Body Lost — Suit Follows

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The U.S. District Court for the Eastern District of Michigan was asked to grant Defendant Netherlands Insurance Company’s Motion for Summary Judgment. Plaintiffs filed suit for declaratory relief and seek coverage under a cemetery’s insurance policy for an allegedly misplaced body in Steven Reed, et al v. Netherlands Insurance Company, No. Case No: 10-13247 (E.D.Mich. 02/16/2012).

The Netherlands policy was effective December 22, 2006 until November 25, 2007. Plaintiffs did not discover the alleged mistake until March 11, 2009. The cemetery claimed the body was never lost. Rather, paperwork was misplaced, and the burial took place on August 10, 2007 as scheduled, in the lot the Plaintiffs purchased.

Plaintiffs’ underlying state court complaint (“Verified Complaint”) alleges breach of contract, negligence, intentional infliction of emotional distress, violation of the Michigan Consumer Protection Act, and fraud. As a result, Plaintiffs alleged they suffered mental anguish, loss of use of attendant property, and interference with the right of burial of human remains.

Netherlands denied coverage. It averred that Plaintiffs’ claims – if they exist – occurred outside of the policy period and even if they are timely, policy exclusions bar coverage.

FACTS

Steven Reed, Kresha Rhan, Ezra Bolden, Cholon Bolden, and Phaedra Bolden (“Plaintiffs’”) are the children of deceased, Katherine Bolden. Plaintiffs allege the United Memorial Gardens Cemetery (“Cemetery”), a cemetery corporation, misplaced their mother’s remains. Plaintiffs filed suit in Wayne Circuit Court on February 12, 2010 against the Cemetery. Plaintiffs’ underlying state lawsuit is against the Cemetery. Plaintiffs entered into a burial contract with the Cemetery on August 7, 2007, to bury their mother. The Plaintiffs allege that they were not allowed to see their mother interred, but do not explain why. The Plaintiffs did not attend the funeral and had no contact with the Cemetery until a year and a half later.

Around March 11, 2009, Plaintiffs contacted the Cemetery to make arrangements to bury their sister next to her mother. Plaintiffs allege they were told their mother was not buried there, but if she was, she was in a different plot. Plaintiffs also say an agent of the Cemetery informed them that a former employee had taken client money and disposed of bodies in unknown locations. The Cemetery says it located Katherine Bolden’s body after the Plaintiffs filed suit in the plot purchased by the family.

In a letter dated May 14, 2009, the Cemetery said its records indicate Katherine Bolden was buried in the space Plaintiffs reserved, on the day she was to be buried. Although Bolden’s file could not be located, the Cemetery says the burial was recorded in two other places. The Cemetery lot book, shows that Bolden’s space had already been sold to someone else at the time Plaintiffs purportedly purchased it; that is why the family was told the decedent was buried in someone else’s space.

GENERAL DESCRIPTION OF POLICY

A. Coverage

In determining Coverage it is necessary to review the insuring agreement, conditions and definitions sections of the policy (“Coverage”). Under Coverage, the insurer agrees to pay damages resulting from “bodily injury,” “property damage” or “personal and advertising injury” caused by an “occurrence” during the policy period.

B. Exclusion

Despite the language in the Coverage section, the policy contains a Funeral Services Exclusion (“Exclusion”). This states that the insurance does not apply to “bodily injury,” “property damage” or “personal and advertising injury” arising out of errors or omissions in the handling, embalming, disposal, burial, cremation, or disinterment of dead bodies.

C. Endorsement

Finally, the insurance policy contains a Funeral Homes or Cemeteries Endorsement (“Endorsement”); this Endorsement modifies the coverage to extend coverage for “bodily injury,” including mental anguish claims, and “property damage” arising from the rendering or failure to render professional services by a funeral home or a cemetery. The Endorsement also modifies coverage to allow recovery for “personal injury” arising out of the interference with the right of burial of human remains.

IV. ANALYSIS

Determining coverage here is complicated by several facts. The policy was in effect December 22, 2006 until November 25, 2007. While Plaintiffs’ decedent was buried during the period of coverage – on August 10, 2007 – Plaintiffs did not find out she was not in the plot they purchased until March 11, 2009 – outside of the policy period. Their so-called mental anguish arises from being given the information that their mother was not in the purchased plot.

Applicable Law

Michigan law governs; a federal court sitting in diversity applies the substantive law of the state in which it sits.  To determine whether an insured is entitled to insurance benefits, a court must first determine whether the policy provides coverage. If it does, the court must then determine whether that coverage is negated by an exclusion.

Plaintiffs’ theory of recovery is that under the Endorsement, there is coverage for “bodily injury” including mental anguish, arising from the Cemetery’s failure to render professional services. Netherlands counters that the claims are barred because Plaintiffs did not discover an alleged error until March 11, 2009 after the expiration of the Netherlands policy.

Emotional distress claims generally do not ripen until the plaintiff suffers the emotional distress. Under the circumstances of this case, a plaintiff’s claim for mental anguish would not accrue until the plaintiff is actually aware that human remains were mishandled.

The Netherlands policy provides coverage only for losses that occur within the policy period. Under the policy, “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Under an occurrence policy, there can be no coverage for an event which doesn’t occur during the policy period.

The Plaintiffs’ claim of mental anguish did not accrue until August 11, 2009, the date Plaintiffs discovered that Katherine Bolden’s body had allegedly been misplaced. This date is outside the effective dates of the policy, and, Netherlands is not obligated to provide coverage for losses that occur outside the policy period.

Plaintiffs contend that as a result of the breach, Netherlands is legally obligated to pay property damages for the loss of use of the burial lot, burial vault, internment rights, perpetual care of gravesite, and services which they paid for and did not receive. Netherlands counters that this property claim fails because: (1) the Exclusion bars coverage; (2) a cause of action did not accrue until the family learned of the alleged misplacement; (3) the body was never misplaced; (4) policy provisions j(6) and m(2) exclude coverage; and (5) recovery for breach of the burial contract is limited to one hundred dollars.

Even if this alleged loss accrued during the policy period, Netherlands alleges that there are exclusions in the policy which bar coverage.  The exclusion states:

Exclusions — this insurance does not apply to:

m. Damage to Impaired Property or Property Not Physically Injured

(2) A delay or failure by you (Cemetery) or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

The court found that Netherlands is correct that Provision m(2) excludes coverage.

Under m(2), there is no coverage under the policy for a delay or failure by the Cemetery to perform a contract. Therefore, Plaintiffs’ property damage claims arising out of the alleged breach of the burial contract are barred because the policy does not provide coverage for instances in which the Cemetery breaches a contract or agreement.

CONCLUSION

The Court declares the policy does not cover any of Plaintiffs’ claims:

1. Plaintiffs’ property damage claims are barred by policy exclusions,
2. Plaintiffs’ claims for bodily injury are barred because they fall outside of the policy period,
3. Plaintiffs’ claim of interference with the burial of human remains is similarly barred; Plaintiffs could not have suffered damages until after the policy expired,
4. claims for emotional distress and fraud are precluded because the policy does not provide coverage for intentional acts,
5. Plaintiffs do not allege a theory of recovery that falls within the policy,
6. arguments regarding an extension of the policy period are unavailing, and
7. Plaintiffs’ contract and negligence claims for burying the body in the wrong place are precluded by the Exclusion.

Finally, when read as a whole, the contract is unambiguous and must be enforced as written.

ZALMA OPINION

As interesting as the facts of this case are – the claimed loss of the body of the plaintiffs’ mother – it is a fairly direct insurance case where the parties seeking insurance coverage must prove that their damage occurred within the policy period and that the policy provided coverage for what allegedly caused damage. Plaintiffs failed and the insurer was granted summary judgment.

A Cemetery is obliged to fulfill the contract with the family of the deceased with knowledge that a failure can cause bodily injury and emotional distress. The potential for such a breach is the reason why Funeral Homes or Cemeteries Endorsement insurance is purchased.

It seems the wrong insurer was sued or that there was no insurer available at the time the Plaintiffs incurred emotional distress. Their attempts to drag Netherlands into the case to provide money for their injuries failed because the district court was willing to read the policy as written.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

The Case of the Art Flambé

The following story is from my E-book “Heads I Win, Tails You Lose” available at

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http://www.zalma.com/zalmabooks.htm and for continuing education credit from A. D. Banker Co., http://www.adbanker.com.  This story is fiction, the people identified bear no resemblance to anyone, living or dead, whose names were changed to protect the guilty.

The Decision to Commit Fraud

When a person decides to perpetrate an insurance fraud, he pushes the pause button on his morality. His plan to commit the fraud will then become so flamboyant and creative that even the most innocent of claims adjusters will detect the crime. Such was the case of a Belgian immigrant. He came to the United States shortly after World War II. He eked out a living with various jobs as a low paid engineering draftsman.

Before he decided to change his career and try arson for profit, he had lead a dull, but exemplary, life. He, at the age of sixty, married his second wife. Later they had a child. When the child was three, he contracted phlebitis and underwent several surgeries. He was unable to keep up with his work and, in any event, the aerospace industry had just lost several major contracts. He lost his job.

Unemployment Compensation did not pay enough for him to make the $1,400 a month payments on his small three bedroom house in Cerritos, California. His lender foreclosed.

After the foreclosure sale had occurred, he was still living in the house. His homeowner’s policy was still in effect. He no longer had an interest in the house and was subject to eviction. The insured recruited his sixteen-year-old son, from his first marriage, to set fire to the house. He made certain that when the fire occurred he, his wife and young daughter were away visiting relatives in Victorville. The house, with the assistance of much gasoline, burned to the foundation.

Much to his surprise (he was not an insurance scholar) the insurance company immediately denied his claim for the loss of his structure. He did not know that he must, at the time of the fire, have an interest in the structure to collect indemnity. The mortgagee, now the owner, received full payment. He had $100,000 in contents coverage and needed to collect it all.

Of course, because of his extended illness and lack of income, the house had relatively threadbare and simple furniture and furnishings. He needed to bring the values up somehow to effect a policy limits payment.

He prepared an inventory of all of his household furniture and furnishings and added to that an original oil painting by Rembrandt, an original oil painting by Pablo Picasso and an original oil painting by Vincent Van Gogh.

The adjuster was surprised that anyone who owned such valuable art work had difficulty making $400 a month payment to his mortgage company. The adjuster could not understand how the insured could allow his house to go by foreclosure. The adjuster retained counsel to examine the insured under oath.

Under oath, the insured’s testimony established that the insured had attempted to perpetrate a fraud on his insurer.

The insured testified that he was of royal birth, his father being a baron in Belgium. The Baron lived in a castle outside of Antwerp having earned his fortune in the diamond trade. The baron, pleased to learn that he had become a grandfather again, brought his son, daughter-in-law and new granddaughter to visit him at the castle. They spent a month at the castle enjoying the generosity of the baron. Before the insured left, the baron pointed to three oil paintings on the castle wall and told his son to take them home. Grandfather, the Baron, made the paintings a gift in honor of the birth of the new granddaughter.

The insured testified that he took the oils out of their frames, rolled them up and placed the three in a shipping tube which he hand-carried back to the United States. Since they were gifts, he did not report them to U.S. Customs. He had no written record of his ownership or possession of the paintings.

He described the Rembrandt as the dark painting of people sitting about a table with a bright point of light. When asked to describe the painting by Van Gogh, the insured testified:

“Another Dutchman. The painting was in the same style.”

Of course, counsel knew that although Rembrandt painted in very dark colors. Van Gogh, however, painted in wild, bright, and exuberant color schemes. A dark and brooding painting like that of Rembrandt never came off Van Gogh’s brush.

Further, counsel knew (after consulting with an art expert) that Rembrandt painted most of his works on board – planks of wood — it was, therefore, impossible to roll it up and put it in a tube. If the insured had one of Rembrandt’s rare canvasses and had rolled it up when he arrived home in Cerritos he would have found a clean canvas and a pile of paint chips at the bottom of the tube.

The insured tried to help the insurer’s investigation. He provided a photograph of a family dinner where the Rembrandt was visible in the background. The insured identified the photograph as depicting the original Rembrandt oil painting in its background. Counsel for the insurer had the photograph enhanced and enlarged. The enlargement showed the single, bright point of light described by the insured was cast by a painting of an electric light bulb. Of course, Tom Edison had not been born when Rembrandt was painting, and would not be born for at least three hundred more years.

To the surprise of the insured only the insurer rejected the claim presented by the insured for fraud, false swearing, and material misrepresentation of fact.
Suit was filed by the Insured for breach of contract and breach of the covenant of good faith and fair dealing. Although the fraud was obvious and blatant the costs of defense of the bad faith action mounted. The suit dragged on for three years. Trial counsel for the insurer were unable to convince a court to grant summary judgment. Finally, at a mandatory settlement conference the lawsuit settled for a payment by the insurer of $30,000 against the wishes of defense counsel who, regardless, admitted he would charge more than $30,000 to take the case through trial.

There is no question that the settlement was an appropriate economic decision if the insurer was only considering the single lawsuit. They were dealing with a plaintiff’s lawyer they saw on a regular basis. To pay him “tribute” as an economic decision was illogical. When a plaintiff’s bad faith lawyer is paid $30,000 by an insurer for a lawsuit that any three-year-old would know was a blatant fraud, he has been given an invitation to file more suits against that insurer, regardless of the merits of the lawsuit. Paying a blatant fraud is tantamount to providing plaintiff’s counsel with the key to the vault that holds the assets of the company. The insurer that does so fools itself only that it is making a reasonable economic decision. It will pay, in the future, thousands of dollars because the plaintiff’s bar knows they will pay off rather than pay their lawyers to defend the most spurious of suits.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Serious Injuries Seek to Stretch the Law

Carbon Dioxide Poisoning

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Two houseguests suffered serious injuries after their host left her car running overnight in an attached garage and the house filled with carbon monoxide. The Connecticut Supreme Court was asked, in New London County Mutual Insurance v. Maria v. Nantes et al., No. (SC 18758), (Conn. 02/21/2012), to determine if the guests’ injuries are covered by a homeowner’s insurance policy issued by the plaintiff, New London County Mutual Insurance Company, to the named defendant, Maria V. Nantes, that excludes coverage for injuries “[a]rising out of . . . [t]he . . . use” of a motor vehicle.

The plaintiff brought this declaratory judgment action against Nantes, the homeowner, her guests, Armenui Dzhgalian and Aida Melikyan, and Nantes’ automobile insurer, Government Employees Insurance Company (GEICO), seeking a declaration that Nantes’ homeowner’s policy does not cover the injuries suffered by Dzhgalian and Melikyan. The plaintiff filed a motion for summary judgment, claiming that the policy does not cover these injuries because they fall within the policy exclusion for injuries “[a]rising out of . . . [t]he . . . use” of a motor vehicle. The trial court granted the plaintiff’s motion and rendered judgment for the plaintiff, and the defendants appealed.

UNDISPUTED FACTS

Dzhgalian and Melikyan are medical school graduates and residents of California. In February, 2007, they traveled to Connecticut to participate in a month long, unpaid internship at Griffin Hospital (hospital) in the town of Derby. During their internships, Dzhgalian and Melikyan lived with Nantes, a hospital employee, at her home in the town of Ansonia. As part of the living arrangement, Nantes drove Dzhgalian and Melikyan to and from the hospital each day. Dzhgalian and Melikyan each agreed to pay Nantes $460 to cover their share of utilities and car expenses.

At the end of the work day on February 12, 2007, Nantes drove Dzhgalian and Melikyan to her house and parked her car in the attached garage. Nantes exited the car without turning off the engine, closed the garage door, and went into the living quarters of the house, which did not contain a carbon monoxide detector. The car’s engine continued to run overnight, and the house filled with carbon monoxide. Dzhgalian and Melikyan suffered serious neurological injuries from carbon monoxide poisoning. They suffered additional injuries when Nantes dragged them, unconscious, out of the house.

The plaintiff promptly disclaimed coverage, relying mainly on the fact that Nantes’ homeowner’s policy contained the following exclusion:

[c]overage [for] [p]ersonal [l]iability and . . . [m]edical [p]ayments to [o]thers do[es] not apply to ‘bodily injury’ or ‘property damage’ . . . [a]rising out of . . . [t]he ownership, maintenance, use, loading or unloading of motor vehicles or all other motorized land conveyances, including trailers, owned or operated by or rented or loaned to an ‘insured’…

Soon thereafter, Dzhgalian and Melikyan returned to California. Nantes subsequently relocated to California as well. Dzhgalian and Melikyan settled with Nantes and obtained an assignment of her rights to sue the plaintiff for indemnity and bad faith tort damages.

The plaintiff filed this declaratory judgment action against the defendants. Relying primarily on the motor vehicle exclusion, the plaintiff sought a declaration that Nantes’ homeowner’s policy does not cover Dzhgalian’s and Melikyan’s injuries. The trial court concluded that Dzhgalian and Melikyan’s lodging and transportation arrangement with Nantes constituted a purposeful business transaction within the meaning of Connecticut statutes and that the plaintiff’s cause of action against Dzhgalian and Melikyan arose out of this transaction.  The Supreme Court concluded that the trial court was correct that Connecticut had jurisdiction.

The Purpose of a Declaratory Relief Action

In Connecticut, the purpose of a declaratory judgment action is to secure an adjudication of rights when there is a substantial question in dispute or a substantial uncertainty of legal relations between the parties.  The Supreme Court noted that the Connecticut declaratory judgment statute is unusually liberal. An action for declaratory judgment is, in Connecticut, a statutory action as broad as it could be made. One type of controversy to which the Connecticut declaratory judgment statute often has been applied is a dispute over rights and liabilities under an insurance policy.

In the present case, the plaintiff sought an adjudication of its rights with respect to an unsettled question of law pertaining to its liability under the homeowner’s insurance policy that it had issued to Nantes.  As the defendants acknowledged the settlement agreement “demonstrated the intent of . . . Melikyan and Dzhgalian to pursue legal action against [the plaintiff], upon the anticipated attainment of an award in arbitration.” A clearer case of an actual bona fide issue in dispute would be difficult to imagine.

The defendants last contention was that the complaint was an abusive attempt to deprive the true plaintiffs of their chosen forum. The defendants assert that the real purpose behind the plaintiff’s declaratory judgment action was to avoid defending a breach of contract action in the defendants’ preferred forum. This purpose, the defendants maintain, has been admonished by courts across the country.

A Forum Cannot Be Chosen if a Party Prefers to Litigate Elsewhere or Prefer to be the Plaintiffs

The defendants failed to cite a single Connecticut case in support of this argument. Even if there were such a case, the Supreme Court concluded it would not be persuaded that the action is an instance of impermissible forum shopping. Rather, the attempt to seek relief in California was, in fact, an instance of forum shopping since the action was brought by a Connecticut insurance company to determine whether a Connecticut homeowner’s insurance policy covers injuries that occurred in a Connecticut home. Under the law in Connecticut, as it should across the country, a forum does not become inappropriate simply because the defendants would prefer to litigate elsewhere or because they would prefer to be the plaintiffs.

On appeal, the defendants advance three arguments:

1. The injuries that Dzhgalian and Melikyan suffered as a result of the carbon monoxide poisoning do not fall under the policy’s motor vehicle exclusion because the injuries did not arise out of the use of a motor vehicle.
2. Even if those injuries did arise out of the use of a motor vehicle, they fall within the scope of coverage under the doctrine of concurrent causes.
3. The additional injuries that Dzhgalian and Melikyan sustained as a result of being dragged out of the house did not arise out of the use of a motor vehicle and, therefore, do not fall within the motor vehicle exclusion.

First, well established principles that govern the Supreme Court’s review of the defendants’ arguments. In the present case the Supreme Court was called on to ascertain the meaning of the phrase, “[a]rising out of” the “use” of “motor vehicles,” a phrase that is clear and unambiguous because our case law explicitly defines it. In Connecticut it is sufficient to show only that the accident or injury was connected with, had its origins in, grew out of, flowed from, or was incident to the use of the automobile, in order to meet the requirement that there be a causal relationship between the accident or injury and the use of the automobile. One may “use” an automobile without personally operating it, as the term use is broader than operation. Finding the provision to be unambiguous the Supreme Court construed it according to its natural and ordinary meaning and determine whether the provision so construed encompasses the injuries that Dzhgalian and Melikyan sustained as a result of their prolonged exposure to carbon monoxide while guests at Nantes’ home.

The defendants do not seriously dispute that Dzhgalian’s and Melikyan’s injuries arose out of Nantes’ act of leaving her car running in the garage because those injuries obviously were connected with that act. The defendants contended that, even if the injuries that Dzhgalian and Melikyan sustained as a result of their exposure to carbon monoxide did arise out of the use of a motor vehicle within the meaning of the motor vehicle exclusion of Nantes’ homeowner’s insurance policy, the doctrine of concurrent causes brings their injuries within the scope of coverage.

The present case involves injuries that stem from two causes, one falling within the exclusion, that is, Nantes’ act of leaving her car running in the garage, and the other arguably falling outside the exclusion, that is, Nantes’ act of closing the garage door. Here it is irrelevant that an arguably covered event – Nantes’ closing of the garage door – was a contributing cause of Dzhgalian’s and Melikyan’s injuries. The fact that Nantes’ use of her motor vehicle was connected to or created a condition that caused Dzhgalian’s and Melikyan’s injuries is enough to bring them within the motor vehicle exclusion.

Finally, facing a loss of the argument, the defendants contended that the bodily injuries that Dzhgalian and Melikyan sustained when Nantes dragged them out of the house (dragging injuries) do not fall within the policy’s motor vehicle exclusion because they neither arose out of nor were causally connected to the use of a motor vehicle. The Supreme Court dealt with the imaginative argument quickly and found, contrary to the defendants’ claim, the dragging injuries arose out of the use of a motor vehicle because Nantes’ negligent act of leaving her car running in the garage was the proximate cause of those injuries.

ZALMA OPINION

When an insurer denies a claim it will invariably find itself a defendant in a case seeking bad faith tort damages. In this case, because the defendant did not have coverage sufficient to pay for the injuries suffered by the two young doctors, the lawyers for the doctors attempted to set up the homeowners insurer for tort damages, including punitive damages, in California although none of the injuries were suffered in California — a forum know to provide large punitive damages awards against insurers.

Connecticut, where the policy was issued and where the injuries occurred refused to allow the injured to select a forum of their choice and allowed the declaratory relief action filed by the Connecticut insurer to have its coverage question resolved by a Connecticut court. They read a clear and unambiguous policy exclusion to apply and refused to apply the creative use of the concurrent cause doctrine to reach a result that applied the clear language of the policy.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Uninsured Government Vehicle

Nealey Michelle Malham appealed a take-nothing judgment in her suit for benefits

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under an uninsured motorist coverage provision contained in her Texas Personal Auto Policy issued by Government Employees Insurance Company (“GEICO”) in Nealey Michelle Malham v. Government Employees Insurance Company, No. 03-11-00006-CV (Tex.App. Dist.3 02/08/2012).

BACKGROUND

Malham was injured in a motor vehicle accident in which the car in which she was a passenger was struck by a pickup truck owned by the City of Killeen and driven by a city employee while in the course and scope of his employment. Malham sued the City and its employee alleging that she suffered injuries as the result of the employee’s negligent acts and omissions and that the City was vicariously liable for the negligence of its employee.

Malham settled her claims against the City and the employee in exchange for payment to her of $87,500. Thereafter, Malham filed a claim under the uninsured motorist coverage provision of her GEICO policy seeking to recover medical expenses related to back surgery she alleges was recommended to treat injuries sustained in the accident. In the underlying cause of action, Malham sought a declaration that the City vehicle that struck the car she was riding in was an “uninsured motor vehicle,” as that term is defined in her contract with GEICO, and that she was entitled to recover $300,000 from GEICO under the terms and conditions of the uninsured-motorist coverage contained in the policy.

The parties agreed to a bifurcated trial whereby they would first try the coverage issues, which presented pure questions of law, to the court and then set any remaining liability and damages issues for a subsequent jury trial. The court entered findings of fact and conclusions of law supporting its conclusion that GEICO was not liable to Malham for the payment of any uninsured motorist benefits under the terms and conditions of her GEICO policy.

DISCUSSION

At the time of the accident, Malham’s GEICO policy contained the following Uninsured/Underinsured Motorist Coverage provision:

We will pay damages which a covered person is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by a covered person, or property damage, caused by an accident.

The parties do not dispute that Malham is a “covered person” or that she was legally entitled to recover damages from the City as a result of the accident. The sole point of disagreement between the parties with respect to the above-quoted provision is whether the City vehicle that caused the accident was an “uninsured motor vehicle” under the GEICO policy.

The GEICO policy contains, in pertinent part, the following definition:

I. “Uninsured motor vehicle” means a land motor vehicle or trailer of any type:

1. To which no liability bond or policy applies at the time of the accident.

II. However, “uninsured motor vehicle” does not include any vehicle or equipment: . . . .

2. Owned or operated by a self insurer under any applicable motor vehicle law.

3. Owned by any governmental body unless:

a. the operator of the vehicle is uninsured; and

b. there is no statute imposing liability for damage because of bodily injury or property damage on the governmental body for an amount not less than the limit of liability for this coverage.

Malham contends that, under the foregoing provisions, the City-owned vehicle that struck the car in which she was a passenger was an “uninsured motor vehicle” under the GEICO policy definition and that the trial court erred in concluding otherwise.

The City is a party to a Liability/Property Interlocal Agreement (the “Agreement”), which creates the Texas Municipal League Joint Self-Insurance Fund (the “Fund”) for the purpose of “providing coverages against risks which are inherent in operating a political subdivision.”  The question before this Court, then, is whether the liability coverage provided for by the Agreement constitutes a “liability policy” as that term is used in the GEICO policy. We conclude that it does.

Insurance policies are interpreted according to the general rules of contract construction.  Although Malham does not dispute that the Agreement essentially functions as insurance, she maintains that it does not constitute a “liability policy” under the terms of the GEICO policy.

As an initial matter, the court noted that the GEICO policy definition of uninsured motor vehicle does not use the words “insurance policy.” Rather, it refers to the absence of a “liability bond or policy.” And there is nothing in the GEICO policy that restricts the term “liability policy” in the narrow and technical manner urged by Malham. The plain, ordinary, and generally accepted meaning of the term “liability policy” embodies a broader notion that includes not only an insurance company-issued insurance policy, but also the type of third-party liability coverage provided by the Agreement.

Because the appellate court concluded that the Agreement provides the City and its employees liability coverage and constitutes a “liability policy,” it also concluded that the operator of the City-owned vehicle was not “uninsured.”

Malham next contends that the City-owned vehicle was uninsured because the City did not meet the requirements of a “self-insurer” under the Texas Transportation Code. The GEICO policy includes a provision that excludes from the definition of an “uninsured motor vehicle” any vehicle “owned or operated by a self insurer under any applicable motor vehicle law.”

CONCLUSION

The appellate court concluded that the trial court did not err in concluding that the City-owned vehicle that caused the accident for which Malham seeks to recover damages was not an “uninsured motor vehicle” as that term is used in the GEICO policy. The trial court’s judgment that Malham take nothing by way of her claim for benefits under the uninsured motorist provision of that policy is affirmed.

ZALMA OPINION

Greed is not unusual. In this case the plaintiff sued the local city whose employee caused her injury while operating a city owned vehicle in the course and scope of his employment. She settled her suit with the City for a considerable sum: $87,500.

Buyers remorse then struck. Since the case against the city was settled there was no way for her to get more money from the city. Assuming that no one likes insurance companies she sued her own insurer claiming that the City, and its driver, who settled with her was uninsured she tried to obtain $300,000 (more than three times the settlement with the city) from GEICO, her insurer.

The court, logically, and on the terms of the insurance contract did not buy the argument and gave a judgment properly to GEICO who should be commended for not entering into a settlement to avoid the costs of litigation. It is this type of action that gives support for the British”loser pays” system. This suit would never have been brought if Ms Malham felt she would have to pay GEICO’s attorneys fees for defending her case to verdict.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Insurance Contract By Compulsion from the State Is Not Enforceable

Health Insurance and Religion

Opinion by Barry Zalma

Zalma on Insurance in Top 50

Government health insurance programs like the 2200 page law euphemistically called “Obamacare” or the program for the elderly called Medicare have no resemblance to true insurance. Both require people to buy the so-called “insurance” and pay for it with tax dollars rather than all of the cost being paid by those insured.

In the real world “Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22] Insurance, to exist, requires a contract freely entered into by two parties, neither under compulsion to enter or not enter into the contract. The insurer, for the payment of a premium from the person to be insured, agrees to indemnify the insured against certain clearly identified risks of loss chosen by both. The insurer expects to profit from the premium collected and the insured expects to be indemnified for the risks of loss identified in the policy agreed to at the time the contract was agreed.

As I listen to politicians and clergy argue over rulings by the Secretary of Health and Human Services requiring religious organizations to provide “insurance” for procedures that are anathema to the religious beliefs of followers of the Roman Catholic Church, many Protestant denominations and Muslim organizations I  wonder if anyone in the U.S. Government knows what insurance is and that insurance is not a right guaranteed by the U.S. Constitution whose terms and conditions could be mandated by the Secretary of Health and Human Services.

In a free society everyone has the right to enter or refuse to enter into a contract free of compulsion.  If the force of the United States government requires a person to buy a contract of insurance that provides coverages not required — like a 90-year-old woman or a nun who took a vow of celibacy coverage for pregnancy — or a 20-year-old man to buy coverage for Viagra it is compelling a contract under the compulsion of fine or jail.

In 1904 the U.S. Supreme Court found in NORTHERN SECURITIES COMPANY v. UNITED STATES, 24 S. Ct. 436, 193 U.S. 197 (U.S. 03/14/1904) the court concluded that “‘Liberty,’ as used in the Fifth Amendment to the Constitution means not merely bodily liberty — freedom from physical duress, but in effect comprehends substantially all those personal and civil rights of the citizen which it is meant to place beyond the power of the general government to destroy or impair.”  The Supreme Court found that it follows that, as used in the Fifth Constitutional Amendment, “liberty” includes equality of rights under the law and secures citizens similarly situated against discriminations between them which are arbitrary and without foundation in reason. United States v. Cruikshank, 92 U.S. 542, 554; Yick v. Hopkins, 118 U.S. 356, 369; Gulf, Colorado & Santa Fe Ry. Co. v. Ellis, 165 U.S. 150, 160. By denying people equality of rights and discriminating between them in the matter of their property rights, arbitrarily and without reason by stopping them from selling their property I believe that ordering someone to buy insurance is the same as a government stopping someone from selling his property.

The U. S. Supreme Court also found in Gibbons v. United States, 8 Wall. 269, in which an army contractor who had agreed to furnish certain oats at a fixed price had, after the delivery of part of the amount, been released from the obligation to deliver the balance. He was, however, carried before the military authority, and influenced by threats, agreed to deliver, and did deliver, the full quantity of oats specified in the contract. He brought suit for the difference between the contract price and the market price of the oats at the time of delivery. It was said that “if such pressure was brought to bear upon him as would make the renewal of the contract void, as being obtained by duress, then there was no contract, and the proceeding was a tort for which the officer may have been personally liable.”

