a result of his loss.”

The appellate court concluded reasonably that paragraph ten was insufficient to put Property Owners on notice of the alleged tort claim. It did not contain any allegation of the type of tortious behavior discussed by the Indiana Supreme Court allowing for the tort of bad faith. Property Owners was under no duty to accept Poling’s claim at face value. Property Owners did not breach any duty owed to Poling merely by disputing the amount claimed by Poling. An insurance company has the right to a good faith dispute with its insured with respect to coverage.

The undisputed designated evidence indicates that Property Owners did not act contrary to the terms of the insurance policy, but rather in a manner specifically provided for by the policy. The fact that Poling asserted that he felt it necessary to employ the services of an attorney and an independent appraiser is not sufficient to put Property Owners on notice of a claim that it committed a tortious act of bad faith when dealing with Poling’s claim.

None of the allegations contained in the first amended complaint are sufficient to put Property Owners on notice of Poling’s alleged tort claim.

Denial of Poling’s Request to File a Second Amended Complaint

On May 17, 2013, over three years after Poling filed his initial complaint and nearly three years after Poling filed his first amended complaint.  The new complaint sought to “clarify the allegations in the first amended complaint” and to add a new count alleging defamation. The trial court denied Poling’s motion, finding that it would be unfair to require Property Owners to defend itself as to these claims and conduct discovery on claims which relate to a fire loss well over four years old and that allowing Poling to amend the complaint would be futile.

In denying Poling’s request, the trial court noted that the alleged events supporting the new claims occurred between January 21, 2009, and June 7, 2010, over three years before the motion. Poling does not assert that he had discovered new evidence which might justify the nearly three-year delay in requesting permission to amend his complaint for a second time. The trial court acted within its discretion in denying Poling’s second request to amend his complaint.

CONCLUSION

Having concluded that the trial court did not err in granting Property Owners’s request to dismiss Poling’s lawsuit, and that the trial court acted within its discretion in denying Poling’s second request to amend his complaint, the court of appeal affirmed the judgment of the trial court.

ZALMA OPINION

This case establishes three important lessons when there is a dispute between an insurer and the insured about the amount of loss:

First, and foremost: An insurer has the right to dispute an insured’s claim as to the amount of loss.

Second: Payment of the appraisal award sets the amount of loss.

Third:  In Indiana, if you wish to sue an insurer for bad faith the pleadings must be clear and unambiguously set forth facts that inform the defendant that the plaintiff is claiming tort damages for breach of the covenant of good faith and fair dealing.

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.

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 recently published the e-books, “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.

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.

 

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Read Policy Obtained by Others Or Else

Don’t Rely on Others to Insure You

In many lease agreements the lessor or lessee often rely on the other to purchase insurance to protect the risks faced by the other. Lawyers negotiate with vigor to write a lease or other contract that protects their client and increases the costs of the other.

FACTS

Insurance does not insure property. It insures people against the risk of loss of their property. Usually there is no problem with such arrangements. However, if both sides fail to work together and review, together the insurance purchased, disputes can arise. In Michelin North America, Inc. v. First Industrial NLF 12 JV, LLC, 01-12-00677-CV (Tex.App. Dist.14 02/13/2014) the Texas Court of Appeal was asked to resolve a dispute that arose when a jury returned a verdict in favor of appellant, Michelin North America, Inc. First Industrial FR NLF 12, LLC, moved for judgment notwithstanding the verdict (JNOV). The trial court granted the motion and awarded First Industrial damages for breach of contract.

Michelin keeps some of its famous tires in a large Harris County warehouse. It used to own this warehouse, but it sold the building in January 2006 to First Industrial as part of a deal in which it would lease the premises. The parties heavily negotiated the agreement and deployed lawyers at the bargaining table. The lease ultimately included a paragraph on insurance which provided that First Industrial would hold a policy insuring the building but would bill Michelin for the policy’s costs.

In September 2008, Hurricane Ike damaged the warehouse. During the preceding years, First Industrial had neglected to bill Michelin for the cost of insuring the warehouse. Now that the building was in need of repair, however, First Industrial invoiced Michelin $232,210.04 for insurance premiums covering February 2006 to the end of 2008. The parties disputed this figure but finally reached a compromise. Then, First National demanded payment for $1,327,642, corresponding to expenses incurred to satisfy the deductible on the warehouse policy.

ISSUES

Michelin filed suit seeking a declaratory judgment that, since First Industrial had failed to give advance notice of the amount of the policy’s deductible, Michelin did not owe the $1.3 million sought. It contended that section 9.2 of the lease obliged First National to inform it of the size of the deductible at the beginning of each “Lease Year, ” which corresponded to the calendar year.

First Industrial counterclaimed for breach of contract. Both parties moved for summary judgment.  Michelin took the position that it had negotiated language in the contract: “Landlord shall notify Tenant of the amount of such Insurance Costs . . .” so that it could know the amount of the deductible on the policy First Industrial had purchased and intelligently decide whether to exercise its “Tenant’s Insurance Election” to procure its own coverage. As Michelin protested, its concern had been merely to obtain insurance with the best combination of deductible and cost. During negotiations, it was amenable to permitting First Industrial to be the party that carried insurance on the warehouse so long as the landlord could obtain a better value. Otherwise, it wanted to secure its own insurance contract. So when First Industrial presented a $1.3 million bill, Michelin claimed to have been blindsided, both because it had been led by First National’s representations to believe that deductible costs would be much lower and because it had no prior warning during the years in which the lease was in effect that First Industrial’s policy included a deductible of that magnitude.

Michelin argued that the court erred by entering JNOV. Michelin claims that either it was the party entitled to judgment as a matter of law or, alternatively, interpretation of the contract was a fact question, and there was sufficient evidence to support the jury’s verdict.

It made two separate arguments. First, it contended that the lease unambiguously did not require notice of a deductible unless such a deductible was actually paid; therefore, it was entitled to judgment as a matter of law. In the alternative, it argued that the evidence was insufficient to support the jury’s findings. The trial court entered a JNOV but did not explain the grounds of its decision.

ANALYSIS

There are two valid reasons for judgment as a matter of law after a jury verdict. The first is that the jury’s findings are actually immaterial to resolution of the controversy before the court.  For example, if a trial court decides that a written contract is unambiguous, then it should give the contract its plain meaning as a matter of law; this circumstance leaves the jury’s findings of fact as to the parties’ true intent irrelevant to the outcome of the case. The second reason JNOV may be appropriate is that the evidence is insufficient to support the jury’s verdict.

If a written contract has a definite legal meaning, then a court should read the text and construe it as a matter of law without help from a jury.  When the words on the page suffice, a court should not look outside the document to decide what the parties agreed. To determine whether a contract is ambiguous, courts apply standard rules of interpretation.

The lease did not include any express language requiring First Industrial to notify Michelin of the size of the deductibles on the policy it carried for the warehouse. Paragraph 9.2 provided two alternative methods by which the landlord could bill the tenant for “Insurance Costs.” Under one method, the landlord could notify the tenant of the amount of Insurance Costs for the Lease Year, and the tenant would be obligated to pay the Insurance Costs in twelve monthly payments over the course of that Lease Year. First Industrial did not exercise this option. Instead, as permitted by the lease, it elected to “bill Tenant annually” for the Insurance Costs.

The lease defines “Insurance Costs” to include “all market based premiums . . . and all commercially reasonable deductibles paid by Landlord pursuant to insurance policies required to be maintained by landlord under this Lease.” Because Michelin disputes the inclusion of deductibles as part of the “Insurance Costs” that it owes, the critical word for purposes of this dispute is “paid.” If the prior year did not feature a claimed loss, then there would be no deductible to pay and the Insurance Costs would include only the amount of the premiums plus reasonable administrative costs. The “Insurance Costs” include any actual payments that First Industrial made to satisfy a deductible.

Michelin contends that it could not make an informed decision as to whether it should purchase its own coverage if it did not know the quality of coverage that First Industrial was obtaining. But Michelin does not explain why it could not simply inquire about the terms of the policy if it wished to investigate its options in this regard. It did not have to wait for a yearly report to make such inquiries.

The appellate court concluded that the lease unambiguously did not require First Industrial to give Michelin advance notice of the amount of the policy’s deductible. As the contract is unambiguous, the court determined its meaning and concluded that the trial court correctly disregarded the jury’s findings and entered judgment in favor of First Industrial.

ZALMA OPINION

Insurance should never be taken for granted. Anyone, like Michelin in this case, when it expects another to buy insurance protecting it against the risk of loss of its property, must not assume that the insurance purchased is beneficial or what is required by its contract. Michelin failed to protect itself – they failed to read the policy that was obtained until after the hurricane – and found it owed money it had not anticipated.

As the appellate court pointed out Michelin could have saved the problem by requiring the lessor to provide a copy of the policy and, if it did not provide the protection desired, could have purchased its own insurance using the buying power of an international corporation. It did not and the clear language of the policy – without the assistance of extrinsic evidence – bound them to pay the lessor.

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.

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 recently published the e-books, “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.

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.

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Murder & Insurance Fraud

Plaintiffs’ Asbestos Lawyers Get Sued

In the fourth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on February 15, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    Overreaching by Asbestos Lawyers Gets Them Sued.
2.    New E-Books From Barry Zalma.
3.    Insurance Fraud & Murder.

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 the 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:

Zalma on Insurance

•    Divorce Doesn’t Pay
•    Insured Must Be Made Whole
•    Reinsurer Sues IRS
•    Nonrenewal Effective
•    Jurors Assessment of Punitive Damages is Not Unbridled
•    Just for Fun
•    No Agreement No Contract
•    Risk Transfer Device Works
•    Court Should Never Rewrite Policy
•    Agent Loses License
•    Insurance Fraud Requires Direct Trip to Jail
•    Advertising Injury Coverage
•    An “Auto” By Any Other Name
•    Pollution Exclusion Effective
•    First Party vs. Third Party
•    Potential Coverage Requires Defense
•    Policy Must Be Read as A Whole
•    No Assumption of Liability
•    Insurer Has Burden of Proving Exclusion
•    Insurable Interest In Life Policy

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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.

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.

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Divorce Doesn’t Pay

Life Beneficiary Loses Right to Proceeds by Statute

When a couple divorces the court distributes the assets and liabilities of the divorcing couple to each party in a fair and equitable manner. When, after a divorce, a spouse dies and the other spouse was named beneficiary of a life insurance policy, recovery of the benefits of the life insurance policy is not as certain as one would expect.

In Branch v. Monumental Life Insurance Co., 14-12-01019-CV (Tex.App. Dist.14 02/11/2014) a dispute over life-insurance proceeds where the deceased insured’s former wife appeals the trial court’s ruling that she is not entitled to the interpleaded funds. The appellate court reviewed the facts and Texas law to resolve the dispute.

FACTUAL BACKGROUND

Monumental Life Insurance Company filed an interpleader action to resolve competing claims to the proceeds of a $10,000 policy insuring the life of Archie Branch Sr. (“Archie”). The policy was obtained during Archie’s marriage to Loretta Young Branch (“Loretta”), and Loretta was the named beneficiary. Archie and Loretta divorced on May 3, 2011.Six weeks later, Archie died.

According to Loretta, she demanded the insurance proceeds as the named beneficiary, but Monumental refused payment. Monumental learned that a newspaper obituary identified the following five people as Archie’s children: Sheila Thompson (“Sheila”), Edward Branch Sr. (“Edward”), Roy Branch (“Roy”); Wanda Ford (“Wanda”); and Graylyn Judkins (“Graylyn”). Monumental, unable to resolve the dispute of the various claimants to the funds,  filed an interpleader action, and on February 24, 2012, the trial court signed an order allowing Monumental to deposit the insurance proceeds into the registry of the court.

After trial the trial court ruled that Loretta “has no legal claim or right” to the deposited funds, which instead belong solely to Archie’s legal heirs. The trial court further ordered the money held in the court’s registry until Archie’s estate “has been properly probated” and the identity of his legal heirs has been determined.

Loretta timely appealed. Through counsel, Loretta filed an appellate brief raising issues on her own behalf.

MERITS OF LORETTA’S APPEAL

Monumental was not required to show that Loretta was or was not entitled to any of the relief she sought. In an interpleader action, each claimant has the burden of proving its own claim and its relative priority as to all other claimants. It therefore was Loretta’s responsibility to show that she had a superior right to any interpleaded funds she claimed.

Loretta Failed to Establish Her Right to Judgment.

Loretta also argues that the trial court erred in ruling that she has no right to the interpleaded insurance proceeds. Where, as here, the case was tried without a jury and no findings of fact or conclusions of law were requested or filed, the appellate court must uphold the trial court’s judgment on any theory supported by the record, implying the necessary fact findings.

Loretta does not explicitly state whether she challenges the legal or factual sufficiency of the evidence supporting the implied findings, but she asserts that she is entitled to the life-insurance proceeds. She does not contend that there is a question of fact or that remand is appropriate. The appellate court, therefore, understoodd this issue as a challenge to the legal sufficiency of the evidence. When a party challenges the legal sufficiency of the evidence supporting an adverse finding on which she had the burden of proof, she bears the burden on appeal to demonstrate that, as a matter of law, the evidence establishes all vital facts in support of the issue.

By statute, if an insured’s spouse is designated as a life-insurance beneficiary but the couple later divorces or their marriage is annulled, the earlier designation of the spouse as a policy beneficiary is ineffective. [See Tex. Fam. Code Ann. § 9.301(a) (West 2006).] If that happens, then the policy proceeds are payable to the named alternative beneficiary, or if there is none, then the proceeds are payable to the insured’s estate. The same statute provides three exceptions to this rule. The earlier designation of a former spouse as a life-insurance beneficiary is not rendered ineffective if (1) the former spouse is designated as the beneficiary in the divorce decree; (2) the insured redesignates the former spouse as a beneficiary after the divorce; or (3) the former spouse is designated to receive the insurance proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either of the former spouses.

It is undisputed that Loretta was married to Archie when she was designated as the policy’s named beneficiary, and that they subsequently divorced; thus, as a matter of law, her designation as the policy beneficiary was of no effect unless one of the three statutory exceptions applies. Loretta does not address the effect of the statute, and instead argues that she is entitled to the insurance proceeds as the designated beneficiary because she did not intend to divest herself of that right.

Where, as here, no marital-property agreement is involved, a divorce’s effect on the designation of a spouse as a life-insurance beneficiary is now governed by statute. Because Loretta does not contend that any of the statutory exceptions apply, the appellate court concluded that Archie’s designation of her as a life-insurance beneficiary is ineffective as a matter of law.

Upon divorce, the trial court was required to-and did-specifically divide or award the rights of each spouse in an insurance policy. Ownership of the policy has already been adjudicated, and the trial court in the divorce case awarded the policy to Archie. During the trial of this interpleader action, Loretta’s counsel acknowledged on the record that in the divorce, Loretta was divested of her interest in the policy.

Because the divorce decree divested Loretta of any ownership interest in the policy and rendered her designation as a named beneficiary ineffective as a matter of law, the trial court did not abuse its discretion by excluding evidence that she paid for the policy premiums as irrelevant to the determination of whether she was entitled to the policy proceeds.

ZALMA OPINION

Loretta would have received the $10,000 if she held off the divorce for seven weeks. If she did she would have been married to Archie when he died. Texas statutory law is clear. Archie got the policy in the divorce decree and it went into his estate. Loretta tried to get money she was not entitled to as a result of the divorce and had the unmitigated chutzpah to take this case to the court of appeals.

The wisdom of the statute may be questionable but it is clear and because Archie died so quickly after the divorce he did not have the time to change the beneficiary. Although I don’t like the idea of a statute changing the terms of an insurance policy purchased by an insured it is the law in Texas and was taken care of by the divorce lawyers and the divorce court who gave the ownership of the policy to Archie.

Lesson learned: Before you divorce in Texas make sure you understand the local law and have a competent divorce lawyer.

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.

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 recently published the e-books, “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.

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.

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Insured Must Be Made Whole

Indemnity Payments Used To Exhaust SIR

It is assumed – incorrectly – that insurers carefully word the policies they issue. Often they attempt to enforce the language they intended to write rather than the the wording they actually wrote. As a result a dispute arose that required the Supreme Court of Florida to answer two questions of Florida law certified by the United States Court of Appeals for the Eleventh Circuit. In Intervest Construction of Jax Inc. v. General Fidelity Insurance Co., SC11-2320 (Fla. 02/06/2014) the Supreme Court answered the questions.

FACTUAL HISTORY

This case involves the terms of a general liability insurance contract entered into by General Fidelity Insurance Company (General Fidelity) with Intervest Construction of Jax, Inc., and ICI Homes, Inc. (ICI). The dispute arose out of a personal injury lawsuit filed against ICI by an injured homeowner.

In 2000, ICI contracted with Custom Cutting, Inc. (Custom Cutting) to provide trim work, including installation of attic stairs in a residence that ICI was in the process of building. The contract between Custom Cutting and ICI contained an indemnification provision requiring Custom Cutting to indemnify ICI for any damages resulting from Custom Cutting’s negligence. In April 2007, Katherine Ferrin, the owner of a residence constructed by ICI, fell while using the attic stairs installed by Custom Cutting. This fall resulted in serious injuries to Ferrin. Ferrin filed suit against ICI for her injuries; she did not file suit against Custom Cutting. In turn, ICI sought indemnification from Custom Cutting under the terms of the subcontract.

At the time of the accident, Custom Cutting maintained a commercial general liability insurance policy with North Pointe Insurance Company (North Pointe). ICI was not an additional insured under Custom Cutting’s policy with North Pointe. ICI held the General Fidelity policy at the time of the accident. Contained in the General Fidelity policy was a Self–Insured Retention endorsement (“SIR”) in the amount of $1 million. The SIR endorsement stated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR.

The parties participated in a mediation and all agreed to a $1.6 million settlement of Ferrin’s claim. As part of the settlement, North Pointe agreed to pay ICI $1 million to settle ICI’s indemnification claim against Custom Cutting. ICI, in turn, would pay that $1 million to Ferrin. The instant dispute then arose as to whether ICI or General Fidelity was responsible for paying Ferrin the remaining $600,000.

Because of the disagreement between General Fidelity and ICI over coverage, North Pointe paid the $1 million into the trust account of ICI’s counsel and each party reserved all rights and claims against the other. Approximately one month later, both ICI and General Fidelity each paid $300,000 to Ferrin, in addition to the $1 million from North Pointe, in order to settle Ferrin’s claim for the full $1.6 million.

The district court denied ICI’s motion for summary judgment but granted General Fidelity’s motion, holding that ICI could not use the $1 million indemnification payment to satisfy the SIR.  Additionally, the district court found that even if ICI had paid the $1 million out of pocket, General Fidelity had paid out the additional $600,000, and ICI was indemnified by Custom Cutting at a later date, ICI would still not have exhausted the SIR as required by the policy because the “transfer of rights” provision in the policy provides that if the insured has rights to recover all or part of any payment that the insurer has made, those rights are transferred to the insurer. Accordingly, the district court entered judgment in favor of General Fidelity for $300,000.

1.    DOES THE GENERAL FIDELITY POLICY ALLOW THE INSURED TO APPLY INDEMNIFICATION PAYMENTS RECEIVED FROM A THIRD-PARTY TOWARDS SATISFACTION OF ITS $1 MILLION SELF-INSURED RETENTION?

2.    ASSUMING THAT FUNDS RECEIVED THROUGH AN INDEMNIFICATION CLAUSE CAN BE USED TO OFFSET THE SELF-INSURED RETENTION, DOES THE TRANSFER OF RIGHTS PROVISION FOUND IN THE GENERAL FIDELITY POLICY GRANT SUPERIOR RIGHTS TO BE MADE WHOLE TO THE INSURED OR TO THE INSURER?

ANALYSIS

Under Florida law, the interpretation of insurance contracts, such as the commercial general liability policy in this case, is governed by generally accepted rules of construction. Insurance contracts are construed according to their plain meaning. Ambiguities are construed against the insurer and in favor of coverage.

