Equitable Mootness

Sit On Rights & You Lose Insurance Benefits

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

FACTS

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

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Posted in Zalma on Insurance | Leave a comment

Insurers Must Write Their Policies Carefully

All Risks Covers Everything Not Clearly and Unambiguously Excluded

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

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

“All Risk” Insurance Policies

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

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

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

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

First Party Physical Damage Coverage Disputes

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Good Faith Requires Insured to Keep Promises

Breach of Condition Eliminates Coverage for Loss

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

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

INTRODUCTION

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

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

FACTUAL BACKGROUND

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When a Condition Precedent Is Not a Condition

Notice Prejudice Rule Defeats Clear & Unambiguous Condition

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

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

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

BACKGROUND

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

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

 

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

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

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

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

ANALYSIS

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

The Policy’s Meaning

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

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

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

Colorado’s “Notice-Prejudice” Rule

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

 

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

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

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

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

FACTS

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

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

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

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

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

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

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

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

DISCUSSION AND DECISION

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

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

ADMISSION OF EVIDENCE

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

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

SUFFICIENCY OF THE EVIDENCE

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

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

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

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

INSURANCE FRAUD

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

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

False Alarm Warranty Allows Insurer to Void Coverage

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

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

The current issue of ZIFL reports on:

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

VISIT ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

Learn About Insurance Publications by Barry Zalma

Zalma On Insurance – A Blog

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

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

Zalma’s Insurance 101 

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

 

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

zalma@zalma.com or bzalma@earthlink.net

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

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

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

Regards,

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

 

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Claims Legend Award

Zalma Receives Claims Legend Award

Industry Icon Honored for a Lifetime of Education

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

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

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

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

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

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

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

Selection criteria met by Mr. Zalma included:

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

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

Posted in Zalma on Insurance | 1 Comment

No Fortuity No Coverage

Known Loss Defeats Claim

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

FACTS

Construction Contractors Employer Group (“Construction Contractors”) discovered that an employee had misappropriated certain funds and that another $1 million was missing. It then purchased an employee-theft insurance policy with Federal Insurance Company (“Federal Insurance”). After Federal Insurance executed the policy, Construction Contractors determined that the same employee had misappropriated the missing $1 million.

Federal Insurance denied Construction Contractors’ claim for the $1 million, and Construction Contractors filed suit. The district court granted Federal Insurance’s motion for summary judgment, concluding that any loss caused by one employee is considered a “single loss” under the policy and that Construction Contractors had “discovered” the loss before the execution of the policy.

Associated General Contractors of Northwest Ohio (“Associated General”) is a non-profit corporation and trade organization for commercial construction contractors. In April 2002, Construction Contractors outsourced its daily operations to AlphaCare Services, Inc. (“AlphaCare”), which was owned and managed by William H. Cook, III, Gerald L. Tillman, and John E. Moon (“Moon”). After working together for a number of years Moon informed Construction Contractors’ president Kevin Smith that Construction Contractors did not have enough assets to meet its obligations even though the subscribers had paid Construction Contractors enough money to fulfill their respective obligations. Moon later, in a Perry Mason moment, explained that he had been falsifying Construction Contractors’ financial statements and that the company had substantial unpaid tax liabilities.

Construction Contractors terminated its agreement with AlphaCare. The next day, it hired Peter VanDenBerghe as interim Chief Financial Officer and Treasurer. VanDenBerghe began reviewing Construction Contractors’ accounts.

Because Moon was responsible for remitting and reporting taxes, VanDenBerghe suspected that Moon was the reason for the more than $1 million loss. Focusing his investigation on Moon, in October 2012, VanDenBerghe determined that Moon had committed wire fraud by transferring over $900,000 from Construction Contractors’ account to AlphaCare’s account between May 2009 and June 2012. In November 2012, the investigation further revealed that Moon had charged Construction Contractors for $30,000 worth of health care premiums and health savings account deposits for AlphaCare employees. VanDenBerghe continued his investigation, as approximately $1 million was still unaccounted for.

On or about January 10, 2013, Construction Contractors applied for a crime-coverage insurance policy, which included coverage for employee theft, from Federal Insurance. The application instructed Construction Contractors to list “all employee theft, forgery, computer fraud or other crime losses discovered … in the last five years, itemizing each loss separately.” Construction Contractors disclosed the following: “Since 2002, [Construction Contractors] was in contract with AlphaCare [ ] to provide specific management duties for [it]. Those duties included the direct management of the corporate bookkeeping and payroll processing. Effective July 31, 2012, [Construction Contractors] terminated its contract with [AlphaCare] for breach of contract. [AlphaCare] was contractually responsible for processing our participants’ payroll and remitting payroll taxes to the proper taxing authorities. A subsequent review of [AlphaCare’s] performance has indicated [its] failure to report, reconcile and remit certain payroll taxes. ¶ A subsequent review of [Construction Contractors’] accounting records indicated unauthorized transfers from [Construction Contractors] owned accounts to ACS owned accounts from 2009 to 2012. Further investigation is in process, and the potential for criminal prosecution is being evaluated by our company attorneys.”

Federal Insurance issued the policy to Construction Contractors, extending coverage from March 22, 2013, through July 1, 2013, and insuring up to $1 million in covered losses. Three provisions of the policy are relevant to this case. First, Construction Contractors purchased a “Loss Discovered” option, which excludes “any loss that an Insured is aware of prior to the inception date of [the] Policy.”

Second, under the “Limits of Liability” section, the policy stated the following: “All loss resulting from a single act or any number of acts of the same Employee or Third Party, and all loss whether such act or acts occurred before or during the Policy Period, will be treated as a single loss and the applicable Limit of Liability set forth in Item 2 of the Crime Declarations will apply, subject to Section X, Liability for Prior Losses.”

Third, the section entitled “Liability for Prior Losses” provided that, for the Loss Discovered option, “coverage will be available for loss sustained at any time and Discovered during the Policy Period.” After the execution of the policy, in May 2013, Construction Contractors detected the method by which Moon had misappropriated the missing $1 million. VanDenBerghe determined that from 2002 until May 2009, Moon had committed check theft by having subscribers write checks to Construction Contractors using AlphaCare’s account number.

Based on this discovery, Construction Contractors submitted a claim for the $1 million check theft to Federal Insurance, which denied the claim. Construction Contractors then filed suit in the district court, seeking declaratory and monetary relief for breach of contract. Both parties filed motions for summary judgment. The district court properly granted Federal Insurance’s motion, concluding that any loss caused by one employee was a single loss under the policy and that Construction Contractors was aware of the loss before the policy’s inception date. Construction Contractors appeals.

ANALYSIS

Ohio state law dictates that interpretations of insurance contracts are questions of law for a court to answer. Ohio courts examine the insurance contract as a whole and presume that the intent of the parties is reflected in the language used in the policy.

Discovery of loss does not occur until the insured discovered facts showing that dishonest acts occurred and appreciates the significance of those facts. Mere suspicion of loss is not sufficient to demonstrate that an insured discovered the loss.

Construction Contractors claims that if the policy is narrowly construed as required by Ohio law, the check-theft loss is a covered loss under its policy with Federal Insurance. First, it asserts that the check-theft loss is covered under the “Employee Theft Coverage” provision of the policy because Moon was a covered employee when he misappropriated funds. Second, it argues that the Loss-Discovered provision applies because it did not “discover” the check-theft loss until it determined that

Both the check-theft loss and the wire-fraud loss were the result of a single actor, Moon, and the provision provides that all actions of a single actor constitute a single loss for purposes of the policy. Federal Insurance contends that because Construction Contractors had already discovered the wire fraud before the inception of the policy, it derivatively “discovered” the check theft, as both constitute a single loss.

The “Liability for Prior Losses” section includes the “Loss Discovered” option — i.e., the coverage option for losses “sustained at any time and Discovered during the Policy Period.”  Thus, if a loss arises under the “Loss Discovered” option, the single-loss provision applies.

The undisputed facts demonstrate that Construction Contractors knew of the wire-fraud loss before executing the insurance policy with Federal Insurance. Because Construction Contractors discovered the wire fraud prior to the policy’s execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy.

ZALMA OPINION

In addition to the conclusion that the loss occurred before the policy was acquired and partially disclosed to Federal. To attempt to say that the theft, which they knew had occurred before acquiring the policy, was a different loss because they learned it was committed by using checks, did not change the fact of theft by a single employee. Buying the policy and attempting the claim was the result of a serious misrepresentation or concealment of a material fact.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

General Damages Prohibited

Operating a Motor Vehicle Without Insurance in California Eliminates Right to General Damages

The state of California enacted a statute to encourage people to carry automobile liability insurance by prohibiting a person injured in an automobile accident from recovering general damages (pain, suffering and inconvenience) if the injured person is not insured at the time of the accident. The statute was designed to protect the public from uninsured people.

In Keegan Valentich and Penny Valentich v. United States Of America, United States District Court, E.D. California 2016 WL 3650094, No. 2:14-cv-01902-MCE-CMK (07/08/2016) was faced with a claim by one plaintiff for bodily injury and a second for property damage. The defendant moved for summary judgment because the bodily injury plaintiff was not insured nor was the motor vehicle (a dirt bike) and the owner of the dirt bike answered an interrogatory admitting the the US employee was not negligent.

FACTS

Plaintiffs Keegan Valentich (“Keegan”) and Penny Valentich (“Penny”) jointly filed this suit against the United States (“Defendant”) alleging negligence on the part of a Lassen National Forest Service Employee during a vehicle accident on a Forest Service road. The accident injured Keegan and totaled Penny’s dirt bike. Penny seeks to recover for the damage to her dirt bike while Keegan requests compensation for his medical bills and the pain and suffering he endured as a result of the accident.

On June 6, 2012 a motor vehicle accident occurred between Keegan and a Forest Service employee, Shannon Williams (“Williams”). Keegan was driving a dirt bike on Service Road 43N26 (“Road”) in Lassen National Forest, near Susanville. As he traveled around a curve, he collided head-on with Williams’ pick-up truck, suffering injuries to his wrist and knee. The dirt bike, owned by Penny, was totaled.

The Road is made of gravel and is narrow with sharp curves. Neither Williams, a Service employee for over 20 years, nor Keegan, a frequent dirt bike rider, had time to avoid the collision. Although the Road may be used by the public, it is only open to motor vehicles “licensed under state law for general operation on all public roads within the state.” Individuals operating motor vehicles on the Road must abide by “State traffic law, including State requirements for licensing, registration, and operation of the vehicle.”

Plaintiffs filed this suit against the United States alleging that Williams negligently drove the Service vehicle on the Road when the accident occurred. Besides payment for medical bills, Keegan seeks non-economic compensation for pain and suffering in the amount of $600,000. He has never had a license to operate a motorcycle in California, and the dirt bike was uninsured at the time of the accident. Moreover, a post-accident police report recommended that Keegan be charged with driving without a license and without insurance.

Penny seeks to recover for the value of the dirt bike, which was totaled in the accident. On December 23, 2014, Defendant submitted interrogatories to Penny. The fourth interrogatory read: “State all facts on which you base your claim that Williams negligently operated his vehicle by failing to be attentive to his driving and by failure to maintain a safe speed for this curvy mountain road.”  Plaintiff Penny answered, “I do not claim that Mr. Williams was negligent and I do not believe my son was negligent.”  Penny never amended this response, and discovery closed on October 16, 2015.

ANALYSIS

In its motion for summary judgment against Penny, Defendant argues that Penny’s undisputed interrogatory response disproves an essential element of her claim for negligence. Defendant further argues that because Keegan failed to comply with California’s financial responsibility laws, he cannot recover non-economic damages.

Penny’s Negligence Claim

To succeed in her claim for negligence, Penny must demonstrate that Williams breached his duty to exercise reasonable care while driving the pick-up truck when the accident occurred. Interrogatory responses are admissible for summary judgment purposes. In her response to “Interrogatory Number 4,” Penny avers that Williams was not negligent during the accident. In other words, Penny admits that Williams did not breach his duty of care. Her concession must be accepted as the truth, and thus, no genuine dispute of material fact exists on the question of breach.

Keegan’s Claim for Non-Economic Damages

California Vehicle Code § 16020 states that “[a]ll drivers and all owners of a motor vehicle shall at all times” maintain insurance coverage for the purpose of establishing financial responsibility. In 1996, California passed Proposition 213, commonly referred to as the “Limitations on Recovery to Felons, Uninsured Motorists, and Drunk Drivers Initiative.” Codified as California Civil Code § 3333.4, it states: “(a) Except as provided in subdivision (c), in any action to recover damages arising out of the operation or use of a motor vehicle, a person shall not recover non-economic losses to compensate for pain, suffering, inconvenience, physical impairment, disfigurement, and other non pecuniary damages if any of the following applies: ¶ (1) The injured person was at the time of the accident operating the vehicle in violation of Section 23152 or 23153 of the Vehicle Code, and was convicted of that offense. * * * ¶ (3) The injured person was the operator of a vehicle involved in the accident and the operator can not establish his or her financial responsibility as required by the financial responsibility laws of this state.” (emphasis added by the court). Therefore, if the driver of a motor vehicle is uninsured and involved in an accident, he cannot recover non-economic damages.

Dirt bikes are motor vehicles.  The USDC concluded it was faced with a simple issue: Keegan was riding an uninsured dirt bike when the accident occurred. Thus, he may “not recover non-economic losses to compensate for pain, suffering, inconvenience, physical impairment, disfigurement, and other non pecuniary damages.”

ZALMA OPINION

Operating a motor vehicle in California without insurance will cause the operator to lose all right to recover general damages – described as non pecuniary damages – and is limited to recover only special damages such as medical bills. Further, it was silly to claim the defendant was not negligent in a sworn answer to interrogatory since that eliminates any chance of proving negligence.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Body Shop – Not an Insured – Can’t Sue On Anti-Steering Statute

Only Parties to Insurance Contracts Can Sue Based on Anti-Steering Statutes

Legislatures, with the odd belief that insurers are in business to take advantage of those they insure have enacted statutes to protect insurance consumers from wrongful conduct by their insurer. In Louisiana such a statute allows an insured to bring an action to collect fines and damages if the insurer breaches the intent of the statute.

In Medine’s Collision Center, LLC v. Progressive Direct Ins. Co. Court of Appeal of Louisiana, — So.3d —- 2015-1661, 2016 WL 3688418 (La.App. 1 Cir. 7/12/16) the Court of Appeal of Louisiana granted certiorari to determine whether the statute, La. R.S. 22:1892(D)(1,) provides a right of action for body shops to seek a fine or injunctive relief from insurers.

FACTS

The plaintiff, Medine’s Collision Center, LLC, is a body shop that, inter alia, repairs automobiles covered by insurance policies that have been involved in motor vehicle accidents. According to Medine’s, a substantial portion of its revenue and income derives from insurance payments. In August 2015, Medine’s filed suit against Progressive Direct Insurance Company and Progressive Security Insurance Company, alleging that the two insurers were acting in concert with one another to steer customers away from Medine’s business.

Medine’s specifically pled the application of La. R.S. 22:1892, an insurance penalty statute that contains the following anti-steering provision: “D. (1) When making a payment incident to a claim, no insurer shall require that as a condition to such payment, repairs be made to a motor vehicle, including window glass repairs or replacement, in a particular place or shop or by a particular entity. Any insurer violating the provisions of this Subsection shall be fined not more than five hundred dollars for each offense.”

Pursuant to La. R.S. 22:1892(D)(1), Medine’s requested injunctive relief, the imposition of a fine on the insurers, and damages.

Defendants responded to the petition by filing two exceptions. Defendants first raised the peremptory exception asserting the objection of no right of action, claiming Medine’s had no right of action under La. R.S. 22:1892(D)(1) because it was neither an insured nor a third-party claimant asserting a claim under an insurance policy. Defendants alternatively raised the dilatory exception raising the objections of vagueness and ambiguity, claiming that the petition failed to provide the specificity and detail necessary to put the defendants on notice of Medine’s claim against them.

When the matter came on for hearing, the trial court denied the defendants’ exception raising the objection of no right of action and granted the defendants’ exception raising the objections of vagueness and ambiguity. The ruling was memorialized in a judgment signed November 9, 2015. Defendants contend that La. R.S. 22:1892(D)(1) can only be interpreted as establishing rights for insureds and third-party claimants with claims brought under an insurance policy—not for third-party body shops—when the statute is read as a whole, jurisprudence interpreting the statute is taken into account, and the legislative history of the anti-steering provision is considered.

The Text of La. R.S. 22:1892

 The text of a law is the best evidence of legislative intent. Where part of an act is to be interpreted, it should be read in connection with the rest of the act and all other related laws on the same subject.

Although Subsection D of La. R.S, 22:1892 does not specify to whom the cause of action belongs, a full reading of the statute shows that the right of action for “steering” is exclusive to insureds or third-party claimants who claim their insurer, or the insurer of a tortfeasor, steered them to a particular body shop. After all, Subsection A of La. R.S. 22:1892 addresses the insurer’s deadlines with respect to certain actions it must take when adjusting insurance claims of first-party insureds and third-party claimants. Subsection B addresses the penalties that may be assessed against an insurer that fails to comply with the duties it owes to first-party insureds and third-party claimants under Subsection A; it also establishes additional duties the insurer owes to third-party claimants. Subsection C sets forth the manner in which the claims of first-party insureds and third-party claimants must be paid. Each of these sections governs the relations between insurers, insureds, and third-party claimants regarding claims brought under insurance policies.

Subsection D, under which Medine’s asserts the underlying action, provides that an insurer cannot condition the payment of a claim upon the requirement that the repairs be made at a particular place or shop or by a particular entity. Logic suggests that Subsection D would likewise govern the insurer’s relations with its insureds or third-party claimants bringing claims under an insurance policy. In this case, Medine’s has not presented a claim under any insurance policy; it is a third-party with no contractual relationship to the defendants.

Jurisprudence Interpreting La. R.S. 22:1892

 Section 1892 is penal in nature and, therefore, must be strictly construed. Strict construction requires that every doubt must be resolved against the imposition of a penalty. Additionally, recovery under Section 1892 requires a plaintiff to first have a valid, underlying, substantive claim upon which insurance coverage is based; the statute does not provide a cause of action against an insurer absent a valid, underlying, insurance claim.

The legislative history reveals an absence of any evidence suggesting that the anti-steering provision was ever intended to create a right in favor of claimants like Medine’s. The plain reading of La. R.S. 22:1892, jurisprudence, and the legislative history of the anti-steering provision of La. R.S. 22:1892, taken together, convince us that Subsection D of La. R.S. 22:1892 fails to create a right of action in favor of Medine’s, a body shop possessing no contractual relationship with the defendants.

Based on the foregoing, the court found that Medine’s lacks the right to recover a fine or seek injunctive relief pursuant to La. R.S. 22:1892(D)(1).

The court dismissed Medine’s claims premised on that statute. Costs arising from review of this matter are assessed to the respondent, Medine’s Collision Center, LLC.

ZALMA OPINION

When a statute is designed to protect insured’s from wrongful actions of their insurer it applies only to the insured and the insurer. In Louisiana insureds can sue. In other states only the department of insurance can enforce the statute. Regardless, in this case, the body shop had no contractual relationship with the insurer and, as a result, had no right to sue.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Policy Limits Irrelevant in UIM Trial

Jury Should Not Hear Available Limits When Deciding Bodily Injuries

Underinsured Motorist (UIM) coverage is designed to protect its insured and provide indemnity over and above the insurance available from the underinsured motorist. It reacts as if the underinsured tortfeasor had the extra insurance provided by UIM policy.

In Darren T. Lucca v. GEICO Ins. Co., United States District Court, E.D. Pennsylvania 2016 WL 3632717 (07/07/2016) the USDC was asked  to keep mention of the available policy limits from the evidence presented to – applying unusual Pennsylvania law – the jury charged with determining the value of Lucca’s injuries.

BACKGROUND

Darren Lucca sued his insurer Geico Insurance Company (“Geico”) for refusing to provide underinsured motorist benefits after he was injured in an April, 2011 car accident. The only issue before the court is the extent of the damages attributable to the accident. Geico moved in limine to exclude any testimony or other evidence relating to the underinsured motorist policy limits and the amount of premiums paid for the policy, arguing that those facts are not relevant to the limited issue to be decided by the jury. Mr. Lucca opposes the motion, contending that the case is one for breach of contract and the details of the contract provide relevant background information for the jury

On April 8, 2011, Plaintiff Darren Lucca was involved in a car accident due to the negligence of another motorist, causing him to suffer various personal injuries. At the time, his car was insured by Defendant Geico. As part of his policy, Mr. Lucca had underinsured motorist benefits. The other motorist had $100,000 in coverage through his insurance carrier, which Mr. Lucca alleges was insufficient to cover his injuries.

On January 8, 2015, Mr. Lucca sought Geico’s consent to settle his claim with the other motorist’s insurer for $75,000. He also sought underinsured motorist benefits from Geico. Geico denied his claim, believing that Mr. Lucca had received $75,000 from the other motorist’s insurance as an award in binding arbitration, not in settlement, and that therefore the other motorist was not underinsured.

The parties’ dispute is solely about the value of Mr. Lucca’s claim because liability will not be contested. Mr. Lucca outlines various items of damages in his pretrial memo, including wage loss, loss of future earning capacity, co-pays and prescriptions, and other medical bills.  Mr. Lucca opposed the motion.

DISCUSSION

The Supreme Court of Pennsylvania allows jury trials for underinsured motorist claims. Geico, by its motion in limine, presents one of the previously unaddressed issues: whether information about an insured’s coverage limits and paid premiums is relevant, non-prejudicial evidence that may be introduced when the jury’s only task is to determine the amount of damages incurred by the insured.

Geico argues that although this is technically a breach of contract action, what is left to decide is much like a tort action, in that although the insured is making a “first party” claim, the value of the claim is based on “third party” principles of liability, causation, and damages. Geico contends that neither the amount of coverage nor the amount paid in premiums have any bearing on how severe Mr. Lucca’s injuries were. Geico also argues, in the alternative, that if this evidence comes in, then Geico should be allowed to offer evidence as to the underinsured tortfeasor’s coverage and the amount of that settlement.

Case law regarding this issue in Pennsylvania is almost nonexistent.  The one reported federal decision on the issue permitted the evidence to be introduced. In that case, evidence of the coverage limits for both the tortfeasor’s and the plaintiff’s insurance policy was permitted, as well as evidence of the amount the plaintiff received from the tortfeasor and the amount the plaintiff paid in premiums for the plaintiff’s own insurance.

The Court acknowledged that the bar for relevance is low. However, the amounts of the policy limits and paid premiums, facts that are undisputed and therefore not for the jury to decide, do not even reach that low bar.

