Failure of Insured to Prove Loss Fatal to Claim

No Bad Faith For Reasonable Dispute

People insured by a first party property insurance policy are obligated to prove that there was a loss due to a peril insured against and the extent of that damage. Only after the insured proves that a loss due to a peril insured against does the insurer have an obligation to prove a provision of the policy deprives the insured of the indemnity sought.

In One Way Investments, Inc.  v. Century Surety..., United States District Court, N.D. Texas, 2016 WL 5122124 (09/21/2016) the Texas District Court was faced with a motion for summary judgment presented by Century Surety Company (“Century”) to dismiss plaintiff One Way Investments, Inc.’s (“One Way’s”) claims for breach of contract, violations of the Texas Insurance Code, and breach of the duty of good faith and fair dealing.

FACTS

Century insured One Way’s Han Gil Hotel Town (the “Property”) in Dallas under a Texas Commercial Property Insurance Policy (the “Policy”). One Way alleges that, on or about June 13, 2012, a severe hail storm caused significant damage to the Property’s roof and appurtenances and to its interior. One Way submitted a claim under the Policy for wind and hail damage caused to the Property by the storm, seeking the cost for repair and/or replacement of the roof, air conditioning units, and damage to the interior walls.

Century’s adjuster estimated the cost of the Property damage to be $2,372.43, which was less than the amount of One Way’s deductible. Accordingly, Century did not pay any amount on One Way’s claim.

One Way sued Century for breach of the Policy, breach of the duty of good faith and fair dealing, and unfair settlement practices and failure to promptly pay its claim, in violation of the Texas Insurance Code.

THE MOTIONS

Century first moves for summary judgment dismissing One Way’s breach of contract claim, in which One Way asserts that Century breached the Policy by not paying for the full cost of repairs to the Property.

Century maintains that the Policy does not cover damage or loss to the Property due to wear and tear; there is no evidence from which a jury could allocate covered loss (due to wind and hail) from non-covered loss (due to wear and tear); there is no expert testimony that the Property damage was caused by wind and hail; there is expert testimony that the Property damage was caused by wear and tear and improper construction; and there is no evidence establishing that the alleged cost of repairs is reasonable and necessary. Century offers the affidavit of its expert, Robert N. Fleishmann (“Fleishmann Affidavit”), as evidence that the damage to the Property was not caused by wind and hail.

One Way offers as evidence the affidavit of Amos Mun, the proprietor of the Property, a report by A & L Engineering and Consulting, Inc. (“A & L”), and an estimate of the cost of repairs by Accord Services, Inc. (“Accord”).

ANALYSIS

In Texas, and every other state, an insured cannot recover under an insurance policy unless the insured pleads and proves facts that show that its damages are covered by the policy. Although an insured who suffers damage from both covered and excluded perils is not precluded from recovering, when covered and excluded perils combine to cause an injury, the insured must present some evidence affording the jury a reasonable basis on which to allocate the damage.

Because an insured can only recover for covered events, the burden of segregating the damage attributable solely to the covered event is a coverage issue for which the insured carries the burden of proof. It is essential that the insured produce evidence which will afford a reasonable basis for estimating the amount of damage or the proportionate part of damage caused by a risk covered by the insurance policy. Failure to segregate covered and non-covered perils is fatal to recovery.

One Way has not introduced any evidence that would enable a reasonable jury to estimate the amount of damage or the proportionate part of damage caused by a covered cause—i.e., hail and wind. Even if the court were to consider the reports of A & L and Accord as timely proffered expert testimony. Neither report provides evidence from which a reasonable jury could allocate damage from wear and tear, poor construction, or any other causes, on the one hand, and allocate damage from wind and hail, on the other hand. Accordingly, because One Way has not created a genuine fact issue concerning whether its alleged damages are covered by the Policy, Century is entitled to summary judgment dismissing One Way’s breach of contract claim.

Century is entitled to summary judgment on One Way’s breach of contract claim for an additional reason. A party seeking to recover for the cost of repairs must prove the reasonable value of the repairs and that the repairs are necessary.  Mere proof of amounts charged or paid does not raise an issue of reasonableness and such amounts ordinarily cannot be recovered without evidence showing the charges were reasonable.

Century also moved for summary judgment as to One Way’s extra-contractual claims for breach of the duty of good faith and fair dealing and for violations of the Texas Insurance Code. Century maintains that there can be no liability for extra-contractual claims where there has been no breach of the Policy.

A “bona fide dispute” regarding insurance coverage precludes liability for breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code. If there is any reasonable basis for denying insurance coverage, the insurer will not be liable in tort.

Century points to the testimony of its expert, Fleishmann, who conducted an examination of the Property. Fleishmann concluded that “hail damage to the roof did not cause or contribute to roof leakage and that there was no wind damage to the roof,” and that “the poor condition of the roof was not caused by hail or any storm event but by the age of the roofing materials and normal wear and tear.”

One Way has not provided any evidence that refutes Fleishmann’s conclusions or that would enable a reasonable jury to find that Century did not have a reasonable basis for denying One Way’s claim. One Way has also failed to introduce any evidence that Century violated its duty of good faith and fair dealing or that Century otherwise violated the Texas Insurance Code by failing to promptly respond to One Way’s claim or by engaging in other unfair settlement practices.

For the reasons explained, the court grants Century’s motion for summary judgment and dismisses this action with prejudice by judgment filed today.

ZALMA OPINION

People who are insured and incur a loss often believe they have no obligation to the insurer and only need to make a claim and collect money and if the insurer doesn’t pay they are entitled to tort damages. Those who do so are wrong.  Since there was a “bona fide dispute” regarding insurance coverage there can be no bad faith tort. Since the insured failed to prove a loss due to an insured peril it had no right to breach of contract damages.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Qui Tam Action Takes the Profit Out of Fraud

Judgment In Favor of Qui Tam Plaintiff Insurer Can Be Enforced

In California an insurer can, on its own behalf and on behalf of itself and the state as a qui tam action. When the state does not join in the action the insurer may try the action alone. In People ex rel. Allstate Insurance Company v. Dahan, California Court of Appeal — Cal.Rptr.3d, 2016 WL 4917188 (9/15/2016) Allstate obtained a judgment against fraud perpetrators and tried to collect.

A private party who brings a qui tam action for insurance fraud under Insurance Code section 1871.7, where the district attorney and the Insurance Commissioner decline to intervene, is entitled to a portion of the proceeds of the action plus fees and costs.

The court was confronted with the novel question whether the judgment-debtor defendants in such an action have standing to challenge the trial court’s post-judgment order allocating the judgment amount between the prevailing plaintiffs, i.e., the private party and the State.

FACTUAL BACKGROUND

Allstate Insurance Company, et al. (Allstate) as private-party plaintiff or “relator,” brought a qui tam action on behalf of itself and the State of California (together plaintiffs), against defendants Daniel H. Dahan and his affiliated corporation, Progressive Diagnostic Imaging, Inc. (together defendants), pursuant to the California Insurance Frauds Prevention Act (§ 1871.7 (IFPA)). Neither the district attorney nor the Insurance Commissioner opted to take over the lawsuit.

The trial court entered judgment against defendants, finding that plaintiffs had proven 487 claims for violation of Penal Code section 550 by defendants, and awarding a total of $7,010,668.40, comprised of $5,788,516.78 in civil penalties and assessments, and $1,222,151.62 in attorney fees, costs, and expenses of investigation. (The qui tam judgment).

Following entry of the qui tam judgment, Allstate began efforts to collect it. During its investigation, Allstate learned of a series of real estate transactions conducted by defendants designed to transfer away their assets. Allstate, on behalf of the State, filed an action to set aside the fraudulent transfers of real and personal property.

Defendants demurred to the operative complaint on the ground that Allstate lacked standing to proceed with the fraudulent transfer suit, in part because the judgment in the qui tam action was never allocated between Allstate and the People pursuant to section 1871.7, subdivision (g)(2)(A), with the result that Allstate had no stake in the qui tam judgment or authority to pursue collection of that judgment from defendants.

The trial court in the instant qui tam action granted Allstate’s allocation motion and entered judgment.

DISCUSSION

The Qui Tam procedure

Anyone engaging in insurance fraud in violation of Penal Code sections 549, 550, or 551 is subject to penalties and assessments. (§ 1871.7, subd. (b).) Section 1871.7 provides for civil penalties of not less than $5,000 to $10,000 for each fraudulent claim presented to an insurance company, plus assessments of not more than three times the amount of each claim for compensation, and equitable relief.

Section 1871.7 authorizes “any interested persons, including an insurer” to bring a qui tam civil action “for the person and for the State of California” to recover penalties and equitable relief for fraudulent insurance claims. (italics added.)

When the state declines to intervene, as in this case, the relator tries the action and is entitled by subdivision (g)(2)(A) of section 1871.7 to a “bounty” of between 40 and 50 percent of the proceeds of the action “for collecting the civil penalty and damages” along with “an amount for reasonable expenses that the court finds to have been necessarily incurred, plus reasonable attorney’s fees and costs” which fees and costs are imposed against the defendant.

Defendants acknowledge that “this Appeal has no effect on that [qui tam] Judgment” and does not alter defendants’ obligation to pay the $7 million. Based on a plain reading of section 1871.7, subdivision (g)(2)(A), the bounty in cases in which the People do not intervene is for trying and collecting the judgment. When the words of a statute are clear and unambiguous, there is no need for statutory construction or resort to other indicia of legislative intent, such as legislative history.

The right to levy on the $7 million qui tam judgment was Allstate’s for the additional reason that the insurer was the direct victim of defendants’ insurance fraud. Unlike the federal False Claims Act (31 U.S.C. § 3730(d)) where the relators are people with knowledge of the fraud but not victims of that wrong, under California’s IFPA, the direct victims of the fraud are the relator-insurers and their insureds.

Allstate, as the direct victim who prosecuted the action and prevailed without the People’s participation, necessarily had the right to collect the civil penalty and damages. To hold otherwise would be absurd given the California qui tam IFPA action is brought, not merely on behalf of the People, but “for the person and for the State of California” (§ 1871.7, subd. (e)(1), italics added), and where the qui tam judgment here, drafted by defendants, was written in favor of all plaintiffs, not just the People. Therefore, an allocation order is not a prerequisite to Allstate’s right to enforce the judgment; it neither “changed” nor “legitimized” Allstate’s legal right to collect the proceeds of the action from defendants, a right Allstate always had as relator.

As the allocation order is not a prerequisite to Allstate’s ability to levy on the qui tam judgment under section 1871.7, subdivision (g)(2)(A), and given defendants’ concession that the appeal has no effect on, and does not alter their obligation to pay the $7 million qui tam judgment, defendants are not aggrieved by the allocation order and have no standing to appeal from it.

In the absence of standing by defendants as appellants, the court had no jurisdiction to hear the appeal.

ZALMA OPINION

Allstate should be commended for expending the funds necessary to obtain a judgment against fraud perpetrators for itself and the state of California and for taking the steps necessary to collect that judgment. The defendants refuse to pay the judgment and Allstate has been forced to work through the court of appeal to even move to collect on the judgment and take the money from false transfers of assets to avoid paying the judgment. The greatest deterrent to insurance fraud is taking the profits out of fraud and I can only hope that Allstate continues its efforts and actually collects the judgment.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Court Can’t Rewrite Insurance Policy

A Rockfall Is Earth Movement

Bad facts create litigation. When a 2700 ton mass of rock and earth fell 1000 feet onto a house killing the occupants and totally destroying the house, garage and a car, insurance coverage was required to ease the pain of the survivors and the bank that issued the mortgage on the house. However, the homeowners policy contained an earth movement exclusion that included landslide.

In Western United Insurance Company, dba AAA Insurance Company v. Janelle Heighton; PHH Mortgage Corporation, and cross claims, United States District Court, D. Utah., 2016 WL 4916785, Case No. 2:14CV435DAK (Filed 09/14/2016) the insurer denied the claim for the replacement of the house and garage.

BACKGROUND

AAA brought this declaratory judgment action regarding insurance coverage for a property destroyed by a rockfall/landslide. In November 2006, AAA had issued a homeowners insurance policy to the property owner, Maureen Morris. The mortgage Ms. Morris secured from Defendant PHH required that she buy and maintain first party property insurance coverage and that the policy name PHH as “loss payee” so that PHH would be paid alongside the named insured in the event of damage to the property.

Ms. Morris’ property was located in Rockville, Utah, near Zion National Park. The property sits at the base of a steep slope known as the Rockville Bench, which rises approximately 1,000 feet above the house. On December 12, 2013, a large rock mass detached from the Shinarump Conglomerate cliff capping the Rockville Bench and fell onto the steep slope below the cliff where it shattered into massive fragments and then rolled and bounced downslope until the rock-fall debris reached Ms. Morris’ home, totally destroying the home, detached garage, and a car parked in the driveway. Tragically, Ms. Morris and her husband were in the home at the time and were killed.

Following the loss, Ms. Morris’ daughter and heir, Janelle Leighton, submitted an insurance claim to AAA under the homeowner’s policy. AAA investigated the loss and concluded that, with the exception of some limited personal property coverage, the policy excluded coverage for the remainder of the damage due to an exclusion for earth movement.

The policy’s “earth movement” exclusion is defined in relevant part to include a “landslide, mudslide, or mudflow.” The policy also provides that “earth movement” can include “any other earth movement including earth sinking, rising or shifting, including any natural or artificially created loss of any kind attributable in whole or in part to any movement of the earth or soil of the earth or soil, whether on or off of the ‘residence premise,” that is caused by, resulting from, contributed to or aggravated by rain or snow, including run-off from same.”

There are also policy provisions regarding coverage in the event of collapse. The parties agree that the house and garage collapsed when they were hit by the rockfall/landslide. However, AAA declined coverage under the collapse provisions because that type of coverage does not apply when the collapse results from earth movement.

After AAA denied the claim, PHH challenged the decision. AAA then filed the present declaratory relief action.

DISCUSSION

It is undisputed that a rockfall destroyed the property. However, the parties dispute whether the rockfall in this case is a landslide. Landslide damage is specifically excluded from coverage under the “earth movement” exclusion in the policy. The parties agree that the terms of an insurance policy are construed according to their “plain and ordinary meaning.” The individual provisions of the insurance policy are construed in light of the policy as a whole. Insurers may only exclude from coverage certain losses by using language which clearly and unmistakably communicates to the insured the specific circumstances under which the expected coverage will not be provided.

Utah courts have consistently enforced earth movement exclusions in homeowner’s insurance policies. No Utah appellate court has specifically addressed whether naturally occurring rockfall damage is excluded earth movement under an earth movement exclusion in an insurance policy. However, in Dupps v. Travelers Ins. Co., 80 F.3d 312 (8 th Cir. 1996), the Eighth Circuit held that the ordinary meaning of the term “landslide” includes rocks falling down a bluff.  Relying on the Random House Dictionary, the court stated that “‘landslide’ is defined as the downward falling or sliding of a massive soil, detritus, or rock on or from a steep slope.”  The Dupps court held that the policy was not ambiguous as a matter of law because “the only reasonable interpretation of the policy prohibits recovery for rocks which have fallen on the Duppses’ property.”

To assert that a rockfall cannot be considered a landslide, PHH relies on Ms. Morris’ application for insurance which asked whether there were “any hazards present [on the property] including flooding, brush, forest fire hazard, landslide, etc.,” or whether there had “been any slipping, sinking or shifting of land, or other earth movement in the area.” Ms. Morris answered “no.” PHH surmises that this answer means that Ms. Morris did not understand rockfalls to be a type of landslide or that the provision was not clear. However, why Ms. Morris answered the question the way she did is unknowable. PHH’s position is pure speculation since she probably would not have stayed in the house had she though tons of rock would fall on her house from the cliff 1,000 feet above the house.

PHH further asserts that the fact that AAA inspected the property as part of the underwriting process and was aware that the property was located in a high rock-fall zone demonstrates that AAA did not believe that the terms rockfall and landslide were synonymous. However, this argument assumes that AAA would not have issued the policy in a high rockfall zone, which is not the case. Insurers frequently issue policies for homeowners insurance in areas where multiple exclusions could apply.

The common understanding of the term landslide includes rocks and soil falling down a slope. The court found nothing ambiguous about the policy’s use of the term “landslide” as an example of earth movement. The court also found nothing ambiguous about whether the term “landslide” would apply to the situation before the court. This is not a case where a single 2700 ton rock broke off of an overhang and fell directly onto a house below without coming into contact with any other soil or organic materials. The 2700 ton piece of the bluff broke off, hit a steep slope, and triggered a downward shifting of a mass of rocks and soil toward Ms. Morris’ house. This case involves a plain and ordinary example of a landslide.

Ambiguity can only be found in Utah if the plain wording of the policy does not resolve the coverage questions. While this court agrees that insureds should receive as much coverage as possible under an insurance policy, the court cannot, should not, and did not rewrite the policy.