On appeal, the Eleventh Circuit stated that the crux of the dispute between the parties focuses on two provisions of the General Fidelity policy, the SIR endorsement and the transfer of rights clause.

The Florida Supreme Court concluded that the policies at issue in the California cases relied upon by the trial court, are materially different from the policy in this case. The language of the policy in this case s arguably less restrictive than the language of the policies at issue in the California cases.

The contract between Custom Cutting and ICI, which included the right to indemnification, was entered into six years before the General Fidelity policy was purchased by ICI. ICI paid for the indemnity protection in the purchase price of the Custom Cutting subcontract and therefore hedged its retained risk in this manner. ICI bargained for and paid for this right to indemnification and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR. In light of the language of the policy and the right to indemnification for which ICI paid, the Supreme Court answered the first certified question in the affirmative and found that the General Fidelity policy allows the insured to apply indemnification payments received from a third party toward satisfaction of its $1 million self-insured retention.

The second certified question asked whether the common law rule of the “made whole doctrine” applies here or whether the transfer of rights clause in the policy abrogated the doctrine. The district court did not address this issue.

The language of the policy is clear — it gives the insurer General Fidelity subrogation rights. However, the provision gives no guidance as to the priority to recover when the indemnity amount is insufficient to “make whole” both parties. Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right.  Florida recognizes two types of subrogation: conventional subrogation and equitable or legal subrogation. In the absence of express terms to the contrary, the insured is entitled to be made whole before the insurer may recover any portion of the recovery from a tortfeasor.

The “made whole doctrine” provides, absent a controlling contractual provision that states otherwise, that the insured has priority over the insurer to recover its damages when there is a limited amount of indemnification available. Using the common law subrogation principle, endorsed by Florida courts, the district court reasoned that the insured was entitled to be made whole before the subrogated insurer could participate in the recovery from a tortfeasor.

The transfer of rights clause does not address the priority of reimbursement nor does the clause provide that it abrogates the “made whole doctrine.” In the absence of such express language, equitable principles prevail. Therefore, the Supreme Court answered the second certified question by stating that the transfer of rights provision in the policy does not abrogate the made whole doctrine, thereby preserving ICI’s right of priority.

ZALMA OPINION

This is an important case because it tells an insurer that if it wants to prevent an indemnity payment from being used to exhaust an SIR it needs to write the language of the policy to clearly say so. The insurer in this case failed to do so and the court pointed to several cases from other jurisdictions where the policy wording was sufficient to prevent an indemnity payment from being used to exhaust an SIR.

In its application of the “made whole” doctrine the court also proved that George Orwell was correct, all litigants are equal, some are just more equal than others. In this case, when the indemnity payment is not enough to make whole the insured and the insurer the insured gets the money first and the insurer gets nothing.

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.

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 recently published the e-books, “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.

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.

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Reinsurer Sues IRS

Retrocessions are Not Reinsurance

The United States has been very creative in its efforts to increase tax revenue. It becomes even more creative when it can tax a foreign corporation for its business efforts in the United States. Many fear the IRS and would rather pay than fight even when certain the IRS has taxed them in error. In Validus Reinsurance, Ltd. v. United States, Civil Action  13-0109 (ABJ) (D.D.C. 02/05/2014) a Bermuda Reinsurance Company paid the taxes wrongfully assessed against it and then sued the United States to obtain a refund of the taxes improperly assessed. Judge Amy Berman Jackson interpreted the statute and proved that “yes” you can sue the United States.

FACTS

Validus Reinsurance, Ltd. sued the United States of America, alleging that the Internal Revenue Service (“the Service”) improperly assessed and collected excise taxes on plaintiff’s foreign retrocession transactions pursuant to 26 U.S.C. § 4371 (2012). Plaintiff seeks to recover the full amount of the excise tax and related interest that it paid in connection with the challenged 2006 tax assessment.

This case involves the taxation of a particular type of insurance transaction. In a direct insurance transaction, a person or entity contracts with an insurance company to receive protection against casualty loss or to obtain life insurance coverage. A reinsurance transaction occurs when the insurance company that directly insured the person or entity buys insurance from another insurance company (“the reinsurer”) to cover the risks associated with the direct insurance policy. In other words, reinsurance is insurance for insurance companies, and it covers an insurer in the event it is required to pay out funds under one or more of the direct insurance policies that it has issued.

A third type of insurance transaction – and the one that serves as the basis for the challenged excise tax in this case – is called a retrocession. A retrocession is a form of reinsurance one more step removed from the original direct insurance policy: it occurs when a reinsurer buys insurance from yet another insurance company (“a retrocessionaire”) to protect the reinsurer in the event it is required to pay claims under one or more of the reinsurance policies that it has issued to the direct insurers.

THE STATUTE

Section 4371 of title 26 of the U.S. Code aims to tax insurance transactions involving policies issued by foreign insurers or reinsurers. The statute imposes a tax on “Reinsurance. — 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of reinsurance” covering casualty or life insurance products issued by a foreign insurer.

The statute defines the “policy of reinsurance” upon which the tax will be imposed as “any policy or other instrument by whatever name called whereby a contract of reinsurance is made, continued, or renewed against, or with respect to, any of the hazards, risks, losses, or liabilities” covered by contracts on casualty and life insurance products issued by foreign insurers. The statute does not mention retrocessions.

THE PLAINTIFF

Plaintiff Validus Reinsurance, Inc. is a Bermuda corporation that “is engaged in the business of reinsurance.”  It sells reinsurance policies to other insurance companies, offering “protection against, or compensation or indemnity for, the liability of [that insurance company] to pay valid claims to its policyholders.”

In an effort to protect itself, plaintiff “sometimes buys reinsurance for a portion of its potential liabilities under the reinsurance contracts it sells.”  These transactions are called “retrocessions, ” and they protect plaintiff ‘against the risk that [it] will have to make payments to [other insurance companies] under its reinsurance agreements with those companies.”  In 2006, plaintiff paid premiums on nine retrocession policies, and all the retrocessionaires from whom plaintiff obtained insurance are considered “foreign reinsurers” within the meaning of 26 U.S.C. § 4371.

In February 2012, the Service first requested that plaintiff “consent to the assessment of [an] Excise Tax . . . (totaling $326,340 for 2006).”  Although the taxes were considered over six years delinquent, the Service noted that it would not impose penalties because plaintiff had a reasonable cause for its position of non-taxability.  Plaintiff paid the assessment in full, plus the $109,040 later assessed in interest, and it then filed a claim for refund with the Service. After six months and no action by the Service, plaintiff filed the instant cause of action, seeking a refund of the excise tax and interest that it paid. The parties filed cross-motions for summary judgment.

ANALYSIS

This case presents the straightforward question of whether 26 U.S.C. § 4371(3) imposes an excise tax on retrocession insurance transactions. Plaintiff argues, among other things, that the plain language of section 4371(3) does not apply beyond the first level of reinsurance transactions. Defendant maintains that Congress intended to impose a tax on any and all successive levels of insurance or reinsurance obtained from a foreign issuer.

When faced with a question of statutory interpretation, a court first must look to the language of the act itself.  Absent a persuasive reason to the contrary, courts give the plain language of an enactment their ordinary meaning.  And the plain language of section 4371(3) forecloses defendant’s argument that the Service properly assessed an excise tax on plaintiff’s retrocession transactions.

The contracts taxable are contracts for “[c]asualty insurance and indemnity bonds and contracts for life insurance, sickness, and accident policies, and annuity contracts. A policy of reinsurance guarding against risk assumed by contracting to provide reinsurance is therefore outside the scope of section 4371(3) and not subject to the tax imposed on reinsurance contracts in that provision.

The challenged excise taxes in this case were imposed upon premiums paid on policies of reinsurance that plaintiff purchased to cover the risks associated with its own reinsurance contracts. These second-level reinsurance policies do not cover casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. Consequently, the transactions giving rise to the challenged tax assessment do not fall within the plain language of section 4371.

The statute only sets forth a rate for premiums paid on policies that cover contracts taxable under the conditions of the statute. Both the active taxing provision and the definition of “policy of reinsurance” explicitly restrict section 4371(3)’s application to transactions where the reinsurance purchased covers contractually assumed risks described as casualty or life insurance issued by foreign insurers. The District Court is bound to follow the plain language of the statute when Congress expresses its intention once. In this case Judge Jackson concluded that Congress expressed its intention twice to only tax reinsurance and showed no intent to tax retrocessions.

Although it may be correct that taxing retrocessions would be consistent with the purpose underlying the legislation, it is not up to a Court to rewrite the statute to accomplish that goal. If Congress is dissatisfied with the gap in this provision, and it wishes to tax plaintiff’s foreign retrocession transactions, Judge Jackson concluded that Congress itself must make the legislative change.

Since the court concluded that 26 U.S.C. § 4371(3) does not apply to retrocessions, it left the court no option but to grant plaintiff summary judgment. The facts in this case are undisputed, and they demonstrate that the challenged transactions all relate to retrocession agreements between plaintiff and nine other entities. Therefore, the Service erred in assessing an excise tax on plaintiff’s 2006 retrocession transactions, and plaintiff is entitled to a tax refund in this case.

ZALMA OPINION

Reinsurance and retrocessions are not the same any more than insurance and reinsurance are the same. The IRS overreached and Judge Jackson made them give back to Validus the taxes and interest they wrongfully collected.

That there will be taxes in any modern society is as certain as we will all die at some time in the future. Taxes, when imposed, must be fair and authorized by statute. The IRS tried to impose the tax in the way that it believed Congress intended rather than in the way that the Congress wrote the statute. Validus had the courage to contest the ruling – although it had to pay the wrongfully assessed tax – before it sued. It did a service for itself and all retrocessionaires who may have been, or will be in the future, assessed similar taxes wrongfully.

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.

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 recently published the e-books, “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.

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

Nonrenewal Effective

Proper Notice Is Enough to Effectively Nonrenew

States across the country have enacted statutes that place restrictions on insurers who wish to cancel or nonrenew policies of insurance. The statutes usually include a long notice requirement and limit the grounds an insurer can use to nonrenew a policy. When an insured receives a notice that his or her policy is to be nonrenewed the statutory requirements provide the insured with sufficient time to replace the nonrenewed coverage with coverage from another insurer. Some insureds fail to obtain other insurance and when an accident occurs, they sue the insurer claiming a failure to properly nonrenew. Insurance, however, is a contract with mutual duties of good faith and fair dealing. Courts must apply the facts to the law and should not answer questions not asked.

Nationwide Mutual Insurance Company (Nationwide) sued the children of Melvin L. Briggs (collectively the Briggses) in the United States District Court for the District of Kansas, seeking declaratory judgment that it had effectively nonrenewed Melvin’s insurance policy before the automobile accident that led to his death. Because Nationwide had complied with statutory and policy requirements for notice of nonrenewal, it was granted summary judgment. The Briggses appealed to the United States Court of Appeals for the Tenth Circuit, arguing that Nationwide also had to comply with the Kansas statute that sets out permissible reasons for coverage termination. The Supreme Court of Kansas resolved the problem in Nationwide Mutual Insurance Co. v. Briggs, 109, 015 (Kan. 02/07/2014).

The Tenth Circuit asked the Supreme Court of Kansas whether under Kansas law, is proper notice sufficient to non-renew insurance coverage regardless of whether there is an authorized basis for non-renewal under the policy or the statute.

FACTUAL BACKGROUND

In September 2007, Nationwide issued an automobile insurance policy covering a 2002 Toyota Camry to Melvin, d/b/a/ Briggs Sod Farm, which contained a provision for uninsured motorist coverage. Nationwide sent Melvin a notice of nonrenewal of the policy on June 27, 2008, effective September 3, 2008. Neither party disputes that the notice was sent and received. On September 11, 2008, Melvin was a passenger in the Toyota Camry when it was involved in a collision with a vehicle driven by an uninsured motorist. Melvin died as a result of the injuries he sustained in the collision.

The Briggses filed a claim under the Nationwide policy for uninsured motorist benefits. Nationwide denied the claim, asserting that the policy had lapsed 8 days before the accident. In its motion for summary judgment, Nationwide asserted that it had satisfied the statutory and policy requirements for effective notice of nonrenewal. The Briggses opposed the motion for summary judgment, arguing that Nationwide had failed to demonstrate that its reason for nonrenewal was authorized by both the Kansas statute and the policy, thus leaving open a genuine issue of material fact for resolution at trial. In response, Nationwide effectively argued that the existence of a permissible ground for nonrenewal was irrelevant to the effectiveness of its notice.

On appeal to the Tenth Circuit, the Briggses admitted that Nationwide complied with statutory and policy notice requirements. They continued to argue, however, that Nationwide must also have complied with both the statute and the policy’s permissible reasons for nonrenewal before any nonrenewal could be valid.

DISCUSSION

The answer to a certified question must be based on Kansas precedent, not on federal rulings interpreting Kansas law. The question presented also involves statutory interpretation, which raises a question of law over which appellate courts have unlimited review. Only if the statutory language is ambiguous does a court rely on any revealing legislative history, background considerations that speak to legislative purpose, or canons of statutory construction.

Insurance is a matter of contract and the parties have the right to employ whatever terms they wish, and courts will not rewrite them, so long as those terms do not conflict with pertinent statutes or public policy. Where a policy of insurance is issued to an insured in compliance with the requirement of a statute, the pertinent provisions of the statute must be read into the policy, and no provisions of the policy in contravention of the statute can be given effect. Nothing precludes the insurer from granting terms more favorable to the insured than that required by statute.

The statute provides in pertinent part:

“Any insurance company that denies renewal of an automobile liability insurance policy in this state shall give at least 30 days written notice to the named insured, at his last known address, or cause such notice to be given by a licensed agent of its intention not to renew such policy. No insurance company shall deny the renewal of an automobile liability insurance policy except in one or more of the following circumstances . . .: ¶  (1) When such insurance company is required or has been permitted by the commissioner of insurance, in writing, to reduce its premium volume in order to preserve the financial integrity of such insurer; ¶ (2) when such insurance company ceases to transact such business in this state; ¶ (3) when such insurance company is able to show competent medical evidence that the insured has a physical or mental disablement that impairs his ability to drive in a safe and reasonable manner; ¶ (4) when unfavorable underwriting factors, pertinent to the risk, are existent, and of a substantial nature, which could not have reasonably been ascertained by the company at the initial issuance of the policy or the last renewal thereof; ¶ (5) when the policy has been continuously in effect for a period of five years. Such five-year period shall begin at the first policy anniversary date following the effective date of the policy, except that if such policy is renewed or continued in force after the expiration of such period or any subsequent five-year period, the provisions of this subsection shall apply in any such subsequent period; or ¶ (6) when any of the reasons specified as reasons for cancellation in K.S.A. 40-277 are existent, …”

The language of Melvin’s policy was consistent with the statute. The Kansas statutes also set general procedural requirements for nonrenewal of an automobile insurance policy with which Nationwide complied.  In short, the statute and the policy language prohibited Nationwide from denying renewal of Melvin’s insurance policy except under certain enumerated circumstances.

The Briggses contend that, as a consequence of statute and policy language, coverage continued unless and until a permissible ground for denying renewal had “accrued,” regardless of Nationwide’s compliance with the statute. The Briggses’ argument equates the statute and its policy equivalent to a procedural requirement that must be satisfied before a policy can be effectively nonrenewed.

In short, neither Kansas statutes nor the language in Melvin’s policy requires a statement of a permissible substantive reason for nonrenewal in the notice to make the notice procedurally effective. Nationwide strictly complied with the statutory and policy procedural notice requirements, and coverage lapsed on September 3, 2008.

This does not mean that the Briggses are necessarily without a remedy. If Nationwide lacked a permissible substantive reason to refuse to renew Melvin’s policy, then it violated the statute and breached the contract of insurance. The violation and breach occurred at the moment of the wrongful nonrenewal — i.e., while the policy was still in force. Nationwide would be liable for any damages caused by its breach.

We answer the clarified certified question from the Tenth Circuit: “Yes.” Notice to nonrenew an insurance policy that complies with the procedure set out in the statute and a consistent provision in the policy itself is sufficient to effectively nonrenew coverage, regardless of whether there is a permissible substantive basis for nonrenewal under the statute. However, if an insurer violates the substantive provisions of the statute and/or the policy, an insured may pursue a remedy for breach of contract, and the insurer may be subject to administrative penalties under the Unfair Trade Practices Act.

ZALMA OPINION

Courts, like the Supreme Court of Kansas, when asked a question by a federal court, should limit its answer to the question posed. In this case the Kansas Supreme Court decided to provide the Tenth Circuit with a Solomon like decision and give the plaintiffs hope that they could still recover money from Nationwide even after it effectively nonrenewed the policy. If they can prove that Nationwide breached its policy and the statute by nonrenewing for an improper purpose their suit may still be viable.

The court, if it wished to emulate Solomon, it should also have recognized that the error was made by Melvin, not the insurer. He received the notice more than thirty days before the nonrenewal took effect and took no steps to replace the insurance or complain about the nonrenewal. Melvin’s silence indicates his agreement that the nonrenewal was proper. A court should recognize that insureds err with regard to their insurance needs as often – if not more so – than insurers.

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.

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 recently published the e-books, “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.

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

Jurors Assessment of Punitive Damages is Not Unbridled

Due Process Limits Punitive Damages to a Ratio of 10:1

An insurance company refused to pay benefits it owed to a paraplegic ex-marine that it clearly owed. The jury, after hearing all of the evidence, decided to punish the insurer for its treatment of the paraplegic ex-marine, and issued a $19 million punitive damage award. After the trial court reduced the punitive damages award to $350,000, both parties appealed.

The sole issue raised by both parties to the California Court of Appeal concerned the punitive damage award, specifically, whether the trial court’s remittitur of that award from $19 million to $350,000 based on a ratio of punitive to compensatory damages of 10:1 comports with due process.  The trial court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a reduction of the punitive damages to $350, 000. Both parties appeal.

FACTUAL BACKGROUND

Stonebridge insured Nickerson under a policy (the policy) providing coverage for hospital confinement, intensive care unit confinement, and emergency room visits. Stonebridge agreed to pay indemnity in the amount of $350 per day for each day of confinement in a hospital for a covered injury, $350 per day for each day of confinement in a hospital intensive care unit, and $150 per visit to a hospital emergency room. Although payment of claims under this policy is related to healthcare services rendered to the insured, the policy is not healthcare insurance that pays for medical expenses.

NICKERSON’S INJURY AND HOSPITALIZATION

Nickerson was involved in a snowmobile accident in 1997 and became paralyzed from his chest down. He now relies on a wheelchair.  Nickerson was sitting in a motorized wheelchair on a lift about to be lowered from his van when he accidently struck the control, causing the wheelchair to lurch forward. He fell from the wheelchair on the lift down to the pavement. He suffered a broken leg and was taken to a VA hospital in Long Beach, first to the emergency room and then to a spinal cord unit, that was equipped to treat paraplegics and quadriplegics.

Nickerson suffered a comminuted, displaced fracture of his right tibia and fibula, meaning that the leg was broken, splintered, and out of place.

TRIAL COURT PROCEEDINGS

Nickerson’s lawsuit against Stonebridge ensued. At the close of Nickerson’s case, the trial court granted his motion for a directed verdict on the cause of action for breach of contract, finding as a matter of law that the “Necessary Treatment” limitation was a limitation of coverage that was not conspicuous, plain and clear in the policy and therefore was unenforceable. The court found that Nickerson was entitled to $31,500 in unpaid benefits for the breach of contract cause of action.

The jury returned a special verdict finding that Stonebridge’s failure to pay policy benefits was unreasonable or without proper cause and that Nickerson suffered $35,000 in damages for emotional distress as a result. The jury also found Stonebridge had “enagage[d] in the conduct with fraud.”