The only issue for the jury to decide in this matter is the extent of Mr. Lucca’s injuries from the accident. That Mr. Lucca’s policy includes a $900,000 underinsured motorist limit or that his stepfather paid a certain amount in premiums for the policy does not have any tendency to make any fact at issue in this case more or less probable than it would be without the evidence.

Indeed, not only is the policy limit irrelevant in this case, introducing evidence of the policy limit may very well serve to prejudice Geico by giving the jury an anchor number that has no bearing on Mr. Lucca’s damages. For these reasons, the Court excluded at trial any mention of the policy limits or the amount of premiums paid.

Once a verdict has been rendered by the jury on the amount of damages suffered by Mr. Lucca, the Court can mold the verdict appropriately to reflect the limits of both Mr. Lucca’s policy and the third party tortfeasor’s policy.

ZALMA OPINION

It has been recognized for more than a century that disclosing to a jury called upon to decide the value of bodily injuries incurred as a result of an automobile accident should never be told about the limits of insurance available to the tortfeasor so as not influence the decision of the insurer. The availability of insurance is irrelevant to the issue of damages and if disclosed to the jury can prejudice the defendant by by giving the jury an anchor number that has no bearing on the extent of the injuries.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Known Loss Defense Fails

Failure to Seek Appropriate Jury Instruction Defeats Insurer’s Defense

The North Dakota Supreme Court was faced with a jury verdict against an insurer and its agent for damages resulting from, what appeared to be, a known loss since the insured reported its additional values while the fire was burning. What should have been an absolute defense failed because of the failure of defense counsel to properly present the facts and law to the jury.

In Bjorneby v. Nodak Mut. Ins. Co., Supreme Court of North Dakota, — N.W.2d —-, 2016 ND 142, 2016 WL 3632915 (July 7, 2016) Nodak Mutual Insurance Company (“Nodak Mutual”) and Bryan Hurst (together referred to as “Nodak”) appealed from the district court’s denial of their motion for judgment as a matter of law and their alternative motion for a new trial.

FACTS

The Bjornebys are farmers. They insured their farming operation with a Nodak Mutual insurance policy. Hurst was their insurance agent. During potato harvest, a fire started in the break room of the Bjornebys’ potato washing facility. The fire spread and caused substantial damage. The Bjornebys filed an insurance claim, and Nodak Mutual covered a number of losses. Nodak Mutual, however, refused to cover certain potatoes because the Bjornebys, who were insured under a reporting form requiring reports of values at risk, reported the potatoes after they became aware of the fire. The Bjornebys sued alleging Nodak Mutual breached their insurance contract and Hurst was negligent. A jury returned a general verdict in the Bjornebys’ favor; the verdict did not allocate liability between Nodak Mutual and Hurst. Nodak Mutual and Hurst moved for judgment as a matter of law or, in the alternative, a new trial.

Hurst had been the Bjornebys’ insurance agent for about four years prior to the fire. He testified he met with the Bjornebys every year and gave them advice on insuring their farming operation. Bjorneby claimed he instructed Hurst to insure all of their harvested potatoes at all times. At the time of the fire, and prior to it, the Bjornebys were insuring their potatoes by periodically reporting the harvested potato count to Hurst. As potatoes were harvested and placed in storage, Chris Bjorneby would call Hurst and update him on the potato count. Hurst would then report the new count to Nodak Mutual. In mid-September 2011, Chris Bjorneby called Hurst and reported the potato count. The fire started on October 7, 2011.

Chris Bjorneby testified that when he first saw the break room fire, he did not think it would result in damage to the potatoes. Nonetheless, he quickly called Hurst and reported additional potatoes had been stored since their last call.

Soon after they hung up, the local fire department decided to ventilate the fire; it then became uncontrollable. The washing facility, where the fire started, was in a building separate from the potato storehouse. However, the two buildings were connected by underground water flumes used to move the potatoes from one building to another. The flumes had seals, and the Bjornebys believed they were sealed while the fire was occurring. The fire was ultimately brought under control, but subsequent flare-ups occurred days after it had started. The additional potatoes Chris Bjorneby had reported on the date of the fire were ruined by smoke.

ANALYSIS

Nodak argues the additional potatoes were uninsurable as a matter of law because Chris Bjorneby was aware of the fire when he reported the potatoes to Hurst. Thus, Nodak contends the district court erred when it denied their motion for judgment as a matter of law because the known loss doctrine precluded coverage of the potatoes. The jury was instructed on the known loss doctrine:

The Supreme Court acknowledged the general rule that insurance cannot be issued for a known loss. Once the loss has occurred, there is no longer any “risk.” Thus, if an insured has actual knowledge that a loss has occurred or is occurring, or that the loss is substantially certain to occur, there can be no insurance coverage.

Nodak argued that N.D.C.C. § 26.1–29–11 codifies the known loss doctrine and “expressly bars the purchase of insurance coverage when a ‘known event’ has occurred or is occurring when the insurance is requested.” Section 26.1–29–11, N.D.C.C., states: “Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest or create a liability against the person may be insured against, subject to this title….”

Neither Nodak Mutual nor Hurst objected to the district court’s known loss instruction.

Although Chris Bjorneby knew a fire was occurring, the trial judge determined the jury had heard evidence from which it had to be determined whether damage to the potatoes was “substantially certain to occur.” The court found: “In terms of the known event, the situation, there’s no question that their fire was in existence at the time of the call. … The Jury, I don’t know, they could have determined that because of the separate location of the potatoes, separate building that’s supposedly sealed building, the circumstances I have just gone through that it was not—that it was a fortuitous situation. That it wasn’t a known loss or event to use that term now.”

Nodak’s argument that Hurst was not negligent as a matter of law is without merit. Nodak argues the evidence presented at trial leaves no factual dispute concerning whether Hurst was negligent; it contends he did not breach his duty of care, as a matter of law, because he acted in good faith and followed the Bjornebys’ instructions. Insurance agents have a duty to “exercise the skill and care which a reasonably prudent person engaged in the insurance business would use under similar circumstances.

With the unobjected-to general verdict, it is impossible to determine on which basis the jury assigned liability – the negligence of the agent or the wrongful denial by Nodak. Because it cannot be held that neither basis would support the jury’s verdict, the district court’s decision not to grant judgment as a matter of law was correct.

Again, it is not clear which theory of liability the jury based its decision on because the jury was issued a general verdict form.

The jury may have concluded Nodak breached a contract to insure the potatoes. Or it may have decided Hurst was negligent by not ensuring the potatoes in storage were insured. In any case, conflicting evidence concerning both theories of liability was presented.

ZALMA OPINION

There is no question that you cannot insure against a known loss. The failure here was a failure of proof and the poor choice of a jury verdict form. Allowing the jury to place the appellate courts in the position of trying to make a decision from a jury verdict form that allowed more than one theory of liability. As a result of that failure the know loss was payable because the jury could have found it was a fortuitous loss or that the loss was due to the negligence of the agent.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Genuine Dispute Defeats Bad Faith Claim

Argument Over Scope of Loss not Bad Faith

Sometimes, when adjusting a property claim, no good deed goes unpunished. Insurers are obligated, under the terms and conditions of a first party property insurance policy to pay indemnity for the losses the policy promised to pay for and to refuse to pay for losses not agreed to be paid by the policy. When a loss occurs common sense seems to disappear, the insurer becomes an adversary, and the insured sues because the insured did not receive everything they asked the insurer to pay.

In Paslay v. State Farm General Insurance Company, — Cal.Rptr.3d —– , 2016 WL 3524086, 16 Cal. Daily Op. Serv. 6896, Court of Appeal, (June 27, 2016) the California Court of Appeal, was faced with a claim that adjustment of the claim presented by the Paslays was bad faith conduct allowing the Paslays to recover damages not covered by the policy and tort damages, including punitive damages, because the Paslays were not satisfied with the insurer’s adjustment of their claim.

Clayton and Traute Paslay asserted claims for breach of insurance contract, bad faith, and elder abuse against State Farm General Insurance Company (State Farm), and requested an award of punitive damages. The trial court granted summary adjudication in State Farm’s favor on each claim and on the request for punitive damages.

RELEVANT FACTUAL BACKGROUND

In December 2010, the Paslays’ house in Pacific Palisades was insured under a homeowners policy issued by State Farm. On December 17, 2010, during a period of heavy rain, a roof drain failed, causing water to enter the house’s master bedroom through the ceiling, and damage other parts of the house. The Paslays reported the incident to State Farm, which arranged for them to live in a rented residence while their house was being repaired. At the end of October 2011, the Paslays resumed living in their house. State Farm made payments under the policy exceeding $248,000, including $122,770.98 for repairs to the house, but denied coverage for certain items, including work undertaken in the master bathroom, replacement of drywall ceilings, and installation of a new electrical panel.

In December 2012, the Paslays sued State Farm. Their second amended complaint (SAC), filed January 15, 2014, contained claims for breach of an insurance contract and bad faith, alleging that State Farm had violated the policy in numerous ways, including refusing to pay for repairs to the master bathroom, refusing to pay for replacement of certain drywall ceilings and the electrical panel, and “[p]rematurely forcing [the Paslays] to move out of temporary rental housing.” The SAC also contained a claim by Traute for elder abuse predicated on allegations that she was 80 years old when the house suffered water damage.

Granting State Farm’s summary judgment motion the trial court concluded that summary adjudication was proper with respect to each claim in the SAC and the request for punitive damages because there were no triable issues whether State Farm failed to pay benefits owed under the policy and forced the Paslays to move prematurely back to their house. On May 19, 2015, the court entered a judgment in favor of State Farm dismissing the entire action with prejudice.

DISCUSSION

In seeking summary adjudication on the Paslays’ claims, State Farm submitted evidence supporting the following version of the underlying events: On December 17, 2010, when rain water leaked through the ceiling of the house’s master bedroom, Traute contacted Clayton, who was then in Texas. After reporting the loss to State Farm and arranging for temporary repairs, Clayton told State Farm that his general contractor would prepare a damage estimate. State Farm assigned a field adjuster to the claim and hired Andrew Gillespie, a general contractor, to assist with its investigation.

On May 9, 2011, State Farm informed the Paslays that it disputed coverage for the demolition and reconstruction of the master bathroom, the proposed new electrical panel, and the replacement of undamaged ceiling drywall. State Farm later set forth its coverage positions relating to the disputed scope-of-repair issues.

In opposing the motion for summary adjudication or judgment, the Paslays maintained there were triable issues regarding numerous aspects of State Farm’s conduct with respect to their claim. 

ANALYSIS

In view of the evidence presented by the insureds there are triable issues regarding coverage for replacement of the removed drywall ceilings. Clayton’s and MacDonald’s testimony, if credited by the fact finder, establish that only removal and replacement of the ceilings (including their undamaged portions) would result in code-compliant ceilings of a “similar construction.”

 The Paslays contend there are triable issues whether State Farm was obliged to pay the costs of replacing their 100 amp electrical panel with a 200 amp panel, even though the former was not damaged by the leak in the master bedroom. The panel’s replacement was not due to repair-related enforcement of the building code, and thus constituted an independent upgrade to the house.

State Farm submitted evidence that in January 2011, it paid for a six-month lease for a residence through Klein, its housing vendor. After July 2011, when the initial six-month lease expired, State Farm authorized payment of the Paslays’ rent on a monthly basis. Although State Farm authorized payment of the rent through the end of November 2011, the landlord rented the residence to a new tenant, effective October 31, 2011.

Under the policy State Farm was obliged to pay “the reasonable and necessary cost to repair” subject to policy coverage, not the actual costs of repair the Paslays incurred. As insurers may properly rely on independent experts to assist in determining repair benefits due under an insurance policy State Farm did not breach the contract merely by relying on Gillespie’s repair estimates.

As there are triable issues regarding unpaid policy benefits due the Paslays related to the work in the master bathroom and the replacement of drywall ceilings summary adjudication was improperly granted with respect to the claim for breach of insurance contract.

BAD FAITH

To establish bad faith, the Paslays must demonstrate misconduct by State Farm more egregious than an incorrect denial of policy benefits. Under this standard, an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith, even though it might be liable for breach of contract.

The genuine dispute doctrine does not relieve an insurer of its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. A genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Those grounds include reasonable reliance on experts hired to estimate repair benefits owed under the policy.  The application of the genuine dispute doctrine becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.

The Paslays’ bad faith claim fails under the genuine dispute doctrine. The only triable issues relating to unpaid policy benefits concern the work in the master bathroom and the replacement of drywall ceilings. Regarding those benefits, the record discloses only a genuine dispute regarding the extent of the damage and required repairs. Where the parties rely on expert opinions, even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.

On this record, there are no triable issues regarding the adequacy of State Farm’s investigation, as the Paslays removed the damaged property before State Farm had an opportunity to conduct a full assessment of the Paslays’ proposals and contentions. The record shows only that State Farm did what it could to assess the claimed losses before denying them. In the court’s view, even if those denials were mistaken, nothing suggests that State Farm acted in bad faith. Summary adjudication was therefore proper on the bad faith claim.

Notwithstanding the existence of triable issues regarding policy benefits due the Paslays, there is no evidence that State Farm acted in subjective bad faith or unreasonably in denying additional benefits. Traute’s elder abuse claim thus fails in light of the evidence supporting the application of the genuine dispute doctrine to the Paslays’ bad faith claim.

Punitive damages are thus unavailable in connection with the Paslays’ breach of insurance policy claim, notwithstanding the existence of triable issues regarding unpaid policy benefits due the Paslays.

Furthermore, as the claims for bad faith and elder abuse fail for want of a triable issue of fact, the Pasleys have asserted no tort cause of action capable of supporting an award of punitive damages. Accordingly, summary adjudication was properly granted with respect to the Paslays’ request for punitive damages.

ZALMA OPINION

Bad faith does not exist when the only dispute is over the extent of damage when both sides rely on experts whose opinions are diverse. It is not bad faith for an insurer to disagree with an insured over the extent of coverage or the extent of the loss. That dispute could have been resolved by appraisal but the insureds preferred, rather than resolve the dispute, to file suit and hope for the windfall of tort and punitive damages. The genuine dispute doctrine trashed their hopes of turning an insured loss into a profit making exercise.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Vague Conclusory Statements Not Sufficient to Plead

No Right to Sue Lender on Force Placed Insurance if Placed in Compliance With Contract

Mortgage holders require, as a matter of course, that borrowers insured the property that is the security for the loan, against certain risks of loss, and if the borrower does not place the insurance the mortgage contract gives the lender to place the required insurance itself at the expense of the borrower. In George P. Klika, v. Capital One Bank, N.A., United States District Court Civil Case No. C15-0107 RSL, 2016 WL 3551812 (06/30/2016) the USDC was called upon to deal with a proposed class action suit for wrongfully placing force placed insurance.

Plaintiff alleges that Capital One participated in a scheme to charge him and similarly-situated mortgagors excessive insurance premiums for unnecessary, unauthorized, or duplicative coverage. Plaintiff asserts that Capital One breached the mortgage agreement, breached the implied covenant of good faith and fair dealing, violated the Real Estate Settlement Procedures Act, violated Hawaii’s Deceptive Practices Act, and was unjustly enriched. Capital One seeks dismissal of all claims asserted against it, arguing that the allegations are insufficient to state a claim upon which relief could be granted and that, given the number of times plaintiff has asserted similar claims in the past, leave to amend should be denied.

In the context of a motion to dismiss, the Court’s review is generally limited to the contents of the complaint. The documents attached to plaintiff’s complaint, including the 2006 mortgage agreement, form the basis of his claims and have been considered in determining whether plaintiff has stated a viable cause of action.

A claim is facially plausible when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Plausibility requires pleading facts, as opposed to conclusory allegations or the formulaic recitation of elements of a cause of action, and must rise above the mere conceivability or possibility of unlawful conduct that entitles the pleader to relief. Nor is it enough that the complaint is factually neutral; rather, it must be factually suggestive.

 BREACH OF CONTRACT

Paragraph 5 of the mortgage contract states in relevant part: “Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards, including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires.”

The contract also required: “If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower.”

The mortgage agreement does not limit the lender to a policy in an amount that is equal to or less than the outstanding loan amount and that it grants the lender the right to require continuous coverage. Plaintiff’s claims of breach involving actions that were permitted by the contract fail as a matter of law. The lender’s right to act is not as broad as Capital One’s argument suggests, however: under the terms of the mortgage agreement, the lender cannot force-place insurance if the borrower already has in place all that the lender required.

At oral argument, plaintiff attempted to fit his claim into this box by asserting that he had in place a hazards policy that covered all of the risks that are specifically required by the policy and that were previously disclosed by the lender (including coverage for wind, perils of wind, and windstorm). Plaintiff stated that it was not until July 18, 2013, that Capital One first notified him that it was requiring hurricane insurance, by which time Capital One had already force-placed the insurance. If that were the state of affairs, a plausible breach of contract claim might be in the offing.

The facts alleged in the complaint and the documents attached thereto defeat such a claim, however. Whatever confusion may have arisen regarding Capital One’s insurance requirements prior to July 18, 2013, Capital One gave clear and unambiguous notice that it was requiring hurricane insurance – covering winds of 75 mph or more – on that date and provided plaintiff an opportunity to purchase the coverage himself. When he did not do so, Capital One purchased hurricane coverage, placing the charge on plaintiff’s escrow account on August 23, 2013, and notifying plaintiff of the purchase by letter dated August 29, 2013. Plaintiff had notice that hurricane insurance was required and failed to maintain the required coverage. In such circumstance, Paragraph 5 gave Capital One the right to act.

Plaintiff has not alleged a viable contract claim, nor has he proposed an amendment that is consistent with the facts of record. In the absence of any indication that the identified deficiencies can be remedied, leave to amend this claim was denied.

BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Plaintiff alleges that Capital One exercised its discretion to force-place insurance capriciously and in bad faith because it acted to maximize its own gain at the borrower’s expense. It is clear that plaintiff’s entire complaint rests on the various provisions of Paragraph 5 of the mortgage agreement. A reasonable person reading Paragraph 5 would understand that if the lender were forced to place coverage, the borrower would have to pay for that coverage.

Plausibility requires pleading facts, as opposed to conclusory allegations. Although it seems unlikely given plaintiff’s statements at oral argument, it is possible that he has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a fee, commission, kickback, or some other direct financial benefit.

Leave to amend this claim is therefore GRANTED.

HAWAII’S DECEPTIVE PRACTICES ACT (“DPA”)

Plaintiff identifies twelve “unfair or deceptive acts or practices in the conduct of any trade or commerce” in which Capital One is alleged to have engaged in violation of statute. In particular, plaintiff alleges that the pre-arranged secret deals between Voyager and/or Assurant and Capital One to provide inadequate and/or unnecessary force-placed insurance at premium rates for the borrower and secret kickbacks, commissions, or fees for the lender are unfair and deceptive.

To the extent Capital One turned the purchase of insurance into a profit-making activity for itself, however, that information was not disclosed and theoretically gives rise to a cause of action.

On the chance that plaintiff has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a direct financial benefit, such as the alleged fee, commission, or kickback, leave to amend this claim is GRANTED.

UNJUST ENRICHMENT

Plaintiff’s unjust enrichment theory is the same one that underlies his potentially viable breach of the implied covenant of good faith and DPA claims. Plaintiff has not, however, alleged non-conclusory facts in support of this claim.

DECLARATORY JUDGMENT/INJUNCTIVE RELIEF

All of plaintiff’s claims are deficient and will be dismissed, including his claim for declaratory and/or injunctive relief. If plaintiff is able to allege facts giving rise to a plausible substantive claim for relief, he may be entitled to equitable protection from future harms of the same sort.

CLASS ACTION ALLEGATIONS

For all of the foregoing reasons, Capital One’s motion to dismiss is granted. Plaintiff’s RICO, fraud, breach of contract and RESPA claims are hereby DISMISSED with prejudice and the class allegations are stricken. If plaintiff believes he can, consistent with his Rule 11 obligations, amend his breach of the implied covenant, DPA, unjust enrichment, and declaratory judgment/injunctive relief claims to allege non-conclusory facts in support of his theory that Capital One received a kickback, fee, commission, or some other direct financial benefit when it force-placed hurricane coverage on plaintiff’s property in August 2013, he may do so within fourteen days of the date of this Order.

If an adequate amendment is not timely filed, judgment will be entered with prejudice in favor of Capital One and against plaintiff. Capital One’s request for judicial notice is granted. Defense counsel shall, within seven days of the date of this date.

ZALMA OPINION

The court in this case generously allowed the plaintiff the opportunity to amend the complaint to find real facts, rather than conclusory statements which the court did not believe exist. Force placed insurance is appropriate if the mortgage contract allows it and although the cost is extreme, it is not more than a means for a mortgagor to protect its interests when the borrower fails to buy the required insurance.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Another Assignment to Sue Insurer to Enforce Judgment Fails

Bird in Hand Is Worth More than $1.8 Million on the Come

There is a strange assumption in the world of litigation that if an insurer refuses to defend its insured it has automatically committed the tort of bad faith. Plaintiffs, with a large judgment some of which could be collected from the defendant, agree to take an assignment of the defendants rights against its insurer, and give up the right to collect from the defendant.

Of course, insurers do not cover everything. Often, when they refuse to defend a suit against their insured, that they did so based on clear and unambiguous language of the policy. In Fayezi v. Illinois Cas. Co., — N.E.3d —-, Appellate Court of Illinois, 2016 IL App (1st) 150873 (June 30, 2016) the Appellate Court of Illinois, was asked to require an insurer to pay a judgment stipulated to by its insured.

FACTS

Mortesa “Marty” Fayezi and American Awning & Window Co., Inc. (collectively, plaintiffs), appeal from the circuit court’s order dismissing their amended complaint with prejudice in this insurance coverage declaratory judgment action.

The plaintiffs initiated a declaratory judgment action to determine whether Illinois Casualty Company (ICC), was obligated to defend a class action against ICC’s insured, and to indemnify the eventual settlement of that underlying action. ICC was the insurer for Pat’s Pizzeria, Inc. (Pat’s), the defendant in the underlying class action. ICC issued a “Businessowners Policy” to Pat’s effective September 2, 2005, through September 2, 2006 (the 2005–06 policy). Among other categories of coverage, the 2005–06 policy provides coverage for “Bodily Injury and Property Damage.”

That coverage was subject to certain exclusions, including an exclusion for: “Any liability or legal obligation of any insured with respect to ‘bodily injury’ or ‘property damage’ arising out of any of the following: ¶  g) The Telephone Consumer Protection Act (TCPA); or ¶ (h) Any amendments to these other laws or by any other similar statutes, ordinances, orders, directives or regulations.”