A contract made by a party under compulsion is void because consent is of the essence of a  contract, and where there is compulsion, there is no voluntary consent. “A contract made by a party, under compulsion, is void; because consent is of the essence of a contract, and where there is compulsion, there is no consent, for this must be voluntary. Such a contract is void for another reason. It is founded in wrong or fraud. It is not, however, all compulsion which has this effect; it must amount to duress. But this duress may be either actual violence, or threat. [Doctor's Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996);DUNCAN v. HENSLEY, 248 Ark. 1083, 455 S.W.2d 113 (Ark. 06/15/1970); The Elfrieda, 19 S. Ct. 146, 172 U.S. 186, 43 L. Ed. 413, 1898.SCT.40283; McCracken v. McCracken, 2009 Ark.App. 758 (Ark.App. 11/11/2009)]

I am fearful of a government that can compel me to enter into a contract I do not wish to enter. If they can compel me to buy a health insurance coverage I neither want nor need for a price I do not want to pay it can compel me to enter into a contract of marriage with a woman I do not know or to buy an automobile I do not want or need, or to buy a house where I do not want to live, or to have adopt children after I am too old to care for them, or to limit my family to one child.

As I listen to the talking heads and politicians speak I was reminded of a poem by Friedrich Gustav Emil Martin Niemöller (14 January 1892 – 6 March 1984) who was a Protestant pastor and social activist. He wrote about his time in Germany during World War II:

When the Nazis came for the communists, I did not speak out;
 As I was not a communist.

When they locked up the social democrats, I did not speak out;
I was not a social democrat.

When they came for the trade unionists, I did not speak out;
As I was not a trade unionist.

When the came for the Catholics, I did not speak out;
As I was not a Catholic.

When they came for the Jews, I did not speak out;
As I was not a Jew.

When they came for me,
there was no one left to speak out.

As a Jew who has different religious imperatives than a member of the Roman Catholic Church, I will not fall into the trap that Pastor Friedrich Gustav Emil Martin Niemöller fell into. I am, by this post, speaking out that the United States Government should not, under the First, Fifth and Fourteenth Amendment to the U.S. Constitution be allowed to compel anyone to buy any type of contract — whether called “insurance” or something else — because to do so is an improper compulsion making the contract voidable.

As I have said many times insurance is a contract between a person who, for a premium, agrees to indemnify another (the insured) against certain enumerated risks of contingent or unknown losses. When a government compels the content of the contract it is no longer a contract between two but a contract where one is compelled against his pecuniary interest to buy insurance protection he neither wants nor needs. It is, by a weight of authority, voidable.

To compel a Catholic priest or nun to be insured for contraception, pregnancy or abortion when they have taken an oath of celibacy is wasteful, a contract unneeded by religious fiat, and an attempt to prevent them exercising their right to practice their religion as they see fit in violation of the First Amendment to the U.S. Constitution.

When representatives of the government say the order of HHS is to protect the health of women like cloistered nuns is a fraud on its face. HHS should stop telling people what insurance coverages they must buy and spend more time prosecuting those health care providers who are stealing from the public treasury billions of dollars by billing for services not rendered.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

INSURANCE FRAUD – AN EQUAL OPPORTUNITY CRIME

In this, the fourth issue of the 16th year of of publication with ZIFL reports on the crime of insurance fraud perpetrated by people from every race, religion, and national origin. ZIFL reminds its readers that insurance fraud continues, without any cognizable abatement and insurers must remain vigalent in the effort to limit the success of fraud perpetrators.

The current issue reports on the effort of two Mississippi lawyers to appeal verdicts that they defrauded a defendant when presenting an asbestos suit; reviews appellate decisions where arson-for-profit insurance fraud failed and convictions were affirmed; the attempts of U.K. lawyers to recruit clients by offering them free I-Pads; Chapter III of the serialized novel “Murder and Insurance Fraud Don’t Mix”; the claims of the Department of Justice about increased efforts to defeat Medicare fraud and recovery of $4.1 billion; and, as usual, reports on convictions for insurance fraud.

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 357 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-book “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US and is available from http://www.zalma.com/zalmabooks.htm.

If you or your client faces a potential insurance fraud, an insurance coverage issue, an insurance claims handling issue or a claim of the tort of bad faith, and wish to have the assistance of one of the very best insurance coverage counsel and insurance claims handling expert and consultant, please contact Barry Zalma at 310-390-4455. Mr. Zalma is an internationally recognized insurance coverage, insurance claims handling and insurance bad faith expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

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

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

ZIFL will be posted for a full month in pdf and full color FREE at http://www.zalma.com/ZIFL-CURRENT.htm.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

Barry Zalma, Esq.

© 2012 – Barry Zalma

    Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

    He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

    Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Can’t Stack Underinsured Motorist Claims In Illinois When There is only One Underinsured Motorist Insurer

Zalma on Insurance in Top 50

The Illinois Court of Appeal was called upon to determine whether the trial court properly granted summary judgment in favor of State Farm Mutual Automobile Insurance Company (State Farm) in Phillip R. Katz v. State Farm Mutual Automobile, 2012 IL App 110931 (Ill.App. Dist.1 02/07/2012). Phillip R. Katz filed an amended complaint against State Farm claiming that he was owed additional underinsured motorist benefits under three insurance policies issued to him by State Farm. At issue is:

(1)     whether State Farm is Katz’s excess underinsurer;

(2)     whether the circuit court properly calculated the applicable setoffs to Katz’s underinsured motorist benefits; and

(3)    whether State Farm’s conduct in denying Katz’s claims of additional underinsured motorist benefits was unreasonable and vexatious such that Katz is entitled to damages under provisions of the Illinois Insurance Code.

BACKGROUND

On February 26, 2008, Katz was involved in an automobile accident. At the time of the accident, Katz was the named insured on three automobile policies issued by State Farm. The relevant provisions of these policies are identical and each included underinsured motorist benefit coverage limits of $250,000 per person. At the time of the incident, Katz was driving a vehicle owned by his employer and insured by Sentry Select Insurance Company (Sentry). The underinsured motorist coverage under the Sentry policy included coverage limits of $50,000 per person. The other vehicle involved in the accident, driven by Gregory Belt, was also insured by State Farm and contained a primary liability policy limit of $100,000 per person.

Katz filed the underlying personal injury lawsuit against Belt in the circuit court of Du Page County. In settlement of the underlying action, State Farm tendered its primary liability policy limits of $100,000 under Belt’s policy to Katz. The settlement order allocated 60%, or $60,000, of the $100,000 settlement amount to Katz and 40%, or $40,000, to Katz’s spouse in compensation for her loss of consortium claim.

Katz also received a workers’ compensation benefit, of which $47,654.08 was paid to Katz and was available for setoff. Sentry paid Katz $2,345.92 under its policy. Although Sentry is not part of this appeal, it appears from the record that Sentry applied a setoff for the workers’ compensation benefits Katz received. Sentry’s policy limit for underinsured motorist benefits was $50,000. After applying the workers’ compensation setoff of $47,654.08 to the policy limits, $2,345.92 of underinsurance motorist benefits remained to be tendered to Katz.

State Farm, under the policies it issued to Katz, paid him $161,876 in underinsured motorist benefits. This amount is $88,124 less than State Farm’s underinsured motorist coverage limits of $250,000 under the polices issued to Katz.

On May 3, 2010, Katz filed his amended complaint for declaratory judgment and attached as exhibits the three policies issued to him by State Farm. In his amended complaint, Katz characterized Sentry as the primary underinsurance policy and State Farm as the excess underinsurance policy. Katz stated that Sentry had already tendered him the benefits it owed him, after it applied a set-off for Katz’s workers’ compensation benefits. Katz sought to have State Farm pay him “the remaining benefit available of $88,124 arising out of the occurrence of February 26, 2008.” Katz pointed to the following policy language in the State Farm policy to support his position:

“If There Is Other Underinsured Motor Vehicle Coverage- Coverage W:

        * * *

2. Subject to item 1 above, any coverage applicable under this policy shall apply:

        a. on a primary basis if the insured sustains bodily injury while occupying your car, or while not occupying a motor vehicle or trailer.

        b. on an excess basis if the insured sustains bodily injury while occupying a vehicle other than your car.” 

On July 7, 2010, State Farm filed its motion for summary judgment. In its motion, State Farm argued that Katz did not have an underinsured motorist claim under the Sentry policy because the primary liability limit on Belt’s car in the underlying lawsuit was more than the underinsured motorist limits of the Sentry policy. Specifically, the primary liability limit for the insurance on Belt’s car was $100,000, whereas the Sentry policy contained a $50,000 underinsured motorist limit. State Farm argued that under the Sentry policy, Katz did not have a claim for underinsured motorist coverage. In its motion for summary judgment, State Farm also contended that it had already paid more than it owed under its own policy with Katz.

State Farm contended that under the terms of its policy $100,000 must be subtracted from the $250,000 policy limit. The $100,000 setoff represents the settlement of the underlying action.

State Farm also argued that an additional setoff of $47,654.08 applied because its policy states that workers’ compensation benefits shall reduce the amount of underinsured motorist benefits available. According to State Farm, Katz was entitled to receive $102, 345.92 under the underinsured motorist policy. This conclusion represents the total underinsurance motorist benefit after subtracting both the $100,000 Katz received from the Belt settlement and the $47,654.08 in workers’ compensation benefits Katz received from the $250,000 policy limit.

State Farm stressed that since it had already paid Katz $161,876, it “owes him nothing.”

On November 18, 2010, Katz filed his cross-motion for summary judgment and response to State Farm’s motion for summary judgment. In his motion, Katz maintained that Sentry was the primary underinsurer and State Farm was the excess underinsurer. Katz argues that both polices may be stacked so that he is able to claim $50,000 worth of underinsurance benefits from Sentry and $250,000 worth of underinsurance benefits from State Farm.

The trial court granted State Farm’s Motion and this appeal followed.

ANALYSIS

Katz argues that aggregating or “stacking” the two benefits together provides him with an underinsurance benefit of $300,000. Katz maintains that any setoffs applied to the underinsurance benefits should first be applied to Sentry, as the primary underinsurer, and then any extra setoff applied to State Farm’s policy, as the excess underinsurer.

The legislative purpose behind underinsured motorist coverage is to place the insured in the same position he would have occupied if the tortfeasor had carried adequate insurance.  According to the definition of underinsured motorist in Sentry’s policy, Belt, the tortfeaser, cannot be considered an underinsured motorist because his primary liability policy limit of $100,000 is greater than the $50,000 limit of coverage provided by Sentry under the underinsured motor vehicle provision of its policy.

The Court of Appeal disagreed with Katz’s characterization of State Farm as the “excess underinsurer” because the Sentry policy, which Katz believes is the primary underinsurer, does not apply in this case. State Farm cannot be considered to be providing excess coverage where it is the only coverage. Therefore, the Court of Appeal held that State Farm’s policy provides the only underinsurance coverage in this case. As the only provider of underinsurance coverage, State Farm is entitled to apply any applicable setoffs regardless of Sentry’s actions.

The language of State Farm’s policy allows for a setoff for workers’ compensation benefits. Based on our conclusion that State Farm does not owe any additional benefits, Katz’s final argument, that State Farm’s conduct in denying his claim for an additional $88,124 in underinsured motorist benefits was unreasonable and vexatious such that he is entitled to damages under the statutes failes because a defendant cannot be liable for violation of the bad faith statute where no benefits are owed.

ZALMA OPINION

The Court of Appeal failed to deal with the 600 pound gorilla in this case — that State Farm overpaid the Katz claim. Finding in its favor they allowed Katz to keep the overpayment because State Farm failed to ask the court to return its overpayment.

When an insured files a complaint for declaratory relief seeking more than that to which he is entitled only to learn he was paid too much he should not be allowed to keep the overpayment. The amount may not be worth filing a suit for its return now that the case has gone through the appellate process.

Insurers, in the same situation as State Farm in the Katz case, should always stand for its rights and if it believes it has overpaid a claim should cross complain for return of the overpayment.

Barry Zalma, Esq.

© 2012 – Barry Zalma

    Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

    He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

    Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

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ARSON FOR PROFIT FAILS

Zalma on Insurance in Top 50

John Plotts appealed the judgment of the Court of Common Pleas of Van Wert County, Ohio that convicted him of arson, aggravated arson, and insurance fraud. On appeal, Plotts contended that the trial court erred by admitting physical evidence for which the State did not sufficiently demonstrate the chain of custody and that he received ineffective assistance of counsel. In  State of Ohio v. John Plotts, Opinion, 2011 -Ohio- 900. (Ohio App. Dist.3 02/28/2011) the Court of Appeal reviewed his claims and resolved the issue.

TRIAL TESTIMONY

In June 2010, Plotts was tried on charges of arson and fraud as a result of two separate fires at Plotts’ residence on April 8, 2009, and April 10, 2009, for which he attempted to collect insurance proceeds from Erie Insurance Company (“Erie”).the case proceeded to jury trial, during which the following pertinent testimony was heard:

• Plotts testified that on April 8, 2009, he resided at his residence, located at 630 Monroe, Van Wert, Ohio;
• that he left his residence for class in Lima, Ohio, driving a green car; that he returned home to retrieve a book;
• that upon arrival, he discovered his residence on fire, and called 9-1-1 on his cell phone;
• that after the fire was under control, he met with Frank Ritemeyer, an Assistant State Fire Marshal;
• that he signed a consent form allowing Ritemeyer to enter the residence, inspect it, and collect evidence;
• that upon exiting the residence, the front door was locked; and,
• that as a result of the fire, he made a claim with his home insurance provider, Erie, representing to them that he had no active role in starting the fire.

Cody Fife, a resident of Van Wert, Ohio, testified that, on April 8, 2009, he was locked out of his home; that as he waited on his porch for his wife, Karri Fife, he noticed a green car circling the block; that upon his wife’s return home, they took his wife’s car and followed the green car; that, eventually, the green car pulled into a driveway located on Monroe Street; and, that, shortly thereafter, he heard fire engines approaching the area.

Ritemeyer testified that the heaviest fire damage was located in the living room; that he slightly moved a burned sweatshirt lying near the entertainment center, which was located in the living room, so he could photograph the sweatshirt; that he moved the entertainment center away from the wall and back again; and, that he did not collect any physical evidence from Plotts’ residence on that day. Ritemeyer further testified that he returned to the residence, on April 10, 2009; that, on that day, he did another inspection of the residence; and, that the heaviest fire damage was located in the master bedroom.

Ralph Kisor, an investigator with Erie, testified that Plotts called Erie to submit claims for both fires; that the first fire caused $77,863.41 in damage, and the second fire caused $51,951.42 in damage.

THE SENTENCE

The jury returned a verdict convicting Plotts on all eight counts. The trial court proceeded to find that Counts One, Two, and Three were allied offenses and merged them into Count One for sentencing purposes. The trial court also found Counts Five, Six, and Seven were allied offenses and merged them into Count Five for sentencing purposes. The trial court then sentenced Plotts to a three-year prison term for Count One; an eighteen-month prison term for Count Four; a three-year prison term for Count Five; and, a six-month prison term for Count Eight.

ANALYSIS

Chain of Custody

The Court of Appeal noted that after retrieving the physical evidence from Plotts’ residence, Spencer placed the evidence in his personal storage facility, which he locked. From that point on, Spencer maintained custody of all the physical evidence retrieved from Plotts’ residence, until he delivered it to the Van Wert County Court House for trial.

The Court of Appeal concluded that the State, with reasonable certainty, established that no substitution, alteration or tampering occurred with regard to the physical evidence presented at trial. Although the chain of custody is not pristine in the case, and it rarely is, Plotts has failed to identify evidence within the record, which demonstrates substitution, alteration or tampering of the physical evidence.

Ineffective Counsel

Plotts contended that he was denied effective assistance of counsel because trial counsel failed to call expert witnesses, inappropriately alluded to a conspiracy between the insurance companies and independent contractors, failed to effectively cross-examine eyewitnesses, and, failed to challenge the absence of proof of loss forms in evidence.

An ineffective assistance of counsel claim requires proof that trial counsel’s performance fell below objective standards of reasonable representation and that the defendant was prejudiced as a result.  In the trial Ralph Kisor, an investigator with Erie, testified that Plotts called Erie to file claims for both fires. Accordingly, the claims were filed orally, which is sufficient to support a conviction of insurance fraud, pursuant to Ohio statutes.  In addition, Kisor testified that the damage caused by the fires totaled $77,863.41 and $51,951.42, respectively. Thus, the record contained enough evidence for the jury to convict Plotts on both counts of insurance fraud.

ZALMA OPINION

Arson-for-profit requires a certain amount of skill to be performed effectively and profitably. Mr. Plotts is an example of everything that can be done to assure a conviction for insurance fraud and arson. Plotts set one fire that caused $77,863.41 in damage and was not satisfied so he set a second fire that did an additional $51,951.42 in damage. Accidental fires seldom occur twice within a few days of each other.

Plotts allowed the investigators into the house to do what they would without control assuming he was so proficient as an arsonist that the investigators would not discover his crime.

Finally, he claimed he hired a stupid lawyer who did not defend him properly although, considering the evidence available, his attorney had little to work with.

Insurers faced with a potential arson-for-profit, like Erie faced when presented with the Plotts claim, must do a thorough investigation before making a decision. Erie did so and the evidence presented by the state and private investigators made it possible for the prosecutor to gain a conviction on eight counts of arson and fraud.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

CAN AN INSURER BE HELD LIABLE FOR PERIODS OF RISK IT NEVER CONTRACTED TO COVER?

The Issues

An insurer sought a declaratory judgment that it was required to indemnify its insured for no more than 40 percent of a state court judgment because it had covered its insured for no more than 40 percent of the time in which the state court plaintiff was exposed to lead poisoning. The district court agreed that the insurer was responsible for only a portion of the judgment, notwithstanding the fact that its insured was held jointly and severally liable for the entire judgment in the underlying state proceeding. The state plaintiff (and defendant in the federal declaratory action) appealed. The Fourth Circuit Court of Appeal was called upon to determine, in Pennsylvania National Mutual v. Lakia C. Roberts, No. 10-1987,10-1988 (4th Cir. 02/03/2012) whether an insurance company cannot be held liable for periods of risk it never contracted to cover.

FACTS

From her birth on January 17, 1991 until 1998, Lakia Roberts resided at a house on 1740 East Preston Street in Baltimore, Maryland. In September 1992, when she was 20 months old, Roberts was diagnosed with lead poisoning. A test indicated that she had an elevated blood lead level of 28 micrograms of lead per deciliter of blood (“mcg/dL”). She continued to exhibit elevated blood lead levels until August 1995.

On February 4, 2005, Roberts filed a complaint in Maryland state court against Attsgood Realty Company alleging that the injuries she sustained from the lead poisoning were the result of its negligent management of the East Preston Street property. Attsgood had owned, leased, and managed the property from Roberts’s birth until November 1, 1993, when it had sold the property to Gordon Gondrezick.

Attsgood then requested defense and indemnification from Pennsylvania National Mutual Casualty Insurance Company (“Penn National”) under the terms of its insurance contract. In 1992, Penn National had issued a liability insurance policy to Attsgood covering the period from January 13, 1992 to January 13, 1993. The policy was later renewed to extend coverage to January 13, 1994. According to the terms of the contract, Penn National promised Attsgood that it would provide liability insurance for “Premises You Own, Rent or Occupy,” including 1740 East Preston Street.

From Roberts’s birth in January 1991 until this coverage began in January 1992, Attsgood lacked liability insurance for the East Preston Street property. Under the contract, Penn National promised to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies” as well as “defend any ‘suit’ seeking those damages.” This guarantee was in turn qualified by a provision stating that “this insurance applies to ‘bodily injury’ and ‘property damage’ only if . . . the ‘bodily injury’ or ‘property damage’ occurs during the policy period.”

The contract also made clear that Attsgood’s “rights and duties under this policy may not be transferred without [Penn National's] written consent except in the case of death of an individual [n]amed [i]nsured.”  In accordance with the policy, Penn National agreed to defend Attsgood subject to a reservation of its rights. Attsgood then filed a third party complaint against Gondrezick seeking contribution and indemnification in the event that Roberts prevailed. After Gondrezick failed to appear or otherwise defend himself, the Maryland court entered an order of default against him in favor of Attsgood.

Following discovery, the state case went to trial on May 4, 2009 on counts of negligence and unfair trade practices. To prove the property owners’ liability, Roberts’s mother and her expert witness provided testimony indicating that Roberts had been exposed to lead poisoning at the East Preston Street property since her infancy and that this exposure had resulted in permanent brain damage. Attsgood in turn challenged the contention that the presence of lead at its property was the actual source of Roberts’s injuries.

The trial ended on May 8, 2009. The jury returned a verdict in favor of Roberts for $2,000,000, which was reduced to $850,000 following an application of Maryland’s non-economic damages cap. It is undisputed that Attsgood and Gondrezick are jointly and severally liable for this amount.

The Litigation

On October 9, 2009, Penn National filed a declaratory judgment action against Attsgood and Roberts in federal court on the basis of diversity jurisdiction. The insurer sought a determination that it was obligated to indemnify Attsgood for no more than 40 percent of the total judgment, or $340,000. Penn National filed a motion for default judgment against Attsgood after it failed to respond. Penn National also filed a motion for summary judgment against Roberts arguing that it should be liable for only 22 months of the entire period of Roberts’s exposure to the risk of lead poisoning. It calculated that while it had insured Attsgood for the 24 months from January 1992 to January 1994, Attsgood had sold the property to Gondrezick in November 1993, thereby resulting in a total of 22 months of coverage.

Roberts saw the matter differently. She argued that Penn National was responsible for paying the entire $850,000 judgment in light of the joint and several liability of its insured. She also contended that even if the district court decided to allocate liability, “virtually all” of her “lead exposure occurred during Penn National’s two policy periods,” beginning with the discovery of her elevated blood lead level in September 1992.

The Continuous Trigger

The district court largely agreed with Penn National.  The trial court relied on “continuous trigger” cases such as that Maryland courts determine an insurer’s liability through a “pro-rata allocation by ‘time on the risk.’” The district court concluded that Roberts had been exposed to lead poisoning from January 17, 1991 to August 1995, for a total of 55 full months. The district court calculated Penn National’s period of coverage. It concluded that Penn National provided insurance to Attsgood from January 13, 1992 to January 13, 1994, for a total of 24 months. The court rejected Penn National’s argument that its period of coverage should be reduced to 22 months because Attsgood had sold the property to Gondrezick on November 1, 1993, concluding that while “under the terms of the insurance contract Penn National may be correct, the record is entirely barren of facts showing that Penn National’s coverage in fact was terminated.”

In its allocation of liability, the district court used the 24 months of coverage as the numerator and the 55 months of exposure to lead poisoning as the denominator to conclude that Penn National was responsible for 24/55, or approximately 43.6 percent, of the judgment. It then found that “Penn National is liable to Roberts for $370,600 (43.6% x $850,000), but no more.”

ANALYSIS

The plain language of the insurance contract limited coverage. Penn National did not contract to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’” without qualification. Rather, it contracted to “pay those sums that [Attsgood] becomes legally obligated to pay as damages because of ‘bodily injury’ . . . to which this insurance applies.” The policy also clearly limited the insurer’s obligation to damage that “occurs during the policy period.”

Not only was Penn National’s coverage limited to the policy period, it was also restricted to premises that Attsgood Owned, Rented or Occupied. This language precluded the Fourth Circuit Court of Appeal from holding Penn National liable for injuries that occurred when Gondrezick, and not Attsgood, owned the house at 1740 East Preston Street. Roberts asked the Fourth Circuit to turn a blind eye to the policy wording and hold an insurance company liable for risks for which it never contracted and for which it never received premiums. It refused to do so.

In addition to ignoring contractual language, Roberts’s position conflicts with Maryland law. In lead paint or continuous trigger cases such as this one, Maryland courts engage in a “pro rata by time-on-the-risk allocation” of liability.

No one disputes that Attsgood and Gondrezick are jointly and severally liable and that each is responsible for the entire judgment under longstanding principles of tort law.

The question before the Fourth Circuit was not whether Attsgood is liable for the entire $850,000 judgment. The question was whether Penn National is responsible for the entire $850,000 judgment. Finding that the question can be answered only by reference to the insurance contract, which necessarily involves the application of contract law, the Fourth Circuit refused to apply tort law and insisted on applying contract law to a contract dispute.

While contractual text and Maryland precedent provide ample reason to reject Roberts’s position, it is also worth noting that her approach to allocating liability would upend insurance underwriting. As multiple courts have pointed out, Roberts’s approach would impose the same amount of liability on an insurance company that provided coverage for one month as the insurer that provided coverage for 10 years.

An insurance contract is, at most, an agreement to accept a premium in exchange for a contractually defined risk. If an insurance company cannot limit its risk to a defined period, it will be unable to determine the precise risks assumed under a contract, which in turn will prevent it from accurately pricing coverage. Not only will this hinder rational underwriting, but the higher premiums necessary to compensate for this rising uncertainty will be passed on to policyholders everywhere.

We recognize that Roberts may not be able to recover her entire judgment from either Attsgood or Gondrezick. It is a dispiriting but inescapable fact that sometimes really bad things happen, and those responsible are either insolvent or inadequately insured. But that regrettable reality does not allow a court to ignore state law, to hold an insurance company to a contractual provision to which it never agreed, or to scramble together whole areas of law that are conceptually distinct.

As the district court suggested, Penn National’s coverage ended “under the terms of the insurance contract” when the property was sold to Gondrezick. There was nothing ambiguous about this aspect of coverage. After Attsgood sold the East Preston Street property to Gondrezick, it obviously neither owned, rented, nor occupied those premises.

The law may not be difficult here, but the human costs incurred are undeniably hard. It is sad that Roberts may recover only partially on her judgment. The jury obviously believed this child suffered significant brain damage from lead poisoning and that Attsgood and Gondrezick were liable. The condition of the property and the failure to procure appropriate insurance were the property owners’ responsibility. Roberts’s misfortune cannot be laid at Penn National’s feet, for that company has not disputed that it must pay that portion of the judgment to which its policy applied.

For the reasons stated herein, Penn National is liable for 22/55, or 40 percent, of the $850,000 judgment. The district court’s judgment is therefore affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.

ZALMA OPINION

As the Fourth Circuit made clear, an insurance contract is, at most, an agreement to accept a premium in exchange for a contractually defined risk. Young Ms. Roberts was seriously injured by the actions of the person insured over a long period of time as she ingested lead into her system from a poorly maintained property. She won her lawsuit against the tortfeasors. One was uninsured and the other was insured only for a short period of time during the time Ms. Roberts was injured.

The Fourth Circuit was correct when it concluded that it is a dispiriting but inescapable fact that sometimes really bad things happen, and those responsible are either insolvent or inadequately insured. But that regrettable reality does not allow a court to ignore state law, to hold an insurance company to a contractual provision to which it never agreed, or to scramble together whole areas of law that are conceptually distinct.

In cases where an injury occurs over a long period of time where periods of insurance, no insurance or multiple insurance policies apply to the risk, Maryland and the Fourth Circuit apply a reasonable application of clear and unambiguous policy language. To do otherwise would be a dangerous rewriting of an insurance contract that might help one little girl but would harm the entirety of the insurance buying public.

Courts must do justice. They should not, nor can they, breach or bend the law of contracts to do what they perceive to be justice. Ms. Roberts and her lawyers will recover 40% of the judgment from the insurer. She and her lawyers must search out all of the assets of the tortfeasors and take them through the process of the court not from an insurer that did not take any premium to recover the rest of the judgment.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

An Arbitration Agreement is Binding

North Star Taxi, Inc. (North Star) challenged the district court’s confirmation of an arbitration award, arguing that the arbitrator misapplied the law and that judicial review of the award is warranted. In North Star Taxi v. Progressive American Insurance Company, No. A11-757 (Minn.App. 01/30/2012) the Minnesota Court of Appeal was asked to determine if the arbitration agreement was against public policy and thus unenforceable so that the Court of Appeal could review the findings of the arbitrator.

FACTS

North Star is in the business of leasing, renting, and bailing taxicabs for use by independent contractors. Progressive American Insurance Company (Progressive) provides automobile insurance. North Star and Progressive are parties to a voluntary arbitration agreement obligating them to resolve their property-damage and business-interruption-loss claims through inter-company arbitration before Arbitration Forums, Inc. (AFI). The agreement requires application of Minnesota law and provides that arbitration awards are “final and binding without the right of rehearing or appeal.”

In February 2008, a motor-vehicle accident occurred between one of Progressive’s insureds and one of North Star’s bailee-independent contractors. Pursuant to the arbitration agreement, North Star presented its property-damage and business-interruption-loss claims to an AFI arbitrator. The arbitrator determined that each of the two drivers was 50% responsible for the accident. Accordingly, the arbitrator reduced North Star’s undisputed damages by 50% based on the bailee-independent contractor’s negligence.

North Star moved the district court to vacate the award, arguing that the arbitrator’s reduction of North Star’s damages was not authorized under Minnesota’s bailment law. The district court concluded that North Star waived the right to seek vacation of the arbitration award by entering into the arbitration agreement and declined to address the merits of the vacation motion. The district court confirmed the arbitration award, and this appeal followed.

ISSUE

Parties to an arbitration proceeding generally are entitled to limited judicial review under the Minnesota Uniform Arbitration Act (UAA). An arbitrator is the final judge of both law and fact, so the standard of review is extremely narrow.  A district court may vacate an award only if it was issued in excess of the arbitrator’s authority. A court can only modify or correct an award if it does not comport with the arbitrator’s apparent intent.

The issue here is whether North Star waived its right to limited judicial review of the arbitration award by entering into the following provision in the arbitration agreement:

The decision of the arbitrator(s) . . . is final and binding without the right of rehearing or appeal … (Emphasis added)

North Star argued that this contract language did not waive its review rights and, if it did, such waiver is ineffective as a matter of law.

DISCUSSION

Waiver is the voluntary and intentional relinquishment of a known right. Whether the parties intended a waiver of judicial review is determined from the plain language of the arbitration agreement. North Star argued that it did not voluntarily and intentionally relinquish its right to obtain judicial review because the arbitration agreement does not expressly reference the UAA.

Although the arbitration agreement does not expressly reference judicial review under the UAA, the language is broad with respect to the finality of the arbitrator’s decision and the unavailability of any appeal. Based on the plain language of the parties’ voluntary arbitration agreement the Court of Appeal found it had no choice but to conclude that North Star waived its right to judicial review of the arbitration award.

Having determined that the arbitration agreement effects a waiver of the right to limited judicial review under the UAA, the court needed to also determine if the waiver provision is valid before deciding the dispute between North Star and Progressive.

Unless public policy otherwise indicates, parties to an arbitration agreement may waive statutory rights in defining the scope of the arbitration. The Court of Appeal noted that the parties’ arbitration agreement plainly establishes a valid waiver of judicial review of the arbitration award and because the agreement to waive review does not violate public policy, the Court of Appeal concluded that the district court did not err by dismissing North Star’s motion to vacate the award.

The award of the arbitrator was affirmed and North Star was limited to 50% of its loss.

ZALMA OPINION

Arbitration avoids expensive litigation. Avoiding expensive litigation is usually a good thing.

When a party to an insurance policy, especially a high risk policy insuring taxi operations, agrees to limit all disputes to arbitration without a right to appeal, the taxi operator will be able to buy coverage for less money than a policy without a limited arbitration agreement. North Star apparently opted to save money in premium in exchange for the right to seek judicial review of the award of the arbitrator.

In this case North Star entered into a contract voluntarily that clearly and unambiguously agreed to limit North Star’s right to dispute claims with its insurer to arbitration and agreed to not dispute the award of the arbitrator. When North Star did not agree with the arbitrator’s finding it attempted, unsuccessfully, to avoid the arbitration agreement because its agreement was clear on the face of the contract. Reducing litigation is not in violation of public policy because the public policy of Minnesota and every other state is to allow people to agree to alternative methods of dispute resolution.