The trial court explained its granting of the motion for new trial and reduction of the punitive damage award “may be unlikely that a punitive damage award reduced to a 10:1 ratio will deter Stonebridge from engaging in similar tortious conduct in the future,” but the court felt “constrained to reduce the punitive damage award to 10:1 based on recent California and federal authority.” In calculating the amount of punitive damages, the court considered only the $35,000 in compensatory damages for Stonebridge’s breach of the implied covenant; it did not include the $31,500 in damages for the insurer’s breach of contract or the $12,500 in attorney fees. Accordingly, the court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a remittitur of the punitive damage award to $350,000, in which event the new trial motion would be denied.

Nickerson rejected the reduction in punitive damages and filed a timely appeal from the order granting a new trial.  As a consequence of Nickerson’s refusal to accept the remittitur of damages, the trial court’s ruling on the new trial motion constitutes an order granting a new trial.

CONTENTIONS

Nickerson contends the trial court erred (1) in concluding it was constrained by law to limit punitive damages to no more than 10 times the compensatory award; and (2) in excluding certain categories of compensatory damages when fixing the ratio of compensatory to punitive damages.

Stonebridge contends (1) there is a low degree of reprehensibility and Nickerson only suffered non-economic damages, and because (2) the evidence does not support the jury’s finding that Stonebridge acted with fraud.

DISCUSSION

California courts do not resolve abstract legal issues, even when requested to do so. They only  resolve real disputes between real people.

THE MAXIMUM CONSTITUTIONALLY PERMISSIVE PUNITIVE DAMAGE AWARD

The amount of punitive damages offends due process under the Fourteenth Amendment as arbitrary only if the award is “grossly excessive” in relation to the state’s legitimate interests in punishment and deterrence. In determining the constitutional maximum for a particular punitive damage award under the due process clause, the U.S. Supreme Court directs state courts to follow three guideposts: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. [Citation.]” (State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408 (State Farm), citing BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 575 (Gore).)

Exacting appellate review ensures that an award of punitive damages is based upon an application of law, rather than a decisionmaker’s caprice. The appellate court must always be conscious that its task is only to determine the maximum permissible award under the Constitution, which is not necessarily the same award it would reach as jurors.

Degree of Reprehensibility

Aggravating circumstances to be considered by an appellate court is:

(1)     the harm caused was physical as opposed to economic;

(2)     the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others;

(3)    the target of the conduct had financial vulnerability;

(4)     the conduct involved repeated actions or was an isolated incident; and

(5)    the harm was the result of intentional malice, trickery, or deceit, or mere accident.

The existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect. Nickerson was made whole for his injuries by compensatory damages, so punitive damages should only be awarded if Stonebridge’s culpability, after having paid compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence.

In addition to its treatment of Nickerson, the record reveals Stonebridge’s indifference to the health and safety of others through its practice of using a hidden “Necessary Treatment” limitation to deny other policyholders’ claims and by preventing full communication between peer reviewers and treating physicians.

Nickerson is clearly financially vulnerable: he is a permanently disabled 58-year-old paraplegic and a former marine whose only source of income is a paltry military pension. Reprehensibility is “influenced by the frequency and profitability of the defendant’s prior or contemporaneous similar conduct.”

We reject out of hand Stonebridge’s suggestion that the trial court improperly permitted the jury to punish it for its handling of other insureds’ claims. California has the constitutional freedom to use punitive damages as a tool to protect the consuming public, not merely to punish a private wrong. To consider the defendant’s entire course of conduct in setting or reviewing a punitive damages award is not to punish the defendant for its conduct toward others. However, by placing the defendant’s conduct on one occasion into the context of a business practice or policy, an individual plaintiff can demonstrate that the conduct toward him or her was more blameworthy and warrants a stronger penalty to deter continued or repeated conduct of the same nature.

Jurors, not appellate justices, hear the evidence and determine the facts. Properly instructed, they are the primary arbiters of acceptable behavior between an insurer and its insured. It is they, with their collective understanding of the limits of what decent citizens ought to have to tolerate, who are charged with assessing the degree of reprehensibility and meting out an appropriate financial disincentive for untoward claims practices. Their authority is not unbridled. However, our role in reviewing the jury’s work is a deferential one.  Four of the five aggravating factors of reprehensibility are present here. Based on Stonebridge’s conduct, the court of appeal concluded Stonebridge’s culpability is sufficiently reprehensible as to warrant the imposition of sanctions to punish and deter.

The Ratio of Punitive Damages to Actual or Potential Harm

The Supreme Court has consistently rejected the notion that the constitutional line is marked by a simple mathematical formula, and reiterated its rejection of a categorical approach. Although repeatedly declining to establish a ratio beyond which a punitive damage award could not exceed  the U.S. Supreme Court found “instructive” decisions approving ratios of four to one, and recognized that in the past, “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”

In California, our Supreme Court discerned the following presumption from the high court’s endorsement of single-digit ratios concluding that ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect. Absent special justification punitive damages cannot survive appellate scrutiny under the due process clause.  In addition, multipliers of less than nine or 10 are not presumptively valid under State Farm. This is so, especially when the compensatory damages are substantial or already contain a punitive element.

As State Farm made clear, “because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those we have previously upheld may comport with due process where ‘a particularly egregious act has resulted in only a small amount of economic damages.”  When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. The precise award in any case, of course, must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.

Stonebridge’s reprehensible conduct that resulted in only a relatively small economic damage award, and Stonebridge’s $368 million net worth, a significant ratio of punitive to compensatory damages comports with due process.  After weighing all of the relevant factors and circumstances pursuant to State Farm and Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159 (Simon), the court of appeal held the trial court’s remittitur of punitive damages was proper.

The nature and size of Nickerson’s compensatory damage award does not justify a punitive damage award beyond the constitutional maximum. The court of appeal concluded that 10:1 is the maximum constitutionally defensible ratio.

ZALMA OPINION

My dissatisfaction with the tort of bad faith and punitive damages is well known and has been stated here more than once. However, in cases like this, where an insurer took advantage of a paraplegic by refusing to accept his hospitalization as necessary when it was obvious to his treating physicians, the jury, the plaintiff and as trial progressed and as both parties accepted as true on the appeal, that the insurer breached its contract in an egregious manner, they needed to be punished.  The punishment, however, must fit the crime or tort. Taking 5% of its net worth is not fair or reasonable. The jurors were angered by the willful and fraudulent conduct of the insurer. It was proper for the court of appeal and the trial court, looking without passion or prejudice, to apply the limits indicated by State Farm and limit punitive damages to 10 times the compensatory damages.

It may not be enough to deter Stonebridge from its bad actions. The news of this judgment, however, will make it difficult for Stonebridge to sell its policies. It is punished and it should change its procedures. Hopefully it will. Making Mr. Nickerson and his lawyers rich will not get rid of the wrongful conduct. News that it treats its insureds unfairly and in bad faith will raise the ire of the public and the California Department of Insurance that has the ability to punish it administratively if it continues the type of conduct that deprived Mr. Nickerson of the benefits to which he was entitled. One can only hope the California Department of Insurance is looking over the conduct of Stonebridge.

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.

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 recently published the e-books, “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.

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

How Not To Commit Arson

The story that follows is based on fact. It is, however, a work of fiction. The names, places and descriptions have been changed to protect the guilty. Any resemblance to real people is purely coincidental. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud.

Most people do not understand how hard it is to set fire to a house that destroys the entire dwelling and its contents. Most residences simply do not have sufficient combustibles in the right place to allow for a sustained fire. Many homes, especially the more modern ones, have fail-safe devices everywhere that make accidental fires a thing of the past.

An Insured decided that the only possible means of escaping his mortgage was to burn down his house. Being a rather imaginative fellow, he decided to also make the fire look like an accident.

On leaving his house in the afternoon, he opened the gas jets on the stove, blew out the pilot on his gas dryer and water heater, and set the thermostat on his electronically ignited furnace to 80 degrees Fahrenheit. It was a hot Summer day, but he assumed it would eventually cool off a little, the thermostat would kick on the furnace, and the electronic starter would ignite the entire house. What he did not count on was Southern California’s Santa Ana Winds that brought heat from the desert, and kept the outside temperature in the hundreds all day and into the night. The Insured could not anticipate that a neighbor with clear sinuses would smell the gas, turn it off at the meter, and save the house.

Of course, when the Insured returned home, he had to hide his disappointment that the house was still there. Undaunted, however, he tried again the next week. This time he took no chances. He went to the hardware store and bought a case of Coleman cooking fuel and spread it throughout the house. Then he tore up a book of paper matches so that there was no cover, only matches. He lit a cigarette and placed it low between the matches and left the house confident that when the cigarette burned down it would ignite the match heads and burn down the house. He was again sorely disappointed when he returned home to find the house still there.

The would-be arsonist had his innocent wife with him as an alibi. When they entered the house, she became hysterical at the sight of the flammable liquids poured throughout the house. She insisted that he report the incident to the fire department. He wouldn’t do it so she, against his wishes, called in the Arson Investigators.

“Boy, you were lucky. The idiot who tried to set fire to your house set his fuse upside down!” The youngest investigator blurted out to them, before his partner’s swift kick in the shins could stop him. The fact that the cigarette, to be used as a fuse, must be placed at the head of the matches, not the base was not known to the insured and the cigarette merely burned itself out.

The Insured learned a lesson from the arson investigator. The house burned down almost totally two days later.

The claim to the insurer included, among many other things, one encyclopedia Britannica and a wooden duck decoy. These inconsequential items, making up part of a claim for more than $100,000.00 in personal property, led to the Insured’s arrest when they were found, intact and undamaged in his temporary residence.

The Insured was arrested for arson and insurance fraud. His claim was denied.

He, of course, sued for bad faith, and the insurer was required to defend the law suit for a total of five years because it could not compel his testimony at deposition or trial until his criminal case was resolved. The suit finally settled with the arsonist and his presumably innocent spouse, for a payment of $2,000.00. Twenty times less than that amount that was expended by the insurer to defend the spurious lawsuit brought by the Insured.

Why did the Insured offer to settle for so little? For at least three reasons:

First, because the District Attorney could not get a man free to try the arson case and it was continued over and over again until all the witnesses were gone or had forgotten everything they knew.

Second, because the District Attorney and the Insured had made a deal that if the Insured pleaded guilty to one count of insurance fraud he would not go to jail. The District Attorney, although he knew of the insurer’s interest in the case and the lawsuit pending against it did not advise the insurer of the deal.

Third, the insured was a drug dealer who made an arrangement with the prosecutor to testify against other drug dealers and was eventually put into the witness protection program.

The insurance case was never tried. Two days after the settlement was paid in the civil action and more than five years after the fire, the Insured appeared in criminal court and pleaded guilty to one count of insurance fraud. He was given probation.  The case wasn’t a priority matter to the prosecutor since only an insurance company was being hurt. The fact that the insurer was required to defend a bad faith suit for five years at enormous cost was of no apparent concern to the prosecutors. The Insured did not profit from the fire with a cash award. He was relieved of his mortgage debt [which the insurer was required to pay to the mortgagee who had not been culpable in the arson] and he paid his lawyer one third of the $2,000 settlement.

The arson investigator who worked so hard to find evidence to arrest the insured was later arrested and convicted as a serial arsonist. Apparently he was upset that there was an arson fire in his town that he did not set. Sometimes, beside its desires, justice is actually done.

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.

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.

The story above came from Mr. Zalma’s collection of fraud stories, “Heads I Win, Tails You Lose,” which is available as an e-book at http://www.zalma.com/zalmabooks.htm.

Mr. Zalma recently published the e-books, “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.

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 Agreement No Contract

Life Policy Must Be Enforced as Written

Business owners often purchase key man life insurance to protect the company from the loss of a key man. When, in Selzer v. Dunn, 12-12-00150-CV (Tex.App. Dist.12 01/31/2014), the two key men bought policies naming the other as a beneficiary without an agreement about what was to be done with the proceeds, the expected litigation began over who should get the proceeds. Tracey Selzer, administrator of the estate of Michael Dewayne Varner, appealed from a summary judgment rendered in favor of Robby Dunn, the second key man, in this suit to determine the fate of the proceeds of a two million dollar life insurance policy on the first key man to die.

BACKGROUND

Dunn and Varner were each fifty percent shareholders in Cleanline Products, Incorporated, a company they started in 1997. In 2008, Lincoln Financial Life Insurance Company issued a two million dollar life insurance policy on Varner, naming Dunn as the sole beneficiary, and it issued a two million dollar life insurance policy on Dunn, naming Varner as the sole beneficiary. Cleanline paid the premiums on both policies. Varner died in 2010.

Dunn filed a petition for declaratory judgment requesting the court declare him the sole beneficiary of the policy, entitled to 100% of the policy proceeds. Selzer filed counterclaims for breach of contract and breach of fiduciary duty, requesting the court render judgment declaring either that Varner’s estate is the exclusive beneficiary of the policy or, if Dunn is the exclusive beneficiary, that he holds the insurance proceeds in constructive trust for the estate.

The evidence presented was that Dunn and Varner agreed to purchase life insurance and they agreed that each would be the owner and beneficiary of a policy on the other’s life. In case one of them died, neither wanted to deal with the family of the deceased so they intended the surviving partner to buy out the family of the deceased. Although they talked about what to do with the life insurance proceeds if one of them died, but they never came to any agreement about purchasing stock. They discussed “trying to do a buy-sell agreement,” but Dunn “never could get [Varner] to agree to anything.”  Neither Dunn nor Varner committed to any of the terms of a buyout.

The company’s lawyer was asked for examples of cross-purchase agreements. They received three different options for their consideration. Dunn and Varner never gave her final instructions as to an agreement regarding the value of the company or the value of the shares.

The lawyer was told that the purpose of the insurance policy was that if one of the partners passed away, the policy proceeds would give the other person the means to purchase the company from the surviving spouse and family and compensate for the loss of the business partner. Neither Dunn nor Varner ever gave counsel any specifics as to the terms for the value of the company or of the shares and they never selected one of the draft agreements.

DECLARATORY JUDGMENT

Dunn moved for summary judgment on his declaratory judgment action, seeking a declaration that he is the sole beneficiary entitled to all of the insurance proceeds. In support, Dunn included the reciprocal insurance policies, as well as the applications submitted to Lincoln National Life Insurance Company.

A person interested under a written contract may have determined any question of construction or validity arising under the instrument and obtain a declaration of rights thereunder. Texas courts interpret insurance policies according to the rules of contract construction. If policy language is worded so that it can be given a definite or certain legal meaning, it is not ambiguous and it is construed  as a matter of law.

Here, Dunn is named as the owner of the policy insuring Varner’s life. The policy specifies that it, along with the application and any endorsements or amendments and riders, make up the contract. The policy further provides that the designation of beneficiary in the application shall remain in effect until the policy owner changes it. In the application, Varner named Dunn sole beneficiary. The evidence is clear and unambiguous and shows that Dunn is entitled to judgment as a matter of law on his declaratory judgment action and he is the sole beneficiary of the insurance policy.

BREACH OF CONTRACT

Dunn’s motion for summary judgment also addressed Selzer’s counterclaim for breach of an alleged oral contract. Under the terms of that contract, Selzer argues, the estate is entitled to all of the insurance policy proceeds, in exchange for Varner’s stock in the company. Dunn asserted that there is no evidence of the elements of a breach of contract cause of action. Specifically, he contended there is no evidence of an offer, an acceptance, a meeting of the minds, execution, or delivery.

The essential elements of a breach of contract claim are (1) the existence of a valid contract, (2) performance or tendered performance by the plaintiff, (3) breach of the contract by the defendant, and (4) damages sustained by the plaintiff as a result of the breach. The requirements of a valid contract include acceptance of the terms of the offer and a meeting of the minds. The term “meeting of the minds” refers to the parties’ mutual understanding and assent to the expression of their agreement. The parties must agree to the same thing, in the same sense, at the same time.  The determination of whether there is a meeting of the minds is based on an objective standard of what the parties said and did and not on their subjective state of mind. With respect to an oral agreement to transfer stock, the terms must state the specific quantity of shares and the specific price in order to be considered clear, certain, and definite.

Dunn’s summary judgment evidence showed that he and Varner never agreed to the number of shares the surviving partner would purchase or the price he would pay for those shares. There was no agreement that any portion of the proceeds would be given to the family of the deceased beyond what was required to purchase the deceased’s shares. Thus, there was no meeting of the minds on these terms that were necessary to the creation of a valid buy/sell agreement.

The corporate lawyer explained that three versions of a cross-purchase agreement were created in a span of less than half an hour. She never heard from Dunn or Varner about the cross-purchase agreement or the drafts she had prepared.

The evidence shows, at best, that Varner had a subjective belief that the proceeds of the insurance policy would be given to his four children. A subjective state of mind is not sufficient to show a valid contract.  The unsigned draft of a buy/sell agreement is not evidence of a specific agreement between Varner and Dunn. This evidence does not show that Dunn and Varner had a meeting of the minds regarding the price to be paid for the deceased shareholder’s shares or how many shares the survivor would purchase. The trial court did not err in granting Dunn’s motion for summary judgment on Selzer’s counterclaim for breach of contract.

BREACH OF FIDUCIARY DUTY

A last grasp argument was Selzer’s breach of fiduciary duty counterclaim. Selzer asserted that Dunn breached his fiduciary duty by structuring the life insurance policies as he did, inducing Varner to enter into the life insurance agreement, and refusing to carry out the oral agreement Varner and Dunn allegedly made. Selzer’s claims for breach of contract and breach of fiduciary duty are based on the same alleged oral contract. The duties allegedly breached were based on, or in conjunction with, the alleged oral contract and the damages Selzer claimed stemmed from that contract.

A fiduciary duty cannot be created off an unprovable and never agreed to claimed oral contract.

ZALMA OPINION

Dealing with key man life insurance policies requires more than a unilateral belief. It requires a contract. Dunn and Varner had no contract and, as a result, created a situation where suits would arise over who got the money. The insurance contract was clear, only Dunn could collect. The attempt to change the contract of insurance by trying to prove a non-existent oral agreement failed.

When people enter into business it is important to consider the early death of one or more key men or women that can be eased by life insurance. A Buy-Sell agreement or agreement of the use of the proceeds of such life insurance must be covered by a binding contract. There was none and the Varner estate got nothing.

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.

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 recently published the e-books, “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.

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.

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Risk Transfer Device Works

Waiver of Subrogation Defeats Suit Against Contractors

Almost every construction contract and almost every standard American Institute of Architects (AIA) construction contracts contain a waiver of subrogation provision. Some courts even conclude that a contract that makes both the owner and the contractor an insured of the same policy, as mutual benefit insurance, effects a waiver as a matter of law. Construction contracts and waivers of subrogation are a clear intent of the parties to defer the risk of loss from the parties to the contract to insurers. The waiver of subrogation is a well recognized and almost ancient risk transfer device transferring the risk of loss from the parties to the contract to insurers.

The Board of Commissioners of Jefferson County (“Jefferson County”) appealed the Scott Circuit Court’s entry of summary judgment in favor of Teton Corporation, Innovative Roofing Solutions, Inc., Gutapfel Roofing Inc., and Daniel L. Gutapfel (collectively “the Appellees”). The trial court determined that Jefferson County waived its right to subrogate damages pursuant to the terms of the American Institute of Architects Contract (“the AIA Contract”) it entered into with the general contractor, Teton. In The Board of Commissioners of County of Jefferson v. Teton Corporation, 72A04-1302-CT-00055 (Ind.App. 02/04/2014) the Indiana Court of Appeal examined the majority and minority views concerning the effect of the waiver and followed the majority view.

FACTS

In 2008, Jefferson County decided to repair and renovate the courthouse in Madison, Indiana. An architect was hired to design the renovation, and the renovation involved repairs to the roof of the courthouse, its flashing, gutters, and downspouts. Jefferson County accepted Teton Corporation’s bid for the repairs. Teton subcontracted with Innovative Roofing to furnish labor and materials for the roofing work. Innovative Roofing sub-subcontracted with Gutapfel Roofing to repair the courthouse’s downspouts.