On or about March 31, 2006, Pat’s transmitted unsolicited advertisements by facsimile (fax) to 3636 recipients. In April 2009, one of the recipients, Fayezi, filed a class action complaint (the underlying complaint) in the circuit court of Cook County on behalf of himself “and all other persons similarly situated” who had received such faxes.

The underlying complaint began with a “preliminary statement” that “[t]his case challenges [Pat’s] practice of faxing unsolicited advertisements.” The preliminary statement recites that the TCPA “provides a private right of action and provides statutory damages of $500 per violation” and states that the case was initiated “as a class action asserting claims against [Pat’s] under the TCPA, the common law of conversion, and the consumer protection statutes forbidding and compensating unfair business practices.” The preliminary statement specified that “[p]laintiff seeks an award of statutory damages for each violation of the TCPA.”

ICC refused to defend the action, apparently on the basis of the 2005–06 policy’s exclusions for “[a]ny liability or legal obligation” for bodily injury, property damage, or personal and advertising injury “arising out of” the TCPA (the TCPA exclusions).

Pat’s and Fayezi subsequently entered into a settlement agreement of the underlying action, by which the parties agreed to an amount of liability that the class would seek to recover only from Pat’s insurers, including ICC.

The parties agreed to seek court approval of a judgment against Pat’s in the amount of $1,818,000. However, the settlement agreement specified that the plaintiffs would not seek recovery from Pat’s but instead would proceed against Pat’s insurers. Thus, Pat’s agreed to assign to the class its rights under the 2005–06 policy, and the class “agree[d] to seek recovery to satisfy the Judgment only against [Pat’s] insurers,” including ICC.

ICC filed a motion to dismiss. Relying on the TCPA exclusions in the 2005–06 policy, ICC argued that it had no duty to defend the underlying class action or to indemnify the resulting judgment.

The trial court granted ICC’s motion to dismiss the plaintiffs’ amended complaint. The court dismissed the plaintiff’s amended complaint in its entirety and with prejudice.

ANALYSIS

First, the appellate court concluded that the motion to dismiss filed by ICC properly argued that the plaintiffs’ action was barred by other affirmative matter avoiding the legal effect of or defeating the claim and did not improperly dispute an essential issue regarding liability.

The appellate court agreed with the trial court that the submission of an affidavit in support of ICC’s motion to dismiss was procedurally proper. Notably, in a recent case involving ICC and the same exclusion language at issue in this appeal, the Second District relied on precedent that ICC did not have a duty to defend a nearly identical underlying complaint.

When the allegations in the lawsuit fail to state facts that either actually or potentially bring the case within, or potentially within, the policy’s coverage the appellate court held that the allegations of the underlying complaint in this case did not trigger ICC’s duty to defend in light of the TCPA exclusions.

First, to the extent the plaintiffs assert that the TCPA exclusions “say nothing about common law claims premised on different facts,” that argument fails, because the underlying complaint simply failed to plead any claims premised on any facts other than the March 31, 2006 fax advertisements that formed the basis for all three counts. Both the exclusion at issue in earlier precedent the TCPA exclusions in this case used unambiguously broad language to indicate that liability “arising” from the TCPA would not be covered. The phrases “any liability or legal obligation,” “with respect to,” and “arising out of” are plainly of broad meaning.

In this case the underlying complaint failed to plead any specific facts that would support liability for counts II and III but which would not also violate the TCPA under count I. The counts for conversion and violation of the Act do not attempt to allege any other particular offending conduct other than the sending of unsolicited fax advertisements on or about March 31, 2006, the very same conduct underlying count I for violation of the TCPA. Indeed, counts II and III specifically incorporated the allegations in count I, the TCPA count, as well as the allegations in the complaint’s “preliminary statement” referencing the TCPA. All three counts of the underlying complaint in this case assert liability “arising out of” the TCPA.

The allegations in the underlying complaint in this case were not vague or ambiguous. Rather, all three counts were clearly predicated on the same facts, i.e., Pat’s transmission of unsolicited fax advertisements on or about March 31, 2006. All of the allegations clearly sought liability “arising out of” the TCPA, implicating the TCPA exclusions.

The appellate court recognized that the applicability of a policy exclusion must be clear and free from doubt in order to relieve ICC of the duty to defend. The appellate court found that the TCPA exclusions unambiguously applied to the underlying complaint and found the language at issue in this case to be clear on its face. Similarly, in this case, we find that the application of the TCPA exclusions is clear.

Moreover, the terms of the settlement agreement and judgment entered in the underlying action indicate that the action was resolved on the basis of TCPA liability alone. It is apparent that the amount of the underlying settlement, $1,818,000, was calculated by multiplying the amount of $500 in statutory damages per TCPA violation by the number of fax advertisements (3636) transmitted by Pat’s on or about March 31, 2006.

The allegations of the underlying complaint clearly implicated the TCPA exclusions. As a result, ICC did not have a duty to defend the underlying action.

In turn, because ICC did not have a duty to defend, the argument that having breached the duty to defend, ICC is estopped to contest indemnity of the judgment following the settlement of the underlying action. An insurer’s duty to indemnify is narrower than its duty to defend its insured. Clearly, where there is no duty to defend, there will be no duty to indemnify. Since ICC had no duty to defend the underlying action, it had no duty to indemnify the resulting judgment.

ZALMA OPINION

What this case teaches is that before entering into a settlement with a covenant not to execute the plaintiffs’ counsel should first consult with experienced coverage counsel to determine whether the insurer wrongfully refused to defend its insured. In this case the plaintiffs gambled and lost.

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 & Video Training

The right of an insured of a receive the benefits of an insurance policy cease when the insured misrepresents or conceals material fact when applying for a policy of insurance exists in most states of the United States and many countries based upon British Common law.

In the latest videos posted to Chapter 16 of Zalma’s Insurance 101 those issues and how to recognize and deal with the potential for rescission are touched upon by Zalma’s Insurance 101. If you want to learn everything from “what is insurance” to bad faith and rescission, you need to consider the 944 videos, the latest videos were posted to http://www.zalma.com/videoblog. In each of the videos approximately three to six minutes each, are based on my book “Insurance Claims: A Comprehensive Guide” where by viewing one or more a day you can learn everything you need to know about property and casualty insurance and insurance claims handling.

The videos track the matters covered in my book “Insurance Claims: A Comprehensive Guide” available from the National Underwriter Company at http://www.nationalunderwriter.com/insuranceClaims

When I began working on this videoblog it was my intent to create a complete insurance claims education in three to four minute increments. It is created to allow the student – whether a novice or experienced insurance professional – to learn painlessly by viewing one or more video a day, five days a week, 50 weeks a year. The videos will provide anyone interested in insurance to painlessly learn everything there is to know about property and casualty insurance while having the morning’s first cup of coffee or while munching on the first bagel of the day.

Also available are 1659 case summaries available at Zalma on Insurance, http://zalma.com/blog.

Posted in Zalma on Insurance | 1 Comment

The Hazards of Using a Professional Employer Organization

Exclusive Remedy Only Applies to Employee Injured in Scope of Employment

Across the nation Workers’ Compensation is an exclusive remedy for an employee injured on the job. However, modern practice allows employers to use Professional Employer Organizations (PEOs) or employee leasing organizations to create a co-employer relationship where the PEO and the actual employer become co-employers of each worker and although officially an employee of the PEO the employee is also an employee of the company that contracted with the PEO for the purpose of workers’ compensation.

In Rodriguez v. Lockhart Contracting Services, Inc., Court of Appeals of Texas, — S.W.3d —- , 2016 WL 3568039 (June 29, 2016) a Texas appellate court was faced with the need to determine who employed whom and who was on first for workers’ compensation and traditional tort damages, if anyone.

Lockhart Contracting Services, Inc. a/k/a Lockhart Contracting Services (“Lockhart”) claimed, when its employee Rodriguez was injured on the job he was also an employee of a PEO with whom Lockhart had contracted. Rodriguez argued he was not an employee of Lockhart and the PEO because he had never signed documents acknowledging an agreement Lockhart had with a new PEO. Summary judgment was granted and Rodriguez appealed.

BACKGROUND

Rodriguez claims he was hired by John Lockhart of Lockhart Contracting on February 18, 2011, at a Lockhart Contracting jobsite in Sweetwater, Texas. Both parties agree that on the 18th, Rodriguez signed several documents relating to his employment. At the time Rodriguez began working at Lockhart Contracting, it had a professional employer services agreement with Accent Professional Payroll Services, Inc. f/k/a Texas Diversification Workforce Inc. f/d/b/a TXWorks (“TXWorks”). TXWorks is a licensed PEO, an entity previously known as a staff leasing company.

The summary judgment evidence shows Lockhart Contracting’s employer services agreement with TXWorks was administratively terminated on March 14, 2011, and Lockhart Contracting entered into a new agreement with Prime Source Too (“Prime Source”)—another licensed PEO—effective the very next day. On March 15 or 16, 2011, the day after the change of PEOs, Rodriguez was injured while working at a Lockhart Contracting jobsite in Huntsville, Texas. Rodriguez signed two forms: “Employee’s Report of Accident/Injury” and “Employee Acknowledgment of Workers’ Compensation Network and faxed them to TXWorks on March 31, 2011. The record shows TXWorks submitted the claim to Texas Mutual Insurance Company (“TMIC”) on April 5, 2011.

As a result of Rodriguez’s claim, TMIC paid out almost $52,000.00 in workers’ compensation benefits associated with Rodriguez’s injury.

After Rodriguez received his final temporary income benefits check, he sued Lockhart Contracting and TXWorks. Rodriguez charged a negligence claim against Lockhart Contracting—contending Lockhart Contracting was his employer and a nonsubscriber to the workers’ compensation law.

ANALYSIS

On appeal, Rodriguez contends the trial court erred in granting summary judgment in favor of Lockhart. Rodriguez argues Lockhart was not entitled to summary judgment because it was not entitled to the benefit of the exclusive remedy provision of the TWCA. Lockhart failed to prove as a matter of law (a) its agreement with Prime Source complied with certain provisions of the Labor Code regarding “sharing requirements,” particularly that its agreement with Prime Source, the PEO, gave Prime Source the right to share in the right to hire, fire, discipline, and reassign leased employees, or (b) that Prime Source provided Rodriguez with the required statutory notice of coverage.

In his reply brief, Rodriguez also contends the acceptance of benefits doctrine is inapplicable.

Applicable Law

Unlike workers’ compensation laws in other states, the TWCA permits private Texas employers to choose whether to subscribe to workers’ compensation insurance. The Texas Legislature adopted the TWCA to benefit employers and employees. For employers, the TWCA limits liability through its exclusive remedy provision.

An employee may also be covered by workers’ compensation insurance—and therefore subject to the exclusive remedy provision of the TWCA—if he enters employment with a professional employment organization that has elected to obtain workers’ compensation insurance coverage and has a professional services agreement with a client for whom the employee actually works.

The “coemployment relationship,” is created when the “client,” enters into a written professional employer services agreement with a “license holder.”  

Generally speaking, if either coemployer has elected to acquire coverage under the TWCA, the worker is covered under the TWCA and subject to its mandates, including the exclusive remedy bar—assuming, of course, the worker was in the course and scope of his employment at the time of the injury and the suit is for those claims covered by the TWCA.

However, the court found that there is more than a scintilla of evidence that Rodriguez was not a Prime Source employee at the time of his injury, precluding coverage for the injury suffered by Rodriguez on the Lockhart Contracting jobsite, because he never signed the employment agreement.

Lockhart failed to establish as a matter of law that Rodriguez became a Prime Source employee as a result of some sort of transfer not mentioned in the contract between Prime Source and Lockhart. The agreement between Lockhart and Prime Source specifically speaks to the manner in which a person becomes an employee covered by Prime Source’s workers’ compensation insurance, and that is by completing and returning the documents identified in the agreement—something Rodriguez never did—not by transfer from another PEO.

An employee may be covered by workers’ compensation insurance—and therefore subject to the exclusive remedy provision of the TWCA—if he enters employment with a professional employment organization that has elected to obtain workers’ compensation insurance coverage and has a professional services agreement with a client for whom the employee actually works. Thus, to be entitled to the exclusive remedy provision of the TWCA, it was incumbent upon Lockhart to establish as a matter of law that at the time of his accident, there was a professional services agreement between itself and Prime Source and Rodriguez was a Prime Source employee. Although Lockhart  established the existence of a professional services agreement between itself and Prime Source, taking all summary judgment evidence favorable to Rodriguez as true, indulging every reasonable inference in his favor, and resolving any doubts in his favor, the appellate court held there is more than a scintilla of evidence that Rodriguez was not a Prime Source employee on the day he was injured. Accordingly, because Lockhart Contracting failed to establish as a matter of law that Rodriguez was a Prime Source employee on the day of the accident, the court held Lockhart Contracting failed to establish as a matter of law that Rodriguez’s suit is barred by the exclusive remedy provision of the TWCA.

The issue is whether the trial court, by ruling Rodriguez’s suit was barred by the exclusive remedy provision of the TWCA, per force ruled his suit was likewise barred by the acceptance of benefits doctrine. Given that the doctrine is grounded in equity, is applicable in numerous contexts, and courts addressing it in the context of the TWCA and its predecessor seem to consider it an alternate and separate ground that may bar an employee’s suit against an employer, we hold it is not part of the statutory, exclusive remedy bar of the TWCA. Rather, it is a separate and distinct ground for summary judgment and not part of the TWCA exclusive remedy provision.

Because the trial court specified it was granting summary judgment based on the exclusive remedy bar of the TWCA, making no mention of the alternate ground of acceptance of benefits, and Lockhart brought neither a cross appeal nor a cross-point asserting acceptance of benefits as an alternate ground for affirmance, it has not been preserved for our consideration.

Based on the foregoing, Lockhart did not establish as a matter of law that Rodriguez was a Prime Source employee at the time of his injury, and therefore, failed to conclusively establish its entitlement to the exclusive remedy provision of the TWCA.

Accordingly, the Court of Appeal reversed the trial court’s summary judgment and remand the matter for further proceedings consistent with this court’s opinion.

ZALMA OPINION

Rodriguez accepted workers’ compensation benefits and, because Lockhart failed to move on that ground, and because there was no employer-employee relationship with the PEO, summary judgment was reversed. Lockhart can file a new motion claiming the benefit of the acceptance of benefits doctrine it will probably succeed and find itself back at the court of appeal.

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

Case Against Insurance Agent Assignable

Putative Insured Can Assign Case Against Agent Who Did not Obtain Insurance Ordered

For centuries it has been impossible to assign a cause of action against a professional, like a lawyer, because of the personal relationship between the client and the professional. The California Court of Appeal was faced, in  AMCO Insurance Company v. All Solutions Insurance…, 244 Cal.App.4th 883, 198 Cal.Rptr.3d 687, 16 Cal. Daily Op. Serv. 1521, 2016 Daily Journal D.A.R. 1383 (February 8, 2016) with the question whether a putative insured could assign his cause of action against the insurance agent who failed to obtain the insurance ordered.

The trial court granted summary judgment in favor of the agent and the parties appealed.

Background

Neighbors who owned a restaurant and the insurer for a second neighbor sued an insurance broker for the building owner who had negligently caused fire which damaged neighboring properties and who had assigned claims against broker to neighbors and insurer, alleging negligence and breach of contract based on broker’s failure to procure fire insurance for building. Following consolidation, the Superior Court, granted summary judgment for broker, and neighbors and insurer appealed.

The plaintiffs—neighboring business owners and an insurance company that paid for damages to a neighboring building—pursued the assigned causes of action by filing a lawsuit against the insurance broker. The insurance broker moved for summary judgment, which the trial court granted. The plaintiffs’ appeal of the summary judgment presents three legal issues.

Plaintiffs Hideyo Ogawa and Myong Echols (Restauranteurs) owned and operated a restaurant at 293 South Washington Street, in Sonora, that did business as Koto Japanese Restaurant. For purposes of this opinion, “plaintiffs” refers to AMCO and Restauranteurs collectively.

Issues

First, are a client’s causes of action against an insurance broker or agent assignable?

Second, does the rule of superior equities from California’s equitable subrogation doctrine apply to the contractual assignments in this case?

Defendant All Solutions Insurance Agency, LLC (Broker) is an insurance broker authorized to do business in California.

The Loss and Claims

On December 15, 2009, a fire started at 301 South Washington Street, a two-story building with an apartment above a restaurant, owned by Amarjit Singh (Singh). The fire started in an electrical panel box and was caused by Singh’s negligence.

Singh suffered $491,088.47 in property damage. In addition, the fire damaged the neighboring properties owned by Saari and Restauranteurs. Singh tendered his first party claim and plaintiffs’ third party claims to his insurance company, but the claims were denied because there was no policy in effect on the date of the fire.

In 2010, Restauranteurs sued Singh for their property and business losses.  Singh eventually stipulated to a judgment for $194,200.71, representing the damage to Restauranteurs’ property and business interests. Singh also assigned to Restauranteurs his rights against Broker for failing to obtain fire insurance coverage for Singh’s Property.

AMCO paid its insured, Saari, $371,326 and then filed a subrogation action against Singh. In November 2011, AMCO obtained a stipulated judgment against Singh for the amount paid. Singh also assigned to AMCO his rights against Broker for failure to obtain insurance.

The Failure To Obtain Insurance

Before the fire, Singh received a notice of nonrenewal from his existing insurer. It is undisputed that Singh communicated with Broker’s personnel—namely, Harish Kapur and Rajni Kapur—after receiving the notice and before the fire.  Singh asserts that he requested Rajni Kapur to obtain insurance before the fire and he believed the property was insured at the time of the fire. In contrast, Broker contends that Singh did not request Broker to obtain either first party property or third party liability insurance for the property.

Broker contends that (1) two different quotations for insurance were communicated to Singh on December 10, 2009; (2) Singh was told that Broker would wait for his response before obtaining a policy; (3) Singh understood that he did not have insurance until he called Broker back with his decision; (4) Singh informed Broker that he would call back the following day with a decision; and (5) Singh did not provide Broker with his decision before the fire occurred.

DISCUSSION

California recognizes the general rule that an agent or broker who intentionally or negligently fails to procure insurance as requested by a client—either an insured or an applicant for insurance—will be liable to the client in tort for the resulting damages. Also, a breach of contract cause of action arises where the agent or broker breaches an oral agreement to obtain insurance as requested by the client.

At common law, California followed the English and American approach that, as a general rule, causes of action were assignable and that nonassignability, the exception, was confined to wrongs done to the person, the reputation, or the feelings of the injured party, and to contracts of a purely personal nature, like promises of marriage. These common law principles are not the final word on the subject because the Legislature has addressed the assignment of causes of action.

Assignment Statutes

Civil Code section 954 addresses assignability by stating: “A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner.” The term “obligation” is defined to mean “a legal duty, by which a person is bound to do or not to do a certain thing.” (Civ.Code, § 1427.)

Under California law, the exceptions to the general rule favoring assignability of causes of action include tort causes of action for wrongs done to the person, the reputation or the feelings of an injured party. Exceptions include legal malpractice claims and certain types of fraud claims. The rule that a cause of action for legal malpractice is not assignable is based on a number of public policy reasons, including protecting the attorney-client relationship. This view is predicated on the uniquely personal nature of legal services and the contract out of which a highly personal and confidential attorney-client relationship arises. The court did not recognize that the relationship between an insurance broker and putative insured is as uniquely personal as the attorney client relationship.

The Court of Appeal held that its conclusion that a client’s causes of action against an insurance broker are assignable found that it is consistent with the majority view.

In summary,  Singh’s negligence cause of action against Broker is assignable under California law. Therefore, the summary judgments granted in favor of Broker cannot be affirmed on the ground that Singh’s cause of action was not assignable.

 In this appeal, the pertinent overlapping relationship involves the terms “subrogation” and “assignment.” Subrogation has been called a sort of assignment by operation of equity and the equivalent of an equitable assignment. Conversely, voluntary assignment has been deemed a kind of subrogation. Thus, the broadest usage of the term “subrogation” includes transfers of causes of action that are implemented by either (1) contract, which is a consensual arrangement, or (2) operation of law without the consent of the owner of the cause of action.

Here, Restauranteurs were not sureties and no payments, akin to the type of payment a surety would make on behalf of another, were made. Therefore, they had no possibility of pursuing a claim for equitable subrogation, much less an equitable subrogation claim that replicated the contractually assigned cause of action against Broker. Consequently, the limitation on contractual assignments does not apply to Restauranteurs.

 The judgment is reversed. The trial court is directed to vacate its July 2014 orders granting the motions for summary judgment and enter a new order denying those motions.

ZALMA OPINION

There should be no question that the putative insured stated a cause of action against the broker for negligence. Allowing the negligent person to, by assignment of a cause of action against the insurance broker he claimed failed to purchase the insurance he ordered, to assign that right to others allows the person responsible for the fire to escape liability for his error. The trial may prove there was no negligence by the agent and the injured parties will get nothing. A potential right assigned is not a right – the parties still must prove the agent was negligent – and may get nothing more than large attorneys fee bills.

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

Health Fraud Case Lawyers Removed

Zalma’s Insurance Fraud Letter

July 1, 2016, Volume 20, No. 13

BZBACKSUIT3

Barry Zalma

Welcome to the July 1, 2016 Issue of ZIFL

Click here to receive the current issue

In this, the thirteenth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on July 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:

  • Health Fraud Case Lawyers Removed
  • First Annual Claims Magazine/Americas Claims Event Legend Award to Barry Zalma
  • Disbarred For Health Insurance Fraud
  • Barry Zalma
  • Claims Commandments 10 – 12
  • Proformative Academy Webinars
  • The Best Defense is Offense
  • Good News From the Coalition Against Insurance Fraud
  • Books from Barry Zalma
  • Wisdom
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

THE “ZALMA ON INSURANCE” BLOG 

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

I have also created a video blog called Zalma’s Insurance 101 which currently has over 900 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

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.

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Insurable Interest & Coverage

Insurance Dispute Resolved by Recognition of Insurable Interest

First party property insurance does not insure property but, rather, insures a person named as an insured against the risk of loss of property in which the person insured has an insurable interest. An insurable interest is one where the insured will be damaged as a result of a loss to the property caused by a peril insured against.

In Fontana Builders, Inc. v. Assurance Co. of America, Supreme Court of Wisconsin, — N.W.2d —- , 2016 WL 3526408 (June 29, 2016) the Supreme Court of Wisconsin dealt with the review of an unpublished decision of the court of appeals affirming judgments entered in favor of Assurance Company of America (Assurance) against its insured, Fontana Builders, Inc. (Fontana), and Fontana’s lender, AnchorBank, FSB (AnchorBank).