The policy excludes coverage for a landslide and the loss of Ms. Morris’ house was caused by a landslide. AAA’s Motion for Summary Judgment was granted.

ZALMA OPINION

It is understandable with such serious damage and death of the insureds that someone, whether heirs or mortgage, would think they have a right to indemnity from the homeowners policy. An insurance policy is a contract where the insurer promises to indemnify its insureds for losses caused by certain enumerated fortuitous risks of loss not excluded. Courts must apply the contract language and should never be tempted, regardless of the needs of the insureds, rewrite the policy to create coverage that was not purchased.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Pay Before Accident to Reinstate Cancelled Policy

No Excuse for Failure to Timely Pay Premium

Insurance premiums are hard to pay. Anyone who owns a car would prefer to only pay insurance premiums until after they have a loss so that they can collect and pass the expense on to the insurer. That, of course, defeats the purpose of insurance to spread the risk to all insureds. When insurers issue auto policies with a monthly premium the failure to pay the monthly installment results in the cancellation of the policy. When the policy premium is paid late the policy is reinstated with no coverage for the period from the cancellation date to the reinstatement date.

In Starr ex rel. Starr-Haller v. State Farm Mut. Auto. Ins. Co., Court of Appeals of Indiana, — N.E.3d —-2016 WL 4945398 (Sept. 16, 2016) the Indiana Court of Appeals was faced with the question whether the insurer must pay for losses during a cancellation period because of the late – after an accident – payment of premium.

Heather Starr–Haller, on behalf of herself and her minor son, Bradley, appealed the trial court’s entry of summary judgment for State Farm Mutual Automobile Insurance Company (“State Farm”) on Starr–Haller’s complaint.

FACTS

 Between December of 2011 and September of 2014, Starr–Haller had an automobile insurance policy through State Farm for her 1998 Chevy Blazer. State Farm provided Starr–Haller’s coverage in six-month terms. However, State Farm billed Starr–Haller for her coverage on a monthly basis.

On three occasions between October 2012 and June 2014, Starr–Haller failed to timely pay the monthly installment due on her premium. Following each missed installment payment, State Farm mailed Starr–Haller a “Cancellation Notice” that stated both the amount due and a coverage “Cancel Date.”  If Starr–Haller failed to pay her premium by the Cancel Date, the Cancellation Notices explained that the following would occur: “Payment prior to the date and time of cancellation will reinstate your policies. If paid after that date and time, you will be informed whether your policies have been reinstated and, if so, the exact date and time of reinstatement. There is no coverage between the date and time of cancellation and the date and time of reinstatement.” (emphasis added).

Starr-Haller failed to timely pay premium.  Following each late installment payment, State Farm mailed Starr–Haller a “Reinstatement Notice.” Those notices stated again that, because Starr–Haller had made her installment payments after the relevant Cancel Dates, “there [wa]s no coverage between the date and time of Cancellation and the date and time of Reinstatement.”

According to the terms of Starr–Haller’s insurance agreement with State Farm, “if [State Farm] cancel[s] this policy, then premium will be earned on a pro rata basis. [ ]Any unearned premium may be returned within a reasonable time after cancellation. Delay in the return of any unearned premium does not affect the cancellation date.”

In August of 2014, Starr–Haller again failed to pay her automobile insurance installment premium. Accordingly, on September 3, State Farm mailed Starr–Haller another Cancellation Notice.

Seven weeks after cancellation, on October 30, Starr–Haller dropped a check off at her State Farm agent’s place of business, after business hours, in the amount of $350. That evening, Starr–Haller’s minor son, Bradley, was involved in a one-car accident in the Chevy Blazer that resulted in injuries to him and totaled the vehicle. Sometime after the accident Starr–Haller paid the remaining $80 due. Upon receiving the total balance due, State Farm reinstated Starr–Haller’s automobile insurance coverage.

Starr–Haller filed a claim with State Farm for coverage relating to the October 30 accident. State Farm denied the claim on the ground that it had cancelled Starr–Haller’s coverage, which had not been reinstated as of the accident date.

DISCUSSION AND DECISION

Starr–Haller contended that State Farm “waived” its right to deny, and “is estopped from denying[,] coverage for the October 30, 2014[,] accident because of its pattern of repeatedly accepting late and non-conforming [installment] payments … and reinstating the policy.”

It is well settled that contractual provisions of an insurance policy may be waived or that the insurer may be estopped from asserting such provisions. Where there are no disputed facts and the undisputed facts establish a party is entitled to judgment as a matter of law, however, summary judgment is proper. The term “estoppel” has a meaning distinct from “waiver” but the terms are often used synonymously with respect to insurance matters. The conduct of an insurer inconsistent with an intention to rely on the requirements of the policy that leads the insured to believe that those requirements will not be insisted upon is sufficient to constitute waiver.

Equitable estoppel is available if one party through his course of conduct knowingly misleads or induces another party to believe and act upon his conduct in good faith and without knowledge of the facts. On the other hand waiver is an intentional relinquishment of a known right involving both knowledge of the existence of the right and the intent to relinquish it.  The elements of estoppel are the misleading of a party entitled to rely on the acts or statements in question and a consequent change of position to that party’s detriment.

Before the October 30 accident, State Farm informed Starr–Haller that the untimely payment of her premium installment would result in State Farm cancelling her coverage until she had paid that installment and State Farm had affirmatively reinstated her coverage.

The language in the Cancellation Notice was consistent with three such prior notices State Farm had sent to Starr–Haller. In reinstating Starr–Haller’s coverage on each of those three prior occasions, State Farm had expressly informed Starr–Haller that it had cancelled her coverage between the relevant Cancel Dates and Reinstatement Dates. State Farm, by its policy, reserved the right to accept late installment payments and to reinstate the policy and coverage prospectively but not to reinstate coverage retroactively during the period in which coverage had been cancelled due to nonpayment of the premium.

State Farm’s actions with respect to the dates that encompassed the October 30 accident were identical to its actions during the three prior occasions in which State Farm had also cancelled Starr–Haller’s coverage. That undisputed evidence plainly shows that State Farm did not intend to relinquish its right to deny Starr–Haller coverage during the period in which those cancellations of coverage had occurred. Likewise, that evidence demonstrates that State Farm’s course of conduct did not knowingly mislead or induce Starr–Haller to believe that she would have retroactive coverage if she did not pay her premium installment when due.

There is nothing in State Farm’s conduct that would have given Starr–Haller a right to rely upon anything other than the express terms of her insurance contract. Indeed, Starr–Haller’s argument that her unrefunded payments entitle her to coverage contravenes her contract with State Farm. Again, in the contract State Farm expressly reserved the right to accept late installment payments without reinstating coverage retroactively, declaring that any “[d]elay [by State Farm] in the return of any unearned premium does not affect the cancellation date.”  At best, Starr–Haller has demonstrated that she is entitled to a refund from State Farm for those unearned premium payments, but she has not demonstrated that she is entitled to coverage.

State Farm did not waive its right to deny Starr–Haller the coverage she now claims. Likewise the evidence shows that State Farm is not estopped from denying her that coverage. Accordingly, State Farm met its burden to demonstrate that it is entitled to judgment as a matter of law, and Starr–Haller has failed to designate evidence to create a genuine issue of material fact on her claims against State Farm. As a result the summary judgment was affirmed.

ZALMA OPINION

This, in  my opinion, is a frivolous suit. Starr-Haller, when she dropped off $350 on the date of the accident after hours at her agent’s office, was still $80 short of the premium owed and that was not paid until well after the accident. I suspect the $350 was delivered after the accident although no evidence presented as to the time of the payment vis a vis the accident.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Ownership Not Required to Have an Insurable Interest

Every Interest in Property Where a Peril May Cause Damage to the Insured is an Insurable Interest

Insurance is a contract of personal indemnity. It does not insure property. Rather it insures the person insured against the risk of loss of described property. Therefore, if a person is not named as an insured that person may not recover regardless of his interest in the property. On the other hand a person who has no ownership interest in property but would be damaged by its loss has an insurable interest.

In A.B. Petro Mart, Inc. v. Ali T. Beydoun Ins. Agency, Inc., Court of Appeals of Michigan, — N.W.2d —-, 2016 WL 4922684 (Sept. 15, 2016) the Michigan Court of Appeals was asked to determine who was entitled to recover under a policy and what is an insurable interest.

FACTS

A.B. Petro Mart, Inc. (Petro Mart) and Aref Bazzi, appeal the trial court’s order that granted summary disposition in favor of defendant Prime One Insurance (Prime One).

Plaintiffs filed this suit to recover insurance benefits related to the destruction of a gas pump at a gas station Petro Mart operated. There is no question that Petro Mart did not own the gas pumps — Bazzi did. Petro Mart instead operated the pumps in the course of selling gasoline at the gas station. There also is no dispute that Petro Mart insured the gas pumps with Prime One. The trial court granted summary disposition in favor of Prime One with respect to Petro Mart’s claim because it determined that Petro Mart did not possess an insurable interest in the gas pumps.

Pursuant to Michigan law, an insurance contract to protect an insured from loss of property is an indemnity contract for fortuitous events. In order to be entitled to indemnity under such an insurance contract, the insured must have an insurable interest in the property. In Michigan, as in most states, legal interest is not synonymous with insurable interest because an insured’s pecuniary interest in the insured property is sufficient to constitute an insurable interest.

This dispute arises from an incident where an automobile ran into and caused the destruction of one of the gas pumps located at the gas station in Detroit. The crash started a fire and destroyed the pump. Bazzi was the sole shareholder and owner of Petro Mart, and Petro Mart is the entity that operated the gas station. However, the gas pumps, themselves, were owned by Bazzi. Petro Mart insured the gas pumps by purchasing an insurance policy with Prime One, which provided, among other things, $30,000 in coverage for gas pumps. After the accident Prime One eventually declined coverage because it asserted that Petro Mart did not have an insurable interest in the gas pumps, as Bazzi—not Petro Mart—owned the pumps.

The trial court noted that there was no dispute that Bazzi owned the pumps and that Petro Mart merely operated them without any leasehold agreement.

ANALYSIS

Under the clear language of the policy, the only named insured is Petro Mart. While Bazzi signed the insurance application,  he is not named anywhere in the policy itself. Indeed, the policy provides that “A B Petro Mart, Inc.” is the sole named insured. Thus, without being a party to the insurance contract, Bazzi cannot maintain a breach of contract claim against Prime One. It is clear that the contract itself did not provide any basis to conclude that Prime One undertook any promise directly to or for Bazzi. Because Bazzi is neither a party to the contract nor a third-party beneficiary, he cannot maintain his action for breach of contract against Prime One. Accordingly, the trial court correctly granted summary disposition in favor of Prime One against Bazzi.

Under Michigan law an insured must have an ‘insurable interest’ to support the existence of a valid insurance policy. The reason for this requirement is based on public policy concerns. Specifically, it arises out of the venerable public policy against “wager policies” that are insurance policies in which the insured has no interest, and they are held to be void because such policies present insureds with unacceptable temptation to commit wrongful acts to obtain payment.  Michigan’s common law instructs that an “insurable interest” is not synonymous with “ownership.” Instead, an insurable interest can arise from any kind of benefit from the thing so insured or any kind of loss that would be suffered by its damage or destruction. Insurable interest may be defined as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage. An insurable interest may be derived by possession, enjoyment, or profits of the property, security or lien resting upon it, or it may be other certain benefits growing out of or dependent upon it.

In dismissing Petro Mart’s claim, the trial court principally relied upon the fact that Petro Mart did not have either an ownership or leasehold interest in the gas pumps.  While it is true that Petro Mart had neither of these interests and was not responsible for the repair of the pumps, these facts, standing alone, do not preclude a finding of an insurable interest. One of the aspects of Petro Mart’s business was selling gasoline at the insured location. The court found it incontrovertible that Petro Mart had more than an incidental, pecuniary interest in the gas pumps. Petro Mart necessarily received income and profits from the use of the gas pumps, including the one that was destroyed in the accident.

To determine insurable interest the insurer must determine whether the insured would suffer a direct, pecuniary loss from the property’s destruction. If the answer is “yes” then there is an insurable interest.

Without question Petro Mart would gain some advantage by the continuing existence of the gas pumps and, conversely, suffer some loss or disadvantage by the destruction of the pumps. Importantly, Petro Mart generated income from the sale of gasoline through the use of the pumps. The loss of one of those gas pumps results in a direct and actual pecuniary loss. The fact that Petro Mart was not financially responsible for repairing any damage to the pumps is not controlling—it still had a pecuniary interest due to the commercial business it operated. We note that while any lost business profits appear to not be recoverable under the insurance policy, this fact is immaterial in determining whether Petro Mart had an insurable interest in the gas pumps, themselves. Because Petro Mart had a clear, substantial, and direct pecuniary interest in the pumps, the court concluded that it had an insurable interest in the damaged gas pump. Because Petro Mart’s ability to operate its gas station is financially affected by the functioning or non-functioning of the insured gas pumps it had an insurable interest and the decision of the trial court, with regard to Petro Mart, was, therefore reversed.

ZALMA OPINION

A professional insurer should know that ownership is not required to create an insurable interest. Since Petro Mart was damaged by the loss of the pump the determination of coverage should have been easy. Instead, the claim was denied incorrectly and the case had to go through summary judgment motions and an appeal to resolve an obvious issue. Of course, the problem could have been avoided by naming Bazzi as an insured on the policy. The insured, the broker who acquired the policy and the insurer’s ignorance, caused this lawsuit and none are without fault.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Conviction for Health Care Fraud Upheld

It is a Crime to Cheat Insurers

The government’s case against Theresa Fisher was strong, predicated in part on the following evidence:

  • testimony by five witnesses who claimed to have been coached by Fisher;
  • testimony by a co-conspirator that both she and Fisher were pressured to bring in patients for insurance-covered procedures;
  • forged doctors’ notes with Fisher’s handwriting;
  • text messages between Fisher and patients regarding insurance coverage for cosmetic procedures; and
  • recordings of Fisher on the phone with one of the patients discussing insurance coverage.

This evidence overwhelmingly implicated Fisher in a mail fraud scheme. She was convicted and now contends that the district court committed several errors that individually and cumulatively created sufficient prejudice to warrant a new trial. The videotape of Fisher’s meeting with the undercover agent was admissible, notwithstanding the government’s erroneous hearsay objection.

In United States Of America v Theresa Fisher, United States Court of Appeals, Ninth Circuit, — Fed.Appx. —- 2016 WL 4784046  (9/14/16) Fisher claimed the court erred by allowing a co-conspirator’s confession that added to the evidence of Fisher’s guilt.

THE ERROR CLAIMED

The district court admitted the portion of Lindsay Hardgraves’ confession that inculpated Fisher. Because Hardgraves did not testify at trial, admission of that portion of her confession violated Fisher’s Confrontation Clause rights. See Bruton v. United States, 391 U.S. 123, 126 (1968). Fisher did not object to the admission of this evidence at trial. Even assuming that the error was clear and obvious, Fisher cannot show that admission of this evidence affected her substantial rights.

Nonetheless, the Ninth Circuit concluded that exclusion of the tape was harmless error given the government’s strong case against Fisher.

Even when combined with the Bruton error mentioned above, the error in excluding the videotape does not warrant a new trial. The government has shown, based on the strength of the evidence presented at trial, that it is more probable than not that these two errors “did not materially affect the verdict.” See United States v. Gonzalez-Flores, 418 F.3d 1093, 1099 (9th Cir. 2005).

Fisher argues that the jury might have convicted her merely upon finding that she deliberately avoided learning that the procedures were not medically necessary, without also finding that she knew the procedures were fraudulently billed to insurance companies. This argument ignores the fact that the jury was required to find that Fisher acted with an “intent to defraud” in addition to finding that she acted knowingly. In order to find an intent to defraud, the jury must have found that Fisher intended to defraud someone or something, and in this case that was the insurance companies.

Fisher contends the jury was required to find the facts that form the basis for the restitution determination. This argument is foreclosed by our decision in United States v. Eyraud, 809 F.3d 462, 471 (9th Cir. 2015) and she must, therefore pay restitution to the insurers.

It would have been error for the district court to have admitted Hargraves’s statement over a Bruton objection. But there wasn’t any Bruton objection or any other objection.

A party may have perfectly valid reasons for declining to object to evidence that is technically objectionable, but that causes no harm in the context of the facts and the theory of the defense. Just as an appellate lawyer chooses which rulings to challenge on appeal and which ones to let go, the same is true of trial lawyers and objections. Not every witness has to be cross-examined; not every evidentiary objection has to be made. Good lawyers pick their fights.

Why didn’t defense counsel raise a Bruton objection here? The answer is: the court doesn’t know. Counsel may have had a strategic reason for his decision, or he may have been asleep at the switch. It was not error per se for the judge to have admitted testimony that wasn’t objected to, even if it could have been. The conviction stands as does the restitution order.