The lessons North Star learned are that although it saved premium money when it entered into the agreement with Progressive to arbitrate without a right to appeal it actually gave up the right to seek judicial review and appeal — that is — that contracts with insurers actually mean what they say. It also learned that arbitration agreements should never be signed unless the parties have independent advice of counsel so that they can make a wise decision to give up the right to judicial and appellate review.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

Zalma on Insurance

The E-Book

© 2011

Barry Zalma

Every lawyer retained to prosecute or defend a civil suit should begin the representation with efforts to find insurance coverage for the benefit of the client. Indeed, a lawyer that does not know the law of insurance is litigating with duct tape firmly placed across his or her mouth.

A few examples of how lawyers are funded by the insurance industry include the following:

•     The tort lawyer is retained by a plaintiff and subject to a contingency fee agreement whose fee, is paid by an insurer.

•     The tort defense lawyer is paid directly by the client’s insurer(s).

•     The insurance defense lawyer is paid directly to defend an insurer.

•     The insurer client pays the insurance coverage lawyer whose practice is limited to litigating against insurers.

•     Insurers pay the regulatory lawyer who deals with regulatory agencies on behalf of or against the interest of insurers a fee.

•     An insurer pays the patent lawyer who determines that the suit for infringement is covered by insurance.

•     An insurer pays the transactional lawyer who writes contracts to compel insurance to be available for the benefit of his or her client.

•     The prosecutor whose practice is limited to the prosecution of insurance fraud is paid by funds paid to the state by insurers to prosecute crimes against insurers.

•     The criminal defense lawyer who defends a client against the crime of insurance fraud is paid by his client as a result of an insurance claim.

Every civil lawyer should understand that a major part of the law firm’s income comes, directly or indirectly, from insurance. Since insurance is an important source of funds for success of a civil law practice it is imperative that every lawyer have a basic understanding of the law of insurance. Similarly, prosecutors or criminal defense lawyers dealing with the crime of insurance fraud must understand the law of insurance to properly represent the state or the defendant. Indeed, the lawyer who is ignorant of the law of insurance cannot adequately serve his or her clients.

The E-book was designed to provide the law student, the practicing lawyer, the insurance lawyer, and insurance professionals with a complete survey of property and casualty insurance with the full text of insurance-related decisions of the United States Supreme Court, the US District Courts of Appeal, state appellate courts, and foreign courts that have molded the law that governs insurance transactions in the United States. It is updated daily by this blog, Zalma on Insurance.

Those who are new to the subject of insurance will find this book a resource and a starting point for research. It can also be used as a basic training course for those who are just beginning the practice of insurance law or the claims business; for those representing insurers, those representing those who are insured; or for those litigating against insurers the book can be used in conjunction with, or as a supplement to, the author’s other books and blog. 

The E-book, in more than 1100 pages, begins with a history of insurance starting with a 1776 decision of the British House of Lords that established the existence of the implied covenant of good faith and fair dealing and pushing through to issues relating to interpretation of insurance contracts, remedies available to insurers and the policyholder, and the litigation of issues with the full text of definitive cases and analysis by Mr. Zalma, an internationally recognized insurance coverage, insurance claims handling, insurance fraud and insurance bad faith expert and consultant. It also has appendices including the full text of the California Standard Fire Insurance Policy, a glossary of insurance terms, and some insurance fraud statutes from across the country.

Available for purchase at http://www.zalma.com/INSURANCE.htm.

Defrauded Banks Seek Recovery From Their Failure of Due Diligence

A Group of banks asked the Minnesota Court of Appeal to overturn a summary-judgment that determined that the banks loan losses arising out of a financial-misrepresentation scheme were not covered by financial-institution bonds purchased from the insurers.  In Alerus Financial National Association, et al v. St. Paul Mercury Insurance Company, et al, No. A11-680 (Minn.App. 01/30/2012) five loans obtained between December 2004 and March 2006 by businessman Louis J. Pearlman, who pleaded guilty to various financial crimes, including a case involving a bank-fraud scheme that related to misrepresentations about the financial condition of Pearlman and his businesses.

FACTS

Pearlman retained North American Capital Markets (NACM), a Minneapolis-based investment broker, to place the loans. NACM in turn retained Minneapolis attorney James Dierking, of Winthrop and Weinstine, P.A., to assist with closing the loans. Each of the loans was structured to have one lead, or servicing, bank that loaned the money and later serviced the loan, with numerous other banks (“participating banks”) buying various percentages or “participations” in the loans. As collateral for the five loans, Pearlman offered guarantees from one of his business entities, Trans Continental Airlines (TCA), as well as TCA stock. Pearlman represented to the banks that TCA was a successful charter airline company. He later admitted that the corporation existed only on paper and had no business or assets.

Pearlman eventually defaulted on the loans, and each of the participating banks made claims against financial-institution bonds purchased from one of the three insurers. The insurers denied coverage, and the banks initiated this breach-of-contract and declaratory-judgment action. The insurers moved for summary judgment, arguing that appellants’ losses did not fall within the bonds’ coverage for losses resulting directly from employee dishonesty or forgery. The district court granted the motion, and this appeal followed.

ANALYSIS

Resolving the issues in this appeal requires us to interpret the financial-institution bonds (FIBs or bonds) issued by the insurers. FIBs insure against the dishonesty of a financial institution’s employees and provide coverage for other crime risks.

Courts have treated FIBs as insurance policies, applying general rules of contract construction to derive their meaning.  The banks first challenged the district court’s determination that the loan losses did not fall within the insurers bonds’ insuring clauses for employee dishonesty.  The banks’ assertions that their losses are covered by these clauses center on the conduct of Dierking, the attorney who closed the five Pearlman loans, and particularly on Dierking’s admitted failure to disclose to appellants his discovery, before closing the second loan, that the amended articles of incorporation necessary to authorize the stock being used as collateral had not been filed with the Florida Secretary of State.

Although not identically worded, the insuring clauses for employee dishonesty in both bonds provide as requisites to coverage of loan losses that

(1)  an employee

(2) commits dishonest or fraudulent acts

(3) with the intent to cause the insured to suffer a loss and

(4) seeks or obtains improper financial gain.

The bonds define an employee to include an attorney who was “retained by” and was “performing legal services for” the insureds. The district court determined that Dierking was not an employee of the banks as a matter of law, relying on both the language of the participation agreements between the servicing and participating banks a 2008 decision of the Minnesota Supreme Court.

Under Minnesota law, the existence of an attorney-client relationship is a question of fact that can be established under a contract or tort theory.

Dierking’s awareness of the identities of the participating banks does not support an inference that he was on notice that he was expected to represent them-much less that he agreed to represent the banks.

The banks also challenged the district court’s reliance on the language of the participation agreements, arguing that the agreements only governed the relationship between the servicing and participating banks, and do not bear on the relationship between Dierking and the participating banks.  In particular, the banks represented in the agreements that they were relying upon their own due diligence, credit investigation and credit analysis, and not on any representations, warranties or statements of the servicing banks.

Although the participation agreements may not be dispositive of whether Dierking was appellants’ employee, they provide relevant evidence that was appropriately considered by the district court.

The banks’ subjective belief that they were represented by Dierking is not, nor can it be, sufficient to demonstrate an implied contractual attorney-client relationship between Dierking and the banks. Minnesota follows the objective theory of contract formation, under which the parties’ outward manifestations are determinative, rather than either party’s subjective intent.

The banks also asked the court to rely on evidence that Dierking was paid out of loan proceeds to which they contributed. In some circumstances, determining who paid an attorney may help in identifying the client. The Court of Appeal concluded that the payment of fees was not helpful to its determination. While Dierking testified that he was paid from loan proceeds, he also testified that it was Pearlman, as the borrower, who actually paid his fees. Because none of the participating banks directly paid Dierking’s fees the Court of Appeal rejected the bank’ assertion that their contribution to Dierking’s fees creates a genuine issue as to whether Dierking was their employee. Since Dierking was not the banks’ employee as a matter of law any losses attributable to his alleged misconduct are not covered by the bonds.

In addition the district court granted summary judgment to the insurers on the forgery claims based on its determinations that the banks’ loan losses were not directly caused by reliance on the forged documents as a matter of law and that the forged corporate actions were not guarantees within the meaning of the bonds.

Although the bonds do not define “resulting directly from,” a majority of courts that have addressed the issue have held that loan loss is not directly caused by reliance on forgeries in documents constituting or referencing collateral when the collateral is worthless at the time of the loan.  It is well settled that the standard bankers bond is not a form of credit insurance. And a proper interpretation of the insuring clauses for forgery construes the insuring clauses in the context of the bond as a whole, taking into consideration the purposes of the bond.  Accordingly, the Court of Appeal concluded that the banks’ loan losses are not covered under the insuring clauses for forgery because those losses did not result directly from the forgeries, but rather from the worthlessness of the TCA guarantees and stock.

Pearlman has admitted that TCA did no business and that it existed only on paper  and for the purpose of facilitating his fraudulent schemes.

ZALMA OPINION

Whenever a lawyer and client agree to representation it is prudent for both to enter into a agreement as to the parameters of the representation. If a bank wants to have a lawyer involved in a transaction to represent them so that he is an “employee” under a bankers blanket bond they must reduce that relationship to writing. In this case the banks tried to create an implied in fact relationship between the banks and the lawyer.

In fact the banks entered into a written contract between themselves and agreed they were not relying on the lawyer retained by Perlman but were relying only upon their own due diligence, credit investigation and credit analysis, and not on any representations, warranties or statements of the servicing banks.

Perlman was a criminal. He defrauded the banks. Their due diligence, credit investigation and credit analysis was wanting. A real investigation would have made it clear to the banks that the security pledged for the loan was worthless. They fell prey to a devious borrower.

A bankers’ blanket bond, as an insurance policy, only indemnifies against the risks of loss taken by the insurer as a result of a contingent or unknown event. They were the victims of a fraud by an outside source, Perlman, not an employee and for that reason their claims against the insurers was fated to, and did, fail.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

“ARISING OUT OF” MEANS CAUSALLY CONNECTED NOT THE PROXIMATE CAUSE OF INJURY

Box Falling Of Truck Causally Connected to Injury

Zalma on Insurance in Top 50

After a box fell off an unidentified truck Larry G. Squires (Squires) attempting to avoid the box crashed and was injured. He applied for uninsured motorist coverage which was denied because the insurer claimed the accident was caused by the box not by a motor vehicle. The insurer filed a successful complaint for declaratory relief and Squires Appealed. In Allstate Property and Casualty Insurance v. Larry G. Squires, No. 11-1664 (3d Cir. 01/26/2012) the Third Circuit Court of Appeal was called upon to resolve the issue.

Allstate Property and Casualty Insurance Company (“Allstate”) was resolved when the trial Court granted it a judgment on the pleadings as it held that Squires’ injuries did not “arise out of ownership, maintenance or use of an uninsured auto” as his policy required for Allstate to be liable to him for UM benefits.

Facts

On October 20, 2008, Squires was driving his pickup truck on State Highway 51 in Beaver County, Pennsylvania when he was injured after swerving to avoid an approximately two-foot square cardboard box lying in the middle of his lane. The parties to this action are uncertain as to how the box came to be left on the road but, for purposes of its motion in the District Court, Allstate stipulated that an unidentified vehicle dropped the box.

The Policy

Squires’s policy provides, in relevant part:

[W]e [Allstate] will pay damages to an insured person [Squires] for bodily injury which an insured person is legally entitled to recover from the owner or operator of an uninsured auto. Bodily injury must be caused by accident and arise out of the ownership, maintenance, or use of an uninsured auto.

The policy’s language tracks the Pennsylvania Motor Vehicle Financial Responsibility Law (“MVFRL”), which requires that insurers offer UM benefits in motor vehicle liability insurance policies.The MVFRL provides for “uninsured motorist coverage” as follows:

Uninsured motorist coverage shall provide protection for persons who suffer injury arising out of the maintenance or use of a motor vehicle and are legally entitled to recover damages therefor from owners or operators of uninsured motor vehicles.

The MVFRL defines “uninsured motor vehicle” to include, inter alia:

An unidentified motor vehicle that causes an accident resulting in injury provided the accident is reported to the police or proper governmental authority and the claimant notifies his insurer within 30 days, or as soon as practicable thereafter, that the claimant or his legal representative has a legal action arising out of the accident.

Although Squires’s insurance policy – unlike the MVFRL – does not include unidentified motor vehicles in its definition of “uninsured auto,” Allstate did not dispute – and the District Court, quite reasonably in view of section 1702, assumed – that the unidentified vehicle was an “uninsured motor vehicle” for purposes of the Court’s coverage analysis.

The Sole Issue

The sole issue that the Court decided was “whether an accident caused by a box which fell from an uninsured motor vehicle can be attributed, as a matter of law, to the ‘ownership, maintenance or use’ of an automobile.”

Trial Court Decision

The Court answered this question in the negative, concluding that there is UM coverage for policies containing the “arising out of” language only when a vehicle – and not some other object such as the box – was “the instrumentality causing . . . the [a]ccident.” The trial Court granted Allstate’s motion for judgment on the pleadings, denied its motion to dismiss the counterclaims as moot, and dismissed Squires’s counterclaims as moot. Squires timely appealed.

Discussion

The parties agree that Pennsylvania law governs the court’s interpretation of Squires’s policy. Under Pennsylvania law, the interpretation of a contract of insurance is a matter of law for the courts to decide. In interpreting an insurance contract, the court is required to ascertain the intent of the parties as stated in the language of the written agreement. When the policy language is clear and unambiguous, the court must give effect to the language of the contract.

The Pennsylvania Supreme Court case of Manufacturers Casualty Insurance Co. v. Goodville Mutual Casualty Co., 170 A.2d 571 (Pa. 1961), held that “[c]onstrued strictly against the insurer, ‘arising out of’ [in an insurance policy] means causally connected with, not proximately caused by. ‘But for’ causation, i.e. a cause and result relationship, is enough to satisfy this provision of the policy.”

This formulation of “arising out of” is now well-settled in Pennsylvania. It has been applied in various insurance law settings.  Squires at this time only needed to allege  that the unidentified vehicle’s use was a cause of his injuries which would not have occurred but for the use of the unidentified vehicle.

The Third Circuit concluded, if faced with a set of facts similar to those here, the Pennsylvania Supreme Court would hold that Squires’s accident arose “out of the ownership, maintenance, or use of an uninsured auto.” In Squires’ case the Third Circuit inferred, since the parties stipulated, that the unidentified vehicle directly was involved in the accident as it was transporting the box as cargo – a common use for many types of vehicles traveling on a roadway.

Therefore, when the unidentified vehicle dropped the cardboard box, it had more than an “incidental involvement . . . in the situation that gave rise to Squires’ injuries.” The accident was a direct consequence of the use of the vehicle for its intended purpose.

As the Supreme Court of Pennsylvania set forth in Goodville, the central inquiry in assessing whether an incident “arose out of the maintenance, ownership, or use” of a motor vehicle concerns causation, which is informed by – but does not necessarily turn on – the “instrumentality” directly causing the accident.

The court in Fox v. State Automobile Mutual Insurance Co., 461 A.2d 299 (Pa. Super. Ct. 1983), faced a situation involving a plaintiff who was injured after tripping over debris left when a car suddenly crashed into her living room. In deciding that the plaintiff qualified as a “victim” under an insurance policy issued pursuant to the Pennsylvania No-fault Motor Vehicle Insurance Act, the court determined that the causal connection between the vehicle and the plaintiff’s injuries was strong enough to support a conclusion that the accident “arose out of” the maintenance and use of the vehicle. Finally the Third Circuit noted that the MVFRL is to be liberally construed in order to afford the greatest possible coverage to injured claimants and in close or doubtful insurance cases, a court should resolve the meaning of insurance policy provisions or legislative intent in favor of coverage for the insured.

ZALMA OPINION

This case is a clear explanation of why interpreting an insurance policy is different than interpreting whether a person is entitled to tort damages.  The single issue was resolved in favor of Mr. Squires because, but for the box falling off an unidentified truck, his accident would not have occurred. Boxes do not appear in the middle of an interstate highway by osmosis – they most like come off another vehicle. Allstate agreed that the box fell off a truck or other vehicle but since there was no contact with the unidentified vehicle, nor was it even seen, by Squires it believed the accident did not arise out of the use of an automobile, a necessary requirement for coverage to exist under an uninsured motorist policy. Allstate convinced the trial court.

The Third Circuit disagreed with a logical conclusion that the box was causally connected to the use of an automobile since, but for the box falling off a truck, Squires would need not swerve to avoid it and the accident would not have happened.

Insurers, as did the Third Circuit, read their policies as broadly as possible to provide coverage for the insured. Allstate acted in good faith, since there existed a series of Pennsylvania cases strong enough to convince the trial court. Sometimes court decisions – like those relied upon by Allstate and the trial court – cause insurers to rely on the statement of the courts rather than upon the need to fulfill the covenant of good faith and fair dealing.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

State Attempts to Compel Insurer To Take Risks It Does not Want to Take

Insurance is a risk taking business. To effectively and intelligently make decision on which risk to take and which risk to refuse an insurance underwriter relies on information available that now includes the use of computer generated models. The use of such information, both actuarial and computer modeled, is part of the basic underwriting function.

As the California Court of Appeal recognized back in 1955: “An insurance company is entitled to determine for itself what risks it will accept … It has the unquestioned right to select those whom it will insure … to the end that a wise discrimination may be exercised in selecting its risks.” (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]) Discrimination in risks taken is, therefore the essence of insurance.

The Supreme Court of Marlyand was called upon to decide whether Allstate Insurance Company (Allstate) may refuse, that is wisely discriminate, to write new homeowners policies in certain geographic areas of the State. The state alleged that prohibitions against discrimination found in its code § 27-501(a) must be considered by the Commissioner to refuse Allstate’s petition to stop insuring high risk areas and claimed it failed in that duty in People’s Insurance Counsel Division v. Allstate Insurance Company, et al., No. 60 September Term 2011 (Md. 01/25/2012).

FACTS

In a memorandum and order filed on his behalf by an Associate Deputy Commissioner, the Commissioner concluded that the filing was subject to administrative review under the Maryland Code and that it satisfied the pertinent criteria under the statutes. People’s Insurance Counsel Division (PICD), a unit within the Office of the Attorney General, tried the case before the Circuit Court for Baltimore City who affirmed both aspects of the Commissioner’s ruling. On PICD’s appeal, the Court of Special Appeals affirmed the Circuit Court judgment, but its conclusion as to the statute rested on alternative grounds — first, that the statute did not apply to the filing and second, that, even if it did, the statute was not violated.

BACKGROUND

Section 19-107(a), which is part of the Title of the Insurance Article dealing with property and casualty insurance, provides, in relevant part:

“An insurer may not refuse to issue or renew a contract of … homeowners insurance … solely because the subject of the risk or the applicant’s or insured’s address is located in a certain geographical area of the State unless:

(1) at least 60 days before the refusal, the insurer has filed with the [Insurance] Commissioner a written statement designating the geographic area; and

(2) the designation has an objective basis and is not arbitrary or unreasonable.”

Title 27 of the Insurance Article deals generally with unfair trade practices in all lines of insurance. Subtitle 5, of which § 27-501 is a part, prohibits a range of discriminatory practices. Section 27-501(a) provides:

“(1) An insurer or insurance producer may not cancel or refuse to underwrite or renew a particular insurance risk or class of risk for a reason based wholly or partly on race, color, creed, sex, or blindness of an applicant or policyholder or for any arbitrary, capricious, or unfairly discriminatory reason. (2) Except as provided in this section, an insurer or insurance producer may not cancel or refuse to underwrite or renew a particular risk or class of risk except by the application of standards that are reasonably related to the insurer’s economic and business purposes.” (Emphasis added)

On February 13, 2006, Allstate filed with the Maryland Insurance Administration (MIA) a new underwriting rule stating that, from and after April 10, 2006, due to “catastrophe management actions,” it would no longer write new homeowners insurance policies on properties in all ZIP Codes located within what it defined as Hurricane Bands 4, 5, and 6. The exclusion, as so identified, would include all of St. Mary’s, Somerset, Talbot, Wicomico, and Worcester Counties and significant parts of Anne Arundel, Calvert, Charles, Dorchester, Prince George’s, and Queen Anne’s Counties.

On May 31, 2007, MIA advised Allstate that it had reviewed the filing under § 19-107 and, based on the information submitted, concluded that the geographic designation had an objective basis and was neither arbitrary nor unreasonable. The next day, PICD, which had received a copy of the filings, requested a hearing, which the Commissioner granted, and a stay, which the Commissioner denied. Allstate was permitted to intervene. With the denial of the requested stay, the new underwriting rule was put into effect on June 4, 2007; Allstate stopped accepting new applications on that date.

The hearing was conducted by the Commissioner on December 13 and 14, 2007. Most of the evidence presented at the hearing came from the testimony, some of it pre-filed, of three expert witnesses called by Allstate – Robert Newbold, an expert in computer modeling, Ryan Michel, an Allstate actuary, and David Chernick, an expert in actuarial science.

Allstate, in the opinion of the Commissioner established several sequential propositions.

1. That managing catastrophic risk presents a unique challenge to insurance companies, for at least two reasons, one dealing with the distribution of the risk and the other dealing with the ability to measure the risk.
1. As to the first, Mr. Michel explained that, for many types of insurance, risk is diversified.
2. The more policies that are written, the less the overall risk in any particular event.
2. Catastrophic risk is different, the more insurance written in a specific area that may be subject to a catastrophic event, the greater the volatility.
1. Mr. Chernick confirmed that point – that adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk.
2. Mr. Newbold observed that, because of the lack of reliable information, it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur.
1. It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;
2. It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses;
3. Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;
4. It provides a means to determine the impact of new scientific information; and
5. It provides a framework for performing sensitivity analyses and “what-if” studies.
3. The model is updated annually.
1. The one used by Allstate in this proceeding was Model 7.0, which is used in 28 States, including the entire Eastern Seaboard.
3. In considering whether Allstate had met its burden of showing compliance with both statutes the Commissioner noted that in some cases insurers have been required to provide statistics to demonstrate the relationship between the underwriting standard applied and the insurer’s business and economic purposes.
1. The Commissioner concluded that that kind of evidence is not required in all cases.

The decision by Allstate to cease writing new property insurance policies in Hurricane Bands 4, 5, and 6 was based on a model. Allstate took the top 5% of events from the model and calculated “damage ratios” for each ZIP Code in the State (as well as in contiguous States).

Mr. Chernick stated that Allstate could not manage its Maryland catastrophe exposure simply by purchasing reinsurance. In light of the amount of reinsurance that would be needed, given Allstate’s significant market share, Allstate would need a consortium of 15 to 20 reinsurers, but there is not the capital available to purchase that amount of insurance. Mr. Chernick also explained why, in his view, additional catastrophic risk could not be managed through increased premiums. He gave as an example a home that suffers a total loss of $300,000. The premium for the insurance is $1,000, of which $250 represents coverage for the catastrophic risk. At that rate, it would take Allstate 1200 years to recover the loss. Even if Allstate were to increase the premium 10-fold and charge $2,500 instead of $250 for the catastrophic risk, it would take 120 years collecting that premium to recover the loss.

The Commissioner’s ultimate findings were that (1) the process used by Allstate to arrive at its business decision produced an underwriting decision that is reasonable and supported by reliable data, (2) it therefore complied with § 27-501(a), and (3) the geographic designations had an objective basis and were not arbitrary or unreasonable, and (4) they therefore complied with § 19-701(a).

DISCUSSION

After considering the textual language and the legislative history of §§ 19-107(a) and 27-501(a), both of which are part of the Insurance Code administered by the Commissioner, the Commissioner concluded that both statutes were applicable – that the Legislature did not intend to exclude from the anti-discrimination and nexus requirements of the statutes.

Allstate was not proposing to cease writing homeowners’ insurance in Maryland. It intended to remain very active in that market, including properties that it currently insured in the designated geographic areas. What it determined to do was to refuse to underwrite new business in those areas, which quintessentially constitutes discrimination against a class of applicants – the class being homeowners who live in the designated areas but were not current Allstate policyholders.

The Maryland Supreme Court concluded it can find nothing in either the texts of the two statutes or in their respective legislative histories to suggest an intent on the part of the General Assembly to give an insurer desiring to discriminate against insureds or applicants on a geographic basis a free pass to violate the prohibitions in the statutes.  The judgment was affirmed.

ZALMA OPINION

Insurance is not a benefit provided by a government. It is a business regulated by the various states who are called upon to keep insurers from wrongfully discriminating against residents of the various states for reasons prohibited by state statutes. Insurance regulators, needing to protect the public against risks of loss also need insurers to make a reasonable profit that can only be obtained by the insurer exercising its unquestioned right to select those whom it will insure to the end that a wise discrimination may be exercised in selecting its risks and thereby make a profit from its efforts.

The state of Maryland found that Allstate, exercising wise discrimination to avoid excessive risks of loss in areas of the state subject to catastrophic damage from hurricanes, did so appropriately and did not violate any statute or regulation.

Insurers who do not discriminate wisely on the risks it will take or not take will lose and go out of business. Other states should follow the lead of Maryland’s Supreme Court and understand the direction provided by the California Court of Appeal in 1955 on the business of insurance.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

VIRGIN GROUND

The First Circuit Court of Appeal was called upon, applying the law of Puerto Rico, whether a CGL policy provided coverage to an insured for claims that sounded in contract rather than in tort. The issue had never been brought to the First Circuit before with regard to contract damages and it made its decision as a decision of first impression. The First Circuit reached its decision in Lopez & Medina Corp., D/B/A Emmanuel Travel & Tours v. Marsh Usa, Inc., As Agent For Certain Subscribing and/Or Participating, No. 10-1702 (1st Cir. 01/26/2012).

FACTS

Plaintiff-appellant Lopez & Medina Corp. (“L&M”) appealed the district court’s order denying its cross-motion for summary judgment. The cross-motion was denied on the grounds that the insurance policy, pursuant to which L&M sought coverage, issued by defendant-appellee United States Aviation Underwriters, Inc. (“USAUI”), did not cover L&M’s losses arising from an alleged breach of contract.

In addressing whether USAUI’s policy covered L&M’s contractually based claim the First Circuit noted that it was treading on virgin ground in its circuit because it had not had the opportunity to address whether the phrase “legally obligated to pay as damages” in a commercial general liability (“CGL”) policy, which usually covers only tort claims, also provides coverage for claims in an underlying action arising out of and related to a contract between the parties.

On September 1, 2001, USAUI and other defendant co-insurers issued Airline Insurance Form PA-01, Policy #SIHL1-200A (the “Policy”) to Pace Airlines, Inc. (“Pace”). Pace was the “Named Insured” under the Policy, and two Boeing 737-200 aircraft were listed as the insured subjects. The Policy covered certain risks assumed by its insured, Pace, in its contractual arrangements with other companies, which generally consisted of charter programs.

Patriot and L&M prepared for their business venture, titled “Dream Air operated by Pace Airlines,” to take off. On June 22, 2002, the first chartered flight left Luis Munoz Marin International Airport, departing from San Juan, Puerto Rico to the Dominican Republic. The First Circuit, analyzing the factual situation with a plethora of puns stated the facts, including that “[b]usiness seemingly continued to soar into early July, with additional flights occurring on July 3, 4, 7, 8, 11, 12, and 14 of 2002. However, it was not long before L&M and Patriot’s business arrangement began to experience turbulence. As of mid-July, L&M and Patriot’s Dream Air operation had become a business venture nightmare. By July 18, 2002, Patriot had taken action and terminated the Passenger Agreement. Two months later, Patriot filed for voluntary bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Northern District of Texas.

L&M alleged three causes of action in its complaint:

1. the named defendants were liable under Puerto Rico’s Direct Action Statute, P.R. Laws Ann. tit. 26, § 2003, for risks insured under the Policy;
2. declaratory judgment, establishing that one or more of defendants’ insurance policies provided coverage for those risks associated with the breach of the Passenger Agreement, Charter Agreement, or any other agreements concerning Patriot and Pace’s charter operations; and
3. a determination that the Policy insured against a breach of contract risk, and therefore, defendant-insurers were directly liable to L&M within the maximum limit of their combined policies for losses arising from the alleged breach, which L&M contended amounted to ten million dollars.

Specifically, defendants requested, and the trial court agreed, that the district court dismiss the case with prejudice because the undisputed facts (namely, the plain language of the Policy) showed that the Policy did not cover L&M’s alleged breach of contract claim, regardless of whether a breach of contract ultimately was or was not established. The district court rejected L&M’s motion, concluding that the Policy “clearly and unambiguously does not provide coverage for a breach of contract claim.”

DISCUSSION

Insurance Policy Construction Under Puerto Rico Law

Puerto Rico law governs this diversity case. Article 1233 of the Puerto Rico Civil Code provides that when the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall be observed. On the other hand, where a policy’s language is unclear, we must construe the provisions against the insurer.

The First Circuit was aware, however, that where a contract’s wording is explicit and its language unambiguous, the parties are bound by its clearly stated terms and conditions, with no room for further debate. The court cannot dwell on the “alleged” intent of the parties at the time they entered into the contract.

Whether the Policy Extends Coverage to L&M’s Claims

L&M’s argument on appeal was that the Policy – in contrast to the district court’s finding – is not limited solely to tort claims, but instead covers both contract and tort actions. Thus, L&M’s claims also must be covered under the Policy. Because the analysis centers on the Policy’s language, which serves as the best evidence of the parties’ intentions, the First Circuit addressed the relevant terms of the CGL provision.

L&M’s Claims

A careful review of L&M’s pleadings, motions, and arguments on appeal establishes that L&M’s allegations against USAUI – based on L&M’s asserted damages for Patriot’s alleged failure to provide chartered air transport via Pace – sound in contract. For example, in its complaint, L&M repeatedly alleges that indirect air carrier Patriot (which leased aircraft from direct air carrier Pace) breached its written Passenger Agreement with L&M. L&M similarly argues in its cross-motion for summary judgment that Patriot breached its Passenger Agreement with L&M and therefore coverage for L&M’s resulting losses should extend to L&M under the Policy.

L&M’s arguments on appeal – generally, that the district court improperly limited L&M’s allegations to a breach of contract claim, despite defendants’ tortious act of refusing or withholding of transportation – do little to persuade the First Circuit otherwise as to the contractual nature of its claim.  Without belaboring the point, L&M repeatedly asserts in its complaint that Patriot breached its contractual obligations to L&M, and that such breach and its resulting losses are covered under the Policy. At no point in the complaint does L&M ever clearly or expressly assert a tort violation. Thus, in order for L&M to receive coverage under the Policy, it must establish that the Policy’s coverage extends to contract-based claims.

Relevant Policy Terms

L&M directs us to specific provisions in the Policy which it alleges support its claim of coverage. The contested form of coverage is that provided under “Part I – Liability Coverage,” also referred to by the parties as the “CGL provision.” L&M based its claim on the following CGL language:

        1. COVERAGE

        The INSURER will pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of:

        B. PERSONAL INJURY arising out of one or more of the following offenses committed during the policy period;

        Group 3. Refusal or withholding of transportation or other public accommodation; but coverage hereunder shall not apply to payments made by the Insured under the provisions of its tariffs or contract of carriage, to persons holding confirmed reserved space on a flight and who are denied boarding on such flights whether such space is relinquished voluntarily or involuntarily.

Furthermore, L&M, throughout its various pleadings and motions, has relied on the following specific language within the CGL provision to support its position that L&M suffered damages due to Patriot’s allegedly bad faith failure to provide air transportation to L&M in violation of their contractual agreement, and that the Policy extends coverage to such damages:

The insurer will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of . . . personal injury arising out of . . . refusal or withholding of transportation or other public accommodation.