The case involves what the Supreme Court found to be a complicated insurance coverage dispute arising out of a 2007 fire that destroyed portions of a high-end custom home that was still under construction in Lake Geneva. The fire caused major damage not only to the home but also to the personal property of the home’s occupants, who were the presumptive purchasers of the home upon its completion but who had not yet purchased the dwelling which was still owned by the builder, Fontana.

Both the construction contractor, Fontana, and the occupants/presumptive purchasers, James and Suzy Accola (the Accolas), had separate insurance policies. After the fire, the Accolas settled with Chubb Insurance Co. (Chubb), the insurer that provided their homeowner’s policy, and received a substantial payment. Assurance then denied all coverage to Fontana for the fire, relying on the “permanent property insurance” condition in its builder’s risk policy as grounds for the denial.

Before getting to the Supreme Court there were two jury trials and two appeals, although this is the first appeal to reach the Supreme Court. The Supreme Court saw two fundamental questions: First, is the interpretation of the “permanent property insurance” condition in the builder’s risk policy a question of fact for a jury or a question of law for the court? Second, if the interpretation of the “permanent property insurance” condition is a question of law, did that condition terminate Fontana’s coverage under the builder’s risk policy?

FACTUAL BACKGROUND

Fontana designed and built “spec” homes, speculative custom houses for which Fontana obtained financing and began construction before securing a buyer for the finished structure. James Accola was the president and sole shareholder of Fontana Builders, Inc.

Nearly all of Fontana’s assets were invested in the house, which the company planned to use to generate new opportunities for itself in the high-end housing market. The home was larger and included more detailed interior work than any previous Fontana-built home. Accola testified at the second trial that he intended to use the home to “showcase” Fontana as “one of the premier builders in the Lake Geneva area.” As the home’s owner, Accola would have unfettered access to an example of Fontana’s finished work when he courted prospective buyers.

Fontana financed the project’s construction through two mortgages with AnchorBank. The first mortgage, dated November 29, 2005, secured a $1.076 million loan. A subsequent mortgage, dated April 23, 2007, secured a $200,000 loan. Accola provided a personal guarantee on Fontana’s loans and mortgages.

Fontana’s Builder’s Risk Coverage from Assurance

Under the builder’s risk policy, Assurance agreed to “pay for direct physical loss to Covered Property from any Covered Cause of Loss described in [the] Coverage Form.” Covered Property included “[p]roperty which has been installed, or is to be installed in any commercial structure and/or any single family dwelling, private garage, or other structures that will be used to service the single family dwelling.”

A separate section of the policy specified additional conditions for coverage: “We will cover risk of loss from the time when you are legally responsible for the Covered Property on or after the effective date of the policy if all other conditions are met. Coverage will end at the earliest of the following: ¶ Once your interest in the Covered Property ceases; ¶  * * * ¶ When permanent property insurance applies;… (Emphasis added.)”

The Accolas’ Homeowner’s Policy from Chubb

James Accola obtained a 30–day temporary occupancy permit dated May 30, 2007, and, shortly thereafter, the Accolas moved most of their personal property into the home. Although the Accolas began residing in the home, Fontana continued interior work preparing the home for permanent occupancy. Fontana remained the home’s owner and had not yet closed a sale or transferred title to the Accolas.

In anticipation of purchasing the home, the Accolas acquired a homeowner’s policy from Chubb Insurance Co. The policy listed “Jim Accola” and “Susy [sic] Accola” as the named insureds, and it listed “Anchor Bank” as the mortgagee. Effective for one year from June 21, 2007, the coverage summary explained: “Your policy provides coverage against physical loss if your home or its contents are damaged, destroyed, or lost.” It provided $2 million of deluxe coverage for the dwelling and $1 million of deluxe coverage for the home’s contents.

The Fire and Its Aftermath

The fire occurred late on the night of June 28, 2007. A Fontana employee working on the property during the day left rags used for wood staining in the garage, and those rags spontaneously combusted. Awakened by smoke alarms shortly after falling asleep, Accola immediately smelled smoke in the house. With thick smoke filling the home’s interior, Accola retrieved his two youngest children from an upstairs bedroom and exited the house.

After the fire, the Accolas submitted a claim to Chubb for damages to their property. They signed a Non–Waiver Agreement allowing Chubb to investigate the claim without acknowledging that the homeowner’s policy provided coverage for the Accolas. Separate from the Accolas’ claim with Chubb, Fontana made a claim with Assurance under the builder’s risk policy. Assurance began investigating Fontana’s claim after James Accola signed a Non–Waiver Agreement on Fontana’s behalf.

Following the mediation, Chubb entered into a settlement agreement with the Accolas. Chubb agreed to pay the Accolas $1 .5 million to dispose of their claim. The agreement allocated $519,000 of the settlement proceeds toward “replacement costs of the [Accolas’] personal property” and $330,000 toward their “additional living expenses,” with the remainder allocated toward “[a]ny other interest the [Accolas] may have in the premises.”

Assurance denied coverage after concluding that the policy did not cover the fire loss and Assurance concluded that the homeowner’s insurance constituted permanent property insurance that applied, thus terminating the Assurance policy.

INTERPRETING THE ASSURANCE POLICY

When determining insurance coverage the Supreme Court examines the facts to determine whether the insuring agreement provides an initial grant of coverage, and the analysis ends if the policy does not provide an initial grant.

The Assurance policy does not define “permanent property insurance.” Nor does the policy define what it means for permanent property insurance — whatever it may be — to “apply.” Assurance contends that Chubb’s payments to the Accolas demonstrate that permanent property insurance applied to the fire loss, thus terminating the Assurance policy. Fontana counters that its insurable interest as a builder was distinct from the Accolas’ interests as occupiers and potential purchasers.

Policy language is ambiguous when “susceptible to more than one reasonable construction. Where an ambiguity exists in a grant of coverage, the court must construe the policy against the drafter, and in favor of the reasonable expectations of the insured.

An insured builder might reasonably expect builder’s risk coverage to end when the builder completes construction and the owner — be it the builder or a new owner — purchases a policy to provide adequate coverage for the finished structure. On the other hand, a party might conclude that it is reasonable for builder’s risk coverage to end when any other property insurance applies to the property, regardless of the party purchasing coverage or the particular interest insured.

For guidance interpreting the phrase “when permanent property insurance applies,” we expand the analysis to consider the phrase within the context in which it appears. Considering the phrase “when permanent property insurance applies” in context suggests that the phrase speaks to the builder’s interest in the property.

The circumstance at issue in this case — “when permanent property insurance applies” — is the only condition or exclusion in the policy that does not explicitly relate to the builder’s interest in the property. Accordingly, based on its context, the Supreme Court read the phrase “when permanent property insurance applies” as addressed to the builder’s insured interest in the property.  Hence, it examined the interests covered by the Assurance and Chubb policies to determine whether the existence of the Chubb policy terminates Fontana’s coverage with Assurance.

This court has explained the broad scope of insurable interests: “A person need not have an absolute insurable right of property in the thing insured or even a special limited interest. It is sufficient if a person’s relationship to the property is such he would reasonably be expected to suffer a loss by the destruction of the property or to derive a benefit from its continued existence. Neither a legal nor an equitable interest nor any property interest as such in the subject matter is necessary.” Ben–Hur Mfg. Co. v. Firemen’s Ins. Co. of N.J., 18 Wis.2d 259, 262, 118 N.W.2d 159 (1962). An insurer under a builder’s risk policy obtained by a contractor and an insurer under a fire policy obtained by a purchaser, who occupied the dwelling prior to conveyance of the title by the contractor, could not prorate a loss, though each policy contained pro rata clauses, because each policy covered a separate insurable interest.

The Accolas’ acquisition of the Chubb policy for their interest as occupants and prospective purchasers did not trigger the Assurance policy’s termination provision because the Chubb policy did not apply to the same interest as the Assurance policy. The Chubb policy in no way covered Fontana’s interest as a builder and owner; therefore, it did not “apply” so as to supersede the builder’s risk coverage. Furthermore, the Accolas’ settlement with Chubb does not change the analysis because even if Chubb had acknowledged that the policy provided coverage — which the settlement expressly disclaimed — any payments to the Accolas would speak to their interest insured by Chubb rather than Fontana’s interest insured by Assurance.

 Leaving builders exposed to such uninsured risk of loss would thoroughly frustrate their reasonable expectations. Assurance, as the drafter of the policy, had the opportunity to set forth in clear terms the circumstances envisioned by the phrase “when permanent property insurance applies.”

CONCLUSION

Legally distinct entities had different interests in the Lake Geneva property at issue in this case. Although the Accolas occupied the property on the date of the fire, their occupancy did not alter Fontana’s insurable interest: construction on the property continued, and Fontana remained the property’s owner because sale to the Accolas had not yet closed. Reaffirming the longstanding principle that interpretation of insurance contracts generally presents a question of law for the court, it concluded that the homeowner’s policy issued by Chubb to the Accolas did not “apply” so as to terminate Fontana’s builder’s risk policy from Assurance.

ZALMA OPINION

This supposedly complex case was truly simple. The Accolas had an insurable interest in both the contents and structure as a place they were occupying and had the right to make a claim against their homeowners insurer, Chubb for all losses up to the amount of their interest. Fontana had a builders insurable interest in the structure and had a right to make claim for its losses due to the fire. The court so found. It ignored the fact that Chubb had the right to subrogate against Fontana for negligently causing the fire that resulted in a $1.5 million settlement that might be presently pending.

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

Declaratory Relief Only Available If There is an “Actual Controversy”

Insurer’s Dispute Premature

Insurance companies often seek the help of federal courts to determine disputes over which insurer owe what to an insured in what amounts. In Progressive American Insurance Company v. Kanzer, Slip Copy, United States District Court, Florida, CASE NO: 8:16-CV-1154-T-30AEP (06/24/2016) the USDC in Florida was asked to resolve a dispute between insurers over defense and indemnity of their mutual insureds as a result of an vehicle accident causing bodily injuries.

BACKGROUND

Plaintiff Progressive American Insurance Company seeks a declaration regarding the priority of insurance coverage. Specifically, this declaratory judgment action arises out of an underlying state court action styled, Anthony Gallo v. Stephen R. Kanzer, pending in Pinellas County, Florida Circuit Court (the “underlying action”). In the underlying action, Anthony Gallo filed a single-count negligence action against Stephen R. Kanzer for bodily injuries Gallo suffered as a result of a motor vehicle accident caused by Kanzer’s negligence.

DISCUSSION

Progressive alleges in this case that it issued two insurance policies to Kanzer: a personal automobile policy, with potentially relevant limits of $250,000 each person and $500,000 each accident, and a personal umbrella policy, with a potentially relevant limit of $1,000,000 per occurrence. Progressive alleges that Twin City Insurance Company issued to Kanzer’s employer, Morgan & Morgan, Tampa, P.A., a liability insurance policy, containing business auto coverage, with a relevant limit of $1,000,000 per occurrence. Progressive also contends that North River Insurance Company issued to Morgan & Morgan a commercial umbrella policy, with a relevant limit of $25,000,000 per occurrence.

Progressive does not seek a declaration from this Court on the duty to defend; it concedes that it is providing Kanzer with a defense in the underlying action. Progressive requests the Court to declare that Kanzer is an insured under the Twin City and North River policies issued to Morgan & Morgan, and is therefore entitled to coverage under those policies for the damages Gallo claims in the underlying action. Progressive also asks the Court to declare that there is a specific priority of coverage among the various policies, whereby the Progressive personal automobile policy provides the first layer of indemnity coverage to Kanzer up to its applicable limits, followed by the Twin City policy up to its applicable limits, followed by the Progressive and North River umbrella policies on a pro rata basis according to their respective policy limits.

North River moves to dismiss Progressive’s complaint for declaratory relief for lack of subject matter jurisdiction (a lack of an “actual controversy”) and for failure to state a cause of action pursuant.

DISCUSSION

The test for an “actual controversy” under the Declaratory Judgment Act does not require a present dispute, but only the “practical likelihood” that a dispute will arise. Here, the Court concludes that there are too many contingencies at issue and that the “practical likelihood” that they will occur is too hypothetical at this point. For example, as North River points out, North River’s indemnity obligations to the insured are contingent on the insured actually being held liable in the underlying action. North River’s indemnity obligations are also contingent on the exhaustion of the underlying insurance. Those events may never occur.

On that same note, any declaration regarding the priority of coverage implies that there is a duty to indemnify Kanzer.

Progressive’s declaratory action is premature. The Court should never waste judicial resources and the resources of the parties on speculative, hypothetical injuries.

However, rather than dismiss this case as North River requests, the Court elects to stay the action, pending the outcome of the underlying action.

ZALMA OPINION

Insurance disputes that pose an actual controversy can always be resolved by a declaratory relief action. However, when the issue is speculative and premature courts should ignore the request for declaratory relief. In this Solomon-like decision the USDC punted the case until there is a resolution of the underlying case. If there is a defense verdict there will be no dispute between the insurers and if there is a verdict for the plaintiff then the court can consider the issue.

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 May Not Change LLP to General Partnership

LLP In New Jersey Not Required to buy Tail Coverage on Winding Up

Lawyers did business as a limited liability partnership (LLP) for some years and then decided to wind up, dissolve, the partnership. After the LLP was dissolved and during the winding up period the LLP only existed to collect fees and pay bills and provided no legal services. The trial court tried to get the plaintiff insurance coverage – since a dissolved LLP has no assets – by converting the LLP to a general partnership (GP) that required continuing insurance coverage. The LLP appealed to the New Jersey Supreme Court.

In Mortgage Grader, Inc. v. Ward & Olivo, L.L.P., Supreme Court of New Jersey , — A.3d –—, 2016 WL 3434529 (June 23, 2016) one of the LLP law firm attorney’s client filed suit against attorney, attorney’s partner, and firm for damages arising out of attorney’s alleged legal malpractice in settlement of client’s patent infringement claims. The Superior Court, denied partner’s motion to dismiss for failure to state claim, determined that defendants failed to maintain requisite lawyers professional liability insurance during period of LLP’s dissolution and windup of LLP’s affairs, converted LLP to general partnership as sanction, and concluded that partner could be vicariously liable for attorney’s alleged malpractice. Partner appealed. The Superior Court, Appellate Division, 438 N.J.Super. 202, 102 A.3d 1226, reversed and remanded.

FACTS

In July 2009, Mortgage Grader hired Olivo of Ward & Olivo (“W & O”) to pursue claims of patent infringement against other entities. Mortgage Grader entered into settlement agreements in those matters. In exchange for one-time settlement payments, Mortgage Grader granted those defendant-entities licenses under the patents, including perpetual rights to any patents Mortgage Grader received or obtained through assignment, regardless of their relationship to the patents at issue in the litigation. It is those provisions of the settlement agreement that allegedly gave rise to legal malpractice.

On June 30, 2011, W & O dissolved and entered into its windup period. It is undisputed that W & O continued to exist as a partnership for the sole purpose of collecting outstanding legal fees and paying taxes. The next day, Ward formed a new LLP and began to practice with a new partner. W & O’s claims-made malpractice insurance policy ran through August 8, 2011. W & O did not purchase a “tail policy.”  Olivo sent Mortgage Grader a letter on May 10, 2012 on behalf of both Olivo Law Group, LLC and W & O, informing Mortgage Grader of the termination of legal services.

Mortgage Grader filed a complaint against W & O, Olivo, and Ward in October 2012. The complaint alleged legal malpractice by Olivo, claiming that the settlement agreements resulting from Olivo’s representation harmed Mortgage Grader’s patent rights. Ward filed an answer and subsequently moved to dismiss for failure to state a claim. Ward argued that the requirement in Rule 1:21–1C, which provides that a law firm organized as an LLP must purchase malpractice insurance, is silent as to tail coverage following its dissolution.

The Appellate Division concluded that the UPA did not provide that a law firm organized as an LLP converts to a GP if it fails to maintain malpractice liability insurance. The panel also noted that Rule 1:21–1C(a)(3) states that the only remedies for an LLP’s failure to maintain malpractice insurance are for this Court to terminate or suspend the LLP’s right to practice law or otherwise discipline it. Because of this, and the fact that the Legislature has never amended the UPA to require conversion of an LLP to a GP as a sanction for failing to purchase a tail insurance policy, the panel found that a trial court has no authority to convert an otherwise properly organized LLP into a GP in order to sanction a partner for practicing without malpractice insurance.

ANALYSIS

Mortgage Grader argues that law firms organized as LLPs in the windup period continue to exist as viable entities, and must therefore maintain professional liability insurance as required by Rule 1:21–1C(a)(3).

W & O maintained professional liability insurance during the entire time it was actively engaged in the practice of law, and after its policy lapsed, W & O existed solely to collect outstanding fees and pay taxes in an effort to wind up the partnership.

The New Jersey Constitution grants the Supreme Court jurisdiction over the admission to the practice of law and the discipline of persons admitted.

The Supreme Court could find no indication that the administrative activities characterizing a windup are included within the term “practice of law.”  A partnership’s existence continues during the windup period and is terminated when the winding up of its business is completed.  In that event, the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred

During the windup period, the LLP continues to exist, but only to wind up the partnership’s affairs. The UPA sets forth activities that do not constitute “transacting business”: “collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired. In sum, the important distinction pertaining to LLP liability is the point in time at which an LLP enters dissolution, commences winding up its affairs, and thus ceases to engage in the business for which it was created.

The administrative activities conducted during the windup period are not the transacting of business for which a law-firm LLP was established. Accordingly, under the circumstances, where a law-firm LLP has entered the windup period and has ceased to provide any legal services, the windup period does not constitute practicing law and therefore no acts of malpractice could be committed during this period. A winding up LLP has no obligation to maintain insurance or tail coverage under New Jersey statutes.

Similarly, the date on which W & O incurred its alleged obligation to Mortgage Grader is also dispositive. Partnership obligations under or relating to a tort generally are incurred when the tort conduct occurs rather than at the time of the actual injury or harm.  A law-firm LLP incurs its obligation to a client on the date the alleged malpractice occurred. Here, W & O was a valid LLP with professional liability insurance coverage at the time of Olivo’s alleged malpractice.

Mortgage Grader, therefore, may not maintain a vicarious liability claim against Ward.

In addition the erroneous determination that W & O was still practicing law during its windup period, the trial court improperly relied on Rule 1:21–1C to convert W & O from an LLP to a GP. The Supreme Court also concluded that the statutes provide no support for the trial court’s conversion of W & O from an LLP to a GP.

The Supreme Court also declined to impose a tail requirement on attorneys who choose to practice as LLPs, particularly because a mandate to purchase tail coverage still would not fully protect the public from uninsured risks and that the mandate to purchase professional liability insurance does not include any requirement to purchase tail coverage.

In conclusion:

  1. neither Uniform Partnership Act (UPA), nor rule that incorporated UPA by reference, which required law firm organized as LLP to maintain lawyers’ professional liability insurance to cover claims arising out of performance of professional services by attorneys employed by LLP, required that firm maintain coverage upon dissolution of firm during windup period;
  2. partner was not vicariously liable for attorney’s alleged malpractice;
  3. Supreme Court, and not trial court, had exclusive authority to impose sanction for alleged violation of insurance mandate;
  4. conversion of LLP firm to general partnership was not authorized sanction for firm’s alleged violation of insurance mandate;
  5. UPA did not authorize conversion of LLP firm to general partnership for violation of insurance mandate; and
  6. even assuming that partner was not shielded from vicarious liability for attorney’s alleged malpractice, client was not obligated to serve affidavit of merit on partner.

ZALMA OPINION

E & O insurance for lawyers professional liability are usually, if not always, a claims made or a claims made and reported policy. The claims made policy only applies if a malpractice claim is made during the time the policy was in effect. If the firm dissolves and desires to be protected for claims made after dissolution it can purchase “tail” coverage that allows a claim to be made after the expiration of the policy and dissolution of the law firm. Tail coverage is not required in New Jersey. If the LLP is liable it can be held to pay a judgment but, since it is dissolved, it is judgment proof with no assets.

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 theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Failure to Read and Apply Policy Is Expensive

Clear & Unambiguous Exclusion Must be Enforced

I have spoken over the last 48 years, until I was blue in the face, that before a decision is made on a claim, before a suit is filed, the people involved must read the entire policy and be certain that all of the conditions of the policy have been met and the claim can be proved.

In Bakri v. Sentinel Ins. Co., Court of Appeals of Michigan, 2016 WL 3429678 (June 21, 2016) the Michigan Court of Appeals was asked to do what the parties and the trial court failed to do: read the entire policy.

FACTS

After a motor vehicle accident between plaintiff and defendant Youssef Ftouni, in which plaintiff suffered injuries. Plaintiff filed a complaint against Ftouni and claimed that Ftouni’s negligence was the direct and proximate cause of the serious impairment of bodily function he sustained in the accident. He also named Sentinel as a defendant because it issued him an underinsured motorist (UIM) policy, under which it was obligated to pay the damages that exceed Ftouni’s own insurance policy limits.

The case was submitted to the Mediation Tribunal for case evaluation, and the panel recommended two awards in favor of plaintiff: $100,000 (Ftouni’s policy limit) against Ftouni, and $100,000 against Sentinel. On September 17, 2014, the Mediation Tribunal mailed a notification of case evaluation results, which indicated that plaintiff and Ftouni both accepted the award regarding plaintiff’s negligence claim. The notice also indicated that plaintiff and Sentinel rejected the award regarding plaintiff’s UIM claim.

After the notice of the evaluation results was issued, Sentinel advised plaintiff that his UIM claim was barred under a policy exclusion that precluded coverage for any claim settled without Sentinel’s consent. According to Sentinel, the exclusion was triggered when plaintiff accepted the case evaluation award against Ftouni without requesting or obtaining Sentinel’s consent. Had Ftouni or his counsel had read the entire policy before accepting the evaluation of the Mediation Tribunal he asked Sentinal to fund the agreement. Rather, Plaintiff filed a motion for declaratory relief and sought an order that indicated that his case evaluation acceptance did not impact his UIM claim. Alternatively, plaintiff requested that his case evaluation acceptance be set aside. The trial court denied plaintiff’s motion and, pursuant to MCR 2.403(M), entered judgment against Ftouni in accordance with the case evaluation award.

ANALYSIS

Sentinel argued that it was entitled to judgment as a matter of law because plaintiff’s claim was barred by the plain language of the UIM policy. On appeal, Sentinel argues that the trial court erred when it concluded that the exclusion in its policy did not preclude plaintiff’s claim.

A genuine issue of material fact exists (sufficient to defeat a motion for summary judgment) when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ. Further, the construction and interpretation of an insurance policy and whether the policy language is ambiguous are questions of law that the appellate court may review as if it was the trial court.