ZALMA OPINION

Defrauding an insurer is a crime. The United States caught Fisher and others cheating  insurers with false medical claims. The evidence against Fisher was damning. Without objection a confession of a co-conspirator was admitted even though a valid objection existed. Because the evidence was damning the error was not sufficient to require a new trial.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Immunity for Insurers

 Zalma’s Insurance Fraud Letter September 15, 2016, Volume 20, No. 18

BZBACKSUIT3Barry Zalma

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

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

The current issue of ZIFL reports on:

  • Barry Zalma Speaks on Fraud in October LEGEND-TROPHY-2
  • Barry Zalma
  • Proformative Academy Webinars
  • Immunity for Insurers
  • Good News From the Coalition Against Insurance Fraud
  • $15 Million Verdict Case Against Insurers
  • New E-Books from Barry Zalma
  • Wisdom
  • The Zalma Insurance Claims Library
  • Investigating Fires
  • Insurance Broker Willis Towers Watson PLC To Pay $120 Million
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Client
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

The Zalma on Insurance Blog

The most recent of the 1710 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.

Zalma’s Insurance 101

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

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

Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

Pass on This Message

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

Regards,

Barry Zalma

 

Posted in Zalma on Insurance | 1 Comment

Clear & Unambiguous Language Not Enough

Latent Ambiguity Trumps Policy Wording

Although the law allows an  insurer to enter into any contract terms it desires that is agreeable to the insured, seriously injured people and a court’s desire to help the injured person, raise a public policy guise to rewrite the language of the policy even after the court found the language to be clear and unambiguous. In Illinois Emcasco Ins. Co. v. Tufano, Appellate Court of Illinois,  — N.E.3d —-, 2016 IL App (1st) 151196 (9/8/16) the Appellate Court was asked to ignore the language of the policy and provide more coverage for an insured based upon public policy and ignore the language of the policy.

FACTS

Defendant Erin Tufano (Tufano) was a passenger in a car that collided with another car. As a result, she suffered significant, permanent injuries that she valued in the millions of dollars. She sued both drivers. One driver had a $100,000 insurance policy that was tendered in full to Tufano. The other driver had a $300,000 insurance policy that likewise was tendered (resulting in a payment of $295,000). Tufano also had underinsured-motorist coverage of her own in the amount of $500,000 with plaintiff Illinois Emcasco Insurance Company (Emcasco).

In this declaratory-judgment action, Emcasco says that it is only required to cover the difference between what Tufano received from the two drivers collectively ($395,000) and what she contracted for with Emcasco ($500,000), so that Emcasco only owes her $105,000 in underinsurance coverage

Emcasco moved for judgment on the pleadings, and Tufano moved for summary judgment. The circuit court agreed with Emcasco and entered judgment in its favor.

Two vehicles were involved in a collision in McHenry Township. One vehicle was being driven by Margaret Zienkiewicz and the other by Nicole M. Mann. Erin Tufano, a passenger in the vehicle being driven by Zienkiewicz, sustained serious injuries including an intracranial subarachnoid hemorrhage, lacerations of internal organs, cognitive deficits and numerous fractures. Her claimed damages from the collision are in the millions of dollars.

Tufano’s underinsured-motorist coverage with Emcasco provided that: “Except in the event of a ‘settlement agreement,’ the limit of liability for this coverage shall be reduced by all sums paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible.”

Emcasco filed a complaint for declaratory judgment. Tufano moved for summary judgment, claiming that the policy provisions on which Emcasco relied violated the public policy of placing an insured in the same position she would have been in had the two drivers been insured to the extent of her underinsured-motorist coverage, $500,000.

The trial court granted judgment on the pleadings in favor of Emcasco and denied Tufano’s motion for summary judgment.

ANALYSIS

Illinois appellate courts apply the clear and unambiguous provisions in an insurance policy as written unless such application violates public policy. Insurance policy provisions are considered ambiguous if they are subject to more than one reasonable construction. Even if the language in an insurance policy is clear and intelligible and suggests but a single meaning, a “latent ambiguity” may arise where some extrinsic fact or extraneous evidence creates a necessity for interpretation or a choice between two or more possible meanings.

The court noted that Emcasco’s position is supported by the plain language of the insurance policy. “As previously detailed, the policy contains a set-off provision that says Emcasco’s $500,000 underinsured-motorist coverage “shall be reduced by all sums paid because of the ‘bodily injury’ by or on behalf of persons or organizations who may be legally responsible.” (Emphasis added.)

On its face, that language could not be any clearer; it allows Emcasco to add up all of the money received by Tufano from all tortfeasors and deduct that sum from any underinsurance coverage Emcasco owes her. Thus, were we to follow the plain language of the policy, Emcasco would be correct that it could offset all of the $395,000 Tufano received from the two drivers and thus would owe Tufano only $105,000.

The court must also consider whether application of the policy language violates the public policy behind the underinsured-motorist statute.

Generally speaking, three separate principles emerge from the court’s review of case law: (1) underinsured-motorist coverage should place the insured in the same position he or she would have occupied if the tortfeasor had carried insurance in the same amount as the insured; (2) underinsured-motorist coverage exists to fill the gap between the amount received from the tortfeasor’s insurance and the amount of the insured’s underinsured-motorist policy limit; and (3) underinsured-motorist coverage is not intended to allow the insured to recover amounts from the insurer over and above the insured’s underinsured-motorist policy limit.

In a scenario involving a single claimant and a single tortfeasor, there is no reason why these principles should conflict. But the situation becomes more complicated when, as here, there are multiple tortfeasors. For example, in the present case, to satisfy the second principle-to merely “fill the gap” between what Tufano received from the two drivers and the limit of her underinsured-motorist policy-Emcasco would only owe the difference between $500,000 and the $395,000 she collectively received from the two drivers, or $105,000.

But that would not satisfy the first principle, to place Tufano in the same position as if both at-fault drivers had $500,000 in insurance coverage, which would entitle Tufano to $1 million overall ($395,000 from the drivers, with Emcasco making up the remainder of $605,000).

In light of this public policy and the existence of multiple at-fault drivers, the set off provision was latently ambiguous, and the ambiguity must be construed, as always in an insurance policy, in favor of the insured.

CONCLUSION

Where multiple tortfeasors are involved in an accident in which an underinsured-motorist policyholder is injured, the policyholder must be placed in the same position as if each tortfeasor carried the same amount of insurance as the policyholder. One tortfeasor’s payment cannot be used to offset the underinsurance gap of another tortfeasor; each instance of underinsurance must be viewed distinctly. But the amount of coverage the policyholder can receive from the underinsured-motorist carrier is capped by the overall limit of the underinsured-motorist policy, because the insurer should not be required to pay a policyholder more than it promised, or more than the amount for which the policyholder paid in premiums.

The appellate court’s holding that Tufano should be entitled to $605,000–though capped at the $500,000 policy limit-is really just another way of saying that she should be entitled to fill the gap between the first driver’s insurance ($100,000) and her policy limit, and then to fill the gap between the second driver’s insurance ($295,000) and her policy limit, thus adding $400,000 and $205,000 for a total of $605,000.

Tufano has already received $395,000 from the two drivers. It is within the realm of possibility that this amount has already covered all the damages she actually suffered in this case. If so, the question of underinsured-motorist coverage is academic. She is obviously not entitled to a double recovery. The question of Emcasco’s liability to Tufano is thus dependent, first and foremost, on a determination that she suffered damages greater than the $395,000 she already received from the two drivers.

If on remand to the trial court her damages exceed $395,000, she is entitled to underinsured-motorist coverage to the extent necessary to make her whole, but capped at an additional payment of $500,000 from Emcasco and crediting the amount that Emcasco has already paid her.

On the question of damages, the trial court shall conduct a hearing as described herein to determine the overall extent of damages suffered by Tufano in the car accident. The court must award damages in favor of Tufano and against Emcasco only to the extent necessary to avoid a double recovery, capped at a total payment by Emcasco of $500,000, and with credit for amounts already paid by Emcasco.

ZALMA OPINION

By finding a clear and unambiguous policy term to contain a “latent” ambiguity it provided a $400,000 windfall and allow her to recover more than allowed by the clear language of the policy by finding a latent defect even though the court found the policy language “on its face, that language could not be any clearer” and yet changed the meaning to provide more to the claimant than she was entitled to receive.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Clear & Unambiguous Policy Language Must Be Enforced

Insurer May Decide What It Wants to Insure

This case involves an insurance coverage dispute arising from a wrongful death and products liability claim. Lindsey King (“King”), individually and on behalf of her deceased minor child Peyton Wilt (“Wilt”), appealed the June 26, 2015 judgment of the district court granting summary judgment in favor of Old Republic Insurance Company (“Old Republic”), and dismissing all claims against Old Republic with prejudice.

In King v. Old Republic Ins. Co., Court of Appeal of Louisiana, — So.3d —- 2016 WL 4698248 (Sept. 7, 2016) the court was asked to ignore the language of an aircraft liability insurance policy and provide coverage for the death of a passenger in an experimental aircraft.

FACTS

On September 21, 2014, Wilt was killed in an aircraft crash, along with Darren Mahler (“Mahler”). Mahler was the pilot of a gyrocopter, an experimental amateur-built aircraft, in which Wilt was Mahler’s passenger at the time of the crash. Prior to the crash, Mahler purchased the gyrocopter from Christopher Brupbacher (“Brupbacher”), who also built the gyrocopter. The gyrocopter was registered with the Federal Aviation Association (“FAA”) with an experimental category airworthiness certificate.

King alleged that Fritts inspected and provided training regarding the gyrocopter prior to its sale to Mahler. King also alleged that Old Republic issued to Mahler an aviation insurance policy (the “policy”), which King alleged provided coverage for bodily injury and property damage resulting from the crash.

Old Republic filed a motion for summary judgment on May 8, 2015, contending that the policy it issued to Mahler provided no coverage for the flight or crash of the gyrocopter or for the death of Mahler’s passenger, Wilt. Old Republic argued that its policy covered only a 1973 Piper PA–28–140 fixed wing aircraft (the “Piper”), which was listed in the declarations section of the policy and was not involved in the crash. Mahler did not seek to add the gyrocopter as a covered aircraft under the policy.

King opposed summary judgment, arguing that the policy provided coverage for “any aircraft” that is “used by the named insured [Mahler]” which “is not an aircraft described in Item 5 of the Declarations.”

King argued that Mahler believed there was coverage for the gyrocopter, and Mahler’s wife attested to her understanding of this belief in an affidavit, which was introduced by King in opposition to summary judgment.

In its reply to King’s opposition, Old Republic argued that King’s interpretation of the endorsement would lead to absurd results, in that such an interpretation would render the policy as providing coverage for any aircraft that Mahler chose to use while the policy was specific to the use of a particular aircraft of an aircraft meeting specific detailed requirements.

The district court rendered judgment, finding that Old Republic was entitled to judgment as a matter of law and dismissing all claims brought by King against Old Republic with prejudice.

ANALYSIS

A dispute as to whether, as a matter of law, an insurance policy provides or precludes coverage to a party usually involves a legal question which can be resolved in the framework of a motion for summary judgment.  When determining whether or not a policy affords coverage for an incident, it is the burden of the insured to prove the incident falls within the policy’s terms.  Summary judgment declaring a lack of coverage under an insurance policy may not be rendered unless there is no reasonable interpretation of the policy, when applied to the undisputed material facts shown by the evidence supporting the motion, under which coverage could be afforded.

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 Civil Code. The judicial responsibility in interpreting insurance contracts is to determine the parties’ common intent.   Words and phrases used in an insurance policy are to be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. An insurance policy should not be interpreted in an unreasonable or a strained manner so as to enlarge or to restrict its provisions beyond what is reasonably contemplated by its terms or so as to achieve an absurd conclusion. Unless a policy conflicts with statutory provisions or public policy, it may limit an insurer’s liability and impose and enforce reasonable conditions upon the policy obligations the insurer contractually assumes.

If after applying the other general rules of construction an ambiguity remains, the ambiguous contractual provision is to be construed against the insurer and in favor of coverage. An insurer, like other individuals, is entitled to limit its liability and to impose and enforce reasonable conditions upon the policy obligations it contractually assumes; it may change or amend the coverage provided by the policy by an endorsement attached to the policy as long as the provisions and/or endorsements do not conflict with statutory law or public policy.  If a conflict between the endorsement and the policy exists, the endorsement prevails. If coverage is provided in the policy, but then excluded in the endorsement to the policy, coverage will be excluded.

The Old Republic policy at issue, which listed Mahler as its insured, was in effect from September 18, 2014 to September 18, 2015. The gyrocopter accident occurred on September 21, 2014.

The parties cite to no Louisiana case, and the court could find none, interpreting either the endorsement or the grammatical construction advanced by King on appeal. The court of appeal was unable to find ambiguity in the endorsement. The endorsement sets forth five clauses, (a) through (e), each separated by a semicolon. Each clause states a qualification that must be satisfied in order for the endorsement to provide coverage for a particular aircraft.

The court of appeal refused to acknowledge the affidavit of Mahler’s wife, attesting to Mahler’s purported understanding of the terms and conditions of the policy, creates ambiguity in the endorsement or raises any genuine issue of material fact. The record on appeal does not reflect that Old Republic moved to strike the affidavit of Mahler’s wife or that the district court explicitly ruled upon the admissibility or competency of this evidence. Regardless, courts are prohibited from taking parol evidence to explain or contradict the insurance contract’s clear meaning.

Here, it is undisputed that the gyrocopter satisfies clause (b), because the gyrocopter is not listed in the policy declarations. However, the undisputed facts also show that the gyrocopter does not meet the requirements of either clause (a) or (c), in that Mahler owned the gyrocopter and the gyrocopter lacked a standard airworthiness certificate, instead having only an experimental airworthiness certificate.

Because the gyrocopter does not satisfy all five clauses set forth in the endorsement, was not listed in the policy declarations, and because Mahler did not obtain additional coverage for the gyrocopter, there is no genuine issue of material fact that the policy did not provide coverage to Mahler for damages arising from the gyrocopter accident on September 21, 2014. Therefore, Old Republic was entitled to summary judgment and dismissal of all claims against it in this matter.

ZALMA OPINION

It is amazing to me that litigants still refuse to accept the fact that an insurance policy is a contract whose clear and unambiguous terms must be enforced. Here, Mahler purchased the gyrocopter, did nothing to add it to his Old Republic policy (probably because, as an experimental aircraft it would not be eligible) and, only after the accident tried to change the wording of the policy by parsing language.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Insurance Companies Have the Right to Limit Coverage in any Manner Desired

Duty to Defend Limited to Time on Risk in Louisiana

When a defendant is uninsured for a particular risk and plaintiffs sue for injuries and illness allegedly incurred of periods of time when the defendant was uninsured and some where it was insured, insured sought defense for the entire period while insurer claimed it was only obligated to pay its pro-rata share of defense and indemnity costs, the Supreme Court of Louisiana was called upon to resolve the dispute in Daniel Arceneaux, Louis Daverede, Jr v. Amstar Corp., Amstar Sugar Corp., Tate And Lyle North American Sugars, Inc., And Domino Sugar Company, Et Al.,…, Supreme Court of Louisiana, — So.3d —-, 2016 WL 4699163 (09/07/2016).

FACTS

In the underlying suit, plaintiffs allege that they suffered hearing loss from exposure to unreasonably loud noise in the course of their work at American Sugar’s refinery in Arabi, Louisiana.

The plaintiffs, approximately 100 in number, allege that they worked at the refinery during various years ranging from 1941 to 2006. Continental issued eight general liability policies in effect from March 1, 1963 to March 1, 1978. Each of the policies contained exclusions for bodily injury to employees of the insured arising out of the course and scope of employment. However, in the last policy, the exclusion was deleted by special endorsement effective December 31, 1975. Thus, there was coverage for bodily injury that occurred from December 31, 1975 through March 1, 1978, a period of twenty-six months.

The policy defines bodily injury as “bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom.” (Emphasis added.)

American Sugar brought a third party demand against Continental alleging that Continental had issued policies that provide coverage for the underlying claims. Furthermore, American Sugar alleged that Continental had been put on notice of the litigation in June 2006 and that Continental breached its policy provisions by failing to provide a defense. American Sugar sought past defense costs, a complete defense going forward, and penalties and attorney fees.

Without offering reasons the trial court granted American Sugar’s request for a complete defense going forward, but denied its summary judgment motion in all other respects, including the request for past defense costs. The Fourth Circuit affirmed the trial court’s ruling holding that an insurer’s duty to defend is not subject to proration.

LAW AND ANALYSIS

At the outset, we must note that an insurer’s duty to defend is distinct from its duty to indemnify. Generally, an insurer’s obligation to defend suits filed against an insured is broader than its obligation to provide coverage for damage claims. The insurer’s duty to defend is determined by the allegations of the plaintiff’s petition, and the insurer is obligated to furnish a defense unless the petition unambiguously excludes coverage.   If, assuming all allegations of the petition to be true, there would be both coverage under the policy and liability of the insured to the plaintiff, the insurer must defend regardless of the outcome of the suit. In short, the duty to defend arises whenever the pleadings against the insured disclose even a possibility of liability under the policy.