Jefferson County’s agreement with Teton Corporation incorporated a form construction project contract prepared by the AIA. The relevant AIA contractual provisions relating to insurance and subrogation provide:

“11.3.1 Unless otherwise provided, the Owner [Jefferson County] shall purchase and maintain . . . property insurance in the amount of the initial Contract Sum as well as subsequent modifications thereto for the entire Work at the site on a replacement cost basis without voluntary deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made . . . This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work.  ¶ 11.3.5 If during the Project construction period the Owner insures properties, real or personal or both, adjoining or adjacent to the site by property insurance under policies separate from those insuring the Project … the Owner shall waive all rights in accordance with the terms of Subparagraph 11.3.7 for damages caused by fire or other perils covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise. ¶ 11.3.7 Waivers of Subrogation. The Owner and Contractor waive all rights against [] each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other . . . for damages caused by fire or other perils to the extent covered by property insurance obtained …”

Jefferson County did not obtain separate property (or builder’s risk) insurance for the courthouse project, but relied instead on its existing property and casualty insurance policy with St. Paul Fire and Marine Insurance Company. Jefferson County also did not inform Teton Corporation that it did not intend to obtain separate insurance for the project. The AIA contract also required Teton to obtain contractor’s liability insurance.

On May 20, 2009, during the renovation, a devastating fire occurred at the Jefferson County Courthouse, which caused over six million dollars in damage. Per the terms of its insurance policy, St. Paul made payments to Jefferson County for damages caused by the fire.

Thereafter, Jefferson County filed a complaint against the Appellees alleging negligence, breach of implied warranties, and breach of contract. Specifically, Jefferson County alleged that Appellee Gutapfel Roofing’s negligence was the primary cause of the fire, but also alleged that Appellees Teton Corporation and Innovative Roofing were negligent as well.

The trial court granted the roofers’ motions for summary judgment and enforced the waiver of subrogation.

ANALYSIS

The primary goal of contract interpretation is to determine the intent of the parties at the time the contract was made as disclosed by the language used to express their rights and duties. Clear, plain, and unambiguous language is conclusive of the parties’ intent, and we will neither construe unambiguous contract language nor add provisions not agreed to by the parties.

Jefferson County concedes that pursuant to the terms of the AIA contract subrogation is barred when a property owner seeks to recover damages to its insured “Work” property, but maintains that “this case involves damage to non-Work property.”  Jefferson County argues that under the AIA contract, Teton was responsible for procuring insurance to cover damages for claims “other than to the Work.”

An agreement to provide insurance constitutes an agreement to limit recourse of the party acquiring the policy solely to its proceeds even though the loss may be caused by the negligence of the other party to the agreement. The AIA contract established the intent to place any risk of loss on the Work on insurance, and the requirement of waivers was consistent with an intent to place the risk of loss on insurance. The AIA standard contract reveals a studied attempt by the parties to require construction project risks to be covered by insurance and to allocate among the parties the burden of acquiring such insurance. In Indiana, if a construction project owner failed to take out sufficient insurance to cover the cost of the undertaking, the owner—not the contractors—was required to bear the loss caused by such a miscalculation.

The California Court of Appeals in Lloyd’s Underwriters et al. v. Craig and Rush, Inc., et al., 26 Cal.App.4th 1194 (1994) the property owner hired Craig and Rush to perform repairs to its roof. During the construction, rain intruded and caused damage to the interior of the facility.  After the losses to “non-Work” property, Lloyd’s as the subrogee of the owner argued that under the AIA contract a loss “outside the Work” would remain the contractors’ responsibility. The California Court of Appeals rejected Lloyd’s argument because it ignores the language defining the scope of claims falling within the waiver clause. The waived claims are not defined by what property is harmed, instead, the scope of waived claims is delimited by the source of any insurance proceeds paying for the loss (i.e., whether the loss was paid by a policy “applicable to the Work”).

Applying the law to this case, the court began and ended with the standard language of the AIA contract the parties chose to use to memorialize their agreement regarding the construction project. That form contract has long been recognized as having as a central tenet its intention to liquidate and settle construction-related claims through non-subrogated insurance coverage purchased specifically for the project.  The unambiguous contract language instructed Jefferson County not only to have in force or even just maintain insurance on the project, but rather, to both “purchase and maintain” the insurance. First, because separate, non-subrogated coverage is so important to the parties’ relationships under the contract, Jefferson County’s failure to notify rendered Teton unable to take advantage of the provisions of the contract that would have allowed Teton to purchase the contemplated separate coverage at Jefferson County’s cost.

The purpose of insurance and waiver of subrogation provisions of the AIA contract constitute a studied attempt by the parties to require construction project risks to be covered by insurance and to allocate among the parties the burden of acquiring such insurance. This is the conclusion reached by the majority of states who have considered the waiver of subrogation, and the Indiana Court of Appeal found it to be the more logical and compelling resolution.

Under the terms of the AIA contract, Jefferson County’s claims for damages against the Appellees are barred and the trial court’s entry of summary judgment in favor of the Appellees was affirmed.

ZALMA OPINION

Insurers who insure people involved in construction and who agree to allow its insured to waive subrogation must carefully review the construction contract, the insurance requirements and the waiver of subrogation language before instructing counsel to file suit against any party to the construction contract. Although the county had an argument, agreed to by one dissenting justice, that the waiver only applied to the work (the roof) and not the rest of the structure and its contents, the language of the construction contract clearly and unambiguously made clear that the parties would rely on their own insurance and would not sue each other for damages intended to be covered by 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.

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 recently published the e-books, “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.

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

Court Should Never Rewrite Policy

FAIR Plan Coverage Limited by Statute

In 1968, the Legislature enacted the California FAIR Plan to provide property insurance to the otherwise uninsurable. Appellants, who lived in high fire risk areas, were insured under the FAIR Plan. Following wildfires, appellants were paid the full amount of their policy limits because their loss was equal to or exceeded the policy limits. Appellants contended, however, that they were entitled to additional payments and should have provided coverage to them under a standard homeowners policy rather than the fire policies issued by the FAIR Plan. The trial court disagreed, determining that the FAIR Plan had met its contractual and statutory obligations to them. The California Court of Appeal, in Gaeton St. Cyr v. California Fair Plan Association, B243159 (Cal.App. Dist.2 01/31/2014) resolved the dispute whether the policy issued by the FAIR Plan to the plaintiffs should have provided broader coverage.

PROCEDURAL HISTORY

Beginning in September 2009, appellants filed several complaints against FAIR Plan. In their first amended complaints, appellants admitted that FAIR Plan paid them the “actual cash value” (ACV) of their respective policies within weeks of their losses. Specifically, they contended that FAIR Plan was required to issue a policy in accordance with the standard form fire insurance policy set forth in section 2071 and the “‘Basic Property Insurance’ written in the normal market.” One appellant asserted that the “Basic Property Insurance written in the normal market is the standard form policy known as the ‘HO-3’” a homeowners policy that provides property, liability and workers’ compensation coverages.

The Court of Appeal noted that it is not clear how the FAIR Plan could issue an HO-3 form since it was not submitted as part of its rate plan nor is the FAIR Plan authorized by the statutory scheme to issue some of the coverages offered under that form like third party liability and workers’ compensation.

The FAIR Plan filed a demurrer to the complaints. The demurrer asserted that appellants had failed to state a cause of action for bad faith breach of contract, for breach of contract, or for unfair business practice, because (1) the Commissioner had approved all of the challenged features of the FAIR Plan, (2) the FAIR Plan satisfied the statutory requirements for “‘basic property insurance,’” and (3) under the statutory scheme, the Commissioner, not the court, must determine whether the FAIR Plan should have expanded coverage beyond that presently provided in the plan.

The trial court sustained FAIR Plan’s demurrer without leave to amend. The trial court found that FAIR Plan “performed the contract as written and that the insurance contract form did in fact comply with the applicable requirements of the Insurance Code.”

ANALYSIS

“Basic property insurance” is defined by statute as insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added with respect to such property by the industry placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.

Under the statutory scheme, FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to “write and engage[] in writing in [California], on a direct basis, basic property insurance or any component thereof in multiperil policies.” (California Insurance Code (CIC) §§ 10094, 10098.) FAIR Plan is the insurer of last resort, that is, FAIR Plan is statutorily mandated to make available basic property insurance to any “persons having an interest in real or tangible personal property who, after diligent effort…, are unable to procure such insurance through normal channels from an admitted insurer.” (CIC § 10094.)

CIC Section 10100.2, subdivision (a)(1) provides that rates for the California FAIR Plan must not be excessive, inadequate, or unfairly discriminatory and must be actuarially sound. Under the rate filing instructions for the Department, insurers must submit a rate filing for any new rates or forms with “rate impact.” A “rate impact” includes “any contract[ual] language change(s) that affect the rate or cost of coverage due to broadening or restricting of coverage.” Appellants assert — and FAIR Plan does not dispute — that in its 1997 rate filing, FAIR Plan submitted a fire policy form to the Commissioner identical to the standard form fire policy set forth in section 2071.

CIC Section 10100.2 and the Department’s rate filing instructions do not mandate the use of any specific form. Here, the Commissioner was asked to opine on the fire policy forms FAIR Plan had issued to appellants. The Commissioner’s response was that there is no information presented to show that any changes to the forms resulted in a change to their rate impact.

CIC Section 2070 provides: “All fire policies on subject matter in California shall be on the standard form, …   No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy…; provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.”

A policy need not comply with the provisions of the standard form of fire insurance policy if that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.

FAIR Plan falls within both exceptions. As an unincorporated association, it may substitute words referring to itself and as the FAIR Plan policy covers both fire and other perils, such as vandalism and malicious mischief the policy form need not comply with the provisions of the standard form of fire insurance policy set forth in section 2071, so long as it provides coverage substantially equivalent, or more favorable, to the insured.

CIC Section 2071 provides that the statutory form set forth in subdivision (a) of that section is the “standard form of fire insurance policy for this state.” The form is bare bones. It provides spaces for “insertion of name of company or companies issuing the policy” and for “listing amounts of insurance, rates and premiums for the basic coverages insured under the standard form of policy and for additional coverages or perils insured under endorsements attached.”

By its plain language, CIC section 2051 provides that under an open policy that pays ACV, the amount an insurer must indemnify a policyholder for a total loss is the lesser of the policy limit or the fair market value of the structure. For a partial loss, the amount is the lesser of the policy limit or the cost to repair and replace the structure and its contents. Here, according to appellants, the fair market value of the insured property or the costs to repair and/or replace the property exceeded the policy limits. As appellants were paid the full amount of their policy limits, they were paid the amount due.

ZALMA OPINION

This case is an example of the failure of an insured to read the FAIR Plan policy and to follow the advise of their ability to obtain full protection provided by their insurance agents and brokers. The FAIR Plan, by statute, provides bare bones fire insurance for people who chose to build and live in high fire risk areas. Most insurers refuse to write that type of insurance and the insureds choose the FAIR Plan as a last resort. They should not, however, stop there. Once the risk of loss by fire is provided by the FAIR Plan the insured can find in the market place a “wrap around” policy that excludes the perils covered by the FAIR Plan and provides all of the other coverages available under a HO-3 homeowners policy.

The plaintiffs in this case did not buy the available wrap around policy and tried, by litigation, to obtain the coverages that they failed to pay for. The Court of Appeal correctly refused to rewrite the FAIR Plan policy and left the insureds with what they bought wondering why they didn’t spend a few dollars more to obtain complete coverage from the FAIR Plan supplemented by a commercial insurance company.

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.

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 recently published the e-books, “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.

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.

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Agent Loses License

Selling After License Revoked Fatal to License

Insurance agents, brokers and intermediaries may only sell insurance policies if they are licensed by the state. The licensing laws are designed to protect the public against unscrupulous agents and brokers. When the agent, broker or intermediary ignores orders of revocation and continues to sell insurance and deal with insurance clients, he or she faces the ire of the state regulator and the courts.

Michael Dermody was one such insurance intermediary. His license was revoked and he appealed an order affirming the decision of the Office of the Commissioner of Insurance (OCI). In Dermody v. Commissioner of Insurance, 2013AP1024 (Wis.App. 01/30/2014) the Wisconsin Court of Appeal was asked by Dermody to reinstate his license.

FACTS

The Commissioner found that Michael violated various Wisconsin statutes which govern the conduct of insurance intermediaries. The Commissioner found that Michael violated the statutes by selling insurance policies to Lyle and Elayne Bolender after his insurance license had been revoked; by making false representations to Cynthia Marino; and by selling insurance policies to Stephen and Susan Tinus after his insurance license had been revoked. As a result, the Commissioner prohibited Michael from reapplying for his insurance license for five years, and ordered Michael to pay restitution and a forfeiture.

Michael argued that the Commissioner erred in basing the decision on credibility determinations and factual findings that were not supported by substantial evidence, and that a remand was required because there were various “material errors of procedure” that compromised the fairness of the proceedings.

Michael was a licensed insurance intermediary until December 2009. On November 3, 2009, OCI sent Michael an Order of Revocation advising Michael that his insurance license would be revoked in thirty-one days for failure to pay taxes if he did not take certain actions. OCI revoked Michael’s insurance license by letter dated December 4, 2009. Although failure to pay taxes is not a violation that involves moral turpitude, like theft or embezzlement, it was sufficient to revoke the license. Michael apparently ignored the order of revocation.

In April 2010, OCI issued a notice of hearing against Michael alleging a number of violations of Wisconsin statutes. The notice of hearing alleged that Michael: (1) sold insurance policies to Lyle and Elayne Bolender after his insurance license had been revoked; (2) mislead Cynthia Marino as to the accessibility of funds in her annuities; and (3) sold insurance policies to Stephen and Susan Tinus after his insurance license had been revoked.

The administrative law judge (ALJ) who presided at a factual hearing issued a proposed decision that included findings of fact and conclusions of law.  In April 2012, the Commissioner issued a final decision that adopted, with minor revisions not pertinent to this appeal, the ALJ’s proposed decision. The Commissioner’s decision prohibited Michael from reapplying for an insurance license for five years, ordered Michael to pay restitution to Marino, and imposed a $15,000 forfeiture.

DISCUSSION

An agency’s findings of fact may be set aside only when a reasonable trier of fact could not have reached them from all the evidence before it, including the available inferences from that evidence. The ALJ recorded her observations regarding the witnesses in her proposed decision. Michael cites no authority in support of his argument that credibility determinations, like findings of fact, must be supported by substantial evidence. The court of appeal rejected Michael’s argument on the basis that in an appeal following an administrative agency decision, the appellate court does not pass upon the credibility of witnesses. In light of the Commissioner’s findings that the testimony was credible.  Michael did not argue that their testimony, if accepted, does not establish the violations alleged. Accordingly, the court of appeal rejected Michael’s challenge based on the Commissioner’s credibility findings.

Michael argued that the fairness of the proceedings against him were impaired by material errors of procedure.  Michael also argued that the Commissioner’s application of the “minimum burden of proof” instead of the “‘middle’ burden of proof” in his case constituted a material error of procedure that compromised the fairness of the proceedings. The Commissioner applied the burden of proof set forth in the Wisconsin Administrative Code which requires OCI to prove the case by a preponderance of the evidence.  Wisconsin does not recognize a “minimum burden of proof” or “middle burden of proof” but only recognizes proof by a preponderance of evidence – that is – 50% + 1.

Michael also argues that OCI failed to provide him with notice of the allegation that he sold insurance policies to Stephen and Susan Tinus on December 30, 2009, and that this constituted a material error of procedure. Contrary to his allegation the appellate court found that the pleadings were properly amended in accordance with Wisconsin statutes.

When an appellate court reviews an administrative agency’s exercise of discretion, it examines whether the exercise of discretion was made based upon the relevant facts by applying a proper standard of law. The burden to demonstrate an erroneous exercise of discretion rests on the party claiming the exercise of discretion was improper.

Michael failed to demonstrate that the ALJ and the Commissioner erroneously exercised their discretion.  The Commissioner agreed with the ALJ’s decision. The court of appeal concluded that the ALJ’s and the Commissioner’s exercise of discretion was based upon the relevant facts and the proper standard of law, and we defer to their discretionary decisions to deny Michael’s motion to reopen the record.

ZALMA OPINION

Insurance agents, brokers or intermediaries must maintain their licenses in good standing. That means they must not only pay their taxes but must also maintain their license, attend sufficient continuing education classes and must treat his clients fairly and in good faith. Michael failed in all respects and had the unmitigated gall to appeal the order revoking his license when the evidence was damning.

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.

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 recently published the e-books, “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.

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.

 

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Insurance Fraud Requires Direct Trip to Jail

In the third issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on February 1, 2014, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    Crooked Chiropractor Not Allowed to Take Back Guilty Plea.
2.    New E-Books From Barry Zalma.
3.    British Public Submitted 6,060 Anonymous Fraud Tips in 2013
4.    $1.9 Million More Death Master File Money to States.
5.    NICB Fraud Predictions.
6.    Workers’ Compensation Top 2013 Fraud Cases.
7.    The 2013 Insurance Fraud Hall of Fame.

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 the 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:

Zalma on Insurance

•    Advertising Injury Coverage
•    An “Auto” By Any Other Name
•    Pollution Exclusion Effective
•    First Party vs. Third Party
•    Potential Coverage Requires Defense
•    Policy Must Be Read as A Whole
•    No Assumption of Liability
•    Insurer Has Burden of Proving Exclusion
•    Insurable Interest In Life Policy
•    Making it Easy to Serve Suit Is Dangerous
•    Insured Must Pay Premium to Effect Insurance
•    Immunity for Reporting Suspected Fraud
•    Failure to File Timely Suit Fatal
•    Flood Insurance Conditions
•    Flood Insurance
•    A Claim Is Not A Suit
•    Fraud Punished With Mercy
•    Disbarred
•    UM Requires Uninsured Vehicle
•    There is No Free Lunch

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.

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.

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Advertising Injury Coverage

Defense by Independent Counsel Dangerous

In June 2006, Theodore W. Lay, d/b/a Ted Lay Real Estate Agency (Lay), faxed an advertisement in regard to the sale of a particular property to Locklear Electric, Inc. (Locklear), and others. Because the facsimile message (fax) recipients had not given permission to receive these messages, Lay violated the Telephone Consumer Protection Act of 1991 (Telephone Act) (47 U.S.C. § 227 (2006)). The statute imposes a penalty in the amount of $500 for each fax sent. Lay was sued in a class action with Locklear as the class representative. Defense of the claim was tendered to Standard Mutual Insurance Company (Standard), Lay’s insurance carrier, which undertook the defense under a reservation of rights. Only to later have the insured fire counsel appointed by Standard and retain independent counsel.

Independent counsel settled with the plaintiffs without the permission or consent of the insurer for $1,739,000 plus costs (the full amount sought in the class action complaint) and assigned all rights against the insurer and took over the insured’s position in the declaratory relief action seeking a determination of no coverage. After two appeals and a Supreme Court decision, the case was sent back to the court of appeal who resolved the issue in  Standard Mutual Insurance Co. v. Lay, 4-11-0527 (Ill.App. Dist.4 01/23/2014).

FACTS

The Telephone Act claim against Lay was a potential multimillion dollar claim that would bankrupt the agency if a verdict were entered against it and it was not covered by insurance.   By so doing the insured’s assets were protected.

The settlement was approved by the federal district court. After extensive briefing, the trial court denied Locklear’s motion and granted that filed by Standard. Locklear appealed this judgment.

First, the commercial general liability (general liability) policy issued to the agency was in regard to a single-family dwelling and several vacant lots under a lessor’s risk-only basis and not in connection with the operation of a business.

On April 19, 2010, the executed settlement agreement was filed with the court in the underlying action. On September 8, 2010, the court entered a judgment on final approval of the settlement for $1,739,000 plus costs.

At the time the settlement in the underlying action was agreed upon and judgment entered, this declaratory judgment action was still pending.