Insurance policies are contracts and, in the absence of an applicable statute, are subject to the same contract construction principles that apply to any other species of contract. Unlike personal protection insurance, UIM insurance is not required by statute in Michigan. Under traditional principles of contract interpretation, unless a contract provision violates law or one of the traditional defenses to the enforceability of a contract applies, a court must construe and apply unambiguous contract provisions as written. Although exclusionary clauses should be construed in the insured’s favor, an exclusion that is specific and clear must be enforced.

The policy provides: “This insurance does not apply to any of the following: ¶ 1. Any claim settled without our consent. However, this exclusion does not apply to a settlement made with the insurer of … [an] “uninsured motor vehicle,” in accordance with the procedures described in Paragraph A.2.b.”

Regardless of how the settlement was reached in this matter, there is little question that plaintiff has, in fact, settled his claim with Ftouni, the underinsured driver. Plaintiff and Ftouni both accepted case evaluation, and the trial court entered judgment against Ftouni in accordance with the case evaluation award. The parties do not dispute that plaintiff settled his claim with Ftouni without Sentinel’s consent. Therefore, under the clear language of the exclusion coverage does not exist.

Mutual case evaluation acceptance cannot reasonably be construed as a “tentative settlement.” In determining the common meaning of a word or phrase like the term “tentative” as “not fully worked out or developed” is a common dictionary definition.  The purpose of case evaluation is to expedite and simplify the final settlement of cases.  An accepted case evaluation serves as a final adjudication and is therefore binding on the parties similar to a consent judgment or settlement agreement. Thus, if case evaluation acceptance is akin to a consent judgment or settlement agreement and intended to facilitate final settlements, a settlement reached by way of case evaluation cannot reasonably be characterized as not fully worked out or developed.

Moreover, even if the Court accepted plaintiff’s argument that the settlement was “tentative” and that he was able to avail himself of the exception to avoid exclusion of his claim, the procedures outlined in that section were not satisfied in this case. The first requirement of the policy was fulfilled: Sentinel received written notice of the settlement by way of the Mediation Tribunal’s notification of results, as well as plaintiff’s correspondence. However, the second requirement remains unsatisfied because there is no dispute that Sentinel never advanced payment of the case evaluation award to plaintiff.

In sum, because Sentinel did not consent to plaintiff’s settlement with Ftouni, the trial court erred when it concluded that Sentinel was not entitled to judgment as a matter of law. An exclusion that is specific and clear must be enforced and the plain language of the policy excludes plaintiff’s claim for UIM benefits. Additionally, giving the benefit of reasonable doubt to plaintiff regarding the “tentative” nature of mutual case evaluation acceptance, there is no question that the requirement was not satisfied because Sentinel did not advance the settlement funds within 30 days of receiving notice of the settlement.

ZALMA OPINION

Mr. Ftouni could have obtained an extra $100,000 by telling his insurance company he would like to accept the recommendation of the Mediation, ask that they agree and fund the UIM portion of the recommendation and wait a few days for the response. Rather, by accepting without obtaining the permission and agreement of the UIM insurer, Ftouni defeated his UIM claim.

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 theLEGENDAWARD 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

Payment of Appraisal Award Promptly Defeats Bad Faith

Breach of Contract Needed For a Bad Faith Claim

Lay people, and some of their lawyers, believe that if they are not paid exactly what they want on a claim promptly and without question is sufficient to establish a bad faith claim. In Texas, at least, the insured must prove that the insurer breached the contract and acted in a conscious way to deprive the insured of the benefits of the contract. Failure to produce proof defeats a bad faith claim.

In Anderson v. American Risk Insurance Company, Inc., Court of Appeals of Texas, Houston (1st Dist.) NO. 01-15-00257-CV, 2016 WL 3438243 (June 21, 2016) Vanessa Anderson appealed from the trial court’s rendition of summary judgment in favor of American Risk Insurance Company, Inc. (“ARIC”). Anderson brought contractual and extra-contractual claims against ARIC related to an insurance coverage dispute that arose after her house was damaged during a storm. After paying the appraisal award, ARIC moved for summary judgment on all claims. The trial court granted summary judgment and rendered a take-nothing judgment.

BACKGROUND

Anderson’s residence in Spring, Texas was covered by an ARIC homeowner’s insurance policy. During a storm on June 12, 2012, a tree fell through the roof of her home. All told, after the storm, one bedroom and one bathroom were destroyed by the tree, and the home had no water, power, or air conditioning.

ARIC’s summary-judgment evidence showed that, within three days of the tree falling, Steve Mazey inspected the property on behalf of ARIC. Mazey estimated the total loss at $58,784.05.

From June to September 2012, ARIC made a series of payments to Anderson totaling $52,475.22. Anderson lived at the apartment complex Marquis at Woodlands from August 11, 2012, through October 10, 2012. According to her affidavit, she accrued late fees because ARIC was slow to reimburse her though she was “very prompt about submitting” receipts.

On November 8, 2012, Anderson sent a demand letter to ARIC seeking $300,000 to settle her claims: $200,000 for actual damages, $25,000 for mental anguish, and $75,000 for attorney’s fees and expenses amounts that had nothing to do with the falling tree.  ARIC did not pay and she filed suit, asserting claims for breach of contract, breach of the common law duty of good faith and fair dealing, various violations of Chapter 541 of the Texas Insurance Code and Deceptive Trade Practices Act (“DTPA”), and violations of the prompt payment provisions set forth in Chapter 542 of the Texas Insurance Code.

ARIC invoked its right to appraisal, as provided for under the policy. After many delays, some caused by her Appraiser, an award was rendered and ARIC issued checks to Anderson on August 8, 2014, in payment of the appraisal award.

ARIC further asserted that it was entitled to judgment as a matter of law on the extra-contractual claims because there was a bona fide dispute about the amount of covered damages and Anderson’s alleged damages are barred by the economic loss rule. Finally, ARIC argued that no genuine issue of material fact existed on the misrepresentation and fraud claims because Anderson had not identified any particular false representation which she relied upon to her detriment.

DISCUSSION

Anderson contends that the trial court erred in granting summary judgment in favor of ARIC because material issues of Breach of Contract

In her petition, Anderson alleged that ARIC was liable for breach of contract because it failed “to pay appellant’s benefits relating to the cost to properly repair” her property. ARIC argues that it is entitled to judgment as a matter of law on Anderson’s breach of contract claim because the claim is precluded by ARIC’s appraisal award payment.

The Texas Supreme Court has long recognized the validity of appraisal provisions, which provide a means to resolve disputes about the amount of loss for a covered claim. When an insurer makes timely payment of a binding and enforceable appraisal award, and the insured accepts the payment, the insured is estopped by the appraisal award from maintaining a breach of contract claim against the insurer.

The undisputed evidence shows that ARIC invoked the appraisal process, as provided for under the policy, to determine the value of Anderson’s claim. Both parties appointed appraisers and agreed upon an umpire. By August 1, 2014, the appraisal award was set. One week later, ARIC tendered payment of the appraisal award after accounting for the deductible, prior payments, and policy limits. Accordingly, the summary judgment record conclusively shows that ARIC fulfilled its obligations under the contract.

The fact that ARIC did not pay the amount of the award earlier, alone, does not raise a fact issue on Anderson’s claim for breach of contract. The court of appeal concluded that the trial court correctly rendered summary judgment in favor of ARIC on Anderson’s breach of contract claim.

Extra–Contractual Claims

The summary judgment evidence demonstrates that the parties participated in the appraisal process and that an appraisal award was determined on August 1, 2014. It is undisputed that ARIC issued checks in full payment of the appraisal award on August 8, 2014—well within the timeliness requirements of the statutes. Because the summary judgment evidence conclusively demonstrates that ARIC fully and timely paid the appraisal award, Anderson is precluded from maintaining her prompt payment claim as a matter of law.

Breach of the Duty of Good Faith and Fair Dealing

Anderson alleged that ARIC breached its common law duty of good faith and fair dealing “by denying [Anderson’s] claims or inadequately adjusting and making an offer on [Anderson’s] claims without any reasonable basis, and by failing to conduct a reasonable investigation to determine whether there was a reasonable basis for these denials.” ARIC argues on appeal, as it did in the trial court, that it is entitled to judgment as a matter of law on Anderson’s common law bad faith claim because there was no breach of contract, and even had there been, there was a bona fide dispute about coverage.

Under Texas law, an insurer has a duty to deal fairly and in good faith with its insured in the processing and payment of claims. An insurer breaches this duty of good faith and fair dealing if the insurer knew or should have known that it was reasonably clear that the claim was covered, but denies or unreasonably delays payment of the claim. However, absent a breach of contract, the insured cannot maintain a common law bad faith claim in Texas unless the insurer commits some act, so extreme, that would cause injury independent of the policy claim or fails to timely investigate the insured’s claim. Evidence establishing only a bona fide coverage dispute does not demonstrate bad faith.

Here, ARIC’s payment of all covered damages extinguished any breach of contract claim arising from the dispute. Thus, in order to avoid summary judgment on her common law bad faith claim, Anderson had the burden to raise a genuine issue of material fact that ARIC commited some act, so extreme, that would cause injury independent of the policy claim or failed to timely investigate her claim. The summary judgment evidence demonstrates only a bona fide dispute about the amount necessary to compensate Anderson for covered damage to her home. Within 15 days of receiving notice of a claim, insurers are required to acknowledge receipt of the claim, commence investigation of the claim, and request items and forms that the insurer reasonably believes, at that time, will be required from the claimant. Undisputed summary judgment evidence shows that on June 15, 2012— three days after Anderson reported the claimed loss—a representative of ARIC inspected the property.

In sum, because Anderson’s breach of contract claim fails and she has failed to show that ARIC caused her to suffer some injury independent of her policy claim or failed to timely investigate her claim, the court concluded that there is no genuine fact issue on Anderson’s common law duty of good faith and fair dealing claim, and thus the trial court did not err in rendering judgment as a matter of law on this claim in favor of ARIC.

ZALMA OPINION

To assert the tort of bad faith the plaintiff must prove that the insurer acted intentionally to deprive her of the benefits of the contract. The evidence presented established that the insurer acted to thoroughly investigate her claim within days of her first report and to pay her claim promptly as it determined and then paid the difference between its finding and an appraisal award. Although it has been said that “no good deed goes unpunished” the court protected the ARIC but it was required to defend itself at trial and in the appellate court for doing everything right.

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 theLEGENDAWARD 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

First Annual Claims Magazine/Americas Claims Event Legend Award

Barry Zalma Named an Insurance Legend

I was honored on June 24, 2016 to be the first person awarded the Claims Magazine/America’s Claims Event (ACE) Legend Award.BZBACKSUIT3

In the June 2016 issue of Claims Magazine an article explained some of the reasons why they decided to give me the award. It is available on line at Property & Casualty 360.  

Looking back on my 48 years working in the insurance business I continue to believe insurance is an extremely rewarding career.  I never went to work feeling like it was going to be a bad day, although I knew there would be bad days. If you have a job where you enjoy yourself, where you are challenged every day, it doesn’t feel like work. The challenge of dealing with a different claim with different facts, different investigative needs and different legal issues made working in insurance a pleasure.

One of the most disheartening changes I have seen in the insurance industry is the apparent lack of interest in maintaining and training a staff of competent claims personnel and the concurrent rise of unnecessary and expensive bad faith law suits that could have been avoided by adequate claims handling. This is what motivated me to write books, Zalma’s Insurance Fraud Letter, this blog and my videoblog, webinars and appearance at places like ACE to do what I can to help improve the professionalism of claims personnel.

Whatever success I have had in the insurance industry has everything to do with the excellent initial education my first employer in the insurance business, the old Fireman’s Fund Insurance Co. gave me as a trainee and continued to give me as a field adjuster. The Fireman’s Fund did not cut corners. It made me study insurance by reading an insurance claims text like my Insurance Claims: A Comprehensive Guide, sent me out as an observer with experienced adjusters in each field of insurance covered by the insurer, a full month of classroom training in every aspect of insurance claims handling, and then six months of on the job training.

It is my hope that you can take note of the benefits of providing solid training and continuing education for your claims staff.

To qualify for the award it must be found Claims and ACE state that:

The award is presented to an individual who has made significant contributions to the claims sector of the insurance industry through education, professional development and perseverance. This professional has been involved in or supported the industry for much of his or her career. Understanding the premise that improving an industry for one group or segment of the population improves it for all, this person has shared knowledge, resources and expertise for the benefit of an entire industry.
        Selection criteria includes:
        Education efforts – speaking at industry events, teaching courses, promoting the insurance profession across a wide variety of audiences
            Written contributions – submits articles, white papers, expertise to publications and news outlets to educate professionals and the public on the industry
            Professionalism – exhibits business and personal ethics, is an avid promoter and supporter of the industry, mentors other professionals
            Making it better – contributes time and talents to community and industry events, offers pro bono services
        Career should encompass at least 10 years of experience in some aspect(s) of the insurance industry – e.g., claims, subrogation, legal, SIU, supporting vendor services, workers compensation, property & casualty.

 

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CGL is Not a Surety

Insured Must Damage Property Not Work to Be Covered by CGL

Contractors often have difficulty with their insurers. A CGL policy covers only accidents and do not guarantee the workmanship of the insured. People who obtain judgments against their contractor try to collect from the contractor’s insurer, especially when the insured goes out of business and has no assets available to collect on a judgment.

In Auto-owners Insurance Company v. Timbersmith, Inc., George Fleming, and Janis Fleming, and George Fleming and Janis Fleming v. the Charter Oak Fire Insurance Company, United States District Court, D. Utah Case No:2:12-cv-00786, 2016 WL 3356800 (06/15/2016) an attempt was made to require two CGL insurers to act as sureties.

FACTS

Third-Party Plaintiffs George and Janis Fleming’s (collectively the Flemings’) motion for summary judgment against Third-Party Defendant The Charter Oak Fire Insurance Company (Charter Oak), the Flemings’ motion for summary judgment against Plaintiff Auto-Owners Insurance Company (Auto-Owners), Charter Oak’s cross motion for summary judgment against the Flemings, and Auto-Owners’ cross motion for summary judgment against the Flemings.

This case arises out of allegations of defective construction against LC Builders and Cory Lowder (collectively LC Builders) and Timbersmith, Inc. The relationship between the Flemings, LC Builders, and Timbersmith began in January 2008 when the Flemings hired Timbersmith to construct a home in a ski resort community in Park City, Utah. LC Builders—working as either a subcontractor or as Timbersmith’s employee—framed the house incorrectly and ultimately walked off the job, leaving the home barely standing.

The Flemings established as a matter of law that due to the negligence of the Defendants and their subcontractors the Flemings had to retain the services of new contractors to repair the damage to the Fleming Residence and the state trial court awarded the Flemings $1,099,227.80 in damages for the costs to repair the defective framing, plus costs and expenses.

The Flemmings arbitrated the dispute with Timbersmith and the arbitrators concluded that the Flemings were entitled to judgment against Timbersmith for damages in the amount of $1,099,277.80, as well as costs and fees.

As a general rule the Flemings are correct that, when an insurer, whose policy requires it to defend its insured, receives notice of a suit against the insured and is allowed an opportunity to defend, but refuses, the insurer is bound by the findings and judgment therein. But the Flemings err in arguing that this general rule precludes Charter Oak from now litigating any issues that are relevant to coverage. An insurance company should be afforded an opportunity to raise and have determined the issue as to its own liability, so long as doing so is not inconsistent with the findings on material issues which were determined between the plaintiff and defendant. Collateral estoppel works, however, only with regard to facts necessarily adjudicated in the lawsuit against the insured.

Indeed, the legal conclusion that LC Builders and its subcontractors’ negligence resulted in the damages reflected in the judgment does not, as the Flemings claim, necessarily mean that there was coverage for this amount under the Charter Oak Policy.

Although the term “accident” is not defined by the Policy, the Utah Supreme Court has explained that “the word ‘accident’ is descriptive of means which produce effects which are not their natural and probable consequences.” Fire Ins. Exch. v. Estate of Therkelsen, 27 P.3d 555, 559 (Utah 2001). Thus, “Under Utah law, when determining whether there is an accident, the court is not to examine whether the underlying act is intentional, deliberate, or foreseeable, but rather whether the result of the act was intended or expected from the perspective of the insured.” Cincinnati Ins. Co. v. Spectrum Dev. Corp., No. 2:11-CV-0015-CW, 2015 WL 730020, at *4 (D. Utah Feb. 19, 2015).

Accordingly, a claim for faulty workmanship, in and of itself, is not an occurrence under a commercial general liability policy because a failure of workmanship does not involve the fortuity required to constitute an accident. Instead, what does constitute an occurrence is an accident caused by or resulting from faulty workmanship, including damage to any property other than the work product and damage to the work product other than the defective workmanship. In other words, although a commercial general liability policy does not provide coverage for faulty workmanship that damages only the resulting work product, the policy does provide coverage if the faulty workmanship causes bodily injury or property damage to something other than the insured’s work product.

The Flemings failed to provide evidence to show that LC Builders or any subcontractors caused damage to property other than that upon which LC Builders or any of its subcontractors were operating that occurred while operations were ongoing.

Even assuming LC Builders used subcontractors whose work was defective, the Flemings do not argue or provide any evidence to suggest that LC Builders’ subcontractors’ negligence caused any property damage that occurred after operations were completed. Indeed, the Flemings have always taken the position that the work performed on the home was defective at the time LC Builders abandoned the project.  And there is some evidence in the record that suggests that no damage occurred after abandonment.

Even assuming that the Arbitration Award or state court judgment against Timbersmith binds Auto-Owners, the Flemings fail to identify any property damage that would be covered by the Auto-Owners Policy. Consequently, the Flemings are not entitled to indemnification from Auto-Owners and the court need not address whether Auto-Owners’ indemnification obligation is discharged because of potential notice issues.

ZALMA OPINION

The decision stated no reason why the insurers failed to defend when their insured’s were sued. Probably, since the insureds disappeared, abandoned the construction, they probably didn’t advise their insurers of the claim. Even if they did there could be no coverage for the losses claimed, regardless of how egregious, because the only damage was to the work of the insureds and clearly not covered losses since there was no bodily injury or property damage other than to the insured’s own work.

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 theLEGENDAWARD 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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Insured’s Settlement With Underlying Insurer Is Fatal to Claim to Excess

Excess Insurance Only Applies After Exhaustion of Primary Coverages

Uninsured and Underinsured Motorist (UM/UIM) is designed to protect the public injured by an uninsured or underinsured motorist by purchasing UM/UIM coverage to avoid the risk of being injured by an uninsured or underinsured motorist. Statutes in the various states require insurers to offer UM/UIM coverage but do not require that people buy the coverage.

In Coker v. American Guarantee and Liability Insurance Company, United States Court of Appeals, Eleventh Circuit, — F.3d —-,  2016 WL 3342621 (June 15, 2016) three excess liability insurers—Great American Insurance Company (“Great American”), American Guarantee & Liability Insurance Company (“American Guarantee”), and Endurance American Specialty Insurance Company (“Endurance”) (collectively “the Defendants”)—appeal the district court’s order granting summary judgment in favor of Gary and Teresina Coker (“the Cokers”) with respect to the Cokers’ breach of contract claims against the Defendants. The district court concluded that Georgia’s UM statute imposed upon the Defendants an unconditional obligation to provide UM coverage to Gary Coker as if they were primary insurers, and that the Defendants’ failure to tender payment amounted to a breach of contract. The defendant excess insurers appealed.

FACTUAL BACKGROUND

Car Accident, Consent Judgment, and Relevant Liability Policies

On September 18, 2007, Plaintiff Gary Coker was driving a truck owned by his then employer, Ansco & Associates (“Ansco”), on a Georgia road. Third-party motorist Donald Woodall crossed the center line of the road and struck Coker head on. Coker was severely injured in the accident.

In November 2010, the Cokers obtained a $5.5 million consent judgment against Woodall. Though Woodall had an automobile liability insurance policy, he was considered “underinsured” because his policy limits were $25,000 and were not nearly high enough to satisfy the consent judgment. The Cokers provided Woodall with a limited liability release in exchange for $25,000, the full limit of Woodall’s automobile liability policy.

Despite this partial recovery from Woodall’s insurer, the vast majority of the $5.5 million consent judgment remained unsatisfied. To satisfy the remainder of the consent judgment, the Cokers turned to policies purchased by Coker’s employer, Ansco.

At the time of the accident, Ansco held the following liability insurance policies:

a.     Liberty Mutual Insurance Company (“Liberty Mutual”) Business Automobile Policy No. AS2-631-004260-027 (“the Liberty Mutual policy”), with limits of $5 million;

b.     Westchester Fire Insurance Company (“Westchester”) Umbrella Policy No. G22049860002 (“the Westchester policy”), with limits of $10 million;

c.     Great American Insurance Company Excess Liability Policy No. TUE356014902 (“the Great American policy”), with limits of $10 million;

d.     American Guarantee & Liability Insurance Company Excess Liability Policy No. AEC913878501 (“the American Guarantee policy”), with limits of $25 million; and

e.     Endurance American Specialty Insurance Company Surplus Lines Policy No. ELD10000214301 (“the Endurance policy”), with limits of $25 million.

These policies were vertically structured so that the Liberty Mutual policy provided first-layer primary coverage, the Westchester policy provided second-layer umbrella coverage, the Great American policy provided third-layer excess coverage, the American Guarantee policy provided fourth-layer excess coverage, and the Endurance policy provided fifth-layer excess coverage.

The Liberty Mutual Primary Policy

The $5 million Liberty Mutual policy provides primary automobile liability coverage. The Liberty Mutual policy specifically provides that “[f]or any covered ‘auto’ you own, this Coverage Form provides primary insurance.” The “Uninsured Motorist Coverage Option Form” attached to the Liberty Mutual policy reflects that Ansco explicitly rejected UM coverage in writing on both September 5, 2006, and September 24, 2007.

The Westchester Umbrella Policy

The $10 million Westchester policy provides coverage for “those sums in excess of the ‘Retained Limit’ which the ‘Insured’ by reason of liability imposed by law … shall become legally obligated to pay.” The Schedule of Underlying Insurance notes that the Liberty Mutual policy does not contain UM coverage.

The Great American Excess Policy

The $10 million Great American policy provides coverage to Ansco “only in excess of the Underlying Limits of Insurance” provided by the Westchester policy.

The American Guarantee Excess Policy

The $25 million American Guarantee policy provides coverage for “the sums in excess of the total Underlying Limits of Insurance.

The Endurance Excess Policy

The $25 million Endurance policy provides coverage for losses in excess of the underlying limits of insurance.