As to an insurer’s duty to indemnify, liability is to be prorated among insurance carriers that were on the risk during periods of exposure to injurious conditions. That indemnification is allocated pro rata is based in large part on Louisiana’s adoption of the exposure theory in long latency disease cases. Long latency occupational disease cases are sui generis, not like anything else, in that a distinct body of jurisprudential law has been developed which applies solely to them.

Further, in cases when claims arise out of occurrences that take place during a period in which no insurer is on the risk, a liable entity is assigned a pro rata share for purposes of indemnification.

Nationwide, two general approaches to allocation of defense costs in long latency disease cases have emerged: the pro rata allocation method and the joint and several allocation method. Under pro rata allocation, insurance carriers of triggered policies are responsible for a share of defense costs based at least in part on the period of time they are on the risk. Defense costs are divided among insurers, and if the insured has periods of non-coverage, the insured is responsible for its pro rata share. The most significant difference between joint and several allocation and pro rata allocation is the treatment of uninsured time periods.

A leading decision in applying joint and several allocation is Keene Corp. v. Insurance Co. of North America. 667 F.2d 1034 (D.C. Cir. 1981), cert denied, 455 U.S. 1007 (1982). In this case, manufacturer Keene Corporation sought declaratory judgment of the rights and obligations of insurers under comprehensive general liability policies, specifically to what extent each policy covered Keene’s liability for asbestos-related diseases. The applicable insurance policies in Keene are substantially similar to the Continental policy at issue in this case. The appellate court in Keene adopted the continuous trigger theory in long latency disease cases, holding that each insurer on the risk between exposure to asbestos and manifestation of injury was liable to the insured, Keene Corporation.

Next, the court determined the extent of coverage for which each insurer was liable. The court noted that the policies provided that the insurer will pay on behalf of the insured “all sums” that the insured becomes legally obligated to pay as damages because of bodily injury during the policy period. The court reasoned that the policies issued to the insured relieved it of the risk of liability for latent injury of which the insured could not be aware when it purchased insurance.

As to allocation of liability, the court reasoned that in asbestos-related disease suits, it is likely that the coverage of more than one insurer will be triggered.

Other jurisdictions have concluded differently, although dealing with essentially the same policy language. The seminal case applying the pro rata allocation method is Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980), clarified on reh’g, 657 F.2d 814 (6th Cir. 1981).

In Forty-Eight Insulations, the insurer sought a declaratory judgment to establish that the insured was responsible for a portion of its defense costs and liability for an asbestos action brought against it because it had been self-insured for a period of time. The court reasoned that when there is no reasonable means of prorating defense costs between covered and non-covered claims, the insurer must bear the entire cost of defense. The court noted this scenario typically arises in suits brought as the result of a single accident, when only some of the damages sought are covered under a policy.

However, in the context of asbestos exposure cases and other long latency disease claims when coverage was triggered under the exposure theory, defense costs can be “readily apportioned.” The duty to defend arises solely under contract. An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period.

The Louisiana Supreme Court, therefore, was persuaded by the reasoning presented in Forty-Eight Insulations and its progeny to adopt the pro rata allocation method for defense costs in the case before us based on the policy language. The duty to defend arises solely under contract. According to those rules, it is the responsibility of the judiciary to determine the common intent of the parties. In this case, the words of the insurance contract at issue are clear and unambiguous.

Applying the pro rata method of allocation here does not violate the reasonable expectations of the insurer or the insured. Based on the policy language, neither party could reasonably expect that the insurer was liable for losses that occurred outside the policy coverage periods.

Subject to the rules on insurance contract interpretation, insurance companies have the right to limit coverage in any manner they desire, so long as the limitations do not conflict with statutory provisions or public policy. The policy language in this case supports a pro rata allocation of defense costs.

Additionally, as recognized by Forty-Eight Insulations and its progeny, the pro rata allocation scheme is an equitable system, that can be readily used in long latency disease claims in Louisiana. Because the duty to defend in Louisiana is determined by consulting the allegations within the petition and the terms of the insurance policy the pro-rata amounts can be determined from the pleadings.

American Sugar will be required to pay for its defense during years in which it did not acquire an insurance policy that would be triggered by the instant litigation.  Continental is only liable, therefore, for its pro rata share of defense costs based on its policy periods as its pro rata share.

ZALMA OPINION

The Supreme Court of Louisiana did Equity – Fairness – by deciding that the insurer in long latency disease claims is only required to pay its pro-rata share based on time on risk and that the insured – for the period it was uninsured – must pay its share of defense costs for the period it was uninsured. The insurer limited its liability and defense obligation to the period its policy was in effect and it would be unfair to make it pay for defense in periods it did not insure.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Set-Up of Injured Plaintiff Fails

Clear and Unambiguous Exclusion Must be Applied

When a liability insurer is presented with a claim seeking defense and indemnity and the facts appear to exclude all coverage it will provide a defense under a reservation of rights so that it can take the time needed to determine whether coverage applies or not. If the insured refuses the defense, fires the defense lawyer appointed because of the reservation of rights, and then settles with the plaintiff and assigns to the plaintiff rights against the insurer the insured rejects the good faith action of the insurer and forces it into a suit with the defendant.

However, if the insured and its independent counsel, believes the insurer is correct and there is no coverage, entering into a separate settlement with the plaintiff and receiving a covenant not to execute, is a brilliant way of defeating the plaintiff’s claim and leaving it with a judgment that is only valuable as wallpaper if only they let the settlement become final.

In State Farm Mutual Automobile Insurance Company v. White, United States District Court, S.D. Mississippi,  — F.Supp.3d —-, 2016 WL 4702372 (September 7, 2016) the USDC, Southern District of Mississippi, proved the wisdom of the insured and only cost State Farm the cost of defending the bad faith action and the insured avoided a judgment of more than $2 million.

BACKGROUND

In May 2015, Defendants John and Rita White filed a complaint in Mississippi state court against Defendants Bobcat Tree Work, LLC, and Christopher Joe Wilson, the owner of Bobcat, “alleging personal injuries and a derivative claim for loss of consortium under circumstances caused by alleged negligence, gross negligence and willful and/or negligent infliction of emotional distress.” In the state court case, the Whites allege that while working for Bobcat, Mr. White suffered injuries when “a portion of a felled tree collided with the elevated ‘bucket’ of a boom lift that was affixed to a truck and the force of the collision damaged the bucket in which he stood, resulting in his falling to the ground from an elevation of sixty-three (63) feet ….”

Wilson had a commercial automobile liability insurance policy through State Farm (“the Policy”). Accordingly, State Farm agreed to defend Wilson and Bobcat under a reservation of rights. It also instituted a declaratory judgment action against Defendants to determine coverage. However, on October 30, 2015, “Wilson and Bobcat, by and through their personal counsel, terminated the services of the attorney[s] hired by” State Farm after State Farm refused their request to withdraw the reservation of rights. The attorneys hired by State Farm thereafter withdrew from the state court case.

Wilson and Bobcat, through personal counsel, then agreed to the entry of judgment in the state court case in favor of the Whites in excess of $2.8 million, but at the same time entered into a Covenant Not To Execute and/or Enroll Judgment with the Whites.

State Farm’s intervened and the parties represented that the Whites rescinded the Covenant Not To Execute and moved to withdraw the Motion for Entry of Judgment. Bobcat and Wilson also instituted a separate state court action against State Farm based on its intervention for alleged tortious interference and other causes of action.

Defendants contend that there is insurance coverage under the Policy for the Whites’ injuries. State Farm claims that no coverage exists based on Policy exclusions, and because Wilson and Bobcat “fail[ed] to cooperate under the terms of the [P]olicy.” It requested a judicial determination that it has no duty to defend or indemnify Bobcat or Mr. Wilson for any claims arising out of the accident at issue.

DISCUSSION

The parties appear to agree—and the insurance policy states—that Mississippi law applies. In applying that law, the Court begins by determining whether the exclusion is ambiguous and in need of interpretation. Under Mississippi law, interpretation of an insurance contract presents a question of law.  The goal in performing this interpretation is to ascertain the intent of the parties and the Court should take into account the subject matter of the contract, the circumstances under which it was made and the purpose sought to be achieved by the parties.  If the language in an insurance contract is clear and unambiguous, the court should construe it as written. A term within an insurance policy is ambiguous if it can be interpreted to have two or more reasonable meanings. Of course, where a policy term is worded so that it can be given a definite or certain legal meaning, it is not ambiguous and will be enforced as written.

The exclusion contained in “Endorsement 6018KK Commercial Vehicle” of the Policy is dispositive. That exclusion states in pertinent part that “[t]here is no coverage for an insured for damages arising out of the operation, maintenance, or use of any equipment that is … mounted on … any vehicle.”

A claim need only bear an incidental relationship to the described conduct for the exclusion to apply.  Here, White fell from an elevated bucket of a boom lift that was mounted to a truck. Although Defendants argue that “[t]he fact that Mr. White was in an alleged attachment on the vehicle does not necessitate that his injuries arose out of its use. The Court finds that the undisputed facts fall squarely within the exclusion.

Nevertheless, Defendants also contend that “equipment” and “mounted on” are ambiguous and are not defined in the policy.  A disagreement over the meaning of a provision or term in a policy of insurance does not make it ambiguous as a matter of law.  Lack of a definition in the policy does not equate to ambiguity either.

White testified, and his state court complaint allegations confirm, that he was in a bucket apparatus attached to a truck at the time of his accident.

The bucket apparatus was an article or implement used for a specific purpose or activity, especially a business operation. There is no dispute that the bucket apparatus was designed for use in tree removal. Furthermore, the photographs of the bucket apparatus clearly show that it is “mounted” on the truck, as that term is ordinarily understood. As such, the claims at issue are excluded from coverage under the Policy. State Farm is not obligated to provide coverage to Defendants Wilson or Bobcat under the Policy based on any claim made by the Whites as a result of the subject accident, and the Court need not consider State Farm’s additional arguments for summary judgment.

ZALMA OPINION

The insured’s lawyers set up a beautiful set-up of the injured person who was ready to take an assignment of a judgment and give the insured a covenant not to execute, only to destroy the plan by fighting the intervention where State Farm would argue over the amount of the stipulated judgment. As a result the deal went away, coverage was found to not apply, and Wilson or Bobcat are now responsible to pay from its own assets to the injured person.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

UIM Coverage Not Available For Driver’s Negligence

UIM Coverage Only Available When Insured Injured by a Third Party

Uninsured Motorist (UM) and Underinsured Motorist (UIM) coverages are designed to provide indemnity to an insured who is injured by an uninsured or underinsured motorist’s negligence. It is not designed to supplement the liability coverage of the negligent person.

In Simmons v. Geico Indemnity Company, Not Reported in S.W.3d, Court of Appeals of Kentucky, 2016 WL 4575669 (9/2/2016) the Kentucky Court of Appeal was asked to broaden the coverages available to the injured person.

ISSUE

This case involves a dispute over insurance coverage. The issue presented is whether the decedent’s estate may recover Underinsured Motorist (UIM) benefits on behalf of the decedent under a policy of insurance tendered by Geico Indemnity Company. The circuit court found it could not.

FACTS AND PROCEDURE

On August 16, 2012, the decedent, Charles Simmons, was a passenger in a 2003 Chevrolet Blazer that he owned. Charles’ step-son, Michael Mundy, was driving. Mundy, traveling westbound, crossed the center line and collided head-on with an eastbound vehicle. The collision claimed Charles’ life.

The Blazer was insured pursuant to a policy issued by Geico to Charles and Lenora Simmons. The policy provided liability coverage up to $25,000 per person ($50,000 per occurrence) and included UIM coverage with policy limits of $25,000.00 per person. Mundy was named an “additional driver” under the policy.

Appellant Lenora Simmons, in her individual capacity and as Executrix of the Estate of Charles Simmons, filed the underlying action seeking a declaratory judgment that the Geico policy provided UIM benefits to which the Estate was entitled. Geico counterclaimed, requesting a declaration that the policy’s express terms explicitly excluded UIM coverage for this particular collision because the vehicle driven by Mundy was not an “underinsured auto.”

The parties filed competing motions for declaratory summary judgment. By Order entered April 15, 2014, the circuit court granted Geico’s motion, finding the insurance policy did not provide UIM coverage for the subject collision.

ANALYSIS

The sole issue, as framed, is whether Charles was entitled to UIM benefits under his own insurance policy with Geico for this particular accident.

As a general rule, the construction and legal effect of an insurance contract is a matter of law for the court. A court must give clear and unambiguous terms in an insurance policy their plain and ordinary meaning.

The policy at issue states Geico will provide UIM coverage “for damages an Insured is legally entitled to recover for bodily injury caused by accident and arising out of the ownership, maintenance, or use of an underinsured auto.” Therefore, if the court of appeal agrees with the Geico and the circuit court that the Blazer was not an “underinsured auto,” the court of appeal must affirm the trial court’s order.

An underinsured auto does not include any vehicle or equipment which is an insured auto.  An insured auto is one that is described in the declarations and covered by the Bodily Injury Liability coverage of this policy.  It is undisputed that the 2003 Chevrolet Blazer involved in this accident was described in the policy’s declarations and the policy provided liability coverage for Mundy’s negligent acts. By definition, it is an insured auto, and concomitantly, not an underinsured auto, under this policy.

The policy’s language is plain, clear and unambiguous. The court of appeal must enforce the policy as written. When the terms of an insurance contract are unambiguous and not unreasonable, they will be enforced.

In pertinent part, that statute says UIM is coverage whereby: “the insurance company agrees to pay its own insured for such uncompensated damages as he may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon ….”

Interpreting the statute, the Kentucky Supreme Court affirmed that it contemplates that the underinsured tortfeasor will be operating a different vehicle than the vehicle providing UIM coverage for the injured claimant. The statute simply “does not authorize recovery against both the liability and UIM coverages of the same policy.

Of course, the policy itself may authorize recovery under both the liability and UIM provisions. The insurance contract could provide broader coverage than required by the statute. The Geico policy in this case contains no such endorsements. It must be remembered that “[t]he purpose of UIM coverage is not to compensate the insured or his additional insureds from his own failure to purchase sufficient liability insurance.” Windham v. Cunningham, 902 S.W.2d 838, 841 (Ky. App. 1995).

Lenora attempts to side-step these principles and the language of the Geico policy by invoking the doctrine of reasonable expectations.

The doctrine of “reasonable expectations” requires the insured be entitled to all coverage he may reasonably expect to be provided under the policy. A limitation of insurance coverage must be clearly stated in order to apprise the insured of such limitations.  Combining these principles, only an unequivocally conspicuous, plain and clear manifestation of the company’s intent to exclude coverage will defeat one’s reasonable expectation of coverage.

The UIM exclusion in the Geico policy is conspicuous, clear, and unambiguous. It describes the UIM exclusion in plain language. We perceive no ambiguity.

Further, the placement later in the policy of the exclusion language does not defeat any reasonable expectation created by the declarations page. Insured persons are charged with knowledge of their policy’s contents. The declarations page is but a single page briefly describing the various coverage and maximum limits. It is manifestly unreasonable to expect an insurance carrier to describe fully the workings of each coverage option in the Declarations page. An insurance policy must be read as a whole.

The reasonable expectation of the average person who purchases UIM coverage is that she will be entitled to UIM benefits if she is struck by another driver whose liability limits are not sufficient to satisfy her damages. To adopt the view propounded by Lenora simply stretches the purpose and scope of underinsured coverage beyond the bounds of reason or common sense.

ZALMA OPINION

One can only wonder why anyone would take to a court of appeal a case where the person responsible for the accident was the person responsible for the accident. The liability coverage was available to the estate of the decedent but not a bonus of UIM coverage since the vehicle was insured. This suit was less than reasonable and sought to get an  insurer to provide coverage that is beyond the bounds of reason and common sense.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Advertising Injury Requires A Fortuitous Loss

Defendant’s Business Saved by Brilliance of Insurer

I have over the last 1700 posts to this blog advised against entering into a stipulated judgment and granting a viable defendant a covenant not to execute in the hope of a windfall judgment from the insurer who refused to defend and indemnity the insured.

In Auto-Owners Insurance Company v. Stevens & Ricci …, — F.3d —-, United States Court of Appeals, Third Circuit. 2016 WL 4547641 (September 1, 2016) Auto-Owners Insurance Company (“Auto-Owners”) sought a declaration that it has no obligation to defend or indemnify its insured, Stevens & Ricci, Inc. (“Stevens & Ricci”), in connection with a $2,000,000 judgment entered against Stevens & Ricci as part of the settlement of a class action lawsuit.

