May a Lender Force Place Insurance?

 Profits, Commissions & Force Placed Insurance

No one likes to pay insurance premiums and would prefer to buy insurance the day before the fire. Unfortunately true psychics are rare so we all buy insurance to protect against unknown future losses.

Mortgage contracts invariably require that the borrower protect the security with hazard insurance. When the homeowner fails to purchase the hazard insurance the mortgagee has the right to place insurance at the expense of the borrower. This force placed insurance is limited to protecting the structure and is invariably more expensive than a property owner can purchase in the open market because of the increased morale hazard caused by an owner who refuses to insure the property. In Johnson v. Green Tree Servicing LLC, Slip Copy, 2015 WL 2452680 (N.D.Miss., 5/22/15) the property owner tried to avoid paying for the force placed insurance by claiming the lender profited from the transaction. The District Court for the Northern District of Mississippi was asked to resolve the dispute.

FACTS

The defendant, Green Tree Servicing LLC (“Green Tree”) is a mortgage servicing company. The plaintiff, Rayar Johnson, has a mortgage serviced by Green Tree. Johnson’s claim arises out of the force-placed insurance (“FPI”) Green Tree acquired on Johnson’s home in Buckatunna, Mississippi. Johnson claims Green Tree illegally benefited from a scheme of unearned “kickbacks” from the insurance company for placing the insurance. Green Tree asserts that Johnson was aware that hazard insurance on the property was required to protect Green Tree’s interest in the property, and that if Johnson did not obtain her own hazard insurance, Green Tree would force place insurance on the property.

Johnson executed a mortgage on her home in 2005, and in 2013 that mortgage was transferred to Green Tree, at which time Johnson no longer had hazard insurance on the property. Section 5 of the mortgage required Johnson to maintain hazard and flood insurance on the property. If Johnson failed to maintain this insurance coverage the mortgage provided the following: “If Borrower fails to maintain coverage described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage…. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained.” (Emphasis added)

Green Tree sent Johnson a letter advising her that she did not have adequate hazard insurance. The letter asked for proof of insurance within 45 days, and if adequate insurance was not obtained in that time period, Green Tree “may exercise [its] right to obtain insurance coverage on the collateral to protect [its] interest.” The letter continued, in bold face type, “Please note that if we do buy insurance coverage on the collateral, we will do so through an affiliated insurance agency that will earn a commission on the insurance policy.”

Johnson never provided proof of coverage and Green Tree purchased force placed policy from American Security Insurance Company. Green Tree sent Johnson a notice of this purchase and again told Johnson that Green Tree purchased the insurance through an affiliated insurance agency and that Green Tree may earn a commission on the insurance policy. Green Tree again urged Johnson to provide proof of her own insurance, and indicated that, if she did so, the policy Green Tree had acquired would be canceled.

ANALYSIS

Johnson alleged breach of contract and breach of the duty of good faith and fair dealing arising out of the hazard insurance Green Tree force placed on Johnson’s property because of Johnson’s failure to obtain hazard insurance.

Plaintiff is not challenging the rates themselves but rather Green Tree’s performance under the terms of the mortgage.  Viewed in a most favorable light, the substance of Johnson’s claim is that the insurance rates were unreasonable or inappropriate. The rate Green Tree charged Johnson was filed with and approved by the Mississippi Insurance Commission. The approved rate included the alleged “kickbacks” and other costs. Since the rate was approved by the Commission, the rate is per se reasonable. Therefore, the District Court found that Johnson’s claims that she was over-charged and cheated are barred by the filed rate doctrine which made the rate charged fair and reasonable.

In addition to being barred by the filed rate doctrine, the court also found that Johnson failed to state a claim for breach of contract or bad faith. The mortgage instrument required Johnson to acquire hazard insurance. Nothing in the mortgage instrument prohibits Green Tree from earning commissions from force placed insurance.

Green Tree repeatedly admonished Johnson to acquire hazard insurance and warned of the consequences of not doing so. Green Tree disclosed the nature and cost of the insurance it would force place on the property and further disclosed that Green Tree may earn a commission on the insurance.

Based on the complaint, a reasonable jury could not find Green Tree either breached the contract or acted in bad faith towards Johnson.

ZALMA OPINION

Every property owner should protect the property from unknown or contingent losses with insurance. To do otherwise exposes the property owner to a total risk of loss. When the property is subject to a mortgage the mortgage agreement requires that the property – the collateral given for the loan – be protected by insurance. The plaintiff not only failed to insure, she refused to insure, and was therefore obligated to pay for the forced placed insurance. To sue the mortgagee for her defalcation was simply an expression of unmitigated gall.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Speculative Conflict & The Right to Independent Counsel

Construction Defect Suit Defended Under Reservation of Rights

Liability insurers commonly have a duty to control defense of any suit against its insured. If an insurer issues a specific reservation of rights that creates a conflict of interest between the insurer and the insured in jurisdictions like California, the insured is entitled to independent counsel. However, the courts refuse to assume that the insurer is evil and will instruct counsel it retains to harm the insured and allow it to eventually refuse coverage. People insured, especially in construction defect actions, assume that the insurer will act, as would the developer, in its own interest over that of the insured. That assumption, of course, would be a violation of the implied covenant of good faith and fair dealing.

A Developer, who was the defendant in underlying construction defect litigation, brought suit against its subcontractors, alleging breach of contract to indemnify, defend, and obtain insurance and also sued the insurers seeking declaratory relief seeking equitable indemnity, contribution and repayment, against the subcontractor’s insurer.

The insurance coverage dispute arose from underlying construction defect litigation in which Corona homeowners have sued the developer, plaintiff and appellant Centex Homes (Centex), for work performed by Centex’s subcontractors. One of the subcontractors, Oak Leaf Landscape, Inc. (Oak Leaf), is insured by defendants and respondents, St. Paul Fire & Marine Insurance Company and St. Paul Mercury Insurance Company (Travelers). Centex is named as an additional insured on the Travelers’s policy. Centex sought defense and indemnity from Travelers in Centex Homes v. St. Paul Fire and Marine Insurance Company, — Cal.Rptr.3d —-, 2015 WL 2437957 (Cal.App. 4 Dist., 5/22/15) and demanded independent counsel after receiving a reservation of rights letter from the Travelers. Travelers demurred and the trial court sustained the demurrer to the causes of action dealing with independent counsel and the reservation of rights. Centex appealed.

FACTUAL  BACKGROUND

When ruling on a demurrer, the facts alleged in the complaint are taken as true. Centex alleges that it was a developer of single-family residences in Corona. In May 2012, Centex was sued by Corona homeowners in Riverside County Superior Court for construction defects. Centex tendered the defense to Travelers, which accepted the defense subject to a reservation of rights, including the right as provided by the contract of insurance to choose and control defense counsel.

Centex filed the present action against 57 subcontractors, alleging six causes of action for breach of contract to indemnify, defend, and obtain insurance, for equitable indemnity, and for contribution and repayment. The complaint specifically alleges that Centex “has incurred, is incurring, and will incur defense fees and costs” to defend the Corona plaintiffs’ claims, all of which are recoverable through defense and indemnity provisions in its agreements with its subcontractors and through various insurers who named Centex as an additional insured under general liability policies issued to the subcontractors.

In its demurrer, Travelers argued that Centex had not alleged any specific facts to demonstrate Travelers is manipulating the defense, thus entitling Centex to independent counsel. Furthermore, the allocation of defense costs and fees is premature because the amount of fees, the parties involved, and the relevant facts are still unknown.

DISCUSSION

Centex argues that, to the extent Travelers controls the defense of both the subcontractors and Centex, Travelers can manipulate the litigation against Centex’s interests, creating an ethical conflict requiring independent counsel: “There is a large block of authority recognizing what also seems relatively obvious: when an insured is obligated to provide defenses for two or more insureds with adverse interests, there is a sufficient conflict of interest that the insurer must provide independent counsel for each insured at its own expense.” (14 Couch on Insurance (3d ed. 2014) § 202:24.) Additionally, Centex claims that, when Travelers seeks reimbursement of defense fees, its right to reimbursement and the issue of allocation must be resolved as part of the action against the subcontractors.

The Eighth Cause of Action

“A reservation of rights by an insurer does not necessarily constitute a conflict of interest requiring the insurer to provide independent counsel. The conflict must be significant, not merely theoretical, actual, not merely potential.” (Emphasis added) [Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1421, 120 Cal.Rptr.2d 392; James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101–1102, 111 Cal.Rptr.2d 181]  Nor is a general reservation of rights sufficient to trigger the right to independent counsel.

The facts alleged by Centex do not support its claim of a conflict of interest with Travelers. An insurer has the right to control a defense. Centex argues Travelers will manipulate experts to its advantage without giving any explanation about how that will be accomplished. Similarly, Centex offers a host of allegations about how Travelers will control the litigation without describing how this is occurring in the underlying construction defect litigation. Centex is alleging conclusions without substance, not facts. The California Court of Appeal, in reaching its decision, concluded that as “Gertrude Stein famously said about Oakland, there is no there there.”

Public policy dictates that leave to amend be liberally granted. If there is any reasonable possibility that the plaintiff can state a cause of action, it is error to sustain a demurrer without leave to amend. As an alternative, Centex requests a reversal to allow Centex the opportunity to amend its complaint.

Unfortunately for Centex it did not request leave to amend from the trial court. On appeal, it does not sufficiently propose how the seventh and eighth causes of action could be amended to state a claim based on an actual, present, existing, or ripe controversy. For that reason, the court rejected Centex’ argument.

ZALMA OPINION

Because major development contracts require multiple versions of risk shifting by each developer requiring the general contractor to defend, indemnify and insure the developer and each sub-contractor required to defend,indemnify and insure the developer and the general contractor, and down the line. That is why Centex sued over 50 subcontractors seeking defense and indemnity from multiple entities and insurers all running in different directions as if they were 50 clowns running out of a Fiat 500. It makes litigation in claims of construction defect a certainty and is a full employment act for the defense bar. This one suit will require the services of over 60 law firms defending each party. Centex speculated evil conduct by Travelers with no facts so it could control the defense. It failed. The entire situation is Nuts!

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Webinar by Barry Zalma

Set-Up of Insurer Bad Faith, Defence of Bad Faith Suits and “Reverse Bad Faith” Claims: Insurer vs. Policyholder Perspectives

Attend Live Online Training Only

http://www.complianceonline.com/set-up-of-insurer-bad-faith-and-defence-of-bad-faith-suits-and-insurer-policyholder-perspectives-webinar-training-703922-prdw?channel=suraj

June 05, Friday 10:00 AM PDT | 01:00 PM EDT

Why Should You Attend:

This webinar will highlight the multi-billion dollar business of insurance and how the tort of bad faith has grown to be a force that bleeds the insurance industry of potential profits. It will explain what the tort of insurance bad faith is, various methods by which insurers are set up by lawyers to obtain actions they can later claim are tortious, and the various weapons provided by legal precedent and professional claims handling to work to reduce the amount claimed by plaintiffs’ bad faith lawyers.

Areas Covered in the Webinar:

  • The tort of bad faith and why it was created.
  • How the tort of bad faith grew from payment of an excess verdict to multi-million punitive damage judgments.
  • The methods used to set up an insurer for claims of bad faith.
  • The appropriate responses to an attempt to set up the insurer for a claim of the tort of bad faith.
  • The type of evidence available to prove the insurer was set up.
  • How to convince courts 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.
  • The defences available to insurers who are charged with the tort of bad faith.

Who Will Benefit:

  • Insurer Claims Executives
  • Insurer Claims Representatives
  • Independent Insurance Adjusters
  • Insurance Agents and Brokers
  • Operational Risk Managers
  • Insurance Coverage Lawyers
  • Insurance Claims Lawyers

The covenant of good faith and fair dealing has been applied equally to both the insurer and the insured since, at least, 1766 when Lord Mansfield in the British House of Lords ruled in a case called Carter v. Boehm. However, since the invention of the tort of bad faith in the 1960’s breach of the covenant by an insurer became a tort but breach of the covenant by the insured is not a tort but may be raised as a defense to claims that the insurer tortuously breached the covenant.

As a result of the lack of equal treatment lawyers who represent plaintiffs in suits against insurers for the tort of bad faith are tempted to use techniques to set up insurers to do things that can later be trotted out as evidence of bad faith rather than attempt to promptly and fairly settle a claim. Insurers may use the bad faith conduct of the insured and the insured’s counsel as a defense to the tort of bad faith suits.

Insurers must refuse to fall into the set up traps laid by plaintiffs’ counsel and must aggressively defend claims of bad faith when they believe they were set up and bring to the fore evidence that the insured treated its insurer in bad faith as a defence to the bad faith suit.

Insurance bad faith was created as a tort to protect the public against abuses by the insurance industry that was perceived to take advantage of unwitting members of the public. In practice, over the last 50 years, the tort of bad faith often is used to bludgeon an insurer into paying claims it does not owe because the expense of defending such actions exceed the amount it would cost to defend. Many insurers pay extortion to avoid the expense of defending cases claiming the tort of bad faith and the extreme cost if the insurer loses at trial.

Courts also must be educated to recognize a set up from a real act of bad faith. The tort of bad faith has run its course and should either be totally done away with or made mutual so that an insurer can recover tort damages from an insured whose conduct breaches the promise to treat the insurer with good faith and fair dealing.

Sign up here.

Posted in Zalma on Insurance | Leave a comment

Is an Insurer Obligated to Pay For Coverage Not Requested?

You Only Get What You Pay For

It is almost expected that no one reads their insurance policy until after a loss. Similarly, people only complain about the inadequacy of the policy acquired if it, as it was ordered, does not provide coverage for the loss incurred. In Siddique v. Western Heritage Ins. Co., Slip Copy, 2015 WL 2451734 (E.D.Okla., 5/21/15) the insured sought to obtain insurance coverage and other damages because the policy acquired did not cover the loss incurred.

On May 19, 2014, Plaintiff Muhammad L. Siddique filed this action in state court against Defendants Western Heritage Insurance Company (“Western Heritage”); Specialty Insurance Managers of Oklahoma, Inc.; Wardlaw Claims Service, LLP; and Dennis Ray Eastep, Jr. Defendant Western Heritage removed the case to the U.S. District Court and subsequently filed the present Partial Motion to Dismiss, challenging the Plaintiff’s Petition for failing to allege sufficient facts to state a claim upon which relief may be granted.

BACKGROUND

The Plaintiff alleges that he suffered property damage to his home arising from a hailstorm in May 2013, and that the Defendant did not properly adjust his insurance claim.

ANALYSIS

To survive a motion to dismiss a complaint must contain a short and plain statement of the claim showing that the pleader is entitled to relief. Detailed factual allegations are not required, but the statement of the claim must be more than an unadorned, the-defendant-unlawfully-harmed-me accusation.

Breach of Fiduciary Duty

The Plaintiff asserts in his Petition that a special relationship akin to that of a fiduciary existed between the Plaintiff and Defendant due to unequal bargaining power, the quasi-public nature of insurance, and the potential for the Defendant to exploit the Plaintiff’s vulnerability. He further alleged that the Defendant’s specialized knowledge and duty to act reasonably created this special relationship.

Fiduciary relationships are not limited to any specific legal relationship, but can arise anytime the facts and circumstances surrounding a relationship would allow a reasonably prudent person to repose confidence in another person. The four elements of a breach of fiduciary duty claim are:

(1)     the existence of a fiduciary relationship,
(2)     a duty arising out of the fiduciary relationship,
(3)     a breach of the duty, and
(4)     damages proximately caused by the breach of duty.

The Plaintiff’s assertion ignores that the Oklahoma Supreme Court has already determined that the special relationship between insurer and insured and that although the state recognizes a duty of good faith and fair dealing that duty does not enlarge to a fiduciary duty.

The District Court noted that the Plaintiff pleaded no facts that support such an allegation of a fiduciary duty, nor has he asserted facts disclosed during discovery would lend support to such an allegation.  The existence of the duty of good faith and fair dealing implied in insurance contracts does not necessarily mean Plaintiffs’ petition states a claim for breach of fiduciary duty.

The court found, therefore, that the Plaintiff failed to state a plausible claim for breach of fiduciary duty against the Defendant Western Heritage. Since the Court has already found that plaintiff has sufficiently pled a cause of action for breach of the duty of good faith and fair dealing, the Court found that plaintiff’s breach of fiduciary duty claim should be dismissed.

Negligent Procurement of Insurance

Next, the Plaintiff asserts that Defendant Western Heritage is vicariously liable for the actions of its agent, former co-Defendant Specialty Insurance, and that Western Heritage owed him a duty to act in good faith and to exercise reasonable care, skill and diligence in the procurement of insurance. Plaintiff in his Petition has not alleged that the agent failed to procure insurance at all, but is rather complaining of the policy that was procured, and that Western Heritage is vicariously liable for the inadequacies of said policy. However, no duty exists upon an insurer to provide an ‘adequate amount’ of coverage when the insurer did not fail to procure insurance for the insured. There is no legal basis for Plaintiff’s negligence claim based on an alleged failure of Defendant’s agent to properly advise Plaintiff regarding its insurance needs or to procure a policy that provided an adequate amount of replacement cost coverage. Accordingly, the Court found that the Defendant is entitled to dismissal of this claim.

Constructive Fraud/Negligent Misrepresentation

In the Plaintiff’s fifth cause of action, he alleges that he was misled by Specialty Insurance’s misrepresentations to purchase Western Heritage’s insurance policy.

Plaintiff argues generally that Defendant owed a duty to exercise reasonable skill and diligence in procuring the insurance Plaintiff requested and that an insurance agent should be held accountable for misrepresenting the terms or limits of an insurance policy. Plaintiff, nevertheless, failed to address the argument that he had received a copy of the policy and that the policy as written was applied to his claim. The lack of factual allegations demonstrating a specific breach of duty renders plaintiffs’ negligent procurement claim insufficient.

Negligent Underwriting

Plaintiff alleges in his sixth cause of action that the Defendant Western Heritage breached its duty of good faith by failing to “conduct an appropriate underwriting analysis” and that the breach “resulted in both inconsistent and inaccurate replacement cost valuations whereby the Plaintiff paid premiums for policy limits that did not accurately reflect the risks insured.”  The Defendant asserts that this is not a recognized claim under Oklahoma law, and the Court agreed.  The Court found no law to suggest that a common law action for negligence may be based on an insurer’s decision to raise an insured’s premium.

If every insured could bring a claim for negligence against the insurer under the insurance contract, there would be no need for claims of breach of contract and bad faith. Negligence actions would swallow insurance jurisprudence.

After reviewing the Plaintiff’s factual allegations and construing them in the light most favorable to the Plaintiff, the Court nevertheless concluded that he failed to state a claim of negligent underwriting, or to support its existence under Oklahoma law.  Plaintiff has simply alleged a claim of bad faith, which remains as the Plaintiff’s eighth cause of action. Without an underlying duty, their constructive fraud/misrepresentation claim and negligent underwriting claims also fail.

ZALMA OPINION

Insurers are obligated to deal fairly and in good faith with those they insure. They are not obligated, however, to compel an insured to buy insurance not ordered. The obligation is to provide the insured the coverage ordered and the limits requested. No matter how unhappy the insured is he will only be able to recover the benefits promised by the policy he ordered and acquired. If he can prove, as unlikely as it seems, that the insurer acted in bad faith, he may still obtain the damages he seeks.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What Are the Insurance Obligations of a Condo Unit Owner?

Must Condo Association Buy Insurance to Protect Contents of Unit Owner?

Condominium Associations are, by the documents that cause them to exist, put the Association in control of the exterior of the structures and the common areas. Condominium unit owners are responsible for the improvements and betterments in the units and their contents. Almost every such association insures the parts of the structures that it controls and advises the unit owners to obtain condominium owners insurance policies to protect their units and the contents of the units.

When the unit owners coverage is inadequate they will attempt to obtain extra payments from the insurance obtained by the Association or from the association itself. In State Farm Fire and Cas. Co. v. Chardonnay Village Condominium Ass’n, Inc., — So.3d —-, 2015 WL 2449422 (La.App. 5 Cir.), 14-959 (La.App. 5 Cir. 5/21/15) the Louisiana Court of Appeal was asked to resolve a claim by a unit owner’s insurer against the Association and the Association’s insurer for more than received from the unit owner’s policy.

FACTS

On February 14, 1997  Mrs. Theodora Lourie, purchased Unit 26C of Chardonnay Village Condominiums in Kenner, Louisiana. On November 8, 2010, a fire occurred in the kitchen of Mrs. Lourie’s condo unit. As a result of the fire, Mrs. Lourie’s insurer, State Farm Fire and Casualty Company (“State Farm”), paid her $28,200.00 for damages to her condo unit, plus $34,330.07 for damages to the contents of her condo unit and $16,645.88 for living expenses.

On November 7, 2011, Mrs. Lourie filed a petition for damages against appellee, Chardonnay Village Condominium Association, Inc. (“the Association”), and its insurer, Underwriters at Lloyd’s, London (“Lloyd’s”). The petition alleged that pursuant to the Louisiana Condominium Act, the Association’s insurance policy with Lloyd’s provided coverage for the damages at issue, and thus the Association and/or Lloyd’s must reimburse Mrs. Lourie not only for the payments State Farm made to her or on her behalf, but also for additional damages sustained to her condo unit not covered under the State Farm policy.

The Association filed a successful motion for summary judgment arguing that it was not liable for the damages occasioned by the fire. According to the Association, it properly exempted itself from insuring the interior of Mrs. Lourie’s condo unit by notifying her on multiple occasions that it would not be maintaining insurance on the interior of her condo unit.

According to the trial court, Mrs. Lourie was given constructive notice pursuant to the public records’ law. The court also found that it was uncontroverted that she was hand-delivered the Association’s 2009 revised Rules and Regulations, and furthermore, as proof of actual notice, Mrs. Lourie had obtained insurance coverage for her unit through State Farm, who then paid for her claims as allowed under its policy.

LAW AND ANALYSIS

In their assignments of error, appellants argue that genuine issues of material fact remain as to whether the Association exempted itself from the requirement to insure the interior of Mrs. Lourie’s condo unit pursuant to the statute that provides, in part: “A. Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent reasonably available: ¶ (1)Property insurance on the common elements and units, exclusive of improvements and betterments installed in units by unit owners, insuring against all risks of direct physical loss commonly insured against. The total amount of insurance after application of any deductibles shall be not less than eighty percent of the actual cash value of the insured property, exclusive of land, excavations, foundations, and other items normally excluded from property policies; [ ] ¶ * * * ¶ B. If the insurance described in Subsection A is not maintained, the association promptly shall cause notice of that fact to be hand-delivered or sent prepaid by United States mail to all unit owners. The declaration may require the association to carry any other insurance, and the association in any event may carry any other insurance it deems appropriate to protect the association or the unit owners.”

The Association advised Ms. Lourie at the time she purchased the unit that the Association holds hazard, property damage and liability insurance policies as required by the Declaration but not the interiors of the units and stated: “It is suggested that each Unit Owner obtain his own insurance covering property damage to his Unit (not covered by the Association policy) and personal property contained therein as well as insurance covering personal liability. You are urged to consult with your insurance agent.” (Emphasis added.)

At the time Mrs. Lourie purchased her condo unit, the Association’s established policy clearly provided that the Association would not be responsible for any interior damage to individual condo units. Further, it is undisputed that in her acquisition of her condo unit, Mrs. Lourie acknowledged in writing (through her agent) that the purchase of her condo unit was made and accepted subject to the covenants, conditions, restrictions, easements, liens for assessments, powers of attorney and limitations on title.

The Court of Appeal found that it was apparent from a plain reading of the 2009 revised Rule that the revised Rule merely restated the earlier Rule and simply reminded unit owners of their responsibility to purchase insurance covering the interior of their units. The court concluded that reasonable persons could reach only one conclusion, that the revised Rule merely repeats and reaffirms that the unit owner must take responsibility for insuring the interior of his/her unit, and thus, there was no obligation on the part of the Association to purchase insurance to protect the interiors of the units and specifically were not required to insure the contents and improvements of Ms. Lourie’s unit.

ZALMA OPINION

Condominium associations are governed by a contract commonly known as the “Covenants, Conditions and Restrictions” that are binding on the Association and the individual unit owners who are the members of the Association. Most, if not all, condominium associations insure only the common areas and the exteriors of the units. The Insurance Services office has created the form HO-6 designed to protect unit owners with a policy like the State Farm policy acquired by Ms. Lourie. State Farm attempted to get its money back from the Association and its insurer, by improperly suing the Association and Lloyd’s Underwriters. Every condominium unit owner should acquire an HO-6 or its equivalent or will find itself uninsured in the event of a loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

An Important Tool – The Examination Under Oath

 False Answer at EUO Is Fraud

A False Answer as to Any Matter of Fact Material to The Inquiry, Knowingly And Willfully Made, With Intent to Deceive The Insurer, Would Be Fraudulent

The position taken by the U.S. Supreme Court in Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884) that the object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims, has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945) the Seventh Circuit stated:

 “We think there is no escape from the conclusion that these witnesses purposefully refused to answer ques­tions upon examination under oath which were materi­al to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy.   We would think that defendants had a right to examine as to any matter material to their liability, as well as to its extent ” (Emphasis added)

In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgement because of the refusal of the insured to answer material ques­tions. The court stated:

 “It is well settled in other jurisdictions that noncompliance with a provi­sion in an insurance policy requiring the insured to submit to an examination under oath precludes recovery by the insured.”

In Hudson Tire Mart, Inc. v. Aetna Casualty and Surety Co., 518 F.2d 671 (C.A.2d, 1975) the insured sought injunctive relief against the examination under oath provision of the standard fire policy because it would deprive him of his Fifth Amendment right against self incrimination. The court rejected the request and held that:

The purpose of the cooperation clause is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved while the information is fresh in order to protect itself from fraudulent and false claims Only after the incriminating question is asked, is he in a position to assert his immunity and seek a protective order. 

Consequently at this stage of the proceedings the dilemma which the appellant attempts to present is a fictitious one.

The failure to appear at examination under oath was held to be an absolute defense in Lentini Brothers Moving & Storage Co., Inc. v. New York Property Insurance Underwriting Assoc., 428 N.Y.S.2d 684 (1980) affirmed 51 N.Y.2d 740 (1981). The court stated:

 “Compliance with the policy provisions is a condition precedent to recovery. No compliance with the provisions as to written proof of loss or sworn examination occurred. Thus, recovery is barred.”

To protect its right to the examination under oath the insurer should always “require” the insured’s attendance at the examination under oath . The insurer, its Insurance Claims Professional or attorney should never “request” the presence of the insured.

If the insurer only “requests” the insured’s presence, the insured, can correctly contend he did not violate a policy condition if he fails to appear. If the insurer, through its Insurance Claims Professional or attorney, “requires” his presence it should be clear that a failure to appear and testify will void coverage.

An Examination Under Oath Is a Serious and Important Part of the   Insurer’s Investigation

The attorney, Insurance Claims Professional or investigator who takes the examination under oath can take a role similar to the role of a prosecutor without the usual constitutional restraints effecting the examination under oath . [Hickman v. London Assurance Corporation, 184 Cal. 524, 195 P. 45 (1920).] A false statement as to any material fact during the examination under oath can cause the policy to be declared void, even if the fact has no relationship to the loss.

In Claflin the false testimony concerned a witness that would not affect the amount payable under the policy but to protect his reputation for veracity. The Supreme Court found that the witness of the injury was material to the investigation and declared the policy void for fraud because he made false statements under oath.

Contrary to the Belief of Lawyers for the Insured, the Examination under Oath Is Not an Adversary Proceeding like a Deposition in a Lawsuit.

The examination under oath is an investigative tool made available to the insurer. It allows the insurer to delve deeply and under oath into all aspects of the policy and the loss. It is not constrained by the rules of discovery or the Codes of Civil Procedure.

The only restraint on the examination under oath is reasonableness. Unlimited questions are allowed. Only totally irrelevant and unreasonable questions dealing with facts completely outside the policy, its acquisition or the loss are not favored.

Irrelevant questions are tolerated if there is any possibility the question may lead to an inquiry about facts relevant to the policy or claim.

The EUO is A Duty Owed by the Insured to the Insurer

Every fire insurance policy issued in the U.S. provides that, in the event of a loss, the insurance company can require the insured to produce documents and testify at an “examination under oath.” The examination under oath is not a deposition; there is no prerequisite lawsuit, nor is the examination subject to formal rules of procedure.

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

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

The examination under oath and the requirement that insureds produce relevant documents in the event of a fire are essential tools to insurers faced with a possible fraud or other issue affecting insurance coverage. Insureds, and their counsel, will often argue that they are not required to produce tax returns or other financial documents because to do so would violate the so-called “taxpayers privilege” or right of privacy. They may refuse to testify about subjects they claim are irrelevant or protected by a privilege or right of privacy. In most states, refusals to testify or produce documents can result in a forfeiture of claims presented by the insured. If, as a result of a fire, the insured has lost the documentary evidence necessary to adequately prove the loss, then the insured can only prove the loss by oral testimony.

By his or her testimony, the insured can remove the suspicions of the insurer. The purpose of the examination under oath is to allow the insured a medium to prove the loss. Sworn testimony is as, or more, effective evidence than documents for an insured to prove his or her loss.

In Rymsha v. Trust Insurance Company, 746 N.E. 2d 561 (Mass. App. CT. 2001), the insured failed or refused to provide financial records including her income tax returns, credit card information regarding the purchase of items reported stolen, photographs and receipts. When she failed the insurer denied her claim. The Massachusetts appellate court reasoned:

We think resolution of Rymsha’s appeal is controlled in all respects by Mello v. Hingham Mut. Fire Ins. Co., 421 Mass. 333, 337 (1995). In that case, the court agreed with those authorities therein cited which hold that the “submission to an examination, if the request is reasonable, is strictly construed as a condition precedent to the insurer’s liability.” Id. We see no basis for a distinction between an obligation to submit to a reasonably requested examination under oath and the duty to produce documents pertinent to the claimed loss. Rymsha does not contend otherwise. Indeed, she does not even cite to, let alone discuss, Mello. Rather, she argues only that, because she informed Trust from the outset that many of the items she reported as stolen had been given to her, the information sought by Trust (specifically, her personal and corporate income tax returns for the years 1988 through 1994) was not pertinent to her claim. In considering whether the documents requested by Trust were pertinent to Rymsha’s claim, the Superior Court judge concluded that Rymsha’s examination under oath and the undisputed circumstances of her claim gave rise to the reasonable suspicion that she did not have the resources to purchase the allegedly stolen items, that she had a ‘motive to stage the loss,’ that Trust had the right ‘to assure itself of the validity of [the] claim,’ and that the requested documents were relevant to that question. We see no error. See Sidney Binder, Inc. v. Jewelers Mut. Ins. Co., 28 Mass. App. Ct. 459, 462-463 (1990) (in theft claim, evidence of insured’s business affairs and personal finances relevant to show that insured had motive to stage burglary). Numerous other jurisdictions have held that the financial status of an insured can be relevant to an insurer’s investigation of a claim. See, e.g., Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 160 (S.D.W. Va. 1987); Pisa v. Underwriters at Lloyd’s, London, 787 F. Supp. 283, 285 (D.R.I.), aff’d, 966 F. 2d 1440 (1st Cir. 1992); DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601, 612 (App. Div. 1995); Dlugosz v. Exchange Mut. Ins. Co., 176 A.D. 2d 1011, 1013 (N.Y. 1991); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wash. App. 712, 720-721 (1997). In the circumstances here presented, the Superior Court judge was not in error in concluding that the challenged documents were pertinent to Rymsha’s claim.

The insured in Rymsha attempted to defeat the insurer’s argument by claiming the insurer was not prejudiced by her failure to produce documents. The Court rejected the argument and found that the failure to produce the reasonably requested pertinent information put the insurer in the untenable position of either paying the claim without question and without any means by which to investigate its validity, notwithstanding the circumstances and amount of the loss described in her unsworn statement and examination under oath testimony, or being sued for breach of contract and unfair acts and practices. The court concluded that, without finding that a showing of prejudice was necessary, the prejudice to the insurer was “too obvious to warrant discussion.” It was enough to state that the insured’s blanket refusal to provide the reasonably requested documents even stymied the insurer’s ability to show actual prejudice.

Concluding that a breach of an examination under oath clause and an Indiana Supreme Court decision, Morris v. Econ. Fire & Cas. Co., 848 N.E.2d 663, 666 (Ind. 2006), held that breaches of examination under oath  clauses do not require a showing of prejudice; rather an insurance company only needed to show a material breach to prevail. [Collins v. State Farm Fire and Casualty Co., No. 06-C-801 (E.D.Wis. 02/28/2008)] The same position as taken in Hanover Insurance Co. v. Cape Cod Custom Home Theater, Inc., No. 07-P-188 (Mass.App. 8/08/2008) where refusal to produce required documents and failure to testify destroyed the insured’s right to recover indemnity. Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 08/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

      Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 8/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Are Intentional Acts Insurable?

Intentional Acts and Insurance

“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] As a result an intentional or intended action that causes damage to a third party is not available to defend or indemnify an insured since an  intentional and known event is not insurable.

In Albert v. Mid-Century Insurance Company, Not Reported in Cal.Rptr.3d, 2015 WL 1915339 (Cal.App. 2 Dist., 5/38/26) Plaintiff Shelly Albert appealed from the judgment in favor of defendant Mid–Century Insurance Company after the trial court granted defendant’s motion for summary judgment. Plaintiff sued defendant for breach of the insurance policy and insurance bad faith after defendant denied her tender of the defense of a lawsuit brought by nonparty Henri Baccouche.

FACTUAL BACKGROUND

Plaintiff purchased a homeowners insurance policy from defendant in January 2008. The policy was in force on January 3, 2011, when plaintiff was sued by her neighbor, Mr. Baccouche, for damage plaintiff caused to his property when plaintiff erected an encroaching fence, and pruned nine mature olive trees on Mr. Baccouche’s property. Plaintiff tendered the claim to defendant to provide a defense, and defendant denied plaintiff’s claim.

The Insurance Policy

The policy defined an “occurrence” as “an accident, including exposure to conditions, which occurs during the policy period, and which results in … property damage … during the policy period. Repeated or continuous exposure to the same general conditions is considered to be one occurrence.” (Boldface omitted) The definition closely tracks the definition of insurance quoted above.

The policy also set forth a number of exclusions, including one for “Intentional acts,” which the policy defined as “property damage … which is caused by, arises out of or is the result of an intentional act by or at the direction of the insured.

Mr. Baccouche’s Lawsuit

Baccouche’s verified complaint alleged causes of action for trespass to real property and trees, abatement of private nuisance, declaratory relief, and for quiet title. The complaint alleged that Mr. Baccouche and plaintiff owned adjacent parcels of land which were subject to a reciprocal roadway easement providing both parcels (and another parcel not at issue here, belonging to another landowner) access to the main public road. Plaintiff erected a permanent fence over a portion of the roadway easement, which also intruded onto Mr. Baccouche’s parcel. The fence enclosed a 644 square foot portion of Mr. Baccouche’s land, which included a grove of nine mature olive trees. The complaint further alleged that plaintiff “willfully and maliciously damaged nine mature olive trees on [Mr. Baccouche’s] property … by severely hacking cutting and pruning those trees so as to greatly reduce their canopies, foliage, limbs, etc., without permission….”

Mr. Baccouche later filed a first amended complaint, newly alleging a cause of action for negligent damage to his trees.

Defendant’s Investigation and Denial of Plaintiff’s Claim

On January 26, 2011, plaintiff provided a recorded statement concerning her claim to defendant. In the recorded statement, plaintiff asserted that the fence she erected was within her property line. Plaintiff did not believe any of her fencing encompassed Mr. Baccouche’s property. As to the trees at issue in Mr. Baccouche’s complaint, plaintiff asserted that the trees were “boundary trees” and that the trunks of the trees essentially straddled the property line between Mr. Baccouche’s and plaintiff’s properties.

Field Claims Manager Kristin Ferren denied plaintiff’s claim, asserting that the allegations in both the initial and first amended complaint “do not meet the definition of occurrence resulting in bodily injury or property damage as defined by your policy.”

The trial court granted defendant’s motion concluding that plaintiff had failed to demonstrate a potential for coverage, as the conduct at issue in Mr. Baccouche’s lawsuit was nonaccidental, intentional conduct.

DISCUSSION

An insurer owes its insured a broad duty to defend against claims creating a potential for indemnity.  When determining whether a duty to defend exists, the court looks to all of the facts available to the insurer at the time the insured tenders its claim for a defense. Initially, the court compares the allegations of the complaint with the terms of the policy. (Frake, supra, at p. 578.) The proper focus is on the facts alleged in the complaint, rather than the alleged theories for recovery. Nevertheless, the insured may not speculate about unpled third party claims to manufacture coverage, and the insurer has no duty to defend where the potential for liability is tenuous and Facts extrinsic to the complaint may also be examined and may either establish or preclude the duty to defend.

When an insured intends the acts resulting in the injury or damage, it is not an accident merely because the insured did not intend to cause injury. The insured’s subjective intent is irrelevant.

It is completely irrelevant that plaintiff did not intend to damage the trees, because she intended for them to be pruned. Moreover, it is undisputed that the contractor intended to cut the trees, and absolutely no facts exist, in the complaint or otherwise, indicating that some unforeseen accident (such as a slip of the chainsaw) caused the damage to the trees.

The appellate court concluded that under any view of the underlying events, the trimming of the trees was no accident.

ZALMA OPINION

Insurance, by definition, does not cover intentional torts or acts that the insured intends to do that cause damage to another. The plaintiff intended to have the trees cut and did so. By so doing there was no potential for an insured peril and the trial court’s summary judgment was affirmed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Is The Car an Innocent Bystander to Road Rage?

Road Rage Assault Out of Car Not Part of Use of the Car?

Road rage is a common event in heavy traffic situations where a person making a long commute becomes frustrated and any slight can result in aggression. People have intentionally crashed their cars into others, shot a pistol at an offending driver, or got out of the car and entered into a fist fight.

FACTS
When an insured and insurer dispute whether an insured vehicle was in “use” when the insured’s employee got out of the vehicle, assaulted a pedestrian rendering him unconscious, and then dragged him to the side of the road before fleeing the scene of the altercation, the U.S. District Court in California was asked to resolve the dispute. The district court held that the car was not in use and dismissed the suit with prejudice. The plaintiff appealed and the Ninth Circuit resolved the dispute in Wincor Nixdorf Inc. v. Discover Property & Cas. Ins. Co., — Fed.Appx. —-, 2015 WL 2374113 (C.A.9 (Cal.) 5/8/15).