On May 23, 2013, the supreme court issued its opinion affirming the court of appeal’s holding the reservation of rights letter issued by Standard was satisfactory to allow it to raise coverage issues and reversing the holding damages provided under the Telephone Act were punitive in nature and uninsurable under Illinois law. The court then remanded this case for consideration of the other issues raised by Locklear.

ANALYSIS

Locklear argues all policies issued to Lay, including the general liability policy issued as lessor’s risk only on a residence and some vacant lots and a second business policy issued as a lessor’s risk only on a four-unit apartment building, provide coverage to Lay under the allegations of the underlying action. It argues coverage is provided under both the advertising injury and property damage provisions of the policies. It further argues Norma Lay had a right to settle the underlying action, with or without the consent of Standard, and Standard’s failure to object to the settlement waived any right of consent to the settlement.

Standard also contends there is no coverage under two out of three policies because they were for lessor’s risks only and pertained to the real estate identified in those policies. It argues coverage is not provided under either the advertising injury provisions or property damage provisions of any of its policies and, if coverage was triggered by those provisions, the exclusions in the policies for rendering of professional services and intentional actions excludes coverage in this case. It further argues Lay had no right to settle without Standard’s consent and Standard did not agree to the settlement.

The court of appeal concluded that Standard’s policies issued to Lay cover the damages alleged but note the purpose of the Telephone Act is “to address telemarketing abuses attributable to the use of automated telephone calls to devices including telephones, cellular telephones, and fax machines.” By allowing liability for telemarketing abuses to be covered by insurance, the company responsible for the abuses, in this case Lay, has no incentive to stop the abuses from occurring in the future and the purpose of the Telephone Act is unfulfilled.

General Liability Policy and Business Policy for Lessor’s Risk

One of the business policies at issue here specifically involves coverage for the operation of Lay’s real estate business. The court found the policy provides coverage for the “blast fax” incident. The other two policies refer to various rental premises or vacant lots owned by Lay. However, the policies do not contain “designated premises” limitations, which would attempt to limit their application to liability coverage for activities arising out of the use of those premises alone. The only reference to those premises in the policies is in the descriptive sections of the policy declarations. In the cases cited by Standard for the proposition these policies do not cover liability for faxes in support of Lay’s real estate sales business, the policies included provisions limiting general liability coverage to injuries arising out of ownership of the premises listed in the declaration. The policies in this case do not contain those provisions.

Lay was a real estate agency, not an advertising company. The claim against Lay was not made because Lay incorrectly performed real estate services. Instead, the claim was based on Lay’s tortious conduct ancillary to the performance of real estate services. Following Standard’s argument an insured advertising its business is an excluded professional service would read the coverage of advertising injuries entirely out of the policies despite the fact such coverage is specifically available under the policies.

Locklear argues coverage lies for fax advertisements under Standard’s “personal and advertising injury” provision. Since faxes were sent without the permission of the recipient, they violated the fax recipient’s right to privacy.

An insurer, being charged with a duty to its insured, controls the insured’s defense. When an insurer surrenders control of the defense, it also surrenders its right to control the settlement of the action and to rely on a policy provision requiring consent to settle. Standard had no right to require Lay to obtain permission to settle the underlying suit or to object to it itself.

CONCLUSION

The insurer of the owners of a real estate agency that clearly violated the Telephone Consumer Protection Act by faxing an advertisement about a property listed for sale to recipients that had not agreed to receive the messages was responsible for providing coverage, where the policies issued by the insurer covered the alleged damages, the claim was not excluded by the professional services exclusion in the policies or the exclusion applicable to intentional conduct, sending the faxes violated the recipients’ right to privacy and fell under the “personal and advertising injury” provision, and the insurer gave up the right to object to the insureds’ settlement of the underlying claim when it allowed them to control the defense.

ZALMA OPINION

Insurance is a business where the insurer uses wise discrimination to choose its risks. When it does not do so, when it issues broad policies with minimal limitations, it must pay for its error. Here, the insurer issued lessors risk policies but did not limit the coverage to the property itself, although it easily could have done so, and by that error cost itself more than one million dollars.

Insurance underwriting is a science and an art where the underwriter assesses the risk, determines a fair and reasonable premium to cover the risk, and issues a policy that covers the intent of the insurer and the insured. When the underwriter fails to perform that duty a case like this one reaches the courts, coverage positions are taken based upon the unstated intent of the underwriter.

Insurers should only try to enforce losses based upon the actual wording of the policy not the wording that the underwriter thought was in the policy or wished was in the policy. It failed and that failure cost it enormously in legal fees and indemnity payments.

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.

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 recently published the e-books, “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.

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.

 

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An “Auto” By Any Other Name

Inadequate Underwriting Is Expensive

One of the operators of a leased food truck was burned inside the truck by oil from a deep fryer that splashed on her. The insurers for the lessor dispute with one another coverage. The automobile insurer claims that the injury should be covered under the commercial general liability policy that, although excluding coverage for injuries arising out of the use of automobiles, covers “mobile equipment,” defined as vehicles used for a primary purpose other than transporting persons or cargo. The commercial general liability insurer asserts that the primary purpose of the food truck was to transport persons and cargo so that it is not within the mobile equipment exception to the auto exclusion.

Royal Catering Company (Royal) owned a fleet of food trucks. It leased its trucks to operators who drove from site to site selling food. Royal leased one of these trucks to Esmeragdo Gomez, who, along with his wife Irais Gomez, operated the truck. The Gomezes’ food truck had only two seats and two seatbelts. The truck was not equipped to transport persons other than a driver and a cook. Each day, Mr. Gomez returned the food truck to Royal. Royal washed and maintained the truck and repaired it as necessary.

On the day of the accident, Mr. Gomez was driving the Gomezes’ food truck. A guest sat in the truck’s passenger seat, and Mrs. Gomez stood in the rear of the truck. At an intersection, Mr. Gomez swerved to avoid an approaching truck. Mr. Gomez’s evasive action failed to avoid a collision. Just prior to the collision, hot oil splashed on and burned Mrs. Gomez. The Gomezes and the passenger in their truck brought an action (the Gomez action) against Royal and others for injuries sustained in connection with the accident.

Royal tendered the Gomez action to American States Insurance Company (American States), which had issued automobile (American States Auto Policy) and excess automobile insurance policies to Royal. American States agreed to provide a defense under a reservation of rights. Royal and American States tendered the Gomez action to Travelers Property and Casualty Company of America (Travelers), which had issued to Royal commercial general liability (Travelers Primary CGL Policy) and excess-umbrella general liability policies. Travelers declined to provide a defense. American States, Royal, and the Gomezes submitted the Gomez action to binding arbitration. The arbitration concerned only Royal’s liability on a products liability theory—i.e., that Royal provided a defective deep fryer basket, which caused the hot oil to spill on Mrs. Gomez.

Regarding responsibility for the accident that caused Mrs. Gomez’s burn injuries, the Arbitrator found: The liability proportions for Mrs. Gomez’s injuries are assigned as follows: [¶] 1. To Raul Carillo: 20%; [¶] 2. To Royal Catering Trucks, Inc.: 40%; [¶] 3. To Esmeragdo Gomez: 25% [¶] 4. To Irais Gomez: 15%.” Based on the arbitrator’s award, by stipulation, a judgment was entered against Royal on Mr. Gomez’s loss of consortium claim and Mrs. Gomez’s products liability claims in the total amount of $2,428,577.34, including costs.

The Litigation

American States brought an action against Travelers, and Travelers cross-complained against American States; both insurance companies sought to establish Royal’s coverage under the other company’s insurance policies.

American States brought an action against Travelers seeking a declaration that Travelers had a duty to defend Royal in the Gomez action under the Travelers primary and excess-umbrella general liability policies and for equitable contribution and equitable subrogation/indemnity for American States’s payment of the defense costs and settlement in the Gomez action. Travelers cross-complained against American States, the Gomezes, and Royal seeking declarations that Travelers had no duty to defend or indemnify Royal in the Gomez action under either the Travelers Primary CGL Policy or the Travelers excess-umbrella general liability policy, that America States had a duty to defend and indemnify Royal in the Gomez action under the American States Auto Policy, and that American States had a duty to indemnify Royal in the Gomez action under the American States excess auto policy before Travelers had any duty to do so under the Travelers excess-umbrella general liability policy.

The trial court granted Travelers’s motion for summary adjudication and denied American States’s motion for summary judgment. It held that the Gomezes’ food truck was an “auto” and not “mobile equipment,” reasoning that “the whole point… of this endeavor is to move food and other items to places where people are waiting to buy them” and that food was the “cargo” the Gomezes’ food truck transported.

The Insurance Policies

The Travelers policy defined “Auto” as “a land motor vehicle, trailer or semitrailer designed for travel on public roads, including any attached machinery or equipment. But ‘auto’ does not include ‘mobile equipment.’”

“‘Mobile equipment’ means any of the following types of land vehicles, including any attached machinery or equipment: … “f. Vehicles not described in a., b., c. or d. above maintained primarily for purposes other than the transportation of persons or cargo.”

The American States Business Auto Policy

Section II of the American States Auto Policy defined “auto” as: “a. Any land motor vehicle, ‘trailer’ or semitrailer designed for travel on public roads; or ¶ “b. Any other land vehicle that is subject to a compulsory or financial responsibility law or other motor vehicle insurance law where it is licensed or principally garaged.”  However, the policy excluded from the term “auto” “mobile equipment.”

DISCUSSION

When determining whether a particular policy provides a potential for coverage the court is guided by the principle that interpretation of an insurance policy is a question of law. A liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity.

American States argues that the trial court erred in holding that the Gomezes’ food truck was an “auto” and not “mobile equipment” under the Travelers Primary CGL Policy. Because the primary purpose of the Gomezes’ food truck was to serve as a mobile kitchen and not to transport persons or cargo.

Under a plain reading of the Travelers Primary CGL Policy, the Gomezes’ food truck was “mobile equipment” and not an “auto.” The primary purpose of the Gomezes’ food truck was to serve as a mobile kitchen and not to transport persons or cargo. The inherent purpose of a mobile catering truck certainly could be seen as including the use and maintenance of its kitchen facilities. For the first two hours of the day, the Gomezes cooked food in their food truck while parked in the Royal parking lot. During the next eight hours, the Gomezes made 12 to 13 stops to cook, or at least heat, and sell food. During those stops, the food truck was not “transporting” anything, but was immobile. The food truck had only two seats and only two seatbelts, and the truck was not equipped to transport persons other than a driver and a cook.

Apart from the specific inclusion of vehicles “maintained primarily for purposes other than the transportation of persons or cargo” within the Travelers Primary CGL Policy’s definition of “mobile equipment,” other language in the definition supports the conclusion that the Gomezes’ food truck was “mobile equipment” and not an “auto.” If Travelers had intended to exclude food trucks from coverage as “autos”—a significant consideration in light of the fact that Royal maintained a fleet of food trucks and was in the business of leasing such vehicles—it would have identified them along with the other special use vehicles it identified as “autos.”

Because the Gomez action was a products liability action and the Travelers Primary CGL Policy provided coverage for products claims while the American States Auto Policy excluded from coverage claims arising out of equipment furnished in connection with Royal’s work.

Travelers Had a Duty to Defend Royal in the Gomez Action

Therefore, judgment in favor of Travelers was reversed. The matter is remanded to the trial court to enter judgment in favor of American States, the Gomezes, and Royal on Traveler’s cross-complaint against them, and in favor of American States on its complaint. American States, the Gomezes, and Royal are awarded their costs on appeal.

ZALMA OPINION

This is a case where weak – or nonexistent – underwriting cost the Travelers a great deal of money. They insured the owner and operator of a fleet of food trucks that were owned, modified and maintained by their insured. The definition of mobile equipment specified things like “bulldozers, farm machinery, forklifts” but did no exclude from mobile equipment “food trucks.” If the Travelers wanted to avoid liability for injuries caused by the food truck it only needed to add food trucks to the litany of vehicles that were mobile equipment. The underwriter used a standard form and did not apply judgment to avoid a risk it knew it faced. The failure was evidence of intent to cover the risk and Travelers’ claims people and counsel attempted to make the policy say what it should have said rather than what it said.

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.

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 recently published the e-books, “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.

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.

 

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Pollution Exclusion Effective

Percholorate is a Pollutant

Insurers, after being forced to cover a risk none had anticipated, the clean up of environmental pollution, inserted into Commercial General Liability (CGL) policies a total pollution exclusion. In addition, the insurance industry created separate policies at a cost appropriate for the risk, coverage for the costs of cleaning up industrial pollution. People insured, unhappy with the exclusions, litigated the pollution exclusion.

Chubb Custom Insurance Co. v. Standard Fusee Corp., 49A02-1301-PL-91 (Ind.App. 01/23/2014) is another one of these cases which was litigated vigorously and traveled from trial to appellate to the Indiana Supreme Court and back again.

FACTS

GAN North American Insurance Company (GAN) and Chubb Custom Insurance Company (Chubb) argued that under the applicable Maryland law the trial court erred in deciding that the total pollution exclusion clause in Appellants’ comprehensive general liability insurance policies is not applicable to Standard Fusee’s liability for the release of perchlorate and therefore the insurers’ duty to defend and indemnify was triggered.

Standard Fusee, headquartered in Maryland, manufactures highway and marine signal/safety flares. An essential ingredient in the manufacture of these flares is perchlorate. In 1988, Standard Fusee purchased the marine signal assets of Olin Corporation (Olin), while at the same time, it also leased two manufacturing facilities from Olin: one at Peru, Indiana and one at Morgan Hill, California. Standard Fusee manufactured highway flares at the Morgan Hill site until 1995. In 1997, Standard Fusee purchased the Peru site from Olin, where it continued its manufacture of marine flares.

In February of 2003, the first of 259 private lawsuits was initiated against Standard Fusee and Olin by property owners in the vicinity of the Morgan Hill facility. The lawsuits generally alleged that Standard Fusee and Olin were responsible for the perchlorate contamination, which resulted in property damage, emotional distress, negligence, nuisance, and trespass. The complainants requested injunctive relief, actual and punitive damages, and attorney’s fees. All of these individual actions were eventually dismissed as to Standard Fusee, either voluntarily or on summary judgment.

Standard Fusee notified its comprehensive general liability insurers, including Chubb and Gan, concerning the claims at Morgan Hill and Peru and requested defense and indemnification. Relying on the pollution exclusion provision in their respective insurance policies, Chubb and Gan rejected their duty to defend Standard Fusee against these claims and refused indemnification. The Chubb comprehensive general liability insurance policy contains the following pollution exclusion endorsement:

“A. This insurance does not apply to bodily injury, property damage, advertising injury, or personal injury arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants: ¶1. at or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured; ¶  4. at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations; ¶ B. This insurance does not apply to any loss, cost or expense arising out of any ¶ 1. request, demand, or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or ¶ 2. claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing or in any way responding to, or assessing the effects of pollutants.”

Standard Fusee filed a complaint for declaratory relief and damages against, among others, Chubb and Gan, seeking coverage under the comprehensive general liability policy for claims of perchlorate contamination asserted against it in California and Indiana. The trial court entered summary judgment for Standard Fusee and against Chubb and Gan. Applying Indiana law, the trial court held that the pollution exclusion clauses included in the insurance policies were unenforceable.

On December 9, 2009, after a detailed choice-of-law analysis, the court of appeal reversed the trial court’s conclusion and adopted a site-specific approach, holding that while Indiana law governs the dispute insofar as it arises out of the site at Peru, Indiana, California law governs the dispute insofar as it arises out of the site in California. See Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Standard Fusee Corp., 917 N.E.2d 170 (Ind.Ct.App. 2009), reh’g denied, trans. granted. On December 29, 2010, the Indiana Supreme Court applied the uniform-contract-interpretation approach and concluded that based on the contacts with Maryland, including the fact that Standard Fusee is and has always been headquartered in Maryland, this case should be decided pursuant to Maryland law. See Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Standard Fusee Corp, 940 N.E.2d 810 (Ind. 2010), reh’g denied. The supreme court reversed the trial court and remanded this case for application of Maryland law to the entire dispute.

On February 23, 2012, upon remand, the trial court entered summary judgment in favor of Standard Fusee finding that the pollution exclusion endorsements in Appellants’ insurance policies are not enforceable with respect to the underlying claim under Maryland law. As such, the trial court declared that Gan and Chubb had incurred a duty to defend and indemnify.

DISCUSSION

Summary judgment is appropriate only when there are no genuine issues of material fact and the moving party is entitled to a judgment as a matter of law. The trial court entered detailed findings of fact and conclusions of law in support of its judgment.

Under Maryland law, the obligation of an insurer to defend its insured under a contract provision is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend. Even if a tort plaintiff does not allege facts which clearly bring the claim within the policy coverage, the insurer still must defend if there is a potentiality that the claim could be covered by the policy.

Maryland courts “construe the instrument as a whole to determine the intention of the parties” and “examine the character of the contract, its purpose, and the facts and circumstances of the parties at the time of execution.” According to Chubb and Gan, the question is very simple: if the release of perchlorate is defined as traditional environmental pollution, Maryland law enforces the application of the pollution exclusion clause in the insurance contract and coverage is precluded.

Guided by the principles of Maryland’s contract interpretation, the court of appeal concluded that perchlorate is included within the usual, accepted meaning of “pollutant.” In the underlying complaint, submitted against Standard Fusee in California, perchlorate is described as: “a highly toxic chemical and is widely known to produce adverse health effects, including an increased risk of cancer.”

Although perchlorate is a naturally occurring substance, it is clear that it is also a harmful contaminant once ingested or disseminated into the environment. As such, perchlorate qualifies as a pollutant under the contractual definition of the pollution exclusion clause.

Based on the facts before the court it concludes that Standard Fusee’s claim is based on a hazardous pollution contamination, resulting from the cumulative effect of numerous releases which occurred on an ongoing basis during the regular course of business over an extended period of time, up to the point where the pollution became concomitant to Standard Fusee’s regular business activity.

Considering Maryland’s case law, the policy as a whole, as well as the facts and circumstances before the court of appeal it held that the perchlorate contamination amounts to traditional environmental pollution, which falls within the province of the policy’s pollution exclusion clause.

ZALMA OPINION

Environmental pollution is a serious problem and exceedingly expensive to remediate. Insurance companies wrote the total pollution exclusions to avoid the expense without first obtaining an appropriate premium for the risk taken. Chubb and Gan did that and their insured refused to accept the fact that the perchlorate contamination was the type of pollution the policy excluded. They won the issue twice in the trial court only to be turned back by the court of appeal that found a clear and unambiguous environmental pollution event that was excluded by the policies.

Insurance is a contract where the insurer promises to indemnify the insured against certain risks of loss. If the risk of loss is excluded – if the insurer states clearly and unambiguously that it refuses to defend and indemnify the insured for losses caused by pollution. Since it was clear that the perchlorate does not apply to bodily injury, property damage, advertising injury, or personal injury arising out of the actual discharge, dispersal, seepage, migration, release, or escape of pollutants.

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.

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 recently published the e-books, “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.

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

First Party vs. Third Party

“Other Insurance Clause” Eliminates Coverage

First party property insurance only insure the owner of the property for its loss and makes no promise to defend or indemnify the insured against claims of third parties. Even in bailment situations, where the policy insures against the risk of loss of property of others, it does not insure against suits by the property owner for its loss. In United National Insurance Co. v. Mundell Terminal Services, Inc., 13-50052 (5th Cir. 01/23/2014) the Fifth Circuit was called upon decide claims seeking coverage under a first party policy for defense and indemnity of a subrogation claim.

FACTS

Mundell Terminal Services, Inc. (“MTS”) and Keith D. Peterson & Company, Inc. (“KDP”) and Scarbrough Medlin & Associates, Inc. (“SMA”) appeal from the district court’s grant of summary judgment in favor of United National Insurance Company (“UNIC”) in this declaratory judgment insurance coverage dispute. The case involves certain property owned by BAL Metals International Incorporated (“BMI”) that was stolen while MTS stored it in its warehouse. The district court held on summary judgment that UNIC’s first-party property insurance policy issued to MTS is excess to BMI’s own insurance policy and, therefore, no coverage exists under UNIC’s policy.