In that class action, the Hymed Group Corporation (“Hymed”) alleged, as representative of the class, that Stevens & Ricci had violated the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227, by sending unsolicited fax advertisements. While that class action was pending, Auto-Owners sought declaratory judgment against both Stevens & Ricci and Hymed. The District Court concluded that the sending of unsolicited fax advertisements in violation of the TCPA did not fall within the terms of the insurance policy, and thus granted Auto-Owners’s motion for summary judgment and denied Hymed’s cross-motion and, as to the class, the $2 million judgment was uncollectable.

BACKGROUND

This case began with the improper use of fax machines. Stevens & Ricci was solicited by an advertiser claiming to have a fax advertising program that complied with the TCPA. Relying on that representation, Stevens & Ricci allowed the advertiser to fax thousands of advertisements to potential customers on its behalf. The advertiser sent 18,879 unsolicited advertisements by fax.

Much later, on June 1, 2012, Hymed filed a class action lawsuit in the United States District Court claiming that the advertisements actually did violate the TCPA, (the “Underlying Action”), which prohibits the “use [of] any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement … .”  Given the volume of faxes sent, a finding of liability to the class under the TCPA, with statutory damages of $500 per fax, could have resulted in a damage award in the Underlying Action of $9,439,500, before trebling. Such a judgment could have bankrupted Stevens & Ricci and caused the dissolution of its business allowing the class to only collect a pro-rata share of the judgment as one, of many creditors, in bankruptcy.

During the time that Stevens & Ricci had the unsolicited faxes sent to Hymed and other class members, it was covered by a “Businessowners Insurance Policy” (the “Policy”) issued by Auto-Owners. The Policy obligates Auto-Owners to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’ to which this insurance applies.”

To be covered, an “advertising injury” must also be inflicted “in the course of advertising [the insured’s] goods, products or services.”

Auto-Owners agreed to defend Stevens & Ricci in the Underlying Action, but reserved its right to later challenge whether the alleged misconduct (i.e., the sending of unsolicited faxes) fell within the terms of the insurance policy’s coverage.  While the declaratory relief action was pending, Hymed, Stevens & Ricci, and Auto-Owners reached an agreement to compromise and settle the Underlying Action.

Among other things, the parties agreed to entry of judgment in favor of the class, and against Stevens & Ricci, in the amount of $2,000,000. Hymed and the class also agreed to seek recovery to satisfy the judgment only from Auto-Owners under the Policy. As a result Auto-Owners protected its insured and placed the gamble of an adverse judgment on itself.

The District Court concluded that the sending of unsolicited faxes to Hymed and other class members did not cause the sort of injury that falls within the Policy’s definition of either “property damage” or “advertising injury.” Accordingly, the Court granted Auto-Owners’s motion for summary judgment and denied Hymed’s cross-motion. Hymed promptly appealed.

DISCUSSION

Viewing this case from the perspective of the insurer at the time of filing of the declaratory judgment complaint, Auto-Owners’s quarrel was with Stevens & Ricci regarding its indemnity obligation under the Policy. The only “amount in controversy” that the insurer was then concerned with was its total indemnity and defense obligation; it presumably had no interest in the way the indemnity sum might later be divided among the various class members. Its dispute was thus with its insured, not the class.

ANALYSIS

A federal court sitting in diversity must apply state substantive law. As best we can tell, Hymed is using the “reasonable expectation” test to empower it to conduct a fifty-state legal survey and to advocate that Arizona’s law must be whatever the prevailing legal theory is across the country since that prevailing law is – given its popularity – inherently “reasonable.

The key term in the definition of the “accident” is “unexpected” which implies a degree of fortuity. An injury therefore is not “accidental” if the injury was the natural and expected result of the insured’s actions. Accident has been defined in the context of insurance contracts as an event or happening without human agency or, if happening through such agency, an event which, under circumstances, is unusual and not expected by the person to whom it happens. That definition comports with the basic purpose of insurance: “to cover only fortuitous losses.” United Servs. Auto. Ass’n v. Elitzky, 517 A.2d 982, 986 (Pa. Super. Ct. 1986).

Here Hymed’s claimed injury is the use of ink, toner, and time that was caused by the receipt of junk faxes. Those injuries are the natural and expected result of the intentional sending of faxes, a far cry from Pennsylvania’s definition of an “accident.” Though it did not intend injury, Stevens & Ricci clearly intended for the third-party advertiser to send the fax advertisements to the members of the class.

The Supreme Court of Pennsylvania has not addressed whether unintended damages from faxes sent in violation of the TCPA constitute an “accident.”  The Third Circuit, as required, predicted that the court would reject coverage under the “property damage” provision of the Policy.

Whether an event is accidental is evaluated from the perspective of the insured. An accident is anything that happens or is the result of that which is unanticipated and takes place without the insured’s foresight or expectation or intention. The use of ink, toner, and time can be regarded as the natural result of the intentional sending of faxes.

The Policy defines “advertising injury” as, among other things: “Oral or written publication of material that violates a person’s right of privacy.”   Congress took aim at unsolicited advertisements, not the content of those advertisements since to do so could be a violation of the First Amendment to the U.S. Constitution. An unsolicited fax intrudes upon the right to be free from nuisance not a violation of the right of privacy.  Accordingly, the TCPA seeks to protect privacy interests in seclusion, not secrecy. The underlying action, similarly, alleged that the sending of the faxes violated “class members’ privacy interests in being left alone.”

The Policy, therefore, does not cover the violation of the class members interests in being left alone. Read in context, the Policy provides coverage only for violations of the privacy interest in secrecy, and thus does not cover violations of a right to seclusion.

The Policy’s protection of the “right of privacy” is thus logically limited to a privacy interest the infringement of which depends upon the content of the advertisements: in other words, the privacy right to secrecy.

None of the allegations in the Underlying Action relate in any way to the content of the faxed advertisements. The faxes caused the alleged damage because they were received without permission, not because of their content. At no point did Hymed allege that those unsolicited faxes included confidential or otherwise secret information about any of the class members. Because the Policy’s “advertising injury” deals only with the publication of private information, it strongly suggests that the injury alleged in the Underlying Action falls outside of the scope of that protection.

ZALMA OPINION

The TCPA law would destroy the sender even though the ads were sent innocently without intent to violate the statute. Auto-Owners knew there was no coverage and, rather than leave its insured destroyed, by defending its insured and then convincing the plaintiffs that rather than destroying Stevens & Ricci, it could take an assignment and collect everything from Auto-Owners if it could prove coverage. Auto Owners protected its insured and destroyed the case of the plaintiffs who were ready to destroy Stevens & Ricci and got nothing because insurance only provides defense and indemnity for a fortuitous act not the intentional act of sending a fax.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Rescission of PIP Policy Available For Fraud

The “Innocent Third Party Rule” Does Not Eliminate Right to Rescind

When an insured obtains a policy of insurance by misrepresentation of a material fact or fraud the insurer may rescind the policy in Michigan. However, when an innocent person is injured by the insured before the policy is rescinded statutes and courts attempt to protect the innocent and require the defrauded insurer to indemnity its insured and cannot assert its rights as the victim of a fraud. In Michigan, the right to rescind in such a situation was resolved on August 30, 2016 in State Farm Mut. Auto. Ins. Co. v. Michigan Mun. Risk, Court of Appeals of Michigan, — N.W.2d —-, 2016 WL 4533622 (Aug. 30, 2016).

The Supreme Court of Michigan sent the case back to the Court of Appeals because, in its original opinion it affirmed the trial court’s denial of summary disposition to QBE Insurance Corporation (QBE) on the ground that the “innocent third-party rule” barred rescission of the policy of insurance at issue.  The Supreme Court, in lieu of granting QBE’s application for leave to appeal, vacated the court of appeals opinion with respect to QBE and remanded the case, instructing us to hold this case pending the outcome of Bazzi v. Sentinel Ins. Co., ––– Mich.App ––––; ––– NW2d –––– (2016).  As Bazzi has now been decided, the Court of Appeal concluded that the “innocent third-party rule” did not bar QBE’s claim of fraud as a defense to an insurance contract, and that the trial court therefore erred in denying QBE’s claim of summary disposition.

PERTINENT FACTS

QBE moved for summary disposition. QBE asserted, inter alia, that it was entitled to rescind its policy of insurance provided to Gray because Gray had procured her policy by defrauding QBE. According to QBE, Gray had supplied false information on her application for insurance by affirmatively indicating that the Cutlass was registered to her, when in fact it was registered to Tina Poole, Gray’s mother. Had Gray truthfully completed the application, QBE would never have issued the policy. Under such circumstances, QBE argued that it was entitled to rescind the insurance policy issued to Gray, and thus was entitled to be dismissed from the suit.

In support of its argument, QBE provided the application for insurance that had been submitted by Gray, which stated that the named insured “must be the registered owner” of the insured vehicle (the Cutlass). Gray had indicated on the application that she was the registered owner of the vehicle, when in fact the vehicle was registered to Poole. Gray testified at her deposition that she did not own the Cutlass.

Insurance coverage required by statute, such as that of the No—Fault Act, MCL 500.3101, et seq., cannot be rescinded after an innocent third party has sustained injury which is the subject of the coverage required by statute.

ANALYSIS

However, because the “innocent third-party rule” did not survive our Supreme Court’s decision in Titan Ins. Co. v. Hyten, 491 Mich. 547; 817 NW2d 562 (2012), the trial court erred in denying summary disposition to QBE on this basis. Bazzi, ––– Mich.App at ––––, slip op at 1. We see no reason to reiterate in full the holding of Bazzi. Suffice it to say that it is precisely on point with respect to the issue presented in the instant case, and is precedentially binding.  Further, the Court of Appeals agreed with the Bazzi panel that the public policy concerns engendered by the abrogation of the “innocent third-party rule” are more appropriately considered by the Legislature, not this Court.

Having concluded that the trial court erred in its denial of summary disposition on the basis of the “innocent third-party rule,” we vacate the trial court’s order in that respect. However, this Court must further consider the posture of this case relative to the underlying issue of fraud. It further opined that while it was inclined to believe that there was fraud in obtaining the insurance just from what’s before me, there at least could be some triable issues in that regard. Based on the Court of Appeals review of the record it could see no reason to disturb that finding.

Because this Court in Bazzi v. Sentinel Ins. Co., ––– Mich.App ––––; ––– NW2d –––– (2016), held that the “innocent third-party rule” was implicitly and effectively abolished in Titan Ins. Co. v. Hyten, 491 Mich. 547; 817 NW2d 562 (2012), for purposes of mandatory personal protection insurance benefits, commonly referred to as PIP benefits, under the no-fault act, the Court of Appeals had no right to apply the rule and required the trial court to order the QBE policy rescinded.

ZALMA OPINION

In every state, including Michigan, fraud is a basis for rescission of an insurance policy because there is no meeting of the minds between the insurer and the putative insured. Gray lied on the application concerning a material fact, the registered owner of the vehicle. QBE was defrauded and never was allowed to agree to the risk it thought it was taking. The policy was void from its inception. The innocent victim was not without a remedy.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Georgia Refuses to Adopt Continuous Trigger

CGL Not Limited to Insuring Injury Taking Place During the Policy Period

When an insured has a continuous loss where pollutants leak into the soils and cause damage over a long period of time it can be held for the damages that result, as part of a continuous loss, over a long period of time. In Columbia Casualty Company v. Plantation Pipe Line Company, Court of Appeals of Georgia, — S.E.2d —-, 2016 WL 4548664 (August 31, 2016) Plantation Pipe Line Company sued five of its excess liability insurers, including Columbia Casualty Company, seeking relief including a declaratory judgment as to each insurer’s respective share of Plantation’s losses arising from a pipeline leak. The trial court granted Plantation’s motion and denied Columbia’s cross-motion.

Columbia appealed both rulings, contending that the trial court erred in allocating all of Plantation’s losses to the policies that were in place at the time of the fuel leak, rather than allocating Plantation’s losses pro rata among the multiple, successive policies that were issued to Plantation over the thirty-year period during which the environmental contamination continued to accrue

FACTS

The record shows the following relevant undisputed facts: On April 2, 1976, Plantation employees discovered that turbine fuel had leaked from an underground Plantation pipeline located in Cabarrus County, North Carolina. Within 24 hours, Plantation repaired the pipeline and cleaned up the leak. Without resorting to insurance, it compensated the only affected landowner $50. More than thirty years later, on April 3, 2007, one of Plantation’s workers found contaminated soil during maintenance of Plantation’s pipeline, and the contamination was traced to the 1976 leak.

Plantation filed this action in 2012, seeking recovery for amounts it has spent to settle third party claims, amounts it has expended for remediation, and projected costs to complete remediation. A Plantation executive estimates that Plantation’s costs through 2030 will total between $5.6 million and $8.6 million.

The record shows that, at the time the initial fuel leak occurred in Cabarrus County in April 1976, Plantation had $1,000,000 in primary coverage under a comprehensive general liability (“CGL”) policy issued by American Reinsurance Company (subject to a self-insured retention of $100,000), and had excess coverage, including $1 million under an umbrella policy issued by Lexington Insurance Company. In late 1975, Columbia issued an “Excess Third Party Liability Policy” to Plantation for the period of January 24, 1976 through November 30, 1976. Unless otherwise provided, the Columbia excess policy incorporated the terms of the Lexington umbrella policy.  In the Insuring Agreements in the Lexington umbrella policy, Lexington agreed: “[t]o pay on behalf of [Plantation] the ultimate net loss in excess of the underlying insurance[ (the self-insured retention and the primary CGL policy issued by American) ], which [Plantation] shall become legally obligated to pay as damages by reason of the liability imposed upon [Plantation] by law … because of … [p]roperty [d]amage … caused by or arising out of an occurrence.”

In the Insuring Agreements in the Columbia excess policy, Columbia agreed to indemnify Plantation for loss in excess of the limits of liability of the Lexington policy, which was the “underlying insurance.” The Insuring Agreements in the Columbia policy further provide as follows: “This policy applies to injury or destruction taking place during this policy period, provided that when the immediate underlying policy insures occurrences taking place during its policy period, instead of injury or destruction taking place during its policy period, then this policy likewise applies to occurrences taking place during this policy period[,] and ‘occurrences’ is substituted for ‘injury or destruction’ in Part III of this policy [regarding reduction of the aggregate].”

ANALYSIS

Columbia contends that it is entitled to judgment as a matter of law that the policy it issued to Plantation is not triggered by the claims at issue in this case.

Columbia points to evidence that the environmental contamination caused by the occurrence at issue, the April 1976 fuel leak, continued to unfold (and even to this day continues to unfold), as the quantity of pollutant that Plantation failed to clean up in 1976 migrated downward through the soil, reached flowing groundwater and formed a plume in the water table, where it contaminated clean water that made contact with the contaminated water, and that such contamination of previously clean water will continue to occur until the remediation process is complete.

Columbia argues that this is typical of environmental contamination cases because environmental contamination by its nature occurs over time, gradually or progressively causing personal injury or property damage, which may be unknown to the injured parties for years.

Columbia points to evidence that from 1976 through 2005 several different insurers issued liability policies to Plantation. Over time, the overall coverage profile varied, as the limits of the different policies, the scheme of the different layers of coverage (self-insured retention, primary coverage, umbrella coverage, excess coverage, etc.), and areas of overlapping coverage all varied from year to year.

Columbia argues that it is typical of environmental contamination cases that, because of the progressive nature of environmental contamination, the resulting personal injury or property damage overlaps multiple successive insurance policy periods of the insured’s liability coverage. And Columbia contends that in this case multiple successive insurance policies were potentially triggered during later policy periods by the unfolding environmental damage that originated with the 1976 pipeline leak and that Plantation’s losses from remediation costs and third-party claims should be allocated among those policies by the Court.

Columbia urges the Court to adopt the so-called “continuous trigger theory.” Columbia argues that Plantation’s total financial loss from the latent, continuous, and progressive property damage that took place over three decades should be allocated pro rata among each successive policy period from 1976 to 2007, when the contamination was discovered and became “manifest.” When this is done, Columbia argues, the amount of loss properly allocated to the policy period of the policy it issued to Plantation is far less than the $2 million attachment point for the excess coverage it provides. As a result, Columbia contends, its policy is not triggered as a matter of law under the continuous trigger theory. Moreover, Columbia argues, the result would be the same if the Court were to adopt in the alternative the so-called “injury in fact” trigger theory.

Even if this Court were inclined to adopt the continuous trigger theory, application of this theory is premised on the assumption that the Columbia policy contains language that limits coverage to property damage that takes place during the policy period. The insuring agreement in the Columbia policy provides that the policy applies to injury taking place during the policy period unless, instead of insuring injury taking place during the policy period, the Lexington policy insures occurrences taking place during the policy period, which it does.

In this case, then, the Columbia policy expressly “applies to occurrences taking place during [the] policy period. Columbia argues that Plantation failed to identify any evidence that more than $2 million worth of property damage occurred during the coverage period for the Columbia policy, again restating its argument that its policy was not triggered.