Discover Property and Casualty Insurance Company (“Discover”) provided auto insurance coverage for Wincor Nixdorf, Inc. (“Wincor”) and its employees, including Robert Kane (“Kane”). Allianz Global Risks U.S. Insurance Company (“Allianz”) provided commercial general liability coverage for Wincor. On May 21, 2009, Kane was driving in the service of his employer when he came to a controlled intersection in downtown San Francisco. Although the traffic light was green for Kane, a pedestrian, Cameron Rodriguez (“Rodriguez”), crossed in front of his car and caused him to stop. Rodriguez and Kane traded verbal insults at which point Rodriguez gave Kane “the bird.” Kane then got out of his car and punched Rodriguez, knocking him to the ground. Kane returned to his work vehicle, but had second thoughts because he “felt bad” and did not want to “just leave this guy … laying in the street.” Kane thus picked up the unconscious Rodriguez by the armpits and moved him to the side of the road where Kane dropped him in the gutter, causing him to hit his head. Kane then drove away. Rodriguez sustained a broken eye socket and a fracture to the back of his head.

Kane was criminally convicted of felony assault and battery, and Rodriguez also settled a civil lawsuit against Kane and Wincor for $1,250,000. Wincor tendered to Discover defense of the company in the civil lawsuit, but Discover refused. Allianz defended Wincor under a reservation of rights. Wincor and Allianz now sue Discover based on the auto-insurer’s refusal to defend Wincor.

ANALYSIS

The District Court concluded that Discover did not owe a duty to defend Wincor against Rodriguez’s civil suit where the claims arose out of Kane’s assault and subsequent dragging of Rodriguez to the side of the road, rather than out of the “use” of the vehicle. The California Supreme Court in State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 100–01 (1973), “left open” the “exact nature of the required causal connection” to show a vehicle was in “use” for purposes of the insurance code, but since then the majority of California Courts of Appeal have held that the “predominating cause/substantial factor test” should apply. Am. Nat’l Prop. & Cas. Co. v. Julie R., 76 Cal.App. 4th 134, 139–40 (1999); see State Farm Mut. Auto. Ins. Co. v. Grisham, 122 Cal.App. 4th 563, 566–67 (2004).

The Ninth Circuit concluded that the district court properly held “there is no causal connection—predominating, substantial, minimal, or otherwise—between the use of the Vehicle and the injuries Rodriguez sustained when being moved off the street.” At most, the car provided transportation to the situs of the tort, but remained an innocent bystander thereafter.

The Ninth Circuit could not even imagine how Kane’s momentary reentry into the vehicle before having second thoughts would dictate a different outcome from the numerous other cases that have held similar road rage incidents to have no causal link to the vehicle. Moreover, even if Kane had been attempting to move Rodriguez out of the vehicle’s path in order to drive away, this fact alone would not change the outcome. Therefore, the Ninth Circuit held that there was no possibility of coverage, and therefore, no duty to defend.  Absent a duty to defend, Discover did not breach its contract with Wincor, and all of the other claims asserted by Wincor and Allianz fail as a result.

ZALMA OPINION

It is seldom that litigation between insurers, like this one, are filed since the position of the Ninth Circuit should have been obvious. What is interesting is that Allianz paid the claim since the conduct of Kane was obviously intentional and should have been sufficient to allow it to join with Discover in its decision to refuse to defend Kane and his employer. Kane was also outside the scope of his employment since no employer – other than a boxing promoter – expect their employee to beat up a pedestrian.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Can a Person Be a Member of a Household Living in a Separate Structure?

What the Heck Is Curtilage?

Allstate Insurance Company brought this action seeking a declaration that Gordon Hammers’s umbrella insurance policy did not cover damages arising out of a car accident with Ellery Chacksfield for which Gordon’s brother Robert had been found responsible because Robert was not a “resident of [Gordon’s] household.”

In response to cross-motions for summary judgment, the district court concluded that Robert was a resident of Gordon’s household and granted summary judgment to Chacksfield. The Ninth Circuit, in a non-officially published opinion, Allstate Ins. Co. v. Chacksfield, — Fed.Appx. —-, 2015 WL 2389248 (C.A.9 (Cal.) 5/20/15), resolved the issue by a discussion of curtilage (An area of land attached to a house and forming one enclosure) as it applied to the insurance coverage analysis.

ANALYSIS

Residents of the same household must live “under one roof or within a common curtilage.” Jacobs v. Fire Ins. Exch., 278 Cal.Rptr. 52, 58 (Ct.App.1991). Robert and Gordon did not live “under one roof” because Robert lived in a separate trailer and had been prohibited to enter Gordon’s house. Regardless, the district court concluded that Robert and Gordon lived within a common curtilage.

California courts seem to apply the same definition of “curtilage” in both the insurance coverage and Fourth Amendment contexts. To determine the extent of a home’s curtilage, courts consider:

(1)     the proximity of the area claimed to be curtilage to the home;
(2)     whether the area is included within an enclosure surrounding the home;
(3)     the nature of the uses to which the area is put; and
(4)     the steps taken by the resident to protect the area from observation by people passing by.

Applying these factors, the Ninth Circuit concluded that Robert and Gordon did not live within a common curtilage.

First, Robert’s trailer was more than 100 feet from Gordon’s home, and even in rural areas, it is rare for curtilage to extend more than 100 feet beyond the home. Second, Robert’s trailer was enclosed within its own fence. Third, Robert’s trailer and Gordon’s home did not share uses in common. Thus, three factors weigh decisively in favor of the conclusion that Robert and Gordon did not share a common curtilage. The fourth factor is not obviously to the contrary, and would not outweigh the other three factors even if it were.

ZALMA OPINION

Insurance is always limited by the insurance contract’s terms and conditions. When a person must be a member of the named insured’s household to obtain coverage, that person must be more than a relative. Living in a separate structure – a mobile home – surrounded by a fence, more than 100 feet from the named insured house is not a member of the household because they do not share a common curtilage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Arson-For-Profit Must Repay Insurer

No Chance of Case by Insurer Against Insured for Tort of Bad Faith

A homeowners’ insurer sued in state court to declare an insured’s policy void, based on allegations that insured intentionally set fire to her home. Following removal of suit to federal court, the insured asserted counterclaims for breach of contract under Kentucky common law, and for bad faith under Kentucky common law, the Kentucky Consumer Protection Act (KCPA), and the Kentucky Unfair Claims Settlement Practices Act (KUCSPA). Following the insured’s indictment for conspiracy to use fire to commit wire fraud, the insurer moved for partial summary judgment, and filed amended complaint seeking damages for insurance fraud and asserting Kentucky common law claim for reverse bad faith.

In State Auto Property and Cas. Ins. Co. v. Hargis, — F.3d —-, 2015 WL 2081922 (C.A.6 (Ky.) 5/6/15) the appeal presented to the Third Circuit Court of Appeal whether it was error for the district court to dismiss the claim asserted by the insurance company against its insured for “reverse bad faith” because it has not been recognized in Kentucky (or any other jurisdiction).

State Auto Property and Casualty Insurance Company (“State Auto”) argued that the district court erred by summarily dismissing the claim without attempting to predict what the state court would do.

FACTS

Lori Hargis’s home located in Henderson, Kentucky, was insured by State Auto under a standard homeowner’s policy when it burned to the ground in the early morning hours of December 9, 2007. No one was home at the time of the fire, but investigations by the Kentucky State Police and State Auto determined that the fire was intentionally set. Hargis filed what she would only later admit was a fraudulent insurance claim for approximately $866,000. State Auto paid out in excess of $425,000—including a mortgage payoff of $386,720.34—before commencing this action in state court to declare the policy void.

State Auto alleged that Hargis caused or conspired to cause the fire and falsely inflated the property loss resulting from the fire in breach of the “intentional loss” and “concealment or fraud” provisions of the policy. The evidence summarized in the district court’s April 2010 Order included circumstantial evidence that Hargis had the opportunity and financial motive to commit the arson.

Trial would not be necessary in the end, however, because State Auto’s investigation eventually led to Hargis’s admission that she had solicited a friend to burn down her house to collect the insurance proceeds. Specifically, the investigation resulted in the return of a federal indictment in January 2011 that charged Hargis and Leslie Veshaun White with conspiracy to use fire to commit wire fraud in violation of 18 U.S.C. § 844(h) and (m).

Hargis pleaded guilty in January 2012, and admitted during the change-of-plea hearing that she solicited White to burn down her house for $10,000 from the insurance proceeds; that she called White on the day of the fire to tell him that she and her children would be out of the house; and that she knowingly filed the fraudulent insurance claim to collect the proceeds of the homeowner’s policy. Hargis was sentenced to a 60–month term of imprisonment and was ordered to pay restitution to State Auto totaling $672,497.80. The restitution ordered was the full amount sought by State Auto and consisted of: $386,720.34 for the mortgage payoff; $11,500 for debris removal; $27,994.43 for living expenses; and $195,116.70 for investigation costs and attorney fees incurred by State Auto (including $80,000 that was attributable to the defense of Hargis’s bad faith claim).

As soon as the indictment was returned against Hargis, State Auto moved for partial summary judgment in its favor with respect to Hargis’s bad faith claims. The district court granted that motion because “State Auto’s refusal to pay Hargis’s claim was at least reasonably debatable” and “[t]he indictment simply provides further support for the Court’s belief.”

CAN THE INSURER MAINTAIN A REVERSE BAD FAITH ACTION?

Absent controlling decisions from the Kentucky Supreme Court, “we must predict how the court would rule by looking to all the available data.” Allstate Ins. Co. v. Thrifty Rent–A–Car Sys., Inc., 249 F.3d 450, 454 (6th Cir.2001). Unable to point to any decisions in Kentucky (or elsewhere) that have recognized a common law claim for reverse bad faith, State Auto argues that there is no reason to conclude the Kentucky Supreme Court would not decide to allow tort recovery (i.e., compensatory and punitive damages) for an insured’s bad faith since the implied covenant of good faith and fair dealing imposes contractual obligations on both parties. Specifically, echoing arguments made in several law review articles, State Auto complains that without reverse bad faith, insureds can take a “no-risk gamble” by seeking punitive damages, while their insurers (and by extension shareholders and policyholders) bear the burden of the high investigation and defense costs associated with those claims.

The strongest argument for recognizing a reverse bad faith cause of action can be made where the insured commits fraud when making a claim under a first-party policy.

Kentucky law implies a covenant of good faith and fair dealing in all contracts that impose on the parties thereto a duty to do everything necessary to carry them out. A separate tort claim for bad faith arises from a violation of a duty to act in good faith that is imposed by the common law, not by the terms of the contract. However, an independent tort claim for breach of that duty is only permitted where there is a special relationship between the parties and where distinct elements are present, such as: unequal bargaining power, vulnerability, and trust among the parties; nonprofit motivations for contracting and inadequacy of standard contract damages.

A common law tort claim for reverse bad faith (bad faith by the insured in the insured’s interaction with an insurer) has not been recognized in any jurisdiction. The California Court of Appeals held that: “An insurer has no claim against its insured in tort for breach of the covenant of good faith and fair dealing.” Agricultural Ins. Co. v. Superior Court, 70 Cal.App.4th 385, 82 Cal.Rptr.2d 594, 595 (Cal.Ct.App.1999) (cited with approval in Kransco v. Am. Empire Surplus Lines Ins. Co., 23 Cal.4th 390, 97 Cal.Rptr.2d 151, 2 P.3d 1, 12 (Cal.2000) (rejecting comparative bad faith defense)).

The court in Agricultural Insurance explained that a relationship including specialized circumstances of reliance and dependence is necessary to transmute such a contractual breach into a tort. Such circumstances do not exist in the context of an insured’s responsibilities toward its insurer, or in the reciprocal context of an insurer’s legitimate expectations from its insured. An insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of “insurance bad faith.”

Hargis’ fraudulent conduct resulted in a civil judgment against her for all of the damages incurred by State Auto and subjected her to incarceration and an order of restitution to State Auto.

Further, even if the prosecution had not gone forward, there is no suggestion that State Auto could not have brought a common law claim for fraud. The Third Circuit found it hard to imagine that a possible claim for reverse bad faith would be more a deterrent than the threat of criminal prosecution.

ZALMA OPINION

The tort of bad faith is an anomaly. It provides tort damages for breach of contract allowing the insured to collect both contract and tort damages for the same series of events. It should not exist any more than an Aardvark – part mammal and part bird – should exist. They both do.

It is a waste of time to attempt to get tort damages from an insured for the insured’s bad faith conduct. If, as in this case, the insured’s bad faith conduct is a fraud or an attempted arson-for-profit then the insurer can sue the insured for fraud and seek punitive damages as a result of the fraudulent conduct. If the insured is just a pest who acts unfairly to the insurer it is best to just deal with the claim, adjust it and go on to future claims.

If insureds, like the defendant in this case, continue to abuse the tort of bad faith by suing the insurer for punitive damages when she knew that she had caused the fire for the sole purpose of defrauding her insurer, that abuse will have repercussions. Abuse of the law by insureds will eventually do away with the tort of bad faith as abuses by insurers caused the judicial creation of the tort of bad faith.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Does the AIA Construction Contract Avoid Litigation?

Insured May Effectively Waive Subrogation

Subrogation is an equitable remedy where an insurer that pays to indemnify its insured will be able to step into the shoes of the insured and sue any tortfeasor who is responsible for the property damage that its policy of insurance was required to indemnify its insured because of the property damage.

Like all rights the right of subrogation can be waived. Most Commercial Property Insurance contracts authorize the insured to waive subrogation as long as the waiver happens before the loss and is a clear, unambiguous written agreement. When people enter into a construction contract published by the American Institute of Architects (“AIA”) the written agreement includes a waiver of subrogation against each other. What that means in understandable language is that the parties agree – rather than sue each other for tort damages – to rely on their own insurance in the event of a loss. By so doing the builder can charge less to do the work and the owner can be sure to avoid litigation.

FACTS

The County, which had entered into construction project contract with general contractor for courthouse renovation, filed suit against general contractor and subcontractors, alleging negligence, breach of implied warranties, and breach of contract, alleging that subcontractor’s negligence was primary cause of fire that occurred during renovation that severely damaged courthouse. Defendants filed motions for summary judgment, arguing that the county had agreed to provide insurance for project, and that county had waived its subrogation rights against them and, thus, was not entitled to recover damages.

Property owners and contractors routinely agree to waive subrogation rights for damages. Here, the parties did so by incorporating an American Institute of Architects (“ALA”) standard form into their contract for the repair of the Jefferson County courthouse. While the repairs were underway, a fire severely damaged the courthouse.

The AIA contract waives subrogation rights for all “damages caused by fire or other perils to the extent covered by property insurance.” The parties now dispute the meaning of the subrogation waiver. Owner seeks to subrogate all damages unrelated to repairs, arguing that the subrogation waiver applies only to construction-related damages. Contractor argues that all damages covered by Owner’s property insurance policy are waived. Both parties cite other states’ precedent to support their position, and the decision below created a split of authority in our own Court of Appeals. We granted transfer in this matter of first impression to establish the Indiana approach.

On May 20, 2009, a fire destroyed much of the Jefferson County courthouse, located in Madison, Indiana. Jefferson County alleged that the fire began while Daniel Gutapfel—a roofing subcontractor—was soldering copper downspouts near the wood frame of the courthouse as part of a four-phase plan to remodel and renovate the entire building. The damages far exceeded the remodeling costs, but were fully covered by Jefferson County’s property insurer, which paid Jefferson County under its policy after the fire.

Jefferson County could satisfy its property insurance requirements in one of two ways: either (1) procure a separate policy to cover only the renovations-commonly referred to as “builders-risk insurance”-or (2) rely on its existing “all-risk” property insurance policy to cover the entire courthouse, including the renovations. Jefferson County chose to rely on its existing “all-risk” policy that it maintained with St. Paul Fire and Marine Insurance Company (“St. Paul policy”).

Discussion and Decision

We must decide whether, under the plain meaning of the AIA contract, property owners waive subrogation rights for construction damages by maintaining “all-risk” property insurance policies that cover both their construction-related damages and their entire property.

The AIA subrogation waiver is well-known in the construction industry and it plays a critical role in the AIA contract’s scheme of remedying construction losses through insurance claims, not lawsuits. The court had no choice but to presume the waiver represents the freely bargained agreement of the parties.

The waiver applies to all “damages caused by fire,” but only “to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work.” Thus, to determine which fire damages are covered by the subrogation waiver, we must look at everything that follows the phrase “to the extent.” The positioning and plain meaning of the word “covered” restricts the scope of the subrogation waiver based on the source and extent of the property insurance coverage, not the nature of the damages or of the damaged property.

CONCLUSION

The Supreme Court of Indiana, in Board of Com’rs of County of Jefferson v. Teton Corp., — N.E.3d —-, 2015 WL 2242352 (Ind., 5/13/15), concluded that the plain meaning of the contract defines the scope of the waiver based on the extent and source of coverage, not the nature of the property damaged. Accordingly, it agreed with the majority of jurisdictions that have applied this plain meaning to bar recovery for all damages covered by the same property insurance policy used to cover construction-related damages-commonly referred to as the “any insurance” approach. Because Contractors have shown that Owner’s insurance covered all damages, the subrogation waiver applies to bar Owner’s claim.

The Supreme Court’s holding is supported by the majority of other jurisdictions that have adopted the “any insurance” approach when interpreting similar AIA waivers. The contract also waived all subrogation rights for damages “to the extent covered by property insurance obtained pursuant to this [agreement] or other property insurance applicable to the Work.

Jefferson County agreed to waive its rights to bring this subrogation claim by relying on its existing “all-risk” property insurance policy that covered the work and all other losses suffered in the courthouse fire. The Supreme Court reached this decision because the plain language of the AIA contract restricts the scope of the waiver based on the source and extent of property insurance coverage, not the nature of the damages. Accordingly summary judgment in favor of Contractors and against Jefferson County was proper.

ZALMA OPINION

Waivers of subrogation are important tools for owners of property, whether dealing with contractors, or lessees. It gives each party to a contract with an owner of real property that regardless of the cause of damage to the property or who was responsible for the cause, both parties agree that they will rely on their own insurance rather than go to the trouble, inconvenience and expense of litigation. The county and its insurer tried to change the terms of their agreements and the Supreme Court insisted on requiring the parties to rely on their own insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When a Customer Is Not a Customer

Bankers’ Bond Requires Loss to Bank’s Customer

In an unusually brief, succinct and intelligent decision the Ninth Circuit Court of Appeal interpreted an insurance contract, called a financial institution bond, as it was written in First Nat. Bank of Northern California v. St. Paul Mercury Ins. Co., — Fed.Appx. —-, 2015 WL 2225044 (C.A.9 (Cal.) 5/11/15).

First National Bank of Northern California (“the Bank”) appealed from a grant of summary judgment against it and in favor of St. Paul Mercury Insurance Company (“the Insurer”).

This insurance coverage dispute arises from a loss caused by the Bank’s payment of two fraudulent wire transfers from the Edwards Living Trust, which the Bank reimbursed. The Bank seeks indemnity from the Insurer under its financial institution bond.

The critical question is whether the Edwardses, who created the Trust, were “customers” within the meaning of the bond. To qualify as a “customer” under the bond, among other things, an individual or entity is required to have a written agreement with the Bank to rely on wire transfer instructions communicated by phone or fax. The undisputed facts show that there was no written agreement.

The Bank argues that the signature card, account agreement, and security procedures may be combined under the incorporation by reference doctrine to establish a written agreement authorizing wire transfers on the basis of voice or fax authorization. Under California law, which governs this dispute, parties to a contract may validly incorporate by reference into their agreement the terms of another document when specific factors are met. The prerequisites for incorporation by reference are:

(1)  a clear and unequivocal reference by the parties;

(2)  the reference must be called to the attention of the other party;

(3)  the party must consent; and

(4)  the terms of the incorporated document must be known or easily available to the contracting parties.

The district court, according to the Ninth Circuit, properly concluded that, under California law, the signature card, account agreement, and security procedures did not qualify as a “written agreement” under the bond definition. The signature card, which is the only document that the Edwardses actually signed, does not refer to the account agreement or the security procedures. The security procedures were not provided to the Edwardses. The signature card does not contain any authorization for a wire transfer from the account by voice or fax authorization.

Under these undisputed facts the combined signature card, account agreement, and security procedures did not constitute a written agreement with the Bank authorizing it to rely on wire transfer instructions communicated by phone or fax. Therefore, the district court correctly concluded that the Edwardses did not qualify as “customers” within the meaning of the bond.

ZALMA OPINION

Financial Institutions Bonds are insurance contracts where the insurer agrees to indemnify the bank if it is defrauded in the course of its business. In this case it only protected losses incurred by the bank’s customers, a term defined by the policy. The Ninth Circuit concluded that since there was no written contract between the bank and the people whose funds the bank improperly transferred. Banks, like everyone who buys insurance, should carefully read the insurance contract and determine if its procedures will allow it to obtain the benefits of the insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What Happens When State Formed Insurer Acts in Bad Faith?

First Party Bad Faith Creature of Statute in Florida

Citizens Property Insurance Corp. (Citizens) was created by the state of Florida to deal with wind damage claims from the annual damage caused by hurricanes passing through the state that standard, for profit, insurers were unwilling to risk. To limit the liability of the state funded insurer the Florida Legislature granted Citizens immunity from most suits with certain exceptions.

In Citizens Property Ins. Corp. v. Perdido Sun Condominium Ass’n, Inc., — So.3d —-, 2015 WL 2236719 (Fla., 5/14/15) the issue raised was whether the Florida Legislature intended Citizens to be liable for statutory first-party bad faith claims as an exception to its statutory immunity from suit. The First District Court of Appeal in Perdido Sun Condominium Ass’n v. Citizens Property Insurance Corp., 129 So.3d 1210 (Fla. 1st DCA 2014), determined that the “willful tort” statutory exception to Citizens’ immunity applied to statutory first-party bad faith claims and certified conflict with the Fifth District Court of Appeal’s decision in Citizens Property Insurance Corp. v. Garfinkel, 25 So.3d 62 (Fla. 5th DCA 2009), disapproved on other grounds by Citizens Property Insurance Corp. v. San Perdido Ass’n, 104 So.3d 344 (Fla.2012), which held to the contrary that Citizens is statutorily immune.  The issue before the Florida Supreme Court was stated as: “Whether the Immunity of Citizens Property Insurance Corporation, as Provided in Section 627.351(6)(S), Florida Statutes, Shields the Corporation from Suit under the Cause of Action Created by Section 624.155(1)(B), Florida Statutes[,] for Not Attempting in Good Faith to Settle Claims?”

BACKGROUND

After prevailing in a breach of contract action against its insurance company, Citizens, Perdido Sun Condominium Association sued Citizens a second time. In the second lawsuit, Perdido Sun alleged a statutory first-party bad faith claim, pursuant to section 624.155(1), Florida Statutes (2009).

Specifically, Perdido Sun claimed that Citizens

(1) refused to pay the full amount owed to Perdido Sun under the insurance policy;

(2) refused to take part in the required appraisal process and instead used that process in an attempt to forestall litigation;

(3) delayed payment of the appraisal award and improperly attempted to condition payment of the award upon the execution of a universal release; and

(4) engaged in a pattern and practice of seeking to avoid or delay full settlement of claims.

Citizens moved to dismiss the complaint, citing its immunity from suit under section 627.351(6)(s)1., Florida Statutes (2009), which provides: “There shall be no liability on the part of, and no cause of action of any nature shall arise against, any assessable insurer or its agents or employees, the corporation or its agents or employees, members of the board of governors or their respective designees at a board meeting, corporation committee members, or the office or its representatives, for any action taken by them in the performance of their duties or responsibilities under this subsection. Such immunity does not apply to:  ¶ a. Any of the foregoing persons or entities for any willful tort; ¶ b. The corporation or its producing agents for breach of any contract or agreement pertaining to insurance coverage; ¶  c. The corporation with respect to issuance or payment of debt; ¶ d. Any assessable insurer with respect to any action to enforce an assessable insurer’s obligations to the corporation under this subsection; ¶ e. The corporation in any pending or future action for breach of contract or for benefits under a policy issued by the corporation; in any such action, the corporation shall be liable to the policyholders and beneficiaries for attorney’s fees under s. 627.428.” (Emphasis added.)

ANALYSIS

Examining the relevant statutory provisions at issue the Supreme Court found no support that the Legislature intended for Citizens to be liable for a breach of the duty to act in good faith by allowing its policyholders to bring a statutory first-party bad faith cause of action. Although the Legislature codified Citizens’ duty to handle claims in good faith, the Legislature never listed statutory first-party bad faith claims as one of the exceptions to Citizens’ immunity. To the contrary, the Legislature chose to immunize Citizens for “any action taken by [it] in the performance of [its] duties or responsibilitie” which necessarily includes a breach of the duty of good faith.

As this Court has recognized, where the Legislature made one exception clearly, if it had intended to establish other exceptions it would have done so clearly and unequivocally. The Legislature has not included statutory first-party bad faith claims among the limited exceptions to Citizens’ immunity when it could have easily chosen to do so. Besides the failure to include a specific exception for statutory causes of action the statutory cause of action for first-party bad faith is a tort or specifically a “willful tort” —  a principle that becomes clear after considering the history of first-party bad faith causes of action.

Unlike common law causes of action for third-party bad faith, first-party bad faith actions are purely a creature of statute that did not previously exist at common law.  The Legislature addressed this issue in 1982 by the adoption of section 624.155, Florida Statutes Citizens also argues that subjecting it to statutory first-party bad faith claims would reduce the funds available to pay insureds’ claims for property damage so that further amounts that might be awarded would be borne by the taxpayers.

In this case, Perdido Sun’s complaint does not allege that Citizens committed a “willful tort.” As Florida Courts have previously recognized, where a plaintiff claims a defendant engaged in egregious and outrageous actions, bad faith can be elevated to a willful tort, an issue that could turn on the facts of the case.  Perdido Sun’s complaint is based solely on the statutorily created first-party bad faith cause of action under section 624.155.

No additional allegations of willful misconduct outside of the statutory bad faith claim are alleged.  Because specific allegations of willful misconduct are not contained in the complaint, the trial court properly dismissed the complaint.

ZALMA OPINION

Because the first-party bad faith tort in Florida exists only as a result of statute and is not a common law (i.e., created by court decision) tort the tort cannot fall within the exception to the immunity. If Perdido Sun wishes to get tort damages from Citizens its only avenue available is the common law tort of fraud which has a much more difficult proof requirement and proof of willfulness. If they thought they could prove fraud I would expect that Perdido Sun would have alleged the tort of fraud in the first place rather than try to change the law.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Murder For Insurance

Zalma’s Insurance Fraud Letter

May 15, 2015

In this, the tenth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on May 15, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    The California Supreme Court on Murder for Insurance
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    From New Jersey & The Coalition Against Insurance Fraud
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Misrepresentations Concerning Theft Claim Voids Coverage
6.    The National Underwriter Company Publishes The Zalma Insurance Claims Library
7.    Mississippi Sues State Farm for Katrina Fraud
8.    State Farm Gets Judgment from Fraudulent Clinic
9.    Florida Deceptive and Unfair Trade Practices Act
10.  Barry Zalma on World Risk & Insurance News – http://www.wrin.com

Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    When Are Intentional Acts Also Accidental?  – May 14, 2015
2.    Is It Time to Reconsider the Notice-Prejudice Rule? –  May 13, 2015
3.    Free Claims Magazine Subscription – May 12, 2015
4.    California SIU Regulations – May 12, 2015
5.    Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer – May 11, 2015
6.    How to Avoid the Tort of Bad Faith – May 9, 2015
7.    I Spoke On Avoiding Bad Faith – May 8, 2015
8.    Policy Definition Controls – May 7, 2015
9.    What is Needed to Prove You are an Insured – May 6, 2015
10.    Can Defendant Depose Plaintiff’s Counsel? –  May 5, 2015
11.    Conflict Stays Declaratory Relief –  May 4, 2015
12.    Advertising Injury Coverage Does Not Cover Breach of Contract – May 1, 2015
13.    Why Insurance Fraud Succeeds – May 1, 2015
14.    Extrinsic Evidence Eliminates Duty to Defend – April 30, 2015
15.    Subrogation – April 29, 2015
16.    A “Heads I Win, Tails You Lose” Story – April 29, 2015
17.    Diminution – April 28, 2015
18.    Is a Liability Policy a First Party Policy? – April 27, 2015
19.    Applicant has Duty to Tell The Truth – April 24, 2015
20.    Unfair Trial Tactics Require Retrial – April 23, 2015

NEW FROM NATIONAL UNDERWRITERThe Zalma Insurance Claims Library

Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

When Are Intentional Acts Also Accidental?

When Herbicides Destroy Crops Litigation Follows

Insurance policies are said to give everything in large print and take it away in fine print. That canard is no longer true since all modern policies are written in common language and each part of the policy is written in the same size print with headings even larger. However, insurance policies provide coverage for every possible risk of loss except those specifically excluded. Some exclusions are written broadly and then give back coverage for certain types of risks of loss so that what looks like an exclusion is actually a grant of limited coverage. This method of writing insurance policies causes confusion and often leads to litigation with each side reading the same language differently.

In National Union Fire Ins. Co. of Pittsburgh, PA v. Florida Crystals Corp., Slip Copy, 2015 WL 2195092 (S.D.Fla., 5/11/15) the U.S. District Court for the Southern District of Florida, was called upon to resolve such a dispute.

BACKGROUND

This case involves a dispute over insurance coverage in a related state-court action. Plaintiff National Union Fire Insurance Company of Pittsburgh, PA (“National Union”)  issued an insurance policy (the “Policy”) to a third party, Fanjul Corp. Defendants Florida Crystals Corporation (“Florida Crystals”) and Sugar Farms Co-op (“Sugar Farms”) are insured under the Policy.

On October 24, 2013, Date Palm Wholesalers, Inc. (“Date Palm”), sued Defendants in state court (the “Date Palm Action”). Date Palm operates a commercial nursery in Palm Beach County.  Florida Crystals and Sugar Farms own and maintain nearby sugar-cane growing and processing operations.

Defendants contract with a company specializing in the aerial application of chemicals, Roma Air Corp. (“Roma”), to apply herbicide at their operations. The Complaint in the Date Palm Action alleges that in March 2013, Defendants directed Roma to spray a powerful herbicide on a large area of land. (“Date Palm Complaint”) This area included not only Defendants’ operations, but also Date Palm’s nursery. The herbicide damaged many of Date Palm’s trees. Date Palm thus sued Defendants and Roma for negligence, strict liability, and trespass.

National Union subsequently commenced the instant lawsuit, seeking a declaration that the Policy imposes no duty to defend Florida Crystals or Sugar Farms in the Date Palm Action. National Union’s Complaint advances numerous theories as to why the claims in the Date Palm Action fall outside the Policy’s scope.

DISCUSSION

National Union contends that the Date Palm Complaint alleges no accident that could give rise to coverage under the Policy, and that the claims in the Date Palm Action come within the scope of the Policy’s various exclusions.

National Union first contends that it owes no duty to defend because the Date Palm Complaint does not rest upon an accident. The Policy covers damage caused by an “occurrence” arising out of the use of certain aircraft. The Policy defines an occurrence as “an accident during the policy period….” National Union argues that the Date Palm Complaint alleges only intentional wrongdoing, thus there is no accident that could give rise to a covered occurrence.

The Date Palm Complaint contains allegations of accidental. Paragraph 21(h) of the Date Palm Complaint states that the spraying of Date Palm’s property arose from a failure to investigate the ownership of the property. Though not pled with exacting clarity, this allegation can plausibly be read as attributing the failure of investigation to Defendants, in addition to Roma. Date Palm premises its negligence claims in part upon the resulting mistaken designation of its property among the land to be sprayed with herbicide. In other words, Date Palm alleges not only that negligence was involved in the act of spraying its property with herbicide, but also that the designation of its property for spraying was an accident.

In the Date Palm Action, Defendants allegedly failed to investigate the ownership of Date Palm’s property, resulting in the mistaken designation of the property for the application of herbicide. This allegation plausibly alleges a mistake giving rise to damage to property of a third party that Defendants neither expected nor intended. Therefore the Date Palm Complaint pleads an “accident.” That Roma intentionally sprayed herbicide on the mistakenly designated property does not require a different outcome.

National Union next argues that the language of Endorsements Seven and Thirteen of the Policy exclude the claims in the Date Palm Action from coverage. Endorsement Seven provides that the Policy “does not cover claims directly or indirectly occasioned by, happening through or in consequence of … pollution and contamination of any kind whatsoever.” To “contaminate” means, among other things, “to soil, stain, corrupt, or infect by contact or association.”

Endorsement Thirteen extends Coverage B to include the aerial application of chemicals “of benefit to or of direct use in the business of” Defendants. This explicit addition of coverage for the aerial application of chemicals in the course of Defendants’ business conflicts with Coverage B’s exclusion of claims for damage resulting from services performed on Defendants’ behalf. Where an endorsement conflicts with the body of an insurance policy, the endorsement controls. Because Endorsement Thirteen appears to create coverage for a portion of the claims in the Date Palm Action, the Policy’s exclusion for services performed on Defendants’ behalf does not relieve National Union of a duty to defend.

CONCLUSION

In sum, National Union has not shown its entitlement to summary judgment on the absence of a duty to defend in the Date Palm Action. The Date Palm Complaint alleges accidental harms that could qualify as an “occurrence” giving rise to coverage under the Policy.

Although a number of the Policy’s exclusions might have applied to claims in the Date Palm Action, Endorsement Thirteen restores coverage at least for parts of those claims. The Court rejected National Union’s argument that Defendants necessarily exercised “control” over Date Palm’s property when Roma sprayed herbicide on it from above.

ZALMA OPINION

To read, understand and properly apply an insurance policy it is necessary to read the entire policy, each and every endorsement, and all of the words that make up the promises of the insurer to defend and indemnify its insured. Then, a thorough investigation of the facts of the claimed loss must be completed with the facts applied to the wording of the policy. The District Court did what was necessary and found that the policy wording was sufficient to allow the potential for coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Is It Time to Reconsider the Notice-Prejudice Rule?

Insured’s Inaction Defeats Coverage

New York, unlike many other states, is willing to enforce provisions requiring report of a loss as soon as practicable. When an insured takes as much as seven to ten months to report a loss it will not be able to obtain defense or indemnity from its insurer. New York does not apply the notice prejudice rule that allows coverage to be provided even after a late report if the insurer is not prejudiced by the delay. New York prefers, logically, to apply the contract of insurance as written.

In Kleinberg v. Nevele Hotel, LLC, — N.Y.S.3d —-, 2015 WL 2097612 (N.Y.A.D. 3 Dept.), 2015 N.Y. Slip Op. 03891 (5/7/15) the Plaintiffs sued Lexington Insurance Company for declaratory relief seeking a declaration that Lexington is obligated to defend and indemnify defendant Nevele Hotel, LLC in an underlying personal injury action. In the underlying action, plaintiffs allege that Nevele’s negligence caused plaintiff Robert Kleinberg to sustain an injury on the slopes of Nevele’s ski resort. Lexington moved for summary judgment, seeking dismissal of the complaint against it and a declaration that it was not obligated to defend and indemnify Nevele in regard to plaintiffs’ underlying action. Lexington argued, among other things, that Nevele had cancelled its insurance policy prior to the date of the alleged injury, and that, even if the policy were in effect, Lexington was not required to provide coverage given that it did not receive timely notice of the potential claim.

FACTS

Plaintiffs alleged that Nevele, rather than themselves, provided Lexington with the necessary notice. In support of its motion for summary judgment, Lexington submitted its policy with Nevele, which contained an “as soon as practicable” notice clause. Through further submissions, Lexington established that Nevele had generated an incident report on the day the accident occurred, in February 2006, and plaintiffs and Lexington agree that Nevele received notice by letter from plaintiffs in March 2006.

Even assuming that Nevele was not put on notice on the day of the accident Lexington established a delay of approximately 10 months between Nevele’s receipt of plaintiffs’ March 2006 letter and its January notice to Lexington. The appellate court noted that the March 2006 letter was submitted by plaintiffs in opposition to defendants’ motion. Even if it relied on the June 2006 letter from plaintiffs to Nevele that defendants submitted in support of their motion—rather than on plaintiffs’ and Lexington’s agreement that the court could consider the March 2006 letter—that seven-month delay would also fail to provide Lexington with timely notice.

Plaintiffs failed to raise a material issue of fact as to its reasonable efforts to identify Lexington as the relevant insurer. Because an injured party is allowed by law to provide notice to an insurance company he or she is also generally held to any prompt notice condition precedent of a policy. However, such an injured party can overcome an insurance company’s failure to receive timely notice—which would otherwise vitiate coverage—by a demonstration that he or she did not know the insurer’s identity despite his or her reasonably diligent efforts to obtain such information.

As proof of their reasonably diligent efforts, plaintiffs submitted two letters that they had sent to Nevele with an attached questionnaire. The letters provided notice of the contemplated personal injury action, requested that Nevele complete the questionnaire and requested that Nevele either kindly refer the letter to Nevele’s insurance company or inform plaintiffs if Nevele was not insured. The attached questionnaire requested insurance carrier information. However, despite the fact that Kleinberg’s accident did not involve any automobile, that questionnaire only specifically requested insurance information regarding Nevele’s automobile insurer. Nevele responded to the second correspondence, but it did not respond to the question relating to insurance coverage. The record is devoid of evidence that plaintiffs took any further efforts to ascertain Lexington’s identity.

The foregoing demonstrates that Nevele responded to plaintiffs’ correspondence and that Nevele neither supplied misinformation nor explicitly refused to provide the relevant insurance information. Moreover, the record fails to demonstrate that plaintiffs made any investigatory efforts outside of their correspondence to Nevele or that they ever responded to Nevele’s correspondence before Nevele eventually gave notice to Lexington.

The combination of plaintiffs’ initial failure to specifically ask for the relevant insurance information, their failure to ask for such information after Nevele’s communication and their failure to promptly follow up in any other manner, plaintiffs failed to raise a triable issue of fact as to their reasonable efforts to ascertain Lexington’s identity.

ANALYSIS

Lexington met its prima facie burden by establishing that it did not receive timely notice of the potential claim. “Where a policy of liability insurance requires that notice of an occurrence be given ‘as soon as practicable,’ such notice must be accorded the carrier within a reasonable period of time” (Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 5 NY3d 742, 743 [2005] [citation omitted] ).  Accordingly, Lexington was entitled to summary judgment dismissing the complaint against it and a declaration in its favor.

Given this determination, Lexington’s remaining contentions, including its arguments regarding the cancellation of the policy and plaintiffs’ obligation to duplicate the notice provided by Nevele, are rendered academic.

The trial court order was, therefore, reversed on the law, with costs, motion granted, summary judgment awarded to defendant Lexington Insurance Company, complaint dismissed against said defendant, and it is declared that Lexington has no duty to defend or indemnify defendant Nevele Hotel, LLC in plaintiffs’ underlying personal injury action.

ZALMA OPINION

The reason for clauses in insurance policies requiring prompt notice of a loss is to allow the insurer to immediately fulfill the promises made to thoroughly investigate all reported losses and protect the interests of the insured. If the insured fails to report the loss promptly the right to investigate promptly is lost.

The notice-prejudice rule has been adopted across the United States by the majority of jurisdictions. This case is an example of why the rule is inappropriate and would raise arguments in a case like this that would prevent the summary judgment approved by the appellate court. An accident on a ski slope, reported ten months later, after the snow has melted and the plaintiff has been treated would probably raise a finding of prejudice but would cause extensive investigation and litigation. By finding the report was too late the court cut off the unnecessary litigation.