MTS operates a warehouse business in El Paso, Texas. In 2008, BMI entered into a contract with MTS to store copper sheeting at one of MTS’s warehouse facilities. On November 28, 2010 and December 5, 2010, thieves stole BMI’s copper, valued at $483,389.20, from the MTS warehouse.

Before the thefts, MTS had purchased a first-party property insurance policy from UNIC (the “UNIC policy”). The “Building and Personal Property Coverage Form” in the UNIC policy defines “Covered Property” to mean MTS’s “Business Personal Property located in or on the building described in the Declarations… ¶ Personal Property of Others that is: (1) In your care, custody or control; and (2) Located in or on the building described in the Declarations . . . .”

The parties expanded coverage to include “Stock,” elsewhere defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.” Moreover, the “Supplemental Declarations” page provides a $500,000 coverage limit for “Stock, including Property of Others while in the insured’s care, custody and control.”

Aon Risk Solutions issued an insurance policy to BMI (the “Aon policy”), which covers the stolen copper. The Aon policy has a policy limit of $25 million. The UNIC policy has a policy limit of $500,000.

In response to MTS’s timely claims for the copper thefts, UNIC sent a “reservation of rights” letter to MTS on December 31, 2010. On January 5, 2011, pursuant to the Aon policy, Aon paid BMI $483,389.00 for the loss. On February 24, 2011, Aon, as subrogee of BMI, filed a law suit against MTS (the “BMI lawsuit”). In March 2011, MTS requested that UNIC defend it in the BMI lawsuit. UNIC rejected MTS’s request because the UNIC policy did not provide liability coverage of any kind.

UNIC moved for summary judgment in its declaratory judgment action, which MTS and BMI opposed. The district court granted summary judgment in favor of UNIC on the first and second declarations. The district court found that the UNIC policy does not impose upon UNIC any duty to defend or indemnify MTS in the BMI suit, and that the UNIC policy precludes coverage for the thefts of the copper under the UNIC policy.

ANALYSIS

Texas courts (which the Fifth Circuit must follow) construe insurance policies according to the same rules of construction that apply to contracts generally. When interpreting insurance contracts, courts seek to ascertain the true intentions of the parties as expressed in the instrument. To this end, Texas courts examine and consider the entire writing in an effort to harmonize, give effect to all the provisions of the contract so that none will be rendered meaningless, and give policy terms their ordinary and commonly understood meaning unless the policy itself shows the parties intended a different, technical meaning.

At issue is whether the theft of the copper is covered under the UNIC policy. The parties do not dispute that the copper is property described in the policy and states a limit in the amount of $500,000. The policy contains an excess “other insurance” clause, which will vary, limit, or eliminate the insurer’s obligation to reimburse the insured where other insurance may cover the same loss. The well-known and evident purpose of such “other insurance” clauses is to avoid and guard against the moral hazards and attendant temptations to fraud which might be reasonably expected to arise out of the existence of undisclosed concurrent policies of insurance having identity of scope and of subject matter. The parties further, did not dispute that the two policies cover the same property — BMI’s copper — against the same risk of theft.

The parties agree that, by storing BMI’s goods in MTS’s warehouse, the two formed a bailor-bailee relationship. Texas law allows a bailee to insure bailed goods for their full value, for the benefit of itself and the bailor.

Under Texas law, MTS insured both its interest and BMI’s interest. Even if SMA can point to distinct “insurable interests” between the UNIC policy and the Aon policy, their coverage need not be completely coextensive to be considered “other insurance” as to each other.  Both policies cover at least BMI’s interest in the copper itself. This sufficiently constitutes coverage of the same interest under the “other insurance” test.  Wherever there are two separate insurers liable for the same loss the fact that one policy covers more property or wider risks than the other does not prevent the insurance being double on the subjects covered by both.

The Fifth Circuit held that both the UNIC policy and the Aon policy are in favor of BMI. The UNIC policy provides that UNIC’s payment for loss of or damage to personal property of others will only be for the account of the owner of the property. As the district court correctly noted, the plain meaning of the phrase for the account of suggests that the UNIC policy covers the personal property of others on behalf of, or for the benefit of, the owners of the property. Furthermore, the policy limits any payment “only” to the account of the owner of the personal property, thereby demonstrating the parties’ intent to solely benefit the owner of the property and not the insured.

Consequently, because the owner of the copper is BMI, any loss incurred under the UNIC policy would actually be paid to BMI, and thus the UNIC policy is in favor of BMI. As there is no dispute that the Aon policy is also in BMI’s favor, this element of the “other insurance” test is also satisfied.

The UNIC policy and the Aon policy thus cover the same property and interest therein, i.e., BMI’s interest in the copper; against the same risk, i.e., theft; and in favor of the same party, i.e., BMI. The Fifth Circuit concluded that the Aon policy constitutes “other insurance” with respect to the UNIC policy. Pursuant to the clear and unambiguous exclusion no coverage exists under the UNIC policy for the thefts of BMI’s copper.

MTS now must face a subrogation claim without liability insurance coverage has no bearing here because the UNIC policy is a first-party property policy and does not provide liability coverage of any kind. Property insurance policies are intended solely to indemnify the insured for his actual monetary loss by the occurrence of the disaster. Liability policies, on the other hand, insure against loss arising out of legal liability, usually based upon the assured’s negligence.

While a liability policy may insure against a loss arising out of the subrogation claim MTS now faces, MTS chose not to procure such insurance.

ZALMA OPINION

Available to a warehouseman like MTS are first party policies that provide coverage for its property and property of its customers in its care, custody, and control to avoid liability suits. Also available are third party liability policies that would promise to defend and indemnify the insured if suit for its negligence caused a loss to its insured. It either failed to acquire liability insurance or refused to make claim to its liability insurer.

The failure to buy the coverage they needed leave MTS open to a suit from BMI’s insurer out of its own pocket.

First party insurance is different from third party insurance as an apple is from an automobile. Never the twain shall meet and the only similarity between the two is the use of the work “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.

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 recently published the e-books, “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.

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.

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Potential Coverage Requires Defense

Subrogation Against Insurer that Failed to Defend

Just because one of two available insurers agrees to defend an insured another insurer has no right to refuse to defend. In Yousuf v. Cohlmia, 12-5034, 12-5038 (10th Cir. 01/21/2014) American National Property and Casualty Company (ANPAC) appealed from the district court’s grant of summary judgment in favor of Physicians Liability Insurance Company (PLICO) in a dispute regarding ANPAC’s breach of its duty to defend a co-insured.

FACTS

In November 2004, Dr. Ashard Yousuf sued Dr. George Cohlmia and Cardiovascular Surgical Specialists Corporation (CVSS) in Oklahoma state court for defamation, tortious interference with business relations/contract, intentional infliction of emotional distress/outrage, negligence, and breach of contract. Dr. Yousuf alleged that Dr. Cohlmia made a series of false statements to local media disparaging Dr. Yousuf’s professional reputation. Dr. Cohlmia denied that the statements he made were false.

Dr. Yousuf and Dr. Cohlmia were both board certified surgeons in Tulsa, Oklahoma, who were granted privileges by Hillcrest Medical Center (HMC) to practice cardio-thoracic surgery. Dr. Yousuf alleged that Dr. Cohlmia wrote a defamatory letter about him to the Board of Directors of the hospital, that the contents of the letter were false or made with reckless disregard of whether or not they were false, and that Dr. Cohlmia intentionally disseminated the contents of the letter to the news media in order to damage Dr. Yousuf’s reputation and occupation as a surgeon. He further alleged that even after the HMC Professional Affairs Committee determined that Dr. Cohlmia’s allegetions were unfounded, Dr. Cohlmia continued to repeat the defamatory statements to the media with reckless disregard for their truth, and that Dr. Cohlmia’s conduct damaged Dr. Yousuf’s professional reputation and caused a decline in referrals to him.

CVSS held a professional liability policy with PLICO and two identical general commercial liability policies with ANPAC (one for each business location), each of which covered Dr. Cohlmia as an additional insured. Dr. Cohlmia demanded that both insurers provide for his defense, pursuant to their respective policies. PLICO agreed to defend the lawsuit under a reservation of rights and requested ANPAC to share in the defense. ANPAC refused, contending its policy did not cover the alleged wrongdoing and that it owed no duty to defend.

After trial the jury returned a general verdict against Dr. Cohlmia in the amount of $5,000,000. Despite finding that Dr. Cohlmia acted intentionally and with malice, the jury declined to award punitive damages.

The Tenth Circuit became involved from the subsequent garnishment action brought in state court by Dr. Yousuf against ANPAC, contending that his judgment against Dr. Cohlmia was covered by ANPAC’s policy because it covered intentional acts. ANPAC removed the action to federal district court. PLICO thereafter filed a motion to intervene, which was granted by the district court. Seeking to recover its defense costs from ANPAC, PLICO asked the district court to find, as a matter of law, that ANPAC’s policies provide coverage for the underlying judgment against Dr. Cohlmia. ANPAC, for its part, maintained that the damages awarded to Dr. Yousuf were not covered by its policy and that it had no duty to defend Dr. Cohlmia in the underlying action.

After briefs were submitted in the Tenth Circuit the Oklahoma Court of Civil Appeals reversed the underlying state court judgment due to an erroneous jury instruction on intentional interference with business relations, and remanded the matter for a new trial. In the consolidated appeals, it vacated the determinations that PLICO’s policy did not cover Dr. Cohlmia’s torts against Dr. Yousuf. The district court then determined that it could no longer decide Dr. Yousuf’s garnishment claim against ANPAC, which hinged on the now-vacated judgment against Dr. Cohlmia, but that it could still decide whether ANPAC had breached its duty to defend Dr. Cohlmia and whether PLICO could recover from ANPAC all or a portion of the costs it had already incurred in Dr. Cohlmia’s defense.

The district court granted summary judgment in favor of PLICO, concluding that under Oklahoma law ANPAC had a duty to defend Dr. Cohlmia in the underlying action and that ANPAC was liable for fifty percent of PLICO’s costs of defending Dr. Cohlmia thus far, under a theory of subrogation. The court held that while PLICO’s policy provided coverage for negligence but not for intentional torts, it nevertheless specifically committed PLICO to defend “any claim for damages if said damages are in consequence of the performance of a criminal act or willful tort or sexual act,” even though any losses from such conduct would not be indemnified under the policy.

ANPAC’s Duty to Defend

An insurer has a duty to defend an insured whenever it ascertains the presence of facts that give rise to the potential of liability under the policy. Thus, in order to determine whether ANPAC had a duty to defend Dr. Cohlmia, the Tenth Circuit was required to ascertain whether the conduct alleged in the underlying suit gave rise to the potential of liability under ANPAC’s policies covering Dr. Cohlmia.

PLICO contends the claim for intentional interference with business relations provides coverage for personal injury resulting from the publication or utterances of a libel or slander or of other defamatory or disparaging material is broad enough to encompass the tort of intentional interference with business relations.

ANPAC contends that such an interpretation is against public policy because it extends coverage to include intentional wrongdoing. First ANPAC’s policies covering Dr. Cohlmia specifically provide coverage, in no uncertain terms, for injuries arising from conduct that constitutes several intentional torts. As discussed above, while ANPAC’s policies preclude coverage for intentional conduct resulting in bodily injury or property damage, they do not exclude intentional wrongdoing that results in “personal injury” which includes, among other offenses, defamation.

Even assuming Oklahoma would generally prohibit indemnity coverage for intentional wrongdoing, the instant matter presents a strong case for allowing an exception to that general rule. ANPAC’s policies covering Dr. Cohlmia specifically provide indemnification for certain intentional misconduct, and there is no evidence that the availability of insurance coverage induced Dr. Cohlmia to engage in intentional misconduct. Furthermore, the interest in compensating an innocent third party, Dr. Yousuf, outweighs the concern that Dr. Cohlmia would unjustly benefit from this coverage.

In sum, given the allegations of Dr. Yousuf and the language of the ANPAC policies, Dr. Cohlmia had a right to expect ANPAC to defend him. ANPAC does not dispute that Dr. Cohlmia and PLICO notified it of the suit and set forth plausible arguments that Dr. Yousuf’s allegations, if proven, could give rise to damages covered by the ANPAC policies.  The Tenth Circuit agreed with the district court that there is no genuine issue of material fact regarding ANPAC’S breach of its duty to defend.

Having established that ANPAC breached its duty to defend Dr. Cohlmia, the Tenth Circuit then turned to the question of whether PLICO can compel ANPAC to reimburse some or all of the costs it incurred during its initial defense of Dr. Cohlmia. The district court held that by defending Dr. Cohlmia under a reservation of rights, PLICO’s policy enabled it to step into the shoes of its insured to recover one-half of its defense costs under a theory of subrogation.

Conventional (or contractual) subrogation is created by an agreement or contract between parties granting the right to pursue reimbursement from a third party in exchange for payment of a loss. Equitable subrogation allows a party who has paid to stand in the shoes of the party to whom the amount was owed and proceed against the third party primarily responsible for the amount paid. In both circumstances the subrogation is based upon payment.

PLICO’s policy covering Dr. Cohlmia clearly gives it a right of contractual subrogation. ANPAC has provided no Oklahoma case suggesting that right does not extend to defense costs. The Tenth Circuit, therefore, affirmed the district court’s grant of summary judgment requiring ANPAC to reimburse PLICO for one-half of its defense costs.

ZALMA OPINION

When there are two insurers who ostensibly provide coverage for the same risk and one or both believe that there may be a reason to refuse coverage but there is still a potential for coverage, prudent insurers avoid this type of lawsuit. It would have been easy for the two insurers both reserve rights and agree to pay half of the costs to defend the insured. The insured would then be protected and the insurers would be protected by the reservations of rights. Once the facts are established by trial in the underlying case then the two insurers can resolve their dispute in a declaratory relief action with stipulated facts and little expense and avoid this kind of appeal.

The duty to defend is as broad as the great outdoors and should not be refused unless there is absolute certainty like a claim to an automobile policy for a trip-and-fall in a grocery store.

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.

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 recently published the e-books, “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.

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.

 

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Policy Must Be Read as A Whole

Single Fire – Multiple Occurrences

Bad facts with severe injuries make bad insurance law when courts attempt to interpret policies to provide maximum funds available for the victim. The Supreme Court of Connecticut was asked to interpret various provisions of a professional liability insurance policy to determine the amount of coverage available when the same general event has given rise to a large number of claimants against the policy. In Lexington Ins. Co. v. Lexington Healthcare Group, Inc., SC 18681, S.C. 18682 (Conn. 01/28/2014) the Supreme Court dealt with such a decision and read the policy as a whole rather than as a means to help the injured.

Insurance is important to the operation of a modern society. It is not an eleemosynary entity. Insurers are only obligated to pay that which they agree to pay by the terms and conditions of the policy agreed to by the insured and the insurer.

FACTS

On February 26, 2003, multiple residents of Greenwood Health Center (Greenwood), a Hartford nursing home, tragically died or were injured when the facility was set ablaze by another resident and rescue efforts by staff members fell short. As a result, thirteen negligence actions seeking damages for wrongful death or serious bodily injury were filed by some of the victims’ personal representatives against Greenwood, Nationwide Health Properties, Inc. (Nationwide), the owner and lessor of the property housing Greenwood, Lexington Healthcare Group, Inc. (Lexington Healthcare), the lessee of that property, and Lexington Highgreen Holding, Inc. (Highgreen), the operator of Greenwood. This case concerns the amount of liability insurance coverage available for these claims. The plaintiff, Lexington Insurance Company, brought this declaratory judgment action against Lexington Healthcare, which is the insured party under a general and professional liability insurance policy issued by the plaintiff, as well as Highgreen, Nationwide and the victims’ personal representatives (individual defendants). Nationwide and most of the individual defendants each filed counterclaims in regard to the policy, also seeking declaratory judgments. Following the parties’ filing of cross motions for summary judgment, the trial court determined the amount of coverage available under the policy and rendered judgment accordingly.

The plaintiff appealed from the judgment of the trial court determining the available coverage. The plaintiff claimed that the trial court misconstrued the policy language pertaining to ‘‘related medical incidents’’ and the endorsement relating to the “aggregate policy limit,” thereby providing more coverage for the individual defendants’ claims than that to which they were entitled.

The policy issued by the plaintiff to Lexington Healthcare provided both general liability and professional liability coverage for Lexington Healthcare’s seven nursing home facilities. As to the amount of coverage available for those claims, the trial court found that: (1) for purposes of applying the policy’s $500,000 per medical incident limit for professional liability coverage, the acts, errors or omissions underlying each individual defendant’s injuries or death constituted separate medical incidents and did not collectively comprise related medical incidents, in which case a single $500,000 limit would have applied; (2) the total amount of professional liability coverage available under the policy for all of the individual defendants’ claims was the $10 million “aggregate policy limit” provided via an endorsement to the policy, rather than the $1 million “aggregate limit” for professional liability coverage stated in the policy declarations; and (3) a $250,000 “self insured retention (SIR) per occurrence” described in another endorsement to the policy applied to reduce the $500,000 per medical incident coverage to $250,000 per medical incident.

ANALYSIS

Related Incidents

The plaintiff claims first that the trial court improperly interpreted the phrase “related medical incidents” as used in the policy, thereby affording greater coverage for the individual defendants’ claims than the parties to the policy had intended. According to the plaintiff, the individual defendants’ claims arose from “related medical incidents,” because all of their injuries or deaths stemmed from the same root cause, namely, the admission of the individual who started the fire to Greenwood and the failure to supervise her properly. The plaintiff argues, therefore, that a single policy limit applies to all of the individual defendants’ claims collectively rather than to each claim individually.

“Related” generally is defined as “connected by reason of an established or discoverable relation,” or “associated; connected” or “standing in relation; connected; allied; akin”. Courts of other jurisdictions, considering these or similar definitions, have opined that the term related covers a broad range of connections, both causal and logical.

Applying the foregoing definitions and their associated limits to the specific allegations of negligence raised by the individual defendants, the court noted that each individual defendant has raised multiple allegations of negligence, in some cases upwards of twenty. Although some allegations pertain to negligent supervision of the individual who started the fire, others aver a wide variety of different safety and response failures by Lexington Healthcare.  Overall, the medical incidents underlying the individual defendants’ claims are as dissimilar as they are alike.

The phrase related medical incidents does not clearly and unambiguously encompass incidents in which multiple losses are suffered by multiple people, when each loss has been caused by a unique set of negligent acts, errors or omissions by the insured, even though there may be a common precipitating factor.

Aggregate Limits

The plaintiff also claims that the trial court improperly concluded that the policy provides a total of $10 million in professional liability coverage for all of the individual defendants’ claims, rather than a total of only $1 million.

The policy contains a number of endorsements, including endorsement no. 3, which provides in an amendment to the definitions section of the policy, which applies to both the general and professional liability parts, to add seven locations.

Endorsement no. 3 also amended the policy to make the aggregate policy limit at $10,000,000. After examining endorsement no. 3 of the policy, the trial court concluded that the total amount of professional liability coverage available for the individual defendants’ claims clearly and unambiguously was $10 million and not $1 million.

The Supreme Court found that the trial court’s interpretation of the policy was incorrect for the following reasons. First, the court improperly equated the different terms aggregate limit and aggregate policy limit when no compelling reason existed to do so. Using the ordinary meanings of its component words, the phrase aggregate policy limit, which appears only in endorsement no. 3, clearly conveys that the amount specified, $10 million, is the maximum amount of insurance available under the entire policy when claims for both general liability and professional liability coverage, at all insured locations, are combined. Additionally, that endorsement explicitly provides that the aggregate policy limit is the most the plaintiff will pay annually for the sum of all damages under both the general liability and professional liability parts of the policy.