In addition, Columbia contends that Plantation’s reliance on the so-called “known loss” doctrine is misplaced because the doctrine is not the law of Georgia and because the doctrine is inapplicable, given the fact that “Plantation judicially admitted it did not know petroleum product and contaminants remained subsurface at the Site after it repaired the leak in April, 1976.”

If the insured knows or has reason to know, when it purchases a CGL policy, that there is a substantial probability that it will suffer or has already suffered a loss, the risk ceases to be contingent and becomes a probable or known loss. Where the insured has evidence of a probable loss when it purchases a CGL policy, the loss is uninsurable under that policy (unless the parties otherwise contract) because the risk of liability is no longer unknown.

ZALMA OPINION

The facts make clear that there was an “occurrence” during the effective dates of the Columbia policy therefore compelling – regardless of the trigger applied – Columbia to defend and indemnify the Pipeline. Of course, since the subsequent policies were triggered when the contamination continued, the Pipeline learned of the continuing pollution much later but it seems to me all policies in effect during the occurrence over the years should be compelled to pro-rate with Columbia. Perhaps, if there is an appeal to the Georgia Supreme Court, the continuous trigger will be adopted since no insurer on the risk when loss is occurring should be exonerated from coverage.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

There Ain’t No Such Thing as A Free Lunch

Court Refuses to Rewrite Insurance Policy to Require Insurer to Pay for Damages Incurred When It Did not Insure

Third party liability insurance policies are designed to provide coverage protecting its insured against risks of losses that occur during the policy period. In Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., — N.Y.S.3d —-, Supreme Court, Appellate Division, First Department, New York 2016 WL 4543479 (9/1/2016) a long-term, gradual environmental property damage caused by pollution from manufactured gas plants (MGPs) owned by plaintiff and/or its predecessors (collectively Keyspan) seeking indemnity for periods while the insurer insured Keyspan and periods when it had no insurance.

Hazardous waste from the MGPs leached into groundwater over a protracted period of time. The New York Department of Environmental Conservation (N.Y.DEC) made claims against Keyspan, requiring it to assume the costs of investigation and clean-up of the environmental contamination. Keyspan, in turn, filed claims with its insurer, defendant Century Indemnity Company (Century), under certain general liability policies in effect during a 16 year period in which the pollution was occurring. During a period of time New York, by statute, made it impossible for Keyspan to buy pollution insurance. There is no dispute that the harm caused by the pollution was indivisible and continuous over a long period of time that greatly exceeded the 16–year period during which Century had issued insurance policies.

The court was faced with an issue of first impression in New York State appellate courts, concerning the proper allocation, under the Century insurance policies, of risk of loss attributable to a continuous harm occurring, in part, during periods when liability insurance was unavailable in the marketplace. The trial court found that the pro rata allocation analysis set forth by the Court of Appeals in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co. (Con Edison) (98 N.Y.2d 208 [2002]) should be refined to require that the insurer assume the allocated risk for losses occurring during periods when liability insurance was unavailable in the marketplace.

FACTS

Keyspan has operated two MGPs, located respectively in Rockaway Park, Queens, and Hempstead, Long Island, since the early 20th century. These (and other) MGP sites are contaminated with numerous hazardous wastes (predominantly tar) that have leached into the surrounding groundwater and soil.  Century claims that contamination of the Hempstead site took place between 1903 and 2001, whereas contamination of the Rockaway site began in 1905 and possibly continued until 2012. The contamination was caused by Keyspan’s operation and maintenance of the MGPs.

In 1995, NYDEC sought to hold Keyspan strictly liable for the resulting pollution, requiring it to pay for the investigation and clean-up of these sites. Keyspan’s remediation costs ran in the millions of dollars. Keyspan now seeks to have Century indemnify it for these costs based upon 16 successive years of general liability insurance policies issued by Century from 1953 to 1969.  Keyspan’s claim for indemnification by Century includes not only the 16–year period that the policies were in effect, but also periods of time, both before 1953 and after 1969, when insurance covering this risk could not be purchased in the marketplace.

Century contended that any property damage that occurred outside that 16–year period and during periods of no insurance is the sole responsibility of Keyspan, whether or not other insurance coverage was available in the marketplace. In concrete terms, the parties’ dispute implicates responsibility for as many as 70 years’ worth of allocated risk.

The trial court held liability that except for the period of time when the Legislature expressly prohibited the sale of pollution liability insurance, liability for periods of time when insurance was unavailable in the marketplace should be allocated to Century.

ANALYSIS

Injuries that are continuous and occur over a period of years frequently implicate multiple, sequential insurance policies, as well as periods of no insurance. The legal challenges raised in these cases occur because it is impossible to precisely determine what injury or damage took place during a particular policy period or during periods of no insurance. While the occurrence of some injury during the policy period will usually trigger coverage under the terms of a particular policy, the parties still face thorny issues about who bears the risk of injuries attributable to different time periods outside of those policy periods.

The specific issue before the Court was whether indemnification for liability for long-term, continuous environmental damage should be allocated among all the insurance polices that are triggered, or whether for every policy triggered by some part of the continuous injury occurring during that policy period, the insurer should be held jointly and severally liable for all of the damages.  The court held that pro rata allocation was more in keeping with the terms of the particular policies than joint and several liability for each insurer.

Where a pro rata allocation is warranted, courts applying New York law have approved the use of a time on the risk allocation formula where time on the risk is applied to allocate damages. Time on the risk is a simple calculation method, best expressed by a formula that multiplies the total risk by a fraction that has as its denominator the entire number of years of the claimant’s injury and as its numerator the number of years within which the policy was in effect. In cases involving environmental contamination, the formula assumes that the amount of pollution occurring in any particular year is always the same as in every other year. This assumption accounts for the uncertainty in determining the amount of pollution occurring in any particular year.

Pro rata allocation typically includes apportioning some part of the risk to the policyholder in connection with periods of no insurance. Policyholders will usually be required to bear the financial burden of periods when it could have, but chose not to, obtain insurance because the insured assumed or retained a risk. The same rationale applies to periods of self-insurance and/or insufficient insurance, which reflect deliberate decisions by the insured. Any rule to the contrary would disincentivize parties to acquire insurance when available, to cover and spread risk, and otherwise achieve cost efficiencies in the marketplace. The question posed by this case is whether, when the reason for the period of no insurance is that the insured could not have obtained insurance even if it had wanted to, is the risk attendant to the unavailability of insurance in the marketplace allocable to the existing, triggered insurance policies or to the insured?

A general concept underlying these decisions is that the policies themselves did not provide coverage for the disputed periods, and the overall effect of passing that risk on to the insurance companies would be to provide free insurance coverage to the policyholders for those periods of no insurance.

The New York Court found that the policy language supports a conclusion that the unavailability exception to proration to the insured does not apply. While none of the policies expressly address how to allocate liability in a situation where the underlying damage is long-term, continuous and indivisible, the fact that the policies require Century to indemnify Keyspan for occurrences, accidents, etc ., “during the policy period” is consistent with allocation for time on the risk.

There are no express contract provisions requiring the insurer to cover damages outside of the policy period when insurance is otherwise unavailable in the marketplace.

New York courts, like courts across the country, will not rewrite the terms of a policy for equitable reasons nor will they disregard clear provisions that an insurer inserted into a policy and the insured accepted.

In the absence of a contract requiring such action, spreading risk should not by itself serve as a legal basis for providing free insurance to an insured.

Century does not have to indemnify Keyspan for losses that are attributable to time periods when liability insurance was otherwise unavailable in the marketplace.

ZALMA OPINION

Rarely, trial courts try to do justice rather than apply the law. That was the case here. The trial court thought it best to require an insurer to pay for uninsured losses than the polluter because the state made it impossible to buy insurance. In so doing it gave Keyspan free insurance coverage. In so doing the trial court, without authority, rewrote the policies to provide coverage that was not paid for by Keyspan.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

STOLI is Dangerous to Health & Liberty

Zalma’s Insurance Fraud Letter September 1, 2016

BZBACKSUIT3

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

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

The current issue of ZIFL reports on:

  • STOLI Is Dangerous to Health and Liberty
  • Barry Zalma
  • Fraud by Health Care Professionals
  • Proformative Academy Webinars
  • Malingering
  • Good News From the Coalition Against Insurance Fraud
  • Medical Disability Fraud
  • New E-Books from Barry Zalma
  • Wisdom
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • The EUO Is a Serious and Important Part of the Insurer’s Investigation
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Fraud Created by Legal Professionals
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Zalma Insurance Consultants

Visit the Zalma Insurance Claims Library

THE “ZALMA ON INSURANCE” BLOG

The most recent posts of the more than 1500 case summaries to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog.

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

Zalma’s Insurance 101

I have completed a video blog called Zalma’s Insurance 101 that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101.
The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.

If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video. Some of the 1,022 videos follow:

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Posted in Zalma on Insurance | Leave a comment

Insured Must Fulfill Policy Conditions

Refusal to Appear for Examination Under Oath is Fatal to UIM Claim

It seems lawyers and litigants refuse to accept what I have stated until I am blue in the face that insurance contracts are mutual agreements where both parties are obligated to treat each other with good faith and fair dealing and do nothing that will deprive the other of the benefits of the contract.

In Allstate Ins. Co. v. Mack, — N.E.3d —-, Appellate Court of Illinois, First District, 2016 IL App (1st) 141171 (Aug. 26, 2016) the insured, Vanity Mack, failed or refused to provide HIPAA authorization forms and appear for examination under oath as required by the underinsured motorist (UIM) claim she had initiated against plaintiff, Allstate Insurance Company. Allstate filed the underlying declaratory judgment in the circuit court, seeking a declaration that defendant breached the parties’ contract by refusing to provide executed HIPAA authorization forms and to submit to an oral examination under oath.

FACTS

On October 26, 2010, Mack submitted a UIM claim to Allstate and also filed a demand for arbitration with the AAA. In response, on December 7, 2010, Allstate advised Mack to provide executed HIPAA authorizations and to appear for an oral examination under oath pursuant to the terms of the parties’ insurance policy. Mack conceded that she failed to comply with Allstate’s requests and additionally conceded that she failed to comply with Allstate’s subsequent repeated requests to do so. In its subsequent declaratory judgment action, Allstate alleged Mack breached the parties’ insurance contract where she failed to comply with the terms of the policy and, therefore, was barred from pursuing her UIM claim.

ANALYSIS

Vanity Mack argues that, because she simultaneously instituted arbitration proceedings when she submitted her UIM claim, only the arbitrator had the authority to order discovery pursuant to the AAA rules, not Allstate. Mack, therefore, insists that she was not obligated to comply with plaintiff’s discovery requests. The issue before the court of appeal was whether Mack breached the parties’ contract by failing to accommodate plaintiff’s requests to provide executed HIPAA authorizations and to appear for an examination under oath.

When the parties filed cross-motions for summary judgment, they conceded that there were no genuine issues of material fact and invited the court to decide the questions presented as a matter of law. The construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court and, thus, are appropriate subjects for disposition by way of summary judgment. In construing an insurance policy, the primary function of the court is to ascertain and enforce the intentions of the parties as expressed in the agreement. To ascertain the intent of the parties and the meaning of the words used in the insurance policy, the court must construe the policy as a whole, taking into account the type of insurance for which the parties have contracted, the risks undertaken and purchased, the subject matter that is insured, and the purposes of the entire contract.

If the words in the policy are clear and unambiguous, a court will afford them their plain, ordinary meaning and will apply them as written. We find the terms of the insurance policy at issue here were clear and unambiguous. Under the section dedicated to UIMs’ insurance coverage, the parties’ policy stated the following:

“Proof of Claim; Medical Reports

“As soon as possible, any person making [a] claim must give us written proof of [the] claim. It must include all details we may need to determine the amounts payable. We may also require any person making [a] claim to submit to [an] examination under oath and sign the transcript.

“The insured person may be required to take medical examinations by physicians we choose, as often as we reasonably require. We must be given authorization to obtain medical reports and copies of records.”

Therefore, according to the plain policy language, in order to make a UIM claim, Mack was required to provide written proof of the claim with all details Allstate may need to determine the amounts payable. This included executing a non-optional authorization to obtain medical reports and copies of records, along with possibly having to submit to an oral examination under oath.

As expressly provided by the insurance policy, plaintiff instructed defendant that, in order to review her UIM claim, it needed executed HIPAA authorizations, as well as for her to submit to an oral examination under oath. Mack conceded that she failed to comply with Allstate’s requests and, therefore, breached the terms of the parties’ insurance policy. As a result, defendant was not entitled to pursue her UIM claim.

Where plaintiff had not yet presented a finding as to defendant’s rights to receive any damages or an amount, there was no disagreement upon which to institute arbitration proceedings. Therefore, the AAA rules did not prohibit compliance with the terms of the insurance policy.

ZALMA OPINION

All Ms. Mack needed to do to obtain UIM benefits from Allstate was to provide a signed HIPAA release and arrange to testify at EUO. She did neither and preferred to take the chance on suing Allstate for wrongfully denying her claim. Her gamble was a failure and she recovered nothing because she refused to fulfill the contract requirements. Greed overcame good sense.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

No Property Damage or Bodily Injury No Duty to Defend

Supplying Drugs for Abuse Is Not Covered

Because the state of West Virginia was faced with a serious prescription drug and abuse problem causing great expenses in police and care for the abusers they sued the distributors of the drugs abused. In The Travelers Property Casualty Company Of America, St. Paul Fire And Marine Insurance Company, Federal Insurance Company And Great Northern Insurance Company v. Anda, Inc. and Watson Pharmaceuticals, Inc. v. Gemini Insurance Company, United States Court of Appeals, Eleventh Circuit. No. 15-11510 (08/26/2016)

The insurers for the distributors raised an insurance coverage dispute arising out of a state court action seeking to hold Appellants liable for damages in connection with widespread prescription drug abuse in West Virginia. The district court held that the insurers had no duty to defend in the underlying action and granted summary judgment for the insurers.

FACTS

Defendants-Counter Plaintiffs-Appellants Anda, Inc. and Watson Pharmaceuticals, Inc. (collectively, “Anda”) distribute pharmaceuticals. The State of West Virginia sued Anda and other pharmaceutical companies in West Virginia state court setting forth various causes of action related to the epidemic of prescription drug abuse and its costs to the State of West Virginia.

Anda purchased a number of general commercial liability insurance policies from Plaintiffs-Counter Defendants-Appellees The Travelers Property Casualty Company of America (“Travelers”), St. Paul Fire and Marine Insurance Company (“St. Paul”), Federal Insurance Company (“Federal”), and Great Northern Insurance Company (“Northern”) and Counter Defendant-Appellee Gemini Insurance Company (“Gemini”) (collectively, the “Insurers”) between 2001 and 2013. Anda sought defense and indemnification in the West Virginia Action. The Insurers initiated this suit against Anda, seeking a declaratory judgment that they have no duty to defend or indemnify Anda in the underlying action in West Virginia state court.

Anda is a wholesale pharmaceutical distributor. The State of West Virginia has sued Anda and other pharmaceutical companies in West Virginia state court, requesting an injunction against their distribution practices and seeking compensation for expenses the state alleges it has incurred as a result of the proliferation of “Pill Mills” and the attendant “opioid epidemic.” State of West Virginia ex rel. Darrell V. McGraw Jr. v. Amerisourcebergen Drug Corp., et al., No. 12-C-141 (W. Va. Cir. Ct., Boone Cty.) (the “West Virginia Action”). The State alleges that, as a result of Anda’s conduct, it has been forced to dedicate significant resources to law enforcement and police operations, hospitals and emergency rooms, and jails and prisons. The costs imposed by the opioid epidemic have diverted funds that the State would have used for other purposes.

The Amended Complaint in the West Virginia Action alleges that Anda and other pharmaceutical distributors are “an integral part of the Pill Mill process.” The State alleges that pharmaceutical distributors, including Anda, knowingly or negligently flood the West Virginia market with commonly-abused drugs. The State claims that it has suffered myriad harms as a result of the over-supply of Anda’s products in the market, the proliferation of Pill Mills, and the attendant opioid epidemic. Those harms include increased crime, congested hospitals and emergency rooms, exhausted law enforcement resources, overcrowded jails and prisons, and court dockets over-crowded with prescription drug-related cases and crimes committed by addicts. The State alleges that Anda’s distribution of its products not only damages the health and safety of West Virginians, but also imposes massive economic damages on the State itself.

THE POLICIES

The Insurers issued general commercial liability insurance policies to Anda between 2001 and 2013, with Traveler’s and St. Paul’s policies issuing between 2006 and 2013. Under these policies, the Insurers have the duty to defend and indemnify Anda in lawsuits seeking damages for or because of bodily injury. These policies exclude, however, coverage for damages included within products-completed provisions. The Travelers policy excludes coverage for injuries “arising out of” “[a]ny goods or products … manufactured, sold, handled, distributed[,] or disposed of by … You” (the “Travelers Products Exclusion”). Similarly, the St. Paul policy states: “We won’t cover bodily injury or property damage that results from your products or completed work” (the “St. Paul Products Exclusion”).