Perhaps it is time to reconsider and do away with the notice-prejudice rule and adopt the methodology of the courts of New York.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Free Claims Magazine Subscription

As a subscriber of Claims magazine, in appreciation of my loyalty Claims Magazine  offered me the opportunity to invite you to subscribe for FREE to the publication that provides complete coverage of the claims industry. Since I write for the magazine and have subscribed for decades I believe it is worthwhile for anyone interested in claims. The price, FREE, can’t be beat. Subscribe at http://list.sbmedia.com/t/5862905/173949378/763872/141/

Don’t let your colleagues miss out on comprehensive analysis of industry trends in insurance claims and market developments to help them stay ahead of the competition.

Sincerely,
Lynn Kruetzkamp
Audience Marketing Director

Posted in Zalma on Insurance | Leave a comment

California SIU Regulations

The Minimum Standards for Dealing With Potential Insurance Fraud in California

California’s SIU Regulations are designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”).  To enforce the statute the  California Department Of Insurance (CDOI) issued regulations that were created to enforce the statute. Every insurer admitted to do business in California must comply with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and annually train all integral anti-fraud personnel to recognize indicators of insurance fraud.

The SIU Regulations define the term “Integral Anti-Fraud Personnel” as follows:

“Integral anti-fraud personnel” includes insurer personnel who the insurer has not identified as being directly assigned to its SIU but whose duties may include the processing, investigating, or litigation pertaining to payment or denial of a claim or application for adjudication or claim or application for insurance. The personnel may include claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff, and other insurer employee classifications that perform similar duties. (Emphasis added.) [SIU Regulations, Section 2698.30 (k).]

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state.

The SIU Regulations

The CDOI enacted a set of regulations starting in 2003 and finalized in 2005. The SIU Regulations have been enforced haphazardly and the training requirements have been ignored by most insurers doing business in the state of California.

The SIU Regulations are designed to micro-manage the work of insurance company efforts against insurance fraud.

The CDOI has audited some insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. The CDOI is authorized to assess major fines, as much as $10,000 per violation, on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can, but probably will not, result in a fine from $500,000 to $1 million.

All insurers admitted to practice insurance business in California must recognize that by the SIU Regulations the CDOI has made almost every employee part of what it considers the insurer’s integral anti-fraud personnel. The CDOI requires that the insurer, or its Special Investigation Unit (SIU), train all of the insurer’s integral anti-fraud personnel annually and train all new hires within 90 days of employment.

When deciding who needs to be trained California Insurers should recognize that the SIU Regulations require almost everyone employed by the insurer to be trained annually.

Fraud Division

The CDOI controls a police agency called the Fraud Division. The Fraud Division is the largest law enforcement unit that makes up the Enforcement Branch of the CDOI.

The Fraud Division’s mission is to protect the public from economic loss and distress by actively investigating and arresting those who commit insurance fraud and to reduce the overall incidence of insurance fraud through anti-fraud outreach to the public, private, and government sectors.

The Fraud Division accomplishes its mission through its staff of more than 260 dedicated employees, of which at least 194 are sworn officers. Fraud Division Detectives are sworn Peace Officers. Fraud Division Detectives conduct a variety of specialized criminal investigations that pertain to insurance fraud within four primary programs:  Auto Insurance Fraud; Workers’ Compensation Fraud; Property/Casualty Fraud, and Healthcare/Disability Fraud.

Crimes investigated under these programs can be prosecuted as a violation of  Section 550 of the Penal Code (Insurance Fraud), violations of the criminal statutes in the California Insurance Code, and other related crimes such as conspiracy, theft, and automobile theft statutes.

For further information about the Fraud Division and its programs, go to the Fraud Division home page at http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/Fraud-About.cfm. The Insurance Code provides a limited immunity to insurers and their employees for reporting a potential fraud to the Fraud Division. The statute provides, in summary, that no insurer, or the employees or agents of any insurer, shall be subject to civil liability for libel, slander or any other relevant cause of action by virtue of providing information concerning a suspected fraudulent claim to law enforcement, including the California Department of Insurance, Fraud Division.

The Fraud Division was developed to help the public and the insurers of the state who are victims of insurance fraud. Any person needing more information or assistance with fraud related matters can contact the Fraud Division directly. [See http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/0400-regional-offices/]

Statutory Duty To Report Fraud

Insurers have a statutory duty to report any suspected insurance fraud to the Fraud Division.

The SIU Regulations are not intended to be a text on the handling of suspected fraudulent insurance claims that must be followed slavishly. They do not even claim to be a complete guide to claims handling or the investigation of suspected insurance fraud. The Regulations are, rather, an outline of basic claims handling techniques when fraud is suspected.

Although the training required by the Regulations is compulsory, the prudent insurer will see that the training requirements provide a benefit to the insurer. The training required by the SIU Regulations can act as a starting point to develop a more professional claims staff fully aware of insurance fraud and how to recognize the red flags or indicators of insurance fraud. There is no downside to a thoroughly and competently trained claims staff that, in addition to knowing the requirement of the Regulations, know how to resolve claims presented to the insurer where fraud is suspected in a professional and competent fashion.

If the insurer has not trained its integral anti-fraud personnel and if the insurer does not have a training program in force the insurer is subject to a finding it is in violation of the SIU Regulations. If there is no training program that can train all employees who fit within the definition of “integral anti-fraud personnel” within ninety (90) days of their employment the insurer will be in violation of the SIU Regulations.

An insurer violates the SIU Regulations if it fails to annually train all: claims handlers; underwriters; agents; policy handlers; call center staff; legal staff; or  other insurer employees that perform similar duties. Very few people employed by an insurer are excluded in this list. Insurers who do not consider underwriters or clerks who answer telephones to be part of their anti-fraud mechanism may find itself fined by the CDOI for failure to train those people on anti-fraud subject matter. Arguably, the Chairman of the Board, the President and the Vice Presidents of Claims and Underwriting of the insurer must also be trained.

Failure to train these individual executives can result in the same fine as a failure to train claims adjusters.

The Regulations also require that the admitted insurer maintain: “[R]ecords of the anti-fraud training provided to all staff [and that it] shall be prepared at the time training is provided and be maintained and available for inspection by the Department on request. The training records shall include the title and date of the anti-fraud training course, name and title and contact information of the instructor(s), description of the course content, length of the training course, and the name and job title(s) of participating personnel.” [Section 2698.39 (d)]

The SIU Annual Report describes the insurer’s anti-fraud operations as mandated by the California Code of Regulations, Title 10, §2698.30 – .43. These regulations require licensed California insurers to submit an annual report. The report must be signed by an officer of the holder of or applicant for the Insurer’s Certificate(s) of Authority.

Every insurer that fails to train its integral anti-fraud personnel annually, as required by the statute, is asking the CDOI to punish them severely. Every insurer that actually trains its integral anti-fraud personnel annually and effectively, will find its payment of indemnity and claims expenses reduced logarithmically and many more attempted insurance frauds will be discovered and defeated to the profit of the insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer

Serious Injuries Not Enough To Get UIM

Uninsured Motorist Coverage (UM) exists to provide coverage for insured injured by an uninsured motorist. When that motorist carries insurance only to find the insurer becomes insolvent, is technically uninsured. If an admitted insurer state insurance guarantee statutes allow for payment of claims made against the insolvent insurer or its insureds with limited coverage available.

The Eighth Circuit Court of Appeal, in McHone v. State Farm Mut. Auto. Ins. Co., — F.3d —-, 2015 WL 2151776 (C.A.8 (Ark.) 5/8/15) was called upon to resolve an UM claim where the defendant’s insurer was declared insolvent. The insolvency cased Christine McHone to sue her UM insurer State Farm Mutual Automobile Insurance Co. (“State Farm”) to recover UM benefits pursuant to her personal policy of insurance issued by State Farm. State Farm moved for summary judgment on the basis that McHone was not entitled to uninsured motorist benefits under Tennessee law and the terms of her policy. McHone filed a counter-motion for summary judgment. The district court granted State Farm’s motion for summary judgment and denied McHone’s counter-motion.

FACTS

On December 15, 2008, a collision occurred between McHone and Jessie Whirley on Interstate 40 in West Memphis, Arkansas. McHone was driving a 2000 Pontiac Grand Prix when she was struck by a tractor trailer driven by Whirley and owned by Diamond S. Express, Inc. McHone, a Tennessee resident, was insured by State Farm. McHone’s policy included coverage for uninsured motor vehicles with bodily injury limits of $100,000 for each person. The trucking company defendants were insured by Gramercy Insurance Company, with liability limits of $1,000,000.

As a result of the collision, McHone suffered bodily injuries, including back related injuries, and sustained medical bills exceeding $400,000. McHone also claims her treating physicians estimate future medical care that will exceed an additional $400,000.  McHone’s alleged damages exceed $800,000.

After the collision, McHone filed suit against Whirley, Diamond Express and its owner, M.C. Mauney. The matter was scheduled for trial in February 2013. However, prior to trial, Gramercy Insurance Company was placed into Rehabilitation by an agreed upon order of the District Court of Travis County, Texas. The Texas court’s order, in part, appointed a rehabilitator and issued an automatic stay with respect to actions against any insured of Defendant for which Defendant was liable under a policy of insurance or was obligated to defend.  McHone’s lawsuit was stayed and the trial date was continued.

On March 4, 2013, McHone’s counsel submitted a letter to State Farm outlining the problems with Gramercy and demanding $100,000 uninsured motorist benefits under McHone’s State Farm policy. On March 14, 2013, State Farm denied McHone’s claim and took the position that no coverage existed. At about the same time, McHone began negotiating with Gramercy’s receivership estate’s third party claims administrator. As a result of those negotiations, McHone agreed to settle her claims against Whirley, Diamond Express, and Young for $300,000. McHone argued the settlement was not based on available insurance.

THE POLICY

McHone’s State Farm policy states (in part): “If the Uninsured Motor Vehicle Coverage limits provided by this policy are greater than the minimum limits required by law, then such limits will be reduced by an amount equal to the sum of the limits of all liability insurance and liability bonds that apply to the accident are collectible to the insured.”
In addition the State Farm policy provided that it would not pay for any damages: “that have already been paid to or for the insured; ¶  a. by or on behalf of any person or organization who is or may be held legally liable for: ¶ i. bodily injury to the insured; or ¶ ii. property damage, ¶ whether such damages are characterized as compensatory or punitive damages.”

State Farm successfully moved for summary judgment asserting McHone was not entitled to uninsured motorist benefits under Tennessee law and the terms of her policy. McHone appealed.

ANALYSIS

Summary judgment is proper only if, viewing the record in the light most favorable to the non-moving party, there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.

On appeal McHone argued the State Farm policy’s reference to “the minimum limits required by the law” actually refers to the legal requirement of interstate carriers to have a minimum of $1,000,000 insurance coverage. Therefore, McHone’s position is the $300,000 she received from the receiver falls short of the applicable minimum limits required by law.

The district court held State Farm was entitled to a credit for the $300,000 settlement McHone received from the Gramercy receivership, $200,000 more than the State Farm policy limit, and therefore, McHone is not entitled to recover the $100,000 uninsured benefits under her policy.

The relevant Tennessee statutes state: “The uninsured motorist insurance carrier shall be entitled to credit for the total amount of damages collected by the insured from all parties alleged to be liable for the bodily injury or death of the insured whether obtained by settlement or judgment and whether characterized as compensatory or punitive damages.” (emphasis added)

The language of McHone’s State Farm policy states State Farm is not liable under its Uninsured Motor Vehicle Coverage for “any damages that have already been paid to or for the insured; by or on behalf of any person or organization who is or may be held legally liable for: bodily injury to the insured.”

The Eighth Circuit concluded, therefore, that State Farm is entitled to a credit of $300,000 for the money McHone received from her settlement with Gramercy’s receivership. McHone’s argument that the credit is not applicable because the payment was made by the receivership rather than by Gramercy itself is unpersuasive and supported neither by the policy language nor Tennessee law.

ZALMA OPINION

Ms. McHone was not the victim of an uninsured motorist. She recovered, by settlement, $300,000 from the receivership estate of the insurer for the person who caused her injuries. Since the amount recovered was more than the policy limit in her UM policy there was no UM loss. Since the jurisdiction allows credit to the UM insurer for the amounts received in settlement, there was no loss McHone could receive from her UM insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Avoid the Tort of Bad Faith

You Need a Professional Claims Staff

I was honored to speak on avoidance of the tort of bad faith by the Pacific Claims Executives Association on May 7, 2015. I explained to the executives attending my opinion for avoiding the tort of bad faith. I spoke for an hour and will provide the main portion of my talk here.

The tort of bad faith was created in the 1950’s to provide more than contract damages to allow an insured to be compensated by an insurer for its bad conduct and abuses of the insured that courts believed existed. Although such abuses were rare they opened all insurers to tort and punitive damages that have enriched many policyholder attorneys.

A PROFESSIONAL CLAIMS STAFF

In my opinion there is only one way to avoid suits for the tort of bad faith: create and maintain a professional claims staff.

A professional claims staff must include people who:

  • Understand insurance.
  • Can read and understand an insurance policy.
  • Understands and can evaluate property losses.
  • Understands tort law.
  • Knows how to take a thorough recorded statement from the insured, claimant or independent witnesses.
  • Knows how to investigate the causes of property losses.
  • Knows how to investigate the causes of bodily injury losses.
  • Knows how to investigate every type of loss the risk of loss of which were insured.
  • Knows how to evaluate the facts gained by a thorough investigation and apply the results to the wording of the insurance policy.
  • Knows how to empathize with the insured or claimant who has incurred a loss.
  • Understands the valuation of used personal property.
  • Understands how to evaluate bodily injury.
  • Understands the difference between bodily injury and personal injury as defined by a liability insurance policy.
  • Knows when to retain experts to assist in the evaluation and analysis of a claim, like:
    • Forensic engineers.
    • Fire cause and origin experts.
    • Forensic accountants.
    • Private investigators.
    • Salvors.
    • Reconstruction contractors.
    • Construction consultants.
    • Insurance coverage lawyers.
    • Insurance defense lawyers.
  • Knows what local juries will award for bodily injury.
  • Knows what local juries will award for breach of an insurance contract.

The insurer needs to develop such a professional staff by training and continuing education of its claim staff.

A new claims person should be required, before allowing him or her to deal with an insured or a claimant, to first learn about insurance and claims handling by requiring the new employee to read and understand a basic insurance claims handling book like “Insurance Claims: A Comprehensive Guide.” After the new claims person has read through the insurance text materials available in the insurer’s office the new adjuster should then be required to ride with, listen to, and learn from an experienced claims person handling every type of claim the insurer writes. For example, when I was a trainee adjuster I rode with and learned from adjusters who handled bodily injury claims, fire and other property claims, surety claims and workers’ compensation claims.

After the ride alongs and practical experience with claims where the new claims person listens and says nothing, the new claims person should be required to attend a classroom based claims training school like those presently maintained by some large insurers and two large independent adjusting firms. This training should include:

  • The methods used by courts to interpret insurance policies.
  • The basic law of negligence.
  • The basic law of contracts.
  • Basic medicine dealing with bodily injuries.
  • Basic knowledge of medical billing.
  • Investigation techniques.
  • How to repair a fire, wind, flood, earthquake or other damage to dwellings and commercial structures.
  • How to conduct a physical inventory of a business.
  • The state’s fair claims settlement statutes and regulations.
  • The state’s special fraud investigation unit statutes and regulations.
  • The use of experts.
  • The use and control of defense and coverage lawyers.

Only after the training can the new claims person be allowed to deal with insureds and claimants and only under close supervision by an experienced and professional claims supervisor or claims manager.

The insurer, even after it has properly trained its new claims person, must inculcate in the claims  person that insurance claims requires a process of never ending education and learning. They must understand that the law of dealing with insureds and claimants change constantly. Education about insurance must be continuous and a daily exercise. They must subscribe to and read insurance trade journals – most of which are available free over the internet or the insurance company’s intranet. They must subscribe to newsletters from counsel who represent the insurer and provide new information on a regular basis. They can read Zalma on Insurance as you are doing now.

Without a professional claims staff mistakes will be made, untrained or inexperienced claims personnel will fall for attempts by claimants, insureds, public insurance adjusters, and policyholder’s lawyers to cause them to do something that can later be trotted out as evidence of bad faith, bad faith suits will be filed and the cost of defense of those suits – even if they eventually result in a defense verdict – far exceed the savings by paying a young and untrained claims person rather than paying the value of an experienced and professional claims person. Training and continuing education will save millions of dollars in bad faith defense costs and tort damages paid to resolve such suits.

By spending the funds needed to complete and maintain a professional claims staff will save millions by avoiding bad faith suits because all claims owed will be paid in full and with empathy so that the claimant and insured leave the process satisfied.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

I Spoke On Avoiding Bad Faith

The Pacific Claims Executives Association honored me by asking me to speak to them about methods to avoid the tort of bad faith at their meeting yesterday in Monterey, California. For that reason, as I travel back to my home there will be no summary today.

I’ll try to write something next week on the subject.

Have a great weekend.

Posted in Zalma on Insurance | Leave a comment

Policy Definition Controls

The Reason for Non Owned Auto Provisions

Auto liability insurance policies are often limited to provide coverage only for the automobile whose risk of loss is insured.  Policies contain Non Owned Auto provisions to avoid coverage for autos that are not normally used by the driver and that change the risk the insurer agreed to insure. In Cowin v. Shelter Mutual Insurance Company, — S.W.3d —-, 2015 WL 2089773 (Mo.App. W.D., 5/5/2015) the Missouri Court of Appeal was asked to ignore the language of a policy and provide coverage to an insured driving a commercial vehicle whose use was not anticipated when the policy was issued. It refused.

FACTS

Paul and Doris Cowin brought an equitable garnishment action against Shelter Mutual Insurance Company seeking to satisfy a judgment against its insured, Jonathon Parsons Jr., in their personal injury case arising out of a car accident. On cross-motions for summary judgment, the trial court entered summary judgment in favor of Shelter finding that the Cowins’ claim against Mr. Parsons fell outside the coverage of the insurance policy and Shelter owed no duty to pay the claim.

Paul and Doris Cowin were injured in an automobile accident on February 20, 2009, when a 1987 Western Star log truck owned by Todd Lumber Company and driven by its employee, Jonathon Parsons Jr., struck the rear of the Cowins’ automobile. Mr. Parsons was authorized by his employer to use the log truck for business purposes. He did not have authority to use the log truck for personal purposes. He did not need to ask specific permission before using the truck. Mr. Parsons used the log truck for business purposes in excess of 50 times in the nine months prior to the accident without seeking specific permission for those uses. On the day of the accident, Mr. Parsons was using the log truck for business purposes, and he did not seek permission that day to use it. The log truck was insured by an insurance policy through State Farm Mutual Automobile Insurance Company with limits of $100,000 per claim.

At the time of the accident, Mr. Parsons had an automobile insurance policy on his 1999 Ford F250 through Shelter Mutual Insurance Company. The insuring agreement contained in the Shelter policy provided bodily injury coverage of $50,000 each person and $100,000 each accident.

The Cowins filed a personal injuries suit against Todd Lumber Company and Mr. Parsons. Thereafter, the parties entered into a settlement agreement, and a consent judgment was entered by the Crawford County Circuit Court. The consent judgment was in the amount of $300,000 with execution of the judgment limited to available insurance coverage. State Farm, which insured the log truck, satisfied $200,000 of the judgment; and the Cowins initiated this equitable garnishment action against Shelter seeking to collect the balance of the judgment.

THE MOTIONS FOR SUMMARY JUDGMENT

The Cowins and Shelter filed cross-motions for summary judgment. In Shelter’s motion, it argued that because the damages sought by the Cowins arose from Mr. Parsons’s use of the log truck owned by his employer that was neither the “described auto” or a “non-owned auto” under the policy, those damages were not covered by the policy and it was not obligated to satisfy any portion of the judgment.

The trial court granted Shelter’s motion for summary judgment and denied the Cowins’ motion. It found that the definitions of non-owned auto and general consent in the Shelter policy were clear and unambiguous and that the Cowins’ claim fell outside the coverage of the Shelter policy and Shelter owed no duty to pay the claim in this case. This appeal bythe Cowins followed.

ANALYSIS

The general rule in interpreting an insurance policy is to give the language of the policy its plain meaning. The entire policy and not just isolated provisions must be considered.  If the policy’s language is not ambiguous, the policy must be enforced as written.

If an ambiguity exists, the language of the policy is construed against the insurer. In determining whether policy language is ambiguous, it is considered in the light in which it would be understood by the lay person who bought and paid for the policy. Courts may not unreasonably distort the language of a policy or exercise inventive powers for the purpose of creating an ambiguity where none exists. Generally, if a term is defined in the insurance policy, a court looks to that definition and nowhere else.

Under the Shelter policy, coverage is provided for damages arising out the ownership or use of the described auto or a non-owned auto. It is undisputed that the log truck was not the described auto in the Shelter policy. The dispute between the parties is on the question of whether it was a non-owned auto. The policy defines a non-owned auto as any auto used, maintained, or occupied with permission but specifically excludes an auto that the insured has general consent to use. General consent is defined in the policy. It is “the authorization of the owner of an auto of another to use it on one or more occasions without the necessity of obtaining permission for each use. General consent can be expressed or implied.”

The Cowins do not argue that Mr. Parsons was not authorized to use the log truck on one or more occasions without first seeking permission for each use. Instead, they contend that because Mr. Parsons only had permission to use the log truck for limited purposes, i.e. only for business, he did not have general consent to use the log truck.

The definition of general consent does not require consent to use the vehicle for any or all purposes. The unambiguous language of the definition requires only that the insured had the auto owner’s permission to use the vehicle on one or more occasions without the necessity of obtaining permission for each use. The uncontroverted facts of this case satisfy the definition and bar coverage. Mr. Parsons was authorized by his employer to use the log truck for business purposes, and he did not need to ask specific permission before using it. He used the log truck for business purposes in excess of 50 times in nine months prior to the accident without seeking specific permission for those uses. On the day of the accident, Mr. Parsons was using the log truck for business purposes, and he did not seek permission that day to use it.

A court’s function is to construe, not make, insurance contracts. Where a term is specifically defined in the policy, a court must look to that definition and nowhere else. Where the policy’s language is not ambiguous, the policy is enforced as written. The uncontroverted facts of this case reveal that Mr. Parsons was authorized to use the log truck on one or more occasions without first seeking permission for each use. Mr. Parsons had general consent to use the log truck; thus, the truck was not a non-owned auto and was excluded from coverage.

The rationale behind non-owned auto provisions in policies, which is to cover occasional or incidental use of other cars without payment of an additional premium but to exclude coverage for habitual use of other cars, which would increase the risk on the insurance company without the corresponding increase in the premium. Mr. Parson’s use of the log truck was more than incidental and to hold otherwise would extend liability under the policy well beyond what the parties intended.

ZALMA OPINION

Although the injured parties argued valiantly to obtain an additional $100,000 in coverage they failed because to grant them coverage under the Shelter policy the court would have been required to change the wording of the policy Shelter and the insured agreed to when the policy was issued.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What is Needed to Prove You are an Insured

To be Insured Party Must Fit Definitions in Policy

FACTS

Plaintiff sued his insurer seeking a declaration that he is a “covered person” under a liability policy issued by defendant Stella Maris Insurance Company, Ltd. (SMI). SMI is a single-parent captive insurance company doing business in the Cayman Islands. Its sole shareholder, Catholic Health East (CHE), a not-for-profit Pennsylvania corporation, has a joint operating agreement with Catholic Health System, doing business as Sisters of Charity Hospital (hereafter, Sisters Hospital) in Buffalo. CHE and its affiliates, including CHS and, in turn, Sisters Hospital, are named as ‘covered persons’ in the professional liability policy issued by SMI to CHE.

In the underlying medical malpractice action, defendant Nicholas Serio alleges medical malpractice by plaintiff in connection with the birth of his daughter at Sisters Hospital. Plaintiff sued the insurer seeking a declaration that SMI is obligated to indemnify him in connection with the underlying medical malpractice action.

SMI moved for summary judgment dismissing the complaint against it, alleging that plaintiff failed to provide timely notice pursuant to the provisions of the policy and that plaintiff is not a covered person under the policy because he was not employed by Sisters Hospital and he was not acting under his contract as an on-call physician when he was the attending physician at the labor and delivery. Plaintiff cross-moved for summary judgment with respect to the declaration sought in the complaint, asserting that the policy is ambiguous and must therefore be construed against SMI. Defendants Mary Serio and Nicholas Serio supported plaintiff’s cross motion.

SMI contends that this declaratory judgment action is premature because the indemnification policy provides that no action shall lie against it until liability is established by judgment or settlement and, here, plaintiff’s liability has not been determined in the underlying medical malpractice action.

ANALYSIS

It is undisputed that CHE and Sisters Hospital are insured as covered persons by SMI. Inasmuch as CHE and Sisters Hospital possess information relevant both to the underlying medical malpractice action and to this declaratory judgment action, and Sisters Hospital is a defendant in the underlying medical malpractice action, the court concluded that they are necessary parties to this action.

The court properly denied SMI’s motion based on plaintiff’s alleged failure to provide timely notice pursuant to the provisions of the policy. Even assuming, arguendo, that SMI met its initial burden, the court concluded that plaintiff raised an issue of fact sufficient to defeat the motion on that ground.

Plaintiff asserted in an affidavit that he was unaware of the existence of the policy until SMI commenced a declaratory judgment action in federal court in 2010. Plaintiff also provided an excerpt from the deposition testimony of SMI’s president and chief executive officer in the underlying medical malpractice action wherein SMI’s counsel stated that “there’s no issue about notice in this case … Notice has absolutely nothing to do with his case.” Furthermore, there had been no discovery with respect to the timing of SMI’s notice of the “medical incident” pursuant to the policy or notice of plaintiff’s claim for excess coverage with respect to his potential liability in the underlying medical malpractice action.

The court also concluded that there is an issue of fact whether plaintiff is a covered person under the policy and thus that neither SMI nor plaintiff is entitled to summary judgment in that respect. Although the record establishes that plaintiff was not acting either as an employee of Sisters Hospital or as the scheduled on-call physician at the time of the alleged malpractice, the court rejected SMI’s contention that the policy provides liability coverage for plaintiff only in the event that he was acting pursuant to his contract with Sisters Hospital to provide on-call coverage.

SMI itself raised an issue of fact whether plaintiff was acting pursuant to the policy provisions and thus is a covered person by providing plaintiff’s deposition testimony in the underlying medical malpractice action, wherein he testified that it was a hospital rule that residents be present for the delivery of twins, as was the case here, for purposes of their education and to assist the attending physician. It is undisputed that two residents were present during Mary Serio’s labor and the delivery of the twins, one of whom is the subject of the underlying action.

SMI failed to establish that plaintiff lacked any responsibility with respect to the supervision or proctoring of the residents who were present for the labor and delivery of twins. Plaintiff, however, failed to establish that his contract with Sisters Hospital covers the situation here.

That he supervised or proctored residents while attending a private patient, or that he supervised or proctored residents who were present pursuant to a rule or policy of Sisters Hospital that residents be present for the delivery of twins for purposes of their education and to assist the attending physician. Therefore, the court concluded that plaintiff’s affidavit stating that he provided “necessary supervision” is conclusory and thus is insufficient to establish his entitlement to judgment and the physicians’ affidavits provided by SMI regarding the responsibility of the on-call physician with respect to the residents treating hospital or other non-private patients are not relevant here.

The appeal was dismissed.

ZALMA OPINION

Insurance policies are nothing more than a contract. To be defended or indemnified as an insured the person seeking coverage must fit within the definition of “insured” in the policy. The plaintiff was in the hospital working for a private patient and was not, therefore, an insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Can Defendant Depose Plaintiff’s Counsel?

Lawyer As Witness

Insurance bad faith cases are never easy. Often the parties, and the counsel for the parties, become combative and do not always act professionally. Each side tries to gain an advantage over the other. The specter of punitive damages raises the efforts of each side. In Cooper v. Omni Ins. Co., Slip Copy, 2015 WL 1943802 (D.S.C., 4/29/15) the District court for the District of South Carolina was faced with what should be, but is not, an unusual attempt by the defendant to depose the plaintiff’s counsel.

Defendant Omni Insurance Company’s (“Defendant” or “Omni”) moved  to Compel the deposition of Plaintiff’s counsel, Pamela R. Mullis, Esquire (“Attorney Mullis”).

STANDARD

The court may restrict discovery of otherwise allowable information, however, if it determines that the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive it can restrict the discovery.

DISCUSSION

The parties do not dispute the factual background giving rise to this motion. This action involves a bad faith claim asserted by Plaintiff against Defendant.  Plaintiff alleges that the bad faith arose in connection with an underlying automobile accident/tort claim (“the underlying action”), where Plaintiff brought suit against Omni’s insured, Benjamin Spears (“Spears”). Spears’s policy limits provided for the minimum liability coverage limits ($25,000/$50,000/$25,000). Plaintiff, however, obtained an excess verdict of $854,075.00 against Spears at trial.  Spears then assigned his bad faith claim against Omni to Plaintiff, who sued Omni. Plaintiff alleges that Omni wrongfully failed to settle her claim against Spears within Spears’s policy limits. Plaintiff’s counsel, Attorney Mullis, also represented the Plaintiff during the underlying automobile accident/tort suit against Spears.

Defendant seeks to compel Attorney Mullis’s deposition, asserting that she “is a witness concerning the facts of this case.” Defendant argues that the present bad faith claim calls into question the facts and circumstances surrounding the underlying case and the failure of the claim to settle. Defendant notes that while deposing opposing counsel is typically unusual, in a bad faith situation like this it is logical, as Plaintiff’s counsel was an active participant in the very events that gave rise to the alleged bad faith claim.

Defendant argues that it has a legitimate basis in seeking the deposition, as the information sought relates to the facts and circumstances surrounding the underlying action’s failure to settle.

ANALYSIS

The party seeking to depose opposing counsel must satisfy a three prong test, showing that:

(1)     no other means exists to obtain the information than to depose opposing counsel,
(2)     the information sought is relevant and nonprivileged, and
(3)     the information is crucial to the preparation of the case.

The purposes of this burden was to guard against the harassing practice of deposing opposing counsel that does nothing for the administration of justice but rather prolongs and increases the costs of litigation, demeans the profession, and constitutes an abuse of the discovery process.

The Fourth Circuit has not adopted a specific approach regarding deposing opposing counsel. Several cases involving facts similar to thist case are instructive. For example, in a case from the Eastern District of California, a defendant sought to depose plaintiff’s litigation counsel in an insurance coverage/bad faith action regarding the facts and circumstances of an underlying lawsuit which settled. See Riverbank Holding Co. v. N.H. Ins. Co., No. 2:11–cv–2681–WBS–GGH, 2012 WL 4748047, at *1 (E . D.Ca. Oct. 3, 2012). The court explained that the party seeking the deposition had not attempted to seek the depositions of other individuals involved in the settlement negotiations who might provide similar insight.

The Eastern District of Pennsylvania reached a similar conclusion when it addressed this scenario. This same situation arose, where the insurance company defendant sought to depose plaintiff’s counsel in a bad faith action regarding his handling of an underlying auto accident case. See Slater v. Liberty Mut. Ins. Co., No. CIV A. 98–1711, 1999 WL 46580, at *1 (E.D.Pa. Jan. 14, 1999). The Court found this was inappropriate, noting that the defendant had other means of discovering what its employees may have said to plaintiff’s attorney. Accordingly, the Court found that compelling the deposition would be inappropriate.

Defendant failed to show that there is any information peculiarly with Attorney Mullis’s knowledge and/or that no other means exist from which to obtain the information.

In its motion, Defendant notes that Attorney Mullis was involved in settlement related communications with Omni. However, Attorney Mullis is not the sole source of information regarding any of these communications. Defendant already has in its possession copies of emails and letters between Attorney Mullis, Omni employees, the attorneys representing Spears through his coverage with Omni in the tort suit, and the attorney representing Spears in his criminal case. Defendant notes that Attorney Mullis participated in settlement negotiations with Omni (not the Plaintiff herself), and thus her testimony may shed light on the failure of the claim to settle.

To the extent Defendants seeks to depose counsel regarding communications with its own client, Attorney Mullis certainly is not the sole source of information. Defendant may depose its employees and agents who engaged in communications with Attorney Mullis in order to obtain that information. Attorney Mullis, as only one side of the settlement negotiations, is not the sole source of information regarding any of these communications.

The Court’s task was to determine whether the facts and circumstances surrounding the negotiations were peculiarly within Attorney Mullis’s knowledge. As the communications involved multiple parties, the Court found that none of the information sought falls into that category. The mere fact that Defendant desires to get Attorney Mullis’s “version of events” is not enough to meet Defendant’s burden.

ZALMA OPINION

This is an example of no-holds-barred litigation. All counsel could get from Attorney Mullis is her thought processes that resulted in a failure to settle the underlying claim, information that is privileged. Plaintiff made the decision to settle or not yet she claimed to have not participated in settlement negotiations. If so the basis of the bad faith case is weak and the attorney’s testimony will not add anything that could be obtained elsewhere. Another case establishing that bad faith litigation should be restrained.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Conflict Stays Declaratory Relief

Whisky Infringement & Declaratory Relief

National Trust Insurance Company (“National Trust”) sued Heaven Hill Distilleries, Inc. (“Heaven Hill”) seeking a declaration from the District Court for the Western District of Kentucky, that it has no duty under the terms of various insurance policies to indemnify or defend Heaven Hill in an underlying lawsuit pending in Ontario, Canada (the “Canadian Litigation”). Diageo Canada, Inc. (“Diageo”) filed the Canadian Litigation on March 26, 2014, asserting that Heaven Hill had infringed its Canadian trademark registrations based on alleged similarities in the bottling and labeling of Heaven Hill’s “Admiral Nelson’s” rum and Diageo’s “Captain Morgan” line of spirits. In particular, Diageo accused Heaven Hill of either willfully and deliberately infringing its rights in the Captain Morgan trade dress, or having a reasonable basis to suspect that Diageo’s rights would be violated.

In National Trust Ins. Co. v. Heaven Hill Distilleries, Inc., Slip Copy, 2015 WL 1931961 (W.D.Ky., 4/28/15)  the District Court, Western District of Kentucky was asked to stay the declaratory relief action until the Canadian Litigation was resolved because there was a conflict between the insurer and Heaven Hill.

FACTS

Heaven Hill acquired rights and interest in the Admiral Nelson’s label in June 2011. Shortly thereafter, National Trust sold Heaven Hill six insurance policies, each containing commercial liability insurance provisions.  Heaven Hill timely notified National Trust of the Canadian Litigation and requested that it defend and indemnify Heaven Hill in accordance with the provisions of the applicable insurance policies. Subject to a reservation of rights, National Trust conditionally acknowledged and responded to its duty to provide Heaven Hill with a defense in the Canadian Litigation.

Thereafter, National Trust sued its insured claiming that it has no duty to indemnify or defend Heaven Hill in the Canadian Litigation under any of its insurance policies. National Trust alleges that coverage for the Canadian Litigation is barred by a number of different provisions of the relevant insurance policies. One of those provisions is an exclusion that bars coverage for any conduct that constitutes a knowing violation of the rights of another. National Trust alleges that Heaven Hill knowingly or willfully infringed upon Diageo’s product trade dress, thereby relieving National Trust of its duty to indemnify or defend Heaven Hill.

Heaven Hill asserts that discovery would prejudice its position and defense in the Canadian Litigation. Furthermore, Heaven Hill argues that permitting National Trust to attempt to discover and prove in this case that Heaven Hill knowingly violated Diageo’s legal rights, while maintaining an obligation to defend Heaven Hill in the Canadian Litigation, is an irreconcilable conflict of interest.

DISCUSSION

Courts weighing a stay based on related foreign litigation have balanced multiple factors, including “the similarity of the issues, the order in which the actions were filed, the adequacy of the alternate forum, the potential prejudice to either party, the convenience of the parties, the connection between the litigation and the United States, and the connection between the litigation and the foreign jurisdiction.” Pexcor Mfg. Co. v. Uponor AB, 920 F.Supp.2d 151, 153 (D.D.C.2013) (citation omitted); see also Ronar, Inc. v. Wallace, 649 F.Supp. 310, 318 (S.D.N.Y.1986).

Heaven Hill asserts that its defense in the Canadian Litigation would be unduly prejudiced if a stay were not issued in this matter. National Trust cannot be found to be fulfilling its duty to defend Heaven Hill free of prejudice while simultaneously compelling it to litigate on two-fronts: both against the plaintiffs in the Canadian Litigation and against National Trust in this case.

The Court has also considered the potential prejudice to National Trust and found that any such prejudice would be minimal by comparison.

Suits are generally considered similar if substantially the same—although not necessarily identical—parties litigate substantially the same issues in different forums.  Romine v. Compuserve Corp., 160 F.3d 337, 339–40 (6th Cir.1998). The declaratory relief action and the Canadian Litigation are both connected. Moreover, both cases stem from the same set of underlying facts.

In the Canadian Litigation, Diageo claims damages under Canadian law for trademark violation, based in part on Heaven Hill’s knowing or willful violation of that law. Similar, if not identical, issues surround both cases.

Courts typically defer to proceedings that are already underway, preferring not to begin anew in a second forum. The Canadian Litigation was filed before the present declaratory judgment matter. Similarly, counsel in this matter have informed the Court of the relative progress of the Canadian Litigation and they anticipate a resolution of that suit by the end of 2016.

CONCLUSION

Without a stay of this action, Heaven Hill would likely be forced to simultaneously litigate the same issue both here and in the Canadian Litigation, resulting in prejudice to the parties, waste of judicial resources, and risk of inconsistent judgments. The balance of the relevant factors weighs in favor of granting a temporary stay. Accordingly, discovery and other proceedings in this case relating to the question of whether Heaven Hill willfully or knowingly violated the rights of Diageo Canada, Inc. was temporarily stayed pending the resolution of the underlying lawsuit pending in Ontario, Canada, or until further Order of this Court.

ZALMA OPINION

Sometimes insurers forget that insurance is a business of utmost good faith. To force an insured into a second lawsuit over the same issues where its insurer – defending it in the Canadian Litigation – seeks to prove the same thing that the plaintiff in the Canadian Litigation is seeking to prove. The court, without ever mentioning the covenant of good faith and fair dealing, reminded the insurer of its obligation to not harm an insured while seeking to protect its rights to refuse defense. Eventually, if it is right, it can recover what it paid for defense of Heaven Hill.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Advertising Injury Coverage Does Not Cover Breach of Contract

There Must Be Alleged or Actual Advertising Injury to Require Defense

Last year I wrote, here, a posting called “Insurer Fails To Assert Exclusions to its Detriment” which can be read at http://zalma.com/blog/insurer-fails-to-assert-exclusions-to-its-detriment/ . Since then Maryland’s highest court has changed the decision I summarized.