The First Circuit noted, with a detailed recitation of cases from other circuits, that the circuit courts of appeals that have ruled on the interpretation of the phrase, “legally obligated to pay as damages,” in a CGL provision have all held that it applies to tort and not contractual liability. Renowned insurance treatises and commentators also agree that the purpose of a CGL policy is to indemnify a party against tort and not contract-based liability.

The phrase, “legally obligated to pay as damages,” refers exclusively “to the liability of the insured arising from the breach of a duty that exists independent of any contractual relationship between the insured and the injured party.”

L&M’s proposed interpretation of the Policy’s CGL language as applicable to contract claims asked the First Circuit to view well-settled insurance law through the looking glass. It is generally not an appellate court to contradict established, well-grounded law. Here, the well-beaten path does indeed make the right road, and the First Circuit refused to accept L&M’s invitation to wander from it. Indeed, the upshot of extending coverage to a breach of contract claim in this instance would be to turn the CGL policy into a performance bond. The First Circuit was unwilling change the policy wording and do what L&M asked.

Conclusion

Finding no ambiguity in the Policy’s clear language, the First Circuit decided to enforce the policy according to its express terms, which, as previously stated, provide no coverage for L&M’s contract-based claims.

In resolving this matter of first impression, the First Circuit  joined the majority of those circuit courts of appeals that have ruled on the issue. The First Circuit also concluded it need not address L&M’s other arguments, as they invite us to look outside the clearly delineated scope of the Policy to external documents and the parties’ alleged intent when entering the agreement.

ZALMA OPINION

The First Circuit followed a plethora of precedent that a CGL is a policy that only insures the person(s) insured against tort liability. It does not, nor can it ever, provide coverage for breach of contract. A CGL policy is not a performance bond nor does it promise, in any way, to guarantee that a person insured will fulfill the terms of a contract it makes with another.

 

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

Zalma’s Insurance Fraud Letter —

February 1, 2012

With the third issue of the 16th Year of publication, Zalma’s Insurance Fraud Letter  (ZIFL) reminds each of you that both trial an appellate courts are starting to take insurance fraud seriously. Although insurance fraud continues to decimate the balance sheets of insurers, more perpetrators are convicted,their convictions are affirmed and they are sent to jail.

Mr. Zalma is now a commentator on the web based television news network, World Risk and Insurance News (http://www.wrin.tv) and asks that you click on the link, watch the initial programming and comment on his new segment in the news programs relating to insurance fraud in Mr. Zalma’s video reports called “Who Got Caught” that are online now at: http://wrin.tv/index.php/component/content/article/3-headline/114-qwho-got-caughtq-with-barry-zalma and  http://wrin.tv/index.php/component/content/article/3-headline/108-qwho-got-caughtq-with-barry-zalma.

The current issue of ZIFL reports on a the affirmation of a conviction for insurance fraud by the California Court of Appeal and a different result when prosecutors become over-zealous they caused a conviction can be overturned in Kentucky. Fire cause and origin experts were misused by the prosecution and the court prevented the defendant from having an expert to testify to counter the state’s witnesses, and the court found the state wrongfully obtain a conviction. ZIFL also reports briefly on three fraud convictions across the country that were affirmed by courts of appeal.

Volume 16, issue 3 also contains Chapter II of the serialized novel, “Murder and Insurance Fraud Don’t Mix.”

The issue closes, with a report from the Coalition Against Insurance Fraud on its 2011 Hall of Shame and, as always, with dozens of reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to many years in jail.

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

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

ZIFL’s author, Barry Zalma, also writes the blog “Zalma on Insurance” http://zalma.com/blog that was named by LexisNexis as one of the top 50 Insurance Law Blogs. “Zalma on Insurance” continues to post a summary of a new and interesting appellate decisions five days a week. Mr. Zalma has posted this year more than 331 articles on the blog whose readership is growing daily. The blog is intended to act as a daily supplement to Mr. Zalma’s new e-book “Zalma on Insurance” which contains what Mr. Zalma believes are most of the important insurance cases decided in the US.

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation and expert testimony concerning insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith to insurers and policyholders.  ZIFL reports to its readers that if you or your client face a potential insurance fraud, an insurance coverage issue or an insurance claims handling issue and wish to have the assistance of one of the very best insurance coverage counsel, insurance claims handling expert and consultant, you should contact Barry Zalma at 310-390-4455 or at zalma@zalma.com.

If you need additional information contact Barry Zalma at 310-390-4455 or write to him at zalma@zalma.com.

 

Barry Zalma, Esq.

 

 

“Who Got Caught?” with Barry Zalma

Also see the weekly news at http://www.wrin.tv.

TRIAL COURT MUST CONTROL FIRE POLICY APPRAISAL FUNCTION

California Insurance Code section 2071 sets forth the California standard form fire insurance policy. It includes a provision requiring the insurer and the policyholder to participate in an informal appraisal proceeding in the event they disagree about the amount of an insured loss. This mandatory appraisal provision, or a similar one, is included in each fire insurance policy in California and is part of the homeowners policy issued by State Farm General Insurance Company (State Farm) to Khosrow and Violet Lalezarian covering their home in Beverly Hills.

The California Court of Appeal was called upon to decide in Khosrow Lalezarian et al v. State Farm General Insurance Company, No. B228361 (Cal.App. Dist.2 01/25/2012)whether, given the limited nature of the appraisal process, the trial court required to order an appraisal when there are disputes not only as to the amount of the insured loss but also as to coverage and the scope of the damage covered by the policy?

FACTUAL BACKGROUND

The appraisal process, a special form of arbitration, is limited:

The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy.’” (Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, 1094.)

The Lalezarians’ home on North Camden Drive in Beverly Hills was damaged in a wind and rain storm on February 21, 2008. At the time the property was insured under a homeowners insurance policy issued by State Farm. The Lalezarians promptly reported the claim. State Farm inspected the property and hired a consulting firm, Tri-Tech Restoration Co., to estimate the cost of repairs. On April 1, 2008 State Farm paid the Lalezarians more than $216,000 in benefits, including approximately $132,000 for the replacement cost of covered repairs based on the consulting firm’s estimates and $83,000 for anticipated additional living expenses during the time the Lalezarians expected to be out of their home while the necessary repairs were made.

With its April 1, 2008 payment, however, State Farm notified the Lalezarians there were significant disagreements as to coverage and the scope of the insured loss.  The Lalezarians hired a contractor to assist with their damage estimates and retained counsel to represent them in connection with the dispute.

18 MONTHS OF NEGOTIATION

Over the following 18 months counsel for the Lalezarians and for State Farm continued to discuss the outstanding issues; further inspections of the Lalezarians’ home occurred; and State Farm made approximately $125,000 in supplemental payments. In October 2009 the Lalezarians’ attorney demanded an appraisal to determine the actual cash value or amount of loss caused by the February 21, 2008 storm pursuant to Insurance Code section 2071. State Farm’s attorney responded, stating appraisal was not appropriate because the Lalezarians had not provided a statement of their position regarding the amount of the covered loss, so there was not yet a “failure to agree”; in addition, counsel wrote, “disputes over the scope of the loss or coverage are not proper subjects of an appraisal.”

The Lalezarians and State Farm remained unable to resolve their differences. On January 25, 2010 the Lalezarian sued. State Farm contended an appraisal is inappropriate when issues exist concerning whether some of the damages to be appraised are covered under the policy.

The trial court explained the Lalezarians’ initial request for an appraisal was improper because there was a dispute as to the scope of the covered loss and an appraisal panel may not determine questions of coverage or interpret policy provisions. The court stated, if permitted, the proposed appraisal “will not expedite this action (as intended by the statute), since it would at most resolve some portion of Plaintiffs’ existing claims.”

THE APPRAISAL PROCESS; THE LIMITED ROLE OF THE APPRAISERS

Fire insurance policies on California properties are required to use standard language specified by the Legislature. The Lalezarians’ homeowners policy includes the statutorily mandated appraisal provision.

An appraisal is a special form of limited arbitration. Notwithstanding the statutory directive to maintain the informality of appraisal proceedings, in general those proceedings must also conform to the procedural requirements of the Arbitration Act. Although an appraisal is a form of arbitration, the appraisers’ powers are far more limited than an arbitrator’s. The appraisers’ authority is restricted by statute and contract language to determining the actual cash value or amount of loss of the specific items submitted for their consideration.  An appraiser has authority to determine only one question of fact, namely the actual cash value or amount of loss of a given item. Nothing more.

Under the statutory provision and related case law construing and implementing it, trial courts have discretion to sever arbitrable claims from claims not subject to arbitration and to stay either the arbitration or the judicial proceeding pending the outcome of the other.

SIMPLY DENYING THE LALEZARIANS’ MOTION TO COMPEL AN APPRAISAL WAS ERROR

The Lalezarians and State Farm agreed to submit to the appraisal process any dispute concerning the actual cash value or amount of loss of items covered by the homeowners policy protecting the Lalezarians’ North Camden Drive residence.  The existence of additional issues not subject to appraisal or arbitration does not vitiate the Lalezarians’ right to an appraisal to resolve their disagreement with State Farm regarding the value of their covered loss.

The trial court disregarded the clear statutory mandate because it believed, with the scope of the covered loss unresolved, ordering an appraisal of the Lalezarians’ claims would almost inevitably lead the appraisal panel to impermissibly determine issues other than the actual cash value or amount of loss of specific items submitted for its evaluation.

The Court of Appeal agreed that the procedural complexities of an immediate appraisal proceeding that troubled the trial court are real. The Court of Appeal concluded that the trial court erred in attempting to avoid the complexities by simply denying the motion to compel an appraisal. Instead, the Court of Appeal ruled that the trial court should have granted the motion and ordered the parties to participate in an appraisal proceeding.

COVERAGE ISSUES ARE QUESTIONS OF LAW

In addition the Court of Appeal concluded the trial court should have exercised its discretion pursuant to the Code of Civil Procedure to order the appraisal, as mandated by statute and the insurance policy, and then stayed the appraisal proceedings pending resolution of the disputed coverage and scope of loss issues.

The dispute between the parties concerning coverage and scope of loss might well be resolved by the court on summary judgment, particularly to the extent it involves matters of contract interpretation, which are questions of law for the court.

Even if State Farm’s concerns were appropriate the purported inefficiency of using the mandated appraisal proceeding is not a sufficient basis for ignoring the plain language of the Insurance Code or the parties’ insurance contract. It is, however, an appropriate ground for the court to exercise its discretion to control the order of proceedings to reduce to the extent possible any unnecessary expenditure of the court’s or the parties’ time and resources. The trial court should resolve the coverage issues by summary judgment and then allow the appraisal to go forward.

ZALMA OPINION

For an insurance claim to be resolved it is necessary that both parties work together with good faith. The fact that State Farm and counsel for the Lalezarians negotiated for eighteen months, convinced State Farm to pay extra money to resolve the claim, only to be sued for bad faith and for a court order compelling arbitration.

As California Supreme Court Justice Kaus said in his dissent to the holding in White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985).

The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith. (Emphasis added)

If there was an honest dispute between State Farm and the Lalezarians as to the extent of loss they could have appraised that issue before they spent 18 months negotiating trying to resolve the dispute.

Appraisal is a wonderful tool to resolve disputes as to extent of loss. Failure to use it properly results in litigation that should have been unnecessary.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

DEPARTMENT OF LABOR SEEKS PRIORITY ON INSURER INSOLVENCY

The New Hampshire Supreme Court was asked to resolve a dispute between the state and the U.S. Department of Labor (DOL) that sought priority to the assets of the insolvent Home Insurance Company regardless of  the limitations of the McCarrent Ferguson Act claiming a federal preemption of state law in Hilda Solis, Secretary, United States Department of Labor v. the Home Insurance Company and Roger A. Sevigny, New Hampshire, No. 10-cv-572-SM (D.N.H. 01/27/2012). The state claimed that the DOL was engaged in a power grab trying to take funds held in trust by the state and eliminate its rights to control insurance.

FACTS

The Home Insurance Company (“Home”) was declared insolvent in 2003 by the New Hampshire Superior court, which ordered its liquidation and appointed the New Hampshire Commissioner of Insurance as liquidator. During the subsequent insolvency proceeding, the United States Department of Labor (“DOL”) filed a proof of claim seeking over $2.6 million in assessments allegedly owed by Home to a “Special Fund” administered by DOL pursuant to the Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-50 (the “Longshore Act”).

State law establishes the priority in which payments from the assets of liquidated insurers are to be made. The Liquidator assigned DOL’s claim to priority Class III. Home’s assets are generally thought to be insufficient to cover Class III claims, so it is unlikely that DOL will recover anything substantial. The DOL brought this suit against Home and Roger A. Sevigny, New Hampshire’s Insurance Commissioner and Liquidator of Home, seeking a declaration that the Longshore Act preempts the state’s priority-setting statute.

The New Hampshire Superior Court (Merrimack County) declared Home insolvent and ordered its liquidation on June 13, 2003. The Liquidator (Sevigny), by statute, is vested with the title to all of the property, contracts and rights of action and all of the books and records of Home. The Liquidator is required by statute to each claim filed in Home’s liquidation, and determine whether the claim should be allowed, in what amount, and at what priority class level. After doing so, the Liquidator presents his findings to the superior court in the form of recommended action for the court’s approval.

The DOL filed a proof of claim and an amended proof of claim in 2003 and 2005, respectively, for assessments totaling $2,672,527 that Home allegedly owes to DOL under the Longshore Act for the period between 2000 – 2004 (collectively the “claim”). In October 2010, the Liquidator issued a notice of redetermination, which allowed DOL’s claim in full. Pursuant to New Hampshire’s statutes the Liquidator assigned DOL’s claim a Class III priority. He also rejected DOL’s argument that state priority law does not apply because it is preempted by the Longshore Act.

DOL filed this federal declaratory judgment action to press the preemption issue. It also asserted, on alternative state law grounds, that its claim against Home’s assets is entitled to either a Class I or Class II priority.

THE FEDERAL LONGSHORE ACT

DOL’s claim against the assets of Home arose from assessments DOL levied against Home pursuant to the Longshore Act. The Longshore Act creates an extensive workers’ compensation program that protects longshore and other specific classes of workers whose injuries occur upon navigable waters of the United States or adjoining facilities like piers and dry docks. The Longshore Act is similar to workers’ compensation programs provided for non-maritime workers.

Section 944 of the Longshore Act creates a “Special Fund” of money held in trust and administered by DOL.  The Special Fund operates primarily:

1. to provide to “second injury” workers compensation beyond that which employers are required to provide, and
2. to provide compensation to workers in the event of employer insolvency.

Section 944 authorizes the Secretary to fund the Special Fund through annual assessments on self-insured employers and insurance carriers. Second Injury Payments from the Special Fund Employer liability for worker compensation under the Longshore Act is limited in cases of “second injury,” that is, where a partially disabled worker suffers a work-related injury that increases her disability. Under such circumstances, the employer is usually liable only for 104 weeks of compensation payments. After that period, liability for payments shifts to the Special Fund.

Shifting liability to the Special Fund is meant to encourage employers to hire workers who have a previous partial permanent disability.

For fiscal years 2000 – 2004, assessments against insurance carriers comprised more than ninety-nine percent of the Special Funds’ revenues. Payments made from the Fund during that same period consisted primarily of second injury payments, which accounted for over 90% of all Special Fund outlays. The next largest category of Special Fund payments for that period consisted of “Section 918″ payments, which comprised less than 5% of payments from the Special Fund.

DISCUSSION

The federal priority statute, provides that a “claim of the United States Government shall be paid first when a person indebted to the Government is insolvent and an act of bankruptcy is committed. DOL’s claim, then, is arguably entitled to first priority in the state insolvency proceedings, notwithstanding the contrary state priority law. However, the U. S. Supreme Court, in United States Dept. of Treasury v. Fabe, 508 U.S. 491 (1993), held that, to the extent a state statute protects policyholders by requiring a different priority class for federal claims in insurance insolvency proceedings, it may supersede the federal priority statute under the McCarran-Ferguson Act, which seeks to preserve the supremacy of the States in the realm of insurance regulation. Because the Fabe decision precludes application of the federal priority statute to DOL’s claim, DOL seeks to conjure up a similar “absolute priority” requirement from the Assessment Provision of the Longshore Act – one DOL contends can survive reverse-preemption under McCarran-Ferguson.

There Is No Express Preemption

DOL bears the burden to present “clear evidence” that compliance with both the federal and state laws is a physical impossibility. DOL argues that defendants cannot comply with both state and federal law because federal law requires them to pay the federal assessment, but the state’s priority law forbids payment because Home’s assets are insufficient to pay DOL’s Class III claim.

Given that the state’s priority law rules out Class I priority for DOL’s claim, DOL need to show that the Assessment Provision requires it.  DOL must also show that the Assessment Provision creates a right of absolute priority for such a claim in state insurance insolvency proceedings. No provision of the Longshore Act speaks to the issue of assessment claim priority. DOL’s argument, therefore, rests entirely on the notion that a preferential priority is implied.

The New Hampshire Supreme Court found there is nothing to suggest that Congress meant to attach “absolute priority” status to assessments and that such a requirement should not be inferred from the silence of Congress.  The court noted that the Secretary may offset Home’s unpaid assessment by increasing next year’s assessments against other carriers and self-insured employers.

In sum, the state’s priority law, as applied in this case, poses an obstacle neither to the primary purposes of the Special Fund nor to the Assessment Provision’s subsidiary purpose of spreading Special Fund costs among industry participants.  The McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq., was enacted to protect the continued regulation and taxation by the several States of the business of insurance. The Act prohibits federal preemption of state laws that regulate insurance, unless the federal statute expressly announces Congress’s specific intention to inject itself into the area of state insurance law.

For McCarran-Ferguson to protect a state law from the application of normal  federal preemption principles, three conditions must be met. 1.    The federal statute “must not ‘specifically relat[e] to the business of insurance.’”  2.    The state law must have been enacted for the purpose of regulating the business of insurance. 3.    The federal statute must invalidate, impair, or supersede the state law.

Since the parties agreed that the second condition is met in that New Hampshire’s insurer insolvency priority law regulates the business of insurance. Moreover the third condition is also met, because the federal law supersedes the state priority law under normal preemption principles. The federal statute does not specifically relate to the business of insurance. A federal statutory provision is related to the “business of insurance” where it affects the core relationship between a private insurer and its insured.

Section 908 of the Longshore Act limits employer liability for second injury compensation.  With respect to its primary function as a reserve for second injury compensation, therefore, the Special Fund operates beyond employer liability and, thus, outside the insurer-insured contract relationship.

Likewise, to the extent the Special Fund operates as a discretionary safety net in the event of employer insolvency, it does not regulate the core relationship between insurer and insured.

CONCLUSION

Because DOL has not shown a clear and manifest Congressional intent to preempt the state priority law. That law, in any event, is protected from federal intrusion under the McCarran-Ferguson Act.

DOL’s motion for summary judgment is denied and since plaintiff is not entitled to the relief she seeks, as a matter of law, judgment shall be entered in favor of defendants, and the case closed.

ZALMA OPINION

Since McCarren Ferguson was enacted insurance has been the province of the individual states. The federal government has no place in insurance and no right right to control insurance or take assets from insurers. Since the U.S. Government continues to run a deficit all departments, including the DOL, seek to add to the revenue of the government whether they have a right to do so or not.

This case tried to create a federal priority out of whole cloth and eliminate the effect of McCarren Ferguson and the Tenth Amendment of the U.S. Constitution to make a DOL fund for second injuries to encourage employers to employ people who had been injured once, is not insurance nor does it even come close to insurance. The New Hampshire Supreme Court saw through the ploy and entered judgment for the state.

Contrary to the arguments made by the DOL insurance is a contract between an insurer and insured whereby the insurer agrees to indemnify the insured against a contingent or unknown event. It can never be an action of governmental largess which is exactly what the second injury fund is and why it has no priority of rights over that of other creditors of the insolvent insurer.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

Insurance is Not A Remedy For Every Wrong

In Chanson Roque and Shannon Isenhour v. Allstate Insurance Company, 2012 COA 10 (Colo.App. 01/19/2012) the appellate court was asked whether exiting a car and then engaging in intentional misconduct breaks the requisite causal chain between use of the vehicle and the injuries. The Colorado Court of Appeal was called upon to resolve issues raised by a “road rage” incident. They needed to decide if the use of a car to block a second car, before the driver exits the first car and assaults persons from the second car, and whether such conduct constitutes use of a motor vehicle for the purposes of uninsured motorist (UM) insurance coverage.

BACKGROUND

Plaintiffs, in Shannon Isenhour’s car, and Richard Terlingen, in his car, exchanged verbal hostilities while driving next to each other. When plaintiffs turned into a McDonald’s parking lot, Terlingen followed. He parked directly behind the plaintiffs’ car, preventing their use of the car to leave. After all three of them exited their vehicles, Terlingen pulled a golf club from the trunk of his car and struck plaintiffs with it, causing injuries.

Terlingen held home, umbrella, and automobile insurance policies with American Family Mutual Insurance Company. American Family obtained a declaratory judgment in federal court that it was not required to cover Terlingen for the injuries that he had caused. The court ruled that the homeowners and umbrella policies expressly excluded coverage for injuries resulting from intentional or criminal acts, and that while the automobile policy covered Terlingen for third-party claims “due to the use of a car,” plaintiffs’ injuries did not result from such use. [Am. Family Mut. Ins. Co. v. Terlingen, 2008 WL 5156425 (D. Colo. No. CIV.08-CV-01273-REB, Dec. 9, 2008)].

Because this judgment rendered Terlingen an uninsured motorist, plaintiffs sought recovery for their injuries through the UM coverage in the Allstate policy covering Isenhour’s vehicle. When Allstate denied coverage, plaintiffs brought this action. The trial court granted Allstate’s motion for summary judgment, holding that plaintiffs’ injuries did not arise from the use of an automobile.

USE OF AN AUTOMOBILE

The Colorado supreme court defined “use of an automobile” for purposes of UM coverage in a fact situation where an assailant kidnapped the insured, drove her in her own car to a remote location, and sexually assaulted her in the vehicle. Her automobile insurer sought a declaratory judgment that its policy did not provide coverage for the injuries arising from the assault. In Colorado there is a two prong test for coverage:

1. The claimant must show that at the time of the “accident,” the vehicle was being used in a manner contemplated by the policy in question and inherent in the nature of the automobile as such. Unless articulated otherwise in the policy, the only use of a non-commercial passenger vehicle that is foreseeable or conceivable at the time of contracting for insurance is use as a means of transportation.
2. There must be a causal connection between the use of the vehicle and the injuries.
1. The claimant must first show that except for the use of the vehicle, the accident or incident in question would never have taken place.
2. To complete and satisfy the causal analysis, the claimant must show that the “use” of the vehicle and the injury are directly related or inextricably linked so that no independent significant act or non-use of the vehicle interrupted the “but for” causal chain between the covered use of the vehicle and the injury.

The Court of Appeal noted that Terlingen’s use of his car failed to satisfy either prong of the test.

First, because Terlingen’s car was a noncommercial passenger vehicle, the car’s only identifiable foreseeable use was for transportation. While Terlingen used the car for transportation during the verbal exchange on the highway and to follow plaintiffs into the McDonald’s lot, parking his car behind plaintiffs’ car to block their driving away was not using the car for transportation and not another use contemplated by the policy.

Second, Terlingen’s battery with a golf club constituted an independent significant act or non-use of the vehicle interrupting the “but for” causal chain between any covered use of the vehicle and the injury.

The Colorado Court of Appeal substantiated its decision by reviewing the decisions of those state courts that have faced the same issue finding that most states conclude that the act of leaving the vehicle and inflicting a battery is an event of independent significance that is too remote, incidental, or tenuous to support a causal connection with the use of the vehicle. The court referred to cases from  Illinois, Alabama, California, New Hampshire, Ohio and others.

UNINSURED MOTORIST STATUTE

Plaintiffs, as a last stretch to find coverage, contended that the Allstate policy is unenforceable to the degree it fails to conform to Colorado’s Uninsured Motorist Statute. Finding no conflict the Court of Appeal recognized that the statute requires automobile liability policies that insure against loss “arising out of the ownership, maintenance, or use of a motor vehicle” to provide supplemental insurance covering such injuries when caused by the operator of an uninsured motor vehicle. [§ 10-4-609(1)(a), C.R.S. 2011]

Neither the statute nor the Allstate policy defines “use,” and plaintiffs do not offer any reason why these provisions are in conflict. Plaintiffs’ disagreement with appellate interpretations of “use of an automobile” does not create a conflict between the statute and the policy, as both are governed by the same case law.

The summary judgment was affirmed.

ZALMA OPINION

Insurance is a contract even when the terms of the contract are mandated by statute. UM coverage is available to an injured person only if injured by an uninsured motorist and if the injury results from the use of an automobile. The word “use” is not defined by the policy or the UM statute for a simple reason, it is a common word whose meaning is clear and unambiguous.

It is sad that the victims of the intentional and vicious battery by Richard Terlingen was not covered by either his insurance or uninsured motorist coverage. Insurance policies do not cover every conceivable event.

Had Terlingen battered the victims on a golf course with no insurance the victims would have been limited to seeking damages directly from Terlingen and his assets. Their suit, and the judgment they will certainly receive, will allow them to take and sell Mr. Terlingen’s automobile, home and earnings for the rest of his life unless he files bankruptcy.

Although it is a maxim of law that for every wrong there is a remedy that does not mean for every wrong there is a remedy that will be paid by an insurers.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

Successful Arson Requires Skill

The California Court of Appeal was asked to reverse a conviction for arson and insurance fraud, both five year felonies, because of what was claimed to be evidentiary errors. After a several week jury trial, Jasen Frank Meyn (Meyn)  was found guilty of three counts relating to a fire which burned his and his then-wife’s home in Napa County. Those three counts were for arson of a structure (Pen. Code, § 451, subd. (c)) and insurance fraud (§ 550, subd. (a)(5)). The trial court sentenced him to a generously short total prison term of four years. Meyn appealed. In The People v. Jasen Frank Meyn, No. A129362 (Cal.App. Dist.1 01/18/2012) the Court of Appeal reviewed the evidence and found it damning.

FACTUAL BACKGROUND

Meyn and Cherise Petker married in November 2005.  At about the same time they married, they bought the house at issue in this case, a house at 116 Ridgecrest Drive, Napa, for about $615,000. All of the cost of the home was covered by a first and second mortgage.

On the afternoon of July 28, 2006, at a time both Meyn and his wife were absent from their home, it started burning and soon became “fully engulfed” by the flames.

Before the fire Meyn read, and recorded in his computer, the following advice:

“Before you try to fake a fire, know how to do it properly. For instance, lots of the new carpeting on the market is now fire retardant, as there are many other sympathetic materials. So rather than start a fire in the middle of the room, start it under an electrical appliance or from a stove burner that has ‘carelessly’ been left on, or some other likely spot.

“Don’t ever use gasoline or other traceable materials to start your fire. Woodgrain alcohol is your best starter because it burns away all traces.”One good fire in an area that will create a lot of smoke from burning materials is preferred. Fire investigators can trace the origin of the fire, and two flames started simultaneously will immediately arouse suspicion.
“Never hang around to watch the fire you set. Police have been known to photograph the crowd; that’s how a lot of pyromaniacs get caught. Don’t let your curiosity get the better of you!”

TESTIMONY AT TRIAL

Four neighbors of Meyn’s home on Ridgecrest Drive testified regarding what they saw before and during the fire. The furniture in the house at the time was “pretty scarce.” At about 1:00 a.m. on July 28, 2006, the day of the fire, a witness saw most of the lights in Meyn’s house on and, the following morning, a truck parked in front of the house.There was activity most of the day of the fire and Meyn was seen going and coming from the house via the front door, and then leaving the house via the garage door and driving away shortly before 5 p.m. In so doing, Meyn manually closed the garage door, and did not use the automatic door opener. About an hour later, Meyn’s house was on fire.

A next-door neighbor of Meyn, heard a loud explosion at about 5:40 p.m. on that day. She went outside on her deck and saw large flames coming out of Meyn’s house. Other neighbors went into the house through a side door and noted that it appeared to be vacant and that the fire was in the entry area of the house. The latter fact appeared to the witness, a professional firefighter with the El Cerrito Fire Department, to be an unusual feature of a fire.

Fire fighters from Cal Fire responded to the 911 call and were able to put part of the fire out, and keep it from spreading to the hillside outside, but not until the center of the house was largely consumed by the fire.

A prosecution witness testified that, in his opinion, the debris he had tested had come in contact with “liquid gasoline.” An expert testified that in his opinion the fire was caused by arson, specifically by ignition from the water heater, leakage from the propane tank in the house, and gasoline poured into the interior of the house. Regarding his own actions on the day of the fire, Meyn told investigators that he had had no problems with the garage door and had, on July 28, exited the garage “by use of the electric door button.” He also specifically denied he had started the fire.

Meyn’s former wife, Cherise, testified and confirmed that she and Meyn purchased the home for $615,000 with 100 percent financing. She testified that their two mortgage payments totaled approximately $4,000 a month, and that, after the purchase, they invested another $70,000 in “home improvements.” Meyn advised his wife that he had adequate assets to pay the two mortgages but, in fact, never paid either after May 2006. Cherise confirmed to him that, because of the 90-day period required before foreclosure, the lender (Washington Mutual) could, effective August 1, 2006, opt to change the locks and take possession of the house.

At some point of time during the winter of 2005-2006, Meyn advised Cherise that there appeared to be a problem with the foundation of their house, specifically that “the stilts had moved forward” which, she said, made him “concerned.” It would, he told her, cost them “somewhere between about $60,000 and $80,000 to fix.”

Meyn also told Cherise that he had lost his grandfather’s Navy watch in the fire, a watch he had always kept near the bed. In fact, however, he had not, and he never told her that he now had the watch (a watch he had told the police he had recovered from a kitchen drawer in the house after the fire). The fire department personnel who responded to the fire had, however, searched for that watch after the fire, but had not found it. It was subsequently found in a console of Meyn’s truck in 2007, during the service of a search warrant at Meyn’s (then) Long Beach apartment. The police officer who found it had been one of the officers who had searched for the watch in the burnt house in 2006, at Meyn’s request.

Two contractors and one structural engineer testified that Meyn had consulted them about the condition of the Napa house in early 2006. One contractor told him that fixing the major foundation problem the house had would cost about $250,000. Another contractor estimated the cost to be over $100,000. The structural engineer testified that he looked at the house and its foundation in May 2006, and told Meyn that it would not be possible to “repair this house because the whole hillside was moving and there was no way to stop it from moving . . . [and] then the house would be subject to a lot of different movements which tend to break it up.”

THE INSURANCE

The house was insured by Farmer’s Insurance, but its policy did not cover earth movement. A Farmer’s executive testified that Meyn reported the claim for the fire to his home the day after the fire. He later filed a written “proof of loss” form. The Farmer’s witness testified that its policy provided coverage of $380,000 for the house itself, plus $285,000 for personal property contents and $190,000 for additional living expenses.

DISCUSSION

The charges against Meyn derived from that fire and involved evidence occurring both before and after it. Trial by jury commenced on April 12, 2010, and concluded on May 5, 2010. On May 11, 2010, after two plus days of deliberation, the jury returned its verdict convicting Meyn of all charged offenses.