The Insurers initiated the suit below, seeking a declaration that they have no duty to defend or indemnify Anda in the West Virginia Action.  The district court concluded that because the State did not assert claims “for bodily injury” or “because of bodily injury,” the Travelers and St. Paul policies did not afford coverage. The district court found that the Travelers and St. Paul Products Exclusions were not triggered because no “bodily injury” was alleged. Anda moved for reconsideration of the court’s grant of summary judgment for the Insurers. The district court denied that motion and this appeal followed.

DISCUSSION

The district court concluded that the St. Paul and Travelers policies did not afford coverage because the State’s Amended Complaint in the West Virginia Action asserted claims “for” and “because of” economic harm to the State rather than “bodily injury.” The St. Paul and Travelers policies do not afford coverage because of the policies’ Products Exclusions. The St. Paul and Travelers policies contain a “Products and Completed Work Exclusion” and a “Products Exclusion,” respectively, that preclude coverage. Accordingly, St. Paul and Travelers have no duty to defend or indemnify.

The Travelers and St. Paul policies are general commercial liability policies that specifically exclude coverage for products liability. The Travelers Products Exclusion omits coverage for bodily injury “arising out of” Anda’s products while the St. Paul Products Exclusion eliminates coverage for damage that “results from” Anda’s products.

“Arising out of” are words of much broader significance than “caused by.” They are ordinarily understood to mean “originating from,” “having its origin in,” “growing out of” or “flowing from” or in short, “incident to, or having a connection with.”

The injuries alleged by the State in the West Virginia Action have, at the very minimum, a “connection with” Anda’s products. In that action, the State seeks to enjoin the way Anda distributes its products. It also seeks monetary damages arising from the injuries—whether they be “bodily” or not—caused by these products.

In essence the State claims that Anda and other pharmaceutical distributors have so flooded the market with their products that West Virginia suffers from an opioid epidemic. As a result of that epidemic, the State has suffered monetary losses that it now seeks to recover.

The causal connection between Anda’s products and the injuries alleged by the State is sufficient to meet the low bar for application of the “arising out of” language. The Eleventh Circuit concluded that all the underlying claims, if covered at all, are embraced within the Travelers and St. Paul Products Exclusions, which render any coverage inapplicable.

The “arising out of” language in the Anda policy exclusions has the same meaning as that in a previous Eleventh Circuit decision. The exclusionary language broadly imposes a low bar for causation. Accordingly, the commercial liability policies issued by Travelers and St. Paul exclude coverage for the claims raised against Anda in the West Virginia Action.

ZALMA OPINION

Liability insurance is designed to protect its insureds against torts it might accidentally commit that causes property damage or bodily injury. Insurers have the right to exclude certain liabilities faced by the insured. When it excludes damages arising out of its products that exclusion must be honored.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Stipulated Judgment Must Be Supported by Evidence

It Isn’t Always Wise to Take A Judgment Subject to a Covenant Not to Execute

Some litigants and lawyers believe they hit the jackpot when an insurer wrongfully refuses to defend opening up its policy limits and conditions to infinity. They think they can pick any number that appears to be reasonable and will be able to collect as bad faith. That is not the case. The judgment must be reasonable and based on evidence.

In Tidyman’s Management Services Inc., et al., v. National Union Fire Insurance Company Of Pittsburgh, PA et al,, Supreme Court of Montana, 2016 WL 4440634, No. DA 15–0583. (Aug. 23, 2016) the Supreme Court of Montana didn’t like what the trial court did in setting the damages and sent the case back twice to get evidence to support the claimed damages.

FACTUAL AND PROCEDURAL BACKGROUND

In Tidyman’s Management Services v. Davis (Tidyman’s I ), 2014 MT 205, 376 Mont. 80, 330 P.3d 1139, the Supreme Court we affirmed the District Court’s finding that National Union Fire Insurance (NUFI) breached its duty to defend its insureds, Davis and Maxwell, but reversed the District Court’s approval of a stipulated settlement between Davis and Maxwell and Plaintiffs for $29 million. The court remanded for a hearing on the reasonableness of the settlement amount. The District Court conducted a reasonableness hearing, and again approved the stipulated settlement.

This is the second time this case has come before the Supreme Court of Montana.  In Tidyman’s I, the court affirmed the District Court’s finding that NUFI unjustifiably refused to defend its insured, Davis and Maxwell, and was therefore estopped from denying coverage. However, the District Court’s entry of summary judgment to the extent it approved a stipulated judgment of $29 million was reversed and remanded for the District Court to hold a hearing to assess the reasonableness of the settlement amount.

DISCUSSION

 Did the District Court err in using a “reliable evidence” test to assess the reasonableness of the stipulated judgment?

Among the questions raised by NUFI were whether the $29 million figure was unreasonable “because it was based only on unsworn opinions of experts whom plaintiffs retained and paid and who have never been cross-examined by [NUFI’s] counsel.”

Over the course of a three day hearing, the District Court received evidence and testimony from Plaintiffs and NUFI. Although the District Court allowed testimony from NUFI’s expert that the stipulated settlement was not reasonable because it exceeded his assessment of the value of the company prior to the insurer’s breach of the duty to defend, the District Court found that this perspective “fail[ed] to account for the measure of damages for the breach of the duty to defend.”

However, as NUFI argues on appeal, by failing to consider the merits and value of the underlying case in assessing the reasonableness of the settlement amount, the District Court failed to comply with the Supreme Court’s instructions on remand. Instead of considering the challenges to reasonableness raised by NUFI and highlighted in our opinion in Tidyman’s I, the District Court based its conclusion that the settlement was reasonable on its assessment that “[t]he materials relied up[on] by Plaintiffs and Maxwell and Davis possess sufficient indicia of reliability.” The District Court did not actually assess the reasonableness of the settlement in this case, but rather sought to determine whether the $29 million amount had some grounding in reliable evidence from the perspective of Davis and Maxwell.

All parties agree that a reasonableness hearing should be conducted objectively from the point of view of a prudent person in the position of the insured defendant. But as Plaintiffs and amicus curiae Montana Trial Lawyers Association point out, in a case in which there has been a breach of the duty to defend, such a defendant is no longer an insured defendant and is faced with personal responsibility for a potentially very large sum. It should not be the court’s objective to further punish the insurer for its failure to defend its insured. The insurer has already suffered the consequences of its failure to defend by having lost the right to invoke insurance contract defenses as well as the right to assert its policy limits.

The test as to whether the settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff’s claim. This involves a consideration of the facts bearing on the liability and damage aspects of plaintiff’s claim, as well as the risks of going to trial. In cases such as the one before us, a “reasonably prudent person in the position of the defendant” does not have the benefit of insurance coverage. Therefore, in assessing the reasonableness of a stipulated settlement when there has been a breach of the insurer’s duty to defend, a district court should objectively consider both the merits of the underlying case and the value to a prudent uninsured defendant of confessing judgment in exchange for a covenant not to execute.

The questions NUFI raised about the valuation of the corporation are relevant to an assessment of the reasonableness of the stipulated settlement, so the District Court should allow additional discovery on and consider such evidence during the second reasonableness hearing.

Because the Supreme Court previously found that NUFI was estopped from denying coverage for unjustifiably refusing to defend its insureds, any measure of damages for breach of the duty to defend has no place in an ensuing reasonableness analysis.

The Supreme Court, therefore,  directed the district court to determine value based both on an objective determination of where the stipulated settlement is within a reasonable range of what an arms’-length negotiation would have produced and the value to a prudent uninsured defendant of confessing judgment. The court erred as a matter of law in subjectively considering valuation solely from the perspective of the uninsured defendants.

By definition, a stipulated or consent judgment is not a court’s or a jury’s calculation of actual damages to which individual plaintiffs are entitled, but rather the amount for which two parties have freely agreed to settle a claim. A judgment by consent or stipulation of the parties is construed as a contract between them embodying the terms of the judgment. It operates to end all controversy between the parties, within the scope of the judgment.  Indeed, this reality is one of the reasons courts conduct a reasonableness hearing in the case of a stipulated settlement: in these types of negotiations there is no assurance that the settlement represents a proper calculation of actual damages.

The $29 million judgment in this case is a stipulated judgment, freely agreed to by Davis and Maxwell and Plaintiffs, and approved by the District Court. While the stipulated judgment is subject to an overall reasonableness assessment, it was not the result of a precise damages calculation performed by the District Court, so it does not account for deductions, credits, or offsets claimed by the insurer but not stipulated to by both parties.  

ZALMA OPINION

 I have, often, in this space argued that taking a stipulated judgment is a gamble that there might not be coverage. Here, the Montana Supreme Court raises a different danger – an inability to prove that the stipulated judgment was fair, reasonable and the type of damage that a person without insurance would have accepted in return for a covenant not to execute. When, as here the stipulation is to damages more than the value of the company defendant evidence more than the un-cross-examined testimony of a few experts. Two appeals to the Supreme Court and still no enforceable judgment.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Evidence Required to Obtain Emotional Distress Damages

Bad Faith Conduct Not Enough to Support Emotional Distress Damages

Insurance companies, like every other business, err. When they breach the implied covenant of good faith and fair dealing, they must pay damages to the plaintiff that are proven. Juries concluding that an insurer acted in bad faith tend to wish to punish the insurer even when they don’t hear evidence of actual damages. Seeking damages without proof to tug at the concerns of the jury can be problematic and be expensive.

In Juan Martinez v. Mercury Insurance Company, Court of Appeal, California, 2016 WL 4446576, B261003 (8/24/2016) the California Court of Appeal dealt with an insurance bad faith case arising out of an insurance claim on medical expenses caused by an automobile accident. Mercury Insurance Company (Mercury) appealed from a jury verdict and judgment in favor of its insured Juan Martinez (Martinez). Mercury challenges the sufficiency of the evidence to support the jury’s emotional distress damages award of $600,000 to Martinez.

BACKGROUND

In 2004 or 2005, Martinez obtained an automobile insurance policy issued by Mercury that included “no excess, no reimbursement” medical payment coverage with a policy limit of $5,000. Under this coverage, Mercury had an obligation to provide payment of Martinez’s medical bills incurred as a result of injuries sustained in an automobile collision, without regard to fault, up to the $5,000 policy limit. Even if Martinez recovered damages from a third-party responsible for the automobile accident, he had no obligation to provide reimbursement to Mercury of any such payments received from third-party sources.

Martinez’s Automobile Accident And Subsequent Injuries

On March 17, 2011, as Martinez drove his 1994 Honda Accord with four passengers (his two children and his girlfriend’s two children) near Downey in Los Angeles County, a semi-trailer truck driven by a third party collided with the left front and side of Martinez’s vehicle. Either later that evening or the following day, Martinez reported the collision to Mercury and thereafter began experiencing pain in his lower back.

Martinez’s Efforts To Obtain Insurance Coverage

Shortly after the accident, the Mercury claims adjuster handling Martinez’s file, Cynthia Bouzos (Bouzos), telephoned Martinez and incorrectly told him that he had only liability coverage and therefore he would need to obtain funds from the truck driver’s insurer to cover any medical care expenses. In fact, Martinez had purchased primary medical payment coverage obligating Mercury to provide payment for Martinez’s medical expenses up to $5,000.

Martinez next retained legal counsel, Jubin Sharifi (Sharifi), in order to assist him in obtaining coverage for medical expenses stemming from the collision. Sharifi gave Martinez a list of healthcare providers who would provide medical services to him on a lien basis. A medical lien required that a healthcare provider receive payment for its services once a patient receives a settlement from a third-party tortfeasor and that, in exchange, the patient has a contractual obligation to satisfy the medical bills first before disbursing any part of the settlement proceeds.

Martinez began receiving treatment from Mednet, a clinic identified on the list provided by Sharifi: between approximately April 20 and August 10, 2011, Martinez received therapy about twice a week from a chiropractor, Dr. Tien Bao, an orthopedist, Dr. Edward Stokes, and a physical therapist. Based on a referral from Dr. Stokes or Dr. Bao, Martinez also underwent magnetic resonance imaging (MRI) scans at Advanced Professional Imaging, under the care of radiologist Dr. Sim Hoffman.

On April 11, 2011, Bouzos sent a letter to Sharifi that again misrepresented Martinez’s medical payment coverage policy issued by Mercury. The letter incorrectly asserted that Martinez had “excess with reimbursement” coverage requiring Mercury to provide payment of Martinez’s medical expenses only if Martinez was unable to obtain payment from a third party and, further, requiring Martinez to reimburse Mercury if he obtained any settlement proceeds from a third-party tortfeasor.

Sharifi sent a letter to Mercury notifying the insurance company that Martinez’s medical bills totaled $8,512.19 and requesting that Mercury “place these bills in line for payment under the medical payment provision of your insured’s automobile policy.” Accompanying the letter, Sharifi enclosed copies of the medical bills and medical reports from Mednet and Advanced Professional Imaging.

After reviewing Martinez’s file, the medical review unit determined that while the treatment matched the diagnosed injury, the treatment should have been priced at $5,532.73 rather than $8,512.19.

In the meantime, in either late September or early October 2011, Sharifi successfully negotiated a settlement with the truck driver’s insurer. On or around October 4, 2011, after negotiating a reduction in Martinez’s medical bills from $8,512.19 to approximately $4,323, Sharifi paid Mednet and Advanced Professional Imaging out of the settlement proceeds.

On or around October 13, 2011, because of suspected fraudulent activity related to the Advanced Professional Imaging radiologist Dr. Hoffman, Bouzos transferred Martinez’s file to Mercury’s special investigation unit and specifically Mercury special investigator Anna Belk (Belk) who reported to the state a report describing the “suspected fraudulent claim activity” as “radiologist recently arrested, investigation ongoing.”

On May 10, 2012, Belk conducted a recorded interview of Martinez at Sharifi’s office. During the interview, Martinez described the March 17, 2011 collision, his subsequent injuries, the treatment he received from Mednet, and the MRI service rendered by Advanced Professional Imaging. Mercury “close[d] the claim without payment” for the following reasons: “SIU [special investigation unit] investigation revealed discrepancies in medical billing. Medical providers uncooperative. Appears providers are not interested in pursuing claim.”

Martinez’s Lawsuit And Mercury’s Denial Of Martinez’s Claim

The trial court conducted a jury trial beginning June 9, 2014. Relevant to the issue on appeal concerning the alleged emotional distress

On June 17, 2014, the jury rendered a general verdict (11 to 1) in Martinez’s favor and awarded him $4,323 for “[c]ontractual damages” (medical payment insurance coverage), $56,360 for attorney fees, and $600,000 for “[m]ental suffering/anxiety/emotional distress damages.”

DISCUSSION

Because the covenant of good faith and fair dealing is a contract term, the remedy for such a breach is generally only contract remedies. In the insurance policy setting, however, an insured may also recover tort remedies for a breach of the covenant including emotional distress damages resulting from the insurer’s bad faith conduct.

As a bad faith action seeks remedy for interference with property rights, not personal injury, damages for emotional distress are compensable as incidental damages flowing from the initial breach, not as a separate cause of action.  Thus, unlike the independent tort of intentional infliction of emotional distress, the requirements of outrageous conduct by the insurer and severe emotional distress by the insured are inapplicable.

Emotional distress is a form of actual damage and must be proved as any other actual damage. While upholding an award does not require proof of bankruptcy, physical illness or injury, nor courtroom demonstrations of the destruction of personal peace of mind or well-being, there must be legally sufficient evidence that the plaintiff suffered emotional distress.

No Substantial Evidence To Support The Emotional Distress Damages Award

The jury awarded Martinez $600,000 for emotional distress caused by Mercury’s bad faith conduct. At trial, Martinez testified only that he could “have used an extra $5,000.” Mercury properly contended that evidence was insufficient to support an award of damages for emotional distress.

The dearth of evidence showing Martinez’s emotional distress there is a complete absence of evidence that Martinez suffered any emotional distress. On appeal, Martinez argues that he suffered anger, frustration, humiliation, and embarrassment but he fails to cite any specific testimony or documentary evidence presented to the jury at trial. The law is clear that Martinez has the burden to prove his damages with reasonable certainty and that evidence of defendant’s bad faith does not lessen this burden.

Neither Martinez nor any other witness provided testimony that Martinez was nervous, upset, or anxious. Martinez, therefore, failed to present sufficient evidence to support a finding of emotional distress.

The judgment as to the award of $600,000 in damages for emotional distress was reversed. In all other respects the judgment is affirmed. The court also awarded costs on appeal to Mercury Insurance Company.

ZALMA OPINION

The bad faith verdict was obvious. The insurer lied to the insured and counsel about the terms and conditions of the policy and should have simply paid the limit after its own medical evaluation showed damages in excess of the limit. Then they refused to pay because one of the doctors had been arrested and would not talk to the SIU investigator. Therefore, the insured received what was owed and what the doctors accepted and attorneys fees. Since there was no evidence of emotional distress he had to pay Mercury’s costs and received none of the $600,000 awarded.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

An Insurance Company is the Victim of Insurance Fraud

Payment of Restitution

When a person is convicted of a property crime, like insurance fraud, restitution is ordered to put the victim of the crime back in the position he or she was in before the crime.