Charles L. Simmons, Jr. of Groman & Williams in Baltimore was kind enough to pass on the decision in Maryland Cas. Co. v. Blackstone Intern. Ltd., — A.3d —-, 2015 WL 1798960 (Md., 4/21/15) to me so that I can update the blog on the changes brought about by this new decision. In the original posting I took umbrage at the failure of the insurer to use its effective exclusions to avoid liability to its loss in the lower courts. Maryland’s highest court proved me wrong. Without considering the exclusions it concluded that none of the acts of the plaintiffs involved advertising injury and there was no obligation on the Insurers to defend or indemnify Blackstone.

FACTUAL BACKGROUND

Under Maryland law, an insurance company has a duty to defend its insured for any claims brought against it that are potentially covered under the insured’s policy. Thus, a duty to defend may extend even beyond instances in which an insured is liable and the insurer must indemnify. In this case, the court was asked to assess whether an insurance company had a duty to defend its insured under a commercial general liability policy’s “advertising injury” clause against a suit sounding in breach of contract and arising out of a joint business venture.

In October 2006, Robert M. Gray, President of RMG Direct, Inc. (“RMG”), first met John F. Black, President and Chief Executive Officer of Blackstone International, Ltd. (“Blackstone”). During their initial conversation, Black informed Gray that he “was in the business of manufacturing and selling lamps and other lighting products designed to assist low vision consumers.” Gray then informed Black of his role at RMG and his “professional background in the vision field.” The two men then proposed a joint venture to “market and sell lighting products to people with low vision problems,” and agreed to discuss the venture at a later date.

Throughout the next four years, Gray—working on behalf of RMG—worked in collaboration with Black and Blackstone employees to develop and market their joint venture. During this time, Gray performed multiple tasks without compensation. As part of his work with Blackstone, Gray participated in the development of a sales presentation to Wal–Mart Stores, Inc. (“Wal–Mart”) in an effort to place the product line for sale in its stores.

RMG filed suit against Blackstone and Black in the Circuit Court for Baltimore County.

BLACKSTONE’S INSURANCE POLICY

Blackstone has been insured by Maryland Casualty Company and Northern Insurance Company of New York (collectively, “Insurers”) for commercial general liability insurance since 2001. Its Commercial General Liability Coverage Form (the “Policy”) included coverage for Personal and Advertising Injury Liability.

Blackstone and Black wrote to Insurers, requesting coverage and litigation defense under the personal and advertising injury provisions of the Policy. The Insurers filed a Complaint for Declaratory Judgment, seeking a judgment that they had no duty to defend the claims because, they argued, the Second Amended Complaint did not allege that Blackstone had engaged in advertising, that RMG had suffered an advertising injury, or that there was any “causal connection between any of RMG’s claimed damages … and any advertising conducted by Blackstone.” Insurers also contended that all six counts in the Second Amended Complaint were excluded from coverage by the Policy’s terms. The Insurers asserted that there was no potentiality of coverage for Blackstone’s claim and that the Insurers had no duty to defend.

DISCUSSION

In Brohawn v. Transamerica Insurance Company, 276 Md. 396, 347 A.2d 842 (1975), the Maryland high court recognized an insurance company’s duty to defend its insured for all claims which are potentially covered under an insurance policy.

In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage? The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit.

In Maryland, an insured may rely on extrinsic evidence where the underlying complaint neither conclusively establishes nor negates a potentiality of coverage However, if the terms of Blackstone’s Policy and the allegations in RMG’s Second Amended Complaint are conclusive there is no need to consider any extrinsic evidence.

Advertising Injury In Commercial General Liability Policies

Blackstone contends it is entitled to insurance coverage under the advertising injury provision of its commercial general liability insurance policy. In the Second Amended Complaint, RMG asserted breach of contract, promissory estoppel, unjust enrichment, quantum meruit, intentional misrepresentation, and accounting for allegations including: (1) developing the product brand name “Vision Enhance”; (2) creating graphics for use in sales sheets; (3) developing and reviewing packaging and marketing of “Vision Enhance”; (4) contacting low vision experts and sufferers on behalf of the venture, including obtaining written testimonials; and (5) introducing the “Vision Enhance” brand by placing a full-page color advertisement in an industry journal.

Provisions offering coverage for advertising injury became common in commercial general liability policies during the second half of the Twentieth Century. A court should consider three inquiries when determining whether a policy provides coverage for advertising injury:

(1)     Is there an ‘advertising injury’ offense as defined by the policy?;

(2)     Was the offense committed in the course of advertising your goods, products or services?; and

(3)     Is there a causal connection between the advertising and the injury?”

These three elements have been recognized and applied in Maryland.

THE CAUSAL CONNECTION REQUIREMENT

The Insurers maintained that the Court of Special Appeals disregarded the requirement that there be a causal relationship between the advertising injury and the claimed damages and contend that RMG did not allege its damages were causally related to any Blackstone advertisement. For its part, Blackstone counters that the Court of Special Appeals considered the causal connection between advertisement and damages and properly concluded that it was subsumed in the Policy’s definition of “advertising injury.”

Advertising injury provisions are typically specified risk coverages whose terms are designed to provide coverage for the enumerated claims only and not to provide generalized liability coverage. A highly attenuated connection to advertising is not sufficient to create coverage.

To meet the causal connection requirement, the advertising injury claimed must be caused by an offense committed in the course of advertising. The question is whether the advertising did in fact contribute materially to the injury.

Although expressed in six counts, the crux of RMG’s complaint is that Blackstone failed to accord RMG a share of profits or an equity interest in return for Gray’s services as called for in an oral contract between them.

RMG plainly alleged that Gray and Black formed an oral contract—that they mutually promised to perform their ends of the bargain. One of the aims of the enterprise was for Blackstone to use Gray’s work in its advertisements. Given this agreement, it cannot be fairly said that RMG suffered injury from the use of advertising materials Gray willingly delivered to Blackstone for that purpose. The wrong RMG alleged was Blackstone’s failure to pay RMG a percentage of profits and give it an equity stake in the venture involving the sale of Blackstone’s product.

The fallacy in Blackstone’s current claim against the Insurers is that Blackstone’s use of RMG’s creative ideas could only enhance RMG’s claims for profits or an equity share, not injure him.

RMG’S UNJUST ENRICHMENT COUNT

RMG’s remaining unjust enrichment claim did, however, depend on Blackstone’s use of RMG’s advertising ideas. In that count, RMG alleged that Blackstone was unjustly enriched by retaining the benefit flowing from its use of RMG’s ideas in advertisements for Blackstone’s products. The complaint’s count for unjust enrichment therefore bore a “direct and substantial” relationship to the use of RMG’s advertising ideas in Blackstone’s advertisements, making that claim an “advertising injury” under the parties’ insurance agreement.

The Court of Appeals disagreed because it saw the same causation problem for the unjust enrichment count as for all other counts.

RMG was allegedly injured by Blackstone’s refusal to pay to RMG its share of the fruits of that advertising, i.e. profits. But the profits from the sale of Blackstone’s product were enhanced by the advertising which was the subject of RMG’s complaint.

In sum, in all of the counts alleged by RMG, the advertising done by Blackstone using Gray’s ideas was all for the positive—it enhanced the value of the profits and joint venture interest to which RMG claimed entitlement. The advertising, even though utilizing Gray’s ideas, did not injure RMG. Unlike the majority of cases finding an advertising injury, it had no competing business.

In conclusion, after reviewing the coverage and defenses under the Policy and the allegations in the underlying action, the court held that there was no potentiality of coverage. Blackstone did not show an advertising injury because none of the allegations of the underlying suit brought by RMG identified any injury that was caused by the advertisements created by RMG. Thus, the Insurer had no duty to defend its insured.

ZALMA OPINION

When I wrote about the lower court decision I said:

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

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

The insurers’ avoided the cost of defense or indemnity because the plaintiffs could not convince Maryland’s highest court that although advertising was involved there was no injury as a result of that injury.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why Insurance Fraud Succeeds

Zalma’s Insurance Fraud Letter

May 1, 2015

Happy Law Day – Celebrate the Magna Carta

In this, the Ninth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on May 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Celebrate Law Day and the American Bar Association’s Theme – “Magna Carta: Symbol of Freedom Under Law.”
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Punitive Damages and Taxes.
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Some Insurance Fraud Appellate Cases
6.    The Staged Loss
7.    Why Insurance Fraud Succeeds
8.    Do Insurers Get Their Money’s Worth From Fighting Fraud?
9.    Medicaid Fraud Control Units Fiscal Year 2014 Annual Report.
10.   Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Extrinsic Evidence Eliminates Duty to Defend – April 30, 2015
2.    Subrogation – April 29, 2015
3.    A “Heads I Win, Tails You Lose” Story – April 29, 2015
4.    Diminution – April 28, 2015
5.    Is a Liability Policy a First Party Policy? – April 27, 2015
6.    Applicant has Duty to Tell The Truth – April 24, 2015
7.    Unfair Trial Tactics Require Retrial – April 23, 2015
8.    How To Determine Who’s On First – April 22, 2015
9.    Can an Insurer Limit Coverage as It Pleases? – April 21, 2015
10.    ISO Files Most Important Homeowners Change in 40 Years – April 20, 2015
11.    When Has Litigation Gone Too Long? – April 17, 2015
12.    Does Extended Reporting Period Extend Claims Made? – April 16, 2015
13.    Not Nice To Sue Your Spouse – April 16, 2015
14.    Zalma’s Insurance Fraud Letter – April 15, 2015
15.    Why the “Bad Faith” Expert Couldn’t Testify – April 14, 2015
16.    May Insured Lie To Insurer When Applying? – April 13, 2015
17.    May Regulator Exceed Power to Protect Public? – April 10, 2015
18.    A Fictionalized Story of Real Insurance Fraud – April 9, 2015
19.    Broker Need Only Acquire Insurance Requested – April 8, 2015
20.    When Is an Intentionally Set Fire Not Vandalism? – April 7, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Extrinsic Evidence Eliminates Duty to Defend

Intentional Pollution Not Covered

In California determining the existence of a duty to defend is not limited to the zealous or artful pleading of the plaintiff the court must also consider extrinsic evidence. In Hollyway Cleaners & Laundry Co., Inc. v. Central Nat. Ins. Co. of Omaha, Inc., Not Reported in F.Supp.3d, 2015 WL 1884311 (C.D.Cal., 4/23/15) an insurance coverage dispute between insureds, Plaintiffs Hollyway Cleaners & Laundry, Inc., Milton Chortkoff, Burton Chortkoff, Edythe Chortkoff and Wilma Chortkoff, and their carrier, Defendant Central National Insurance Company of Omaha, Inc. was presented to the District Court for the Central District of California. The suit alleged that the Defendant breached, and continues to breach, its duty to defend in an underlying action potentially covered by their insurance policy. Defendant contends there is no duty to defend because the policy does not cover the environmental damage in the underlying action.

FACTUAL BACKGROUND

Central National Insurance Company of Omaha, Inc. (“CNI”) issued a standard comprehensive general liability insurance policy (“the Policy”) to Hollyway Cleaners & Laundry Co., Inc. (“Hollyway”), Milton Chortkoff, and Burton Chortkoff. (P. SUF ¶ 1.) Under the Policy, Milton and Burton Chortkoff’s wives, Edythe Chortkoff and Wilma Chortkoff, are also insureds.

Originally, the Policy was issued for a three-year period from November 1, 1983 to November 1, 1986, but was cancelled on November 1, 1985. The Policy limits liability to $500,000 per occurrence, in the aggregate, and per year. According to the Policy: “CN will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages of … property damage to which this insurance applies, caused by an occurrence and arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental to the business of the Named Insured at or from the insured premises, and CN shall have the right and duty to defend any suit against the Insured, seeking damages on account of such … property damage, even if any of the allegations of the suit are groundless, false, or fraudulent….”

The Policy contains a “chemical discharge exclusion,” which provides that: “[t]his insurance does not apply * * * to … property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalies, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.”

Holloway and the Chortkoffs were sued for allegedly causing environmental contamination to the soil and groundwater at and around the site where their dry cleaning business was located.

Coverage Dispute

Three days after Echo filed suit, Bret Stone, Cumis counsel for Hollyway, tendered the complaint to CNI. “CNI agreed to defend Hollyway, under a reservation of rights, in its capacity as a dissolved corporation.” After the individual Chortkoffs were added as defendants in the Underlying Action, CNI denied that it had any duty to “fund a defense in which the interests of the individual Chortkoffs, whom CNI was not defending, were prioritized over the different and conflicting interests of Hollyway as a dissolved corporation, which CNI was defending.”

According to CNI, the Underlying Action “is directly related” to a 1989 federal lawsuit-Sunset/Echo Corporation v. Hollyway Real Estate and Development, et al., No. 89–1490 WMB (“1989 Action”). CNI alleges that, during their depositions, Milton and Burton could not recall any chemical leaks or spills at the property, including any spills resulting from the delivery of chemicals, transfer of clothes from the cleaner to the dryer, or from an earthquake or any other natural event. CNI further alleges that Milton and Burton admitted that “the regular practice at Hollyway Cleaners was the intentional and deliberate disposal of the chemical waste—i.e. ‘muck’—and/or the filters containing the chemical waste into the dumpster and other trash receptacles on the Subject Property.
On September 23, 2013, Hollyway and the Chortkoffs filed suit against CNI in Los Angeles Superior Court for: (1) declaratory relief; (2) breach of contract; (3) breach of the implied covenant of good faith and fair dealing; and (4) unjust enrichment. On October 9, 2013, CNI removed the action to federal court.

DISCUSSION

Duty to Defend

“The duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source.” Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993) (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 276–77, 54 Cal.Rptr. 104, 419 P.2d 168 (1966)) (original emphasis). Whether an insurer has a duty to defend turns on “those facts known by the insurer at the inception of a third party lawsuit, even though the face of the complaint does not reflect a potential for liability under the policy. Because the parties agree the Policy includes a duty to defend, the Court must determine whether extrinsic evidence eliminates the possibility of coverage under the Policy and thus Defendant’s duty to defend.

The extrinsic evidence at issue is Milton and Burton’s deposition testimony from the 1989 Action, which was filed decades before the Underlying Action. During their depositions, Milton and Burton explained that the regular practice at Hollyway for disposing of chemical waste and filters containing chemical waste was to throw such materials in the dumpster and other trash receptacles on the property. Finding no evidence that “such discharge, dispersal, release or escape” of chemical waste was “sudden and accidental,” Defendant concludes that it has no duty to defend.

Milton and Burton’s deposition testimony shows that, over twenty-four years before the filing of the suit for which defense is requested, the regular practice at Hollyway was disposing of chemical waste and filters containing chemical waste in the dumpster and other trash receptacles on the property. Such “discharge, dispersal, release or escape” of chemical waste is neither “sudden” nor “accidental” and therefore not covered by the Policy. The Court finds that this extrinsic evidence conclusively eliminates the possibility of coverage under the Policy.

Plaintiffs argue that it is “possible that a sudden and accidental release that caused the property damage during the CNI Policy could be discovered during the course of the Underlying Case.”

A good many things are technically possible. However Plaintiffs failed to produce a single piece of evidence to show that one of the technically possible causes contributed to or caused the contamination. Plaintiffs’ speculation is not sufficient to create a genuine issue of material fact. Plaintiffs must, and have failed to, provide evidentiary support to substantiate their claims.

ZALMA OPINION

I have written here many times concerning the four corners or eight corners rule where coverage determination is based on the artful pleading of the plaintiff rather than what actually happened. Here, had the case been in a four corners state the insurer would be required to defend the plaintiffs who admitted that they intentionally contaminated the property. Those states that apply the four corners rule should reconsider and follow the lead of the state of California.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Subrogation

Injured Parties Owe Fiduciary Duty to Health Insurer

Automobile Accident Leads to Settlement, Insurance Payments

William and Regina Angel are married and have two children, William, Jr., and Josephine. On July 30, 2009, the Angel family was in an automobile accident caused by Michael Nagel. All four members of the family sustained injuries. At the time of the accident, William Angel was an employee of Montgomery County, Ohio. As a benefit of his employment, Mr. Angel had health insurance for himself and his family through a plan operated by the county.

The plan contained the following provisions: “[I]f a Covered Person receives any payment from any Responsible Party or Insurance Coverage as a result of an injury, illness or condition, the plan has the right to recover from, and be reimbursed by, the Covered Person for all amounts the plan has paid and will pay as a result of that injury, illness or condition, from such payment, up to and including the full amount the Covered Person receives from any Responsible Party.  * * *  This plan shall be entitled to full reimbursement on a first dollar basis from any Responsible Party’s payments, even if such payment to the Plan will result in a recovery to the Covered Person which is insufficient to make the Covered Person whole or to compensate the Covered Person in part or in whole for the damages sustained. * * *  For purposes of this provision, the term Insurance Coverage refers to any coverage providing medical expense coverage or liability coverage including, but not limited to, uninsured motorist coverage, underinsured motorist coverage, * * * or any first party Insurance Coverage.”

The Angel family received treatment for the injures they sustained, and their health-insurance plan paid $63,513.89 of those expenses. A few months after the accident, Montgomery County put the Angel family on notice that it claimed a lien on any proceeds that they might receive from a third party as a result of injuries they sustained in the accident.

In March of 2010, the Angel Family hired attorney Eric Deters and his law firm to represent them in a lawsuit against State Farm Insurance Company. State Farm was their automobile insurance company, and the Angels were seeking compensation under their underinsured-motorist provision, because the party who caused the accident was underinsured. The matter was quickly settled for at least $180,460.92. The Deters firm was paid $54,020 for its work, but Montgomery County was not compensated for its lien.
Because Montgomery County was not compensated, it filed suit against the Angel family members, Deters, and the Deters law firm to recover the proceeds. After some initial discovery, Montgomery County filed a motion for summary judgment. The trial court granted the motion, and entered judgment in favor of Montgomery County. The Angel family, Deters, and the Deters law firm (hereinafter “appellants”) have appealed.

ANALYSIS

In one assignment of error in Montgomery Cty. v. Deters, Slip Copy, 2015 WL 1843667 (Ohio App. 1 Dist., 4/22/15), 2015 -Ohio- 1507, appellants claim that the trial court improperly granted Montgomery County’s motion for summary judgment.

A health insurer that has paid medical benefits on behalf of its insured and has been subrogated to the rights of its insured may recover from the insured after the insured recovers from the insured’s auto policy. Appellants’ first argument is that it is unfair for Montgomery County to recover anything, because the appellants did all the work in order to recover from Nagel and State Farm.

The Ohio Supreme Court noted in a similar case, “[a]lthough some may view a subrogation provision granting priority to the insurer as unfair, courts should not rewrite contracts. * * * Cases of contractual interpretation should not be decided on the basis of what is ‘just’ or equitable. This concept is applicable even where a party has made a bad bargain, contracted away all his rights, and has been left in the position of doing the work while another may benefit from the work. Where various written documents exist, it is the court’s duty to interpret their meaning, and reach a decision by using the usual tools of contractual interpretation (e.g., the written documents, the intent of the parties, and the acts of the parties) and not by a determination of what is fair, equitable, or just.” [Ervin v. Garner, 25 Ohio St.2d 231, 239–240, 267 N.E.2d 769 (1971)]

“[A] contract is illusory only when by its terms the promisor retains an unlimited right to determine the nature or extent of his performance; the unlimited right, in effect, destroys his promise and thus makes it merely illusory.” [Century 21 Am. Landmark, Inc. v. McIntyre, 68 Ohio App.2d 126, 129–130, 427 N.E.2d 534 (1st Dist.1980).

In exchange for having their medical bills paid under the plan, the Angels agreed to hold aside the money they recovered for repayment to Montgomery County. When they failed to do so, they breached their fiduciary duty under the plan. The trial court properly granted Montgomery County’s motion for summary judgment.

ZALMA OPINION

Insurance is a contract. When the employee accepted health insurance for himself and his family from his employer he also agreed to give the insurer – in exchange for prompt payment of medical expenses without a need to prove negligence — agreed to pay the insurer back if he recovers from a tortfeasor. He did recover and refused to pay the lien improperly. The covenant of good faith and fair dealing is a two way street. The insured owes the same duty of good faith to his insurer that the insurer owes to the insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

A “Heads I Win, Tails You Lose” Story

Help, My House Is Falling Into The Sea

The following is a story from my e-book, “Heads I Win, Tails You Lose” which is a fictionalized story based on a true story with the names and places changed to protect the guilty. The full e-book with more than 80 stories is available at http://zalma.com/zalmabooks.htm

Career criminals are not the only people who perpetrate insurance fraud. The temptation has become so great that almost anyone will try.

A few years ago residents of a hillside community received a letter from the county engineer informing them that their houses sat on an active landslide. The engineers concluded that an unusual amount of irrigation water, water from septic systems, and rainfall lubricated an ancient landslide under their homes. The slide was moving. The engineers were concerned because it was moving at the rate of three inches a year. The houses sitting on the landslide were also moving a few inches a month. Within ten years the houses would be torn apart by the movement if nothing was done to stabilize the hillside.

Homeowners, living on the hill, noticed cracks in the plaster walls. Concrete block walls split at the mortar seams. Cracks formed in the foundation systems. Since the homes on the hill were all valued from  $500,000 and $5,500,000, the monetary value of the potential loss of 300 homes on the landslide was enormous. Many of the homeowners gathered and hired counsel to pursue persons responsible for their damage.

On advice of counsel, the homeowners reported claims to their insurers. Most of the insurers denied the claims. The insurers concluded that the predominant cause of the damage was the excluded peril of earth movement. The claims were fairly and reasonably rejected. Some of the homeowners accepted the decision of their insurers. Some of the homeowners sued their insurers. The imaginative homeowners, like the insured, found a better way.

The insured was a real estate lawyer. He had experience in dealing with insurers for commercial developers he represented. He knew that, in addition to the basic retail insurance market, there was a surplus and excess lines insurance market that would insure almost anything.

Without informing his broker of the landslide situation on the hillside he asked the broker to seek a specialty insurance policy for his home. He wanted insurance that covered him for both earthquake and earth movement, landslide, mudslide or other types of earth movement normally excluded by homeowners policies. He explained to the broker a concern that the wild fires that often devastate hillside communities in Southern California remove vegetation from the hillsides and increase the hazard of mudflow and landslide. He had invested a great deal of money in his home and wanted to protect against that risk.

The broker found a policy offered by a surplus lines insurer. The policy insured dwellings only for the perils of earthquake and earth movement. The premium was a reasonable 3.75 percent of the value of the dwelling with a deductible equal to 5 percent of the total amount at risk. All the insurer required, by way of application, was the name of the insured, the address of the property to be insured, and the amount of insurance requested.
After receiving a signed application from the insured the insurer agreed to insure the property because it did not fall within certain specified earthquake fault areas. The insured obtained a $2,500,000 policy for a premium of only $9,375.00. At the time the insured bought the policy he had received and read the letter from the County. He knew there was a landslide actively affecting his house. At the time he bought the policy the insured had already seen cracks in his plaster walls. When he bought the policy the insured applied the old maxim “ask me no questions – I’ll tell you no lies.”

His experience as a real estate attorney convinced the insured that if he told his prospective insurer his house was sitting on an active landslide they would not insure him. The insurer did not ask. The insured did not offer the information.

After the policy had been in effect for three months and the cracks in the plaster had grown to a size that he could place his index finger inside the crack he reported a loss to the earth movement insurer. He presented a claim for the total loss of the house. He demanded payment of policy limits less the deductible.

The insurer sent its adjuster to meet with the insured. They retained a geologist to inspect the property and determine the cause of the damage. The geologist learned of the active landslide from the public records kept by the city and County. He informed the insurer that thirteen months before it issued the policy the county had sent notice to all homeowners, including the insured, advising the homeowners of the active landslide.

After completing its investigation, with the advice of counsel, the insurer did the following:

1.    It advised the insured that the policy was rescinded from its inception because of the concealment of a material fact. The insured had concealed the fact of the landslide. With notice the insurer returned the $9,375.00 premium.

2.    It advised the insured that even if it had not rescinded the policy it would have denied his claim as one that was not fortuitous. Its investigation showed that the landslide had started before the inception of the policy. It further advised the insured that the loss in progress rule barred any recovery.

3.    The insurer recommended that the insured present his claim, if he still wished to pursue it, to the insurer who insured him a against earth movement at the time of the loss.
The insurer, reasonably concluded that although the loss was progressive and continuous it was fairly certain that a loss had occurred on or before the insured learned of the landslide.

Of course, the insured did not have earth movement insurance at the time of the notice and bought the insurance from the surplus line insurer in an attempt to recover for the loss that had already occurred.

The insured, if asked, would testify that he had no intent to defraud his insurer. He would testify that the insurer, if it had asked him, would have been told the truth. All he was doing was taking an economic advantage over a lazy insurer who did not bother to ask. What the lawyer/insured would have said sounds reasonable. It wasn’t true. He knew of a material fact that would affect the decision of his insurer to insure him. He concealed that fact from the insurer. He intended to conceal the fact from the insurer. Had the insurer known the truth it would not have issued a policy for a loss that was in progress. The insured attempted a fraud. His action in fraudulently getting an earth movement policy was reprehensible. His actions in buying the earth movement policy were no less a fraud than if he set the house aflame and made claim on his fire insurance.

Insurance is, as the lawyer should have known at the time: “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]

“Concealment” is defined by California Insurance Code Section 330 as “[n]eglect to communicate that which a party knows, and ought to communicate.” In addition, section 332 states: “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.” Therefore, the insured was actively failing to comply with the public policy stated in the California Insurance Code since the facts were within the insureds knowledge and material to the contract.

As a lawyer the intentional concealment of a material fact with the intent to deceive an insurer to its detriment is fraud and grounds for disbarment. For that reason the insured accepted the denial and did nothing further about the claim.

Had the insurer not done the minimum investigation and retained the services of a competent engineer it would have paid the $2,500,000.00 claim.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Diminution

Is There a Right to Diminution In Value After Repairs

This is an excerpt from my e-book Diminution in Value Damages available at http://www.zalma.com/zalmabooks.htm.

 

Since the Georgia Supreme Court decided Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) I have written several articles concerning the right to recover damages for diminution of value of property even after the damaged property is repaired.

The subject caused concern to the insurance industry, every person insured with a policy of insurance that promised to pay only the cost to repair or replace the property with material of like kind and quality, appraisers, adjusters, and lawyers.

Because of the apparent confusion I created an e-book to more thoroughly review how the United States deals with questions of diminution in value. It covers each of the fifty states of the United States, the District of Columbia, the 12 federal Circuit Courts of Appeal and the U.S. Supreme Court and how they dealt with the issue of establishing the amount of loss to property.

It also covers in detail how each of the jurisdictions dealt 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 much tortfeasors, or their insurers, must pay to those whose property is damaged by their actions.

Since insurance was invented in ancient Sumeria when insurance policies were written on clay tablets, insurers and their insureds have struggled with establishing a fair method to properly and fairly compensate the person insured for the property lost or damaged as a result of a peril insured against. Since insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event, the key question to be answered is how much is needed to indemnify the person insured? The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court said: “Indemnity means an obligation to make good a loss…” Although, on its face, calculating indemnity seems to be a simple task, as the cases in this E-Book are reviewed the reader should be in a position to understand why diminution in value is a concept that has given litigants, insurers and courts serious problems and what seems to be a constant deluge of litigation.

That few jurisdictions agree on methodology and proper computation of damages justify this exercise.

The measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury.  The measure is often difficult to determine. The measure seldom fits into a hard rule of thumb. Every possible means of providing complete indemnity is required when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.

The courts of the various states and federal jurisdictions do not use identical rules to calculate the proper measure of damages. To understand the issue and to apply the proper remedy requires an understanding of how each state applies, what it believes to be, the proper measure of damages for tort, for contract breaches and for insurance claims situations. Although each court should reach the result of true indemnity the same way diversity of opinion is the rule rather than the exception.

For example, automobile insurance policies usually promise to pay the insured, when an automobile is damaged by collision or some other insured cause, the costs to repair the vehicle or if unrepairable, the actual cash value of the vehicle. Most policies say nothing about the difference in value of a vehicle that is repaired after an accident. Because the policies were silent and only promised repair or actual cash value, insurers decided it was unnecessary to even mention the difference in value before the accident and the value after repairs. Since no promise was made to pay for more than actual cash value or the cost of repair the issue was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).  Mabry caused serious concern among insurers. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired. Insurers believed this decision was a judicial rewriting of the wording of the policy and generated suits across the country seeking recovery for diminution of value in suits against insurers and third-party-defendants.

Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass repair of diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policies wording that establishes that the insurer does not intend to, nor will it, pay for diminution of value.

When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repair. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired. The resale value most likely will be less than that for a comparable automobile that has not been damaged. In other words, the damage results in a reduction — or “diminution”— in the resale value of the automobile. On the other hand, when real property is repaired replacing old material with new the resale value of the real property is often increased. No one, however, has suggested that the insurer or tortfeasor is entitled to a reduction in its payment for repair because the insured profits from the repair and is not, therefore, truly indemnified.

When the property is insured, the insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s automobile or it may arise from a first-party claim against the insured’s own physical damage coverage. The key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by state insurance departments, and the holding of the various courts.

With regard to first-party claims by a person insured against an insurer, while it is perhaps arguable, the ISO contract language — specifically the Limit of Liability condition — appears to cover only the actual cash value  of the damage or the actual cost to repair the damage, some states require payment of additional sums to indemnify the owner for loss in value. Although there is nothing in the policy wording that even appears to contractually cover any reduction in market value, some courts require that the insurer pay extra. Even if the insured could prove the amount of reduction in value collecting from an insurer should require a change in the policy wording.

The policy usually allows the insurer to deduct for “betterment” or depreciation, although the burden of proof is on the insurer to demonstrate such depreciation or betterment.  In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but will not compensate the insured for a reduction in value due to the same accident.

Third-party claims (claims against an insured person for damages done to the property of some third person) for “diminution of value,” on the other hand, have generally been found by the courts to be covered by auto insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in value of the property before the loss and the value of the property after the loss.

For example, Texas court cases have found that legal liability for third-party damages includes diminution of value. However, no single measure of damages can serve in every case to adequately compensate an injured party. For the award of damages to be fair, recognizing that diminution of value is not always accurate, an award of restoration damages, according to some courts, must be available to compensate a plaintiff fully for damages to property when diminution in value fails to provide an adequate remedy.

The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value, unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.  If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the  amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.

There is a disparity between the various states on the subject. Some apply the rules strictly, some apply the general rule of fairness while others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims. The following is a review of how the various states deal with the issue of the proper measure of damages to achieve complete indemnity.
In this book, by including the full text of the court decisions, the issue of diminution  of value damages, is covered thoroughly for every state of the United States and all federal jurisdictions.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Diminution

Is a Liability Policy a First Party Policy?

Unambiguous Statute Must Be Interpreted as Written

Insurance parlance defines the first party as the person insured, the second party as the insurer and the third party as a person who claims injury as a result of actions of the first party. First party insurance causes the second party to pay indemnity to the person insured. Third party insurance pays to defend and indemnify its insured against claims of negligence causing injury to a third party who receives the payment. The state of Washington instituted a statute called the Insurance Fair Conduct Act (IFCA) which allows insured’s, harmed by the unfair conduct in a first party claim, to obtain punitive damages from their insurers.

In King County v. Travelers Indem. Co., Slip Copy, 2015 WL 1867098 (W.D.Wash., 4/23/15) the U.S. District Court for the Western District of Washington was asked to resolve a claim by King County for defense and indemnity coverage provided by insurer defendants and for violations of the IFCA. The defendants moved to dismiss only the IFCA claim.

BACKGROUND

Plaintiff King County claimed defense and indemnity coverage under third-party liability policies issued by multiple insurer Defendants for costs arising from Plaintiff’s defense associated with the cleanup of two superfund sites in the county. Plaintiff filed its original complaint on December 23, 2014; on February 5, 2015 (before any answers had been filed), Plaintiff amended its complaint to allege violations of the IFCA.

ANALYSIS

Defendants assert that, as a matter of law, Plaintiff cannot state a claim under IFCA arising from demands for insurance coverage under a third-party liability insurance policy. The District Court has twice addressed this issue (Cox v. Continental Casualty Co., C13–2288MJP, 2014 WL 2011238, 2014 WL 2560433; and Central Puget Sound Regional Trans. Authority v. Lexington Ins. Co., C14–778MJP, 2014 WL 5859321) and twice determined that “IFCA … applies only to first-party insurance.”

Plaintiff attempts a third bite at this apple, arguing that preceding proponents of its position have failed to present to the Court the legislative history of IFCA which the County alleges supports its position. Plaintiff asserts that this Court must follow Washington’s principles of statutory construction, and that those principles direct the Court to employ statutory construction to carry out the intent and purpose of the Legislature.

While Plaintiff urges the Court to consider IFCA’s legislative history in accord with Washington principles of statutory construction, it fails to place those principles in context. The Washington Supreme Court counseled that resort to the tools of statutory construction only under certain circumstances.

In determining the meaning of a statute, the court must apply the general principles of statutory construction. These principles begin with the premise that if a statute is plain and unambiguous, its meaning must be derived from the language of the statute itself. Ambiguity exists if the language of a statute is susceptible to more than one reasonable interpretation. If a statute is ambiguous, resort to the tools of statutory construction is appropriate. A finding of ambiguity must precede any inquiry into legislative intent.

A cause of action arises under IFCA when “[a]ny first party claimant to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.” [RCW 48.30.015] The statute defines “first party claimant” as “an individual, corporation, association, partnership or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.” (emphasis added) [RCW 48.30.015(4)]

The Court saw no ambiguity in the language of the statute or the statutory definition of who may assert an IFCA claim. The Washington Supreme Court has defined “first-party insurance” as any policy that pays specified benefits directly to the insured when a determinable contingency occurs, allowing an insured to make her own personal claim for payment against her insurer. The statute defines “first party claimant” narrowly, in a way that applies only to first-party insurance.

The County points to no ambiguity in the language of the statute and the Court found none. In the absence of any ambiguity, the meaning of IFCA must be derived from the language of the statute itself.

Neither will the Court adopt Plaintiff’s argument that public policy should be allowed to dictate the meaning of the statute. Punitive damages such as those levied under IFCA are, as a rule, contrary to public policy. Brown v. MHN Gov’t Serv., Inc., 178 Wn.2d 258, 277 (2013). Further, Washington adheres to the principle of statutory construction [that] statutes in derogation of the common law must be construed narrowly.

As it has previously, the Court declines to adopt the expansive reading of IFCA propounded by Plaintiff.

CONCLUSION

“First party claimant” as used in IFCA does not apply to an insured with a third-party insurance contract, and thus Plaintiff’s IFCA cause of action in its amended complaint must be DISMISSED as to all defendants. Because there is no further amendment possible which could remedy this defect, the dismissal of the IFCA claim will be with prejudice.

ZALMA OPINION

It is interesting that although the punitive damages are contrary to the public policy of the state of Washington it still enacted the IFCA. The court made clear that, as a result, the application of the IFCA must be narrowly construed to limit its application to first party policies and claims of the first party. Plaintiffs, after failing to stretch the statute by court rulings should give up and lobby the state Legislature to change the statute if it believes such a change is worthwhile.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is a Liability Policy a First Party Policy?

Applicant has Duty to Tell The Truth

Lawyer Applying For Insurance Should Never Lie to the Insurer

The covenant of good faith and fair dealing implied in every contract of insurance requires that neither party should misrepresent or conceal material facts from the other to deprive the deceived party from receiving the benefits of the contract of insurance.

Chicago Insurance Company (Chicago), a professional liability insurer sued its insured, the law firm, Paulson & Nace, PLLC (Paulson), and their client, seeking declaratory judgment that it had no duty to defend or indemnify Paulson in an underlying legal malpractice lawsuit. The United States District Court for the District of Columbia entered summary judgment in Chicago’s favor, and defendants appealed to the DC Circuit in Chicago Ins. Co. v. Paulson & Nace, PLLC, — F.3d —-, 2015 WL 1782273 (C.A.D.C., 4/21/2015).

FACTS

Paulson was engaged to bring a medical malpractice action on behalf of a young woman who had become paralyzed after surgery. Roughly a year and a half after the engagement, shortly before the statute of limitations was about to run, the firm filed a complaint in Virginia state court. The original suit was dismissed without prejudice for failure to correctly caption a pleading. A second complaint was filed with the correct caption but was dismissed with prejudice for filing outside the statute of limitations.

THE DISPUTE

The insurance coverage dispute at the heart of this appeal turns on whether, at the time the law firm applied for its new policy, the firm was on notice that it had committed a breach of professional conduct, or otherwise should have foreseen that the dismissals could give rise to a legal malpractice claim.

On July 18, 2007, while the state court appeal was still pending, the firm’s sole member, Barry J. Nace, applied for a new insurance policy with Chicago Insurance Company. Nace was asked whether there were “any circumstances which may result in a claim being made against [his] firm.” Despite the recent dismissal of Gilbert’s claims, Nace responded “no.”
Chicago Insurance subsequently issued a “claims-made” liability insurance policy—that is, coverage for all claims made within the policy period, regardless of when the events giving rise to the claim occurred. But the policy also contained a standard known risk exclusion, meaning pre-policy conduct would not be covered if the firm had a reasonable basis “to believe that the [firm] had breached a professional duty” prior to the policy’s issuance or to otherwise foresee that pre-policy conduct might result in a claim against the firm.

Paulson eventually informed Chicago Insurance of the Gilbert incident, though it represented that the potential malpractice had occurred in 2008, not 2006. Shortly thereafter, Chicago Insurance provided Paulson with an attorney, who submitted relevant case files and other materials to Chicago Insurance throughout 2010 and 2011. In November 2011, the insurance company noticed that Paulson had made the caption error in 2006—prior to the policy period. On January 13, 2012, Chicago Insurance notified Paulson that it reserved its rights to deny coverage under the known risk exclusion if a malpractice suit arose.

Ms. Gilbert eventually filed a legal malpractice action against the law firm in March 2012, and she was awarded $1,750,000 by a Virginia court in 2013. Chicago Insurance brought this declaratory judgment action premised on diversity jurisdiction, contending that Paulson should have known of the potential claim when it applied for the insurance policy and that the known risk exclusion therefore applied. The District Court granted summary judgment in favor of Chicago Insurance. Chicago Ins. Co. v. Paulson & Nace, PLLC, 37 F.Supp.3d 281 (D.D.C.2014). Paulson & Nace appeals.

ANALYSIS

The principal question in this case is whether a reasonable attorney in Paulson’s position would have been on notice by July 2007 of a possible breach of professional duty or a potential malpractice claim, such that there was an obligation to disclose the underlying incident to the insurer.  This question is appropriate for summary judgment only if a reasonable jury can draw but one inference and that inference points unerringly to the conclusion that the insured has not acted reasonably under the circumstances

The DC District agreed with the District Court that no reasonable jury could have found against Chicago Insurance on this question. It is undisputed that Paulson was aware that the first complaint was improperly captioned, as evidenced by its attempt to correct the error in October 2006 and by the dismissal of the complaint on the basis of the captioning error in February 2007. It also is undisputed that Paulson knew that its attempt to correct the error had failed at the trial level, and that Ms. Gilbert’s claims were going to be dismissed with prejudice.