Demands for Payment

In March 2011, the Cokers made separate written demands against Liberty Mutual, Westchester, and each of the Defendants for payment of the $5.5 million consent judgment. In March 2012, the Cokers entered into a confidential settlement agreement with Liberty Mutual for substantially less than the $5 million policy limit. In June 2012, the Cokers entered into a confidential settlement agreement with Westchester for substantially less than the $10 million policy limit. Despite the money recovered in the Cokers’ settlements with Liberty Mutual and Westchester, a substantial portion of the $5.5 million consent judgment remained unsatisfied.

The three excess insurer Defendants here did not tender payment in response to the Cokers’ demands.

DISCUSSION

On appeal, the Defendants argue that the district court erred by granting summary judgement in favor of the Cokers on the ground that Georgia’s UM statute imposed upon the Defendants an unconditional obligation to provide UM coverage to the Cokers as if the Defendants were primary insurers. The Defendants principally argue that, regardless of any obligations imposed by Georgia’s UM statute, the terms of the Defendants’ policies required the Cokers to exhaust the limits of the Westchester policy and, if applicable, any other underlying excess insurance policies before seeking payment from the Defendants.

Typically, when interpreting a contract under Georgia law, courts must construe a contract as written and not make a new contract for the parties. Although they acknowledge their statutory obligation to provide UM coverage, the Defendants argue that, pursuant to the terms of their excess liability policies, they were not required to tender payment until the Cokers exhausted the policy limits of the underlying $10 million Westchester policy and, if applicable, any other underlying excess liability policies.

Defendants’ Excess Liability Policies Contain Vertical Exhaustion Requirements

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. Georgia courts have repeatedly recognized the validity of excess policies and the exhaustion requirements necessarily embedded within those policies.

Under Georgia law, when an excess policy clearly sets a threshold starting point for payment, the contract is unambiguous and must be enforced. Here, each of the Defendants’ excess liability policies contain unambiguous language limiting recovery to only those amounts exceeding the policy limits of an underlying insurance policy or policies.

A vertical exhaustion requirement does not undermine the remedial purpose of the UM/UIM statute. The only way an insured might not recover for the full amount of his injuries—and therefore realize the harm the statute was designed to prevent—is if, as is the case here, he settles with an underlying insurer for less than the policy limits.

In that case, the insured voluntarily settled for less than the policy limits and, therefore, is undercompensated of his own volition. In such a situation, it is not the exhaustion requirement that directly contravenes the legislative intent of the statute, but the insured’s own settlement negotiations.

The Defendants are entitled to summary judgment in their favor with respect to the Cokers’ breach of contract claims. Each Defendant’s excess policy contained an unambiguous statement that coverage would not apply until the insured exhausted the $10 million policy limit of the Westchester policy. Indeed, the American Guarantee and Endurance policies even contained further vertical exhaustion requirements with respect to their codefendants. Though the Defendants were obligated by statute to provide UM coverage, they did so in the permissible excess way.

The Eleventh Circuit concluded that because the Cokers failed to exhaust the limits of the underlying Westchester policy, the Defendants were under no obligation to provide any coverage whatsoever. As such, they are entitled to summary judgment on the Cokers’ breach of contract claims.

ZALMA OPINION

The plaintiff, and his lawyers, managed to get settlements from two excess insurers and the primary insurer for sums less than their limits and then went to the excess insurers for more money. Since the three excess insurers who were defendants required a full exhaustion of the underlying insurance, by settling for less than limits the plaintiffs destroyed their own case and the trial court was reversed.

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 theLEGENDAWARD 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 Insured’s Settlement With Underlying Insurer Is Fatal to Claim to Excess

False Alarm Warranty Allows Insurer to Void Coverage

Innocent Material Misrepresentation Sufficient for Insurer to Rescind

The covenant of good faith and fair dealing requires both the insured and the insurer to deal fairly and in good faith when dealing with the acquisition of insurance. When an insurer makes the decision to insure or not insure a person against the risk of loss of his or her property the insurer relies on the honesty of the insured when he or she submits an application.

FACTS

In Certain Underwriters at Lloyd’ s London v. Jimenez, — So.3d —-, District Court of Appeal of Florida,Third District, 2016 WL 3265750 (June 15, 2016) those Certain Underwriters at Lloyd’s London (“Lloyd’s”) appealed a final judgment following a non-jury trial, in which the trial court granted declaratory relief to Raul and Ada Jimenez, the appellees/homeowners, and determined that Lloyd’s was not entitled to rescission of the property insurance policy issued to the homeowners.

In 2007 Raul Jimenez, on behalf of himself and his wife, Ada Jimenez, completed and executed an application for homeowner’s insurance policy on their home built in 1985, with assistance from their insurance agent, A & A Insurance Underwriters (“A & A”). A & A submitted the Jimenez’s homeowner’s insurance application to a managing general agent of Lloyd’s. During the application process, A & A asked whether Mr. Jimenez had a smoke, temperature or burglar alarm, and if so, whether these alarms were monitored. Mr. Jimenez said he had a monitored central station alarm on the property. On the application form, Mr. Jimenez designated the central station monitor as a protection device that monitored for smoke, temperature, and burglary. After signing the application, Mr. Jimenez was given a copy and was given a chance to ask questions and make sure his answers were true and correct. The policy was given a discount because of the representation that the Jimenezes had a central station alarm monitoring for smoke, temperature, and burglary.

The policy was renewed three times with the same representation and warranty about the alarm system.

As a condition of the insurance, the Jimenezes were required to maintain in good working order all fire alarms, security systems and physical protection devices identified in their application for insurance. The Protection Device Endorsement provision provided that all alarms/security systems must be fully operational and engaged at all times. Failure to comply with this condition would render the insurance null and void.

Thepolicy was personally underwritten by Efren Serrate, president of the managing general agent of Lloyd’s. Serrate testified at trial that a representation in the application that the property had central station monitored smoke and temperature alarms was material to the risk. He further stated that, if the property actually did not have those systems, the Protection Device Endorsement would preclude insurance coverage. Serrate specified that he would not have accepted the risk and quoted a premium if he had known that the Jimenezes did not have a central station monitored smoke and temperature alarm.

In August 2009, there was a kitchen fire at the Jimenez’s home.

Delta Alarm Systems monitored and maintained the Jimenez’s alarm system. At trial, Jose Quintero, the corporate representative of Delta Alarm Systems, testified that the Jimenezes had a burglar alarm but not a central station monitored smoke or temperature alarm system. Lloyd’s expert testified why the alarm warranty was material.

Lloyd’s tendered the full return of the insurance policy premium to the Jimenezes  policies. At trial, the parties agreed that the return of the premiums for each of these policy years had been tendered in full to the Jimenezes. The trial court found in favor of the Jimenezes for declaratory relief as to coverage and for breach of contract and held that Lloyd’s was not entitled to rescission.

ANALYSIS

The interpretation of an insurance contract is a question of law.

First, regarding the summary judgment issue, the appellate court agreed with Lloyd’s that the Jimenez’s misrepresentations of the presence of a central monitored alarm system for smoke, temperature and burglary were material as a matter of law to the issuance of Lloyd’s insurance policy. As such, recovery for the Jimenez’s house fire was unwarranted.

Florida Statute section 627.409(1) provides that misrepresentations, omissions, concealment of facts, and incorrect statements on an insurance application will not prevent a recovery under the policy unless they are either: (1) fraudulent; (2) material to the risk being assumed; or (3) the insurer in good faith either would not have issued the policy or would have done so only on different terms had the insurer known the true facts. Lloyd’s relies on (2) and (3) in claiming that the Jimenez’s central monitored system statements in their application prevent recovery under the policy in question.

An insurance company has the right to rely on an applicant’s representation in an application for insurance and is under no duty to inquire further unless it has actual or constructive knowledge that such representations are incorrect or untrue. Under Florida law, an insurer has the right to unilaterally rescind an insurance policy on the basis of misrepresentation in the application for insurance. The misrepresentation need not be fraudulently or knowingly made but need only affect the insurer’s risk or be a fact which, if known, would have caused the insurer not to issue the policy or not to issue it in so large an amount.

Lloyd’s has presented sufficient evidence to show that the misrepresentation regarding the presence of a central monitored system was material to issuance of a policy and that, had Lloyd’s known of such lack of protection, it would not have issued its policy. As discussed previously, the broker explained that the existence of protection device systems was material. The testimony provided by Delta Alarm Systems’ corporate representative, Jose Quintero, indicated that no agent for Lloyd’s had been notified of the lack of a central monitored system on the property until after the fire incident occurred.

The misrepresentation made by the Jimenezes regarding the presence of a central monitored system on the property in the insurance application precludes coverage because the misrepresentation was material and was detrimentally relied upon by Lloyd’s. Secondly, Lloyd’s alternatively contends on appeal that, because the lack of a central monitored system was material to the issuance of the policy and was relied upon, the trial court erred in denying Lloyd’s entitlement to rescind the policy. The appellate court agreed.

If an insured’s misrepresentation was material to the insurer’s acceptance of the risk or, if the insurer in good faith would not have issued the policy under the same terms and premium, then rescission of the policy by the insurer is proper. Misrepresentations in or omissions from an insurance application may fail to meet the knowledge and belief standard (that the information given was correctly recorded, complete, and true to the best of the insured’s knowledge and belief) and entitle the insurer to rescind the policy without the misrepresentation or omission being intentional. Even an insured’s failure to read a policy application in its entirety prior to signing it does not preclude an insurer’s right to rescind the policy for nondisclosure of material information.

Because the appellate court found there was a material misrepresentation sufficient to allow rescission, the case was remanded to the trial court with instructions to enter Final Judgment in Lloyd’s favor because the policy does not provide coverage for the Jimenez’s kitchen fire under the language of the Protection Device Endorsement, and because Lloyd’s is entitled to rescission of the policy due to material misrepresentations in the application.

ZALMA OPINION

It is not only a violation of the covenant of good faith and fair dealing to lie on an insurance application, in some states it is criminal to lie on an application. Rescission is an equitable remedy where the court determines, because Lloyd’s, in this case, was deceived, it did not matter that the insured intended or did not intend to deceive it, the policy was void from its inception and never existed.

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 theLEGENDAWARD 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 False Alarm Warranty Allows Insurer to Void Coverage

Consideration Required for Insurance

Failure to Pay to Be Made Insured Fatal to Request for Coverage

Liability insurance, especially liability insurance with high limits, is a temptation for every plaintiff and defendant, even state governments. In State of New Jersey and New Jersey Department of Education v. Star Insurance Company and Meadowbrook, Inc., Superior Court of New Jersey, Appellate Division, 2016 WL 3199530 (June 10, 2016) the Appellate Division was called upon to resolve an insurance coverage dispute, plaintiffs State of New Jersey and New Jersey Department of Education (collectively, the State) had with Star. The trial court granted summary judgment in favor of defendants Star Insurance Company and Meadowbrook, Inc. (collectively, Star).

FACTS

The Star policy was issued on July 1, 2007. The declarations page listed “Newark Public Schools” as the named insured, and “2 Cedar Street Newark, NJ 07012” appeared as the insured’s address on both the policy and the application for insurance. In addition to the named insured and its employees, the policy provided coverage to anyone “acting as [a] real estate manager” for the named insured. The policy did not define the term “real estate manager.”

The policy did not list the State as an additional insured, nor did it identify the Newark Public Schools as a State-operated school district.

The coverage dispute concerned litigation arising from a 2007 incident in which six gang members attacked four individuals who were sitting in a District school yard at night. Three of the victims were killed and the fourth was severely injured. In 2008, the surviving victim and the administrators of the deceased victims’ estates (the Aeriel plaintiffs) filed a complaint against the attackers, the District, and its State-appointed school superintendent, Dr. Marion Bolden.

The Aeriel plaintiffs also sued the State, on the theory that, because the District was under the State’s control, the State was liable for failing to maintain the school yard in a safe condition. In defending against the Aeriel lawsuit, the State produced legally competent evidence that it had no responsibility for managing or maintaining the District’s real estate. That evidence, which included Dr. Bolden’s sworn testimony, was later presented as part of Star’s summary judgment motion in the insurance coverage case.

In the Aeriel lawsuit, Star defended and indemnified the District as its named insured and the superintendent as a District employee. In 2012, a few months before the scheduled trial date, the State asserted for the first time that it was entitled to coverage under the Star policy. Star denied coverage, and in December 2012, the State filed the insurance coverage lawsuit. In 2013, the Aeriel lawsuit was settled mid-trial, with Star paying two million dollars on behalf of the District and the superintendent, and the State paying three million dollars.

The State claims coverage under three theories: the State should be deemed covered under the policy as the District’s “real estate manager”; the State was an additional insured because the listed insured’s name—“the Newark Public Schools” — was ambiguous and should be construed as covering the State; and the State was an “implied insured” under the policy.

ANALYSIS

Whether plaintiff was a “real estate manager” is to be determined by the language of the agreements and the language of the insurance policy.

The insurance policy here did not acknowledge the District’s relationship with the State or put the insurer on notice that it might be called upon to insure the State as well as the District. Moreover the Appellate Division found it was too great a stretch to consider the State as the District’s “real estate manager” based on Bolden’s general statutory authority as superintendent under the Education Act. However, the aim of the Act is not to make the superintendent into a real estate manager, or its equivalent, but to put the superintendent in charge of the District’s educational policies and practices.

The undisputed record evidence in this case is that Bolden did not take over the District’s function of keeping up its property, but she instead left that responsibility in the hands of the District’s employees. Further, although she took direction from the State, by law Bolden was an employee of the District and thus was covered under the Star policy as a District employee. Hence, even if she were also deemed to be a “real estate manager,” she was the District’s manager and not the State’s manager.

Courts “conceive a genuine ambiguity to arise where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.” Zacarias v. Allstate Ins. Co., 168 N.J. 590, 598 (2001) (citations omitted). “In that instance, the policy should be construed to comport with the insured’s objectively reasonable expectations of coverage.” Christafano v. N.J. Mfr.’s Ins. Co., 361 N.J.Super. 228, 234 (App.Div.2003). Conversely, in the absence of an ambiguity, a court should not write for the insured a better policy of insurance than the one purchased, but should instead enforce the policy as written.

The request for proposals issued by the District when it sought insurance for 2007 listed only “The Newark Public Schools, the largest school district in the State of New Jersey” as the proposed insured. There was no mention that bidders were also being asked to write coverage for the State or the State Education Department. There was no evidence that Star should have known that it was writing coverage for the State as an additional insured, without the need for any specific notice or application.  Star’s and the District’s records both indicate that where the District intended to add an insured to one of its Star-issued insurance policies, it specifically applied for the addition of that entity, and the addition was reflected in the declarations page of the policy. For example, the District applied to add the New Jersey Schools Construction Corporation (NJSCC) as an additional insured on one of its policies. Based on that application, Star issued a policy listing NJSCC as an additional insured.

Under the Act, the District remained a corporate entity. It did not become synonymous with the State by virtue of the State’s intervention under the Act. In light of Star’s and the District’s documented course of business dealing, if the District intended to purchase coverage for the State or the State Education Department as an additional insured, it would have specifically requested that coverage and be required to pay extra for that coverage.

ZALMA OPINION

It is common knowledge that you only get what you pay for. The State of New Jersey attempted to get coverage for a $3 million liability without paying for it. The School District, paid for, and obtained the coverage it bought. It did not seek coverage for, nor did it receive coverage for, the State nor did the state pay for any coverage from Star.

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 theLEGENDAWARD 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 Consideration Required for Insurance

The Best Defense Is an Offense

Affirmative Defense Does Not Translate Into A Suit For Damages

When an insurer is sued for breach of contract and bad faith it presents a thorough and extensive defense. When the insurer learns, through discovery, that its insured perpetrated a fraud in the acquisition of the policy and in the presentation of a claim and that the insured breached its contractual obligations, it must amend its position to seek breach of contract damages from the insured to return funds it paid before it learned of the existence of facts that established no coverage for the claimed loss.

In Militello v. Allstate Property and Casualty Insurance Company, United States District Court, M.D. Pennsylvania, 2016 WL 3254144 (06/14/2016) Allstate Insurance Company, after obtaining a trial verdict in the suit filed against it, tried to get back money it paid to the insured based upon the affirmative defenses it filed in answer to the complaint. It did not affirmatively seek return until after the trial verdict. The defense was effective but there was no offense.

BACKGROUND

Briefly, Plaintiff Guy Militello (“Plaintiff”) owns a horse barn located within the Middle District of Pennsylvania that was insured by Defendant Allstate Property and Casualty Insurance Company (“Allstate”). On October 5, 2012, the roof of the barn collapsed, the cause of which remains in dispute, and Plaintiff thereafter submitted a claim to Allstate for the damage in the amount of $216,170.00. Allsate declined to pay the claim in its entirety and instead provided Plaintiff with a payment in the amount of $109,834.52.

Plaintiff sued and Allstate later filed counterclaims against Plaintiff. The crux of the lawsuit at the time of trial involved Plaintiff’s allegation that Allstate breached the parties’ insurance contract by failing to pay the full value of his property insurance claim, and Allstate’s counterclaim that Plaintiff committed insurance fraud by misrepresenting to Allstate that the property was not used for commercial purposes and by inflating his contractors’ repair estimates in order to receive additional insurance proceeds.

THE COUNTERCLAIMS

Counterclaim I, containing a claim for fraud, alleged that Plaintiff committed fraud by representing to Allstate that no part of the barn was used for business purposes and by altering his contractors’ estimates. Counterclaim I further alleged that Allstate would not have provided Plaintiff with the insurance policy or made payment on the claim had Plaintiff truthfully and accurately represented that the structure was used for business purposes, or if Allstate had known that Plaintiff knowingly misrepresented the value of his claim. Counterclaim II, containing a claim pursuant to Pennsylvania’s Insurance Fraud Statute, 42 Pa.C.S.A. § 4117(b)(4), likewise alleged that Plaintiff misrepresented the use of the structure and intentionally altered estimates. Counterclaim III, alleged that Plaintiff misrepresented the use of the structure and the value of his claim, and that, based on its terms, the insurance policy is void and Plaintiff is not entitled to insurance coverage for the loss. For relief, Counterclaim III sought “a declaration that the insurance policy is void and/or Plaintiff breached the terms of the insurance policy, and order that Plaintiff return all monies paid to him by [Allstate].”

THE TRIAL

Following a four-day jury trial, the jury rendered a verdict in favor of Allstate on Plaintiff’s breach of contract claim, and in favor of Plaintiff on Allstate’s claims for common law and statutory insurance fraud. At issue herein is the jury’s response to Question Number 1 on the verdict sheet in which the jury found that the loss did not occur during the course of repair.  Because the insurance policy at issue would only cover the collapse if it occurred during the course of repair, the jury’s answer to that question necessarily rendered a verdict in favor of Allstate on Plaintiff’s breach of contract claim.

DISCUSSION

Allstate contended that the final judgment dated February 12, 2016 fails to give effect to the jury’s verdict in favor of Allstate on Plaintiff’s breach of contract claim and should be amended by the court. Specifically, Allstate argues that, because the jury found that the collapse did not occur during the course of repair as Plaintiff ultimately represented in his claim and at trial, the jury also found that Plaintiff concealed and/or misrepresented his claim to Allstate. As such, Allstate contends that the claim is not a covered loss for which the policy provides coverage and therefore Allstate  should be reimbursed the $109,834.52 it paid to Plaintiff on the claim.

Allstate’s July 6, 2015 answer primarily asserted counterclaims against Plaintiff for common law and statutory fraud, with a particular emphasis on Plaintiff’s alleged misrepresentations regarding his use of the property.

Many months later and following a four-day jury trial at which the jury rendered a verdict in favor of Plaintiff on Allstate’s previously filed counterclaims for fraud. Allstate is essentially raising, for the first time, a breach of contract claim, having come to the conclusion based upon the verdict form that Plaintiff breached the insurance contract by misrepresenting a material fact regarding the cause of the collapse in the submission of his insurance claim.

Allstate raised its breach of contract claim far too late in the day, and for that reason, the court precluded it from pursuing it now.

As an initial matter and notwithstanding Allstate’s assertions to the contrary, it is clear that an affirmative defense is not a claim for relief but a defense to a claim for relief, and, therefore, it does not provide an avenue for an award of damages.

In its declaratory judgment claim, Defendant sought a declaration, in part, that “Plaintiff breached the terms of the insurance policy.”  While the court may have construed the claim as a breach of contract claim and addressed it as such at trial.  There was no indication whatsoever prior to trial—or even at trial—that Allstate was attempting to pursue a breach of contract claim related to misrepresentations made by Plaintiff during the procurement of his insurance policy or the submission and investigation of his claim.

Instead, all of Allstate’s efforts during the course of this litigation pertained to defending itself against Plaintiff’s breach of contract claim and pursuing its own claim for fraud, which it had the burden of proving by clear and convincing evidence. Only after the jury rendered its verdict in favor of Plaintiff on Allstate’s counterclaims for fraud did Allstate argue that a breach of contract claim should be considered by the court as grounds for granting a declaratory judgment in its favor.

If a judge has wide latitude in limiting parties to the issues that were raised pretrial, then it is only logical that that discretion is even broader when a party completely fails to raise a claim prior to trial, proceeds through trial with the court and the opposition assuming that it is only pursuing its asserted claims, and then drops the bomb of trying to raise, for the first time, a brand new claim following trial as part of its declaratory judgment claim.

Allstate had months to consider the nature of Plaintiff’s alleged misrepresentations and was fully aware of the factual basis for a potential breach of contract claim and the legal arguments it might make.  Allstate put off making any such claim until post-trial, well after Plaintiff had committed itself to a strategy in defending against Allstate’s claims of fraud for which Allstate carried the more taxing burden to prove by clear and convincing evidence. As to the claims Allstate chose to pursue, the jury clearly found that it did not prove those claims by clear and convincing evidence.

CONCLUSION

For the reasons stated above, the court found that Allstate waived its claim for breach of contract.

ZALMA OPINION

Allstate did an effective job defending the suit but forgot or failed to protect its right to reimbursement by not seeking contract damages. Because proof of fraud required clear and convincing evidence Allstate should not have emphasized the fraud and ignore the clear breach of 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 theLEGENDAWARD 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 Best Defense Is an Offense

Zalma’s Insurance Fraud Letter – June 15, 2016

Zalma’s Insurance Fraud Letter 

June 15, 2016

MBZBACKSUIT3urder for Insurance Fraud

Zalma’s Insurance Fraud Letter – June 15, 2016, Volume 20, No. 12  

I will be speaking at America’s Claims Event in Minneapolis on June 23, 2016 and will also be honored with the Claims Magazine/ACE Legend Award.

Please come. 