Restitution is only ordered after a criminal conviction and must, by definition, be for an intentional act that is either uninsurable, as against public policy, or by specific exclusions in a policy.  Insurers (and their insureds) who incur losses as a result of criminal activities should make it a practice to appear at the sentencing hearing with evidence of the amounts paid or incurred as part of the investigation of the claim and demand an order of restitution. Since such orders are usually made as a condition of probation, recovery can be easier than collecting a judgment, since failure to pay will cause the defendant to be sent directly to jail.

A Kentucky statute, for example, allows  restitution for insurance-fraud related crimes. In relevant part, it provides a person convicted of certain insurance fraud crimes: “[M]ay be ordered to make restitution to any victim who suffered a monetary loss due to any actions by that person which resulted in the adjudication of guilt, and to the division for the cost of any investigation. The amount of restitution shall equal the monetary value of the actual loss or twice the amount of gain received as a result of the violation, whichever is greater. [Killion v. Com, Court of Appeals of Kentucky, 2014 WL 3021316 (2014)]

Duty to Defend After Criminal Proceedings

Usually, a criminal proceeding is an action by the government against an individual for the commission of a crime prohibited by statute. No damages are sought. No one seeks indemnity for bodily injury or property damage.

Generally, the higher standard of proof and numerous safeguards in criminal proceedings are given as rationale for the rule allowing judgments in criminal proceedings to have a preclusive effect in subsequent civil actions. Ohio Casualty Co. v. Clark, 583 N.W. 2d 377 (N.D. 08/18/1998).

If, therefore, an insured is convicted in a criminal proceeding he or she may not seek defense or indemnity from an insurer to a civil action based on the same set of facts.  Attorney Lynn Boyd Stites’s conviction estopped him from defending the civil action brought by Fireman’s Fund and others for money taken by him in a fraudulent scheme.

Similarly, in Mead v. Farmers Union Mutual Insurance Company, 2000 N.D. 139 (N.D. 07/07/2000), the insured, Mead, shot and killed Officer Keith Braddock. The North Dakota court found there was no duty to defend when Mead was convicted of murder, felonious restraint, and terrorizing:

Because Robert Mead’s policy with Farmers Union contained an exclusion of liability for intentional acts and because the issue of whether Robert Mead acted intentionally when he shot and killed Keith Braddock is res judicata, the district court did not err in ruling Farmers Union had no duty to defend Robert Mead in the Braddock suit.

In Giddings v. Industrial Indemnity Co., 112 Cal. App. 3d 213, 219-220, 169 Cal. Rptr. 278 (1980) the court held:

Insurance Code section 533 specifically provides, “An insurer is not liable for a loss caused by the willful act of the insured.” But, Pahl argues, the insurance company’s duty to defend is much broader than its duty to indemnify.Gray v. Zurich Insurance Co., 65 Cal. 2d 263, 275, 54 Cal. Rptr. 104, 419 P. 2d 168 (1966). In Gray the court held an insurer had a duty to defend its insured in a personal injury action based on allegations of an intentional tort even though the applicable policy excluded injury intentionally caused. Part of the rationale of that decision was that the suit involved potential damages based on  nonintentional conduct which was within the coverage of the policy. As long as the potentiality of coverage exists, the duty to defend also exists. But where there is no possibility of coverage, there is no duty to defend. This is such a case. Pahl’s homeowner’s policy does not cover any liability which might arise from the alleged criminal action. (Emphasis added.)An insured’s criminal conviction for involuntary manslaughter estopped him from contending, in homeowner’s insurer’s declaratory judgment action, that the injury he caused to the victim was not “reasonably expected” to result from his criminal act within the meaning of a coverage exclusion, thus relieving the insurer of any duty to defend or indemnify in wrongful death action brought against the insured by the victim’s estate. [Allstate v. Hieber, 2014 IL. App (1st) 132557, 24 N.E.3d 139, 388 Ill.Dec. 231 (2014)]

INTENTIONAL ACT EXCLUSION

The basic CGL policy excludes coverage for intentional acts but has an exception to the exclusion for intentional acts done to protect persons or property. The exclusion in the policy states:

 “Bodily injury” or “property damage” expected or intended from the standpoint of the “insured.” This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.

In American Family Mutual Insurance Co. v. Savickas, 304 Ill. App. 3d 614, 711 N.E. 2d 1, 238 Ill. Dec. 188 (Ill. App. 10/20/1998), the Court of Appeal found that an allegation of self-defense:

    … creates a duty to defend because the fact that Savickas negligently assessed the need for self-defense does not entail a finding that he expected his acts to harm Thomas. In West American Insurance Co. v. Vago, 197 Ill. App. 3d 131, 137, 553 N.E. 2d 1181 (1990), and State Farm Fire & Casualty Co. v. Hatherley, 250 Ill. App. 3d 333, 337-38, 622 N.E. 2d 139 (1993), the court emphasized that the complaints alleged facts that proved the insurance coverage did not apply. Here, the complaint lacks such allegations. From the face of the complaint we can draw no conclusions about Savickas’ expectations. Therefore, American Family has a duty to pay for Savickas’ defense of the lawsuit. See Cowan v. Insurance Co. of North America, 22 Ill. App. 3d 883, 896-97, 318 N.E. 2d 315 (1974).

In Virginia, the court held there was no duty to defend:

        In sum, we hold that Buckner should have expected that punching Weston in the face would cause injury and therefore, the “intended or expected” exclusion precludes coverage of the incident under the Erie insurance policy. Since an insurer is relieved of the duty to defend “when it clearly appears from the initial pleading the insurer would not be liable under the policy contract for any judgment based upon the allegations.” Reisen v. Aetna Life and Cas. Co., 225 Va. 327, 302 S.E. 2d 529, 531 (Va. 1983), and Erie Insurance Group v. Buckner, 489 S.E. 2d 901, 127 N.C. App. 405 (N.C. App. 09/16/1997).

Also, note the holding of the West Virginia Court of Appeal that stated:

        … coverage under an intentional injury exclusion clause in a homeowners insurance policy may be denied when one who commits a criminal act has a minimal awareness of the nature of his act. Municipal Mutual v. Magnus, 443 S.E. 2d 455, 191 W.Va. 113 (1940).

In addition, consider the state-specific decisions in the following cases:

  • In Everglades Marina, Inc. v. American Eastern Dev. Corp., 374 So. 2d 517 (Fla. 1979), Florida public policy permitted enforcement of an insurance contract requiring an insurer to compensate boat owners for damage to boats stored in a marina, which was intentionally burned by the insured;
  • In American Home Assurance Co. v. Fish, 122 N.H. 711, 451 A. 2d 358, 360 (N.H. 1982), New Hampshire “public policy sanctions rather than opposes insuring for liability arising directly against the insured from intentional torts such as false arrest, slander or [violations leading to] § 1983 actions”; and
  • In Colson v. Lloyd’s of London, 435 S.W. 2d 42, 47 (Mo. App. 1968), the decision held that it is not “against [Missouri] public policy to permit an association of law enforcement officers to insure themselves against alleged willful and intentional acts.”

Unambiguous contract language must be interpreted according to its plain meaning. Any ambiguity in an insurance contract is construed strictly against the insurer and liberally in favor of the insured. The court found that neither the assault nor Bryant’s motive for it were related to the conduct of Prime Cut’s business or within the scope of his employment with Prime Cut. Bryant admitted he took it upon himself to try to “set Latanowich straight.” The court concluded that an ordinary person would not think that the policy’s language would cover his assault of another motorist, especially where the employee was off the clock and returning from a personal camping trip, and where the employee exited his vehicle in the middle of the road to “set [another driver] straight,” notwithstanding that the employee’s independently owned and maintained vehicle was marked with the name of his employer and that he was on his way to the employer’s premises.

The basic CGL policy excludes coverage for intentional acts but has an exception to the exclusion for intentional acts done to protect persons or property. The exclusion in the policy states:

“Bodily injury” or “property damage” expected or intended from the standpoint of the “insured.” This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.

In American Family Mutual Insurance Co. v. Savickas, 304 Ill. App. 3d 614, 711 N.E. 2d 1, 238 Ill. Dec. 188 (Ill. App. 10/20/1998), the Court of Appeal found that an allegation of self-defense:

… creates a duty to defend because the fact that Savickas negligently assessed the need for self-defense does not entail a finding that he expected his acts to harm Thomas. In West American Insurance Co. v. Vago, 197 Ill. App. 3d 131, 137, 553 N.E. 2d 1181 (1990), and State Farm Fire & Casualty Co. v. Hatherley, 250 Ill. App. 3d 333, 337-38, 622 N.E. 2d 139 (1993), the court emphasized that the complaints alleged facts that proved the insurance coverage did not apply. Here, the complaint lacks such allegations. From the face of the complaint we can draw no conclusions about Savickas’ expectations. Therefore, American Family has a duty to pay for Savickas’ defense of the lawsuit. See Cowan v. Insurance Co. of North America, 22 Ill. App. 3d 883, 896-97, 318 N.E. 2d 315 (1974).

In Virginia, the court held there was no duty to defend:

In sum, we hold that Buckner should have expected that punching Weston in the face would cause injury and therefore, the “intended or expected” exclusion precludes coverage of the incident under the Erie insurance policy. Since an insurer is relieved of the duty to defend “when it clearly appears from the initial pleading the insurer would not be liable under the policy contract for any judgment based upon the allegations.” Reisen v. Aetna Life and Cas. Co., 225 Va. 327, 302 S.E. 2d 529, 531 (Va. 1983), and Erie Insurance Group v. Buckner, 489 S.E. 2d 901, 127 N.C. App. 405 (N.C. App. 09/16/1997).

Also, note the holding of the West Virginia Court of Appeal that stated:

… coverage under an intentional injury exclusion clause in a homeowners insurance policy may be denied when one who commits a criminal act has a minimal awareness of the nature of his act. Municipal Mutual v. Magnus, 443 S.E. 2d 455, 191 W.Va. 113 (1940).

In addition, consider the state-specific decisions in the following cases:

  • In Everglades Marina, Inc. v. American Eastern Dev. Corp., 374 So. 2d 517 (Fla. 1979), Florida public policy permitted enforcement of an insurance contract requiring an insurer to compensate boat owners for damage to boats stored in a marina, which was intentionally burned by the insured;
  • In American Home Assurance Co. v. Fish, 122 N.H. 711, 451 A. 2d 358, 360 (N.H. 1982), New Hampshire “public policy sanctions rather than opposes insuring for liability arising directly against the insured from intentional torts such as false arrest, slander or [violations leading to] § 1983 actions”; and
  • In Colson v. Lloyd’s of London, 435 S.W. 2d 42, 47 (Mo. App. 1968), the decision held that it is not “against [Missouri] public policy to permit an association of law enforcement officers to insure themselves against alleged willful and intentional acts.”

Unambiguous contract language must be interpreted according to its plain meaning. Any ambiguity in an insurance contract is construed strictly against the insurer and liberally in favor of the insured. The court found that neither the assault nor Bryant’s motive for it were related to the conduct of Prime Cut’s business or within the scope of his employment with Prime Cut. Bryant admitted he took it upon himself to try to “set Latanowich straight.” The court concluded that an ordinary person would not think that the policy’s language would cover his assault of another motorist, especially where the employee was off the clock and returning from a personal camping trip, and where the employee exited his vehicle in the middle of the road to “set [another driver] straight,” notwithstanding that the employee’s independently owned and maintained vehicle was marked with the name of his employer and that he was on his way to the employer’s premises.

Pursuant to the unambiguous language of the policy, the Supreme Judicial Court ruled that the trial court correctly concluded that Bryant’s assault of Latanowich was not covered by the policy, and properly entered summary judgment.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Coverage First then Try Bad Faith

Mandamus Granted to Sever Bad Faith from Contract Action

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

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

BACKGROUND

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

PREREQUISITES TO MANDAMUS

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

SEVERANCE AND ABATEMENT

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

Standard of Review

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

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

Governing Law

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

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

ANALYSIS

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

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

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

DISPOSITION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Coverage First then Try Bad Faith

Notice-Prejudice Rule Now the Law In Wyoming

Court Rewrites a Policy To Adopt Notice-Prejudice Rule

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

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

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

FACTS

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

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

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

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

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

DISCUSSION

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

The Traditional Rule and the Notice-Prejudice Rule

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

 

Posted in Zalma on Insurance | 2 Comments

Two Excess Policies are Repugnant

Even True Excess Policies Must Share Loss Pro-Rata

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

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

BACKGROUND

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

Retained Limit Clauses

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

 

Posted in Zalma on Insurance | 1 Comment

Child Molestation is Always an Intentional Act

Intoxication Does Not Eliminate Intent to Molest a Child 

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

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

FACTS

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

 

 

Posted in Zalma on Insurance | Comments Off on Child Molestation is Always an Intentional Act

Cancellation for Failure to Respond to Underwriting Proper

Dangerous to Ignore Requests from Insurer

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

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

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

FACTS

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

This conclusion was supported by specific findings of fact.

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Cancellation for Failure to Respond to Underwriting Proper

You Only Get What You Pay For

Clear and Unambiguous Policy Term Must Be Applied

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

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

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

BACKGROUND

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

ISSUE

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on You Only Get What You Pay For

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

Excellence in Claims Handling

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

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

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

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

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

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

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

Insurance claims professionals are people who:

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

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

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Policy Lapse Not Cancellation

Failure to Timely Pay Premium Causes Policy to Expire

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

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

 Background:

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Policy Lapse Not Cancellation

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

Zalma’s Insurance Fraud Letter

August 15, 2016, Volume 2, No. 16  

At Least, This Time, Fraud Doesn’t Pay

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

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

The current issue of ZIFL reports on:

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

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

Zalma Insurance Consultants

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

Visit the Zalma Insurance Claims Library

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

THE “ZALMA ON INSURANCE” BLOG

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

 Check in every day for a case summary including:

Zalma’s Insurance 101

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

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

 

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

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

Regards,

Barry Zalma
Zalma Insurance Consultants

 

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

At Least, This Time, Fraud Doesn’t Pay

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

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

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

BACKGROUND

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

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

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

The Scope of the Trial in the Present Case

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

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

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

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

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

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

The Lago Agrio Judgment Drew Heavily on the Cabrera Report

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

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

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

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

The Lago Agrio Judgment Was Written by the LAPs

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

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

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

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

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

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

The LAPs Bribed Zambrano To Sign the Judgment They Wrote

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

The Final Judgment in the Present Action

 

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

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

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

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

DISCUSSION

The RICO-Based Rulings Against Donziger

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

RICO Injury and Causation

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

The Availability of Equitable Relief Under RICO

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

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

The Availability of Equitable Relief Under New York Common Law

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

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

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

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

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

Responsibility of the LAPs for the Misconduct of Their Attorneys

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

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

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

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

Appropriateness of the Equitable Relief Granted

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

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Flood Insurance Procurement Not a Federal Issue

National Flood Doesn’t Preempt State Court Action Against Broker

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

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

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

A Party Must Act Fairly When Seeking Equity

The Anti-Subrogation Rule And Equity

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

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

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

BACKGROUND

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

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

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

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

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

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

ANALYSIS

The Anti-Subrogation Rule

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

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

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

Application of the Rule

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

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

Whether an Exclusion Applies

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

Equitable Considerations

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on A Party Must Act Fairly When Seeking Equity

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

Excess Insurer Can Recover From Primary Excess of Limits from Primary

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

INTRODUCTION

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

FACTUAL BACKGROUND

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on Primary Insurer’s Failure to Settle Within Limits Allows Excess Insurer to Sue

When a Roof is not a Roof

Component Parts Are Not a Roof

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

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

FACTS

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

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

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

THE SUIT

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

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

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

ANALYSIS

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

Whether There Was a Roof

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

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

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

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

Whether the Roof Was Temporary

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Bad Injuries Cause Interesting Litigation

What’s My Limit?

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

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

BACKGROUND

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

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

THE POLICIES

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

THE ALIGNMENT OF THE PARTIES

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

ANALYSIS

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

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

HHS May Not Amend a Law

Insurers and Those Insured May Purchase Whatever Coverage they Want

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

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

ISSUE

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

THE PHSA

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

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

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

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

ANALYSIS

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

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

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

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

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

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

 ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on HHS May Not Amend a Law

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

The Examination Under Oath

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on The Role of the Insurer’s Lawyer in a Fraud Investigation

No Breach of Contract – No Bad Faith

Limit of Liability is Cost Actually Spent to Replace Destroyed House

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

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

FACTS

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

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

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

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

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

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

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

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

TRIAL COURT DECISION

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

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

ANALYSIS

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

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

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

Safeco is entitled to attorney’s fees on appeal.

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

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