Under such circumstances—that is, where an attorney is aware that he committed a procedural error that resulted in an unfavorable outcome—there is no triable question with respect to a lawyer’s duty to inform his insurer of the potential claim. The dismissal of a lawsuit because of attorney error would clearly put a lawyer on notice of the possibility of a malpractice claim.

Paulson claimed that expert testimony should have been required to determine what a reasonable attorney might have foreseen. It is true that expert testimony is routinely required in legal malpractice actions where lay jurors are ill-equipped to evaluate the merits of an attorney’s strategic decisions. But no expert testimony is required if an attorney’s lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.

The Virginia state court did all the expert legal work needed here in dismissing the cases based on Paulson’s procedural error prior to decision on the merits. Nothing more than this dismissal with prejudice—which can be explained to a jury through lay testimony and court records—was needed to establish that Gilbert’s legal malpractice claim was reasonably foreseeable.

In fact, Paulson initially informed Chicago Insurance that the alleged malpractice occurred within the policy period and it never expressly alerted the insurer to its error. Chicago Insurance was under no duty during the preliminary stages of the claim process to sift and verify the information provided by Paulson.  An insurer generally has the right to rely on statements made in an insurance application; the insurer need not conduct an independent investigation unless it has reason to doubt the statements.

For the foregoing reasons, Chicago Insurance was entitled to summary judgment in this case and the District Court’s decision awarding summary judgment in its favor was affirmed.

ZALMA OPINION

When Mr. Nace, after having a medical malpractice case dismissed because of a procedural error and a new complaint dismissed because it was filed after expiration of the statute of limitations on a suit he had a year and a half to file, answered “no” to the question about potential claims, was either intentionally deceptive or simply ignorant. The lie on the application will cost his law firm $1,750,000 plus interest without insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Applicant has Duty to Tell The Truth

Unfair Trial Tactics Require Retrial

Can A Party Mention Insurance In a Tort Case?

Under any court system it is difficult to attain a true and just result even under the most favorable conditions because of the frailty of man and his subjectivity to various prejudices and other influences that may warp his judgment in attempting to attain the ultimate truth in a given factual situation. When either party to a cause, whether deliberately or inadvertently, of improper influence in a jury trial is a distinct disservice to the administration of justice. Lawyers, as officers of the courts, and the courts, on their own motion if need be, must be ever vigilant to see that no such influence creeps into the proceedings in even the slightest degree because it will subvert the noble purpose of the court system to provide justice under law.

In Kochalka v. Bourgeois, — So.3d —-, 2015 WL 1809568 (Fla.App. 2 Dist., 4/22/15) the Florida Court of Appeal was faced with a trial verdict based on the alleged subversion of justice.

FACTS

Bonnie Kochalka challenged the final judgment entered in favor of Appellee Lyndse Bourgeois in an automobile negligence action and the prevailing party cost judgment entered against her in the same case. Ms. Bourgeois sued Ms. Kochalka for injuries she claimed to have sustained when Ms. Kochalka rear-ended her car while it was stopped at an ice cream shop’s drive-through window. In the appeal from the final judgment, Ms. Kochalka asserts that the trial court erred in refusing to excuse a prospective juror for cause; that it improperly excluded opinion testimony of her only expert witness; and that Ms. Bourgeois improperly informed the jury about Ms. Kochalka’s liability insurance.

FAILURE TO EXCUSE A PROSPECTIVE JUROR FOR CAUSE

During jury selection, Ms. Kochalka’s counsel asked the prospective jury panel if anyone had any life experiences that they thought they could not put aside when considering this case. He offered the prospective jurors an analogy in which he stated that if someone feared snakes, it would be very difficult for them to put that fear aside and be forced to pick up two snakes. Prospective juror Bonfe immediately raised her hand and discussed a prior bad experience she had with the judicial system.

Counsel then moved on to discussions with other prospective jurors, and eventually asked her to explain that life experience, and she described how she no longer believes in the jury system at all.

The test for juror competency includes not only the question of whether the juror can lay aside any bias or prejudice toward the parties but also whether the juror can render a verdict based solely on the evidence presented and the instructions on the law given by the court. When assessing that issue, the trial court must excuse a prospective juror for cause if any reasonable doubt exists regarding his or her ability to render an impartial verdict.

Errors in jury selection are per se errors requiring a new trial.

EXCLUSION OF MS. KOCHALKA’S EXPERT’S OPINION

One of Ms. Bourgeois’ claimed injuries was a torn meniscus in her knee. She claimed that it happened when she struck her kneecap on the dashboard during the accident. Ms. Kochalka had an orthopedic surgeon who was prepared to testify that from an orthopedic standpoint that was not possible. In order for the meniscus to tear, there had to be a rotational or twisting injury, not a blunt force one.

Ms. Bourgeois successfully kept that testimony from the jury’s consideration by arguing that it was a biomechanical opinion—which as an orthopedic surgeon he was unqualified to provide—not a medical opinion. Ms. Kochalka correctly argued the doctor was doing nothing more than engaging in a differential diagnosis analysis and identifying—or in this case eliminating—a potential cause of the injury. The Court of Appeal agreed with Ms. Kochalka’s characterization of the doctor’s testimony. Therefore, it was error for the trial court to exclude the doctor’s opinion as improper biomechanical testimony.

REFERENCES TO INSURANCE

During voir dire, Ms. Bourgeois’ counsel asked the panel members about their prior involvement with accidents and lawsuits. When one potential juror stated that he had been in an auto accident, counsel discussed with him the fact that he hired an attorney, made a claim, and ultimately obtained a settlement. He then asked about the liability insurance.

At that point Ms. Kochalka’s counsel objected and moved to strike the panel, stating at a sidebar conference: “Why are we asking who the carrier was? The carrier is not involved in this case. That’s twice he’s done it. That’s trying to inject that there is insurance involved in this case.” The trial judge asked Ms. Borgeois’ counsel why he was asking that question, and he responded: “I was just trying to see if it was the same as the carrier in this one.” The judge sustained the objection and instructed counsel to stop referencing insurance but denied the motion to strike the panel.

During the evidentiary portion of the case, Ms. Bourgeois described the accident, and then referenced the fact that Ms. Kochalka did have insurance, stating: “She asked if we were okay. You know, she just wanted to-she apologized. She did apologize, and then we exchanged insurance information. We had called the police station, but because it was in a parking lot they don’t come to that scene. So after exchanging information we all left.”

Ms. Kochalka once again objected and moved for a mistrial. The judge reserved ruling at that time but ultimately denied relief on that issue post-trial. For the purposes of remand, we remind the parties and the trial court that in a negligence case the potential existence or amount of a defendant’s insurance coverage has no bearing on the issues and should not be revealed to the jury. See, e.g., Beta Eta House Corp. of Tallahassee v. Gregory, 237 So.2d 163, 165 (Fla.1970) (“The existence or amount of insurance coverage has no bearing on the issues of liability and damages, and such evidence should not be considered by the jury.”). The injection of any insurance issues into the case, whether deliberate or inadvertent, is improper and creates grounds for a mistrial.

ZALMA OPINION

Insurance is an important risk avoidance tool that is purchased to protect the person insured against liability for his or her negligence. However, when a jury learns that a party defendant is insured and may not need to pay a judgment out of the defendant’s pocket, they will be more generous to the plaintiff. Since the existence of insurance has nothing to do with the liability or damages issues it should never be mentioned.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Unfair Trial Tactics Require Retrial

How To Determine Who’s On First

Primary v. Excess Determined by Contract

Construction contracts are, among other things, risk transfer devices. The owner transfers its risk of lost to the general contractor and the sub-contractors, the contractors and sub-contractors transfer the risk to their sub-contractors and all try to transfer the risk to their various insurers by forcing each contractor and sub-contractor to make the owner and contractors into additional insureds. As a result, the parties often dispute, which insurer is primary and which is excess.

In Liberty Ins. Corp. v. Admiral Ins. Co., Slip Copy, 2015 WL 1757136 (N.D.N.Y., 4/17/15) multiple parties and multiple insurers asked a New York Appellate court to determine who was on first.

BACKGROUND

A. The Underlying Actions

On or about October 21, 2013, Kevin Harrington (“Harrington”) commenced an action entitled Kevin Harrington v. State University Construction Fund, Christa Construction, LLC, and Schenectady Steel Co. Inc. Harrington commenced a separate action in the New York Court of Claims, entitled Kevin Harrington v. The State of New York and State University of New York College at Oneonta. Admiral and Liberty seek a declaratory judgment determining whether Liberty has a co-primary duty to defend and indemnify Christa Construction LLC (“Christa”), the State University of New York Construction Fund (“the Fund”), the State of New York (“the State”), and the State University of New York College at Oneonta (“SUNY Oneonta”) in Harrington’s State Court and Court of Claims actions (“the underlying actions”), by virtue of an endorsement in Liberty’s Commercial General Liability (“CGL”) policy.

DISCUSSION

The only issue before the Court was whether Liberty has a co-primary duty to defend Christa, the Fund, the State, and SUNY Oneonta in the underlying actions.

Under New York law, an insurance policy which contemplates contribution with other policies or does not by the language used negate that possibility must contribute ratably with a similar policy, but must be exhausted before a policy which clearly states in its conditions that it is intended to be excess over other excess policies.

The general rule of ratable contribution is inapplicable if it would effectively deny and clearly distort the plain meaning of the terms of the policies.  The purpose of the exception to the general rule, requires New York courts to construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.

Item 11 in the Liberty Endorsement (“Item 11”) includes an other insurance provision that states that the Liberty Policy: “shall be excess over any other insurance available to the additional insured, whether such insurance is on an excess, contingent or primary basis, unless the written agreement with you requires that the insurance provided for the additional insured be primary concurrent or primary non-contributory, in comparison to the additional insured’s own policy or policies.” This provision thus provides that the Liberty Policy is excess as to the additional insureds unless an exception is triggered by a written agreement as described.

The language “the written agreement with you” in the Liberty Policy refers to a written agreement by Schenectady to procure additional insurance coverage.  The Schenectady contract, where Schenectady agreed to obtain coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds, triggered the exception in the other insurance provision of Item 11, because Exhibit C of the Schenectady contract specifies that Schenectady’s coverage for the additional insureds will be on a primary and non-contributing basis.

Liberty asserted that the phrase “in comparison to the additional insured’s own policy or policies” (“the ‘in comparison’ clause”), means that when the exception is triggered, the Liberty Policy would only be primary to the additional insureds’ own policies. Liberty defines “own policies” as policies where the additional insureds under the Liberty Policy are named insureds. Under Liberty’s interpretation, Liberty could be a primary insurer as to “the Fund’s, C[h]rista’s, the State’s, or SUNY’s own policies[,]” but not as to Capital’s policy with Admiral, where Christa, the Fund, the State, and SUNY Oneonta are all additional insureds.

When a court is called upon to resolve a dispute over insurance coverage, it must first look to the language of the policy. The court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect. The Court found that Admiral’s interpretation of the Item 11 other insurance provision would render the “in comparison” clause superfluous, because Liberty would have a primary duty to defend and indemnify in any instance where a written agreement required that the policy holder’s insurance would be primary non-contributory as to the additional insureds’ own policy.

If Liberty’s policy was primary as to all policies available to the additional insured when the exception applied, then the “in comparison” clause would serve no purpose.

On the other hand, Liberty’s interpretation does not disregard or “fail[ ] to give effect to that portion of the Liberty Policy Other Insurance provision stating ‘unless the written agreement with you requires that the insurance provided for the additional insured[s] be primary concurrent or primary non-contributory” (“the ‘unless’ clause”), as Admiral argues. If the Liberty Policy additional insureds were named insureds under the Admiral Policy, Liberty would be a co-primary insurer with Admiral, and the “unless” clause would give Liberty a duty to defend and indemnify the named insured. However, as Christa, the Fund, the State, and SUNY Oneonta are all additional insureds on the Admiral Policy, the “in comparison” clause functions as a limitation on the “unless” clause, leaving Liberty as the excess insurer, and Admiral as the sole primary insurer.

As a result the appellate court concluded that when a dispute arises involving the terms of an insurance contract, New York insurance law provides that ‘an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract.

Admiral’s “PRIMARY/NON–CONTRIBUTING INSURANCE ENDORSEMENT” is evidence of Admiral’s intent to provide the sole primary insurance coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds. In contrast, the Liberty Endorsement is evidence that establishes that Liberty and Schenectady’s intent was that Liberty be an excess insurer as to the additional insureds, except in comparison to their own policies. Further, the Capital Subcontract establishes Schenectady’s and Capital’s intent to make Admiral’s policy primary “on a noncontributory basis before any other insurance.”

If the Court declared Admiral and Liberty co-primary insurers for these additional insureds, it would negate the bargained-for contractual expectation that the endorsements signified. It refused to change the agreed upon contract terms.

ZALMA OPINION

People involved in complex construction agreements must carefully write the construction contract terms to effectively transfer risk and the insurers involved in insuring those risks must carefully write their contracts of insurance, and additional insured provisions, to limit their exposure before there is a loss. It is improper and usually ineffective to attempt to change the wording of the policy by litigation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How To Determine Who’s On First

Can an Insurer Limit Coverage as It Pleases?

Insurer Has Unquestioned Right to Set Terms of Insurance Contract

Insurers have the unquestioned right to select whom it will insure and the risks it is willing to take as long as the contract is clear, unambiguous and not in violation of public policy. In Byoung Suk An v. Victoria Fire & Cas. Co., — A.3d —-, 2015 WL 1743163 (Pa.Super. 4/28/26) 2015 PA Super 84 a policy that limited coverage to the “named driver only” was upheld by the trial court and Appellant, Byoung Suk An, appealed.

FACTS

Suk An sued Matthew Gilmore (“Gilmore”) and Walker. In the underlying complaint, Suk An alleged he was injured in a motor vehicle accident on March 20, 2011, which involved a vehicle owned by Walker and operated by Gilmore. At the time of the alleged accident, the motor vehicle owned by Walker was insured under a Pennsylvania Personal Automobile Policy (“Policy”) underwritten by Victoria Fire and Casualty Company (“Victoria”). The Policy did not provide liability coverage for any person not listed as a named driver on the Policy. Walker was the sole driver listed on the Policy.

Suk An sued Victoria for declaratory judgment seeking a declaration by the court that Victoria had a duty to defend and provide insurance coverage to Walker and Gilmore for all claims arising out of the alleged motor vehicle accident.

The trial court entered an order denying Suk An’s motion for summary judgment, and a separate order granting Victoria’s motion for summary judgment, thereby dismissing Suk An’s action for declaratory judgment. Suk An timely appealed.

THE APPEAL

Suk An argued that the trial court committed an error of law when the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to the “named driver exclusion” of the Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa.C.S. § 1718(c)(2), and is therefore invalid. He also claimed that the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to public policy in Pennsylvania, and is therefore invalid?

ANALYSIS

A reviewing court may disturb the order of the trial court only where it is established that the court committed an error of law or abused its discretion. The rule governing summary judgment in Pennsylvania, like all other jurisdictions, states that where there is no genuine issue of material fact and the moving party is entitled to relief as a matter of law, summary judgment may be entered.

The trial court concluded that section 1718(c) refers to “named driver exclusion” policies which exclude a particular driver, as opposed to the situation presented in the Policy currently at issue, where only the named driver is provided coverage. Suk An contends that Victoria’s “named driver only” coverage impermissibly expands the legislature’s exclusion outlined in section 1718(c) to include “any person not listed as an insured on your policy” without requiring that the first named insured request that the person be excluded from coverage, or a determination as to whether the excluded person is insured on another policy of motor vehicle liability insurance.

The interpretation of an insurance policy is a question of law for the court. In interpreting the language of an insurance policy, the goal is “to ascertain the intent of the parties as manifested by the language of the written instrument.”  When analyzing a policy, words of common usage are to be construed in their natural, plain, and ordinary sense. When the language of the insurance contract is clear and unambiguous, a court is required to give effect to that language.  A “named driver exclusion” prohibits coverage for a person named in the policy while the Victoria policy excluded coverage for any driver not listed on the policy.

That Application Walker signed when he obtained the policy, included the following statement:

APPLICANT’S STATEMENT—READ BEFORE SIGNING WARNING

“PLEASE NOTE: In order for us to offer you this low cost Lite product, your policy contains a number of coverage restrictions. This policy will not provide coverage when the driver of your auto is not listed on the policy. This policy will not provide coverage when you are driving a vehicle other than those listed on the Declaration page. Automatic coverage for a newly acquired auto is also restricted to 72 hours after the purchase or lease of that auto.” (Emphasis added)

Walker was the only driver identified on the Application. Based on the Application, Victoria issued the Policy to Walker. The Policy,  emphasizing the statement in the application, included the following statement: “PLEASE NOTE: IN ORDER FOR U.S. TO OFFER YOU THIS LOW–COST EXPRESS PRODUCT, YOUR POLICY CONTAINS A NUMBER OF COVERAGE RESTRICTIONS. THIS POLICY WILL NOT PROVIDE COVERAGE WHEN THE DRIVER OF YOUR AUTO IS NOT LISTED ON THE POLICY.”

Clearly, Victoria advised Walker that the coverage only applied when he was driving the vehicle identified in the policy. The appellate court concluded, therefore, that the Policy at issue does not conflict with, nor is it contrary to, section 1718(c), as alleged by Suk An. Rather, section 1718(c) is inapplicable to the Policy in this case since it did not deal with a “driver only” policy.

If the court accepted Suk An’s argument to its logical end, pursuant to ection 1718(c)(2), an insurer would not be liable for damages caused by any (and every) driver only if any (and every) driver was 1) specifically excluded by the named insured and 2) was insured under another policy. The court concluded that such a requirement is absurd.  The court concluded that section 1718(c) is inapplicable to the Policy at issue in this case and the policy language is clear and unambiguous in limiting coverage only to the named driver.

Suk An next argues that the “named driver only” Policy at issue in this case conflicts with, and is contrary to, public policy in Pennsylvania, and is therefore invalid.

Public policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest. As the term “public policy” is vague, there must be found definite indications in the law of the sovereignty to justify the invalidation of a contract as contrary to that policy. In the absence of a plain indication of that policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy.

Our Supreme Court had the opportunity to address public policy concerns arising from the interpretation of automobile insurance policies in Progressive Northern Ins. Co. v. Schneck, 813 A.2d 828 (Pa.2002). The insured in Schneck had named her husband as an excluded driver pursuant to section 1718(c)(2) because he had a suspended driver’s license. In recognizing the exclusion as being consistent with public policy, the Court stated that: “The overarching public policy of the Motor Vehicle Financial Responsibility Law (MVFRL) is concern over the increasing cost of insurance premiums … [t]his public policy is exemplified by 75 Pa.C.S. § 1718(c), which permits named driver exclusions. These exclusions are designed by insurers to avoid covering someone with a bad driving record or in a high-risk category … since the premium for such coverage would be exceedingly high.”

The provision of low-cost, affordable policies in return for motor vehicle liability coverage of only the named driver, and the concomitant risk reduction, does not violate public policy. Any determination that such a cost saving policy is against public policy must be left to the legislature. In the absence of a plain indication of dominant public policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy and should be content to await legislative action.

ZALMA OPINION

Although empathy rests with the injured person he is not without a remedy. He can make claim on his uninsured motorist coverage or can continue with his suit against the tortfeasors and execute on their assets. No matter how sad or severe Suk An’s injuries his injuries are not a basis for changing the terms and conditions of a limited contract of insurance created properly.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can an Insurer Limit Coverage as It Pleases?

ISO Files Most Important Homeowners Change in 40 Years

When is Your Home Not Where You Reside?

I thank my friend, Bill Wilson, CPCU, ARM, Associate Vice President, the Big I, who kidly gave me permission to reprint his article from the Big “I” Virtual University Newsletter. Unlike everything else in this blog, I did not write the following article, it was written by Bill Wilson and is posted here because it is so important to those of us involved in insurance and homeowners insurance.

Abstract

In 2001, we learned of a potentially catastrophic coverage gap in most homeowners policies. For the past 14 years, we have written about this and discussed it in seminars and webinars across the country. For the past 10 years, we have worked with ISO through our national Technical Affairs Committee in negotiating a resolution to this problem that all affected parties can live with. This effort has culminated in the recently filed ISO changes addressed in this article.

Background

Fourteen years ago, in the March 16, 2001 edition of our (The Big I) Virtual University VUpoint newsletter (Vol. 2, No. 6), we published what I believe was our first article on what would later become known as the “Where You Reside” homeowners insurance issue. That article was followed by several more related articles emphasizing the importance of a potentially catastrophic coverage gap in most homeowners policies we reviewed. In order to bring the issue to focus, in October 2009 we combined all of the articles into a white paper and presented a countrywide webinar on December 3, 2009. Both the white paper and webinar are linked from the Where You Reside page in the “Featured Resources” area of the VU.

In the meantime, in 2005, our national Technical Affairs Committee presented this issue to ISO in our annual meeting with them. For 10 years, we pursued a remedy for ISO HO forms in this forum and at the Mid-America Insurance Conference via a series of points and counterpoints until, in November 2014, we were able to reach a negotiated agreement on changes to ISO’s Homeowners program that we all could live with. Neither viewpoint “won” but we believe the resolution is workable and a starting point for further evolution and tempering of this homeowners issue.

The countrywide ISO filings effecting this change have been made with an effective date in most states of October 1, 2015. The forms changes include a new mandatory endorsement, an optional broadening endorsement, and a nonfiled notice/questionnaire form. The purpose of this article is to provide an overview of the issue and the purpose of the ISO filings. We will also identify several caveats and preview several initiatives we plan to undertake this year.

Loss Examples

Consider the following scenarios:

A homeowner is confined to a nursing home and then learns she will never be able to return home. Her home remains fully furnished, but she no longer lives there and will not be able to return. According to one interpretation by a number of adjusters and courts, at the instant she learns that she will not be able to return to her home, her residency ends and so does the coverage on her dwelling. If it is destroyed overnight by a covered peril, she has no coverage for the damage to her home, the largest asset she owns and one she would probably need to sell in order to afford the costs of long term nursing home care.

  •  You sell your existing home and buy or build another home. Your new home is ready and the purchasers of your old home have qualified for a loan that will be closed in 5 days. In the meantime, you move to your new residence which you have insured on a new HO policy and you allow the purchasers to begin painting, replacing carpeting, etc. in your old home. Your existing HO policy remains in force on your old house until the closing. Unfortunately, a tornado strikes the day before the closing and the adjuster denies the claim because you no longer reside in the home.
  •  You purchase a “fixer-upper” and place homeowners coverage effective on the date of closing. You plan to move into the home in 28 days after your contractor son completes some renovations (hardwood floors, new kitchen countertops and appliances, bathroom remodeling, etc.). Three days after the closing, a fire breaks out overnight causing $186,000 in damage to the dwelling. When the adjuster learns that you have not yet moved into the home, he denies the claim based on a lack of residency, citing three court cases in your state upholding such claim denials.

These are not hypothetical situations. In our original white paper on this issue, we identify over a dozen scenarios where residency may end during the policy term. We also cite a similar number of court cases that have considered this coverage scenario. Some courts overruled the claim denials, but a slight majority of decisions that we have identified have agreed with the interpretation that the end of residency ends the coverage on the dwelling. In addition, based on real-life claims submitted through the VU “Ask an Expert” service or directly by member agents, we are aware of at least a dozen claim denials:

  •  Total loss while insured was in a nursing home (KY)
  • $100,000+ condo rental claim (FL)
  • 5-figure loss while home was being remodeled (AZ)
  • $186,000 renovation claim (GA)
  • $150,000 ten-month house rental (FL)
  • $135,000 four-year house rental (FL)
  • $123,000 two-year house rental (FL)
  • $300,000 “nonclaim” with daughter occupancy (NY)
  • $229,000 total loss with niece occupancy (MN)
  • Small fire loss (NC)
  • Fire loss with daughter’s temporary occupancy (PA)
  • Fire loss while house was undergoing renovation (RI)

The Problem: Three Little Words

  •  Using the ISO HO-3 policy as a model form, this is the language being cited in the claim denials we’ve heard about and most of those in the court cases we’ve reviewed:

HO Insuring Agreement:
“We cover…The dwelling on the residence premises shown in the Declarations….”

HO Definitions:
“’Residence premises’ means…The one family dwelling where ‘you’ reside….”

The basis for these denials is the premise that the insured (“you”) must reside in the dwelling in order for coverage to apply. According to this interpretation of the “residence premises” policy definition, if a “you” (named insured or resident spouse) doesn’t reside in the dwelling at the time of loss, the dwelling is not a “residence premises” and, if it’s not a “residence premises,” then the insurer does not cover, under the insuring agreement, the dwelling because it’s not on the “residence premises.”

The “where you reside” language was not in ISO’s 1976 HO policies, nor was its addition to the 1984 edition mentioned in that filing. The language has been in subsequent ISO HO forms in 1991, 2000, and 2011. Our research also indicates that this language is common in most non-ISO HO forms in the marketplace, though not all policies.

For the record, OUR interpretation does not agree with that of a number of adjusters and courts. Numerous courts have held that, to be enforceable, an “exclusion” must be “clear and conspicuous.” We believe that coverage for the primary asset owned by a family should not hinge on three words in a definition referenced from an insuring agreement. There is nothing “clear and conspicuous” about this language that would lead an insured to believe that an interruption of residency would suspend coverage on the dwelling. From the standpoint of public policy, it makes little sense that, if the insured is operating a meth lab and blows up his home, there is coverage under his HO policy, while there is no coverage for a tornado destroying her home the Friday evening an 80-year-old homeowner learns that she will be confined to a nursing home henceforth.

Courts that have found FOR coverage have generally interpreted the “where you reside” language to be “words of description,” not a warranty of occupancy or a condition for coverage. Additional rationales for our continued position on this are outlined in our original white paper. And, for what it’s worth, in a past Property Loss Research Bureau publication, PLRB also took the position that this language does not preclude coverage for damage to a dwelling.

IIABA/ISO Negotiations

The Big “I” national Technical Affairs Committee meets annually with ISO to discuss changes in, or additions to, ISO policy form portfolios that we believe are beneficial to consumers and businesses. Our agendas are typically 150-200 pages. Some of our recommended changes are accepted fairly quickly by ISO, others are declined, and many others are discussed over a period of years before being accepted by ISO or dropped by our committee. In the case of the “where you reside” issue, we considered a number of options over a ten-year period before we reached a compromise with ISO for changes in their HO forms.

The preference of our committee would be the complete elimination of the “where you reside” language, but that was not a resolution ISO could accept. So, unlike Congress, we compromised on a mandatory conditional “grace period” endorsement and an optional endorsement that does eliminate the “where you reside” language. While, from our perspective, this is not a perfect nor ideal solution, it is one that is workable if certain caveats are followed by all parties, as discussed later in this article. In the meantime, let’s examine the changes being made in two new ISO filings – forms and rules – that have a proposed effective date in most states of October 1, 2015, along with a nonfiled notice/questionnaire form.

ISO Filings

ISO has made two countrywide filings:

Forms Filing HO-2015-ORPFR

  • Homeowners Residence Premises Definition Revised; Optional Endorsements Introduced

Rules Filing HO-2015-RRPRU

  • Homeowners Manual Rules Revised

Forms Filing HO-2015-ORPFR

The forms filing includes the following new endorsements:

Mandatory endorsements

  • HO 06 48 10 15 – Residence Premises Definition Endorsement
  • HO 17 48 10 15 – Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 26 10 15 – Residence Premises Definition Endorsement – Mobilehom

Optional endorsements

  • HO 06 49 10 15 – Broadened Residence Premises Definition Endorsement
  • HO 17 47 10 15 – Broadened Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 27 10 15 – Broadened Residence Premises Definition Endorsement – Mobilehome

The three “Residence Premises Definition Endorsements” are mandatory forms…the HO 17 48 is used with the HO 00 06 condo form while the HO 06 48 is used with all other HO forms. The three “Broadened” endorsements are optional forms…the HO 17 47 is used with the HO 00 06 condo form while the HO 06 49 is used with all other HO forms. There are two complementary Mobilehome program endorsements. You can review the endorsements by clicking on the links above.

Mandatory Endorsements

Using an excerpt from the above forms, the mandatory endorsements redefine “residence premises” to mean the “dwelling where you reside…on the inception date of the policy period shown in the Declarations and which is shown as the ‘residence premises’ in the Declarations.” The highlighted language is new and is explained by ISO in the filing as follows [emphasis added]:

These endorsements introduce revised language to more explicitly describe that the residency requirement, when determining coverage applicability, will be satisfied as long as the insured resides at the residence premises on the inception date of the policy period. Currently, depending on insurer claims practices, a policyholder may or may not have coverage when they cease to reside at the residence premises mid-term or at renewal. These revisions will provide coverage through the end of the policy period despite mid-term changes in residency while allowing an insurer the opportunity to confirm residency as part of the renewal underwriting process.

In other words, if the insured resides in the dwelling at the inception of the (new or renewal) policy period, coverage remains in force even if the insured should discontinue residency later in the policy period. This “grace” period lasts throughout the policy term but should be reaffirmed by the carrier on each renewal.

Optional Endorsements

The optional endorsements completely remove the “where you reside” language from the “residence premises” definition for a specified period of time indicated on the endorsement. As we read these new endorsements, they can be used in two ways.

First, the inception and termination dates on the endorsement can be identical to the policy’s inception and termination dates. This is the solution IIABA sought from the beginning. Our position has always been that residency is an eligibility issue, not a coverage issue, and should be dealt with as an underwriting consideration, as it was in the pre-1984 HO forms.

Second, these endorsements can be used to temporarily remove the “where you reside” language during a specified portion of the entire policy term. The best example of this use is when a policy if first issued on a newly built or purchased home. Residency in the home may not take place for several days or a week or more following the closing of a loan. Or, as presented as a scenario at the beginning of this article, the homeowner may wish to spend a month or longer renovating the home…this endorsement could serve to clarify that there is no residency until the renovations are complete.

Rules Filing HO-2015-ORPFR

The rules filing primarily addresses the use of the Broadened endorsements on a “temporary” nonresidency basis, though there’s nothing that appears to preclude that period encompassing the entire policy period if the carrier’s eligibility and underwriting guidelines permit. This filing indicates that the Broadened endorsements, under ISO rules, are premium bearing so that the Base Premium can be increased, for example, by up to 12% (2% per month) for a six-month nonresidency period.

Nonfiled Notice/Questionnaire Form

ISO has also developed the following nonfiled form:

  •  HO N 009 10 15 – Residence Premises Questionnaire

 

This form can be used by carriers on new and renewal business to provide notice to insureds of the importance of residency and, based on the insured’s responses, identify whether the Broadened endorsement is appropriate. We suspect that carriers might prefer a “stronger” notice of the importance of residency and notification of the insurer when residency is discontinued. We plan to work with ACORD in the coming months to draft an ACORD notice/questionnaire form and to determine what changes might be indicated in other ACORD forms such as the ACORD 80 Homeowner Application.

Caveats

As indicated earlier, this resolution is not perfect or exactly what we believe is in the best interest of consumers, agents, and the industry at large. However, it is a reasonable compromise that we believe can serve as a starting point for a more complete market-based solution in the coming year. Still, there are caveats to this change that must be acknowledged.

First, even with a mandatory endorsement, there is still a potential for a coverage gap at policy inception for carriers who interpret the “where you reside” language to be a residency requirement for coverage. For example, on new business it is customary to provide a policy (or, more likely, a binder) effective on the date of the loan closing. However, as is often the case, the insured may not move into the home and begin residency on the date of closing. As a result, for carriers with a restrictive interpretation of “where you reside,” a Broadened endorsement should likely be used at policy inception and the insured made to understand the importance of revising the termination date on the form if move-in takes longer than expected.

Second, since renewals are usually processed a month or two in advance, even with a notice form, it’s possible that an insured might unexpectedly discontinue residency (e.g., medical conditions, unanticipated work relocation, military deployment, etc.) between completing the renewal paperwork and renewal policy inception. Again, it is critical when placing or renewing insureds with carriers that hold to a restrictive interpretation of “where you reside” that the insured fully understand the importance of providing notice of nonresidency. In such instances, then Broadened endorsement may be used until (and if), the account needs to move from a Homeowners to a Dwelling Fire policy.

Third, when we originally presented this issue to ISO for consideration, one of the points we made was our belief that this is an eligibility, not a coverage, issue. We illustrated that with ISO’s own eligibility rules that permit the use of an HO policy on a home under construction. Obviously, no one can reside in a home under construction, so our argument is that a literal reading of the “where you reside” language couldn’t preclude coverage because every unoccupied home under construction would have illusory coverage, something courts have uniformly found to be prohibitive. But, for insurers who hold the restrictive interpretation of “where you reside,” the Broadened endorsement should be attached at inception for the duration of construction.

Next Steps

In the months prior to October 1, we will be approaching ACORD about the need to amend any existing ACORD forms and develop an industry-standard residency “notice” form.

We will be issuing a news release on this change in the near future and making contact with various industry and consumer media. We recommend that agents do the same in their local communities and communicate this change to their customers.

We plan to initiate a dialog with independent agency carriers about adopting the Broadened language that eliminates the “where you reside” language. We continue to believe that the restrictive interpretation of this language is detrimental to consumers and to the image of the insurance industry, and we believe that residency has always been, and should continue to be, an eligibility and underwriting consideration for new and renewal business, not an unclear and inconspicuous “exclusion.”

In order to provide greater detail about this change and to enable Q&A from agencies and carrier staff, we will be holding a FREE live countrywide webinar on July 8, 2015:

“Biggest Homeowners Change in 40 Years Explained”

FREE nationwide webinar

July 8, 2015 – 3:00 – 4:00 p.m. EDT

Click here to register

We are limited to 1,000 internet connections for this broadcast. When we announced the webinar on April 9, three months in advance, we had 50 registrations within two hours. So, we encourage you to register immediately. However, if you are unable to attend or we reach capacity, we do plan on recording the webcast and will publish a link to the archived recording shortly after the live broadcast. In addition, we plan to maintain, if warranted, a Q&A document in our “Where You Reside” web area.

How to learn more…

If this issue is new to you, you can download our original white paper and review our original webinar on the Where You Reside page in the “Featured Resources” area of the VU.

How can you stay abreast of emerging issues and announcements regard this change? Subscribe to our free, biweekly Virtual University newsletter, The VUpoint. This award-winning newsletter is the primary communications vehicle we use to bring emerging, relevant, and urgent insurance coverage issues and developments to your attention. Each issue usually features a personal lines coverage article, a commercial lines coverage article, and a rotating third article on agency management, sales, customer service, or technology. You do not have to be a member agency to subscribe…many of our 10,000 subscribers in 70 countries are company underwriters, adjusters, regulators, risk managers, and defense attorneys.

Bill Wilson, CPCU, ARM is the Assoc. VP of Education & Research for the Independent Insurance Agents & Brokers of America and director of their Virtual University.

Copyright 2015 by the Independent Insurance Agents & Brokers of America. All rights reserved.

Republished with permission.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on ISO Files Most Important Homeowners Change in 40 Years

When Has Litigation Gone Too Long?

More on the Dam Case

Some litigation seems to continue forever. When a dam was destroyed by flood in 1997 litigation began between the owners of the dam and their insurer. The litigation has gone through trial, appeal, back to the trial court, trial again, and now motions for reconsideration and clarification. The issue should have been simple:

  1. whether the insured can elect to take only the ACV of the dam; or
  2. full replacement cost if the dam is rebuilt if the insured elects to rebuild;
  3. how long the insured has to complete the rebuild; and
  4. whether the insured is entitled to pre-judgment interest.

FACTUAL BACKGROUND

This case involves a dispute regarding insurance coverage that Sierra Pacific procured from Defendants. Sierra Pacific operates power generation stations in Nevada and California. Defendants insure Sierra Pacific’s facilities, including the Farad Dam on the Truckee River in California (“the Dam”). The Dam was completely destroyed by a flood in 1997, at which point Sierra Pacific filed a claim for damages with Defendants.

Following a three-day bench trial on April 8 to 10, 2008, as well as written briefing and written closing arguments by the parties, the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. [See report at http://zalma.com/blog/a-dam-case/]

On December 5, 2014, the Court affirmed that the ACV of the Dam when it was destroyed was $12,216,600 and awarded prejudgment interest to Sierra Pacific on this amount less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. On December 31, 2014, Defendants filed a Motion to Reconsider, and Sierra Pacific filed a Motion to Clarify. On February 5, 2015, the Court reaffirmed its ruling that prejudgment interest is appropriate in this case. The Court clarified its prior ruling to state that any prejudgment interest should begin to run starting on April 3, 2001, and that Sierra Pacific was at a maximum entitled to prejudgment interest based on the estimated replacement cost of the Dam in 2001, $16,205,303, less reductions described in that Order. The Court held further that its orders on the parties’ motions to amend did not disturb the September 30, 2008, Findings of Fact and Conclusions of Law that the applicable insurance policies “provide Sierra with full replacement cost coverage subject to the sublimit liability for flumes and waterways of $29,000,000 and the sublimit of liability for California locations of $62,000,000.”

On March 5, 2015, Sierra Pacific “reluctantly” filed the present Motion for Further Clarification, asking the Court to confirm that if Sierra Pacific rebuilds or replaces the Dam, it could recover “the actual expenditures incurred by Sierra, up to the policy limits of $29,000,000 (TIV Dams), $62,000,000 (California locations) and an additional $10,000,000 of coverage for Demolition and Increased Costs of Construction (DICC).”

Sierra Pacific also asked the Court to clarify that the time for calculating or computing the actual expenditures incurred is “three years after the conclusion of all litigation, including all appeals.” In its own Motion to Reconsider, Defendants again request that the Court reconsider its ruling granting prejudgment interest to Sierra Pacific, this time arguing that the Court exceeded the scope of the Ninth Circuit’s remand when it granted prejudgment interest on December 5, 2014.

DISCUSSION

The Court found that the law of the case doctrine does not preclude Sierra Pacific from recovering more than $19,800,000 if it decides to rebuild the Dam and costs in good faith exceed that figure.

First, neither this Court nor the Ninth Circuit explicitly decided that the $19,800,000 replacement cost figure constituted an absolute maximum such that Sierra Pacific could not recover if replacement costs exceeded that figure. Second, the Court’s original Findings of Fact and Conclusions of Law found that the estimated replacement cost of the Dam was $19,800,000, but that the insurance policy’s limits were $29,000,000 for flumes and waterways, $62,000,000 for California locations, and $10,000,000 for demolition and increased costs of construction. The Ninth Circuit upheld the $19,800,000 replacement cost figure, and did not disturb the Court’s holding regarding sublimits of liability. Accordingly, the law of the case doctrine does not limit Sierra Pacific’s recovery for rebuilding the Dam to $19,800,000, and the Court reaffirms its finding that the sublimit of liability for flumes and waterways is $29,000,000, the sublimit for California locations is $62,000,000, and the policy provides for a limit of $10,000,000 in demolition and increased costs of construction.
Tolling of Three–Year Period for Rebuilding the Dam

Sierra Pacific requests that the Court clarify that the “period of time for determining the limitation on replacement costs … shall continue for a three-year period after the conclusion of all litigation, including all appeals.” The Court found in the September 30, 2012, Findings of Fact and Conclusions of Law that it was “equitable to extend the two-year time period laid out in the policy to replace Farad for an additional three-year period.” The Ninth Circuit affirmed the finding “that the time limit to rebuild the dam should be three years rather than two years.”  The court added that “the three-year period granted for rebuilding Farad Dam should be tolled until the conclusion of the litigation, including during the pendency of any appeal.” The court also ordered that Sierra Pacific was required to decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.