In contrast, the term aggregate limit appears both in the declarations page, directly beneath the heading, Healthcare Professional Liability. By virtue of its placement and the absence of the word “policy,” the term aggregate limit logically means the total amount available for professional liability coverage only, at a particular location.

Next, in reading the policy as it did, the trial court rendered the portion of the declarations page pertaining to aggregate limits superfluous, referring to it as ‘‘irrelevant, ’’ instead of attempting to read the declarations in conjunction with endorsement no. 3 to see if each part of the policy could be given effect. By its plain terms, the portion of endorsement no. 3 providing for an aggregate policy limit for general and professional liability coverage does not purport to alter or supersede any specific, preexisting part of the policy, but only to amend the policy as a whole.

The policy, without consideration of the endorsements, provides for a total of $1 million in general liability coverage and a total of $1 million in professional liability coverage for a single location. These coverage limits are stated clearly on the declarations page under the heading of “Limits of Insurance,” where an “Aggregate Limit” of $1 million is listed for each type of coverage.

The clear language of the policy, read as a whole, with the endorsements provides $1 million in the aggregate at each location. Properly construed, the aggregate policy limit amends the policy to reduce the total combined coverage to an amount that is less than what it otherwise would have been.

A firm foundational rule in the construction of insurance contracts is that the expressed intent of the parties is to be ascertained by examining the contract or policy as a whole. By equating distinct terms and reading endorsement no. 3 in isolation, rather than in conjunction with other parts of the policy, the trial court improperly rendered the aggregate limits provided by the declarations superfluous and improperly concluded that a total of $10 million in professional liability coverage was available for all of the individual defendants’ claims. The Supreme Court  concluded, to the contrary, that the policy provides for only $1 million in professional liability coverage for those claims, because that is the aggregate limit for that coverage part at a single insured location.

The SIR

The trial court interpreted the SIR endorsement as requiring the plaintiff to provide coverage to Lexington Healthcare for each medical incident only to the extent that damages for that incident exceeded $250,000, the amount of the self-insured retention. According to the court, even though Lexington Healthcare is insolvent and, therefore, unable to pay the self-insured retention amount itself, the policy clearly provides that the plaintiff is not responsible for the first $250,000 of damages for each medical incident. The trial court concluded further that the SIR endorsement operates to reduce the maximum amount payable by the plaintiff for any one medical incident from $500,000, as stated in the declarations, to $250,000.

To begin, paragraphs A and B of the SIR endorsement make it abundantly clear that Lexington Healthcare, and not the plaintiff, must pay the first $250,000 of damages attributable to any one medical incident, including investigation and defense expenses. The Supreme Court disagreed with the trial court’s conclusion that, once the plaintiff’s duty to indemnify is triggered by the amount of a particular claim exceeding $250,000, its liability for that claim is limited to only the next $250,000 of damages, and not the $500,000 per medical incident provided in the declarations, which is the most the plaintiff will pay.

Because the $500,000 per medical incident limitation provided in the declarations was not altered by the SIR endorsement the plaintiff remains potentially liable for the next $500,000 in damages for each medical incident over the first $250,000.

ZALMA OPINION

This is an important decision on several levels, the most important of which was taking the time and effort to read the insurance policy as a whole rather than take its component parts out of context to provide additional indemnity dollars available to the victims of a bankrupt defendant. Although the victims of the fire deserve to be compensated, because of the insolvency of the defendant, they are limited to recovery from the insurance 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.

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 at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

Mr. Zalma recently published the e-books, “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.

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.

 

 

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No Assumption of Liability

AIA Contract Promises No More Than to Perform Work in a Good and Workmanlike Manner

The United States Court of Appeals for the Fifth Circuit sent the following certified questions to the Supreme Court of Texas. The certified questions are:

1.     Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.

2.     If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.” [Ewing Constr. Co. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012).]

The Supreme Court of Texas resolved the issue in Ewing Construction Co., Inc. v. Amerisure Insurance Co., 12-0661 (Tex. 01/17/2014) and gave all contractors across the county time to issue a sigh of relief.

BACKGROUND

In 2008, Ewing Construction Company, Inc. (Ewing) entered into a standard American Institute of Architects contract with Tuluso-Midway Independent School District (TMISD) to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. Shortly after construction of the tennis courts was completed, TMISD complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. TMISD filed suit in Texas state court against Ewing and others (the underlying suit). Its damage claims against Ewing were based on faulty construction of the courts and its theories of liability were breach of contract and negligence.

Ewing tendered defense of the underlying suit to Amerisure Insurance Company, its insurer under a commercial package policy that included CGL coverage. Amerisure denied coverage, prompting Ewing to file suit in the U.S. District Court for the Southern District of Texas. There, Ewing sought a declaration that Amerisure had, and breached, duties to defend Ewing and indemnify it for any damages awarded to TMISD in the underlying suit.

Amerisure did not deny that Ewing established coverage under the policy’s insuring agreements; rather, it urged that policy exclusions, including the contractual liability exclusion, precluded coverage and negated its duties to defend and indemnify. On cross motions for summary judgment, the district court denied Ewing’s motion, granted Amerisure’s motion based on the contractual liability exclusion, and entered a final judgment dismissing the entire case.

On appeal, the Fifth Circuit, in a 2-1 opinion, initially affirmed the district court’s judgment on the duty to defend but vacated and remanded with respect to the duty to indemnify and the related Prompt Payment of Claims Act issue to await the results of the underlying suit. Ewing petitioned for rehearing, and the Fifth Circuit withdrew its opinion and certified the above questions to the Texas Supreme Court.

DUTY TO DEFEND

Texas courts follow the eight corners rule in determining an insurer’s duty to defend. Under that rule, courts look to the facts alleged within the four corners of the pleadings, measure them against the language within the four corners of the insurance policy, and determine if the facts alleged present a matter that could potentially be covered by the insurance policy. The factual allegations are considered without regard to their truth or falsity and all doubts regarding the duty to defend are resolved in the insured’s favor.

The insured has the initial burden to establish coverage under the policy. If it does so, then to avoid liability the insurer must prove one of the policy’s exclusions applies.  If the insurer proves that an exclusion applies, the burden shifts back to the insured to establish that an exception to the exclusion restores coverage.

THE UNDERLYING SUIT AND THE EXCLUSION

Amerisure’s policy provides that the insurance applies to “bodily injury” and “property damage” only if: (1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and (2) The “bodily injury” or “property damage” occurs during the policy period.

It also provides that “This insurance does not apply to: ‘Bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1)That the insured would have in the absence of the contract or agreement; or (2)Assumed in a contract or agreement that is an ‘insured contract’ . . . .”

Amerisure does not dispute that the alleged defects in the tennis courts occurred during the policy period and constitute “property damage” caused by an “occurrence” within the scope of the policy’s insuring agreement.

CONTRACTUAL LIABILITY EXCLUSION

Amerisure contends that the contractual liability exclusion means what it says: it excludes claims when the insured assumes liability for damages in a contract or agreement, except when the contract is an insured contract or when the insured would be liable absent the contract or agreement. Amerisure argues that the exclusion applies because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet that standard.

Ewing proposes that its agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it has under general law to comply with the contract’s terms and to exercise ordinary care. That being so, Ewing argues, its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. The Supreme Court agreed with Ewing.

The exclusion means what it says: it excludes liability for damages the insured assumes by contract. Assumption of liability means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.  Otherwise, the words “assumption of liability” are meaningless and are surplusage.  The term “assumption” must be interpreted to add something to the phrase “assumption of liability in a contract or agreement.” Reading the phrase to apply to all liabilities sounding in contract renders the term “assumption” superfluous. Interpretations of contracts as a whole are favored so that none of the language in them is rendered surplusage.

Negligence means the failure to use ordinary care, that is, failing to do that which a reasonable person or provider of the defendant’s type would have done under the same or similar circumstances. As Ewing points out, it had a common law duty to perform its contract with skill and care. The common law duty to perform with care and skill accompanies every contract. Accordingly, a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. We answer the first question “no” and, therefore, need not answer the second question.

More often, however, faulty workmanship will be excluded from coverage by specific exclusions because that is the CGL’s structure.  Because the policy contains exclusions that may apply to exclude coverage in a case for breach of contract due to faulty workmanship, our answer to the first certified question is not inconsistent with the view that CGL policies are not performance bonds.

The Fifth Circuit answered the first certified question “no” and had no reason to answer the second.

ZALMA OPINION

The court’s decision was one of the most anticipated insurance cases in the country. If the Texas Supreme Court had ruled in favor of the insurance company, coverage of construction mistakes in Texas would have virtually disappeared.

Although most general liability policies have a clause that allows the insurance company to exclude liability claims when a contractor assumes liability “in a contract or agreement” that contract or agreement must be an assumption greater than the obligation to perform the work in a good and workmanlike manner. Insurance companies will, if the insured takes on greater risks, require it to pay more for the extra coverage. Here the insured did not take on a greater risk than that contemplated and did not assume any greater obligations, like a promise to indemnify a third person not doing the work.

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© 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.

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 recently published Mr. Zalma’s book, “Construction Defects” is available at the website, http://www.stpub.com/construction-defects-litigation-and-claims.

Mr. Zalma recently published the e-books, “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.

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.

 

 

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Insurer Has Burden of Proving Exclusion

“Unknown Cause” is Different than Intentional

Accidental life insurance policies require that the death must be accidental. If an insurer believes the death was not accidental it has the burden of proof. Sometimes insurers carry the burden and sometimes insurers stretch the language of the policy to the breaking point to find a way to avoid payment. In Nichols v. Unicare Life and Health Ins. Co., 12-4047, 13-1033 (8th Cir. 01/16/2014) the Eighth Circuit was faced with a case that seemed to be of the latter type, and resolved the issues faced by the beneficiary and the insurer.

FACTS

UniCare Life and Health Insurance Company (“Unicare”) appeals the district court’s grant of summary judgment in favor of Sean Nichols in this Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 et seq. case.

Nichols is the surviving spouse of Dana Nichols. Dana was employed by Acxiom Corporation, and she was insured under the Acxiom Corporation Life and Accidental Death and Dismemberment Insurance Plan (the “plan”). The plan is funded by a policy underwritten by UniCare, and UniCare also serves as the claims administrator.

On May 3, 2010, Dana was found face down in bed, and upon being transported to a nearby hospital, she was pronounced dead. The autopsy report indicated that her manner of death (natural, accidental, etc.) “could not be determined,” and her cause of death was mixed drug intoxication. The autopsy reported that “[t]oxicology detected multiple drugs in the blood to include citalopram/escitalopram, hydrocodone, oxycodone and loratadine. The atropine detected is the result of terminal medical attention. No alcohol was detected.” An insurance record documenting Dana’s prescription claims during the last twelve months of her life show that she was prescribed Endocet, Ambien, levothyroxine, apap/codeine, diazepam, and sertraline. Emergency personnel responding at the scene also reported a prescription bottle for hydrocodone on the night stand with 12 pills missing from it.

Nichols filed a claim for accidental death benefits under the plan. UniCare denied Nichols’ claim, stating that because the cause of death was listed as “could not be determined, ” it had “no choice” but to deny the claim. Nichols recounted that since Dana’s March 2010 car accident, she had difficulty sleeping, and was prescribed Ambien. He noted that while on Ambien, Dana had been sleepwalking throughout the house and would even eat something and not remember it in the morning.

By letter dated September 2, 2011, UniCare denied Nichols’ appeal, this time stating two reasons for the adverse decision: (1) the manner of death was listed on the death certificate as “could not be determined,” and (2) the plan excludes benefits for death caused by intoxication. Nichols filed the instant action in district court pursuant to ERISA.

With regard to the intoxication exclusion, the district court concluded that the exclusion was not intended to cover Dana’s situation. The district court found that a reasonable person in the position of a plan participant would understand that the exclusion for intoxication was intended to apply to death caused by committing acts, such as driving, while intoxicated, not to situations where the immediate cause of death is ingestion of a lethal mixture of prescription drugs.

DISCUSSION

The challenged decision is the administrator’s denial of a claim for accidental death benefits. The plan’s language in the claims section, which is lacking discretion-granting words is the most relevant. Nor is there a general grant of discretionary authority to UniCare to construe all plan terms.

ACCIDENTAL DEATH CLAIM

Nichols submitted proof of his claim for accidental benefits in the form of the death certificate, autopsy report, insurance medical records, prescriptions records, and evidence relevant to Dana’s state of mind, her relationships with family, and an upcoming scheduled surgery.

An event is an accident if the decedent did not subjectively expect to suffer an injury similar in type or kind to that suffered and the suppositions underlying that expectation were reasonable. The determination of what suppositions are unreasonable should be made from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences. If the evidence is insufficient to determine the decedent’s subjective expectation, the question is then whether a reasonable person, with background and characteristics similar to the insured, would have viewed the injury as highly likely to occur as a result of the insured’s intentional conduct.

UniCare ignores the subjective evidence submitted by Nichols, and instead makes leaps to get to the “objective” conclusion it desires. There was no evidence in the record that Dana had developed a tolerance to her medications or that she took all 12 of the missing hydrocodone pills on the night of her death. No evidence suggests that Dana was suicidal. Dana had been taking this combination of prescribed medications, as admitted by UniCare, for some period of time. There is no evidence whatsoever that Dana intended to kill herself or thought it likely she would die. The subjective evidence, in the form of letters and statements from her husband and parents, suggests otherwise. Under these circumstances, a reasonable person with Dana’s characteristics would not have viewed death as highly likely to occur. Nor is there a medical determination that the death was “not accidental.”

The Eighth Circuit concluded that “Dana’s death falls squarely within the meaning of accident, a word not otherwise defined in the policy. Considered from the perspective of the insured, allowing the insured a great deal of latitude and taking into account the insured’s personal characteristics and experiences. All of the evidence indicates that Dana’s death was the unexpected result of ingesting prescribed medications.” Accordingly, the Eighth Circuit agreed with the trial court and found that the district court correctly found that UniCare erred in denying coverage for accidental death benefits.

INTOXICATION EXCLUSION

UniCare’s final argument is that it can avoid paying benefits due to the plan’s intoxication exclusion. The exclusion states that no benefit will be paid for a death that results from being intoxicated. “Intoxicated” is defined in the plan as “legally intoxicated as determined by the laws of the jurisdiction where the accident occurred.”

Arkansas law defines intoxication with reference only to the public offenses of drunk driving and public intoxication. Dana’s death involved neither. A reasonable plan participant would have understood that the plan’s intoxication exclusion is intended to apply to death caused by committing acts, such as driving, while intoxicated; not to situations where the immediate cause of death is ingestion of a lethal mixture of drugs that have been prescribed for use by the decedent.

ZALMA OPINION

Insurance contracts, whether governed by statute like ERISA or the standard fire policy, or written exclusively by the insurer must be interpreted reasonably and in good faith. Insurers should interpret the language in a manner where, if possible, coverage should apply and the claim should be paid. The insurance policy makes a promise to pay money in case a certain event happens. In this case the event was the death of Dana. Once the husband proved that Dana had died the burden shifted to the insurer to prove the death was not accidental or that an exclusion applied. UniCare failed to carry the burden and was found to have tried to stretch the language of the policy beyond reason.

Fortunately, for UniCare, ERISA does not allow suits for the breach of the covenant of good faith and fair dealing.

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© 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.

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.

Mr. Zalma recently published the e-books, “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.

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.

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Insurable Interest In Life Policy

Life Policy Cannot Be Cancelled by Life Insured

When a life insurance policy is purchased and paid for by persons other than the life insured, disputes invariably arise. When the personal representative of a life insured attempted to cancel a life insurance policy because she believed that the wife of the life insured was starving him to death to gain the proceeds of the insurance, she learned that insurance law is not as simple as she thought.

In the Interdiction of Lalehparvaran, 48, 655-CA (La.App. Cir.2 01/15/2014) the Louisiana Court of Appeal was called upon to decide whether the representative of the life insured could cancel the policy to protect the life of Mr. Lalehparvaran. Life insurance policies on people unable to care for themselves bring out the worst in families. The court was asked to resolve the dispute between the relatives and still apply the law of insurance.

FACTS

Majid Lalehparvaran obtained a $500, 000 life insurance policy as part of a business venture. Mr. Lalehparvaran was the owner of the policy and a limited liability company in which he owned an interest paid the premiums.

Mr. Lalehparvaran was interdicted. In Louisiana, that is, the legal process by which persons who are unable to make their own decisions in some life areas receive a curator (or curatrix, if female) to make these decisions for them. The interdicted person loses the right to vote, to enter into contracts, to marry, to determine where he or she will live, the types of medical care provided, and how his or her money is spent.

His wife, Anabel S. Lalehparvaran, was named curatrix. In 2008, the limited liability company made plans to liquidate and would no longer pay the premiums on the life insurance policy. The Lalehparvarans allegedly could not afford to pay the premiums. Instead of allowing the policy to lapse and be terminated, Azim Jalaldin and Bal K. Dahal agreed to acquire ownership of the policy and pay the premiums. As the then-curatrix of Mr. Lalehparvaran, Mrs. Lalehparvaran filed a petition for authority to convert the existing life insurance policy into a new policy with the following beneficiaries: Mrs. Lalehparvaran 34%, Mr. Jalaldin 33% and Mr. Dahal 33%. The trial court granted the petition and authorized Mrs. Lalehparvaran on behalf of Mr. Lalehparvaran to execute any documents to convert the life insurance policy as requested. The life insurance policy was converted from a term life policy to a whole life policy with Mr. Jalaldin and Mr. Dahal as owners and Mrs. Lalehparvaran, Mr. Jalaldin and Mr. Dahal as beneficiaries.

Thereafter Mrs. Lalehparvaran was removed as curatrix and replaced by Mrs. Hosseini, the sister of Mr. Lalehparvaran.  Mrs. Hosseini filed a petition to cancel the insurance policy. Mrs. Hosseini alleged that Mrs. Lalehparvaran neglected Mr. Lalehparvaran and tried to starve him to death so that she could collect on the life insurance policy. Mrs. Hosseini also argued that Mr. Jalaldin and Mr. Dahal have no insurable interest in the life of Mr. Lalehparvaran and that the insurance policy is, therefore, unlawful and unenforceable.

The insurer argued that Mrs. Hosseini, nor  Mr. Lalehparvaran, are not parties to the life insurance policy and, thus, do not have the authority to cancel the policy.  A hearing was held on the exceptions of no right of action filed by New York Life and of no cause of action filed by Mr. Jalaldin and Mr. Dahal.  New York Life stated that Mrs. Hosseini’s allegations that Mrs. Lalehparvaran neglected and starved Mr. Lalehparvaran do not provide a basis for cancelling the policy.  Mrs. Hosseini asserted that Mr. Jalaldin and Mr. Dahal’s exception of no cause of action should also be dismissed because they misrepresented facts to New York Life and should not be able to benefit from Mr. Lalehparvaran’s death. Mrs. Hosseini requested that the trial court cancel the policy or change the beneficiaries of the policy because the trial court erred in allowing Mrs. Lalehparvaran to convert the policy. Stating that only the owners of the policy have the authority to make changes to the policy, the trial court found that Mrs. Hosseini was not an owner of the policy and, therefore, had no right of action to request cancellation of the policy.

Eventually the trial court signed a judgment maintaining both the peremptory exceptions of no right of action and no cause of action.

DISCUSSION

The function of a peremptory exception of no right of action is to determine whether a plaintiff has a real and actual interest in an action or belongs to a particular class to which the law grants a remedy for a particular harm alleged. The determination of whether a plaintiff has a right of action is a question of law. An insurance policy is a contract between the parties and should be interpreted by using the general rules of interpretation of contracts. Contracts have the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law.

A life insurance policy is a contract between the owners of the policy and the insurance company. Among the rights of ownership set forth in the policy are the rights to surrender or cancel the policy and to change the beneficiary. When the life insurance policy was converted, Mr. Jalaldin and Mr. Dahal became the owners of the policy and are listed on the policy as the owners. As owners of the policy, Mr. Jalaldin and Mr. Dahal have the authority to cancel the policy and change the beneficiaries of the policy. When the policy was converted Mr. Lalehparvaran was removed as the owner of the policy and does not maintain the rights of ownership under the new policy.