There Was No Abuse of Discretion in Admitting the Evidence of Meyn’s “Change of Identity” Query to His Wife or the “Arson” Material Found on His Computer.

Bearing in mind that the first count of the information charging Meyn was for the commission of arson in violation of section 451, subdivision (c), it was surely appropriate for the jury to be told, and to be able to see and hear, a portion of a publication that had been downloaded onto his computer in January 2006 (and revisited 10 days later), and a portion which dealt very specifically with how to commit arson and get away with it.

In summary on the altered appearance issue, the combination of Meyn’s “different identifications” conversation with Cherise on the cruise and the downloaded information about false identifications were clearly relevant to an effort by the prosecution to show that Meyn was attempting (even if arguably ineptly) to disguise his appearance at or around the time he was attempting to commit arson.

ZALMA OPINION

Amateurs should never attempt an arson-for-profit scheme. Mr. Meyn read up on arson, learned what accelerants to use, what evidence to avoid and how to avoid arrest. He left that information in his computer so that the police could find it.

Meyn did everything wrong. He knew his house had little or no value because of earth movement, he had obtained a 100% mortgage in a state where there is a statute that prevents a mortgage holder from suing for the difference between the value of the property and the mortgage, and yet decided to burn the house.

The local police and fire investigators did a thorough job collecting evidence and presenting experts who established how and why the fire happened. Since fire is dangerous, could have spread to a hillside and neighboring properties and could have injured or killed someone, Mr. Meyn is fortunate that he was sentenced to only four years in prison especially since he had good advice on how to get away with arson but decided to not follow the advice.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

IF INSURER FRONTS “SIR” TO SETTLE IT IS A VOLUNTEER

Axis Specialty Insurance Company (“Axis”) sued The Brickman Group Ltd., LLC (“Brickman”), alleging, among other claims, breach of contract for Brickman’s failure to repay funds Axis expended in settling a dispute covered by a liability insurance policy. Brickman counterclaimed, alleging that Axis breached its duties under the policy by failing to contribute to Brickman’s defense in its litigation of the same dispute.

The United States District Court for the Eastern District of Pennsylvania entered judgment in Brickman’s favor as to Axis’s claim, entered judgment in Axis’s favor as to Brickman’s counterclaim, and denied the parties’ motions in all other respects. Both appealed. in Axis Specialty Insurance Company v. the Brickman Group Ltd., LLC, No. Nos. 10-4688/4771 (3d Cir. 01/23/2012) the Third Circuit was asked to determine who, if anyone, owed what amount to whom.

BACKGROUND

A. Facts

In 2006, Deborah Peisel sued Brickman and Home Depot, seeking redress for injuries sustained when she fell in a Home Depot parking lot. Piesel claimed in her suit that Brickman, which had plowed the snow in Home Depot’s  parking lot, caused her injury by inadequately removing the snow.

At the time of Peisel’s accident, Brickman owned two liability insurance policies. The first policy, purchased from ACE American Insurance Company (“ACE”), provided coverage in the amount of $750,000 over a self-insured retention (an “SIR”) of $250,000. The policy did not require ACE to defend Brickman in litigation against it, but did state that ACE had “the right and opportunity to assume from the insured the defense and control of any claim or “suit.”

The second policy, purchased from Axis, provided coverage in the amount of $5 million in excess of what it listed as the $1 million of total coverage provided by the ACE policy. It required Brickman to maintain the ACE policy, but stated that failure to do so would “not invalidate t[he] insurance” Axis provided, which would instead “apply as if the underlying [ACE] insurance were in full effect.” The Axis policy further stated that Axis had a duty to defend Brickman in two circumstances:

We will have the right and duty to defend the insured against “suits” seeking damages for “bodily injury”, “property damage” or “personal and advertising injury” covered by this policy when the “underlying insurance” does not provide such coverage.We will also have the right and duty to defend the insured against “suits” seeking damages for “bodily injury”, “property damage”, “personal and advertising injury” or damages resulting from wrongful acts, errors or omissions arising out of the conduct of your business and covered by this policy, when the limits of insurance of the “underlying insurance” have been exhausted by payment of damages.

On January 23, 2008, after the parties in the Peisel action had just completed non-binding arbitration, Axis was informed by letter from an insurance broker that Axis’s coverage could be implicated in resolving Peisel’s claim. The letter stated that the arbitrator had concluded that Peisel sustained $2 million in pain and suffering damages and lost $172,748 in wages as a result of the accident, for which Brickman was cumulatively apportioned 65% of the liability. It advised, however, that the parties had 30 days to file an appeal, and that Peisel intended to do so inasmuch as she sought a $5 million settlement.

Axis stepped in and negotiated on behalf of Brickman, and ultimately reached a settlement with Peisel for $1.15 million. The settlement was funded by both Axis and ACE, which paid $400,000 and $750,000, respectively. Brickman never paid its $250,000 SIR under the ACE policy and did not contribute any funds to the settlement. Recognizing that Brickman had failed to pay that sum, Axis’s counsel stated at the time the settlement was placed on the record in the Peisel action:

[M]y understanding is that the $750,000 policy limits of [ACE] are available for the settlement, that a $400,000 offer on top of that $750,000 is made upon behalf of Brickman by [Axis] pursuant to its policy of insurance, that there will not be a concern addressed at this time and in this matter regarding the self-insured retention of . Brickman, which is represented to be $250,000, that we will work within our own group here, not as part of this case, and the plaintiff has not to be concerned about it, that the money will be given as set forth, [$]750,000 from [ACE], [$]400,000 from [Axis] on behalf of Brickman.(Emphasis added)

Counsel for Brickman did not object.

On March 5, 2009, Axis ’ lawyer wrote Brickman to “seek the payment of the $250,000.00 ‘retained limit’ which is applicable to the Peisel claim — as set forth in the underlying ACE policy.”

B. Proceedings in the District Court

Brickman never paid Axis that sum, however, and this lawsuit against Brickman followed.   Brickman interposed a counterclaim, alleging that Axis breached its duty to defend Brickman by failing to contribute to its legal expenses in the Peisel action. Upon the parties’ cross motions for summary judgment, the District Court entered judgment in Brickman’s favor as to Axis’s claim against Brickman, and judgment in Axis’s favor as to Brickman’s counterclaim against Axis.

DISCUSSION    

A. Axis’s Appeal

Axis argues that the District Court erred in granting summary judgment in Brickman’s favor on its breach of contract claim.

Under Pennsylvania law, “a plaintiff seeking to proceed with a breach of contract action must establish:

(1)     the existence of a contract, including its essential terms,

(2)     a breach of a duty imposed by the contract, and

(3)     resultant damages.

According to Axis, Brickman breached its contractual duty to pay Axis the $250,000 expended in settling the Peisel suit so as to satisfy its SIR under the ACE policy.

The Third Circuit concluded that the Axis position is fatally flawed. There is, as Axis tacitly acknowledges by urging us to read the Axis policy and the ACE policy as “part of a unitary liability insurance program maintained by Brickman”, no provision in Axis’s policy with Brickman that requires Brickman to pay the first $250,000 of any settlement or otherwise reimburse Axis for the payment it made.

Although the ACE policy does contain an SIR that Brickman was required to pay under that policy, Axis cannot use a duty created by a separate contract, to which it is neither a party nor a third-party beneficiary, to recover in contract against Brickman.

Nor can Axis create the missing contractual duty by relying on the provision that its coverage would “apply as if the ‘underlying [ACE] insurance’ were in full effect” even if Brickman failed to maintain the ACE coverage.  That Axis promised to provide coverage in excess of $1 million regardless of the existence of an underlying policy purportedly insuring Brickman up to that amount does not, and cannot, imply a corresponding, unwritten promise by Brickman to pay Axis back any sum expended above and beyond that which Axis was contractually required to pay.

Because there was no contractual duty in the insurance policy that requires Brickman to pay Axis the $250,000 that Axis expended in settling the Peisel suit, the Third Circuit affirmed the District Court’s judgment in Brickman’s favor on Axis’s contract claim.

Similarly, because the policy language does not support Brickman’s contention that Axis breached its contractual duty to defend, the Third Circuit also affirmed the District Court’s judgment in favor of Axis on Brickman’s counterclaim.

ZALMA OPINIONS

When I was a child I learned that the true meaning of the word “assume” is found by breaking it into its component parts. In this case the insurers and their counsel — anxious to settle a bodily injury claim with serious injuries assumed that the insured would be pleased to pay its self insured retention once the case was resolved. They did not include the repayment requirement in the settlement agreement and there was no language in the Axis policy requiring repayment.

Brickman did not object to the settlement because Axis made it a gift of $250,000 it did not owe. Axis, and its counsel, assumed that Brickman would be honorable rather than stand on the words of the contract of insurance.

This lawsuit and appeal could have been avoided by simply writing a settlement agreement that required Brickman to pay its $250,000 SIR into the settlement pot or its agreement to repay the insurer if the insurer funded the settlement. It could also have been avoided by making the payment of the SIR in the Axis policy.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.“

Barry Zalma on “Who Got Caught?”

“Who Got Caught” with Barry Zalma

 Barry Zalma has joined World Risk and Insurance News with his first program, Who Got Caught. In this first edition of Who Got Caught?, Barry Zalma comments on crime and appropriate punishment in workers compensation fraud. Mr. Zalma, an internationally recognized insurance lawyer, consultant and expert witness, will narrate the new WRIN.tv series, Who Got Caught? Barry Zalma, will focus on the apprehension of perpetrators of all types of insurance fraud…from healthcare and workers comp fraud, to murder for life insurance, arson for profit, and more…

World Risk and Insurance News (WRIN.tv) is the online video-based insurance news network delivering late-breaking and relevant business-to-business information, analysis and forward-thinking programming for the global risk, insurance and financial services industries.

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Insurance Broadcast System has assembled a diverse leadership team and, with backgrounds in video news, new and social media, and the world of risk and insurance, to develop an online, broadcast quality news network that expands on the original vision of IBS.   Meet our visionary Management Team and Board of Directors

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© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

TO LIMIT UIM COVERAGE THE INSURED MUST BE WARNED

Plaintiff Timothy F. Long (Long) appealed from the summary judgment dismissal of his declaratory judgment action seeking underinsured motorist (UIM) coverage under his personal automobile insurance policy, issued by defendant Mercury Insurance Group. In Timothy F. Long v. Mercury Insurance Group, No. A-3238-10T1 (N.J.Super.App.Div. 01/17/2012) summary judgment was entered in favor of the insurer based upon a limiting exclusion.

FACTS

On January 15, 2009, Long, acting in the course of his employment, was operating a vehicle owned and insured by his employer, Admiral Nissan (Admiral), when Maureen Porter failed to stop at a stop sign and crossed into his lane of travel. As a result of the ensuing automobile accident, plaintiff suffered a shoulder injury necessitating surgery.

After notifying defendant and Admiral’s insurance carrier, Long accepted $15,000 to settle his underlying negligence action because it represented the liability limits of Porter’s automobile insurance policy. Long also recovered $20,000 from Admiral’s commercial vehicle insurance carrier. This amount was the difference between the UIM policy limit covering Admiral’s commercial vehicle ($35,000) and the sum tendered by Porter ($15,000). Although Long was not a named insured under Admiral’s commercial insurance policy, he was nevertheless an insured under the policy and entitled to coverage under its UIM provisions.

Long next submitted to Mercury a $65,000 claim as a named insured under the terms of his personal automobile liability policy. The sum sought represented the difference between his $100,000 UIM policy limits less the $35,000 he had received from Porter and Admiral. Mercury denied the claim and declined to submit the matter to arbitration, relying on an exclusion found among the UIM provisions.

Part III of the Mercury policy begins on page twenty-four and addresses UIM and uninsured motorists (UM) coverage. Part III’s “Limits of Liability” provision states: “[t]he amount of coverage is shown on the declarations page[.]” The declaration page details the UIM bodily injury coverage as “$100,000 Each Person, $300,000 Each Accident.”

Exclusion 5 is located on page twenty-eight of the 38 page policy under the section captioned, “When Coverage Does Not Apply[,]” which lists eighteen provisions when “[t]here is no coverage for property damage or bodily injury[.]“

Exclusion 5 states:

When Coverage Does Not Apply

There is no coverage for property damage or bodily injury:

5. For you while occupying a vehicle insured under another policy on which you are an insured.

Long sued Mercury asserting the it wrongfully denied coverage of a valid claim. Mercury successfully moved for summary judgment.

ANALYSIS

The purpose of UIM coverage is to provide as much coverage as an insured is willing to purchase, up to the available limits, against the risk of an underinsured claim.  The legislative mandate, requiring carriers to offer UIM coverage, reveals an “evident perception that in terms of obtaining an adequate recovery from a negligent driver, the victim, especially one sustaining serious injuries, is placed at financial risk not only by uninsured drivers but also by underinsured drivers,” especially those carrying only the minimum statutory liability coverage. Longworth v. Van Houten, 223 N.J. Super. 174, 177 (App. Div. 1988).

Long appealed claiming that the trial judge’s enforcement of Exclusion 5 was error because the provision — shifting recovery to another UIM policy — deviates from the Legislature’s intent. Prior to New Jersey’s legislature’s amendment of the UM statute in 2007 several cases examined commercial insurance contract clauses limiting recovery by stepping it down to the limits under an insured’s personal automobile policy. New Jersey Courts were confident enforcing such exclusions.
The Legislature reacted to the Court’s opinion by adding subsection f to N.J.S.A. 17:28-1.1, known as the “Scutari Amendment.” The amendment provides:

A policy that names a corporate or business entity as a named insured shall be deemed to provide the maximum… underinsured motorist coverage available under the policy to an individual employed by the corporate or business entity, regardless of whether the individual is an additional named insured under that policy or is a named insured or is covered under any other policy providing . . . underinsured motorist coverage. [N.J.S.A. 17:28-1.1f.] (Emphasis added)

The statutory section explicitly rejects the step-down practice  and changed existing law by assuring the expansive coverage of an employer’s automobile liability policy was fully extended to its injured employees.

Exclusion 5 is designed to limit the scope of defendant’s risk attached to the insurance contract by denying additional benefits once an insured is eligible to recover UIM benefits as an insured under another policy. Clearly, the provision differs from the step-down practice proscribed by the 2007 statutory amendment.  It is a limitation on recovery, somewhat the reverse of the prior practice. Long’s demand for coverage under his employer’s commercial vehicle policy was not denied, but was confined to the limits of the employer’s policy precluding benefits for supplemental UIM coverage under his personal automobile policy.

When reading Exclusion 5 with the other policy provisions and UIM statute, the Court of Appeal found an ambiguity exists preventing plaintiff from clearly understanding the significant limitations imposed on the particular UIM coverage he purchased. As a result it interpreted the contract to comport with the reasonable expectations of the insured and found coverage exists.

Exclusion 5 seeks to join UIM coverage to a covered vehicle with a lower limit, rather than the insured who purchased the coverage, thus conflicting with the precise statutory language requiring coverage to be offered “by an insurer to the named insured.”

Exclusion 5 confines plaintiff’s recovery to instances of injury when occupying his own vehicle or a vehicle not subject to UIM coverage. This imposes a major limitation on the principles and goals of the UIM statute and the anticipated scope of UIM coverage.

Other than Exclusion 5, found on page twenty-eight, deep into the thirty-eight page policy, defendant does not identify any alternative notice signaling a major limitation to the anticipated UIM coverage purchased.

An insured’s reasonable expectation when voluntarily purchasing UIM insurance is to obtain insurance covering damages that the insured is entitled to recover from the underinsured tortfeasor, less the amount of the tortfeasor’s coverage.  An insured would not reasonably believe UIM coverage depends on the fortuitous event of which vehicle he occupied.

There is no expectation that additional coverage bought and paid for would be tied to a vehicle and become a nullity simply because the insured occupied a vehicle with a lower UIM coverage limit when injured. Exclusion 5 was found by the Court of Appeal to be a “hidden pitfall” that defeats enforcement of Exclusion 5.

The exclusion, perhaps simply worded, was not prominently presented, despite its importance in circumscribing the availability of UIM coverage. It is the placement of the notice and not its specificity that is the issue. The Court of Appeal also found that Exclusion 5 is ambiguous when compared with other policy provisions addressing the availability of UIM coverage and the Court of Appeal, therefore, reversed the summary judgment and remanded the case back to the trial court.

ZALMA OPINIONS

As soon as the court mentioned the length of the policy Mercury was certain it was in trouble. In fact, the court used the length of the policy and the placement of the exclusion, to find an ambiguity where none existed in the wording of the policy and its exclusion 5.

This case teaches how difficult it is to write an insurance policy that is enforceable in a trial or appellate court. When the policy moves from a standard, as did the Mercury policy, it is prudent for the insurer to brag on the first page and on the declarations page the difference. It should also attach a letter to go with the delivery of the policy that it is different from other UM/UIM policies and provides less indemnity than other policies that cost more may provide. Hiding a clear exclusion in a 38 policy is dangerous because it give an appellate court a weapon to construe the policy against the insurer and in favor of the insured.

Of course, the amendment of the UM/UIM statute had a serious effect on the analysis and it was important for the change to be made clear, open and obvious. Mercury failed to do so and must now suffer the consequences by paying a claim it did not intend to pay when it wrote the policy wording.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

General Release Applied Differently From Limited Release

Frank Caballero (Caballero) signed a release when he left employment with Phoenix American Holdings (Phoenix) after which he filed a six count complaint against Phoenix.  Phoenix obtained a summary judgment and Caballero appealed. In Frank C. Caballero v. Phoenix American Holdings, Inc., et al., No. 3D11-957 (Fla.App. 01/18/2012) the Florida Court of Appeal was asked to determine the viability of the release.

FACTS

Caballero alleged the following counts:

1. retaliatory discharge and violations of the Florida Private Sector Whistleblower’s Act;
2. breach of Compensation Agreement;
3. fraudulent inducement with respect to the Compensation Agreement;
4. unjust enrichment;
5. promissory estoppel; and
6. tortious interference with a business relationship.

Caballero signed a release as part of a termination package between Caballero and his former employer, Phoenix American Warranty Company, Inc.

The releasees include Phoenix American Warranty Company, Inc., and its affiliates, which included those sued unsuccessfully by Caballero. The title of the release, “General Release,” was found to be a misnomer because the release was limited by its terms as follows:

(a) The released claims consist of and are limited to any and all Claims that in any way relate to: (i) employment of [Caballero] with Company, or the termination thereof, or Claims for compensation, bonuses, commissions, lost wages, or unused accrued vacation or sick pay.

Caballero’s first five claims relate to Caballero’s employment, termination, or compensation. The Court of Appeal, therefore, concluded the trial court properly granted summary judgment as to these counts of the third-party complaint.

The tortious interference claim, however, plainly relates to a subsequent employment relationship Caballero had with Road America Motor Club, Inc., which he claimed was terminated by Road America as a direct result of intentional and unjustifiable interference by the Phoenix. Because the allegations in this count are alleged to have occurred after the release was executed and pertain to actions outside of Caballero’s employment with Phoenix American Warranty Company, Inc., the Court of Appeal reversed the final summary judgment for further proceedings on that count only.

ZALMA OPINIONS

Drafting a release should not fall prey to a need for speed. A release provides protection against future involvement with the party granting the release by the party being released. In this case the drafter of the release limited its effect and as a result lost its protection.

Of course it is difficult, if not impossible, to draft a release that will protect against tortious actions happening after the release is executed.  The release was very limited and Caballero — by signing the release — gave Phoenix a sense of security only to open them to the need to defend a suit for tortious interference.

The lesson: take your time and draft as air-tight, broad and unambiguous a release as possible.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

Medicaid Recipients Not Entitled to Double Recovery

Two Medicaid recipients obtained a judgment against a tortfeasor for the death of a child who was a Medicaid recipient who paid for the child’s medical care before she died. Medicaid, through its assignees, asserted a lien against the tort recovery. The plaintiffs insisted they were entitled to keep all of the money and were not required to reimburse Medicaid. In Amy Rathbun et al. v. Health Net of the Northeast, Inc., No. (AC 32712) (Conn.App. 01/24/2012) Amy Rathbun and Tanequa Brayboy (plaintiffs), asked the Connecticut Court of Appeal to resolve a dispute with Medicaid after the trial court granted a motion for summary judgment in favor of the defendant, Health Net of the Northeast, Inc. (Health).

On appeal, plaintiffs, who are Medicaid recipients, contend that the court erred in determining that the Health could assert a claim against the plaintiffs to recover the costs of medical care owed to the plaintiffs by responsible third parties.

FACTS

The following facts were stipulated to by the parties and accepted by the court.

1. Under the Medicaid Act (Medicaid); 42 U.S.C. § 1396 et seq.;
2. Federal financial assistance is provided to states that choose to reimburse the costs of medical care to the economically disadvantaged.
3. States may choose contractors to provide or to arrange for services under the state Medicaid plan, which is known as Medicaid managed care.
4. The state of Connecticut participates in the Medicaid program and has authorized the department of social services (department) to administer the program within the state.
5. The department contracted with the defendant directly.
6. The contract required the defendant to make efforts to determine the legal liability of third parties for health care services provided to Medicaid enrollees, and to “pursue, collect, and retain any monies from third party payers for services to [the defendant's] members under this contract . . . .”
7. Kay’ Anah Brayboy, the daughter of Tanequa Bray-boy, was a member of the defendant’s Medicaid managed care plan.
8. In July 4, 2007, Kay’ Anah was struck by a motor vehicle and subsequently died as a result of her injuries.
9. The defendant paid $13,541.45 for medical treatment affiliated with Kay’ Anah Brayboy’s injuries from the accident.
10. Tanequa Brayboy retained legal counsel to pursue possible tort claims against the driver of the motor vehicle that struck her daughter.
11. Tanequa Brayboy’s counsel was advised that the defendant had a claim for repayment for medical benefits paid on behalf of Kay’ Anah Brayboy in connection with the motor vehicle accident.
12. To date, the defendant has not been reimbursed for the cost of medical care provided to Kay’ Anah Brayboy.

ISSUES

The plaintiffs sought declaratory judgment of the plaintiffs’ rights and obligations to reimburse the defendant pursuant to Connecticut statutes, regulations and contract. Both parties filed motions for summary judgment. The trial court granted the defendant’s motion for summary judgment and denied the plaintiffs’ motion for summary judgment. The trial court also concluded that, under Connecticut law, the defendant, as the assignee of the department, was not required to bring a separate action against the third party tortfeasor to recover the medical expenses expended on behalf of the Medicaid enrollee.

ANALYSIS

The relevant statute, Section 17b-265 (a), provides in relevant part that “[i]n the case of such a recipient who is an enrollee in a care management organization under a Medicaid care management contract with the state or a legally liable relative of such an enrollee, the department shall be subrogated to any right of recovery or indemnification which the enrollee or legally liable relative has against such a private insurer or other third party for the medical costs incurred by the care management organization on behalf of an enrollee.”

In the present case, the department contracted with the defendant to administer the Medicaid managed care program. The department assigned to the defendant “all rights to third party recoveries . . . who may be responsible for payment of medical costs of [the defendant's] members.”

The contract further provided that the defendant was to make every reasonable effort to determine if there was third party liability for medical payments made to the defendant’s members and to pursue, collect, and retain any monies from third party payers for services to the defendant’s members under the contract. The Court of Appeal concluded that, the department, through its contract with the defendant, assigned its statutory right to subrogation under § 17b-265 (b) to the defendant.

THE RIGHT TO SUBROGATION

The primary issue on appeal is whether the defendant may assert its right to subrogation as a basis on which to recover money from the plaintiffs.  In its simplest form, subrogation allows a party who has paid a debt to ‘step into the shoes’ of another to assume his or her legal rights against a third party to prevent that party’s unjust enrichment.  In that way, an insurance company, for example, can be substituted for the insured in an action against a third party tortfeasor. The insured, having been paid by the insurer, in essence, transfers his rights against the tortfeasor to the insurer.  To obtain reimbursement when a third party is liable for a recipient’s medical expenses that the state has paid, the state may pursue those claims against the third party directly pursuant to the assignment and subrogation scheme or, alternatively, indirectly by placing a lien on personal injury judgments or settlements obtained by a medicaid recipient from a liable third party.

The defendant had a statutory right to subrogation, which the plaintiffs affected when they settled or secured judgment with the responsible third parties. Like the statute in Barton, the statute here does not reference the department’s express right to recover from the insured directly under its right to subrogation. Simply because the statute does not reference a direct right to be reimbursed from funds collected by the insured does not mean that such right does not exist. The statute specifically provides that the Medicaid enrollee must make a subrogation assignment to the department or its designee. It would thus be inequitable to allow the insured to bypass the dictates of the statute simply by securing a settlement or judgment and ultimately recovering a double payment.  As such, an insurer who possesses a subrogation right, such as the defendant in this case, has the right to seek reimbursement from the insured if the insured has effected a settlement or judgment with a responsible third party.

ZALMA OPINON

The right of subrogation is an ancient equitable remedy. Medicaid and Medicare are government sponsored programs where the government sponsored programs pay the debts of poor people who cannot afford to pay their own medical bills. The payments are not gifts because the statutory basis for the programs give the government the right to recover from a responsible tortfeasor or to assert a lien against suits filed by the beneficiary.

In this case the beneficiaries of Medicaid’s largess sought to profit by keeping the recovered medical bills and not honoring the lien of Medicaid and its assignees. They failed and the court in Connecticut affirmed the right of the government to recover and, thereby, reduce the full cost of helping the poor.

Medicaid and Medicare are similar to insurance and have the right to subrogate against responsible parties to recover what they paid to help the poor. It is not designed to help the poor profit from injuries.

Barry Zalma, Esq., CFE

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

Judgment for Insurers Against Syrian Government

Several insurers who paid for an airliner after a 1985 highjacking sued state sponsors of terrorism to recover, in subrogation, what they had to pay the owners of the airliner destroyed by terrorists. In Certain Underwriters at Lloyd’s, London, et al. v. Great Socialist People’s Libian Arab Jamahiriya, et al., Civil Action No. 06-cv-731 (JMF) (D.D.C. 2011), Certain Underwriters At Lloyd’s v. Great Socialist People’s Libyan ) Arab Jamahiriya, et al, No. 06-cv-731 (JMF) ,08-cv-504 (D.D.C. 09/02/2011) the United States District Court for the District of the District of Columbia that the insurers are entitled to recover, plus interest, what they paid.

INTRODUCTION

Before me at this time are two actions: Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya, No. 06-CV-731, which was filed on April 4, 2006 (“Certain Underwriters I”), and Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya, No. 08-CV-504, which was filed on March 24, 2008 (“Certain Underwriters II”). The named Libyan defendants were dismissed from each of these actions pursuant to the enactment of the Libya Claims Resolution Act, Pub. L. No. 110-301, 122 Stat. 2999 (2008), but the plaintiffs’ claims remain pending against the following defendants: the Syrian Arab Republic; the Syrian Air Force Intelligence Agency (Idarat al-Mukhabarat al- Jawiyya); and Syria’s Director of Military Intelligence (General Muhammad al-Khuli) (hereinafter collectively the “Syrian defendants” or “Syria”).

SUMMARY OF FINDINGS

These actions seek judgment and an award of damages for acts of state-sponsored terrorism that resulted in the hijacking of EgyptAir Flight 648 on November 23, 1985, while the aircraft was bound for Cairo, Egypt from Athens, Greece, and the complete destruction of the EgyptAir Flight 648 aircraft, insured by the Certain Underwriters plaintiffs, that resulted from that hijacking.

The Court, having heard and reviewed the evidence, does hereby determine (i) that the hijacking of EgyptAir Flight 648 on November 23, 1985 (the “EgyptAir hijacking”) was an act of international terrorism; (ii) that the terrorist shootings of the American victims of the EgyptAir hijacking-Patrick Baker, Jackie Pflug, and Scarlett Rogenkamp-were acts of international terrorism that occurred during and as a result of the November 23, 1985 terrorist hijacking; (iii) the hijacking resulted in the reasonably foreseeable complete destruction of the aircraft owned by EgyptAir and insured by plaintiffs; (iv) that said hijacking was committed by terrorist operatives of the Abu Nidal Organization (“ANO”), which has been designated by the U.S. Department of State as a Foreign Terrorist Organization; (v) that the ANO, at the time of and prior to the EgyptAir hijacking, was sponsored and supported by Syria, which has been designated by the U.S. Department of State as a State Sponsor of Terrorism; and (vi) that the Syrian Arab Republic, the Syrian Air Force Intelligence Agency, Idarat al-Mukhabarat al-Jawiyya, and Syria’s Director of Military Intelligence, General Muhammad al-Khuli, conspired with and provided substantial and material support to the ANO terrorist organization, and that the Syrian defendants caused and are liable for the acts of international terrorism against the plaintiffs and the resultant damages, for which the Court will award damages as set forth below.

The Court further finds that the Syrian defendants provided material support and resources and conspired with the ANO in the planning, training, support for, and commission of the EgyptAir hijacking, and that the lead ANO terrorist operative, Omar Ali Rezaq, was trained and supported by the Syrian defendants. The Court finds that the Syrian defendants intended that their support of the ANO would promote and cause extra-judicial killings of American citizens, as well as necessarily result in the property destruction of the EgyptAir airplane incidental to the goals and objectives of the Syrian defendants and the ANO terrorists. The Court finds that Syria’s actions could not have occurred without the explicit authorization by then-Syrian President Hafiz al-Asad. Accordingly, the Court will enter judgment and grant an award of damages on behalf of the plaintiffs against the Syrian defendants as set forth below.

STATEMENT OF THE CASE

Plaintiffs brought this action pursuant to the provisions of the Foreign Sovereign Immunities Act (“FSIA”), codified at 28 U.S.C. § 1602, et seq. The Syrian defendants were served with process on June 28, 2003. The Syrian defendants have neither answered nor appeared.

A five-day hearing on liability and damages was held, commencing on May 3, 2010.

During the hearing, this Court accepted evidence in the form of, inter alia, live testimony, live video-link testimony, affidavit, de bene esse deposition, and original documentary evidence. The Court also accepted credible expert testimony from eight well-qualified experts on various subjects related to the issues pending before the Court in this matter.

• The Abu Nidal Organization Perpetrated the EgyptAir Flight 648 Hijacking
• Syria Sponsored and Supported the Abu Nidal Organization
• Syria is a State Sponsor of Terrorism
• The Total Destruction of the EgyptAir Aircraft was Reasonably Foreseeable Losses Sustained by Certain Underwriters, et al.

CONCLUSIONS OF LAW

In 2008, the National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, § 1083, 122 Stat. 3, 338-344 (2008) (hereinafter “2008 NDAA”) revised the FSIA framework under which state-sponsored terrorism cases may be brought by substituting 28 U.S.C § 1605A in place of 28 U.S.C. § 1605(a)(7). Perhaps most important, it furnished a cause of action against state sponsors of terrorism, while the earlier law, § 1605(a)(7), could only be used as a “pass-through” for plaintiffs seeking to bring suit in federal court against foreign sovereigns for terrorism-related claims; the claims themselves had to be based in state law. Murphy v. Islamic Republic of Iran, 740 F. Supp. 2d 51, 56 (D.D.C. 2010).