The Court reaffirmed its decision that if Sierra Pacific elects to rebuild the Dam, it shall have three years to do so after all appeals are resolved, and Sierra Pacific shall inform Defendants whether it will rebuild the Dam or recover its ACV within ninety (90) days of the completion of all appeals.

Defendants’ Motion to Reconsider

Defendants argue for the second time that the Court erred in granting prejudgment interest on amounts to which Sierra Pacific was entitled beginning April 3,
The Ninth Circuit did not decide, explicitly or by necessary implication, whether Sierra Pacific was entitled to prejudgment interest. In addition to requesting recovery under the policy and attorney fees, Sierra Pacific’s original Complaint requests “such other and further relief as this Court deems just and proper.” Thus, the fact that Sierra Pacific did not explicitly request prejudgment interest in its Complaint does not preclude an award of prejudgment interest.

Despite their opportunity to raise this argument twice before, Defendants attempts a third bite at the apple by raising an entirely new argument in this second Motion to Reconsider. The Court denied Defendants’ attempt to reargue the prejudgment interest, noting that motions cannot be used merely to reargue an issue that has already been decided.

Defendants have a complete right of appeal if they believe that the Court’s Order awarding prejudgment interest was in error, but it is improper to repeatedly reargue an issue in motions to reconsider in lieu of a timely appeal.

ZALMA OPINION

When large amounts of money are involved – and this dam case involves many millions – the parties appear to forget the purpose of insurance is to indemnify an insured against damages resulting from certain identified risks of loss for either the ACV of the property destroyed or its full replacement cost as specified in the policy. The parties in this case appear to prefer to litigate than resolve the dispute. Since the court ended its opinion with an invitation to appeal the order it seems this case will continue to keep the lawyers for the parties busy for a long time when they should be working to resolve the dispute.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Has Litigation Gone Too Long?

Does Extended Reporting Period Extend Claims Made?

Claims Made & Reported Policy Limits Exposure to Loss to a Specific Time

Insurers institute a claims made and reported liability policy to limit their exposure to loss to a specific period of time so that they have no concern for late made or reported claims like those faced by insurers who expose themselves to long tails with an occurrence policy. It allows lower premiums because of the limitation on the period of time the insurer is exposed to potential liability.

Continental Casualty Company (“Continental”) sough summary judgment in Schleusner v. Continental Cas. Co.. Not Reported in F.Supp.3d, 2015 WL 1609202 (D.Mont.), arguing to a district court in Montana that it is not obligated to provide insurance coverage in an underlying state case because notice was not timely given by the insured.

BACKGROUND

The Policy

Continental issued a claims-made-and-reported Real Estate Professional Errors and Omissions Policy (the “Policy”) to RE/MAX Realty Consultants, LLC (“Re/Max”) for the period September 6, 2007, to September 6, 2008. The Policy’s insuring agreement stated that “[a] claim must be first made during the policy period and must be promptly reported to [Continental] in accordance with Section VI, Conditions, paragraph B .”   The Policy defines “claim” as “an oral or written demand received by the Insured for money or services, including a demand alleging personal injury, arising out of an act or omission in the rendering of professional real estate services. The service of suit or the institution of an arbitration proceeding against the Insured will be considered a demand.”

Regarding notice of claims to the insurer, the relevant portion of the Policy states: “[t]he Insured, as a condition precedent to our obligations, must promptly give written notice to us during the policy period or any renewal policy period: ¶ a. of any claim made against the Insured during the policy period; ¶ b. of any notice, advice or threat, whether written or verbal, that any person or organization intends to hold the Insured responsible for any alleged breach of duty or other act or omission. ¶  This condition will not be a barrier to coverage for those Insureds who do not have personal knowledge of a claim or potential claim. However all Insureds must promptly comply with this condition upon obtaining such knowledge.”

FACTUAL BACKGROUND

On June 27, 2008, Re/Max was advised that the Policy was set to expire on September 6. On August 28, 2008, Re/Max received a renewal invoice informing it that coverage under the Policy would terminate on September 6 if Re/Max did not renew it. Re/Max did not renew the Policy. The non-renewal automatically triggered the Policy’s extended reporting period. The automatic extended reporting period will terminate after sixty (60) days.  It also made clear that the “extended reporting period” shall not be construed to be a new Policy and any claim submitted during such period shall otherwise be governed by the terms of the policy.

The Underlying Lawsuit

On April 18, 2008, the Schleusners filed a state court action against Re/Max and one of its real estate agents, alleging damage as a result of Re/Max’s conduct while acting as their real estate agents. The Schleusners’ counsel mailed written notice of the action and a copy of the complaint to Re/Max on November 4, 2008, and Re/Max received this notice on November 5. According to the Schleusners, Judith Wahlberg, the former owner of Re/Max, reviewed the letter and complaint and sent the claim to Continental on November 5, 2008, the same day she received it.

The Schleusners settled their claims against the Re/Max real estate agent in October 2013 and against Re/Max in April 2014. According to the settlement agreements, both Re/Max and its agent confessed to entry of judgment against them in the amount of $2,191,828.90 and assigned their claims for coverage from any insurer to the Schleusners. Judgment was entered accordingly and, on July 31, 2014, the Schleusners sued the insurer.

ANALYSIS

The interpretation of an insurance policy is a question of law. Courts will not rewrite clear and explicit language in an insurance contract. The primary issue before the Court was one of notice. Under Montana law, “a notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company.”

Under claims-made policies, “coverage is determined by claims made within the policy period, regardless of when the events that caused the claim to materialize first occurred. Claims-made policies are further classified as either claims-made or claims-made-and-reported policies. Claims-made policies contain no requirement that the claim be reported by a set date, but in the case of claims-made-and-reported policies, notice is the event that actually triggers coverage and is generally required within the policy period or extended reporting period.

On its face, the Policy  is a claims-made-and-reported policy, conditioning indemnity and defense coverage on claims made during the policy period and reported prior to the expiration of the extended reporting period. Whether the claim was timely made turns on the question of whether the initiation of the lawsuit against Re/Max on April 18, 2008, constituted making a claim or whether a claim was initially made on November 5, 2008, when Re/Max first was made aware of the claim. Continental asserts a “claim” requires that a demand for money or services be received by the insured and it must be received when the Policy is in effect. Pursuant to the plain language of the Policy a claim was made on November 5, 2008, the day Re/Max received notice of the underlying lawsuit.

Next the court found it needed to decide whether a claim made during an extended reporting period, and not during the policy period, is timely.

The Policy defines an extended reporting period as “the period of time after the end of the policy period for reporting claims by reason of an act or omission, which occurred prior to the end of the policy period and is otherwise covered by this Policy.” Additionally, the Policy states, “[a] claim must be first made during the policy period.”

The clear language of these provisions reveal that to trigger coverage, a claim, as defined by the Policy, must be made on the insured within the policy period itself and not during an extended reporting period. The claim was, therefore,  made beyond the policy term.

Because the condition precedent of a timely claim was not met, Continental had no duty to defend or to indemnify in the underlying case because  notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company and the summary judgment was granted in favor of the insurer.

ZALMA OPINION

This is another case where greed and the hope of punitive damages from an insurer trumped good sense. ReMax, unless it was bankrupt or judgment proof, had assets to pay some or all of the judgment.  The reason for a claims made and reported policy is to give the insurer confidence that its exposure to loss is limited in time. There is no long tail. There is no tail at all as there is in an “occurrence” based policy. The insurer in this case was generous and gave the insured an additional sixty days to report a loss that occurred during the policy period. The extended reporting period was just that, it was not an extra sixty days of coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Does Extended Reporting Period Extend Claims Made?

Not Nice To Sue Your Spouse

Defense Required for Cross-Claim In Suit For Injuries to Spouse

Sue Kim (hereinafter Sue) allegedly was injured in a two-car accident that occurred in Pennsylvania disputes arose over insurance coverage. When she was injured Sue was a passenger in an automobile driven by her husband, the defendant Young S. Kim (hereinafter Young). The other vehicle involved in the accident was operated by the defendant Elmer Glick. Sue commenced an action in Pennsylvania against Young, Glick, and Amos R. Beiler, who owned the property at the intersection where the accident occurred.

Glick asserted a cross claim against Young, who is insured by the plaintiff Metropolitan Group Property and Casualty and Insurance Company (hereinafter Metropolitan).
The trial court granted Metropolitan’s motion for summary judgment because of the policy provision and the law that prevented coverage for suits between members of the same family. The trial court denied Glick’s cross motion, and declared that Metropolitan is not obligated to defend and indemnify Young with respect to Sue’s complaint or Glick’s cross claim in the underlying action.

THE STATUTE

Pursuant to Insurance Law § 3420(g), “[i]n the absence of an express provision in an insured’s policy, a carrier is not required to provide insurance coverage for injuries sustained by an insured’s spouse” (State Farm Mut. Auto. Ins. Co. v. Harkins, 30 AD3d 502, 502–503. Insurance Law § 3420(g) “was enacted to prevent the possible fraud and collusion that might arise in actions wherein an injured spouse seeks to recover for injuries resulting from the negligence of an insured spouse” (Matter of General Acc. Ins. Co. v. Elbaum, 236 A.D.2d 472, 473).

In Metropolitan Group Property v. Kim, — N.Y.S.3d —-, 2015 WL 1652319 (N.Y.A.D. 2 Dept.), 2015 N.Y. Slip Op. 03138 the appellate court noted that the chance of fraud and collusion, however, is slight where a passenger-spouse is suing a third-party who brings a claim for relative contribution against a driver-spouse as the recovery of the injured spouse is not dependent upon proving the liability of the driver-spouse.

ANALYSIS

Therefore,the  appellate court concluded that Insurance Law § 3420(g) does not preclude liability insurance coverage on a third-party claim for contribution against an insured (joint tortfeasor) spouse of an injured person.

Here, although Insurance Law § 3420(g) precludes liability insurance coverage of Young vis-vis Sue’s complaint against him in the underlying action, the statute does not preclude coverage of Young with respect to Glick’s cross claim. The language of Metropolitan’s policy endorsement providing coverage for third-party claims should be broadly construed to apply to Glick’s cross claim. Therefore, contrary to Metropolitan’s contention, Metropolitan is required to defend and indemnify Young with respect to Glick’s cross claim in the underlying action.

Accordingly, the appellate court concluded that the trial court should have granted Glick’s cross motion, in effect, for summary judgment declaring that Metropolitan is obligated to defend and indemnify Young with respect to Glick’s cross claim in the underlying action, and denied that branch of Metropolitan’s motion which was, in effect, for summary judgment declaring that it is not so obligated.

ZALMA OPINION

In another brief and to the point decision from the New York appellate courts the decision makes clear that laws that prevent suits between members of the same family to avoid collusion, apply to direct actions, but do not apply to claims for contribution from a third party who is alleged to have injured a spouse. Mr. Kim gets no coverage for the suit by the wife for her injuries but gets coverage for the claim for contribution by one of Mrs. Kim’s suit for her injuries claiming that Mr. Kim contributed to her injury.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Zalma’s Insurance Fraud Letter – April 15, 2015

What Is Insurance Fraud?

In this, the Eighth issue of the 19th  year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on April 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Insurance Fraud – Adapted From “The Insurance Fraud Deskbook
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Intent to Commit Insurance Fraud Not a Defense to Burglary.
4.    Kentucky Adds Anti-Fraud Law to Its Statutes
5.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Why the “Bad Faith” Expert Couldn’t Testify – April 14, 2015
2.    May Insured Lie To Insurer When Applying? – April 13, 2015
3.    May Regulator Exceed Power to Protect Public? – April 10, 2015
4.    A Fictionalized Story of Real Insurance Fraud – April 9, 2015
5.    Broker Need Only Acquire Insurance Requested – April 8, 2015
6.    When Is an Intentionally Set Fire Not Vandalism? – April 7, 2015
7.    What the Heck is an Honorable Engagement Agreement? – April 6, 2015
8.    Emotion Should Never Be Basis of Judgment – April 3, 2015
9.    Is Entrustment Exclusion Enforceable? – April 2, 2015
10.    “Insurance Law” A New Book From Barry Zalma – April 1, 2015
11.    Zalma’s Insurance Fraud Letter – April 1, 2015
12.    False Application For Health Insurance is a Crime In Connecticut – March 31, 2015
13.    Join Me at the 19th Annual America’s Claims Event – March 30, 2015
14.    Can Reinsured Allocate Claims Payments? – March 30, 2015
15.    The Use of the Insurance Examination under Oath – March 27, 2015
16.    Plaintiffs’ Lawyers Need to Understand Insurance – March 26, 2015
17.    Is Drunken Brawl Resulting In Death Covered? – March 25, 2015
18.    MCS-90 Controls – March 24, 2015
19.    Captive Agent Must Use Ordinary Care – March 23, 2015
20.    No Way to Avoid Workers’ Compensation – March 20, 2015

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10
Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

“Insurance Law”

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – April 15, 2015

Why the “Bad Faith” Expert Couldn’t Testify

Bifurcated Case Limited to Breach of Contract

Cases seeking damages for the tort of bad faith are often bifurcated so that the jury first is asked to decide if there was a breach of the insurance contract. If the jury finds the contract was breached then the bad faith portion of the trial goes forward. If, however, the jury finds no breach of contract the case is over. By bifurcating the trial the court saves a long and contentious trial and avoids confusing the jury by mingling tort issues with contract issues.

After a ten day trial, a jury agreed with Federal Insurance Company (“Federal”) in an insurance coverage dispute with property owners Jerome and Deborah Tannenbaum. Although the Tannenbaums claimed that strong winds had caused significant damage to their property in Nashville, Tennessee, the jury determined that landslides, which were excluded from policy coverage, were the primary catalyst for the damage, as Federal had contended. The Tannenbaums appealed and the Sixth Circuit Court of Appeal resolved the dispute in Tannenbaum v. Federal Ins. Co., — Fed., Appx. —-, 2015 WL 1543080 (C.A.6 (Tenn., 4/7/15)

FACTS

In August 2009, the Tannenbaums took out a one-year insurance policy from Federal for their property in Nashville, Tennessee. The policy, in relevant part, defines a “covered loss” as including “all risk of physical loss to your house or other property covered … unless stated otherwise or an exclusion applies.” One of the enumerated exclusions to coverage is “earth movement including volcanic eruptions, landslides, mud flows, and the sinking, rising or shifting of land.” Wind damage, on the other hand, is not excluded from coverage.

During the weekend of May 1–2, 2010, storms passed through Tennessee over the Tannenbaums’ property while the Tannenbaums were not present. Although the parties dispute how the damage occurred, both sides agree that the storms damaged the property extensively. The Tannenbaums assert that violent winds caused the damage by uprooting trees and hurling them into the house, a theory which, if true, would entitle them to full coverage for the damage. Federal, on the other hand, through the analysis of its two primary claim adjusters, as well as several experts, concluded that landslides had caused the majority of the damage. The only wind damage Federal found was damage to the roof caused by a single fallen tree. Federal paid the Tannenbaums $58,418.50 for the tree damage caused by the wind, but denied coverage for all remaining damage, since landslide damage was an enumerated exclusion from coverage under the policy.

The Tannenbaums sued Federal in the Circuit Court for Davidson County, Tennessee. The complaint raised four claims: 1) breach of contract; 2) failure to adjust the claim; 3) violations of the Tennessee Consumer Protection Act (“TCPA”); and 4) bad-faith refusal to pay. The district court granted Federal’s motion to bifurcate, dividing the trial into a breach-of-contract phase and a bad-faith phase. The case then proceeded to trial on October 22, 2013, beginning with the breach-of-contract phase.

On the sixth day of the trial of the breach-of-contract claim, the Tannenbaums called their expert, Charles Howarth to the stand, despite the district judge’s previous statement he could only testify in the bad faith portion of the trial. Federal objected, insisting that Howarth was the Tannenbaums’ bad-faith witness and thus his testimony would be irrelevant to the breach-of-contract phase of the trial. The court sustained the objection.

That same day, the jury returned a verdict in favor of Federal on the breach-of-contract claim.

ARGUMENT

The Tannenbaums first argue that the district court erred by excluding testimony from their expert witness during the first phase of the bifurcated trial.

The Tannenbaums contended at trial that even though Charles Howarth would have been their “bad-faith” expert witness had the trial proceeded in just one phase, they had instructed him not to testify about bad-faith issues during the breach-of-contract phase of the bifurcated trial. Howarth, they argued, would have testified about whether Federal had met the applicable standards for adjusting the type of policy the Tannenbaums had purchased..

The report submitted by Howarth to the court outlining his expert opinions, however, is littered with references to “bad-faith.” Although he discusses the industry standards on claim adjustment in the report, these standards merely form the basis for his conclusion that Federal acted in bad-faith throughout the claim adjustment process. The district court had relegated all bad-faith argumentation to the second phase of the trial, if one were needed. The Sixth Circuit concluded that there was no error in postponing the testimony of the Tannenbaums’ bad-faith witness to the bad-faith phase, especially because even the proposed, potentially relevant testimony about industry standards would not have been helpful to the jury.

A trial judge has authority to refuse to give a proposed instruction about permits for reconstruction if insufficient evidence supports it. Athough only a “slim amount” of evidence is required to support a proposed jury instruction, allowing the Tannenbaums’ claim here would strain the definition of “slim.” During a ten day trial, the Tannenbaums can point to at most a handful of, and, more realistically, two, definitive statements about permits in the entire trial transcript.

The Tannenbaums argue finally that the district court erred by not including a jury instruction on resolving ambiguity in insurance contracts. The Tannenbaums proposed an instruction stating that ambiguous language in an insurance policy is always construed against the insurer and in favor of effecting coverage. They argue on appeal that the district court’s decision removed from the jury the question of whether ambiguities in fact existed and, if so, the impact those ambiguities had on coverage for their losses.

Although, in a rush of wishful thinking perhaps, the Tannenbaums argue that the jury might have found certain provisions of the contract ambiguous had the judge instructed them on contract ambiguity, this threshold inquiry is for the judge, not the jury. And the district court never found any provisions of the policy to be ambiguous. The Tannenbaums’ proposed ambiguities are simply complaints about Federal’s application of the policy to their claims disguised as purported problems with the contract language. Thus, even if the jury were the proper avenue for resolving contract ambiguities, the proposed instruction would not have helped the Tannenbaums.

ZALMA OPINION

Since the insurer paid what it owed for windstorm damage and the jury found there was no breach of contract for the remainder of the claim because of the exclusion the purpose of a bifurcated trial was met and the parties were saved from trying the bad faith portion of the trial. The Tannenbaum’s were not happy with the result but, rather than using a bad faith expert to help them get excess damages, they should have invested in an engineer who could have convinced the jury that the damages were caused by wind, not landslide.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why the “Bad Faith” Expert Couldn’t Testify

May Insured Lie To Insurer When Applying?

Failure to Disclose Involvement With Ponzi Scheme Fatal to Insurance

Many policyholder lawyers forget that the obligation to deal fairly and in good faith in insurance transactions is mutual. The insured owes the duty to the insurer to deal fairly and in good faith and the insurer owes to the insured the duty to deal fairly and in good faith with the insured so that neither deprives the other of the benefits of the policy. In simple language neither should lie to the other.

When a securities firm applied for professional liability insurance, it disclosed one of the customer claims against it, but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. In Crown Capital Securities, L.P. v. Endurance American Specialty Insurance Company, — Cal.Rptr.3d —-, 2015 WL 1607164 (Cal.App. 2 Dist., 4/10/15) the insurer refused to defend the securities firm against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim.

BACKGROUND

On October 26, 2009, investor George Bou–Sliman transmitted a letter to plaintiff and appellant Crown Capital Securities, L.P., (Crown Capital), which letter attached a summary of the Final Report of the Examiner (Bou–Sliman Claim). Bou-Sliman advised Crown Capital that a bankruptcy proceeding established the principal of DBSI, was the operator of a ponzi scheme  and provided a copy of the examiner’s report that contained sad evidence contrary to your plan.

Darol Paulsen, on behalf of Crown Capital, executed an “Application for Professional Liability Insurance” from defendant and respondent Endurance American Specialty Insurance Company (Endurance) for a professional liability insurance policy for work performed by its security broker-dealers and investment advisors. Concerning Crown Capital’s claims experience Paulsen answered that question, “Yes” and disclosed the Bou-Sliman claim.

However, with regard to Question 10 of the application asked, “Is the Applicant (after diligent inquiry of each principal, partner, managing member, director or officer) aware of any fact, circumstance, incident, situation, or accident (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) that may result in a claim being made against: (a) the Applicant; … ?” Paulsen answered that question, “No.”

The application warned: “NOTE: It is agreed that any claim or lawsuit against the Applicant, or any principal, partner, managing member, director, officer or employee of the Applicant, or any other proposed insured, arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed in response to Questions 9, 10 and/or 11, is hereby expressly excluded from coverage under the proposed insurance policy.

Shortly thereafter multiple claims resulting from the alleged “Ponzi Scheme” were brought against Crown Capital.  Endurance denied insurance coverage to Crown Capital under the Policy for the three new claims, and refused to defend Crown Capital against those claims.
The trial court granted Endurance summary adjudication on its cross claims as to the three claims, ruling that those claims were excluded from coverage under the Policy’s Application Exclusion and that there was no potential for coverage. The trial court reasoned that the Final Report of the Examiner that was attached to the Bou–Sliman claim “disclosed an array of investments under the DBSI umbrella, the failure of which were tied to the DBSI activities. [¶] The evidence shows that the Bochner, Biles, and Grana claims all arise out of a ‘fact, circumstance, act, error or omission’ that was previously disclosed.”

DISCUSSION

Whether an insurer owes its insured a duty to defend is made, in the first instance, by comparing the allegations in the complaint with the terms of the policy. If there is no potential for coverage under an insurance policy’s terms, an insurer acts properly in denying a defense. If there is any doubt about whether there is a duty to defend, the matter is resolved in the insured’s favor. If an exclusion is not ambiguous, however, it will prevail over the insuring clause and preclude coverage.

Bou–Sliman’s claim concerned his investment in a DBSI investment property known as Northpointe Towers, which investment Crown Capital broker-dealer Naylor recommended. The three additional claims concerned his investment in DBSI; a claim concerned investment in DBSI investment properties other than Northpointe Towers. Crown Capital argued that the three claims did not arise from the Bou–Sliman Claim because none of the claims involved the same investor or the same investment that was at issue in the Bou–Sliman Claim, and none of the investments at issue in the claims were recommended by the same Crown Capital broker-dealer who recommended the Northpointe Towers investment to Bou–Sliman.

It is undisputed that Crown Capital was aware of the Bou–Sliman Claim when Crown Capital applied for the Policy, for that claim was reported in the application. Like the Bou–Sliman Claim, the other three claims arose out of the DBSI Ponzi scheme.
Crown Capital was aware that DBSI had declared bankruptcy and allegedly had been operating a Ponzi scheme, that Bou–Sliman had claimed that Crown Capital had failed to exercise due diligence in connection with a DBSI investment, and that its broker-dealers had sold other DBSI investments to their customers—i.e., investments that were part of a Ponzi scheme that was the subject of a bankruptcy proceeding. Crown Capital, therefore, was obviously aware of facts and circumstances that might result in a claim or claims being made against it. The facts of which it was aware, including the report showing it was selling investments in a Ponzi scheme, required it to disclose under Question 10 of the application for the Policy.

With respect to the scope of the “arising from” language, the trial court correctly stated, “ ‘ “[a]rising out of” is ordinarily understood to mean “originating from, having its origin in, growing out of, or flowing from, or in short, incident to, or having connection with.’ Davis v. Farmers Ins. Group (2005) 134 Cal.App. 4th 100, 107. ‘California courts have consistently given a broad interpretation to the terms ‘arising out of’ or ‘arising from’ in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.’ Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App. 4th 321, 328.”

Although advancing various theories, all of the causes of action that the three asserted in their claims against Crown Capital and its broker-dealers concerned the purchase of DBSI investments. At the time that Crown Capital applied for the Policy, it was aware of facts and circumstances that might result in a claim being made against Crown Capital—i.e., DBSI’s bankruptcy, the alleged operation of a Ponzi scheme, and the investment by Crown Capital’s customers in DBSI investments.

The awareness of those potential claims brought such claims within the Application Exclusion regardless of the theory upon which such claims might be based. Accordingly, the trial court properly ruled that the entire Bochner, Biles, and Grana Claims, regardless of the theory of liability, were excluded from coverage under the Application Exclusion.

ZALMA OPINION

Crown Capital attempted to confuse the issues by claiming each of the claims and suits filed by its investors were different from the Bou-Sliman claim it did report. In so doing it lied on the application and allowed the insurer to defend based on the exclusion contained in the application. The insurer could, had it desired, also rescinded the policy from its inception because of the misrepresentations and concealment of material fact in the application. Either way it did not pay for Crown Capital to deceive its insurer and, as a result, it is without the ability to obtain defense or indemnity from its insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on May Insured Lie To Insurer When Applying?

May Regulator Exceed Power to Protect Public?

Regulator Not Allowed to Protect Insured From Insured’s Mistake

Modern homeowners insurance policies insure against the risk of loss to the home up to the full cost to repair or replace up to the limit of liability chosen by the insured or even a greater amount – usually 150% of the policy limit – if necessary. Generally, the amount to replace is chosen by the insured. Insurers, insurance agents, and insurance brokers, will assist the insured in determining the amount necessary to repair or replace, but do not, nor can they, guarantee the accuracy of the estimate. Insurance professionals are not construction experts. Especially in catastrophe situations, where the costs of materials and labor necessary to replace a damaged property increase exponentially, estimates of replacement cost accurate in a one off fire will not be accurate in a fire storm situation.

Insurance Regulators are consumer protection agencies and often consider the insurers they regulate to be the enemy trying to prevent people they insure from receiving the benefits of the insurance contract. As a result they often try to micro-manage the business of insurance in order to make the insurance policies issued in the state pay as many claims in sufficient amounts to indemnify the people insured, even if the policy wording agreed to does not allow payment. In Association of California Insurance Companies v. Jones, — Cal.Rptr.3d —-, 2015 WL 1569669 (Cal.App. 2 Dist., 4/8/15) the California Court of Appeal was asked to decide whether the Insurance Commissioner (Commissioner) had authority to promulgate California Code of Regulations, title 10, section 2695.183 (the Regulation) under the authority delegated to him by the Unfair Insurance Practices Act (UIPA), Insurance Code sections 790–790.15. The trial court found that he did not.

FACTUAL BACKGROUND

The Regulation

The Regulation at issue involved homeowner insurance, and specifically replacement coverage in the event of a covered event like a fire. In general, there are three kinds of replacement cost coverages. Each requires an insurer to pay replacement costs up to a limit defined in the policy or up to a set amount above the policy limit. If the cost of repairing or rebuilding a home damaged or destroyed by a covered event exceeds that limit, the homeowner has to pay the difference. The Regulation provides a lengthy and detailed methodology for determining the replacement cost of a dwelling the risk of loss of which might be insured.

Insurance Code Section 2051.5, subdivision (a) defines replacement cost, in pertinent part, as “the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.”

The Regulation was promulgated in 2010 in response to complaints received from homeowners who lost their residences in the wildfires in Southern California in 2003, 2007, and 2008. These complaints arose when homeowners learned that they did not have enough insurance to cover the full cost of repairing or rebuilding their homes because when they bought their homeowner insurance, the estimates of replacement value were too low.

The introductory sentence of the Regulation prohibits a “licensee” from “communicat[ing] an estimate of replacement cost to an applicant or insured in connection with an application for renewal of a homeowners’ insurance policy that provides coverage on a replacement cost basis” that does not satisfy the content and format provisions in the Regulation. The Regulation, therefore, requires an insurer or its agents and representatives to become experts in the replacement costs of a dwelling and punishes them if they fail.

The estimate must itemize “the projected cost” of each expense listed in subdivision (a)(1)–(4), and the assumptions as to the components listed in subdivision (a)(5). (Reg., subd. (g)(2).) A copy of the estimate and any update of the estimate “must” be given to the applicant. (Reg., subds.(g)(1), (h).) Subdivision (e) requires that “reasonable steps” be taken to “verify … sources and methods used to generate the estimate of replacement cost” “no less frequently than annually.” The Regulation also imposes recordkeeping obligations on the licensee. (Reg., subd. (i).)

Subdivision (j) of the Regulation provides that “communicat[ing] an estimate of replacement value not comporting with divisions (a) through (e)” to an applicant for homeowner insurance “provid[ing] coverage on a replacement cost basis,” or any renewal thereof, “constitutes making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.”

Furthermore, the Regulation renders as unfair and deceptive estimates that are accurate, but not in the format dictated by the Regulation. At the same time, the Regulation does not sanction an inaccurate estimate that complies with the format and content requirements of the Regulation.

DISCUSSION

Read as a whole, the UIPA did not give the Commissioner authority to promulgate the Regulation. The Commissioner has only the authority conferred on him by the Legislature. An appellate court must deduce that authority from the language of the statute itself by applying familiar maxims of statutory construction.

The expression of some things in a statute necessarily means the exclusion of other things not expressed.

The language of the UIPA reveals the Legislature’s intent to set forth in the statute what unfair or deceptive trade practices are prohibited, and not delegate that function to the Commissioner. Thus, section 790.02 states, “No person shall engage in this State in any trade practice which is defined in this article as, or determined pursuant to this article to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.”

The Commissioner did not have authority to add content and format requirements for replacement cost estimates in homeowner insurance to the list of practices set forth in section 790.03 under the guise of deeming nonconforming estimates misleading. Section 790.04 gives the Commissioner “power to examine and investigate into the affairs of every person engaged in the business of insurance … in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 790.03 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance.” It does not give the Commissioner the authority to add to the list of deceptive practices since, if the Legislature intended that to be in the statute it would have added it.

The Legislative Evolution of the UIPA as Well as Other Sections in the Insurance Code Support the Conclusion That the Commissioner Was Without Authority to Promulgate the Regulation

The UIPA as originally enacted in 1959 (Stats.1959, ch. 1737, § 1, p. 4187) did not include all the acts and practices currently deemed unfair and deceptive in section 790.03. Section 790.03, subdivision (h), regarding unfair claims settlement practices, was added to the UIPA in 1972. Section 790.03, subdivision (h) covers categories of claims settlement practices that could have been regulated under the Commissioner’s interpretation of his authority under sections 790.03 and 790.10 without amending the statute.

The decision, according to the court “is limited to one conclusion—that the UIPA has not as of yet given the Commissioner authority to regulate the content and format of replacement cost estimates.”

ZALMA OPINION

Anyone with knowledge of construction recognizes that estimating replacement cost of a dwelling before it is damaged is nearly impossible because of the need to determine the amount of demolition, the amount of the structure that can be saved, the cost of materials and labor at the time of the loss, and changes in codes and regulations between the time of the estimate and the loss.

The statute gives the Commissioner broad powers but it does not give the Commissioner carte blanche authority to regulate whatever he wants when he sees what he believes is a social wrong. He is limited by the statute. The court did not discuss, but I am sure noticed, that the Regulation – almost impossible to comply with in the normal course of the business of insurance – was a full employment act for policyholder’s lawyers whose clients chose to limit the premium paid by selecting a low policy limit. Regulators must remember that they are also required to keep the insurers they regulate viable so that they can pay claims and not set them up for multiple unnecessary bad faith lawsuits.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on May Regulator Exceed Power to Protect Public?

A Fictionalized Story of Real Insurance Fraud

The Trees that Washed Away

The story that follows is based on fact. I was the lawyer who represented the insurer. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. It is adapted from my e-book, “Heads I Win, Tails You Lose” which is available at http://www.zalma.com/zalmabooks.htm.

Northern San Diego County, California is avocado country. Trees grow everywhere. The heavy green fruit is a cash crop.

The hills and valleys of California were once the bottom of the sea. Bedrock, at best, is sandstone. The soil is thin and porous. It is perfect for growing avocados because it drains well. We irrigate the roots to have enough, but not too much, water.

The farmers cannot control the rain. If Southern California receives one of its rare, real, rainstorms, the soil turns to viscous slime. Gravity moves the hillsides into the valleys.
Property owners rebuild and replant regularly. Topographical maps become inaccurate after five to ten years. Mapping companies, to keep current, get aerial photographs as often as once every three years.

The insured was a successful businessman. He had made his fortune in manufacturing. The insured sold his business, and, wanting to be a gentleman rancher purchased  a fifty-acre avocado ranch on a hillside in Northern San Diego County. He planted the hill with trees ranging in age from three to eight years. All bore the Haas variety of avocado. The insured irrigated with a drip irrigation system that provided the right amount of water to create the maximum amount of crop. The insured knew nothing about avocado ranching. He intended to learn, on the job. He did not need the income from the crop to survive. He could live a life of luxury without any income from the ranch. He was a businessman. He understood that agriculture was a risky business. Risks he understood.

The purchase of insurance can spread risks. He went to his corporate broker, told the broker of his concerns, and got a policy insuring against the loss of the trees. He had talked with his neighbors and  knew, from his experience, that the risk faced by an avocado rancher was the loss of the trees from fire or an overabundance of rain.

The broker he used was the same broker who handled his manufacturing business. A major multinational brokerage firm with the purchasing power to insure anything their clients desired. The insured told his broker what he wanted. The insurer created a special policy by adding to the normal perils of fire, lightening, windstorm and hail, the peril of rain. At the time he bought the policy the insured knew that his ranch had lost, to mudslide, half its trees six years before. He also knew most of the trees fell down the hill five years before that. The insurer, in the application for insurance, only asked if the insured had incurred prior losses. Since he was a new owner of this property, he replied “New venture, no losses.”

The insurer issued the policy and for six months the insured enjoyed his leisure and supervised his small staff of farmhands. The insured harvested his first crop in February. The proceeds equaled his expenses. He was a happy man.

In March, the rains came. First, the gentle Southern California shower that dropped an inch of rain in forty-eight hours and turned the hillside green with new grass. Then, the remnants of typhoon Pacita pulled up along the Southern California shore and stopped. Water dropped from the sky as if a giant tap had opened. Raindrops didn’t fall they cascaded out of the sky. The hillside became saturated within the first hour. The hill could absorb no more water. The rain continued. Rivers formed in every crease of every hill. The once stable hillside began to slide. Chunks of earth fifty feet wide and ten feet deep would pop off the hillsides and fall to the valleys below. Looking up through the rain, the insured saw his neat rows of trees begin to waver. Straight lines of trees danced, like an out-of-control conga line, down the hillside. By the end of the day only two hundred of his ten thousand trees still stood on his hillside. The remainder were in the pasture of his downhill neighbor with their roots pointing to the sky.

When the rains stopped the insured called his broker to report a loss as a result of rain. The trees had a fair market value between $50 and $300 each. The insured could purchase them from commercial nurseries at various stages of development. The loss seemed a simple one to resolve. The insurer could not question, from the reports of the weather bureau, that the loss of the trees would not have occurred but for the unusual rain.
The insurer was faced with a massive loss. California law bound it to conduct a thorough investigation before rejecting the claim.

The insurer learned that aerial photographs, taken regularly, were available. They purchased those photographs of the insured’s property going back thirty years before the loss. Surprised, the insurer found that in every ten year span, portions of the hillside, and its trees, washed away. After each storm, the person owning the property replanted the trees. The insurer documented seven landslides destroying trees in the thirty years before the issuance of the policy.

Since the first insurance policy was written on a clay tablet in ancient Sumeria insurers and insureds have recognized that it is a business of the utmost good faith. For an insurance contract to be effective the insurer must be fully informed of the risk it is taking. If the insurer is deceived, whether intentionally or unintentionally, the contract survive. Good faith requires the insured to reveal everything he knows about the risk that would be material to the decision of the insurer to insure or not insure him. Failure to reveal material facts is concealment. When an insured conceals a material fact from the insurer, he is committing fraud in the inception of the policy. When an insured conceals or misrepresents a material fact in the presentation of a claim then he has committed fraud.
The insurer confronted the insured with the aerial photographs. They asked if he had known about the slide. He admitted knowledge of one or two prior slides. He claimed he did not tell his insurer about the slides because they did not ask him.

The claims man consulted with the underwriter. The underwriter said that he would never have written the policy had he known of the regularity with which the property suffered landslides. The only way he would insure the property was if the insured agreed to a specific exclusion for loss due to landslide, surface water or excessive rain. The claims man sought advice of counsel. Counsel informed the insurer that the evidence it provided established a material concealment of fact. A concealment of material fact authorizes an insurer in California to rescind even if the concealment was innocent. If it wanted, the insurer could rescind the policy.

Counsel further advised that the insured would almost certainly sue. The suit would include a claim for breach of the covenant of good faith and fair dealing and would seek punitive damages. The suit would be expensive to defend. Counsel further advised that jurors, because of their dislike for insurers, had a tendency to ignore a clear statement of the law given to them by the court. Jurors more frequently find the need to punish insurers.

The insurer decided to be practical rather than aggressively pursue its rights. Counsel met with the insured, showed that the number of trees counted from the aerial photographs showed less trees than those for which the claim was presented. Over a fine restaurant meal the insured and counsel for the insurer settled the claim for the value of the tress counted in the aerial photographs less the value the remaining trees. Both considered the settlement to be a favorable settlement. The underwriters for the insurer vowed to never insure trees on a hillside again.

This is not the type of fraud insurers’ normally face. There was no intent of the insured to defraud the insurer. In fact he did deceive the insurer but he had none of the malice required to prove fraud with regard to the acquisition of the policy. He did, however, overstate the number of trees he claimed lost because he had never counted them and that, if intentional, would have been a provable fraudulent claim.

Paying his claim was a economic decision. If justice could have been done he would have been paid nothing. The insurer paid the insured because he was willing to reduce his claim to something close to his real loss and because the insurer knew it was less expensive to settle than to fight.  They insisted that the settlement be kept secret to keep others from learning its willingness to pay off a fraudulent claim. Hopefully, the insurer will not do so again.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on A Fictionalized Story of Real Insurance Fraud

Broker Need Only Acquire Insurance Requested

The Least Expensive Insurance is Not Always Best

People who are not knowledgeable about insurance will select their insurer based upon the lowest premium price and will pick the lowest possible coverage limits available when deciding on the insurance to acquire. When the insured incurs no loss that practice works. However, when there is a loss, there may not be sufficient coverage to indemnify the insured for the loss incurred. Rather than recognize that the insured – shopping for the lowest price – is at fault for the shortfall, they blame the insurer or the insurance broker for not forcing them to buy sufficient coverage.