The status as the insured does not make the insured a party to the contract and does not give the insured the rights of ownership. Neither Mr. Lalehparvaran as the insured, nor Mrs. Hosseini as his curatrix, has the authority to cancel the life insurance policy or change its beneficiaries. Therefore, Mrs. Hosseini does not have a right of action to challenge the life insurance policy, and we find that the trial court did not err in granting New York Life’s peremptory exception of no right of action.

In Louisiana, any individual of competent legal capacity may procure or effect an insurance contract upon his own life or body for the benefit of any person; however, no person shall procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under such contract are payable to the individual insured or his personal representatives, or to a person having, at the time when such contract was made, an insurable interest in the individual insured.

To this court’s knowledge, the beneficiaries have not received any benefits from the life insurance policy. Therefore, no one, including Mrs. Hosseini, has the right of action at this time to challenge the policy on the grounds that the beneficiaries lack an insurable interest.

ZALMA OPINION

Correct on the law this decision may guarantee the death of Mr. Lalehparvaran who, if Mrs. Hosseini is telling the truth in this case, is being starved to death by his wife in order to gain the benefits of the policy. When he dies, as we all must, then there may be some very interesting causes of action against the owners and beneficiaries of the policy.

Litigation is designed to provide indemnity to a person harmed by the actions of another. The court, finding no one harmed, only the possibility of a future harm, could do nothing to require the insurance company to cancel the policy when the owners and beneficiaries of the policy did not want it covered.

This reads like an Agatha Christie mystery without Hercule Poirot or Miss Marple to solve the crime because the murder has not yet happened.

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© 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.

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.

Mr. Zalma recently published the e-books, “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.

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.

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Making it Easy to Serve Suit Is Dangerous

Insurer Lives and Dies by the Words of Its Policy

Insurance companies, like the people they insure, sometimes fail to read the policies they issue. When an insurer creates a “service of suit” clause that allows an insured to serve suit on the insurer by mail, it must be careful to establish procedures to deliver to its counsel the suit when the service is performed by mail. Placing something as important as the service of a lawsuit into the control of the lowest paid employee in mail room is neither prudent nor logical.

The Supreme Court of South Carolina was asked to determine the validity of a service-of-suit clause in an insurance policy in light of the South Carolina Code that provides for service of process on an insurer through the Director of the Department of Insurance. The circuit court upheld the service-of-suit clause and refused to relieve the insurer from default judgment. The court of appeals reversed, holding the statute provides the exclusive method for serving an insurance company. White Oak Manor, Inc. v. Lexington Ins. Co., 394 S.C. 375, 382, 715 S.E.2d 383, 387 (Ct. App. 2011).

However, in White Oak Manor, Inc. v. Lexington Insurance Co., 27351 (S.C. 01/15/2014) the Supreme Court considered the meaning of the statute and the meaning of the policy wording to resolve the differences between the court of appeal and the trial court.

FACTUAL HISTORY

White Oak Manor, Inc. owns and operates a nursing home in York, South Carolina. After sustaining injuries from the improper replacement of a feeding tube, a White Oak resident filed a lawsuit against the nursing home. White Oak ultimately settled the lawsuit without the involvement of its insurer, Lexington Insurance Company.

White Oak subsequently filed this declaratory judgment action against Lexington to determine coverage for the malpractice claim. The policies between White Oak and Lexington contained a service-of-suit clause which provided: “It is further agreed that service of process in such suit may be made upon Counsel, Legal Department, Lexington Insurance Company, 200 State Street, Boston, Massachusetts 02109 or his or her representative, and that in any suit instituted against us upon this Policy, we will abide by the final decision of such court or of any appellate court in the event of any appeal.”

In compliance with the policy provision, White Oak served Lexington by mailing the summons and complaint by certified mail, return receipt requested, to “Lexington Insurance Company, 200 State Street, Boston, MA 02109, ATTN: LEGAL DEPARTMENT.” According to the return receipt, service was accepted May 20, 2005, and signed for by a Thomas W. Dinam. After Lexington failed to respond within thirty days, a default judgment was entered against Lexington on July 15, 2005. Approximately two months later, White Oak amended its complaint, alleging Lexington was in default and moving for damages. It again served the amended summons and complaint on Lexington by mail.

Thereafter, Lexington filed an answer and counterclaim as well as a motion to set aside the entry of default, alleging insufficient service of process. At the hearing, Lexington offered three alternative arguments in support of its motion. Initially, Lexington argued service on an insurance company could only be effectuated pursuant to the South Carolina statute which requires service of process be through the Director of the Department of Insurance, and any contrary contractual provisions were invalid. Additionally, Lexington argued that even if White Oak legally served it pursuant to the contract, service was nevertheless ineffective because White Oak did not substantially comply with the contractual provisions. In particular, Lexington noted that although it had documentation that it received the summons and complaint, it had no record of an employee named Thomas W. Dinam, and he was neither counsel nor counsel’s “representative.” Furthermore, Lexington argued good cause existed to set aside the default.

The circuit court denied the motion, holding Lexington and White Oak agreed contractually to another means of service and therefore, service through the Director was not required. The court also found Lexington failed to demonstrate good cause for setting aside the default, citing caselaw providing that losing a complaint is not a basis to set aside default. The court of appeals reversed, holding the service of suit clause did not absolve White Oak of the responsibility to comply with the requirement of the statute that it deliver two copies of its summons and complaint to the Director of the Department of Insurance in order to serve process on Lexington.

ISSUES PRESENTED

I. Did the court of appeals err in holding service on an insurance company can only be accomplished by compliance with section 15-9-270?

II. Did the circuit court err in failing to set aside the entry of default?

ANALYSIS

White Oak argued that the court of appeals erred in holding service pursuant to the statute was the only legally sufficient manner of service on an insurance company.

The cardinal rule of statutory construction is to ascertain and effectuate the intent of the legislature, and the text of a statute is considered the best evidence of legislative intent. Statutory language must be construed in context and in light of the intended purpose of the statute in a manner which harmonizes with its subject matter and accords with its general purpose.

The statute provides: “The summons and any other legal process in any action or proceeding against it must be served on an insurance company . . . by delivering two copies of the summons or any other legal process to the Director of the Department of Insurance . . . . A company shall appoint the director as its attorney . . . When legal process against any company with the fee provided in this section is served upon the director, he shall immediately forward by registered or certified mail one of the duplicate copies prepaid directed toward the company at its home office . . . .”

The court of appeals found the above quoted language mandated that any process served on an insurance company must be made through the Director. White Oak argued the settled principle that parties are free to agree to alternative methods of service just as they may waive service altogether.

The purpose of the summons and its service upon the defendant is to acquire jurisdiction of the person of the defendant and to give him notice of the action and an opportunity to appear and defend.  Parties are generally permitted to agree to particular methods of service or to waive service altogether. Where service is accomplished in a manner consented to by the defendant, service of process is valid and a court has jurisdiction over the defendant for purposes of entering judgment.

The statute did not do anything to circumvent the long-standing rule that service can be consented to by the parties or waived entirely. As a result the Supreme Court held that Lexington is bound by its own policy’s terms and rejected the notion that the statute is intended to allow an insurance company to prescribe a method of service in its policy and then declare its own provision invalid under the statute.

The Supreme Court, in the past, interpreted insurance service statutes as “designed by the legislature to provide a simple and easy method of obtaining jurisdiction over a foreign insurance company.” Equilease Corp. v. Weathers, 275 S.C. 478, 483, 272 S.E.2d 789, 791 (1980). The statute is not intended to serve as a shield protecting insurance companies from their own policy terms.

A holding that personal jurisdiction is contingent upon the Director’s receipt of the pleadings would lead to the absurd result that an insurance company could never waive a claim of defective service, even by a voluntary appearance, because to do so would abridge the Director’s right to be served.

The court found the only excuse offered was that Lexington lost the pleadings and concluding that ground was insufficient, properly denied the motion.

In addition the Supreme Court concluded that there is no way that serving an insurance company in accordance with its own service-of-suit clause can be characterized as unfair or an attempt to take advantage of the insurer or its attorney.

ZALMA OPINION

There is no question that Lexington was served as required by its policy. If it lost the complaint by hiring an incompetent in the mail room or by someone in its Legal Department misplacing the suit, it cannot claim its incompetence is a basis to be rescued from its own default.

This problem can be resolved simply by eliminating from the policy a service of suit clause and requiring that service be performed in accordance with local law. Lexington was, by its policy wording, was properly hoist on its own petard and patibulated in its own gibbet.

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© 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.

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.

Mr. Zalma recently published the e-books, “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.

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.

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Insured Must Pay Premium to Effect Insurance

If Judge Doesn’t Believe You – You Lose

Mark Brooks appealed from a judgment of the Superior Court in favor of Massachusetts Mutual Life Insurance Company (MassMutual) following a jury-waived trial. At trial, Brooks asserted that MassMutual made misrepresentations to him regarding his obligation to make premium payments on a disability insurance policy. In Brooks v. Massachusetts Mutual Life Insurance Co., 12-P-1843 (Mass.App. 01/08/2014) the Massachusetts Appellate Court was asked to reverse the decision of the trial court because it failed to apply Brooks’ testimony.

FACTS

Brooks applied for disability insurance in November, 2000. The application indicated that the policy would take effect only if the first full premium was paid. After receiving Brooks’s application, the agent sent him a form for payment of the premium by payroll deduction. That form indicated that deductions would start on the first pay period in January, with ‘JANUARY’ in capital letters.  Brooks signed and returned the form, and on December 8, the agent sent Brooks a copy of the policy. Later that month, however, Brooks submitted his resignation and was terminated from his position; no salary deductions were made, nor did Brooks make any premium payments by other means.

The parties gave conflicting testimony about the ensuing events. Brooks testified that he made numerous telephone calls to the MassMutual customer service center between December, 2000, and May, 2001, inquiring how to pay his insurance premiums and was told to wait until he received a bill. However, a witness for MassMutual testified, based on the company’s computer telephone records, that these calls never occurred. In addition, Brooks testified that he never received a January 4, 2001, letter telling him to select an alternative payment method.

In response, a witness for MassMutual testified that Brooks mailed materials to MassMutual in the prepaid envelope included with the letter and payment selection form mailed to him. The judge did not credit Brooks’ testimony.

ANALYSIS

Brooks’s claims that the judge’s findings in the present case are erroneous rest on his contention that the judge erroneously declined to credit his testimony. It is settled law across the country that questions of the weight and credibility of the evidence are the province of the trial judge or jury. Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be erroneous. In the present case, the judge’s the court of appeal noted that the judge’s findings were supported in the evidence the judge found credible.

Brooks’s equitable estoppel claim similarly depends on his factual assertions regarding MassMutual’s representations. Because he did not demonstrate that such representations occurred, the claim fails.

Brooks also argues that the trial judge was biased by defense counsel’s question about pornography found on Brooks’s computer at another employer, a question to which the judge sustained an objection. Because Brooks did not raise the issue of bias below, the court considered it waived. Similarly, to the extent that Brooks’s brief alleges breach of contract or violation of Massachusetts insurance statutes, those arguments are being made for the first time on appeal and are likewise waived.

ZALMA OPINION

It is amazing that this suit was filed. It is more amazing that it went to an appellate court. Finally, why an appellate court took the case seriously enough to write an opinion and not sanction Brooks and his lawyer for bringing an action seeking insurance when the insured admittedly never paid a premium is an amazing action by an appellate court to a litigant.

It makes no sense to bring a lawsuit seeking insurance benefits when no premium had been paid and when it is based upon the uncorroborated testimony of the plaintiff that, when presented to a judge, it was not believed.

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© 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.

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.

Mr. Zalma recently published the e-books, “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.

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.

 

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Immunity for Reporting Suspected Fraud

Zalma’s Insurance Fraud Letter

January 15, 2013

In the second issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, in the January 15, 2014 issue, continues the effort to reduce the effect of insurance fraud around the world.

The current issue of ZIFL reports on:

1.    Reporting Suspected Insurance Fraud Protected.
2.    New E-Books From Barry Zalma.
3.    Anti-Fraud Effort in Washington State.
4.    Trip & Fall Fraud Grows in the U.K.
5.    N. Y. Enacts Referral Disclosure Requirement Law for Public Adjusters

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 the 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:

Zalma on Insurance

•    Failure to File Timely Suit Fatal
•    Flood Insurance Conditions
•    Flood Insurance
•    A Claim Is Not A Suit
•    Fraud Punished With Mercy
•    Disbarred
•    UM Requires Uninsured Vehicle
•    There is No Free Lunch
•    Fiduciary Relationship Never Unilateral
•    Happy New Year Everyone
•    Asbestos Exclusion
•    No V&MM for Vacant Property
•     “Abuse” Includes Battery of Child
•    Private Limitation of Action
•    Prosecutor Must Prove Insurance & Fraud
•    Where There’s A Will – There’s Relatives
•    Lie To Insurer – Lose
•    Don’t Settle Without Permission of Insurer
•    Policy Excluded Major Risk Faced by Insured
•    Profit Is Essence of 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.

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.

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Failure to File Timely Suit Fatal

Third Party Beneficiary Must Fulfill Conditions

The Iowa Supreme Court, in Osmic v. Nationwide Agribusiness Insurance Co., 12-1295 (Iowa 01/10/2014),  was asked whether a policy provision limiting the time to file an action to recover underinsured motorist’s benefits is binding on a passenger who was injured while riding in the named insured’s vehicle. The passenger brought this action approximately one month after the deadline set forth in the policy, which required suit to be commenced “within two years after the date of the accident.” The passenger claimed that the two year private limitation of action provision did not apply to him since he was not a party to the contract and that the insurer acted wrongfully when it failed to advise the passenger of the limitation provision.

FACTS

On May 23, 2009, Esad Osmic, his wife, and his children were riding as passengers in a Ford Explorer owned and operated by Esad’s brother Selim. Some members of Selim’s immediate family were also riding in the vehicle. A Nissan Sentra that was owned and driven by Rochelle Heasley entered the highway, cut across two lanes without clearance to do so and forced Selim to take immediate evasive action. He swerved to avoid being hit, but as a result, he lost control of the Explorer. It ended up rolling over in the grass embankment next to the highway. Selim was ejected from the vehicle.

At the time, Heasley was insured by Progressive Insurance, with coverage limits of $50,000 per claim and $100,000 per occurrence. Selim had coverage with Nationwide Agribusiness Insurance Company (Nationwide), including underinsured motorist (UIM) coverage.

A Progressive claims representative advised Nationwide’s claim representative that Progressive had settled with Selim and his family for $65,000, leaving only $35,000 in remaining coverage for the accident. Esad’s attorney sent a demand to Progressive that sought $178,500 for Esad and $13,000 each for the two children. At that time, approximately ten weeks remained before the May 23, 2011 expiration of the two-year statute of limitations to bring suit against Heasley.

Upon receipt of this letter, Progressive informed Esad’s attorney that only $35,000 remained on its policy to cover claims arising from the May 23, 2009 accident. Progressive offered to pay $25, 000 to Esad and $5000 for each of his children to settle the claims.

In response to the offer from Progressive, Esad’s counsel finally initiated contact with Nationwide by phone. During the conversation, Nationwide requested a copy of the demand letter to Progressive and copies of Esad’s and his children’s medical records.

Thereafter, Esad’s counsel provided Nationwide’s claims representative with a copy of his demand letter to Progressive, along with copies of his clients’ medical records and medical bills. The letter also summarized the status of Progressive’s remaining insurance coverage and its outstanding settlement offer of $25,000 for Esad and $5000 each for the two children.  Nationwide’s claims representative wrote back to Esad’s attorney. She granted consent to settle the claims with Progressive for $25,000, $5000, and $5000, respectively.

On May 27, 2011, Nationwide’s claims representative wrote Esad’s attorney, advising that the UIM coverage under Selim’s policy “has now expired per the contract language which states Underinsured Motorists coverage will be barred unless suit filing is commenced within two years after the date of the accident.”

Esad brought this action against Nationwide alleging he had suffered damages in excess of the Progressive policy limits and seeking recovery on Nationwide’s UIM coverage. Nationwide moved for summary judgment, claiming Esad’s petition was untimely because he had failed to file it within the policy’s two-year deadline.

The district court denied Nationwide’s motion because Esad was not a party to Nationwide’s insurance policy. The court further found that even though Nationwide had not waived its statute of limitations defense, it “intentionally did not provide plaintiff with a copy of the policy which would have revealed the contractual limitations within the two-year time period.”

LEGAL ANALYSIS

Under Iowa Code section 516A.1, UIM coverage must be included in every motor vehicle liability insurance policy unless the insured rejects it. Selim’s policy contained a UIM endorsement. That endorsement provided: “We will pay compensatory damages which an ‘insured’ is legally entitled to recover from the owner or operator of an ‘underinsured motor vehicle’ because of ‘bodily injury’ caused by an accident.”

The endorsement defined “insured” to include any other person occupying your covered auto. Hence, Esad was an insured for purposes of the UIM coverage.

THE REASONABLENESS OF THE CONTRACTUAL TWO-YEAR LIMIT ON FILING SUIT

Because UIM claims are contractual, they are presumptively subject to a ten-year statute of limitations.  However, Iowa has held that parties to an insurance contract can modify the deadline for bringing suit. Iowa has long recognized the rights of insurers to limit time for claims, irrespective of a legislative imprimatur on such provisions.

There is no question that the two-year contractual limit was reasonable in this case. Esad was represented by counsel who made contact with Nationwide nearly a year before the two-year limitations period ran out. Esad could have sued for UIM benefits during that period.

ESAD’S RIGHTS UNDER SELIM’S POLICY

The fact that an additional insured (such as a passenger) is not a signatory to the contract does not exempt such an insured from the application of policy conditions and requirements to which a named insured is subject. A third-party beneficiary of the policy and bound by all its provisions when a claim for uninsured motorist coverage is made against the policy. The rights of a third-party beneficiary are controlled by the terms of the contract. Where there is a contract, the right of a beneficiary is subject to any limitations imposed by the terms of the contract.

Esad is subject to the provisions of Selim’s insurance policy, including the one requiring “any suit” under the UIM coverage to be brought within two years of the accident.

IS THERE AN AFFIRMATIVE DUTY TO ADVISE AN INSURED OF THE POLICY’S LIMITATIONS PERIOD?

In Iowa an insurer does not have the duty to warn its policyholders that the time period for filing suit against it is running out.” [Morgan v. Am. Family Mut. Ins. Co., 534 N.W.2d 92, 100 (Iowa 1995)] Morgan, the plaintiffs, alleged their insurer, American Family Mutual Insurance Company (American Family) acted in bad faith when it refused to pay benefits under the Morgans’ uninsured motorist policy for injuries suffered by their daughter during an automobile accident.

Just as there is no general duty to affirmatively disclose the limitations deadline to policyholders, no duty arises to affirmatively disclose it to additional insureds. Any other conclusion would undermine the principle, just discussed, that a third-party beneficiary’s rights under a contract do not exceed those of the primary party. Notably, Esad, like the Morgans, had retained counsel well before the limitations period ran.

EQUITABLE ESTOPPEL

Regardless of Nationwide’s underlying motive, in the absence of a duty to disclose the limitations period or conduct amounting to an estoppel, it may enforce the limitations clause in its insurance contract. For the foregoing reasons, the Supreme Court of Iowa vacated the court of appeals decision, reversed the judgment of the district court, and remanded the case with directions to enter summary judgment in favor of Nationwide.

ZALMA OPINION

As the concurring opinion stated: “At the very least, the lesson to learn from this case is that an insured who may be entitled to benefits under underinsured motorist coverage should request the insurance company to provide a copy of the policy or clarify his or her rights under the coverage as soon as practicable.” When the lawyer for the insured, or the unrepresented insured, fails to do so they both face the potential loss of coverage and rights under a policy with a private limitation