Conviction for Insurance Fraud Murder Upheld

In this, the twelfth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on June 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:

  • Conviction for Insurance Fraud Murder Upheld
  • Barry Zalma
  • The Claims Commandments – 7-10
  • Proformative Academy Webinars
  • Insurance Fraud Investigation Techniques
  • Good News from The Coalition Against Insurance Fraud – Convictions
  • First Annual Claims Magazine/Americas Claims Event Legend Award to Barry Zalma
  • Books from Barry Zalma
  • Wisdom
  • Staged Accident Results in Criminal Conviction
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Visit The Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

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 at http://zalma.com/blog

Zalma’s Insurance 101 

I have also created a video blog called Zalma’s Insurance 101 which currently has over 881 three to six minute videos starting with “What is Insurance” and moving forward to the Release of All Claims explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101 where you can view some of the following as part of the 881 videos:

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library
Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – June 15, 2016

Ventura Loses Judgment Because of Improper Comments by His Counsel

Sniper Lost Right to Fair Trial By Argument He was Insured

People buy insurance to protect against their own negligence. However, the courts have recognized for many years, that mention of the existence of liability insurance to pay for defense and indemnity of an insured, can prejudice the insured party when the jury believes that any judgment they render will be paid by an insurer and not the defendant.

In Jesse Ventura, also known as James G. Janos v. Taya Kyle, as Executor of the Estate of Chris Kyle, United States Court of Appeals, For the Eighth Circuit  (June 13, 2016) the Eighth Circuit Court of Appeals, in a case dealing with two celebrities ignored their celebrity and applied the law requiring that a trial – whether civil or criminal – must be fair.

TRIAL COURT DECISION

Before his death, Chris Kyle was a sniper for a United States Navy Sea, Air and Land (SEAL) team. He authored the book American Sniper: The Autobiography of the Most Lethal Sniper in U.S. Military History (American Sniper). In the book, Kyle described punching a “celebrity” referred to as “Scruff Face” who was making offensive remarks about the SEALs at a gathering following the funeral of a SEAL killed in combat.  In interviews about the book, Kyle revealed “Scruff Face” was James Janos, better known as Jesse Ventura. Ventura, who was at the bar but denied a  fight occurred, sued Kyle in this diversity  action under  Minnesota  law for defamation, misappropriation, and unjust enrichment, alleging Kyle fabricated the incident. The jury found in favor of Ventura on the defamation claim, awarding $500,000 in damages, and found in Kyle’s favor on the misappropriation claim.  Serving in its advisory role as to the equitable unjust-enrichment claim, the jury recommended an award of approximately $1.35 million, which the district court adopted.

BACKGROUND

The alleged altercation underlying this action occurred at McP’s, a bar in Coronado, California, where Kyle and some friends were gathered in October 2006 after the funeral of a fellow SEAL.  According to Kyle, Scruff started running his mouth about the war and everything and anything he could connect to it. Kyle approached Scruff and asked him to “cool it.”  “You deserve to lose a few,” Scruff replied.  Kyle was “calm,” but Scruff swung at him.  Kyle “laid him out.  Tables flew. Stuff happened. Scruff Face ended up on the floor. [Kyle] left.”

On January 4, 2012, the day after his book was released, Kyle was interviewed on “The O’Reilly Factor” to promote the book. During the television interview later that day, host Bill O’Reilly asked Kyle, “[Y]ou say you knocked Jesse Ventura to the floor with a punch. Now, you don’t mention his name, but everybody knows who that is. . . . [T]hat happened?”

After the interviews, Ventura sued Kyle for defamation, misappropriation, and unjust enrichment on the grounds that Kyle fabricated the entire interaction with Ventura.

The case was tried in summer 2014, almost eight years after the alleged altercation. At least seven witnesses testified they overheard some of Ventura’s remarks, and offered generally similar accounts of what Ventura said. At least seven witnesses testified they saw Kyle (or an unidentified man, for those who did not know Kyle) punch Ventura; saw Ventura on the ground or getting up off the ground; or heard a “commotion” or “yelling.”

Kyle’s editor, Peter Hubbard, testified the “Scruff Face” story was not relevant to his decision to enter into a book contract with Kyle.  He characterized the “mention of Jesse Ventura” as having a “negligible” effect on the success of the book.

During closing arguments, Ventura’s counsel opined: “Sharyn Rosenblum testified that she did not know her company’s insurer is on the hook if you find that Jesse Ventura was defamed. Both her and Peter Hubbard also testified that they do not know that their company’s insurer was paying for the defense of this lawsuit. But they are not the disinterested, unbiased witnesses they were put in front of you for you to believe. … Chris Kyle is an additional insured for defamation under the publisher’s insurance policy.”

The jury struggled to reach a verdict.  At noon on the fourth full day of deliberations, the jury reported they could not reach a unanimous decision.  The jury ultimately reached an 8-2 verdict on the fifth full day of deliberations. The jury found for Ventura on the defamation claim, made an advisory recommendation in Ventura’s favor on the unjust-enrichment claim, and found for Kyle on the misappropriation claim.  The jury awarded damages of $500,000 for defamation and recommended damages of approximately $1.35 million for unjust enrichment.  The district court adopted the jury’s recommendations as to the unjust enrichment claim and accompanying damages award.

DISCUSSION

Initially, the court rejected Ventura’s assertion Kyle waived any objection to the insurance testimony and argument because he did not object to the admission of his publishing agreement, which states, “Author will be named as an additional insured under the terms of any insurance policy that Publisher may carry which covers the cost of claims.”  (Emphasis added).  In the event the jury analyzed the lengthy publishing contract’s fine print and learned Kyle may have had insurance, this evidence alone would not permit Ventura’s counsel to argue to the jury that an insurance policy including Kyle actually existed and the “insurer is on the hook.” Counsel’s argument would have been improper and prejudicial, even if the jury already was aware of an insurance policy. The record presented to this jury contained no evidence establishing an insurance policy covering Kyle, which makes Ventura’s counsel’s argument more improper and prejudicial.

The insurance questions posed by Ventura’s counsel assumed facts never in evidence—an insurance policy purchased by HarperCollins that covered Kyle, and Kyle’s attorneys were paid by the insurer.   The district court permitted this cross-examination, by which Ventura’s counsel ostensibly sought to show the HarperCollins witnesses were biased in favor of Kyle because HarperCollins and Kyle were covered by the same insurance policy.

Rule 411  of the Federal Rules of Evidence prohibits  the introduction  of insurance evidence to prove whether a person acted wrongfully but permits it for other purposes, such as proving a witness’s bias.

There is no evidence Rosenblum and Hubbard had any economic tie or “substantial  connection” to HarperCollins’s  insurance  carrier. As a matter of basic evidentiary foundation, Ventura never established by direct evidence or reasonable inference that Rosenblum and Hubbard even knew about  any insurance coverage  or possible insurance  payment.  It is difficult to envision how Rosenblum and Hubbard could have been biased or even influenced by an insurance policy of which they were unaware.

When deciding whether to grant a new trial due to improper remarks by counsel, the court considers whether: (1)  “the  remarks  in question ‘were  .  .  .  minor aberrations made in passing’”; (2) the district court took “‘specific curative action’”; and (3) “‘the size of the damage award . . . suggest[s] that counsel’s comment had a prejudicial effect.’”  Gilster v. Primebank, 747 F.3d 1007, 1011-12 (8th Cir. 2014)

Although relatively brief, Ventura’s counsel’s closing remarks about insurance were not minor aberrations made in passing. Given Ventura’s  repeated efforts to introduce  evidence of HarperCollins’s and Kyle’s insurance at trial, it is difficult to see how Ventura’s counsel’s comments were anything other than “a deliberate strategic choice” to try to influence and enhance damages by referencing an impersonal deep-pocket insurer.

After five days of deliberations, the jury could only reach an 8-2 verdict.  Although there was extrinsic evidence suggesting the falsity of Kyle’s assertions that he punched Ventura and police witnessed that altercation arising from the alleged statements, the trial essentially was a credibility contest between Ventura, Kyle, and their respective eyewitnesses.

Finally, the risk of prejudice is high. Ventura’s counsel’s closing remarks, in combination with the improper cross-examination of two witnesses about Kyle’s insurance coverage, prevented Kyle from receiving a fair trial.  The appellate court, therefore, remanded the defamation claim for a new trial.

The court could not accept Ventura’s unjust-enrichment theory, because it enjoys no legal support under Minnesota law.  Ventura’s unjust-enrichment claim fails as a matter of law.

ZALMA OPINION

Judges must protect the parties to a tort action to keep information about the existence of insurance protecting the defendant from a tort action. In this case Ventura’s counsel improperly attempted to use the existence of insurance to establish that Kyle intentionally defamed Ventura and that Kyle’s widow would not suffer since an insurer would pay any judgment. This convinced eight jurors but not the Eighth Circuit.

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 theLEGENDAWARD 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 Ventura Loses Judgment Because of Improper Comments by His Counsel

Consolidation of Tort & Insurance Action Inherently Prejudicial to Insurer

Never Shall the Liability Insured & Insurer Meet in Suit Brought by Tort Plaintiff

Since insurers are not popular in the minds of the general public tort plaintiffs will often try to bring an insurer into a tort action to convince the jurors that the tort defendant – insured – has unlimited funds to pay any judgment they may award to the plaintiff.

THE LITIGATION

McGinty v. Structure-Tone, — N.Y.S.3d —-, 2016 WL 3148494, 2016 N.Y. Slip Op. 04365 2016 WL 3148494, Supreme Court, Appellate Division, First Department, New York (June 7, 2016) the plaintiff sought to consolidate two actions, a personal injury action and an insurance coverage action.

The New York Supreme Court, Appellate Division, exercising its usual wont to enter a brief, clear, and succinct opinion, found that the two suits do not involve common questions of law or fact. Rather, they involve different contracts, different parties, and different factual issues.

Moreover, litigating an insurance coverage claim together with the underlying liability issues is inherently prejudicial to the insurer. (see Kelly v. Yannotti, 4 N.Y.2d 603, 607 [1958]; McDavid v. Gunnigle, 50 A.D.2d 737 [1st Dept 1975]; D’Apice v. Tishman 919 Corp., 43 A.D.2d 925 [1st Dept 1974] ). Consolidation in this case would result in a single action involving the insured, the insurance policy, and the construction of that policy.

FACTS

In addition, Eurotech did not bring its coverage action against QBE until more than six years after it was named as a third-party defendant in the liability action and almost four years after plaintiff McGinty filed the note of issue and certificate of readiness in the liability action.

DECISION

Litigating the actions separately will allow QBE to take any necessary discovery to which it is entitled, while avoiding prejudice caused by delay to McGinty.

The appellate court, therefore, affirmed the decision of the Supreme Court, Bronx County (Larry S. Schachner, J.) that was entered January 28, 2016, which denied Eurotech Construction Corp.’s motion to join QBE Insurance Corp. as a party to a personal injury action and consolidate the personal injury action with Eurotech’s coverage action against QBE, unanimously affirmed, without costs.

ZALMA OPINION

Why this case was litigated is beyond me since the prejudice to an insurer is obvious. The plaintiff wanted to profit from the prejudice and, wisely, was refused the ability. The law in New York, and across the country, would prevent dragging an insurer into a suit where its insured was named as a defendant and who it is defending.

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 theLEGENDAWARD 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 Consolidation of Tort & Insurance Action Inherently Prejudicial to Insurer

Pay Premium or Lose Coverage

No Contractual Right to Reinstatement

Insurance is a based on the terms of the contract. It is not a right conferred upon persons by the U.S. Constitution. It requires the insured to keep certain promises made by the insured to the insurer, the most important of which is the obligation to pay the premium. When the insured breaks the promise and fails to pay the premium the policy will usually cease to exist and the insured loses all rights to the benefits of the insurance policy.

In Angel Moreno And Carmelita Moreno v. Wells Fargo, N.A.; American Bankers Life Assurance Company Of Florida, Formerly Known As Union Security Life Insurance Company, …, — Fed.Appx. —- , Ninth Circuit, 2016 WL 3092186 (6/2/16) the Ninth Circuit was faced with the appeal of Angel Moreno and Carmelita Moreno whose suit had been dismissed. Their amended complaint alleged claims under Arizona law against Defendants Wells Fargo, N.A. (Wells Fargo) and American Bankers Life Assurance Company of Florida (American Bankers) for disability benefits.

The Morenos’ claims included those for breach of the duty of good faith and fair dealing, breach of contract, consumer fraud, and unfair and deceptive acts and practices in the business of insurance.

FACTS

This case arises from a home loan that the Morenos obtained through Wells Fargo. In conjunction with this loan, the Morenos elected to purchase disability insurance coverage from Union Security Life Insurance Company, now known as American Bankers. The insurance policy at issue provided that coverage would terminate if and when: “You are considered in default under the terms of your debt agreement with the Creditor, or in default with your monthly insurance premium.”

It was not disputed that the Morenos failed to timely make full mortgage and insurance premium payments beginning in April 2012, several months prior to Wells Fargo’s August 20, 2012 letter notifying the Morenos that their insurance coverage had ended. Accordingly, the Morenos’ failure to make their payments caused them to lose their insurance coverage, not any act or omission by defendants.

To be sure, Wells Fargo’s Truth in Lending Disclosure for Optional Credit Insurance provided that the Morenos would be notified prior to termination. As such, the Morenos contend that had they been notified prior to termination, they would have corrected the deficiency. However, neither the disclosure nor the insurance policy provided a right to cure or to reinstatement, and the statutory right to cure under Arizona law does not apply to insurance agreements. Accordingly, it would not have been reasonable for the Morenos to expect that a right to cure existed.

The parties do not dispute that Mr. Moreno became disabled in December 2012. Nor do the parties dispute that the Morenos seek coverage under the policy in question beginning at that time. The Morenos’ disability insurance coverage, however, terminated several months before Mr. Moreno’s disabling event and, therefore, before any coverage rights under their policy would have accrued.

DECISION

As a result, any failure by defendants to provide prompt notice of termination in April 2012 when the Morenos first failed to make full mortgage and insurance premium payments did not cause the Morenos’ loss.

Because the Morenos cannot overcome their causation problem, any amendment of the complaint would have been futile.

Nor did the district court abuse its discretion in awarding attorneys’ fees. The Morenos’ contention that the district court did not give sufficient consideration to their financial condition is unavailing. The district court acknowledged and discussed the Morenos’ financial condition and dramatically lowered the attorneys’ fees award sought by each defendant as a result.

ZALMA OPINION

The Ninth Circuit, avoiding its usual facility to write a long and convoluted opinion, stuck to the facts and the law and concluded that when an insured breaches the contract by failing to pay the premium and the mortgage payments they are not entitled to recover credit disability benefits.

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 theLEGENDAWARD 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 Pay Premium or Lose Coverage

Insured v. Insured Exclusion

Exclusion Applies Burden Falls on Insured to Prove Exception

Appellate courts often write opinions that require a wheel barrow to carry. However, when a case gets to a straight-forward point an appellate court will fool the parties and the nation by writing an opinion that is brief, clear, and easy to understand.

AMERCO, Plaintiff  v. National Union Fire…, United States Court of Appeals, Ninth Circuit,Fed.Appx. —-, 2016 WL 3157301 (June 06, 2016) is just such a case where the Ninth Circuit wasted no time or effort to reach a decision.

FACTS

Five plaintiffs filed five shareholder derivative lawsuits against AMERCO and its directors and officers in Nevada state court, and the state court consolidated the cases. AMERCO sought coverage for costs associated with the consolidated action under its directors and officers liability policy (“D & O policy”). Its insurer, National Union Fire Insurance Company of Pittsburgh, PA (“NUF”), denied coverage because one of the plaintiffs in the consolidated action, Paul Shoen, was an “Insured” under the D & O policy. AMERCO sued for breach of the insurance contract. The district court granted NUF’s motion to dismiss.

ANALYSIS

The district court properly dismissed AMERCO’s complaint because AMERCO did not allege that the non-Shoen plaintiffs instigated and continued their claims totally independent of Paul Shoen, an Insured under the policy. The “Insured v. Insured” exclusion in the D & O policy barred coverage for security holders’ claims except when “such security holder’s claim is instigated and continued totally independent of” any Insured. [Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 666 (9th Cir. 2009)] Biltmore interpreted a similar exclusion under Arizona law and explained that “the [shareholder derivative suit] exception to the exclusion only applies if the claims are ‘instigated and continued totally independent of’ the corporation”. Under Arizona law, the insurer has the burden of proving that a policy exclusion is applicable, but the insured carries the burden of proving that his claim falls within an exception to that exclusionary clause.

Here, AMERCO stated in its complaint that the five plaintiffs in the consolidated action were security holders, but it did not allege that the non-Shoen plaintiffs filed or maintained their claims independent of Paul Shoen. AMERCO conceded in its complaint (and in its briefing to the Ninth Circuit) that Shoen participated in the underlying lawsuit.

AMERCO therefore failed to carry its burden of alleging that the non-Shoen claims fell within the exception to the “Insured v. Insured” exclusion, and, therefore, affirmed the district court’s dismissal of AMERCO’s complaint on that ground.

ZALMA OPINION

No insurer is willing to take the risk the potentiality of colussion when an insured sues an insured. For that reason insured vs insured exclusions exist in almost every liability insurance policy and must be applied. Perhaps that is why the Ninth Circuit wrote such a brief and intelligent opinion.

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 the alma will be recognized with the 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 Insured v. Insured Exclusion

Exclusive Remedy of Workers’ Compensation

General Buys Workers’ Compensation Insurance for Sub-Contractor

It is axiomatic, applied universally, that recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage against the employer or an employee of the employer. The purpose of workers’ compensation law is to provide an injured worker with benefits immediately without a need to prove negligence or any other cause of the injury, just that the injury happened when working.

When an employee is seriously injured at work the benefits provided by the policy is inadequate and he will seek tort damages from people not the injured person’s employer to gain additional damages to compensate for the serious injury.

The Texas Supreme Court was asked, in TIC Energy and Chemical, Inc. v. Martin, Supreme Court of Texas — S.W.3d —-,  2016 WL 3136877 (June 3, 2016) in a personal-injury case to determine whether a subcontractor is entitled to the exclusive-remedy defense as a fellow employee of the general contractor’s employees by virtue of the general contractor’s written agreement to provide workers’ compensation insurance to the subcontractor.

THE STATUTES

Under section 406.122(b) of the Labor Code, a subcontractor is not an employee of the general contractor if the subcontractor (1) is operating as an independent contractor and (2) has agreed in writing to assume the responsibilities of an employer for the performance of the work.  However, section 406.123 of the Labor Code expressly confers statutory-employer status on general contractors who provide workers’ compensation insurance to their subcontractors pursuant to a written agreement. This case involves a written agreement that ostensibly meets the terms of both sections.

The trial court denied the subcontractor’s summary-judgment motion asserting the exclusive-remedy defense, and in a permissive interlocutory appeal, the court of appeals affirmed.

FACTUAL BACKGROUND

Union Carbide Corporation employed Kevin Martin at its facility in Seadrift, Texas. Martin lost one of his legs in a workplace accident and recovered workers’ compensation benefits through an owner-controlled insurance program (OCIP) administered by Union Carbide’s parent company, Dow Chemical Company.  Martin subsequently sued TIC Energy & Chemical, Inc., a subcontractor providing maintenance services at the Seadrift facility, alleging TIC’s employees negligently caused his injury.

TIC filed a traditional motion for summary judgment based on the Workers’ Compensation Act’s exclusive-remedy provision.  TIC claimed the statutory defense as Martin’s deemed fellow employee. TIC produced evidence of a written agreement with Union Carbide that extended workers’ compensation insurance coverage under the OCIP to TIC and its employees, with the cost of coverage premiums excluded from TIC’s bid.

In response, Martin argued the exclusive-remedy provision does not apply because TIC was an independent contractor and had entered into a written contract with Union Carbide under which TIC “assume[d] the responsibilities of an employer for the performance of work.

STATUTORY REVIEW

The Texas Workers’ Compensation Act provides reciprocal benefits to subscribing employers and their employees. Covered employees sustaining work-related injuries are guaranteed prompt payment of their medical bills and lost wages without the time, expense, and uncertainty of proving liability under common-law theories. In exchange, the Act prohibits employees from seeking common-law remedies from their employers by making workers’ compensation benefits an injured employee’s exclusive remedy. The exclusive-remedy defense extends to the employer’s servants, meaning covered employees secure additional benefits under the Act in the form of protection from personal-injury claims by co-workers. The issue in this case is the extent to which statutory benefits and protections afforded to a subscribing general contractor and its employees may be shared with subcontractors and their employees.

A general contractor who has, pursuant to a written agreement, purchased a workers’ compensation insurance policy covering its subcontractors and its subcontractors’ employees becomes the statutory employer of its subcontractor’s employees, and is thus entitled to the benefits conferred on employers by the Act.  Furthermore, because a contractor can provide workers’ compensation, even when it has not purchased the insurance directly, multiple tiers of subcontractors thereby qualify as statutory employers entitled to the exclusive-remedy defense.

Such a scheme seems consistent with the benefits offered by controlled insurance programs, which are designed to minimize the risk that the subcontractors’ employees will be left uncovered. The Supreme Court explained that a construction and application of the statute that favors blanket coverage to all workers on a site accords with legislative intent and the Legislature’s decided bias’ for coverage.

In this case, the summary-judgment record conclusively establishes that Union Carbide and TIC had an agreement complying with the statute and for purposes of this appeal, TIC does not dispute it was engaged as an independent contractor for Union Carbide under an agreement meeting the criteria specified in the statute, the matter in dispute is the legal effect the statutes have in the subcontractor relationship.

DISCUSSION

Applying well-established statutory-construction principles, the Supreme Court discerned no ambiguity in the relevant statutory provisions and construed it according to its plain language as informed by the statutory context without resorting to canons of construction and extrinsic aids.

The Workers’ Compensation Act defines the terms “employee” and “employer” in different ways depending on the context. Even acknowledging the potential for redundancy, however, that circumstance alone is too thin a reed to justify contorting the statute’s natural flow and creating disharmony in the application of the statutes in multi-tier contractor scenarios.

Affording the legal effect of the statutes dictated by plain terms and supported by the statutory structure, reciprocal-benefit scheme, and Texas precedent, the Supreme Court held that TIC is entitled to rely on the Workers’ Compensation Act’s exclusive-remedy defense as Martin’s co-employee.

ZALMA OPINION

Although we can feel for the plaintiff who lost his leg should receive the benefits of the workers’ compensation law he must take the benefits of the workers’ compensation law and by so doing must give up his right to sue his employer or fellow employees. When the general contractor buys workers’ compensation insurance for itself and all of its subcontractors all of the employees of the general and the subcontractors are covered and the exclusive remedy applies.