Service under the FSIA is governed by 28 U.S.C. § 1608. Subsection (a) governs service upon a foreign state or political subdivision of a foreign state, while subsection (b) provides for service upon an agency or instrumentality of a foreign state. In determining whether a foreign entity is to be treated as the state itself or as an agency or instrumentality, courts employ the “core functions” test as it was set out in Roeder v. Islamic Republic of Iran, 333 F.3d 228 (D.C. Cir. 2003). Id. at 234. The approach is categorical: if the core functions of the entity are governmental, it is considered to be the foreign state itself. Id. If its core functions are commercial, then it is an agency or instrumentality of the foreign state. Id.
Jurisdiction and Standing

The FSIA provides “the sole basis for obtaining jurisdiction over a foreign state” in United States courts. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 (1989). One of the enumerated exceptions to the FSIA is 28 U.S.C. § 1605A, the state-sponsored terrorism exception to sovereign immunity. Under § 1605A, a foreign state that is or was a state sponsor of terrorism shall be liable to a United States citizen for personal injury or death. 28 U.S.C. § 1605A(c). In such an action, a foreign state is vicariously liable for the acts of its officials. Id. Additional damages, including property damages, are available under § 1605A(d): “After an action has been brought under subsection (c), actions may also be brought for reasonably foreseeable property loss, whether insured or uninsured, third party liability, and loss claims under life and property insurance policies, by reason of the same acts on which the action under subsection (c) is based.” 28 U.S.C. § 1605(d). Under the language of the statute, once a party with valid standing has brought an action under § 1605A(c), it is unnecessary for a party filing suit under § 1605A(d) to establish standing separately; standing under § 1605A(d) is derivative of that under § 1605A(c). Furthermore, the legislative history of § 1605A(d) contains a specific reference to the case at hand:

Personal Jurisdiction

As noted above, the FSIA establishes requirements for proper service upon a foreign state in 28 U.S.C. § 1608; plaintiffs properly served Syria under § 1608(a)(3). Supra at V.B. Furthermore, having determined that Syria, as a foreign state, is the only defendant against whom an action may properly be maintained (id.), there is no issue of due process under the Fifth Amendment, as “foreign states are not ‘persons’ protected by the Fifth Amendment.” Valore, 700 F. Supp. 2d at 70 (quoting Price v. Socialist People’s Libyan Arab Jamahiriya, 294 F.3d 82, 96 (D.C. Cir. 2002)). Finally, “customary international law,” which may call for a “minimum-contacts-like test” is inapplicable in these circumstances. Valore, 700 F. Supp. 2d at 72. The Court has personal jurisdiction over Syria in this case.

Legal Standard for FSIA Default Judgment

Under the FSIA, a default judgment may only be entered if “the claimant establishes his claim or right to relief by evidence satisfactory to the court.” 28 U.S.C. § 1608(e). All uncontroverted evidence is accepted as true. Id. See also Campuzano v. Islamic Republic of Iran, 281 F. Supp. 2d 258, 268 (D.D.C. 2003) (the “satisfactory to the court” standard is identical to the standard for entry of default judgments against the United States in Federal Rule of Civil Procedure 55(e)). In light of defendants’ failure to object or enter an appearance to contest the matters in this case, the Court accepts the uncontested evidence and sworn testimony submitted by plaintiffs as true.

Liability

The basis of Syria’s liability is its provision of material support and resources to the ANO. The FSIA explicitly provides that “a foreign state shall be vicariously liable for the acts of its officials, employees, or agents.”

I find that the total destruction of the aircraft was reasonably foreseeable, given Syria’s sponsorship of a notoriously violent terrorist organization to conduct a mid-air hijacking. Syria is liable for the total destruction of the EgyptAir aircraft, along with the associated costs related to the destroyed aircraft, including charges for storage by the government of Malta, solicitors’ fees for work performed in relation to the destruction of the aircraft, and costs for the claims survey process under which damage was assessed and payments distributed under the applicable policy.

Property Damage

The evidence in this case establishes that the aircraft was declared to be a constructive total loss under the applicable policy as a result of the damage sustained during the hijacking. The total recoverable loss is $11,043,660.83.

Prejudgment Interest

It is within the Court’s discretion to award plaintiffs prejudgment interest from the date of the attack on November 23, 1985, until the date of final judgment. Plaintiffs sustained injuries in the form of total destruction of the aircraft, for which they reimbursed EgyptAir. The Court will award plaintiffs prejudgment interest on their actual property damage, minus salvage recovery, which equals $10,542,967. Interest will be computed at a rate of 7.03% per annum from November 23, 1985 to the present.

CONCLUSION

For the foregoing reasons, final judgments will be entered against defendants by way of a separate Judgment Order in the amounts set forth above, plus any applicable post-judgment interest allowed by law. Furthermore, the case at No. 08-CV-504, Certain Underwriters at Lloyd’s London v. Great Socialist People’s Libyan Arab Jamahiriya (“Certain Underwriters II”), will be dismissed with prejudice.

ZALMA OPINION

I look forward to the insurer’s efforts to collect on this judgment which can be enforced upon any assets of the government of Syria that may reside in the United States. I hope this victory against those who would support terrorists will think twice when their money they though safely placed in U.S. banks disappears into the accounts of the insurers.

Further suits against state supporters of terrorism may be seeing many more similar suits that will take the profit out of terrorism.

Insurers have the assets to fight this type of case and should file as many as the insurer finds sufficiently large to justify the litigation. Aircraft, ships, and buildings paid for by insurers should be reimbursed by similar litigation against state supporters of terrorism.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

IGNORANCE IS CURABLE

STUPID IS FOREVER

The Texas Court of Appeal was called upon to deal with a workers’ compensation claim and suit brought by a party who filed pro se (acting as his own lawyer) in McClennon Cook v. Robin M. Mountain and Texas Department of Insurance, Division of Worker’s Compensation, No. 02-10-00465-CV (Tex.App. Dist.2 01/12/2012).  Although Mr. Cook may have been injured on the job the workers’ compensation panel found he was not injured. He filed suit and an appeal to get the benefits without the assistance of counsel.

Proving the maxim in the title correct, Cook lost his right to gain the benefits available under the Texas Workers’ Compensation law because he insisted on suing the wrong party even after he was advised of his error and given the opportunity to file against the correct party in a timely fashion.

INTRODUCTION

Appellant McClennon Cook, representing himself, appealed the dismissal of his claims related to an on-the-job injury. His first four issues address the sufficiency of evidence presented in the administrative hearing on his worker’s compensation claim, and the fifth addresses the dismissal by the trial court of his suit for want of prosecution.

DISCUSSION

On May 15, 2009, the appeals panel of the Department of Insurance, Division of Worker’s Compensation (the Division) filed its decision upholding the hearing officer’s decision and order denying Cook’s August 4, 2006 worker’s compensation claim.

On August 7, 2009, Cook filed a petition for writ of mandamus against “Robin M. Mountain et al Greyhound Line Inc.,” asking the trial court to compel the parties to respond and asserting that on June 5, 2009, he filed his original petition in the trial court regarding the appeals panel decision. Cook specifically complained that “opposing party Robin M. Mountain has failed to file any response in this cause of action,” and he asked that mandamus relief be granted to compel Mountain to answer.

Cook attached a copy of the hearing officer’s decision and order to one of his appellate filings. Under the order finding that the insurance company was not liable for benefits, the document contains the following information:

The true corporate name of the insurance carrier is ACE AMERICAN INSURANCE COMPANY and the name and address of its registered agent for service of process is ROBIN M. MOUNTAIN 6600 CAMPUS CIRCLE DRIVE EAST, SUITE 300 IRVING, TEXAS 75063.

Referencing the same document, Mountain argues that he is not a proper party to the underlying district court litigation or this appeal. Cook states the following in his reply to Mountain’s argument: “Appellant Cook asserts that the DWC Decision and Order Page-(4) of the order designates the true corporate name of the insurance carrier is Ace American Insurance Company and the name of it’s [sic] Registered Agent for service of process is Robin M. Mountain.” Cook argued that Mountain, simply a person available to accept service for Ace, is the proper party to this suit.

The Court of Appeal made clear that Mountain is merely the registered agent listed for the proper party-the insurance company. Cook did not sue the insurance company in this lawsuit.

Texas Labor code section 406.031 states that “[a]n insurance carrier is liable for compensation for an employee’s injury” if at the time of the injury, the employee is subject to “this subtitle”.  The employee and the insurance carrier are the only parties with an interest in the outcome of litigation following the exhaustion of administrative remedies in a worker’s compensation case. The Court of Appeal concluded that as in regular tort litigation, a claimant under the worker’s compensation system must correctly name the opposing party or parties in his district court litigation, and his time limit for filing suit continues to run until such time as the proper parties are joined.

Cook did not sue the insurance company in the trial court. Further, the applicable version of labor code section 410.252(a) sets out that Cook’s filing deadline to seek judicial review of the appeals panel decision was “not later than the 40th day after the date on which the decision of the appeals panel was filed with the division.”  The filing deadline under Texas statutes is mandatory and jurisdictional. When a plaintiff fails to name the proper party within the statutory time limit, the court has no option but to dismiss the employee’s suit.

Cook had only until June 24, 2009 to file suit against the insurance carrier. Cook allegedly filed his original petition in the trial court against Mountain and Greyhound Line Inc. on June 5, 2009, and he filed his petition for writ of mandamus regarding these parties on August 7, 2009.

Because Cook failed to sue the proper party: Ace American Insurance Company within the allotted time period the Court of Appeal concluded that dismissal of his suit was mandatory and proper.

ZALMA OPINION

Mr. Cook was obviously not a lawyer. He allowed emotion and lack of knowledge to

destroy his case. He not only had an idiot for a client he had an incompetent lawyer.

Courts, as did the trial court in this case, bend over backward to help a non-lawyer in litigation. They issued an order telling him who to sue and how to deliver service. Even with this assistance Cook went his own way. He gave the insurer rope to hang him, put it around his own neck, threw the rope over a tree and hung himself.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published four new E-Books: “Zalma on Diminution of Value Damages – 2012,” “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011” now available.

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Zalma on Diminution of Value Damages — 2012

(c) 2012 by Barry Zalma & ClaimSchool, Inc.

This is the 2012 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more than 240 pages of new cases and statutes. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2012 was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property has been repaired. It will assist you in answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It will allow you to find the answer in the appropriate jurisdiction if the proper measure of damage:

• Is it cost of repair?
• Is it the difference between fair market value before and fair market value after it is damaged?
• Is it the cost of repair plus stigma damages?
• Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged?
• Is it something in the middle?

The subject of diminution of value damages caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay the cost of repair. It also caused concern to appraisers, adjusters, lawyers and every person who incurred property damage. The methodology used to establish true indemnity is different in each decision. The application of which measure of damages is to be used is different from state to state and from U.S. District Court of Appeal to District Court of Appeal.

Because of the differences in the various jurisdiction and apparent confusion concerning diminution of value damages this E-Book was created to more thoroughly review how each jurisdiction in the United States deals with the issue. The E-book covers each of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court.

Zalma on Diminution of Value Damages – 2012 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and tries to deal with the issue of establishing the amount of loss to property in each jurisdiction.

Since this is an update of the 2010 E-book, Zalma on Diminution in Value Damages some of the original information remains the 2012 version is, in effect, a new book.

The E-book covers in detail how each of the jurisdictions deal with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, or their insurers, to determine how to calculate what they must pay to those whose property is damaged by their actions.

Mr. Zalma also has written other e-books available at Zalma Books.

DELIBERATELY SETTING FIRE IS EXCLUDED

As I have said many times before insurance is a contract where an insurer agrees to indemnify the persons insured against contingent or unknown events. When one deliberately sets fire to a house, pleads guilty to the crime of arson, and then claims a right to recover under the policy of insurance that insured against the risk of loss by fire, is doomed to fail. In Barbara A. Lachman, et al. v. Farmers Insurance of Columbus, 2012 -Ohio- 85. (Ohio App. Dist.8 01/12/2012) the Ohio Court of Appeal was asked to compel the insurer to provide indemnity for the destruction of the house and to defend the arsonist from a suit brought by a neighbor whose house was also damaged by the same fire.

FACTS

Barbara A. Lachman, Craig Lachman, Victoria Greenleaf, and Christopher Hanczrik (Appellants) appeal from the decision of the trial court granting summary judgment in favor of Farmers Insurance of Columbus. The Appellants claimed that the trial court erred in determining that the intentional act exclusion applied, that they were not entitled to a defense on a subrogation claim, and that Greenleaf and Hanczrik were not covered insureds under the policy.

Barbara Lachman deliberately set a fire on March 24, 2009 to the home in which she lived with her husband, Craig, located in Lakewood, Ohio. On that evening, Barbara admittedly set fire to the comforter located in the master bedroom on the second floor of the residence. She did so in what Appellants characterize as a misguided attempt to have her husband become a hero by extinguishing the fire before any damage beyond the loss of the comforter occurred. Barbara used a cigarette lighter to ignite the blaze and then called to her husband to get a fire extinguisher. Craig did bring a fire extinguisher to the bedroom but was unable to extinguish the fire, which rapidly spread to other flammable objects and went out of control. Both Barbara and Craig fled the residence as the fire spread.

Although Barbara initially told investigating authorities that she was smoking in bed at the time of the fire, she later admitted deliberately setting the fire. The fire caused a total loss to the structure as well as to most of the contents contained therein. Additionally, the fire spread to the home next door causing damage to the exterior of that residence.

The Lachman’s residence was originally owned by Judith Hanczrik, the mother of Barbara, and her siblings, Victoria Greenleaf and Christopher Hanczrik. At the time of her passing in 2003, Judith Hanczrik’s estate passed to her three children in equal shares, leaving each adult child with a one-third interest in fee simple. From 2003 onward, both Barbara and Craig lived in the residence. Neither Victoria nor Christopher lived in the residence from 2003. Although Judith Hanczrik died in 2003, Barbara and her siblings continued to pay the premiums on the Farmer’s Insurance of Columbus homeowner’s policy, which remained in Judith Hanczrik’s name.

Subsequent to the fire, appellants filed an insurance claim seeking insurance proceeds for damage to the property as well as proceeds for lost personal property, contents, and living expenses. Farmers Insurance denied Appellants’ claim. Specifically, Farmers Insurance determine that because neither Victoria nor Christopher were permanent residents of the property, they were not insured under the policy. Additionally, as it related to Barbara’s claim for insurance proceeds, Farmers determined the following:

Your claim for coverage for damage to the dwelling and personal property located at 1570 Woodward Avenue, Lakewood, OH 44107 is denied because the fire was intentionally set by Barbara Lachman, an insured under the policy.

In particular, Farmers Insurance of Columbus determined that the Intentional Acts exclusion provision of the policy applied to bar Barbara’s claims for proceeds. The intentional acts exclusion provides as follows: “If any insured directly causes or arranges for a loss to covered property in order to obtain insurance benefits, this policy is void. We will not pay you or any other insured for this loss.”

THE LITIGATION

On June 17, 2010, appellants filed the instant complaint for declaratory judgment, seeking to recover policy proceeds and coverage for damages resulting from the fire as well as defense coverage for property damage sustained by the neighbor’s house. Farmers responded and then filed a motion for summary judgment that the trial court granted.

The trial court found that Victoria Greenleaf and Christopher Hanczrik were not entitled to coverage because they were not insureds under the insurance policy. Additionally, the court determined that Barbara and Craig Lachman were not entitled to coverage because Barbara’s conduct in setting the fire fell under the intentional act exclusion of the policy pursuant to the doctrine of transferred intent.

The trial court concluded as a matter of law that the act of a person setting fire to a comforter inside a bedroom, failing to take the proper precautions to prevent the fire from spreading is intrinsically tied with the resulting fire damage. Fire by its very nature is harmful, destructive, and extremely difficult to control. Lastly, the court determined that Farmers did not owe Barbara a defense or indemnification in connection with Westfield’s subrogation claim because her actions were: (1) excluded under the policy and (2) reasonably foreseeable to cause damage to the neighbor’s property.

THE APPEAL

Farmers also cited the Statement Under Oath of Barbara Lachman where she admitted to deliberately setting fire to the comforter in her bedroom. In particular, Barbara stated as follows:

And so I decided that I would make a symbolic gesture to kind of rally the troops, and so I thought what I would do is start a controlled fire and that we would put the fire out and then say, well, you know, come on, you know, things looked bad for a moment, we got that under control, we can, we can do this. So, but it got out of control more quickly than I had assumed, and my husband brought a fire extinguisher up to me, ran back down to get another fire extinguisher. By the time he came up with the second fire extinguisher, they, the room had gone up, and so we just got ourselves and the dogs out of the house.

Barbara further admitted that she had been drinking that evening and that she got the idea to start the fire to raise her husband’s spirits. Lastly, Farmers Insurance advised the court about Barbara’s two convictions for arson in connection with her actions on March 24, 2009. Specifically, Barbara pleaded guilty to two counts of arson thereby admitting that there was evidence beyond a reasonable doubt that the Barbara intentionally set fire to the house.

ANALYSIS

An insurance policy’s intentional act exclusion applies when the intentional act of an insured and the resulting harm are intrinsically tied together. Limiting the scope of the doctrine is appropriate because the rule is needed only in a narrow range of cases – those in which the insured’s testimony on harmful intent is irrelevant because the intentional act could not have been done without causing harm. Thus, an insured’s intent to cause injury or damage may be inferred only when that harm is intrinsically tied to the act of the insured.

The Court of Appeal concluded that the obvious was true, there is no other conclusion the court could reach. The intentional act of setting fire to a comforter can only result in harm. Whether Barbara intended the fire to spread to the remainder of the home is irrelevant; the damage caused by a fire cannot be separated from the act of intentionally setting that fire. Additionally, Barbara’s claim that she did not set the fire in order to recoup insurance proceeds is misplaced because insurance proceeds are exactly what the lawsuit and appeal sought. Fire by its very nature is harmful, destructive, and extremely difficult to control. Therefore, the Court of Appeal concluded that no one, including the Appellants, should be rewarded for partaking in an inherently dangerous activity.

The doctrine of inferred intent equally applies to the damage suffered by the neighbor. Barbara’s act of setting fire to her home cannot be separated from the damage suffered not only to her home, but to the residence of the neighbor. Barbara’s claim that she did not intend the resulting damage simply does not matter in this case. The act is intrinsically tied with the harm.

The plain language of the insurance policy precludes Farmers Insurance from providing a defense or indemnification in instances of intentional acts where the results are reasonably foreseeable. Appellants have failed to raise any set of facts where Farmers Insurance would owe Barbara a defense or indemnification and, as such, they have failed to raise a genuine issue of material fact to preclude the grant of summary judgment.

Victoria and Christopher offer no evidence that they attempted to modify the insurance policy to include themselves as named insureds, nor do they attempt to argue that they were permanent residents of the property. In the absence of such evidence, Appellants have failed to set forth any genuine issue of material fact to preclude the grant of summary judgment. The policy language is clear, and under that language, neither Victoria nor Christopher can be considered named insureds.

ZALMA OPINION

I am amazed that the court found there were reasonable grounds for this appeal. The insured intentionally set fire to the house. Her excuses and claims of true intent were defeated by her pleas of guilty to arson. She intentionally cause the fire beyond a reasonable doubt and allowing her or her husband to recover indemnity as a result of her acts would be unconscionable.

Her innocent syblings lost because they ignored their rights when their mother died. Insurance is a contract of personal indemnity and does not follow the title to the land. They each could have purchased a separate policy of insurance on the house based upon their obvious insurable interest or could have requested that the name of the insured be changed to include all of the owners as insureds, an act that could have been easily accomplished.

In California and some states an innocent spouse can recover his or her share of a loss regardless of the intentional act exclusion that in this case dealt with “any insured”.  For example, in Watts v. Farmers Insurance Exchange, 98 Cal.App.4th 1246, 120 Cal.Rptr.2d 694 (Cal.App. Dist.2 06/05/2002) found that the acts of the criminal spouse cannot be imputed to the innocent spouse. Interestingly, when the case was sent back to trial it was found that the “innocent spouse” was also intentionally involved in the fraud and the Watts’ recovered nothing.

Also, whenever the statutory clause limiting the insurer’s liability in case of fraud by the insured is used in Delaware it will be read to bar only the claim of an insured who has committed the fraud and will not be read to bar the claim of any insured under the policy who is innocent of fraud [Steigler v. Insurance Co. of North America (Del. 1978) 384 A.2d 398, 402].

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

INVITED ERROR

The California Court of Appeal was called upon to resolve an issue relating to what it called “the esoteric subject of reinsurance.” Rather than resolving the “esoteric” issue the California Court of Appeal, in Transport Insurance Company v. TIG Insurance Company et al, No. A122573 (Cal.App. Dist.1 01/13/2012) it decided the case on the doctrine of “invited error” rather than on what the parties desired, by determining the “esoteric” issues of accrual of a claim against a reinsurer and the commencement of the running of a statute of limitation.

INVITED ERROR

Under the doctrine of invited error, when a party by its own conduct induces the commission of error, it may not claim on appeal that the judgment should be reversed because of that error.

It has been said that the invited error doctrine applies with particular force in the area of jury instructions. The instruction was the subject of lengthy argument below, ten pages to be exact.

The invited error doctrine should not apply when a party, while making the appropriate objections, acquiesces in a judicial determination. An attorney who submits to the authority of an erroneous, adverse ruling after making appropriate objections or motions, does not waive the error in the ruling by proceeding in accordance therewith and endeavoring to make the best of a bad situation for which he was not responsible.

FACTUAL BACKGROUND

Appellant Transport Insurance Company (Transport) insured Aerojet-General Corporation (Aerojet) under a liability policy issued in 1973, and that same year entered into the three reinsurance contracts pertinent to the litigation. Numerous suits were brought against Aerojet, and as early as 1980 it began submitting claims for property damage to Transport, which it denied based on a policy exclusion. Notwithstanding that denial, Transport began paying some investigative expenses, and began to submit claims to the reinsurers. A December 1997 decision by the California Supreme Court held that site investigative expenses could be covered, and in late 1999 Transport finalized a settlement with Aerojet, agreeing to pay $26.6 million. Transport claimed that over $12 million of this was the responsibility of the reinsurers, and in December 1999 submitted its billing and final proof of loss to them.

Years went by without resolution. In 2006 Transport filed separate lawsuits against each reinsurer. The suits were consolidated. Following an 17-day trial, the jury quickly answered “No” to special verdict questions whether the lawsuits were timely filed, and judgment was entered against Transport.

Transport appealed. The appeal that has generated over 8,000 pages of appendices, 35 volumes of reporter’s transcripts, and 425 pages of well-written briefing, including a 180-page appellant’s reply brief. Transport told the Court of Appeal the case presented two issues of first impression in California, issues “that when decided by this court, will have an impact far beyond the confines of the specific dispute in this case. . . . [T]his court’s opinion is likely to become the lead authority on issues involving the statute of limitations in reinsurance claims, not only in California, but possibly throughout the nation.”

The Insurance Contracts

In July 1973, Transport’s predecessor, Transport Indemnity Company, issued to Aerojet a blanket excess liability insurance policy, providing coverage from July 15, 1973 to July 15, 1976. Following issuance of the policy to Aerojet, Transport entered into three contracts of reinsurance, the contracts pertinent to the appeal. The reinsurance contracts were with TIG and Seaton.

Reinsurance contracts are classified as either “facultative” or “treaty.” Reinsurance is facultative if it covers the reinsured’s risk on an individual policy. The majority of reinsurance contracts are placed under a treaty, which covers the reinsured’s risk for an entire class of policies. Under pro-rata reinsurance, the reinsurer assumes a specified percentage of the risk (and premiums) associated with the particular percentage of the risk (and premiums) associated with the particular policy or class of policies covered.  Under excess-of-loss reinsurance, the reinsurer pays losses only after they exceed a specified amount (the “retention”).

The classification of coverage as “pro rata” or “excess of loss” was germane to some of the issues between Transport and the reinsurers, and the subject of much testimony at trial. One provision in each of the reinsurance contracts is germane, however: when loss was to be paid. As to this, the TIG contracts stated that “Payment of its proportion of loss and expense paid by [Transport] will be made by [TIG] to [Transport] promptly following receipt of proof of loss.” The Seaton contract stated that “[p]ayment of [Seaton's] proportion of loss and expense incurred by [Transport] will be made to [Transport] promptly upon receipt and approval by [Seaton] of proof of loss in form satisfactory to [Seaton].”

REINSURANCE

Reinsurance is defined in Insurance Code section 620: “A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.” Reinsurance is a contract by which one insurer transfers to another insurer all or part of the risk it has assumed under a separate policy or group of policies in exchange for a portion of the premium.

In essence, reinsurance is insurance for insurance companies. Reinsurance provides insurers with the ability to spread the risk they have assumed, thereby preventing any one insurer from suffering a catastrophic loss. The insurer obtaining the reinsurance is called the “ceding insurer.”

One aspect of reinsurance that distinguishes it from other insurance is that reinsurance contracts have no limitation provision, no reference to when suit has to be brought on the reinsurance contract.  Among the other distinguishing attributes of reinsurance are the sophistication and expertise of the reinsured which are themselves insurance companies. Another is that the reinsurer does not itself investigate or adjust claims, but relies on the ceding insurer to do that.

Some case law even refers to reinsurers and their cedents as “partners” rather than adversaries. All issues between reinsureds and reinsurers are fair game, including statutes of limitations. However, because custom and usage have established a gentility and unity of interest between the reinsured and its reinsurer a generation ago the courts have doubted that the defendants would even have considered asserting a statute of limitations defense until the collapse of prominent British reinsurers, and the financial distress of Lloyd’s of London before the turn of the century times may have changed.

THE CLAIMS

Aerojet’s primary business was the development and production of missile and rocket motors for NASA and the armed forces. Aerojet was sued in a number of actions alleging damages caused by toxic contamination of groundwater involving pollution at Aerojet sites in Rancho Cordova and Azusa, California, and began submitting claims to Transport as early as 1980, including for both loss and expense. Following long and tortuous litigation through the lower courts the California Supreme Court held that while Transport had no duty to pay Aerojet’s losses at Rancho Cordova, if certain criteria were met site investigation expenses might constitute defense costs covered under the policy. In September 1999 Aerojet and Transport entered into a settlement by which Transport agreed to pay $26,655,000 in exchange for a release of all claims under the Aerojet policy, including for both Rancho Cordova and Azusa. The settlement agreement did not allocate the amount between loss and expense, or between Rancho Cordova or Azusa.

According to Transport’s brief, with this settlement “the reinsurers’ contractual obligation to pay for their proportionate share of the Aerojet claims arose.” And “[b]y letter dated December 20, 1999, Transport submitted its final billing in the Aerojet matter to TIG, seeking the full amount of its reinsurance claim, a total of $6,608,039. [Citation.] This was sent on Transport’s behalf by Vito Peraino . . . . Peraino sent the letter to William Pascale, TIG’s manager of assumed reinsurance claims. [Citation.] The letter stated: [¶] We have finalized our billings, having assembled all prior payments, and enclose our billing to you for this matter. As this matter was rather complex and carries with it a bit of history, we would like the opportunity to meet with you to present our claim, and to answer any questions you might have.”

Much of the testimony at trial focused on the numerous communications between Transport and the reinsurers that ensued, and hundreds of exhibits were introduced. Similarly, much of the parties’ briefing sets out these communications in great detail.

Following the September 1999 settlement with Aerojet, Transport brought in a third law firm, Luce Forward, Hamilton & Scripps (Luce Forward), to allocate the settlement between the Aerojet sites and between loss and expense, in order to bill the reinsurers. Some issues arose as to just how to apportion, and one attorney at Luce Forward told Transport that “it is unlikely that anyone is just going to write a check” regarding the proposed allocation, and another that his “expectation was that the matter was likely to go to litigation at the end of the day.” They also warned Transport regarding the statute of limitations.

It was not until many years later that Transport filed any lawsuit.

TRANSPORT’S LAWSUITS

On January 26, 2006, Transport filed a complaint against TIG, followed four days later by a complaint against Seaton. Both complaints alleged two causes of action, for declaratory relief and breach of contract, based on the respective reinsurer’s failure to pay its proportionate share of the Aerojet settlement.

TIG filed its answer on March 7, 2006, Seaton on April 10. Both asserted the affirmative defense that Transport’s claims were barred by the four-year statute of limitations applicable to breach of contract claims.

THE TRIAL

The case proceeded to a jury trial, which began on May 12, 2008. The parties had submitted trial briefs, and as to the statute of limitations issue. Continental Casualty Co. v. Stronghold Insurance Co. 77 F.3d 16 held that the statute of limitations does not start to accrue until the reinsurance claim is denied. In passing discussion, the Stronghold court also noted that an alternative time would be a reasonable time following submission of the final proofs of loss if the reinsurer did not act upon the final proofs.

The jury instruction ultimately given on the statute of limitations was as follows: “Affirmative defense statute of limitations. [¶] In this case, Transport’s claims against the defendant accrued after Transport submitted its claims to defendants and when, one, defendants denied the claims, or, two, a reasonable period of time elapsed after the submission of the claims without a decision by the defendants. [¶] If Seaton either denied the claims or a reasonable period of time elapsed following submission of the claims by January 30, 2002, Transport’s claims against Seaton were filed too late and are time barred. [¶] If TIG either denied the claims or a reasonable period of time elapsed following submission of the claims by January 26, 2002, Transport’s claims against TIG were filed too late and are time barred.”

ANALYSIS

Transport Agreed to the Statute of Limitations Instruction. It arose in the context of, as Judge Woolard described it, “Jury Instructions Disputed by Transport,” and specifically in Transport’s argument that TIG had “agreed” to a different instruction than the one it proposed. The claimed “agreed” to instruction was the one to which Transport and Seaton had agreed: the instruction Transport complained of on appeal.

If It Did Not Propose It, and Any Claim That It Was Erroneous Is Barred By the Invited Error Doctrine

Transport’s first argument is that the trial court’s instructions regarding the statute of limitations was prejudicially erroneous because it contained an incorrect statement of law regarding accrual and utterly failed to address tolling.

However, in this case, Transport agreed to – if it did not propose – the language in the instruction. It did not object, let alone “strenuously.”

Judge Woolard herself said that she “wonder[ed] if I misspoke in my writing of these orders.” As also noted, counsel for Transport said nothing in response, which is perhaps not surprising, as Transport was pushing strongly for the instruction. Transport fought tooth and nail to keep Judge Woolard from giving TIG’s proposed instruction, an instruction that, as described at oral argument, was “worse for Transport.” Put otherwise, Transport made a strategic reason to vigorously argue for the instruction Judge Woolard gave, especially as there had to be some instruction on the subject – as Transport expressly admits.

Transport cited cases concerning tolling only in its summary adjudication papers. It never proposed a jury instruction based on equitable tolling or one even mentioning the leading case on the subject.

Finding that the issues of “accrual” and “tolling” are fact specific Transport expressly admitted that the law supports a finding of equitable tolling is a question of fact for the jury (or trial court) to decide on remand. Equitable tolling is a fact intensive issue and it is determined based upon evidence.

Moreover Transport’s lawyers had advised it that the statute of limitations might be a factor, a fact that militates against a claim of estoppel.

Transport failed to point to any evidence that it reasonably relied on conduct of either reinsurer in deciding not to sue. Its sloth resulted in a loss of the right to collect on its reinsurance contract with the defendants.

ZALMA OPINION

This case, from its beginning, was a comedy of errors. The reinsured simply sat on its rights and, rather than deal with the issue before it, wrote hundreds of letters and had its insurers write more demanding payment over a period of multiple years. What it failed to do was listen to its lawyers who advised it to sue the reinsurers because of counsel’s concern that all would be lost by the running of the statute of limitations.

By the time the reinsured got around to filing suit every possible statute of limitations had run. It hired exceptionally professional and proficient lawyers who spent hundreds of hours, destroyed dozens of trees in preparing documents for trial and appeal, all of which was thrown away by proposing a jury instruction that resulted in a prompt, deafening, and obvious ruling by the jury that the statute had run. It then tried to couch the case as one of first impression that required the court to resolve multiple issues of reinsurance law.