Insurance brokers are only required to buy the insurance the insured requests. It has no further duty unless the insured and broker establish a special relationship where the agent agrees to use its expertise to properly value the property. Merely telling an insured to obtain insurance for the replacement value of the property does not create the special relationship but, rather, puts the insured on notice to protect herself.

THE RESULT WHEN INSURED SEEKS LEAST EXPENSIVE INSURANCE

New York appellate courts are well known for writing opinions that are brief, clear, concise and definitive. In Kaufman v. BWD Group LLC, — N.Y.S.3d —-, 2015 WL 1526154 (N.Y.A.D. 1 Dept. 4/7/15), 2015 N.Y. Slip Op. 02905 is another example of that trend in avoiding lengthy and incomprehensible opinions. In the Kaufman case the broker was sued for breach of contract and negligence alleging that defendant insurance brokerage company failed to procure sufficient insurance coverage to fully compensate her for her loss of personal property after a fire damaged her Massachusetts home in June 2009.

The court concluded that the brokerage made a prima facie showing of its entitlement to judgment as a matter of law by submitting evidence that plaintiff never specifically requested that it obtain a certain level of contents coverage for the home and that there was no special relationship between the parties requiring it to obtain appropriate coverage. The record demonstrates that plaintiff did nothing to change the contents coverage in the six months before the fire, even though defendant had informed her in January 2009 of the amount of the coverage and that it was at its lowest available limit.

In opposition, the court concluded that the plaintiff failed to raise a triable issue of fact. That plaintiff’s husband, who was not an insured, believed that the policy provided full compensation was of no moment since defendant’s employee had informed plaintiff in January 2009 of the amount of coverage. Further, it was undisputed that plaintiff never paid for an evaluation of the home’s contents and that defendant never agreed to conduct such an evaluation. Moreover, there is no evidence that defendant told plaintiff that she would be completely compensated for any damaged personal property should an insurable loss occur.

Although plaintiff had been purchasing insurance from defendant for over 20 years, this alone does not raise an issue of fact as to a special relationship, especially since the evidence shows that plaintiff chose the coverage amounts and did not rely on defendant for any advice as to the appropriate amounts.

ZALMA OPINION

Price should only be one point of consideration when deciding to purchase insurance. The risks faced by the property, the value of the property at risk, the cost to replace or repair the property, and the sufficiency of the limits acquired must all be considered. When there is valuable personal property like antiques and art, an appraisal by a professional should be used to avoid problems and to separately insure the valuable items on a personal articles floater. Kaufman did nothing necessary and since there was no special relationship with the broker, the suit was properly summarily dismissed.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Broker Need Only Acquire Insurance Requested

When Is an Intentionally Set Fire Not Vandalism?

A Fire Started on a Kitchen Floor is not Friendly

As a young adjuster I learned the difference between a friendly and an unfriendly fire. A friendly fire is one in a place where it can be contained like an oven or a fireplace. An unfriendly fire is one where it burns property not intended to hold a fire. A fire in a house with no electricity or gas service set in the middle of a kitchen floor is, by definition, an unfriendly fire and the person who sets such a fire is a vandal and an arsonist even if he subjectively only intended to set the fire to keep warm.

In Ong v. Fire Insurance Exchange, — Cal.Rptr.3d —-, 2015 WL 1524464 (Cal.App. 2 Dist., 4/3/15) the majority of the California Court of Appeal reached an amazing and difficult to support decision that ignored reality to send the case back to the trial court for decision. Plaintiff contends that the trial court erred in concluding that a vacancy exclusion in his policy for a loss from “vandalism or malicious mischief” applied to fire damage caused by a warming fire started by a transient that spread to other parts of the property.

FACTUAL BACKGROUND

The property was vacant for more than a year when, on December 20, 2011, Ong submitted a claim to Defendant for a fire at the property. Defendant retained an experienced fire investigator, Guy Childress. On December 23, 2011, Childress went to the property to investigate and made a written report concluding, “it appears the fire may have been initiated as the result of an uncontrolled warming fire started by an unauthorized inhabitant.”  The property did not have a fireplace.

A claims log indicated that a claims adjuster for Defendant, Debra Kryklund, met with Childress and others on December 23, 2011, and noted the following: “Kitchen. Multiple pts of origin. Bed in kitchen. Unintentional incendiary. Likely transient in house and warming fire got out of hand. Firewood found inside house.”

On February 10, 2012, Kryklund sent Plaintiff a letter disclaiming coverage for his claim.

DISCUSSION

On appeal, Plaintiff contends that the trial court erred because the fire was negligently lit and since the definition of vandalism requires an intent to destroy property it was not vandalism under the ordinary and popular sense of the term. Plaintiff, grasping at straws also argued that the trial court erred because the dwelling was inhabited by a transient and therefore not vacant.

INSURANCE LAW PRINCIPLES

The California Supreme Court has recently reiterated the principles that apply when interpreting an insurance policy in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 194–195: “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract.  If contractual language is clear and explicit, it governs. A term is not ambiguous merely because the policies do not define it. If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist  in order to protect the insured’s reasonable expectation of coverage.

ANALYSIS

Vandalism refers to a willful or malicious destruction or defacement of public or private property.  “Malicious” in turn is defined in the dictionary as “having or showing a desire to cause harm to someone.” Using these dictionary definitions, vandalism in the ordinary and popular sense, means the willful destruction of property or the destruction of property with a “desire to cause harm.” The trial court, however, did not look to the dictionary to define “malicious” in its “ordinary and popular sense.” Rather the trial court relied on the meaning of malice in the “legal sense,” and specifically of “malice in law” in two criminal cases cited by Defendant.

Under the Penal Code, a person is guilty of arson when he or she “willfully and maliciously sets fire to or burns or causes to be burned … any structure, forest land, or property” (Pen.Code, § 451) and “maliciously” is defined as involving “a wish to vex, defraud, annoy or injure another person, or an intent to do a wrongful act, established either by proof or presumption of law” (Pen.Code, § 450, subd. (e)). Even if the plain meaning of “malice” included malice in the legal sense—i.e., that it can be presumed from a wrongful act, done intentionally and without justification, excuse of mitigating circumstances—the majority of the court of appeal believed that there would be a question of fact as to whether there were mitigating circumstances in this case precluding summary adjudication as Childress’s report indicated that the transient may have attempted “to throw burning wood outside when the warming fire got out of control.”

While a vacancy exclusion serves to protect the insurer against the increased risks of loss that occur when premises are vacant for an extended period of time such an exclusion does not protect against all increased property risks but only those within its terms. Defendant as the party drafting the policy had the opportunity to include property risks other than vandalism in its vacancy exclusion. Here, the vacancy exclusion in Plaintiff’s policy was limited to “vandalism and malicious mischief.” Defendant could have listed fire as a risk excluded under a vacancy provision but did not do so.

The trial court’s grant of summary judgment was reversed and the matter is remanded to the trial court for proceedings consistent with this opinion.

DISSENT

Rothschild, P. J., dissented with analysis that make more sense than the majority.

Presiding Justice Rothschild noted that it was undisputed that the insurer’s investigators concluded that a transient intentionally started the fire on the floor of the kitchen in order to keep warm but did not intend the fire to grow as large and destructive as it did. Starting  a fire in the middle of a kitchen floor would inevitably damage or deface the floor. It therefore constitutes vandalism under the dictionary definition. And it does not matter that the person who started the fire did not intend for it to become as destructive as it did.

The insurance policy exclusion applies to both direct and indirect loss from vandalism. Starting the fire was vandalism (because it was willful destruction or defacement), so the loss resulting from the fire is not covered. It also does not matter that the person who started the fire did it to keep warm. What is relevant is that someone intentionally started the fire on the kitchen floor, which constitutes willful destruction or defacement of property.

The damage was caused by a fire started on the kitchen floor (not in a fireplace) by a transient. That is the kind of willful destruction that becomes much more likely when the property is left vacant for an extended period. Therefore, in addition to fitting within the literal terms of the exclusion, it seems like the kind of thing to which the exclusion ought, in fairness, to apply.

ZALMA OPINION

I, like Justice Rothschild, can only wonder what the majority of the court was thinking. It seems they, rather than apply the facts to the policy and the law, decided to find some way to get coverage for Mr. Ong. Ong left his property vacant for more than a year. It was invaded by a person who unlawfully occupied the property and intentionally set a fire on the kitchen floor – whether to keep warm or to destroy the house – can only be speculation since the arsonist is not available. Anyone setting an unfriendly fire in a dwelling house in a place where it will obviously cause damage to the house is acting maliciously to cause damage. The majority based its decision on speculation. Hopefully at trial that speculation will not be allowed and the trier of fact will reach a proper decision more in concert with the dissent.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Is an Intentionally Set Fire Not Vandalism?

What the Heck is an Honorable Engagement Agreement?

Arbitration Not Necessarily a Way to Resolve Problems

A party that implores a court to vacate an arbitration award normally faces a steep uphill climb: the scope of judicial review of arbitration awards is among the narrowest known in the law. In First State Ins. Co. v. National Cas. Co., — F.3d —-, 2015 WL 1263147 (C.A.1 (Mass.) 3/20/15) primary insurers filed a petition pursuant to Federal Arbitration Act to confirm the arbitrators contract interpretation award against reinsurer over reinsurance and retrocessional agreements.

BACKGROUND

A primary insurer may cede risk to another insurer who becomes a reinsurer. When a reinsurer cedes assumed risk to yet another insurer, that transfer is called a retrocessional agreement.

First State Insurance Company and New England Reinsurance Corporation (collectively, First State) entered into a number of reinsurance and retrocessional agreements with a reinsurer, National Casualty Company (National). First State demanded arbitration under eight of these agreements to resolve differences of opinion about billing disputes and the interpretation of certain contract provisions relating to payment of claims.  By agreement of the parties, all the arbitrations were consolidated in a single proceeding before a panel of three arbitrators.

After briefing and argument, the arbitrators handed down a contract interpretation award. This award established a payment protocol under the agreements. It provided that National’s payment obligations were to be triggered “upon its receipt of a billing supported by a Proof of Loss and Reinsurance Report(s) prepared by First State in a form and content generally as those introduced with the briefings on this motion.” The award further noted that “[s]aid payments may be made subject to an appropriate reservation of rights by [National] in instances where it has or does identify specific facts which create a reasonable question regarding coverage under the subject reinsurance agreement(s)” but “[p]ayment obligations on the part of [National] are not conditioned upon the exercise of its right to audit or the production of additional information or documents, other than those provided by First State as described … above.”

First State filed a petition to confirm the award. National thereafter cross-petitioned to vacate the contract interpretation award.

ANALYSIS

National’s claims of error relate only to the contract interpretation award. First State asserts that National’s cross-petition to vacate the contract interpretation award was filed outside this temporal window and is, therefore, time-barred.

A federal court’s authority to defenestrate (throw out of the window) an arbitration award is extremely limited.  Here, the sole inquiry is whether the arbitrators “even arguably” construed the underlying agreements and, thus, acted within the scope of their contractually delineated powers. A legal error (even a serious one) in contract interpretation is, in and of itself, not a sufficient reason for a federal court to undo an arbitration award. Only if the arbitrators acted so far outside the bounds of their authority that they can be said to have dispensed their “own brand of industrial justice” will a court vacate the award. As long as an arbitration award “draw[s] its essence” from the underlying agreement, it will withstand judicial review—and it does not matter how “good, bad, or ugly” the match between the contract and the terms of the award may be.

National submits that this case represents one of the rare instances in which the vacation of an arbitration award is warranted because the arbitrators exceeded the scope of their powers by re-writing the terms of the parties’ agreements. In its view, the payment protocol fashioned by the arbitrators is “ultracrepidarian,” that is, they criticized, judged, or gave advice outside the area of his or her expertise,  since it obligates National to pay billings that may not fall within the terms and conditions of any applicable agreement. National further submits that the award effectively forecloses or at least significantly impairs its broad access rights under the inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights. This reservation of rights procedure, National says, is plucked out of thin air and not derived from any contract term.

The contract interpretation award mirrors this separation; it provides that National’s payment obligations are independent of and not conditioned upon the exercise of National’s right to inspect and audit First State’s records.

This brings us to National’s complaint that the reservation of rights procedure outlined in the contract interpretation award does not draw its essence from the underlying agreements. That procedure, National says, operates to circumscribe its broad inspection and audit rights under those agreements.

Each of the eight reinsurance agreements, as well as the agreement to consolidate the arbitrations, contains an honorable engagement provision. This language directs the arbitrators to consider each agreement as “an honorable engagement rather than merely a legal obligation” and goes on to explain that the arbitrators are “relieved of all judicial formalities and may abstain from following the strict rules of law.”

We believe that an honorable engagement provision empowers arbitrators to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement. This is a huge advantage: the prospects for successful arbitration are measurably enhanced if the arbitrators have flexibility to custom-tailor remedies to fit particular circumstances. An honorable engagement provision ensures that flexibility.
Honorable engagement provisions in the arbitration clauses of the underlying agreements authorized the arbitrators to grant equitable remedies. The appellate court concluded that the reservation of rights procedure is such a remedy. Consequently, National’s objection to that procedure did not carry the day.

First State acknowledged both in its brief and at oral argument in this court that the contract interpretation award does not condition National’s inspection, audit, or recoupment rights on its submission of an appropriate reservation of rights. As First State concedes, the contract interpretation award leaves National, upon receipt of a billing from First State, with three options: it may (i) reject the billing, (ii) pay the billing without comment, or (iii) pay the billing with a reservation of rights.

Whether National employs the second or third option when paying a particular billing, it retains the right thereafter to inspect First State’s records, audit the claim, and seek recoupment through a subsequent arbitration should it conclude that payment was improperly made. First State has endorsed this reading of the contract interpretation award and, therefore, it cannot assert either the absence or inadequacy of a reservation of rights as a defense to future recoupment efforts by National.

ZALMA OPINION

One must wonder why an honorable engagement provision was placed in the contracts between the reinsurers and the retrocessionaires since it gave the arbitrators a wide latitude and removed the restrictions of the law when reaching their decision. The honorable engagement provision gave great power to the arbitrators to create an award that did, what the arbitrators in their sole discretion, believed to be justice rather than the letter of the contracts. By including an honorable engagement provision the parties left the right to argue their position based  on the law to the whim of three arbitrators with no chance of setting aside the award. We can only hope such an agreement does not find its way into an insurance policy.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What the Heck is an Honorable Engagement Agreement?

Emotion Should Never Be Basis of Judgment

Judgments Must Only Be Based on Evidence

Litigants are entitled to a fair trial culminating in a jury verdict rendered after consideration of properly admitted evidence and the law. Often, although equal in the eyes of the law, insurance companies are not treated equally and fairly by trial courts who treat plaintiffs suing insurers as more equal than the insurers.

A jury verdict infused with sympathy for a litigant is based on emotion, not the evidence or the law, and may be set aside on application to an appellate court.

Government Employees Insurance Company (GEICO) invoked these well-established principles in Government Employees Insurance Company v. Madeline Kisha, — So.3d —-, 2015 WL 1470104 (Fla.App. 5 Dist., 4/2/15), claiming that it did not receive a fair trial in the underlying declaratory judgment action because the trial court erroneously allowed Madeline Kisha to introduce evidence of her long relationship with GEICO, as an insured, regarding prior policies that had expired long ago. GEICO argued that this evidence was erroneously admitted because it was irrelevant to the issue of whether GEICO cancelled Madeline’s current policy for nonpayment of premiums prior to her automobile accident and her claim for personal injury protection (PIP) benefits. GEICO also argued the evidence was highly prejudicial because it filled the jury with sympathy, thus tainting the verdict and judgment declaring Madeline’s entitlement to those benefits.

FACTS

The current policy had a designated policy period from December 19, 2010, to June 19, 2011, and provided PIP and underinsured/uninsured motorist coverage to Madeline and her husband, Stephen Kisha.

The Kishas chose to make monthly premium payments. On March 14, 2011, GEICO sent the Kishas the monthly bill requiring payment of $195.20 by March 29th. When GEICO did not receive the payment by the due date, it sent a Notice of Cancellation for Nonpayment of Premium to the Kishas on April 4th. This Notice was in conformance with the cancellation provisions in the policy and advised the Kishas that unless they submitted the past due payment prior to April 20th, the effective date of cancellation, their policy would be cancelled as of that date. The Notice stated in pertinent part, “As of 12:01 a.m. local time Apr. 20, 11, your policy will cancel due to nonpayment of your premium. It added, in boldface, larger font: “Please submit a payment immediately to prevent the cancellation of your policy.”

The Notice also advised that if they chose to pay by mail, the payment had to be postmarked by the cancellation date to avoid a lapse in coverage. The Kishas admitted they received the Notice, but neither recalled reading it.

Stephen Kisha testified that he wrote the check for $195.20 to GEICO on April 17th. Although the check was dated April 17th, the postmark on the envelope was April 25th, five days past the cancellation date. Several weeks later, on May 8th, Stephen and Madeline were injured in a rear-end collision. The Kishas were treated in the emergency room and released. They both filed claims for PIP benefits under the current policy.

THE MOTION IN LIMINE

Prior to trial, GEICO filed a motion in limine seeking to exclude evidence of the length of time the Kishas had been policyholders (between seventeen and twenty-four years), arguing that such evidence was irrelevant and prejudicial because it would enrage and curry sympathy from the jury. The court denied the motion and the case proceeded to trial.

THE TRIAL VERDICT

The jury found GEICO had waived its right to deny insurance coverage to Madeline and that GEICO was estopped from denying coverage. GEICO appealed.

INAPPROPRIATE CLOSING ARGUMENT

In closing argument counsel argued: “Now, they have been paying premiums for 17 to 24 years. I think we heard both, 17 and 24. Either way it’s a long time to have an insurance company and to pay premiums month in and month out. It’s thousands of dollars that they’ve been paying to GEICO for this coverage to protect them. This was coverage to protect them, and this is the one time that she has made a claim in all of those years and they leave her out in the cold. After all those years.” He also argued: “An insurance company like GEICO, they want to try and deny claims. They investigate, they do their evaluation. They take statements. They look over records. What way can we find to deny this claim? GEICO has the obligation to inform its insureds—in this case the Kishas—if they do not have coverage as soon as possible so they can fix that problem. They owe it to the Kishas for all those years.”

ANALYSIS

The Florida appellate court concluded that the length of time the Kishas had been insured by GEICO was not relevant to prove or disprove any material fact and was, therefore, inadmissible since relevant evidence is evidence tending to prove or disprove a material fact. The fact that the Kishas had been insured with GEICO for more than 17 yeaars did not tend to prove any of the elements of waiver: the existence of a right by GEICO that was waivable; GEICO’s knowledge of the right; or GEICO’s intention to relinquish the right. The length of her history with GEICO did not tend to prove the Kishas detrimentally relied on any act or omission of GEICO in connection with the April late payment. Madeline’s argument was that GEICO’s cashing of the late check on April 29th, nine days after the policy had been cancelled and ten days prior to the accident, and its retention of the funds after the date of the accident created the detrimental reliance—not anything that had previously occurred in the Kishas’ payment history.

There was no evidence that the Kishas had ever before made a payment after a cancellation date, such as occurred here, and thus their payment history was not relevant to the instant situation.

It also found that it was patently obvious that Madeline’s attorney used this evidence to appeal to the jurors’ sympathy when it referenced, for example, “all the years of” and “thousands of dollars of” payments the Kishas had made and argued GEICO left the Kishas “out in the cold” upon her first claim. Madeline’s attorney even argued that GEICO “owe[d] it to the Kishas” to provide coverage after all those years. This evidence did nothing more than portray Madeline as a pitiable individual who had been injured in an automobile accident and then abandoned in her time of need by GEICO after many years of paying premiums for insurance from which she never derived a benefit. To suggest, as Madeline does, that it did not unduly influence the jury is to suggest that this court indulge a naive assumption that we are not inclined to do.

The right to a fair trial necessarily imposes on jurors the duty to fairly and impartially determine the facts from relevant evidence presented to them and apply those facts to the applicable law. Fidelity to that duty prohibits a jury from being swayed by sympathy for any party when rendering its verdict. The irrelevant evidence of the Kishas’ long history with GEICO became one of the centerpieces of Madeline’s case and constituted an impermissible plea for sympathy that impeded the jurors’ ability to fulfill their duty and intruded too far into GEICO’s right to a fair trial. Accordingly, the judgment under review is reversed, and this case is remanded for a new trial.

ZALMA OPINION

It is axiomatic that when a lawyer has no facts in his favor he argues the law, when there are no facts in his favor he argues the law, and when he has neither he pounds the table and tugs at the jury’s heartstrings. That is what happened here. The only issue was whether the policy had been effectively cancelled. If not coverage would apply if so the plaintiffs would recover nothing. That they had insurance with the same insurer for many years meant nothing to the issue of whether the policy was cancelled. Had the Kisha’s mailed the check on the date it was allegedly written they would have had coverage.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Emotion Should Never Be Basis of Judgment

Is Entrustment Exclusion Enforceable?

Do Not Entrust Your Property to a Thief

Businesses and people, as a matter of course, will entrust their property to others. They place product in a commercial warehouse; they let friends or relatives have control of their property; and they consign property to others for sale. When the person entrusted with the property is not trustworthy losses occur.

Insurance is designed to protect the insured against the risk of loss of property from designated risks of loss. The all risk or direct risk of physical loss policies, insure conceivable risks of physical loss not specifically excluded. Because the insurer has no way of gauging the risk of loss when an insured entrusts its property to another insurers have developed exclusions for losses to property when it is damaged, destroyed or stolen by the person to whom it was entrusted.

In Warehouse Wines & Spirits, Inc. v. Travelers Property Cas. Co. of America, Slip Copy, 2015 WL 1454883 (S.D.N.Y., 3/31/15), the District Court for the Southern District of New York, was asked to apply the exclusion to a theft by a warehouseman of property entrusted to it.

FACTS

On July 23, 2013, plaintiff Warehouse Wines & Spirits, Inc. (“Warehouse Wines”), a retail seller of wine and liquor, sued Travelers Property Casualty Company of America (“Travelers”) after Travelers denied Warehouse Wines’ insurance claim for stolen product.Warehouse Wines alleges that it lost over 4,000 cases of its wine and liquor when the product was stolen by James Ceseretti, who ran the warehouse in which Warehouse Wines stored excess inventory. In 2015 Ceseretti pled guilty to grand larceny in the second degree for the theft of property from Steven Goldstein, President of Warehouse Wines, in excess of one million dollars.

Warehouse Wines submitted a claim under its first party property insurance policy with Travelers for loss of inventory. Travelers denied the claim based on the “Dishonest Acts” exclusion in the policy, which precludes coverage where a loss is caused by the dishonest acts of a person “entrusted with the property”. The parties agree that Warehouse Wines entrusted its wine and liquor to Ceseretti and his warehouse. As Ceseretti has already admitted guilt to the theft, there is also no dispute as to a dishonest act occurring.

Ceseretti and his Bestway Warehouse & Transportation company were conducting business as a warehouse when the theft occurred. Warehouse Wines had a written agreement for the warehousing of its merchandise. There was no time limitation to their storage and the warehouse was not used as a temporary way station while the goods waited to be transported elsewhere.  Ceseretti stole Warehouse Wines’ wine and liquor while the goods were in storage at the warehouse—not while they were in any stage of transport.

In February 2011, Ceseretti was unable to deliver cases of Captain Morgan rum to Warehouse Wines despite records indicating that there should have been 31 cases in the warehouse. In November 2011, he was unable to deliver 3 cases of Dom Perignon although the cases should have been in the warehouse. By early December 2011, he was unable to deliver a particular Belvedere vodka although he was supposed to have 60 cases. Warehouse Wines’ order on December 23, 2011 was short 53 of the 591 expected cases. On January 3, 2012, Goldstein inspected the warehouse and discovered a loss of approximately 4,000 cases he calculated to be worth approximately $1,200,000.

On May 23, 2013, James Ceseretti was arrested and charged with the theft of property belonging to Warehouse Wines and Herman from his warehouse. Ceseretti, Bestway Logistics Transportation, and Bestway Warehouse & Transportation were each indicted in connection with the theft. On January 9, 2015, Ceseretti pled guilty in the Supreme Court of the State of New York County of Suffolk to grand larceny in the second degree to Count One of the Indictment. In exchange for Ceseretti’s guilty plea, indictments against the two companies through which Ceseretti conducted business with Warehouse Wines—Bestway Warehouse & Transportation, Inc. and Bestway Logistics Transportation, Inc.—were dismissed as being “covered by [Ceseretti’s] plea.”

THE INSURANCE POLICY

Prior to the theft, Warehouse Wines and Travelers had agreed to a first party property insurance policy (the “Policy”) which insured Warehouse Wines against certain risks of direct physical loss to its property. The “Property Floater Coverage” section of the Policy provided coverage only while the goods were in storage at the Bestway warehouse, subject to a limit of $4 million and a $25,000 deductible.

The Policy provided: “2. We will not pay for a “loss” caused by or resulting from any of the following: ¶  * * *  ¶ d. Dishonest acts by you, anyone else with an interest in the property, your or their employees or authorized representatives or anyone entrusted with the property, whether or not acting alone or in collusion with other persons or occurring during the hours of employment.”.

On April 24, 2012, Warehouse Wines filed its Sworn Statement in Proof of Loss, stating a loss of 4,095 cases of wine and liquor with a claimed value of $1,155,480. The statement asserted that the amount of insurance in force was “$4,000,000 at Location”, reflecting a claim made under the “Property Floater Coverage” which applies only to property in storage at the Bestway warehouse. Travelers denied coverage and rejected the Proof in a letter dated August 6, 2013.

DISCUSSION

There is no dispute as to the existence of an insurance contract wherein Travelers agreed to “pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” That policy, however, contains an exclusion covering loss resulting from the dishonest act of someone entrusted with the insured property. There is no dispute that Ceseretti stole Warehouse Wines property that he was entrusted to store in his own warehouse. That fact is made clear by Ceseretti’s guilty plea.

DISHONEST ACT EXCLUSION

Once a plaintiff has established that it sustained a loss to covered property, the burden shifts to the insurance company to prove that the claimed loss is subject to an exclusion. The “Dishonest Acts” exclusion in the contract between the parties bars coverage where a claimed loss results from a dishonest act by, among others, anyone entrusted with the insured property. Although the parties dispute exactly which entity was the custodian of the property at the time of the theft, it is undisputed that Warehouse Wines entrusted its property to James Ceseretti and whichever of his companies that operated the warehouse.

Courts in New York have held that exclusions for the dishonest acts of persons to whom the insured entrusts its property are enforceable. [Superior Steel Studs. Inc. v. Zurich N.A., Inc., 368 F.Supp.2d 208 (E.D.N.Y.2005) (applying the exclusion to bar insurance coverage for theft of steel coils by officers of the company who had been given the property for processing); Cougar Sport, Inc. v. Hartford Ins. Co., 737 N.Y.S.2d 770, 771–72 (Sup.Ct.N.Y.Cty.2000), aff’d, 733 N.Y.S .2d 151, 152 (1st Dep’t 2001) (applying the dishonest acts exclusion to bar coverage for thefts committed by a warehouseman).

In Cougar Sport, the plaintiff was an importer of children’s clothing who arranged for some of its goods to be delivered directly to one of several warehouses for storage. When one of the warehouses sold all of the goods without authority from the plaintiff, the plaintiff made a claim to its insurer for the loss. The insurer denied the claim based upon a similar exclusion for dishonest acts as exists here. That court found that “entrust” must be given its ordinary meaning, and that the plaintiff’s surrender, delivery or transfer of possession of its goods to the warehouse with confidence that the property would be used for the purpose it intended amounted to entrustment. Here, the parties admit that Warehouse Wines entrusted its property to Ceseretti when it directed its suppliers to deliver excess inventory to his warehouse.

Warehouse Wines’ loss was caused by the dishonest acts of someone “entrusted with the property.” There can be no dispute that Travelers has met its initial burden of showing that the “Dishonest Acts” exclusion applies to Warehouse Wines’ claimed loss.

There is no dispute of material fact that James Ceseretti operated the warehouse from which he stole over one million dollars of wine and liquor goods under the name Bestway Warehouse & Transportation. It was responsible for warehousing the goods and cannot be construed to be a carrier for hire.

ZALMA OPINION

Although the guilty plea made the decision with regard to cause the insured argued against the application of the Dishonest Acts exclusion none of which were convincing. The property was entrusted to the warehouseman who stole the property. The exclusion is clear and unambiguous and once the chaff had been taken from the argument the court granted summary judgment.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is Entrustment Exclusion Enforceable?

“Insurance Law” A New Book From Barry Zalma

Insurance Law Now Available for Pre-Orders

Try It RISK-FREE for 30 Days—Your Satisfaction is Absolutely Guaranteed. For Fastest Service—Call 1-800-543-0874 Today! Also you can order on line at http://www.nationalunderwriter.com/insurance-law.html

INSURANCE LAW

Only Insurance Law—the professional’s all-new, one-stop tool—delivers real-world expertise and practical guidance on:

  • Trigger of Coverage
  • Doctrine of Fortuity
  • Duties of the Insured and Insurer
  • Key Differences between
  • Property and Liability Policies
  • The Contract of Personal Indemnity
  • Rescission
  • Preemption
  • Independent Counsel Fraud and False Swearing
  • Subrogation
  • “Other Insurance” Clauses
  • Punitive Damages

The brand new Insurance Law is also available as an e-book, featuring instant download,  hyperlinking, bookmarking, print capabilities, multiple device compatibility, no WIFI  connection after download—and more.

For a limited time, when you purchase the all-new Insurance Law, you’ll also receive (at no additional cost) a subscription to the popular, powerful Monday Claims Report, the weekly e-newsletter featuring coverage and analysis of the most recent insurance law  developments across the country.

Insurance Law is the must-have reference for attorneys and numerous professionals,  including risk managers, property owners, business owners, underwriters, brokers, agents, claims representatives, insurance adjusters, insurance claims supervisors, insurance claims executives, and public insurance adjusters.

Every civil attorney quickly learns that a major part of the law firm’s income comes directly, or indirectly, from insurance—and that insurance law touches almost every civil lawsuit in some form or another.

The all-new Insurance Law is a crossdiscipline, one-stop, practical reference tool for any professional whose job necessitates a fundamental understanding of insurance law.
This brand-new resource includes:

  • Multi-jurisdictional case law, including up-to-date analysis with a focus on new cases that have changed the law
  • State-by-state fraud statutes
  • Model statutes
  • Built-in discussion questions and key focus points that guide you to the core of the most vital issues

Comprehensive yet practical, this is the ideal resource for the newcomer and veteran
alike. It clearly and concisely covers the fundamental principles of insurance law and
also provides expert insight into the most recent insurance coverage law decisions
from across the nation. Plus—You get the full text of key insurance cases with citations to relevant statutory, regulatory, and judicial sources.

The National Underwriter Company’s 100% Satisfaction Guarantee!

You can try Insurance Law , Risk-Free for 30 days. The National Underwriter Company fully guarantees your satisfaction. If for any reason you find you are not 100% satisfied with our product, just return it to us with the invoice marked “cancel.” It’s that simple. If you have pre-paid, we can provide you with a credit to your account or a refund.

Try It RISK-FREE for 30 Days—Your Satisfaction is Absolutely Guaranteed. For Fastest Service—Call 1-800-543-0874 Today! Also you can order on line at

http://www.nationalunderwriter.com/insurance-law.html

About the Expert Author

Barry Zalma, Esq., CFE

Barry Zalma is a renowned and respected insurance coverage attorney, consultant
and expert witness who consults with insurers, insurance brokers and agents, and
policyholders internationally.

An independent practitioner, Mr. Zalma assists counsel for insurers and
policyholders on insurance coverage issues, claims handling, and bad faith
claims. He has represented the widest range of insurers from Allstate to
Underwriters at Lloyd’s, from Westfield Insurance Company to Allianz. He has
qualified as an expert in state and federal courts in California, Mississippi, Texas,
New Mexico, Oklahoma and the British Crown Colony in the Grand Caymans.

Mr. Zalma has authored several books on property and liability claims,
numerous articles for insurance trade publications and law journals, a bimonthly
publication, Zalma’s Insurance Fraud Letter and regular columns in National
Underwriter P&C magazine and the Underwriters Insider. He acts as an expert
commentator for the International Risk Management Institute; is a member of
the faculty of the Insurance Agents and Brokers of America’s Virtual University;
and is the author of distance learning and computer-based training programs for
people in the business of insurance.

Posted in Zalma on Insurance | Comments Off on “Insurance Law” A New Book From Barry Zalma

Zalma’s Insurance Fraud Letter – April 1, 2015

 Anti-Fraud Efforts Continue

This is not an April Fool’s joke.

Rather, it is the announcement of the Seventh issue of the 19th  year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on April 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    New Anti-Fraud Law in New Jersey.
2.    From the California Department of Insurance – Revocation of Blue Shield’s Tax Exempt Status
3.    The Burden of Proof for Misrepresentation Defense and Statutory Fraud
4.    More on the Death Master File Violations – $4.5 Million to Be Paid
5.    Fireman’s Fund to Pay U.S. $44 Million
6.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com
7.    Fraud Accusation & Withdrawal of Claim

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    False Application For Health Insurance is a Crime In Connecticut – March 31, 2015
2.    Join Me at the 19th Annual America’s Claims Event –  March 30, 2015
3.    Can Reinsured Allocate Claims Payments? – March 30, 2015
4.    The Use of the Insurance Examination under Oath – March 27, 2015
5.    Plaintiffs’ Lawyers Need to Understand Insurance  –  March 26, 2015
6.    Is Drunken Brawl Resulting In Death Covered? – March 25, 2015
7.    MCS-90 Controls – March 24, 2015
8.    Captive Agent Must Use Ordinary Care – March 23, 2015
9.    No Way to Avoid Workers’ Compensation – March 20, 2015
10.    Silica Dust Is a Pollutant – March 19, 2015
11.    The Equitable Remedy of Rescission – March 18, 2015
12.    Interview Techniques March 17, 2015
13.    When Is an Exclusion “Conspicuous, Plain and Clear” – March 16, 2015
14.    Zalma’s Insurance Fraud Letter – March 15, 2015
15.    Must Be Named as Insured On Date of Loss To Recover – March 13, 2015
16.    No Cover for Incorrectly Performed Work – March 12, 2015
17.    Cancellation Waives Right to Rescind – March 11, 2015
18.    Broad Exclusion – if Plain – Applies – March 10, 2015
19.    Buyer’s Remorse – March 9, 2015
20.    To Stack or Not to Stack, That is the Question – March 6, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – April 1, 2015

False Application For Health Insurance is a Crime In Connecticut

Probable Cause Defeats False Arrest and Malicious Prosecution Claim

Insurance fraud is a serious felony. It is especially wrongful in the health insurance context. In Connecticut, making a false statement on an application for health insurance is a crime. Insurance fraud perpetrators become offended when they are caught and have no qualms about suing the police officer who arrested them. By so doing they depress the ability of local authorities to prosecute the crime.

Michael Plude (“Plude”), upset about being arrested for insurance fraud sued Officer John T. Petrillo, Jr. of the Shelton Police Department (“Petrillo”), Rebecca Adams (“Adams”), David L. Guay, Thomas Reynolds and the Connecticut State Board of Accountancy. The court had dismissed all claims against all defendants other than Petrillo. As to Petrillo, Plude brings a claim for false arrest and a common law claim for malicious prosecution. Petrillo filed a motion for summary judgment and the District Court for the District of Connecticut resolved the issue in Plude v. Adams, Not Reported in F.Supp.3d, 2015 WL 1014526 (D.Conn.).

FACTUAL BACKGROUND

Plude is a certified public accountant and a partner in an accounting firm. From 1999 until July 2008, he provided accounting services to Pioneer Gas & Appliance Inc. (“Pioneer”). This action arises out the Shelton Police Department’s investigation and arrest of Plude, pursuant to a warrant, for health insurance fraud and conspiracy to commit health insurance fraud.

Under Connecticut General Statutes § 53–442, a person is guilty of health insurance fraud if he: “with the intent to defraud or deceive any insurer … presents or causes to be presented to any insurer or any agent thereof any written … statement as part of … an application for any policy of insurance … knowing that such statement contains any false, incomplete, deceptive or misleading information concerning any fact or thing material to such claim or application, or omits information concerning any fact or thing material to such claim or application. …”

Petrillo conducted the investigation of Plude, which revealed, among other things, that Plude had submitted an application for health insurance with Anthem Blue Cross Blue Shield Insurance (“Anthem”) through Pioneer, which stated that he worked 40 hours per week for Pioneer as its Treasurer and his date of full-time hire was December 17, 2006; and Pioneer denied that it ever employed Plude. Plude was arrested.

Petrillo learned that Anthem, Pioneer’s medical insurance carrier, had filed an Insurance Fraud Report with the Connecticut Insurance Department against Plude for fraudulently receiving medical benefits through Pioneer (the “Anthem Insurance Fraud Report”).

Over the course of the investigation that followed, Petrillo obtained, among other things, records related to Plude’s health insurance coverage and professional relationship with Pioneer, and statements and reports from Pioneer employees and others. Petrillo obtained a copy of Plude’s insurance application that claimed his employer was Pioneer, his occupation was Treasurer, and that he worked 40 hours per week. Health insurance benefits through Pioneer were limited to Pioneer employees who worked 30 hours or more per week.  Pioneer’s Vice President, Ralph Tirella (“Tirella”), provided Petrillo a written statement that contradicted material information in Plude’s health insurance application. Tirella stated that was in charge of hiring at Pioneer and that Plude was never an employee of Pioneer. Rather, Plude was an independent contractor who performed accounting services for Pioneer through his accounting firm. Plude was not authorized to add himself to the Pioneer medical insurance plan because he was never an employee, and Tirella was not aware that Plude enrolled himself on Pioneer’s insurance plan until several months after he had done so.

Petrillo also received a number of documents from Pioneer that were inconsistent with information in Plude’s health insurance application. Although Plude’s application stated that he worked for Pioneer full time, his new employee information form and weekly paystubs showed that he received an annual salary of $23,316.60, which was equal to the cost of his medical insurance, after deductions.

Plude disputes much of the information that Petrillo collected during his investigation. Plude explains that his firm ceased billing Pioneer for the accounting services it provided after Plude was enrolled in Pioneer’s health insurance plan.

LEGAL STANDARD

Petrillo argues that summary judgment should be granted in his favor on both claims because he had probable cause to arrest Plude. Probable cause is a defense to both a claim of false arrest and a common law claim for malicious prosecution. An action for malicious prosecution against a private person requires a plaintiff to prove that: (1) the defendant initiated or procured the institution of criminal proceedings against the plaintiff; (2) the criminal proceedings have terminated in favor of the plaintiff; (3) the defendant acted without probable cause; and (4) the defendant acted with malice, primarily for a purpose other than that of bringing an offender to justice.Probable cause exists when one has knowledge of, or reasonably trustworthy information as to, facts and circumstances that are sufficient to warrant a person of reasonable caution in the belief that an offense has been or is being committed by the person to be charged.