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.

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

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 Exclusive Remedy of Workers’ Compensation

The First Annual Claims Magazine/ACE Legend Award

Honored for a 48 Year Love of Insurance Law

Please visit http://www.propertycasualty360.com/2016/06/01/fraud-insurance-and-the-law-an-interview-with-barr where, although I was sworn to secrecy, it seems that Claims Magazine has issued the news in advance of the ACE Conference, you will understand why I was asking all of you that can to attend the ACE Conference in Minneapolis to do so. I hope to see everyone of my readers there.

The article conveys my advice for anyone entering the insurance field today simple — enjoy yourself. “It’s a great business and one of the only white-collar jobs where you get to meet new people every day — in person or on the phone — have to educate yourself, learn new things every day, and you can make a fairly good living at it.”

“I never went to work feeling like it was going to be a bad day, although I knew there would be bad days. If you have a job where you enjoy yourself, it doesn’t feel like work.”

Barry Zalma has helped to educate hundreds of professionals by sharing his hard-earned lessons through articles, presentations, videos, blogs, books and other outlets. For his many contributions to the insurance industry over a lifetime, Zalma will be recognized with the first annual Claims Magazine/ACE Legend Award at the America’s Claims Event Conference in Minneapolis, Minn., this month.

Read more at http://www.zalma.com; http://zalma.com/blog and http://www.zalma.com/videoblog

Posted in Zalma on Insurance | 1 Comment

Staged Accident Results in Criminal Conviction

Lie to Insurer About Claim

Go Directly to Jail

Insurance fraud is a general intent crime. It is important to prosecute and convict those who stage an accident and then intentionally present a false claim to an insurer. Arguing against a jury conviction is often difficult and without a showing of false testimony, bias, prejudice or lack of adequate representation is impossible after admitting the crime. Why the defendant appealed is curious.

In State v. Alston, Slip Copy, Court of Appeals of North Carolina 2016 WL 2865469 (May 17, 2016) Patrick Henry Alston (“Defendant”) appealed following a jury verdict convicting him of insurance fraud. Following the verdict, the trial court sentenced Defendant to 15 to 27 months imprisonment.

Factual and Procedural Background

The prosecution proved that the Defendant unlawfully, willfully and feloniously did, with the intent to defraud and deceive an insurer, Repwest Insurance Company, present a written and/or oral statement as part of and in support of a claim for payment pursuant to an insurance policy, knowing that the statement contained false and misleading information, alleged a vehicle accident, claiming self and two children as being in the vehicle. Another party involved gave a confession, that the accident was staged and occupants were not inside the vehicle.

The evidence presented at trial, taken in the light most favorable to the State, tended to show the following: On 29 May 2013, Defendant contacted his friend, Cleve Fleming (“Fleming”). Defendant wanted to “try to get some money, insurance money” by staging an automobile accident on a rural road “[o]ver there off of … Sam Powell Dairy Road.” The two agreed they would file personal injury claims and “well, basically whenever the money came through, [they] would just bust it up or split it up” amongst themselves.

Fleming agreed to rent a U–Haul truck but he only had $3.00 to rent the truck. Defendant drove Fleming towards a U–Haul dealer in Roanoke Rapids, North Carolina. On their way, they stopped at a Wal–Mart and Defendant transferred $160.00 to a pre-paid credit card and gave it to Fleming.

Defendant dropped Fleming off at the U–Haul dealer and Fleming “told [the dealer] [he] wanted insurance with the rental.” He paid the rental fee with the $160.00 Defendant gave him, and signed the rental form. Fleming drove the U–Haul truck and met up with Defendant. Defendant drove his daughter’s Nissan Maxima with the following people inside: his daughter, Christina Patrice Alston; the father of Christina’s children, Phillip Putney, Jr.; and Christina’s and Phillip’s two infant children. The group traveled to a predetermined spot on State Road 1429 and parked.

Fleming got out of the U–Haul truck, and everyone exited the Maxima. Defendant drove the U–Haul truck into the back of the Maxima. Nobody was inside the Maxima at the time of the collision. Defendant got out of the U–Haul truck and stood on the side of the road with everyone else.

EMS paramedics arrived and Fleming told them he had a hurt shoulder, back, and arm. The paramedics took Fleming to the emergency room in an ambulance.

At 11:55 p.m., North Carolina State Trooper Levern Bynum traveled to the scene of the collision. He explained this section of State Road 1429 is not perfectly straight or all that curvy; rather, it eases back-and-forth “[like] how a snake crawls.” At the scene, Trooper Bynum found “a U–Haul truck and a [Nissan Maxima], the U–Haul truck being behind the [Maxima] off the roadway to the right.” Trooper Bynum determined the U–Haul truck traveled eighty-three feet after impact, and the Maxima traveled 102 feet after impact. The U–Haul truck sustained some damage on its front right side, and the Maxima sustained “approximately $1,000 [.00] of damage” to its back left side.

Following the accident, Fleming filed a claim with his insurer, Dairyland Insurance, but his policy had lapsed and he “couldn’t get no [sic] money.” Defendant filed an insurance claim with U–Haul’s insurer, Repwest Insurance Company (“Repwest”). Christina Patrice Alston also filed a claim with Repwest.

When Repwest investigated the insurance claim, Fleming told Repwest that a deer ran in front of Defendant’s Maxima and Defendant hit the brakes before he could slow down the U–Haul truck. He told Repwest that he did not know Defendant and that he was “sorry about the accident since [he] noticed there were two small children in the car.”

Fleming called Repwest “several times regarding the claims in this case….” He spoke with Repwest’s Special Investigator Audrey Dumas. Repwest’s Special Investigation Unit investigated the collision and gave its findings to Investigator Selby Bass, of the North Carolina Department of Insurance.

Investigator Bass reviewed information gathered by Repwest, including the U–Haul truck’s “black box,” similar to an airplane’s black box, which records the speed of the vehicle and whether the brakes were applied by the driver. Investigator Bass interviewed Fleming who admitted the accident was staged. Then, Investigator Bass interviewed Defendant. Defendant stated, “that he was not going to lie and say that the whole wreck was legitimate but that there is more to the story than [Investigator Bass] may know.”  He at no point acknowledged — nor ever denied the accident was staged.

The jury, in less than an hour of deliberation, found Defendant guilty of insurance fraud and attempting to obtain property by false pretenses.

Analysis

After reviewing the language the Court set out the following elements for insurance fraud: (1) the accused presented a statement in support of a claim for paying under an insurance policy; (2) the statement contained false or misleading information concerning a fact or matter material to the claim; (3) the accused knew that the statement contained false or misleading information; and (4) the accused acted with the intent to defraud.  Taking the evidence in the light most favorable the State, the record refers to Defendant as the “claimant driver.”  The record shows, through Defendant’s cross-examination of Investigator Bass, that Repwest representatives spoke with Defendant and “[h]e advised he was the driver [of the Maxima] at the time of the incident.” Further, Defendant gave a recorded statement to Repwest that was transcribed in Exhibit 4 and admitted at trial.

Reviewing the elements of insurance fraud, along with the record evidence and Defendant’s statements, it is clear (1) Defendant made a statement to Repwest in support of an insurance claim, (2) his statement that he was driving the Maxima was false or misleading and concerned a fact or matter that is material to the insurance claim, (3) he knew his statement contained false or misleading information, and (4) he acted with the intent to defraud Repwest.

The testimony from Fleming and Investigator Bass provides substantial evidence that a reasonable mind might accept as adequate to support a conclusion that Defendant committed insurance fraud when he made false statements to Repwest.

Although Defendant contended he received ineffective assistance of counsel, the appellate record does not disclose whether the actions of Defendant’s counsel were inadequate.

ZALMA OPINION

Insurance fraud is a dangerous crime, especially when it involves a staged accident, since innocent people can be injured or killed. By exiting the vehicles the Defendant in this case avoided injury to anyone but himself since the people who were to be claimants stood outside the vehicle while the Defendant drove a U-Haul truck into the rear of his car and then claimed he and all the passengers in his car were injured. The jury spent more time than necessary in finding him guilty after less than one year in jail for the crime.

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.

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

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 Staged Accident Results in Criminal Conviction

Ten Years & Still Litigating With Vigor

No Right to Read Opponent’s Litigation File

Sometimes lawsuits live longer than the career of the judge assigned to hear it. Sometimes the lawsuit takes on a life of its own. In Genesis Insurance Company v. Magma Design Automation, Inc., United States District Court, N.D. California 2016 WL 3057375 (05/31/2016)the USDC for the Northern District of California was called upon to resolve a discovery dispute in an insurance coverage lawsuit that has been pending for ten years.

INTRODUCTION

The discovery dispute arises in litigation involving the following parties:

  1. Magma Design Automation, Inc. (“Magma”), a local high technology company that carried Director’s and Officer’s (D&O) liability insurance during the time in question;
  2. Executive Risk Indemnity Inc. (“ERII”), which provided primary D&O coverage to Magma for the policy year 2004 and again for 2005;
  3. Genesis Insurance Company (“Genesis”), which covered Magma under a D&O excess policy for a year that spanned 2003-2004 (“the 03-04 policy”); and
  4. National Union Fire Insurance Company (“National Union”), which covered Magma under a D&O excess policy for years spanning 2004-2006 (“the 04-06 policy”).

FACTS

A patent infringement action was filed against Magma in 2004. As sometime happens, the patent action spawned two shareholder securities lawsuits against Magma that were filed in 2005. For insuring purposes under the D&O policies, the parties needed to prove when the securities actions arose. There was no dispute that ERII had the primary coverage for both 2004 and 2005 but they could not agree which excess carrier had coverage for them. The dispute, still pending after almost ten years was to determine whether National Union, who was on the risk at the time the suits were filed, or Genesis, who was on the risk the year before when the patent case was filed.

Under the terms of the Genesis policy, it would actually have been Genesis if it had received from Magma at the time of the patent action’s filing, a proper “notice of circumstances” advising that a securities lawsuit was looming in the future. Magma said that the notice it had caused to be sent to Genesis back in 2004 said what it needed to say and was sufficient to trigger coverage under the Genesis 03-04 policy for the 2005 securities lawsuits. ERII agreed with Magma, although it also acknowledged that its primary coverage could be deemed invoked for either its 2004 or its 2005 policy (which year made no difference to ERII). Genesis disputed the sufficiency of the “notice” and denied coverage. National Union denied coverage.

The present litigation began by Genesis filing a declaratory relief action against Magma challenging the sufficiency of the “notice.” Before that suit could be addressed by the court, the parties in the securities actions negotiated a settlement. ERII paid its $10,000,000 limits. Genesis, under reservation of rights, paid its $5,000,000 limits. After the settlement, Genesis wanted its money back, either from National Union or Magma. National and ERII also became parties in a flurry of cross-claims and counterclaims. National said it had good policy defenses. Magma just wanted one of the two excess carriers to be held responsible and did not much care which one it was.

The first court ruling on the merits was a summary judgment that declared the 2004 “notice” to Genesis was sufficient, triggering coverage for the 2005 securities actions under the Genesis 03-04 policy. National Union was off the hook.

Genesis appealed the summary judgment, and the Ninth Circuit not only reversed but specifically held that the “notice” was not effective to trigger coverage under Genesis’s 03-04 policy. Genesis was vindicated.

In a subsequent summary judgment ruling, the District Court found that National Union had the excess coverage for the 2005 securities actions and that National Union must reimburse Genesis for the $5,000,000 that it had paid toward the settlement. National Union was back in the picture.

National Union appealed, and the Ninth Circuit reversed. It did not rule out that National Union might ultimately have to come up with the $5,000,000. However, it held that there was no such obligation yet because there had been no exhaustion of ERII’s $10,000,000 primary limit of its 2005 policy.  For the moment, National Union could keep control of its funds.

THE LATEST MOTIONS FOR SUMMARY JUDGMENT

Again, summary judgment motions were brought, and the court made a series of rulings:

  • The exact same “notice” that Magma sent to Genesis, a notice that the Ninth Circuit held did not trigger coverage under the Genesis policy, was also sent to ERII. Therefore, as a matter of law, the notice to ERII was not sufficient to trigger coverage under ERII’s 2004 primary policy. Thus, ERII was mistaken to book its $10,000,000 payment under its 2004 policy and shall adjust its records to apply it instead to its 2005 policy;
  • It followed, then, since ERII’s primary limits for 2005 had been exhausted, that National Union’s excess obligation kicked in;
  • Since Genesis paid what National Union should have paid, Genesis was entitled to equitable subrogation, to be reimbursed by National Union for the $5,000,000. Judgment was entered in favor of Genesis and against National Union for that amount, plus interest.
  • Based on the record presented, the court declined to rule that National Union had breached its contractual obligations to Magma. That remains an open question. (So does Magma’s bad faith claim against National Union.)
  • National Union appealed from the judgment in favor of Genesis. That appeal is pending.
  • National Union also moved for summary judgment on Magma’s claims for breach of contract and bad faith. That motion is set for hearing soon.

DISCUSSION

Magma seeks an order requiring National Union to produce its “claims handling information” (presumably, documents). National Union says, and Magma does not dispute, that this information was produced for the time period starting with the initiation of the securities claims and going up to the date that Magma filed suit against National Union. That is, National Union produced the documents it had about the securities claims, from when they were made to when they were settled. That’s not what Magma wants now. Now it wants the claims handling information about its claim against National Union for excess coverage. In other words, it wants National Union’s claim file for the very claim that is currently in litigation between them.

In opposing this discovery request, National Union primarily relies on the litigation privilege created by California Civil Code § 47(b), which protects any “publication” made “[i]n any…judicial proceeding….”

Magma wants these documents because it believes National Union stubbornly refuses to step up to the plate and acknowledge it is liable for the $5,000,000 excess. Magma relies for support on White v. Western Title Ins. Co., 40 Cal. 3d 870 (1985). There, the court upheld a bad faith judgment against a title insurer that was based on the evidence that the insurer had made two low-ball settlement offers to the insured. True, that decision opened a crack in the very door that Magma seeks to open wide but subsequent courts have not opened it any further and have mostly limited it to its facts. Indeed, the insurer has an absolute right to defend against its insured’s claims, and opening up its litigation file to its insured would undermine its right to a fair day in court.

Ironically, National Union’s initial coverage position (to deny coverage) was precisely the position advocated by its insured, Magma. It was only after Magma’s choice to put the excess risk on Genesis’s 03-04 policy backfired, that Magma then came back to National Union.

As the litigation progressed National Union decided it may have policy defenses that it had not had at the very beginning of the securities actions. It may have been wrong, and–if the latest summary judgment holds up on appeal–will ultimately have to pay, but it seems it should be able to litigate the correctness of its legal position without opening up its litigation strategy.

CONCLUSION

Magma has not cited and the court did not find any precedential decision that permitted discovery such as is sought here. Magma’s request for post-litigation “claims handling information” (including reinsurance and reserves) is denied.

ZALMA OPINION

Although, it often seems that when insurance litigation is concerned that an insurer is less equal than the insured in the eyes of the court. Here, the USDC determined that the insurer was the equal of the insured and would not let the insured peek into the work and plans of its opponent in the lawsuit. The work product protection kept the insurer’s litigation strategy closed to those suing it.

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.

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

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 Ten Years & Still Litigating With Vigor

Named Insured May Cancel a Policy At Any Time

Policy Cancelled Before Loss

Disputes over cancellation of insurance policies usually center around cancellations by insurance companies. In Ged v. Select Portfolio Servicing, Inc., United States District Court, D. New Jersey, 2016 WL 3033683 (05/26/2016) the USDC was faced with a claim presented for a loss that occurred after the named insured cancelled the policy insuring the risk.

Defendants, American Security Insurance Company (“ASIC”) and Select Portfolio Servicing, Inc. (“SPS”) (collectively, “Defendants”) move the USDC, New Jersey, for summary judgment in their favor.

DISCUSSION

 Ged “is a citizen of the State of Florida who … reside[s] … [in] Parkland, Florida ….” ASIC is “an insurance company or entity duly organized in the State of Delaware, selling and issuing policies of flood insurance within the State of New Jersey.”  SPS “is … a corporation engaged in the mortgage servicing business within the State of New Jersey.”

The Property and Insurance Policy

Ged owns a house located at 6 Stoney Road, Point Pleasant Beach, New Jersey (hereinafter “the Property”). SPS was the designated servicer of the mortgage for the Property on or about December 1, 2011. ASIC issued a residential flood insurance policy (“the Policy”) to SPS. The Policy covered the Property, and identified SPS as the “Named Insured Mortgagee[.]” The Policy also listed Ged as “an additional insured[.]”

ASIC mailed a copy of the Policy to Ged at an address in Plantation, Florida. SPS, as a Named Insured Mortgagee, paid the Policy’s annual premium of $1,816.20 in monthly installments. The following terms governed cancellation of the Policy: “1. Cancellation ¶ a. Coverage under this Policy shall automatically and without prior notice, cancel when the named insured no longer has an interest in the described location or when the named insured has been provided with another policy that meets the requirements of the named insured as set forth in the mortgage agreement applicable to the described location. ¶ b. This Policy may also be cancelled by the named insured by returning it to us or notifying us in writing of the date cancellation is to take effect. ¶ c. We may cancel this Policy by mailing notice of cancellation to the named insured at the address shown on the Additional Insured Endorsement or by delivering the notice not less than 30 days prior to the effective date of cancellation.”

Short Payoff Settlement

Ged and SPS negotiated a short payoff settlement  (SPS) of the mortgage on the Property from January 2012 through July 2012.  The SPA advised Ged that SPS “agree[d] to accept [his] proposed Short Payoff [of $375,000.00] and … release the lien on the [P]roperty ….”

The SPA, which was the only document that governed the short payoff settlement, stated that “[u]pon satisfaction of all terms of this approval, the mortgage [would] be discharged in its entirety with any deficiency rights waived, and a lien release document [would] be forwarded ….”  The terms of the SPA did not address the Policy. Ged accepted the terms of the SPA, and paid SPS $375,000.00 shortly thereafter.

Cancellation of the Policy

SPS, upon executing the SPA, informed ASIC that Ged paid his mortgage in full effective July 16, 2012. ASIC then proceeded to cancel “the Policy in accordance with instructions from SPS[.]” ASIC refunded SPS $79.81, as a portion of the unearned premium for the month of July 2012.

ASIC forwarded a cancellation notice via letter dated July 26, 2012 (“7-26-12 Cancellation Notice”). The 7-26-12 Cancellation Notice read, in relevant part, as follows: “The Named Insured Mortgagee/Lender has requested cancellation of the lender-placed insurance that was issued in compliance with your mortgage/lien agreement. This cancellation is effective at 12:01 a.m. on [07-16-2012]. The reason for this cancellation is: ¶ Named Insured’s Request. You have paid off your loan and the mortgagee/lender no longer has an insurable interest in the [P]roperty.”

Superstorm Sandy

The Property sustained flooding damage during Superstorm Sandy on October 29, 2012.  Ged “filed an insurance claim [with ASIC] … seeking compensation for direct loss by flood” in February 2013. Ged claimed he was “required to demolish the … Property and rebuild in order to return the home to pre-loss condition and comply with local zoning requirements.”

ASIC informed Ged “that it was unable to confirm that there was any coverage in force for the Property on … October 29, 2012 ….” ASIC, upon further reviewing the claim, issued a letter dated February 13, 2013 (“2-13-13 Letter”) to Ged.  The 2-13-13 Letter informed Ged “that ASIC had been unable to locate any active policy for the reported date of loss of October 29, 2012, given that the Policy terminated before the date of loss upon the short payoff of … Ged’s loan.”

APPLICATION OF LEGAL STANDARD

Ged conceded that the issues for determination by this Court pertain to the breach of contract and the Policy cancellation.

Ged’s Arguments

Ged alleges that Defendants failed to provide: (1) coverage warranted under the Policy; and (2) “proper notice of cancellation[.]”  Ged conceded that the SPA “did not confer any rights to him with respect to the Policy.” Ged also admitted that “there was no contract directly between [himself and] ASIC [.]”

Ged contends that the Policy was effective on October 29, 2012 on the grounds that he was: (1) an additional insured under the Policy; and (2) a third-party beneficiary under the Policy.  According to Ged, payments made “on the Policy as part of his monthly mortgage payment to SPS …. demonstrate that the Policy was intended to confer a direct benefit to him and as such he is entitled to third-party beneficiary status ….”  Ged also argues that ASIC had an obligation to: (1) verify his address; and (2) forward the 7-26-12 Cancellation Notice to his verified address. Thus, Ged argues, with respect to the 7-26-12 Cancellation Notice, that “there is a genuine dispute as to whether [Ged] was provided with effective notice” by the cancellation of the Policy.

ASIC’s Arguments

ASIC argued that Ged “cannot maintain a claim for insurance coverage against ASIC … because the Policy terminated more than three months before the date of the loss[,]” thereby extinguishing SPS’ interest in the Property. With respect to the 7-26-12 Cancellation Notice, ASIC argues, inter alia, that it “fully complied with its notice obligations by sending Confirmation of Cancellation to the named insured, SPS, which had full authority under the Policy terms to receive notices of cancellation on behalf of [Ged], the additional insured.”

SPS’ Arguments

SPS argued, inter alia, that Ged was not a third-party beneficiary under the Policy because after SPS and Ged executed the SPA, “SPS no longer had an insurable interest in Ged’s home ….” According to SPS, “New Jersey law would have prevented SPS (and therefore Ged) from pursuing a claim for the 2012 flood damage to Ged’s property, regardless of whether SPS formally cancelled the [P]olicy in July 2012, because SPS ceased to have an insurable interest after the short payoff settlement in July 2012.”

Analysis

The Court was unable to find a dispute of material fact as to whether the Policy was effective on October 29, 2012, the date of Ged’s claimed loss. ASIC issued the 7-26-12 Cancellation Notice pursuant to the Policy terms.  Moreover, Ged provided no evidence that: (1) ASIC was required to verify his address pursuant to the terms of the Policy; or (2) he was a third-party beneficiary under the Policy.  Accordingly, the Court concluded that there was no genuine dispute of material fact regarding the claims at issue, and granted summary judgment in favor of ASIC and SPS.

ZALMA OPINION

Mr. Ged was a victim of bad timing and a failure to protect himself against loss by flood that his lender had required as a condition of lending him the money to buy the house. When he paid off the loan he was no longer bound by the loan’s requirement for flood insurance and the lender – without an insurable interest – had no right to maintain the policy. The policy was cancelled by the named insured immediately upon its request by notice to the insurer. The only way Ged could have been insured when Sandy hit was to buy insurance in his name.

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.

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

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