The Court of Appeal wisely refused to enter into such a discussion because it found that the doctrine of invited error destroyed the entire appeal and made it unnecessary to go into detail on the other issues.

The lesson taught by this case is that those who sit on their rights will lose those rights.  As the U.S. Supreme Court has stated, statutes of limitations represent a pervasive legislative judgement that it is unjust to fail to put the adversary on notice to defend within a specified period of time and that “the right to be free of stale claims in time comes to prevail over the right to prosecute them.” [United States v. Kubrick, 444 U.S. 111, 117, 100 S. Ct. 352, 356, 62 L.Ed.2d 259, 266 (1979) and Railroad Telegraphers v. Railway Express Agency, 321 U.S. 342, 349[, 64 S. Ct. 582, 586, 88 L.Ed. 788, 792] (1944)]

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Burden On Insured to Prove Accidental Death

The Kentucky Court of Appeal was asked to resolve the dispute Melissa Slone Hastings (Slone), who appealed from a summary judgment of a trial court in favor of Modern Woodmen of America (Modern Woodmen), against Modern Woodmen in a contract action involving an accidental death rider to a life insurance policy. The decision of the Kentucky Court of Appeal in Melissa Slone Hastings v. Modern Woodman of America, No. 2010-CA-002225-MR (Ky.App. 01/06/2012) interpreted an exclusionary clause dealing with abuse of drugs.

FACTUAL BACKGROUND

Slone was listed as the beneficiary on a life insurance policy secured by her husband Charles, now deceased, through Modern Woodmen. The policy included an accidental death benefit in the amount of $75,000 in addition to the standard policy amount. However, the accidental death rider contained the following specific exclusion:

No accidental death benefit will be payable if death of the insured results from, or is caused by: . . .

4) The voluntary taking or using of any hallucinogen, narcotic or drug, except on the advise (sic) of a licensed physician.

On January 20, 2005, Charles died from a prescription drug overdose.

The coroner’s report showed the presence of multiple drugs in his system, including methadone, diazepam, and hydrocodone. The drugs found in Charles’s system at his death were all drugs he had previously been prescribed, although not all of them were current prescriptions. Slone filed for the accidental death benefit from Modern Woodmen and the claim was denied on the grounds that the policy excluded from coverage any death resulting from the use of drugs not taken on the advice of a licensed physician. Slone thereafter filed suit in the Floyd Circuit Court.

After discovery, Modern Woodmen filed a motion for summary judgment. The trial court granted judgment and Slone now appeals.

On appeal, Slone argued that an issue of material fact existed as to whether the drugs found in Charles’s system were taken on the advice of a physician.

ANALYSIS

To determine whether there was a genuine issue of material fact regarding whether Charles took the medications which caused his death on the advice of a physician, the court must look to the evidence presented in support of the motion viewing it in a light most favorable to Slone.

The evidence showed that Charles’s last prescription for methadone was on December 16, 2004 (approximately one month before he died); his last prescription for diazepam was on February 10, 2004 (approximately eleven months before he died); and his last prescription for hydrocodone was on December 28, 2001 (approximately three years before he died).

State Medical Examiner Dr. Gregory James Davis testified in his deposition that the cause of Charles’s death was multiple drug intoxication. Dr. Davis testified that he could not form an opinion as to whether the medications found on the autopsy were taken on the advice of a physician. However, Dr. Davis testified that the pharmacy records indicated that Charles was not taking the medications as directed. Davis testified that medical examiners usually do not see multiple drug intoxication deaths except where the individuals are taking the medications in ways other than directed. Specifically, Davis stated as follows:

We do approximately one to two drug intoxication deaths per day in my office in Frankfort, which covers 58 counties in central and Eastern Kentucky. The vast majority of those, in fact, all that I can remember are in individuals who were not taking those medications as they were directed by a physician.

Slone argued that, although the drugs were not taken “as prescribed,” they were taken “on the advice of a physician.” Slone argued that the policy exclusion contains no requirement that the medications causing accidental death are taken “as prescribed,” and that the trial court essentially wrote this term into the contract.  Modern Woodmen argued that it is irrelevant whether the death was intentional or accidental because the policy rider required that the drugs causing death be taken “on the advice of a licensed physician,” and they were not.

Contrary to Slone’s assertion, the general standard in Kentucky is that the beneficiary of a policy of life insurance bears the burden of proving accidental death.  Slone is not entitled to recover under the terms of the policy unless the drugs found in Charles’s system at the time of death were taken “upon the advise (sic) of a licensed physician.” In order for Slone’s claim to survive summary judgment, there must be evidence, when viewed in a light most favorable towards her, from which the inference could be drawn that Charles was using the drugs on the advice of a physician.

INSURANCE POLICY INTERPRETATION

Ambiguous coverage exclusions in a policy of insurance are typically strictly construed against the insurer. Absent any ambiguity in the insurance contract, however, the contract shall be construed according to its plain and ordinary meaning.

In the present case, the exclusionary language, “on the advise (sic) of a licensed physician,” regardless of the spelling error, is not ambiguous. The Court of Appeal refused to interpret this clear and ordinary language to mean that an individual may retain old, unused medicine and combine it with new drugs without first asking his physician. In the present case, had Charles taken only current prescriptions, and/or perhaps engaged in some foreseeable misuse or minor error in following doctors’ orders, there might be a genuine issue of material fact raised. On the contrary, Charles took medications, prescribed by different doctors unaware of each other, two of which were not even current prescriptions. This unfortunate decision led to his death.

CONCLUSION

Taking a prescription that is three years old and one that is six months old, in combination with a current prescription written by a different doctor, cannot be considered as being on the advice of a physician.  Charles took prescriptions prescribed by different doctors, which were not prescribed for use concurrently, one of which was three years old.

The court concluded that Slone failed to present sufficient evidence to avoid judgment as a matter of law.

ZALMA OPINION

In Kentucky the beneficiary of  an accidental life insurance policy has the burden of proving that the death was accidental. Mrs. Sloane was unable to carry that burden because the evidence from the decedent’s physicians clearly established his death from drug intoxication was a result of abuse not taking drugs as prescribed or that had been prescribed in a manner that no physician had advised.

Insurers who wish to exclude risks of loss must do so in a clear and unambiguous manner. A computer’s spell check would not have resolved the error in spelling but an underwriter with a high school education would have avoided the misspelling. In this case, even with a misspelled word, the exclusion was clear and unambiguous.

To avoid litigation insurers should be more careful in drafting the terms and conditions of their policies and have the wording reviewed by underwriting, marketing and independent counsel.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

“In The Business Of” Language

Not Ambiguous

The Indiana Supreme Court was called upon to resolve a dispute between an insurer and a local youth soccer team. The players on the youth soccer team sought to recover under the state youth soccer governing association’s business auto-insurance policy for injuries sustained when the van in which they were riding was involved in an accident. Because the van was not being used in the business of the association, a condition for coverage under the insurance policy at issue, the insurer refused coverage. In Sarah Haag, Gordon Haag and v. Mark Castro, the Indiana Youth Soccer Association, Virginia Surety, No. 29S04-1102-CT-118 (Ind. 01/10/2012) the Supreme Court agreed with the insurer.

BACKGROUND

The plaintiffs in this case were players (or parents of players) on a soccer team called Carmel Commotion. Carmel Commotion was one of a number of teams fielded by the Carmel United Soccer Club in 2004. The Carmel United Soccer Club is an affiliated member in good standing of the Indiana Youth Soccer Association (“IYSA”). The IYSA is a not-for-profit corporation that governs youth soccer in Indiana; it is charged with developing and promoting youth soccer in Indiana in conjunction with various national organizations.

In June, 2004, Carmel Commotion traveled with the IYSA’s approval to Colorado to participate in a youth soccer tournament. Mark Castro, the team’s IYSA-certified coach, organized the trip.

On June 12, 2004, while attending the soccer tournament in Colorado, the team decided to go on a white-water rafting trip as a “team-building” activity. Castro transported the players to the rafting activity in a passenger van that he had rented for the team’s use during the trip. While en route, the van collided with another vehicle, resulting in injuries to several players.

The injured players, by their parents (referred to collectively as “Players”), sued Castro and the IYSA’s insurance carrier, Virginia Surety Co., Inc. The Players sought a declaration that the IYSA’s insurance policy through Virginia Surety provided coverage while Castro drove them to the white-water rafting activity. Both Virginia Surety and the Players moved for summary judgment. Following a hearing, the trial court granted summary judgment in favor of Virginia Surety.

A divided panel of the Court of Appeals affirmed, the majority holding under the relevant insurance policy language that Castro was not using the rented van “in the business of” the IYSA at the time of the accident.

DISCUSSION

Virginia Surety issued a commercial lines policy to the IYSA that provided business auto coverage in certain circumstances. At issue in this case is an endorsement for “hired” (rented) vehicles that reads as follows:

With respect to hired auto and employers non-ownership liability, the insured means the named insured, member associations and its clubs, leagues teams, employees, volunteers, executive officers, directors, stockholders, therein, but only while the automobile is being used in the business of the Named Insured. Coverage is not provided on behalf of the parents, managers, coaches, umpires, officials, referees, of the insured or volunteers using any automobile (personally owned, leased, borrowed or employer furnished) in the transportation of youth or adult participants to and from athletic games or athletic events, including but not limited to practices, exhibitions, post season and scheduled events. (Emphasis added)

The Players make three arguments about this endorsement.

First, they contend that under the first sentence of the endorsement, the rented van in which they were riding was being used in the business of the IYSA.

Second, they contend that the second sentence of the endorsement does not apply because they were not traveling to an athletic game or event; rather, they were traveling to a “team-building” event.

Third, they contend that the endorsement must be construed to provide coverage in these circumstances because if it is not, coverage would not be available under any reasonably expected set of circumstances and, therefore, would be “illusory.”

The policy does not define “in the business of” and the Players argue that this creates an ambiguity that should be construed against the insurer. Of course, that a policy does not define a term does not necessarily make the term ambiguous. The IYSA’s Articles of Incorporation declare its relevant purposes and a set of  “Playing Rules” that “are intended to provide a uniform set of guidelines governing: player eligibility, registration, team formation, player assignments, playing rules, and standards of Sportsmanship and conduct for all Member Organizations.”  The Supreme Court read the organizational documents to identify three lines of endeavor or “business” for the IYSA: (1) “promoting” soccer; (2) “regulating” competition, leagues, teams, and players (e.g., registering teams, certifying coaches and referees, sanctioning participation in tournaments, etc.); and (3) “conducting” specific events.

The Virginia Surety policy requires that the automobile be “used in the business of the [IYSA]” for there to be coverage, the policy requires that the automobile be used in one of these three lines of business — “promoting,” “regulating,” or “conducting.”

Perhaps because our state is home to so many sports governing bodies, there is wide-spread general familiarity with their business. These bodies are not in the business of “competing” in athletic events — their business is promoting, regulating, and sometimes sponsoring competition. Likewise, the IYSA is not in the business of “competing.” It is a state governing body, acting in conjunction with the United States Youth Soccer Association, the United States Soccer Federation (also known as U.S. Soccer, the national governing body of the sport), and the United States Olympic Committee.

CONCLUSION

What Carmel Commotion (with Castro’s help) was doing was participating in a specific event, a soccer tournament; Carmel Commotion’s “business” is competing — along with the practicing, “team-building,” and the like that comes with it.  When an IYSA-registered team, with the help of its coach, competes in a tournament (even a tournament sponsored or sanctioned by the IYSA), the team is engaged in its own business, not that of the IYSA.

Examining the second sentence of the endorsement helps in understanding this point. It specifies that the policy does not cover any automobiles used “in the transportation of youth or adult participants to and from athletic games or athletic events.” Why not? Because participating in the soccer games themselves — the competition — is not the business of the IYSA.

The fact that coverage is not available here does not make the coverage the IYSA purchased “illusory.” Coverage under an insurance policy is not illusory unless the policy would not pay benefits under any reasonably expected set of circumstances.

That the IYSA might need auto-liability insurance in respect of hired or non-owned vehicles is clear. In the course of traveling to promote youth soccer or in transporting a celebrity guest — perhaps a member of our national team like Lauren Cheney or Lori Lindsey — to an IYSA sponsored event, an employee or volunteer might be involved in an auto accident while using a rented vehicle. The coverage is not illusory.

We have not been asked to decide whether the Players had any claim against IYSA, only whether Virginia Surety has liability under the endorsement. Because Castro was not using the automobile “in the business” of the IYSA, the policy provides no coverage. The judgment of the trial court is affirmed.

ZALMA OPINION

This case has nothing to do with the injuries suffered by the Players. The suit was filed to gain an additional deep pocket to pay the Players for their injuries. It was creative, imaginative, and sufficiently well reasoned to get one justice on the court of appeal and one justice on the Supreme Court to file a dissent.

© 2012 – Barry Zalma

Barry Zalma, Esq.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Insurance Only Pays Indemnity

A theft occurred at the business office where Donna Summers conducted her marketing and graphic design business. The computer on which Summers’s work product was stored was stolen. In the process of investigating Summers’s claim, her insurer, State Farm General Insurance Company (State Farm), requested that she provide it with hard copy samples of her work. Summers did so.

State Farm lost the samples.

Summers sued State Farm for negligence, conversion, and bailment for the loss of the samples, and for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing for its alleged failure to fully compensate her for her losses due to the theft. During the liability phase of a bifurcated trial, the trial court refused to instruct the jury on the elements of the claims relating to the lost samples because State Farm conceded liability. During the damages phase of the trial, the court instructed the jury, in relevant part, that the damages for the loss of the samples would be their fair market value. The jury awarded Summers $85,000. Summers appealed in Donna Summers v. State Farm General Insurance Company, No. G043853 (Cal.App. Dist.4 01/04/2012) seeking additional damages including the cost to replace the samples lost.

Summers is the sole proprietor of a graphic design business, Summers By Design, which creates marketing materials for business entities. On or about June 24, 2007, a theft occurred at Summers’s business, resulting in the loss of her computer equipment and other business personal property. She claimed that the computer equipment contained all of her work product, work in progress, invoices, and business records, and that she had no backup for any of this material.

Summers is the named insured under a general commercial insurance policy issued by State Farm. Summers made a claim under the policy for the loss of her business personal property. State Farm paid Summers a total of $45,925.51 for the lost computer equipment and the replacement cost benefits. State Farm also paid Summers in excess of $250,000 for lost income resulting from the loss of the computer equipment.

MEASURE OF DAMAGES

The lost samples were not unique items lacking any market value.

Summers also claimed a loss for two separate projects involving the production of CD directories of golf courses and wineries in California. State Farm ultimately denied this portion of Summers’s claim.

Summers sued State Farm for breach of the insurance contract and breach of the implied covenant of good faith and fair dealing in connection with the losses due to the theft of her computer equipment. Summers also sued State Farm for negligence, conversion, and bailment in connection with State Farm’s loss of her samples.

State Farm admitted liability for the loss of the samples. The court bifurcated the trial into two parts: (1) liability for claims based on the insurance policy; and (2) damages.

In phase one of the trial, the jury found State Farm had not breached the insurance policy. In phase two of the trial, the jury determined that the fair market value of the lost samples was $85,000. Judgment was entered, and Summers timely appealed.

DISCUSSION

Summers argues the trial court erred in its instructions regarding the damages available for her claims based on the lost samples. In phase two of the trial, the jury was instructed as follows regarding damages for the lost samples claims:

“You must decide how much money will reasonably compensate plaintiff for her harm. This compensation is called ‘damages.’

“The amount of damages must include an award for each item of harm that was caused by the defendant’s wrongful conduct, even if the particular harm could not have been anticipated.

“Plaintiff does not have to prove the exact amount of damages that will provide reasonable compensation for the harm. However, you must not speculate or guess in awarding damages.

“The following are the specific items of damages claimed by plaintiff:

“1. Economic damages consisting of the fair market value of the samples at the time defendant wrongfully lost them;

“Or

“Non-economic special damages resulting from defendant’s loss of the samples; and

“2. Reasonable compensation for the time and money spent by plaintiff in attempting to recover the samples; and

“3. Emotional distress suffered by plaintiff as a result of defendant’s conduct.

“In order to recover special damages, plaintiff must prove:

“1. That at the time of the delivery of the samples, State Farm had reason to suppose from sources other than plaintiff that the samples had a peculiar sentimental or emotional value to plaintiff.

“2. That it was reasonably foreseeable that special injury or harm would result from the loss of the samples; and

“3. That reasonable care on plaintiff’s part would not have prevented the loss.

“‘Fair market value’ is the highest price that a willing buyer would have paid to a willing seller, assuming:

“1. That there is no pressure on either one to buy or sell; and

“2. That the buyer and seller know all the uses and purposes for which the [samples are] reasonably capable of being used.

“No fixed standard exists for deciding the amount of damages for mental suffering and emotional distress. You must use your judgment to decide a reasonable amount based on the evidence and your common sense.”

The instructions given set forth the damages available for the causes of action for negligence, conversion, and bailment that damages for conversion are fair market value plus compensation for expenses in attempting to recover the property.

Summers cited cases authorizing the use of replacement or re-creation cost as the measure of damages where the item of personal property lost has no market value. However, the lost samples did have a market value, determined by the jury to be $85,000. Summers testified the lost samples had a value of $700,000 on the open market, and could have been sold by her to existing or prospective clients for that sum.

CONCLUSION

The Court of Appeal concluded that the trial court did not err in instructing the jury that damages on the lost samples claims were the fair market value of the samples, not their replacement or re-creation cost.

ZALMA OPINION

Insurance provides indemnity it should never be asked to provide an insured with a profit as a result of the loss. The property lost by Ms. Summers had a value and the jury found the fair market value of the property after listening to the evidence and was not willing to allow Ms. Summers to collect what it would cost her to re-invent the wheel. By finding an amount that was the fair market value the jury placed her in the exact financial position she was in before the loss.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Test of Coverage is Causal Connection

The South Carolina Court of Appeal was called upon to decide whether the insurance carried on a motor home and insurance on the automobile it was towing are both required to respond to defend and indemnify the insured of the vehicular unit. In Auto-Owners Insurance Company v. Joseph Gordon Long, Bruce A. Carter, Administrator of the Estate, No. 2012-UP-005 (S.C.App. 01/04/2012) coverage was determined based on whether the use of the vehicle was causally connected to the collision.

FACTS

Joseph Long was driving a motor home, insured by GMAC and the motor home was towing a Saturn automobile insured by Auto-Owners. The motor home, tow bar, and Saturn comprised a single vehicular unit that was over 50 feet long. Mr. Long had entered the intersection and was attempting to make a left turn onto Northbound US 76 (a four-lane highway divided by a 28-foot median) when a collision occurred between Mr. Long’s vehicular unit and Mrs. Carter’s 1996 Chevrolet Suburban SUV.

Auto-Owners acknowledged that its insured’s towed vehicle was “in use” when the collision occurred. As a result, the only question before the circuit court was whether a causal connection existed between the vehicle’s use and the collision that caused Martha Jean Carter’s injuries and subsequent death. The Saturn and the attached tow bar added over 16 feet to the total length of the vehicular unit. When the vehicles collided, Mr. Long’s vehicular unit was blocking the majority of Southbound US 76 – the direction in which Mrs. Carter was traveling. At the time of the accident Mr. Long’s vehicular unit was blocking over half the outside, 11-foot, Southbound lane; the entire inside, 11-foot, Southbound lane in which Mrs. Carter was traveling; the entire inside, 10-foot, Southbound turning lane; and 23 feet of the 28-foot median separating Southbound and Northbound traffic.

A witness testified that: “At the time of the impact, the motor home and Saturn blocked so much of the roadway that Mrs. Carter had nowhere to maneuver to avoid hitting the motor home.”

DECISION

The South Carolina Court of Appeal determined that Mr. Long’s use of the Saturn was causally connected to the accident and concluded that the test for determining whether an automobile liability policy provides coverage for an accident is not whether the automobile was a proximate cause of the accident but rather whether there is a causal connection between the use of the automobile and the accident.

Since the Saturn was causally connected to the accident and acted to defeat Mrs. Carter’s ability to escape the accident the Saturn’s insurer as well as the motor home’s insurer was required to defend and indemnify Mr. Long.

ZALMA OPINION

Serious injuries always make interesting law. In this case a woman died due to the negligence of the driver of an over 50 foot long motor home with an automobile attached that resulted in the death of a woman driving an large Chevrolet Suburban motor home. The decision allowed Mr. Long, the negligent driver, to access the limits of his motor home insurance policy with GMAC and his automobile insurance policy with Auto-Owners.

The estate, as a result, had the opportunity to collect more money than it would if the court limited coverage to the operator.

Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The accident was both a contingent and unknown event at the time the policies were acquired and clearly were purchased to respond to the claim of the estate of Mrs. Carter.

This case teaches insurers to work together in a serious injury case rather than force the insured into unneeded litigation.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Faulty Workmanship is Not an “Occurrence” But the Damage it Does Is an Occurrence

The Wisconsin Court of Appeal was called upon to resolve a dispute that arose out of damages suffered by VPP Group, LLC the grew from construction work being performed by contractors on a building owned by VPP. VPP was insured by Acuity. Acuity paid the damage claims filed by VPP arising out of the construction work. Acuity then filed a subrogation action against the contractors and their insurer, Society Insurance. Society successfully moved for summary judgment noting that Society’s CGL policies did not provide coverage for damages caused VPP by the contractors because there was no “occurrence” within the meaning of the policies under the facts of the case in Acuity, A Mutual Insurance Company v. Society Insurance, A Mutual Company, No. 2009AP2432 (Wis.App. 01/05/2012).

BACKGROUND

VPP, Ron Stoikes d/b/a RS Construction (RS), and Terry Luethe d/b/a Flint’s Construction (Flint) entered into a contract to remove and reinstall a concrete wall on the south side of the “engine room” building which provided refrigeration and necessary utility services to VPP’s entire animal processing plant for a contract sum less than $9,000.

The work contracted for was limited to removal and replacement of the engine room’s south wall. VPP supplied all materials; RS and Flint provided all labor. RS and Flint began work in late May 2006. RS first shored up the engine room and removed the existing wall to grade level. The VPP processing plant continued at full operation during this phase of the work.

On June 12, 2006, during Flint’s excavation of a trench adjacent to the south wall site, the soil began to erode from under the concrete slab of the first floor of the engine room. As a result, the engine room’s first floor slab cracked and a portion deflected downward. The part of the building above the compromised floor, including the second floor and roof, likewise deflected downward. The engine room’s masonry walls adjacent to the south wall also sustained damage. As a result of this damage to the engine room, the utility service to the rest of the processing plant was disrupted, including electrical service, anhydrous ammonia, and the refrigeration functions of the engine room’s roof top condenser. Also, the roof top condenser was disabled because the water required to run it was too heavy for the damaged roof. Due to this damage, the entire processing plant’s refrigeration capacity was reduced by twenty-five percent. In addition to the engine room itself, an adjacent building which shared a common wall incurred large cracks in the cooler housed inside it, which impaired its ability to cool processed beef.

Beef being processed must be rapidly cooled, and the processing is monitored by United States Department of Agriculture (USDA) on-site inspectors during all processing shifts. Because of the reduced refrigeration capacity, VPP had to change its processing schedule, adding an extra animal “kill” day, to ensure that it could fill its customer orders. Because of the need to add another “kill” day, VPP incurred costs for additional personnel hours, additional USDA inspectors’ hours, extra freight and fuel charges, and other expenses in the amount of approximately $380,000.

VPP repaired the engine room by replacing that portion of the first floor concrete slab that had cracked, jacking up the second floor level to its original level and replacing portions of the roof slab that had cracked. Only after these repairs were made was RS able to complete the original job of rebuilding the south wall.

The Original Insurance Settlement by Acuity

VPP contacted its insurer, Acuity, following the loss. After adjusting the losses, Acuity paid a total of $636,466.39 to VPP in final settlement of the loss claims, which amount included the $380,000 claimed for the extra expenses and the remainder representing the damages relating to repairs to the building. Not included in this amount were the costs to VPP related to replacing the south wall.

Acuity commenced this subrogation action against RS and Flint and their insurer, Society Insurance, seeking to recover damages arising from the engine room collapse, and alleging breach of contract and negligence.

Discussion

The issue on appeal is whether there is coverage for VPP’s claims under Society’s CGL policies issued to RS and Flint.

Acuity argued that the partial collapse of the engine room that resulted from faulty excavation techniques by Flint constitutes an “occurrence” under the CGL policy. Society contends that the circuit court correctly found that there was no “occurrence” under the policy.  When interpreting an insurance policy Wisconsin courts use a three step process:

1. It examines the facts of the insured’s claim to determine whether the policy’s insuring agreement makes an initial grant of coverage.
2. If an initial grant is triggered, it looks to see if any exclusions apply.
3. It then looks to see whether any exception to that exclusion reinstates coverage.

Since neither party contended that any exception to the exclusions applies and the court could not find one so its analysis was limited to the first two steps.

Under the CGL policy, to trigger coverage, there must be “property damage” caused by an occurrence. “Property damage” is defined within the policy as “physical injury to tangible property, including all resulting loss of use of that property.” The damage to the engine room, the roof, and the resulting damage to the equipment is plainly “physical injury to tangible property.”  There was no question that there was property damage as defined by the policy.

An “occurrence” is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The factual pleadings in the amended complaint allege “property damage” caused by an “occurrence” within the meaning of Society’s CGL policy. The Court of Appeal found it clear that the damage was caused by the accidental soil erosion that occurred because of faulty excavation techniques.

In analyzing whether this was an “occurrence” under the insurance policy, we relied on the analysis in earlier Wisconsin Supreme Court cases and concluded that while faulty workmanship itself is not an “occurrence,” where the “damage” was caused by an accident in that the damage was not intended or anticipated it constituted an “occurrence” under the policy.  Faulty workmanship may cause an unintended event, such as soil  erosion, and that event–the “occurrence”– may result in harm to other property.

The Court of Appeal concluded there was an “occurrence” under the CGL policy issued by Society and therefore there is an initial grant of coverage.

The dispute in this case focused on what constitutes “[t]hat particular part” of the property on which work was being performed. Although the business risk exclusions “have generated substantial litigation,” no published case in Wisconsin has specifically interpreted the k.(5) exclusion at issue here, nor has a Wisconsin court construed and applied the phrase “that particular part” as used in both the k.(5) and k.(6) exclusions. The k.(5) exclusion, however, is commonly found in CGL policies written after 1986 and courts from other jurisdictions have construed its precise terms in other policies.

The Court of Appeal was persuaded that the phrase “that particular part” in the k.(5) and k.(6) exclusions applies only to those parts of a building on which the defective work was performed, which is determined based on the scope of the construction agreement. The scope of the contracted work was to remove and replace the south wall of the “engine room.” Applying the interpretation of “that particular part” in the business risk exclusions to the scope-of-work the Court of Appeal concluded that the k.(5) exclusion does not apply and that damage to the engine room building and the equipment in that building is covered under the policy.

Conclusion

The Court of Appeal decided that there was an “occurrence” within the meaning of the CGL policies issued to RS and Flint, and that neither exclusion k.(5) nor k.(6) in the policies apply. It, therefore, reversed the circuit court’s grant of summary judgment in favor of Society, and remand this case for further proceedings.

Zalma Opinion

This case adopts what I believe has been adopted by the majority of states — although faulty workmanship should never be an “occurrence” under a CGL because if it was the policy would be a guarantee of the work rather than an insurance policy insuring against accidents — if the faulty workmanship is the cause of damage to property not involved in the work there is an “occurrence.”

When analyzing coverage all of the facts and all of the wording of the policy must be considered and interpreted to give the parties to the contract the indemnity promised by the policy if doing so is linguistically permissible.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

Agent Sued Because of Misrepresentation of Another Out of Luck

The California Court of Appeal was called upon to determine if an insurance agent sued for a tort he did not commit could successfully sue those who used his name to deceive an insured who then sued the agent in Dupre Insurance Services, Inc v. Samantha L. Hall et al, No. C066073 (Cal.App. Dist.3 01/05/2012). Dupre Insurance Services, Inc. (Dupre), an insurance agent, was sued by a third party for failure to procure liability insurance for the third party resulting in the insurance company’s denial of a defense in an action against the third party. Dupre then filed a cross-complaint claiming the cross-defendant’s negligence was responsible for the failure to obtain insurance, thus requiring the Dupre to defend against the action by the third party. The trial court granted the cross-defendants’ summary judgment motion on the ground they were not negligent.

Dupre claimed the trial court erred in entering summary judgment as to its “tort of another” cause of action because “the evidence and argument presented in the moving papers did not address the factual and legal basis for [that] cause of action,” namely that cross-defendants’ (collectively “Hall”) misappropriation and use of Dupre’s name led to Dupre having to defend itself in a lawsuit brought against it by a third party and to bring a defensive cross-complaint.

THE TORT OF ANOTHER DOCTRINE

Under the tort of another doctrine, a person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred.

Dupre’s tort of another cause of action is premised on cross-defendants’ alleged negligence in failing to procure liability insurance applicable in defense of third party’s action against Dupre. The trial court concluded that Hall were not negligent.

FACTUAL BACKGROUND

Ross Garrison dba Ross Garrison Construction (Garrison) sued Dupre, Insurenet, and others for professional negligence and negligence after Garrison’s insurance carrier refused to defend him in a lawsuit on the ground the carrier had not been paid for Garrison’s commercial general liability policy, and the policy had been cancelled. Garrison’s claims were based on Habbestad’s alleged negligence in procuring and maintaining the policy. Believing Habbestad “was employed by DUPRE and/or its successor-in-interest INSURENET,” Garrison named Dupre and Insurenet as defendants in his complaint.

Dupre cross-complained against Insurenet, Hall, and Habbestad for, among other things, negligence and “tort of another.” Dupre’s tort of another cause of action likewise was based on Hall’s purported negligent misrepresentation that she and Habbestad were agents or employees of Dupre, and Habbestad’s alleged failure “to exercise ordinary care” in procuring the insurance policy for Garrison.

The trial court granted Hall’s motions for summary judgment, finding: “There is no triable issue of material fact that any of these moving parties caused any damage to Garrison. There is no triable issue of material fact that they violated any duty to either Garrison or Dupre as these challenged causes of action allege. There is no triable issue of material fact that the moving parties made any money or were enriched due to the alleged use of Dupre’s name, license or good will.”

DISCUSSION

Dupre contended the trial court erred in granting summary judgment as to its tort of another cause of action while Hall asserted that the tort of another doctrine is limited to torts committed against third parties and does not extend to torts committed against the party asserting the doctrine.

The Court of Appeal concluded that because it was undisputed that cross-defendants committed no tort against Garrison, Hall’s assert that summary judgment was proper was correct.  The Court of Appeal noted that the tort of another doctrine, which allows a person to recover his attorney fees if he is required to employ counsel to prosecute or defend an action against a third party because of the tort of the defendant, is an application of the usual measure of tort damages.The theory of recovery is that the attorney fees are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

To recover under the doctrine, Dupre needed to establish a tort actually was committed. Dupre’s negligence cause of action, like its tort of another cause of action, was based, in part, on Hall’s alleged misrepresentation that she and Habbestad were agents or employees of Dupre. Since summary judgment was entered as to Dupre’s negligence cause of action, and Dupre did not challenge that portion of the trial court’s order on appeal Dupre was precluded from relying on Hall’s alleged misrepresentations as the basis for its tort of another cause of action.

There can be no tort of another without a tort. For that reason Dupre’s tort of another cause of action was barred as a matter of law.

ZALMA OPINION

Insurance agents and brokers are often sued when the named insured finds the insurance purchased does not cover the loss. Although the Hall cross-defendants were wrong, misrepresented their relationship with Dupre, and used Dupre’s name without his permission causing him to be sued, there was no harm done because the court found that the Hall defendants were not negligent in failing to obtain insurance for Garrison. Since they committed no tort against Garrison Dupre’s need to defend was not due to Hall’s tort.

To quote the late Chick Hearn, the announcer for the Los Angeles Lakers “No harm, no foul.”

The Hall Defendants should have been punished but what they did was not sufficient to allow Dupre to recover its attorneys fees from them.

Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The following is from the introduction to my e-book, Zalma on Rescission of Insurance in California that is available at http://www.zalma.com/rescission.htm.

Rescission

Rescission is an equitable remedy as ancient as the common law of Britain.
When the United States was conceived in 1776 the founders were concerned with protecting their rights under British common law. They adopted it as the law of the new United States of America modified only by the limitations placed on the central government by the U.S. Constitution.

The viability and ability to enforce contracts was recognized as essential to commerce. Courts of law were charged with enforcing legitimate contracts. Courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.

The common law developed rules that courts could follow to refuse to enforce the terms of a contract that was entered into because of mutual mistake of material fact, a unilateral mistake of material fact, the breach of warranty (a presumptively material promise to do or not do something), a material concealment, or a material misrepresentation. The remedy – called rescission – created a method for voidance of a contract and allowed courts to refuse to enforce such a contract.

Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith. Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.

Rescission, since before the U. S. Constitution, became an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission. In California the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or an innocent misrepresentation of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, are expected to be fair. California follows the ancient equitable remedies and has codified the right to rescission of insurance contracts because the legislature considered it unfair to make a contracting party abide by a contract that was not obtained fairly. The ancient maxim that “No one can take advantage of his own wrong” is applied when a court is faced with a request to confirm rescission.

California Law

Under California law, every party to an insurance contract must communicate to the other, in good faith, all facts within his knowledge which are material to the contract  and which the other has not the means of ascertaining.

When a party to a contract of insurance decides the policy must be rescinded it need only advise the other party in writing and return the consideration: either the premium collected by the insurer or the policy delivered to the insured who wishes to rescind. It is not necessary for either party to file suit to confirm the rescission, it is effected once notice is given and return of consideration is offered. If a party does not agree to the rescission he, she or it can file suit for a declaration by the court that the rescission was improper. If the party rescinding desires he, she or it can also sue for a declaration that the rescission was proper. Acceptance of the return of consideration is usually sufficient to confirm a rescission and will avoid unnecessary litigation.

If the parties do not agree to a mutual rescission the decision that a contract of insurance is effectively rescinded is a decision made only by a California court or U.S. District Court applying California law, sitting as a court of equity.  The court of equity must exercise its discretion and make a ruling that is fair to all parties.  When the court grants rescission it always requires that the both parties be returned to the status quo ante with all consideration paid or delivered is returned.

Rescission is the equitable process that authorizes a court of equity to conclude that it would be unfair to the parties to allow a contract to continue or be enforced.  It places the parties back in the position they were in before the contract date. Although most reasons for rescission are not discovered until there is a claim sometimes insurers learn of grounds for rescission by conducting an engineering survey, a visit by the agent, broker or underwriter to the insured’s premises or an inquiry from the insured.

For example an insurer learns after a policy was issued that a jeweler insured who applied for insurance against theft and reported that his premises were protected by a central station reporting burglar alarm system. The insurer’s loss protection engineer visited the premises and reported to the insurer that the alarm is only a local gong that does not report to a central station. The insurer is entitled to rescind for misrepresentation of a material fact since the security promised was not the same as that which actually existed. The insurer returns the premium to the insured with notice that the policy is rescinded from its inception. The insured is unconcerned since, before the rescission, he had not suffered a loss. The rescission of the jewelers policy would have been as effective if the insurer had learned of the misrepresentation after a loss.

Rescission Is A Remedy That Must Be Used With Care

Insurers must use the rescission remedy with care. Insurers should never assume that the promise to pay indemnity to the insured under a policy of insurance can, with impunity, be broken by advising the insured that the insurer has rescinded the policy.

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Where no valid ground for rescission exists, the threat or attempt to seek such relief,  may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.
California courts have made clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations, easily proved, of extra-contractual torts.

If sufficient evidence exists, the rescission remedy will deprive the insured or the insurer of all rights under the policy. The court will conclude that the contract never existed and neither party has any right under the contract.

The primary bases for rescission in California are misrepresentation, concealment, mistake of fact, mistake of law and fraud. In California these bases are codified.
This book will include the full text of the relevant statutes and the decisions of the California Supreme Court, California Courts of Appeal, and the Federal Ninth Circuit Court of Appeal when it is called upon to interpret California law. By including the full text of the statutes and court decisions the insurance professional will be in a better position to recognize factual grounds that may give rise to remedy of rescission so that the factual bases can be presented to a competent, experienced insurance coverage lawyer for advice and counsel.

Before a party considers rescission, whether insured or insurer, the following must be established:

• The facts represented in the acquisition of the policy.
• Evidence that establishes whether an fact was misrepresented.
• Evidence that establishes that a material fact was concealed.
• Evidence that establishes that the fact(s) misrepresented was material to the decision of the insurer to insure or not insure.
• Evidence that the person seeking rescission did not have better knowledge of the facts claimed misrepresented or concealed.
• A sworn declaration from the underwriter who made the decision to insure or not insure concerning the effect true facts would have had on the underwriting decision.
• A review of the policy, application process, investigation results and applicable law by a competent insurance coverage lawyer.

After you make a payment through PayPal, please wait for the E-Book to upload to your machine.  If you have a problem with the purchase please write to me at zalma@zalma.com. 

New California Law Should Concern to Insurers and Insurance Agents

Effective January 1, 2012, a new California law, adding Sections 226.8 and 2753 to the California Labor Code, creates large penalties for employers who “willfully” classify workers as independent contractors who are really employees. This law is especially important to insurers, insurance agents and brokers who often enter into nonexclusive agency agreements.

The new law arose because of a growing crackdown by the federal government and various states concerned that employers were taking advantage of employees to punish employers who treat regular employees as independent contractors to avoid taxes and fail to fulfill various employment laws. People who are compensated by commission are often classified as an independent contractor only to later claim the rights of an employee.

The California Court of Appeal, days before the new Labor Code Sections were to come into effect was called upon to determine the status of a licensed insurance agent and broker. The insurer contended that the agent was an independent contractor and the agent claimed she was an employee.

Kimbly Arnold (Arnold), by contract with Mutual of Omaha (Mutual), sold Mutual products as a nonexclusive agent. Her agreement with Mutual allowed her to, and she also sold insurance products for other insurers. Arnold became unhappy with the relationship with Mutual and terminated the contract. She then sued in Kimbly Arnold v. Mutual of Omaha Insurance Company, No. A131440 (Cal.App. Dist.1 12/30/2011) for benefits as if she was an employee that were not provided to her as a non-exclusive, independent contractor, agent. Arnold’s suit claimed unpaid employee entitlements under the California Labor Code.

Summary judgment was granted in favor of Mutual with the trial court finding that the undisputed facts established she was not an employee, but rather an independent contractor.

BACKGROUND

The complaint consisted of three causes of action. The first cause of action alleged Mutual failed to reimburse Arnold and class members fully for “necessary business-related expenses and costs” to which they were entitled under the California Labor Code. The second cause of action alleged Mutual had willfully failed to pay Arnold and members of the class she sought to represent, for wages earned but unpaid prior to their being discharged from employment or prior to their quitting employment, for which they were entitled to recover under multiple Labor Code sections. A third cause of action alleged Mutual’s conduct constituted an unlawful business practice in violation of the Unfair Competition Law for which Arnold and class members sought compensation and an injunction requiring Mutual to pay all outstanding wages and costs.

Mutual filed a motion for summary judgment contending Arnold was an independent contractor rather than a former employee under the common law test, and hence, she was not entitled to any relief under her first or second causes of action. Because Arnold’s third cause of action under the UCL was derivative of her first cause of action, it similarly afforded her no relief as a matter of law.

THE TEST OF EMPLOYMENT

In California the principal test of an employment relationship under common law is whether the person to whom service is rendered has:

• the right to control the manner and means of accomplishing the result desired;
• whether the principal has the right to discharge at will, without cause;
• whether the one performing services is engaged in a distinct occupation or business;
• the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
• the skill required in the particular occupation;
• whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
• the length of time for which the services are to be performed;
• the method of payment, whether by the time or by the job;
• whether or not the work is a part of the regular business of the principal; and,
• whether or not the parties believe they are creating the relationship of employer-employee.

The individual factors must not be applied mechanically as separate tests, but are intertwined, and often given weight depending on the particular combination of factors.

EVIDENCE AT MOTION FOR SUMMARY JUDGMENT

The evidence presented in the motion for summary judgment showed that Arnold was licensed by the Department of Insurance as an independent agent or broker and was authorized to offer products to prospective clients from different companies. When she first contracted with Mutual, in November 2006, she was under appointment with another insurance company to offer its products, and while under that appointment had acted on behalf of a third insurance company. At both of these insurance companies she performed as an independent contractor, receiving commissions and 1099 tax forms were produced by the insurers reporting that income.

The evidence presented at the motion for summary judgment established that Arnold used her own judgment in determining whom she would solicit for applications for Mutual’s products, the time, place, and manner in which she would solicit, and the amount of time she spent soliciting for Mutual’s products. Her appointment with Mutual was nonexclusive, and she in fact solicited for other insurance companies during her appointment with Mutual. Training offered by Mutual was voluntary for agents, except as required for compliance with state law. Under the principal test for employment under common law principles, Mutual had no significant right to control the manner and means by which Arnold accomplished the results of the services she performed as one of Mutual’s soliciting agents.

THE CONTRACT WITH MUTUAL

Under Arnold’s contract with Mutual, the latter appointed her as a nonexclusive “agent” to solicit and procure applications for Mutual’s products. Arnold had the responsibility to maintain the proper licenses required to perform this service. Her chief duties were to procure and submit applications for Mutual’s products, collect moneys, and service clients. Compensation was by commission for products sold, with a chargeback on any commission paid when moneys for sale of a product were uncollected or refunded. Either party could terminate the contract with or without cause through written notice to the other, with automatic termination in the event Arnold failed to submit an application for one of Mutual’s products for a period of 180 days.

One clause of the contract stated that Arnold was “an independent contractor and not an employee,” that no terms of the contract “shall be construed as creating an employer-employee relationship,” and that Arnold was “free to exercise [her] own judgment as to the persons from whom [she] will solicit and the time, place and manner, and amount of such solicitation.”

Arnold testified that she had read the contract, and understood when she signed it that her appointment with Mutual was as an independent contractor. She agreed she used her own judgment in tending to her business, and more particularly in determining who she would solicit for applications for Mutual’s products, when and where she would do so, and the amount of time she spent engaging in such solicitations.

Arnold exercised her contractual right to terminate her appointment with Mutual by a letter dated March 24, 2008, which advised Mutual that she had entered into a contract to represent another insurance company exclusively, and was prohibited from maintaining her appointment with Mutual.

THE COMMON LAW TEST FOR EMPLOYMENT

In California a statute is construed in light of the common law unless the Legislature clearly and unequivocally indicates otherwise. Thus, when a statute refers to an “employee” without defining the term, courts have generally applied the common law test of employment to that statute.

The Court of Appeal found that:

1. Arnold was engaged in a distinct occupation requiring a license from the Department of Insurance.
2. She was responsible for her own instrumentalities or tools with the exception of limited resources offered by Mutual to enhance their agents’ successful solicitation of Mutual’s products.
3. Arnold was required to pay a fee for the use of Mutual’s office space and telephone service.
4. Although Mutual paid its agents in a systematic way every two weeks, Arnold’s payment itself – chiefly commissions – was based on her results and not the amount of time she spent working on Mutual’s behalf.
5. Arnold and Mutual believed, at the time of her appointment, they were creating an independent contractor relationship and not an employee relationship.

In California, the existence and degree of each factor of the common law test for employment is a question of fact, while the legal conclusion to be drawn from those facts is considered a question of law. Even if one or two of the individual factors might suggest an employment relationship, summary judgment is nevertheless proper when all the factors weighed and considered as a whole establish that Arnold was an independent contractor and not an employee for purposes of Labor Code sections 202 and 2802. The Summary Judgment, therefore, was affirmed by the Court of Appeal.

ZALMA OPINION

Insurance agents and brokers who enter into contracts with insurers to sell insurance products to the public can be classified as independent contractors or as employees depending on whether they fall, or do not fall, within the common law definition of who is an employee.

It is imperative that the agent or broker entering into a contract with an insurer be certain of the relationship before signing such an agreement. The contract signed by Ms. Arnold clearly and unambiguously set forth the relationship between Mutual and Arnold was not employment. Arnold, and any agent entering into such a contract that wants to be considered an employee should seek the advice of counsel. Independent contractor classification is often a nuanced legal question. In this case the common law and the written contract eliminated the nuance.

The new penalties accentuate the importance for both the insurer and the agent to receive sound legal advice. Employees, by statute in California and most states have rights that are not available to an independent contractor. Insurers appointing agents must be careful to avoid claims of employment if they wish the agent to be an independent contractor not subject to labor laws and employee benefits and should carefully consider the common law elements of employment.

Arnold entered into an agreement with Mutual that clearly stated she was not an employee but that the relationship established was that of an independent contractor. The facts of the relationship and how it functioned clearly established that Arnold was not an employee. She attempted to gain benefits to which she, and the class she claimed to represent, were not entitled to receive because they were not employees.

Based on her own testimony it is difficult to understand why she brought the action and why, after losing at trial, she decided to take the case up on appeal. However, by doing so Arnold unwittingly did a service to Mutual and all other insurers who use nonexclusive independent agents who will be able to defend against punishment from the new law.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

The following is an excerpt from the introduction to the e-book, “Insurance Fraud” available, along with other e-books written by Barry Zalma, from ClaimSchool at http://www.zalma.com/Zalmabooks.htm.

Insurance Fraud Is Epidemic

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. Estimates of the extent of insurance fraud in the United States range from $87 billion to $300 billion every year.

In truth no one really knows the extent of insurance fraud because most frauds succeed without the insurer even suspecting that it is being defrauded. Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. No one will ever place an exact number on the amount lost to insurance fraud but everyone who has looked at the issue know – in their heart and gut – that the number is enormous and that when insurers and governments put out effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-insurers drops logarithmically.

Insurance fraud is not limited to the US. In Britain fraud costs the British economy amounts estimated as at least £14 billion in a report commissioned by the Association of Chief Police Officers (ACPO) published in March 2007.

Insurers will often complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud. Police and prosecutors complain that the insurers do nothing to defeat the crime. It is time that insurers, police and prosecutors stop complaining and do the work necessary to reduce the effectiveness of this metastasizing crime. If not, the logarithmic growth of fraud against insurers and government based programs like Medicare and Medicaid, will eat away any chance insurers – and their shareholders – have of making a profit and will make the tax burden insufferable.

Insurers have good reason to complain. They are universally ignored by police agencies when they report the crime. When insurance criminals are caught in the act they are seldom arrested, even less often prosecuted and almost never punished.

Police and prosecutors have good reason to complain because insurers are not equipped to perform an adequate criminal investigation. If prosecution of insurance fraud is to be successful it is necessary that insurers, prosecutors and police agencies work together as a team dedicated to defeat insurance fraud.

Some estimates indicate that more money goes out fighting fraud than is saved. Although insurance fraud is a crime in almost every jurisdiction in the United States, it is the only crime where the victim is required to perform the investigation from its funds and to pay special taxes to support investigation and prosecution by public agencies.

The California Department of Insurance, like similar agencies across the country, continues to add taxes on insurers and the insurance buying public to pay for the state’s portion of the fight. Insurers are compelled by statute and Regulation to maintain Special Fraud Investigation Units, a detailed anti-fraud program and train all of their anti-fraud personnel. The Departments of Insurance audit insurers regularly to be sure that each insurer works hard to train its people to investigate and seek prosecution of the crime of insurance fraud. Failure to do so sufficiently allows the state Department of Insurance to fine the insurer for not doing the work traditionally the duty of the state to investigate and prosecute crime. In addition, adding insult to the injury, courts and juries assess punitive and exemplary damages against insurers who accuse their insured’s of fraud because the immunity provisions of anti-fraud statutes are anemic.

Similar businesses in the financial sector, which are also regular victims of fraud and other crimes, are not taxed or compelled to investigate crimes committed against them. No one demands that a local or national bank pay for prosecuting embezzlers. No one demands that convenience store owners pay for prosecuting people who hold up 7-11 stores. No Regulator requires stockbrokers to investigate money laundering or fraudulent transactions. The imposition upon the insurance industry – and the attendant cost passed to the insurance consumer – is unique. Insurers are treated differently than all other businesses in the United States. George Orwell was right when, to paraphrase, he had a character in “Animal Farm” say, “all businesses are equal, some are more equal than others.” Clearly, insurers are less equal with regard to crimes perpetrated against them than are other businesses.

Do Insurers Get Their Money’s Worth From Fighting Fraud?

The simple answer is “yes.” The more difficult question to answer is how to quantify the worth of fraud fighting.

The Coalition Against Insurance Fraud reported that:

    •    More than one of every three bodily-injury claims from car crashes involve fraud. Insurance Research Council (1996)

    •    17-20 cents of every dollar paid for bodily injury claims from auto policies involves fraud or claim buildup. Insurance Research Council (1996).

    •    Fraud adds $5.2-$6.3 billion to the auto premiums that policyholders pay each year. Insurance Research Council (1996)

    •    Claims for bodily injuries under the Personal Injury Protection portion of New York’s no-fault auto coverage rose 79 percent between 1999 and 2000, compared to 25 percent in all no-fault states. Insurance Research Council (2001) Since then reports indicate that New York PIP losses are growing to an insufferable amount.

    •    Insurers increased auto premiums up to 25 percent for New York City in 2001. Insurance Information Institute (2001)

    •    The average PIP claim is $7,950 in New York State — 47 percent higher than the national average. Insurance Information Institute (2001). Fraud costs each insured driver in New York State $75-$115 per year. Insurance Information Institute (2001)

    •    PIP claims in New York State rose nearly one third in 2000, more than twice as fast as second-place Florida. Insurance Information Institute (2001)

    •    The average PIP claim in New York State jumped 19 percent over the first nine months of 2000, and 64 percent between 1995 and 3Q 2000. This compares to a 33-percent increase for other states. Insurance Information Institute (2001)

    •    Auto insurers in New York pay out nearly twice as much in PIP claims as they collect in premiums. For every $100 auto insurers received, they paid $177 in claims through 3Q 2000. Insurance Information Institute (2001)

It also reports that:

    •    Criminal convictions increased 31 percent. Coalition Against Insurance Fraud (2004)

    •    Cases presented for prosecution rose 14 percent. Coalition Against Insurance Fraud (2004)

    •    Investigations initiated increased by nearly 18 percent. Coalition Against Insurance Fraud (2004)

    •    Referrals of suspected fraudulent actions were up 4.5 percent. Coalition Against Insurance Fraud (2004)

Arrests and Prosecutions

The Coalition reported that the Fraud Bureaus and Fraud Divisions in the various states are delivering record results in combating swindles, but the positive figures mask deeper weaknesses in some areas of performance. A study of 47 state agencies by the Coalition Against Insurance Fraud revealed that, for the most part, fraud fighters are priming the pipelines with fresh cases that could create a new generation of convictions in the years ahead. Still, the lack of growth in convictions and cases opened is a cause for concern, says the report. The study says arrests and convictions are up but on the downside, 18 fraud bureaus reported declines in convictions even though fraud convictions rose 6.4 percent overall.

The average docket of new cases also has stayed flat since 2001, the coalition’s study says. New cases increased 6.4 percent overall mainly because two new units started feeding cases into the pipeline.  Despite the clear warning signals, fraud bureaus are making progress and may be setting the stage for even stronger results over the next several years. “Convictions — the bottom line for fraud-fighting — thus may spike in the next few years as growing investigations mature into full-blown prosecutions,” said Dennis Jay, the coalition’s executive director. While the total cases presented for prosecution — 5,467 — rose 6.5 percent, most of the growth appears to come from newer fraud bureaus as their early cases wind through the pipeline. Fraud bureaus with dedicated prosecutors, such as Florida, had the largest growth in cases.

Convictions

California continues to convict more insurance swindlers than any other state — one of every three convictions in the U.S. The Golden State’s fraud bureau logged a record 1,546 conviction, well ahead of runners up Florida (493), New York (450) and New Jersey (354). The report concludes “though fraud bureaus show encouraging gains on several important fronts, fraud fighters should be wary of too much celebration. The sobering truth is that America’s fraud problem may be much larger than people realize…”

What Do The Results Really Show?

Insurance fraud prosecutions and investigations are anemic. What the reports does not tell is that most of those convicted were sentenced to probation. Few made full restitution and those who served time were few and far between. Insurance criminals are laughing at the insurance industry, the police agencies, the Fraud Divisions and the prosecutors. If they are one of the few criminally convicted, they face an average sentence of only five years probation and 60 days in jail. Jail time is usually served on weekends so that the convicted fraud perpetrators can still ply their fraudulent trade on weekdays.

Fraud bureaus are not as effective as they want to be or want insurers to believe.  Small percentages of those arrested are convicted and only a minuscule number of those reported by insurers are investigated by the prosecutors and police agencies.
Contrary to the belief of many prosecutors, even though people are seldom physically injured by insurance fraud, it is a major crime with a statutory maximum punishment in most of those states where it is a crime, of five years in state prison. In addition, staged auto accidents often result in real injuries and the death of innocent motorists not involved in the fraud. The amount of money is so massive that organized crime figures from every part of the world are joining into the crime with the usual vicious activities that organized crime brings to everything with which it is involved.

Specialists who know insurance and insurance fraud investigate it.  It is, at least in California and those states that have a criminal insurance fraud statute, a rather simple crime to prove. It should be the type of case a prosecutor would want to file and try. Instead, as an ex-prosecutor said to me: “insurance fraud is a crime prosecutors run away from because the cases are usually heavy with documentary evidence and are complex.” Consider the public outcry if gangs of bank robbers took $100 billion a year from banks in the U. S. every year. Would the public stand for groups of criminal stockbrokers looting their 401k and other pension plans?  What would happen if a motorcycle gang went across the country and stole $100 billion every year from convenience stores across the country? There would be a hue and cry for the heads of the police, prosecutors and police who failed to detect it. Yet, when the public is told that a group of criminals steals $100 billion every year from the insurance industry the response is either a yawn or a cheer for the criminals who make Bernie Madoff, the Ponzi Schemer, seems an amateur.

I have heard the following from prosecutors to whom insurance fraud cases were presented:

    “A confession on the record with five corroborating witnesses is not enough to support a fraud prosecution.”    “An insurance company can’t be a victim of a crime.”
   “You have a good case but I don’t have time to prepare an indictment or take the case to a grand jury.”
   “Juries don’t like insurance companies.”
    “Are you bringing this case because you don’t want to pay a legitimate claim?”
    “I don’t understand what the claimant did wrong.”

What Can Insurance People Do to Change The Statistics?

It is the obligation of all whose work is to protect insurers against insurance fraud to do something to change the situation.  Methods that are available and that should be exercised by every person who wants to reduce the effect of insurance fraud include:

▸    Insurers should lobby local, state and federal police agencies to change the system so that:

    •    All the insurance tax money must go to all kinds of insurance fraud at the discretion of the Commissioner of Insurance.

    •    Prosecutors must be assigned to the Fraud Bureau or Fraud Division whose only job must be to prosecute insurance fraud.

    •    When the local D.A. does not file a criminal complaint, the fraud investigator or lawyer for the insurer, must complain, loudly.

▸    Insurers and their staff should work within the system to:

    •    Report every suspected fraudulent claim to the Fraud Division   •    Follow-up with the Fraud Division after you get the letter saying they won’t investigate.
•    Supplement the Suspected Fraudulent Claim (“SFC”) report with investigation results and transcripts of examinations under oath.
•    Develop a personal relationship with investigators at the Fraud Division.
•    Develop a personal relationship with supervising investigators at the Fraud Division.
•    When The Fraud Division refers a case to a prosecutor, determine the identity of the prosecutor and establish a relationship with the prosecutor.
•    Make it clear to the prosecutor that you represent an interested and proactive victim.
•    Make it clear to the prosecutor that your insurance company is upset that it is the victim of a crime.
•    Make it clear to the prosecutor that you will make available to him or her anything required as required by the law.
•    Make it clear to the prosecutor that you, and other employees of the insurance company, will be available to testify at the trial of the insurance criminal.
If you are in California and sixty days go by after the case is referred to the D.A. demand compliance with the requirements of the California Insurance Code. California Insurance Code § 1872.4 that provides, in relevant part, as follows: 

   “ If prosecution by the district attorney concerned is not begun within 60 days of the receipt of the commissioner’s report, the district attorney shall inform the commissioner and the insurer as to the reasons for the lack of prosecution regarding the reported violations.” [Italics added]

If you are not in California look for similar statutes in the state you are in or simply complain to the D.A. or State’s Attorney. Remember, a prosecutor is a public servant who is obligated to work with and on behalf of the victim of the crime. As a victim of a crime the insurer has the right to speak with and complain to prosecutorial agencies.

The letter demanding an explanation for why prosecution has not been filed should go to the elected District Attorney and the Commissioner of Insurance. He or she will refer the letter for response to a head deputy. Often they will be ashamed to tell you that the only reason for the failure is that other cases always have priority over insurance fraud. The District Attorney of every county must be made aware that he or she is obligated to inform the insurance company victims why the crime is not being prosecuted. Enough letters, enough complaints, and insurance fraud will be recognized by prosecutors as a serious crime. It often takes the embarrassment of the individual prosecutor before it is possible to increase the number of prosecutions and the speed with which they are brought to trial.

It is also the obligation of everyone involved in the effort to hinder insurance fraud to obtain publicity to make the public at large aware of a problem of insurance fraud. To do so each person involved in the attempt to reduce the extent of insurance fraud can:

    1.    Write articles for your local newspapers.
2.    Telephone local reporters and complain that they don’t cover the crime.
3.    Call talk-radio and explain the expense of insurance fraud.
4.    Volunteer for your company’s speaker’s bureau and give talks on insurance fraud to every Rotary, Lions, BPOE or other service organization meeting.
5.    Appear at the trial of every insurance fraud case.
6.    Demand restitution when an insurance fraud perpetrator is convicted.
7.    Refuse to pay fraudulent claims regardless of the costs of defense.
8.    When sued by people who are believed to have presented fraudulent claims insist that the case be tried to a jury before any payment is made.

Remember Pogo who was reported to have said: “We Have Met The Enemy and They Is Us!” People involved in the business of insurance should do nothing to make the crime easier to succeed and do everything possible to defeat each attempt at insurance fraud.

To defeat insurance fraud it must be prosecuted. To get it prosecuted the insurer must do the work to complete a thorough investigation that can be presented to a prosecutor. Every person involved in the business of insurance must understand that insurance fraud is the orphan child of the criminal justice system. Insurance fraud will never be totally defeated. It will be reduced and be unprofitable to the perpetrators when the public and prosecutors recognize that insurance fraud is a serious problem that effects their own financial condition.

Everyone involved in the business of insurance and everyone who buys insurance must make it clear that they are angry with what is happening to their insurance premium dollar. When I, and everyone who has ever purchased a policy of insurance, hear that $300 out of every $1,000 we pay in premium goes to a criminal we should all want to scream out the window, as did the character in “Network” — “I’m mad as Hell, and I’m not going to take this any more!”

The e-book, Insurance Fraud is available for download at http://www.zalma.com/zalmabooks.htm.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma has published three new E-Books: “Zalma on Insurance,” “Murder and Insurance Fraud Don’t Mix,” a short novel and “Zalma on California Claims Regulations – 2011″ now available.

A RELEASE SHOULD BUY PEACE

The Tennessee Court of Appeal was called upon to resolve a dispute between an insured and his insurer that became a lawsuit only after the insured settled his uninsured motorist claim with the insurer. In James Watry v. Allstate Property and Causality Insurance Company, An Illinois Corporation, No. M2011-00243-COA-R3-CV (Tenn.App. 12/28/2011) Watry, the insured was injured by an automobile driven by an uninsured motorist. Insured filed a claim with Insurer seeking uninsured motorist coverage benefits and settled for an amount that was less than what he believed to be his actual damages. Insured then sued Insurer seeking damages for fraudulent misrepresentation, breach of contract, and violation of the Tennessee Consumer Act. Insurer filed a motion for judgment on the pleadings which the trial court granted.

BACKGROUND

James Watry suffered injuries from an automobile accident with Richard Dewayne Davenport on March 2, 2009. Mr. Davenport drove into Mr. Watry’s automobile, causing him to suffer damages.

Mr. Watry had an automobile insurance policy with Allstate Property and Casualty Company (“Allstate”) that included uninsured motorist coverage with policy limits of $100,000 per person. Mr. Davenport was uninsured and was operating an uninsured automobile, as that term is used in the insurance policy.

Mr. Watry asserted his damages resulting from the accident totaled $32,207.30 in medical bills and expenses for necessary and reasonable medical services and $3,000 in lost income. Allstate sent Mr. Watry a letter dated June 9, 2009, that offered is $25,500.00. The medical bills considered in this settlement came to $24,512.00. We did subtract all bills related to the nasal fracture as we do not see that this was part of the “auto accident.” Mr. Watry entered into a Receipt and Release with Allstate (the “Release”) on September 22, 2009, in which he agreed to accept $29,512 in full satisfaction of his claim for coverage against Allstate. Following his execution of the Release and receipt of the settlement proceeds, Mr. Watry filed a Complaint against Allstate in which he asserted that Allstate fraudulently misrepresented material facts, breached the contract, and violated the Tennessee Consumer Protection Act. The trial court granted Allstate summary judgment.

Mr. Watry appealed the trial court’s judgment dismissing his claims. On appeal Mr. Watry claims the trial court erred in dismissing his Complaint because he alleged sufficient facts to withstand a motion for judgment on the pleadings.

ANALYSIS

The only representation of material fact Mr. Watry alleges Allstate made is set forth in paragraph 21 of his Complaint: “Plaintiff was only entitled to $5,000.00 for all his general damages under the Policy.” Mr. Watry does not assert that this statement is false or allege that his reasonable reliance on this statement caused him to suffer damages as he must to state an actionable claim for fraudulent misrepresentation.

The insurance policy Mr. Watry had with Allstate is a contract between Mr. Watry and Allstate. To state a claim for breach of contract, Mr. Watry must describe some conduct by Allstate that was inconsistent with one or more provisions of the insurance policy and that he suffered damages as a result. However, Mr. Watry does not allege Allstate violated any terms of its policy in its dealings with him or that it took any actions that contradicted any of its terms.

In support of his consumer protection claim, Mr. Watry asserts in his brief that he signed a release of his uninsured motorist claim “based upon an adjuster’s misrepresentations.” However, the only representation Mr. Watry mentions in his Complaint is that Allstate told him he was entitled to no more than $5,000 for his general damages under the policy. Mr. Watry settled with Allstate for $29,512, which is $4,000.00 more than Allstate offered in its June 9 letter. I