A person is guilty of health insurance fraud if he: “with the intent to defraud or deceive any insurer … presents or causes to be presented to any insurer or any agent thereof any written … statement as part of … an application for any policy of insurance … knowing that such statement contains any false, incomplete, deceptive or misleading information concerning any fact or thing material to such claim or application, or omits information concerning any fact or thing material to such claim or application….”

Petrillo had information showing that Plude submitted a health insurance application that contained material misstatements about his professional relationship with Pioneer, in the absence of which misstatements he would have been ineligible for health insurance through Pioneer.

The court found the facts in dispute in this case are not material to whether Petrillo had probable cause to believe that Plude committed health insurance fraud. It is undisputed that Pioneer employees were only eligible for health insurance through Pioneer if they worked 30 hours or more each week, and Plude offers no evidence that Petrillo ever had any information tending to show that Plude worked more than 30 hours per week for Pioneer other than Plude’s response on the health insurance application. There is no genuine issue as to the fact that Plude filled out the field on his insurance application that stated that he worked 40 hours a week, and Plude offers no evidence that Petrillo had any information tending to show that Plude did not complete that portion of the application.

In fact the record revealed that Plude continued to work for his accounting firm and the only compensation he received from Pioneer was in the form of health insurance coverage.  Plude offers no evidence that Petrillo had any information tending to show otherwise.  The record also revealed that Pioneer executives were aware of Plude’s conduct and that he was not a 40 hour a week employee.

Assessing the record in the light most favorable to Plude and drawing all reasonable inferences in his favor, the court concluded that the facts and circumstances known to Petrillo were sufficient to warrant a person of reasonable caution to believe that Plude had falsely stated on his health insurance application that he was a full-time employee of Pioneer for the purpose of obtaining health insurance through Pioneer, which was only available to employees of the company who worked more than 30 hours per week. There being no genuine issue of material fact as to whether Petrillo had probable cause to arrest Plude for health insurance fraud, Petrillo is entitled to summary judgment.

The information Petrillo had strongly suggested (and in fact still suggests) that at the time Plude was enrolled in Pioneer’s health insurance plan, he was not an employee of Pioneer, much less one who worked 30 hours per week or more, but rather had arranged to secure health insurance benefits in exchange for accounting services.  The court concluded that it was objectively reasonable for Petrillo to believe that probable cause existed and officers of reasonable competence could disagree on whether the probable cause test was met.

In addition, although unnecessary, Petrillo was entitled to qualified immunity as to Plude’s  false arrest claim

ZALMA OPINION

Fraud, either in making claims, or acquiring insurance is criminal in many states. In this case there was no basis for a suit against the officer who arrested Plude because he had a plethora of probable cause to arrest him. Plude had his license as a CPA suspended because of the arrest. The real question is why Plude was not tried and convicted of the fraud for which he was arrested.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on False Application For Health Insurance is a Crime In Connecticut

Join Me at the 19th Annual America’s Claims Event

Attend the 19th Annual America’s Claims Event and Get A Discount

I will be speaking at the conference on the subject of “Millions for Defense and Not a Dime for Tribute”

AGENDA  SPEAKERS  SPONSORS  VENUE  REGISTER AND SAVE
Every Angle of the Claims Process Covered
with Expertise at ACE 2015

As a speaker at the America’s Claims Event, I would like to extend a special Discount Registration to you to attend the 19th Annual America’s Claims Event in Austin, TX on June 17-19, 2015. Save $100 when you register by May 29th using promo code SP100.

There is no better way to be exposed to new ideas and insights about best practices than attending industry events with our peers.

4 *NEW* FOCUSES FOR 2015
  1. The balancing of innovation and performance in the digital age
  1. Organizational branding & market PR; harnessing the power of new & developing media to engage the client base, improving customer loyalty
  1. Change Management in Claims Transformation
  1. The latest in fraud prevention, preparedness & mitigation

I welcome you to join me at this CAN’T MISS conference. Learn more here!


The Annual America’s Claims Event is one of the ONLY industry events where senior managers, practitioners & experts involved with claims operations can get the insight they need to implement effective and tactical strategies for their claims handling process. More than 400 professionals and decision-makers from mid-size to large Fortune 500 companies attend the event to engage in idea exchanging and peer-to-peer learning. Attendees gain deep insight from the experts and obtain unparalleled access to proven solutions to confront their operational challenges. Register Here Today

To take advantage of this $100 discount, mention promo codeSP100 when you register either by phone 888-608-6754 or online on or before May 29th.

Register Online Here

HOW TO REGISTER

Enter Promo Code: SP100

Register Online:
PROMO DISCOUNT URL

Call Customer Service:
888-608-6754

Email Customer Service

Discount applies to standard conference rate
and cannot be applied towards existing attendee or additional exhibitor/sponsor staff registrations.

Posted in Zalma on Insurance | Comments Off on Join Me at the 19th Annual America’s Claims Event

Can Reinsured Allocate Claims Payments?

Are Cedent’s Allocation Decisions Immune from Scrutiny?

Reinsurance allows an insurer to lay off part of its obligations to a reinsurer thereby buying insurance against the obligation to pay claims as a direct insurer. Because the agreements are between insurers the covenant of good faith and fair dealing applies to all transactions whether written into the reinsurance agreement or not.

Plaintiff New Hampshire Insurance Company (New Hampshire) settled, along with several affiliated liability insurers under common corporate control (collectively, AIG), hundreds of millions of dollars of claims—most but not all of which are asbestos-related personal injury claims—with nonparty Kaiser Aluminum & Chemical Corporation (Kaiser), a common insured of the settling carriers. AIG’s settlement agreement with Kaiser does not address the allocation of losses to particular claims, policies or carriers beyond providing that AIG may effect such an allocation “for its own purposes, in its own books and records,” which AIG has done. That allocation ascribes 100% of the settlement amount to asbestos product liability claims within the coverage of Kaiser’s New Hampshire excess policy (issued for the period from June 1973 to June 1976) and none of the amount to other settled claims—for bad faith, defense costs in addition to policy limits, and premises liability—that Kaiser had asserted against certain other AIG carriers, but not against New Hampshire.

In New Hampshire Ins. Co. v. Clearwater Ins. Co., — N.Y.S.3d —-, 2015 WL 1292579 (N.Y.A.D. 1 Dept., 3/25/15) New Hampshire sued Clearwater Insurance Company (Clearwater), a reinsurer of the excess policy New Hampshire issued to Kaiser, seeking to require Clearwater to indemnify New Hampshire for the share prescribed by its reinsurance certificate of the portion of the Kaiser settlement payments that AIG has allocated to the New Hampshire policy. In its defense, Clearwater challenges AIG’s allocation of 100% of the settled losses to asbestos products liability claims, contending that this allocation unreasonably results in the reinsured New Hampshire policy bearing part of the cost of settling the premises, bad faith and defense cost claims that Kaiser had not asserted against New Hampshire or that were not covered by the New Hampshire policy. Clearwater also asserts, as additional affirmative defenses, that New Hampshire (known as the ceding company, or “cedent,” in reinsurance nomenclature) has breached its contractual notice, reporting and risk retention obligations under the terms of the reinsurance certificate.

New Hampshire argued that Clearwater, as a reinsurer, was bound, as a matter of law, by New Hampshire’s allocation of settled claims to the reinsured policy under general principles of the law of reinsurance.

Factual Background

The NH–Kaiser policy was not implicated until Kaiser’s covered losses for a given year during the policy period exceeded $50 million.  Although the NH–Kaiser policy apparently was the only one that New Hampshire issued to Kaiser, the record reflects that six other AIG-affiliated carriers issued Kaiser a total of 48 excess liability policies, at various levels of coverage, during the period from 1970 to 1985. The aggregate limits of Kaiser’s 49 AIG policies (including the NH–Kaiser policy) totaled approximately $575 million.

The Reinsurance Contract

New Hampshire ceded a portion of its risk under the NH–Kaiser policy to Clearwater  pursuant to a contract entitled “Casualty Facultative Reinsurance Certificate No. 0567,” dated July 10, 1973 (hereinafter, the Clearwater–NH certificate). The Clearwater–NH certificate established Clearwater’s pro rata share of New Hampshire’s liability under the NH–Kaiser policy to 8%, or up to $4 million per year.

The Clearwater–NH certificate provides that Clearwater’s “liability … shall follow [New Hampshire’s] liability in accordance with the terms and conditions of the policy reinsured hereunder except with respect to those terms and/or conditions as may be inconsistent with the terms of this Certificate.”  New Hampshire further agreed that it would “notify [Clearwater] promptly of any event or development which [New Hampshire] reasonably believes might result in a claim against [Clearwater]” and would “forward to [Clearwater] copies of such pleadings and reports of investigations as are pertinent to the claim” under the certificate.

The Claims Against Kaiser and Ensuing Coverage Litigation

Kaiser was first named as a defendant in asbestos-related personal injury actions in the late 1970s. Eventually, the asbestos-related claims against Kaiser numbered in the hundreds of thousands. The accumulation of these claims forced Kaiser into Chapter 11 bankruptcy proceedings in 2002.

In 2000, Kaiser commenced a declaratory judgment action in California. In the asbestos products action, Kaiser asserted, in addition to its claims for declaratory relief and breach of contract, claims for bad faith against certain insurers, including two AIG carriers, Lexington Insurance Company (Lexington) and Insurance Company of the State of Pennsylvania (ICOP), but not New Hampshire.

The Kaiser Settlement

In 2006, Kaiser’s total unliquidated liability for personal injury claims of all kinds was estimated to be as high as $2.5 billion, while the aggregate limits of its remaining solvent insurance coverage then totaled approximately $1.5 billion.

The remaining aggregate limits of Kaiser’s coverage from the AIG carriers were then approximately $568 million.

In April 2006, Kaiser and the AIG carriers, including New Hampshire, resolved their coverage disputes by entering into a settlement agreement (the Kaiser settlement), which was approved by the bankruptcy court on May 9, 2006, and went into effect upon Kaiser’s emergence from bankruptcy on September 16, 2006. The Kaiser settlement essentially requires Kaiser’s seven AIG carriers, collectively, to pay a trust that had been created to liquidate claims against Kaiser up to the full amount of the AIG carriers’ aggregate remaining policy limits as of 2006—approximately $568 million—on a quarterly basis over a period of 10 years. In exchange, the AIG carriers received a full release of all claims under, or relating to, the policies issued to Kaiser, including: (1) asbestos products claims; (2) premises claims, whether for exposure to asbestos, silica, coal tar pitch volatiles, or benzene, or for noise-induced hearing loss; (3) the bad faith claims that had been asserted against Lexington and ICOP; and (4) the defense costs claims that had been asserted against ICOP.

The Current Suit

When AIG began billing Clearwater for its 8% share of the settlement payments allocated to the NH–Kaiser policy, Clearwater declined to pay, leading to this lawsuit.  In its answer, Clearwater asserted as its second and third affirmative defenses, respectively, that New Hampshire had failed to comply with its reporting and notice requirements under the Clearwater–NH certificate, and, as its seventh affirmative defense, that New Hampshire had “breached the retention warranty in the Facultative Certificate.”

Discussion

A reinsurer is required to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it. A reinsurer cannot second guess the good faith liability determinations made by its reinsured. The rationale behind this doctrine is two-fold: first, it meets the goal of maximizing coverage and settlement and second, it streamlines the reimbursement process and reduces litigation.

In view of its finding that Clearwater has a duty under the Clearwater–NH certificate to “follow the settlements,” the Supreme Court (trial court) held that New Hampshire’s decisions concerning the allocation of settlement payments among its policies are entitled to “deference”. Nonetheless, recognizing that, even under the “follow the settlements” doctrine, a cedent’s allocations decisions are not immune from scrutiny, the court denied New Hampshire summary judgment on the ground that the existing record raises a triable issue concerning the reasonableness of New Hampshire’s allocation. In this regard, the court noted that discovery had still been “in its infancy” when stayed by New Hampshire’s summary judgment motion.

The purpose of a “following form” clause is to achieve concurrency between the reinsured contract and the policy of reinsurance, thereby assuring the ceding company, that by purchasing reinsurance, it has covered the same risks by reinsurance that it has undertaken on behalf of the original insured under its own policy.

Clearwater’s affirmative defenses alleging that New Hampshire did not meet the loss notice and reporting requirements under the Clearwater–NH certificate should not have been dismissed, as issues of fact exist as to whether New Hampshire met those requirements. The requirements are intertwined and exist to ensure that a reinsured apprises the reinsurer of potential liabilities in order to enable the reinsurer to set reserves and to potentially associate in the defense and control of the underlying claims. At the very least, issues of fact exist concerning the sufficiency of New Hampshire’s reporting and notice.

Clearwater claims that it was prejudiced because New Hampshire’s allegedly late notice resulted in disadvantageous commutation agreements between Clearwater and its own reinsurers, or retrocessionaires. Since New Hampshire’s summary judgment motion was premature, given that it was made when discovery was still “in its infancy”, Clearwater’s submissions in opposition to the motion sufficiently raised the issue of whether it had been prejudiced by the alleged late notice.

The court also erred in granting New Hampshire summary judgment dismissing Clearwater’s seventh affirmative defense, which raised the issue of whether New Hampshire had retained $2 million of risk under the NH–Kaiser policy as required by New Hampshire’s retention warranty in the Clearwater–NH certificate. While New Hampshire submitted an affidavit by an administrator asserting in conclusory fashion that New Hampshire had complied with the retention warranty, Clearwater is entitled to test this claim through further discovery. In any event, an issue of fact was raised by evidence Clearwater submitted suggesting that New Hampshire had pooled the retention with other AIG companies.

ZALMA OPINION

The appellate court, faced with serious reinsurance questions, kicked the can down the road and found that the trial court was wrong in granting partial summary judgment while discovery was just in its infancy. It did, however, find that the allocation decisions made by AIG were subject to scrutiny and that a reinsurer has the right to complain about a late report of the loss, giving to the reinsurer defenses that would be available to an insured when sued by its insurer on a coverage question.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can Reinsured Allocate Claims Payments?

The Use of the Insurance Examination under Oath

A Weapon to Defeat Fraud

The “examination under oath”  (EUO) is a formal type of interview authorized by an insurance contract. It is taken under the authority provided by a condition of the insurance policy that compels the insured to appear and give sworn testimony on the demand of the insurer. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

The adjuster (in complex cases, the attorney) retained to represent the insurer questions the person interviewed in a manner similar to a deposition in a legal proceeding. Because of the formality of the proceeding—it includes an oath, and the presence of the certified shorthand reporter—the task of establishing rapport with the person interviewed and obtaining information from him or her is more difficult than in an informal interview.

A tool for gleaning the maximum amount of information, the examination under oath is an effective weapon against insurance fraud. Often, however, the purpose of the examination under oath is not to stop fraud, but rather to allow an insured the opportunity to prove his or her claim of loss in cases where evidence has been destroyed by a casualty or is otherwise unavailable.

Taking an Examination under Oath

The examination under oath is usually conducted by an attorney for the insurer. An attorney, however, is not required by law: any person appointed by the insurer can take the examination. Similarly, the insured is permitted counsel, if desired, but the presence of counsel is not a legal requirement. If the insured opts for it, his or her attorney has no right to ask questions or offer information during the examination. Regardless, the wise interviewer allows the insured’s attorney to ask any question he or she wishes, and to elaborate on any facts, since this will further the purpose of the examination—to get as much information as possible. The professional prefers to learn what the insured has to say immediately, rather than during later litigation.

In cases where more than one insured is named on a policy, the insurer may, depending on the state or the policy language, compel the insureds to testify separately outside the hearing of the other insured(s). The subject will provide less guarded responses if he or she knows that a coinsured is being questioned as well. Separate examinations under oath, exactly like separate civil interviews, lead to more accurate information and less chicanery.

The Insurance Services Office appears to have modified its form of Homeowners’ Policy–3 to avoid the impact of court decisions by specifically stating that the insurer can require each insured to appear and, furthermore, to testify separately, thereby avoiding the possibility of collusion.

The insured’s counsel may object to the form of the questions posed. If the objection is well taken, honor it, since your goal is to get usable testimony. If the objection is not well taken, though, the questioner may simply ignore it.

If the insured’s attorney instructs him or her not to answer a material question, this can in itself be sufficient grounds to deny the claim. It constitutes failure to comply with the policy condition concerning examinations under oath. When faced with an instruction not to answer, it is often effective for the interviewer to say to the insured and his or her attorney:

“I respect your decision not to answer the question. I must advise you, however, that the insurance company I represent considers the question you have refused to answer to be relevant and material to its investigation. The company can, if you continue in your refusal, decide to deny your claim on that ground alone. I make no such decisions, so I will honor your decision not to answer and go on to other questions. I feel, nevertheless, that it is my duty to advise you of the rights you gave to the company when you acquired the policy. You can certainly reconsider your decision. Would you like to meet privately with your attorney to discuss this matter?”

Usually, the insured and his or her attorney then reconsider the potentially heavy consequences and answer the question.

There is no reciprocal provision allowing the insured to take testimony of representatives of the insurer. Attorneys for insureds will attempt to pose questions to the claims person. These attempts must be rebuffed politely and with good grace.

The Role of the Insurer’s Attorney

A well-executed examination under oath is not only one of the insurer’s most effective weapons against fraud. It can also be highly instructive for the adjuster. If an attorney is responsible for performing the examination, the adjuster must make clear that it is his or her obligation to provide sufficient factual information supported by legal authority for the insurer to make a decision on the claim. The adjuster should also, if possible, attend the examination to help the attorney and to study questioning techniques. Attorneys, whose job it is to ask questions, will usually do a more thorough job of examination under oath than will insurance claims staff.

After the examination, the attorney can also give the adjuster legal advice as to the insurer’s rights, duties, and obligations.

Counsel’s report should include all the facts necessary to support any decision, whether learned in the course of the investigation or from testimony at the examination under oath. The adjuster must analyze the facts in relation to statutory and case law; only then will he or she be in a position to make a fully informed decision on the claim. More often than not, the examination will cause the insurer’s attorney to recommend payment of full indemnity to the insured.

If the attorney advises the insurer that indemnity should not be paid, the adjuster should carefully analyze the recommendations to independently verify that there are sufficient facts, supported by policy language and legal precedent, to support the conclusion. It is the claims person who makes the decision, not the attorney. Decisions made by insurers must sometimes be based on reasons other than the law.

Insurers should use the examination under oath tool judiciously. It should only be used in cases where the insured is unable to prove his or her loss, when the insured’s proof is inconsistent or incomplete, or when the insurer has a reasonable belief that a fraud is being attempted. Used properly by insurers, adjusters, and insureds who are intent on providing (or obtaining) only the indemnity promised by a policy of insurance to which they are entitled, the examination under oath will help the insured and the insurer fulfill the promises they made each other at the inception of the policy.

The Right to an Examination Under Oath

A Duty Owed by the Insured to the Insurer

Every fire insurance policy issued in the U.S. provides that, in the event of a loss, the insurance company can require the insured to produce documents and testify at an “examination under oath.” The examination under oath is not a deposition; there is no prerequisite lawsuit, nor is the examination subject to formal rules of procedure. The EUO is a product of a contractual promise. The insured, when he, she or it acquires a policy of insurance the insured promises that if a claim is presented and the insurer asks, the insured will appear for, testify at EUO and then read, correct and sign under oath the transcript of the EUO.

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

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

The position taken by the Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F. 2d 6, 13 (7th Cir. 1945), the court stated:

We think there is no escape from the conclusion that these witnesses purposely refused to answer questions which were material to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy. . . . We would think that defendants had a right to examine as to any matter material to their liability, as well as its extent. (Emphasis added by the court).

The examination under oath and the requirement that insureds produce relevant documents in the event of a fire are essential tools to insurers faced with a possible fraud or other issue affecting insurance coverage. Insureds, and their counsel, will often argue that they are not required to produce tax returns or other financial documents because to do so would violate the so-called “taxpayers privilege” or right of privacy. They may refuse to testify about subjects they claim are irrelevant or protected by a privilege or right of privacy. In most states, refusals to testify or produce documents can result in a forfeiture of claims presented by the insured.

If, as a result of a fire, the insured has lost the documentary evidence necessary to adequately prove the loss, then the insured can only prove the loss by oral testimony. By his or her testimony, the insured can remove the suspicions of the insurer. The purpose of the examination under oath is to allow the insured a medium to prove the loss. Sworn testimony is as, or more, effective evidence than documents for an insured to prove his or her loss.

The right to examination under oath is based on language in property or fire insurance policies. For instance, the Standard Fire Policy provides:

The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described and submit to examination under oath by any person named by this company, and subscribe the same; and as often as may be reasonably required, shall produce for examination and copying all books of account, bills, invoices, and other vouchers.

Similarly, the 1991 edition of the Homeowners’ Policy (Insurance Services Office Form HO 00 03 04 91) provides, in easy to read language:

Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:

  1. As often as we reasonably require:

(1) Show the damage property.

(2) Provide us with records and documents we request and permit us to make copies; and

(3) Submit to examination under oath, while not in the presence of any other ‘insured’ and sign the same.

In Rymsha v. Trust Insurance Company, 746 N.E. 2d 561 (Mass. App. CT. 2001), the insured failed or refused to provide financial records including her income tax returns, credit card information regarding the purchase of items reported stolen, photographs and receipts. When she failed the insurer denied her claim. The Massachusetts appellate court reasoned:

We think resolution of Rymsha’s appeal is controlled in all respects by Mello v. Hingham Mut. Fire Ins. Co., 421 Mass. 333, 337 (1995). In that case, the court agreed with those authorities therein cited which hold that the “submission to an examination, if the request is reasonable, is strictly construed as a condition precedent to the insurer’s liability.” Id. We see no basis for a distinction between an obligation to submit to a reasonably requested examination under oath and the duty to produce documents pertinent to the claimed loss. Rymsha does not contend otherwise. Indeed, she does not even cite to, let alone discuss, Mello. Rather, she argues only that, because she informed Trust from the outset that many of the items she reported as stolen had been given to her, the information sought by Trust (specifically, her personal and corporate income tax returns for the years 1988 through 1994) was not pertinent to her claim.

In considering whether the documents requested by Trust were pertinent to Rymsha’s claim, the Superior Court judge concluded that Rymsha’s examination under oath and the undisputed circumstances of her claim gave rise to the reasonable suspicion that she did not have the resources to purchase the allegedly stolen items, that she had a ‘motive to stage the loss,’ that Trust had the right ‘to assure itself of the validity of [the] claim,’ and that the requested documents were relevant to that question. We see no error. See Sidney Binder, Inc. v. Jewelers Mut. Ins. Co., 28 Mass. App. Ct. 459, 462-463 (1990) (in theft claim, evidence of insured’s business affairs and personal finances relevant to show that insured had motive to stage burglary). Numerous other jurisdictions have held that the financial status of an insured can be relevant to an insurer’s investigation of a claim. See, e.g., Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 160 (S.D.W. Va. 1987); Pisa v. Underwriters at Lloyd’s, London, 787 F. Supp. 283, 285 (D.R.I.), aff’d, 966 F. 2d 1440 (1st Cir. 1992); DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601, 612 (App. Div. 1995); Dlugosz v. Exchange Mut. Ins. Co., 176 A.D. 2d 1011, 1013 (N.Y. 1991); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wash. App. 712, 720-721 (1997). In the circumstances here presented, the Superior Court judge was not in error in concluding that the challenged documents were pertinent to Rymsha’s claim. (Emphasis added).

The insured in Rymsha attempted to defeat the insurer’s argument by claiming the insurer was not prejudiced by her failure to produce documents. The Court rejected the argument and found that the failure to produce the reasonably requested pertinent information put the insurer in the untenable position of either paying the claim without question and without any means by which to investigate its validity, notwithstanding the circumstances and amount of the loss described in her unsworn statement and examination under oath testimony, or being sued for breach of contract and unfair acts and practices. The court concluded that, without finding that a showing of prejudice was necessary, the prejudice to the insurer was “too obvious to warrant discussion.” It was enough to state that the insured’s blanket refusal to provide the reasonably requested documents even stymied the insurer’s ability to show actual prejudice.

Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 08/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

Reasonableness of the Examination Requirement

Courts have consistently held that the requirement in an insurance policy that an insured submit to an examination under oath is reasonable. More than 80 years ago, in Hickman v. London Assurance Corp., 184 Cal. 524, 529, 195 P. 45 (1920), the California Supreme Court expressly approved the reasonableness of an examination under oath as a means of “cross-examining” other statements of the insured.

In West v. State Farm Fire & Casualty Co., 868 F. 2d 348, 351 (9th Cir. 1989), the Ninth Circuit, applying California law, held:

For West to claim that the scheduled examination under oath was unreasonable is tantamount to a claim that insurance companies are always required to pay claims at their face value on the basis of a preliminary interview. Besides being patently illogical, this argument is controverted by the insurance policy and by California law.

In West v. State Farm, the insurance company interviewed James West in the presence of a court reporter. During the interview West refused to answer any question that he had been asked during the interview by the adjuster because he claimed the adjuster’s interview was a statement under oath. West based this claim on a question that the adjuster, Stone, asked West at the end of the interview; namely, whether West had answered Stone’s questions truthfully.

After the interview with West, State Farm sought to interview Mrs. West, who was also named as an insured under the policy. In addition, State Farm attempted to interview the Wests’ two teenaged daughters. All three women failed to appear for the scheduled interviews. State Farm then denied the claim because of West’s alleged breach of a material condition.

In Globe Indemnity Co. v. Superior Court (Guarnieri), 6 Cal. App. 4th 725, 8 Cal. Rptr. 2d 251 (1992), the court held: “The right to require the insured to submit to an examination under oath concerning all proper subjects is reasonable as a matter of law.”

In California FAIR Plan Association v. The Superior Court, 2004 DJDAR 796 (California Court of Appeal, 01/23/04), the Court of Appeal adopted Hickman, West and Globe, and ordered the trial court to enter summary judgment in favor of the insurer because of the insured’s refusal to appear for examination under oath. The insured, as the plaintiff in the action, argued that Gruenberg v. Aetna Insurance Co., 9 Cal. 3d. 566, 108 Cal. Rptr. 480 (1973)—which found failure of an insurer to allow an insured to dispose of criminal charges before he testified at examination under oath could be considered bad faith—allowed the insured to refuse to testify. The California Court of Appeal rejected the argument:

Unlike the complaint in Gruenberg, this case does not involve allegations that the insurer rejected an insured’s claim based on trumped up charges by the insurer. Here, there is no evidence in the record that the lack of cooperation in submitting to an examination under oath was due to any statements or conduct by Fair Plan or any of its agents…An examination under oath being a condition precedent to suit on the policy, the trial court erred in denying summary judgment to Fair Plan.

ZALMA OPINION

This posting is my start in the work to write a book about the EUO. It is not complete but it provides a good look at what the EUO is and how it is used to protect the interests of the insured and the insurer. Remember, an EUO can also be used as a tool to allow the insured to prove a loss that cannot be proved because the fire or theft took away the documentation needed to prove a loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on The Use of the Insurance Examination under Oath

Plaintiffs’ Lawyers Need to Understand Insurance

Notice-Prejudice Rule Does Not Apply to “Claims Made” Policy

 

Lawyers who specialize in bodily injury tort claims usually have little or no knowledge about insurance coverage and the obligations required to obtain coverage. They know torts and will invariably demand that the tortfeasor report a claim to their liability insurer. They do not know that many liability insurance policies contain a medical payments provision that will pay for medical expenses without regard to fault. Plaintiffs’ lawyers are concerned with fault, not with making an insurance claim separate from fault.

In Brenegan v. Fireman’s Fund Insurance Co., Not Reported in Cal.Rptr.3d, 2015 WL 1309638 (Cal.App. 2 Dist., 3/23/15) Kenton Brenegan (“Kenton”) appealed from a judgment entered in favor of Fireman’s Fund Insurance Co. (“Fireman’s”). Kenton made a claim for medical expenses pursuant to a medical expenses clause in Fireman’s’s insurance policy. The trial court concluded that Kenton was not entitled to recover his medical expenses because he had failed to timely comply with a reporting requirement.

BACKGROUND

In October 2010 Kenton fell down the stairs of a parking facility in Mission Hills. The facility was owned by G & L Realty Corp., LLC (G & L), which had insurance coverage under a commercial general liability policy issued by Fireman’s.

The policy provided that Fireman’s will pay “medical expenses … for bodily injury caused by an accident … [¶] provided that: [¶] (a) The accident takes place in the coverage territory and during the policy period; [¶] (b) The expenses are incurred and reported to us within one year of the date of the accident….” (Italics omitted.) The policy further provided that payments for medical expenses will be made “regardless of fault” and “will not exceed the applicable limits of insurance.” The medical expenses limit for any one person is $20,000.

In a November 2010 letter to G & L, Kenton’s counsel asserted “[a] claim for damages” and requested that G & L “forward this letter to your liability insurance carrier.” Four days later, G & L’s counsel wrote a letter to Kenton acknowledging receipt of his claim. The letter said nothing about G & L’s insurance carrier.

In November 2011 Kenton filed an action against G & L. During discovery in September 2012, Kenton allegedly “learned of the existence of [Fireman’s’s insurance] policy, but … did not learn at this time that the policy provided medical payments coverage or had any special reporting requirements.”

In a letter to Fireman’s dated April 25, 2013, Kenton’s counsel demanded “payment of any and all Med Pay available under” its policy insuring G & L. Fireman’s’ employee, Bob Holliman, declared that this letter was Fireman’s’s first notice of Kenton’s loss. According to Holliman, Fireman’s “had not received any communications from G & L … or its attorney” about the accident. Fireman’s “notified [Kenton] it was denying his claim because it did not receive notice of medical expenses within one year of the accident” as required by the medical expenses clause of the policy.

In June 2013 Kenton filed the instant action against Fireman’s. Kenton’s complaint consisted of two causes of action: breach of insurance contract and insurance bad faith. Kenton alleged that, while on G & L’s premises, he had fallen “and suffered injuries … resulting in $65,348.02 in reasonable and necessary medical expenses.”

The trial court granted Fireman’s’s motion for summary judgment because Kenton had not given timely notice of his claim for medical expenses. The court rejected Kenton’s argument that coverage applied unless Fireman’s showed actual prejudice from the delay in making the claim.

PRINCIPLES OF INTERPRETATION OF INSURANCE POLICIES

While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. Accordingly, in interpreting an insurance policy, courts seek to discern the mutual intention of the parties and, where possible, to infer this intent from the terms of the policy.

ISSUE

The central issue here is whether the medical expenses clause is analogous to an “occurrence” policy or a “claims-made” policy. “California’s ‘notice-prejudice’ rule operates to bar insurance companies from disavowing coverage on the basis of lack of timely notice unless the insurance company can show actual prejudice from the delay. The rule was developed in the context of ‘occurrence’ policies. [Citations.]” (Pacific Employers Ins. Co. v. Superior Court (1990) 221 Cal.App.3d 1348, 1357.) The notice-prejudice rule does not apply to claims-made policies.

ANALYSIS

The medical expenses clause here is not the typical claims-made policy clause because coverage does not depend on reporting the claim to the insurer during the policy period.

Unlike an occurrence policy, the medical expenses clause contains a reporting element essential to coverage. Regardless of fault, the clause covers medical expenses up to $20,000 provided: “The expenses are incurred and reported to us within one year of the date of the accident.” (Italics added.) Coverage is triggered not by the accident, but by reporting the medical expenses within one year of the date of the accident.

Claims-made policies are essentially reporting policies. Because the medical expenses clause makes notice an element of coverage, the application of  the notice-prejudice rule would materially alter the insurer’s risk. Kenton argues that the medical expenses clause is analogous to an occurrence policy. The medical expenses clause is more correctly classified as claims-based because the reporting requirement is an element  of coverage.

Kenton contends that he should be “equitably excused” from complying with the one-year reporting requirement because he did not know of the policy’s existence within the one-year reporting period.  If the one-year reporting requirement here were a condition precedent that could be excused if equity required it, equity would not require that it be excused under the particular circumstances of this case.

The Court of Appeal concluded that Kenton was unjustifiably dilatory in reporting his medical expenses claim to Fireman’s. From the beginning, Kenton took it for granted that G & L was insured. In a November 2010 letter to G & L asserting his client’s claim, Kenton’s counsel requested that G & L “forward this letter to your liability insurance carrier.” Counsel did not ask for the policy number and name of the carrier so that he could contact it. Nor did he ask whether the policy provided for the payment of medical expenses and, if it did, whether special reporting requirements applied. Kenton alleged that, during discovery in September 2012, approximately two years after the accident, he first “learned of the existence” of Fireman’s’ policy. Kenton did not diligently pursue the medical expenses issue at that time. Kenton’s counsel declared that it was not until seven months later, on April 25, 2013, that he “directed his staff to demand medical payments benefits from” Fireman’s.

The court of appeal agreed, therefore, with the trial court’s conclusion that Kenton knew of his injuries in October 2010. He and his counsel, acquired soon thereafter, were in control of his litigation, and in control of requesting insurance information. Since Kenton gave notice to G & L and since G & L failed to notify its carrier would, at most, support a claim against G & L.

ZALMA OPINION

This case teaches that a person making a bodily injury claim against a third party who it knows, or believes, is insured should always ask if there is medical payments coverage available and, if so, what is required to make the claim. Counsel did not ask and even when he learned of the existence of medical payments coverage he did nothing to pursue the claim for seven months. Kenton not only has a case against G&L for failing to report his claim, he has a case against his lawyer for failing to protect his rights.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Plaintiffs’ Lawyers Need to Understand Insurance

Is Drunken Brawl Resulting In Death Covered?

Agent Only Responsible for Acquiring Policy Ordered

In Atlantic Cas. Ins. Co. v. Norton, Slip Copy, 2015 WL 1293666 (E.D.Tenn., 3/23/15)  a patron at the Grill & Pub died at a tavern owned and operated by Grover Norton in Harriman, Tennessee. A patron of the tavern accidently backed his vehicle into another vehicle in the tavern’s parking lot. A dispute then arose between several patrons leading to the violent beating death of David Lee Harvey. A wrongful death lawsuit was filed against Norton and others. Atlantic Casualty Insurance Company brought this declaratory action seeking a declaration that it has no duty to defend or indemnify Norton in the action. Norton has filed a Third–Party Complaint for failure to procure insurance against AGA Insurance, Inc. The parties filed cross-motions for summary judgment.

Atlantic claims that it does not owe Norton a duty to defend or indemnify him in the wrongful death lawsuit. Atlantic asserts that the allegations in the wrongful death lawsuit are excluded from coverage pursuant to the terms of the insurance policy Atlantic issued to Norton including, but not limited to, the policy’s “Assault and/or Battery” exclusion.

Norton also filed a Third–Party Complaint against AGA Insurance, Inc., alleging that he relied on AGA to exercise due diligence in providing a policy that would protect him for foreseeable perils such as the assault and battery described in the wrongful death lawsuit. Therefore, to the extent that coverage is not available to him under the policy of insurance with Atlantic, AGA should be held liable for any damages assessed against Norton as a result of its intentional or negligent acts, omissions, or misrepresentations related to procurement of coverage for the tavern.

APPLICABLE POLICY PROVISIONS

Atlantic issued a commercial lines insurance policy to Grover Norton d/b/a/ The Grill & Pub. The assault and battery exclusion provided: “This insurance does not apply to and we have no duty to defend any claims or “suits” for ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ arising in whole or in part out of:a)  the actual or threatened assault and/or battery whether caused by or at the instigation or direction of any insured, his employees, patrons or any other person;…”

ANALYSIS

As a general rule, Tennessee law construes any ambiguities in an insurance policy in favor of the insured. Yet, if the terms of the policy are clear, the court enforces insurance contracts “according to their plain terms” with the language construed in its “plain, ordinary and popular sense.” Tennessee courts do not create a new insurance contract for the parties.

Assault And Battery Exclusion

The underlying wrongful death Complaint alleged that Eric Glen Gallaher, Derek Lynn Gallaher, Devin Lee Bertram, and Anderson Treavin Wright, either acting alone or in concert with one another, did unlawfully, negligently, recklessly or intentionally assault and kill David Lee Harvey in the parking lot of The Grill and Pub owned and operated by the Defendant, Grover Norton. It also alleged that Grover Norton failed to exercise reasonable care by failing to operate the Grill and Pub and its parking lot in such a fashion so that it would not attract or provide a climate for crime such as was perpetrated on David Lee Harvey as alleged herein.

Commercial general liability policies are designed to protect an insured against certain losses arising out of business operations. Commercial general liability policies are divided into several components, including the insuring agreement, which sets the outer limits of an insurer’s contractual liability, and the exclusions, which help define the shape and scope of coverage by excluding certain forms of coverage.

The court concluded that the claims in the wrongful death action fall squarely under the policy’s exclusion. Courts construing similar policy provisions have found similar claims excluded by the policy’s Assault and/or Battery exclusion.

Norton does not challenge the validity of the Assault and/or Battery exclusion, or contest that it applies to the allegations in the underlying case; instead, he argues that the insurance agent, AGA Insurance Inc., failed to secure proper coverage for his business, and that this failure is attributable to Atlantic, because AGA is the agent of the insurer, Atlantic, and not the insured.

Responsibility of Broker

Under Tennessee law, a cause of action for failure to procure insurance is separate and distinct from any cause of action against an insurer, and the agent, rather than the insurance company, is independently liable. Norton alleges in his Third–Party Complaint that he assumed he had coverage for assaults and batteries, and he believed he had coverage for the type of incident that is at issue in the wrongful death lawsuit.

In his affidavit, Norton does not state that he instructed AGA to obtain a policy with assault and battery coverage, or that AGA made a mistake in carrying out his instructions. Nor does he state that at any time during the 20 years he purchased insurance from AGA, he ever asked AGA to obtain assault and battery coverage for him. AGA was acting as Norton’s agent, not Atlantic’s. Therefore the alleged actions by AGA do not bind Atlantic to coverage for the allegations of assault and battery in the wrongful death lawsuit.

The insured may recover from the agent the loss he sustains as a result of the agent’s failure to procure the desired coverage if the actions of the agent warrant an assumption by the client that he was properly insured in the amount of the desired coverage. An agent or broker is liable for failure to procure on the theory that he or she is the agent of the insured in negotiating for a policy, and owes a duty to the principle to exercise reasonable skill, care, and diligence in effecting the insurance.

The elements of a cause of action for failure to procure are: (1) an undertaking or agreement by the agent or broker to procure insurance; (2) the agent’s or broker’s failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure; and (3) the agent’s or broker’s actions warranted the client’s assumption that he or she was properly insured.

Norton testified he had purchased insurance for his tavern through AGA since approximately 1990. Norton admitted he did not talk to the agent or anyone else at AGA about obtaining a policy providing coverage for assault and battery, and no one at AGA ever told Norton the policies being purchased would provide coverage for assault and battery. Norton received a copy of the Atlantic policy and later received copies of the policy upon renewal. Norton acknowledged that he did not read the policy. Bob Layton, the agent with AGA who initially procured insurance coverage for Norton, testified that exclusions for assault and/or battery are universal with commercial liability policies, and that each property and commercial liability policy secured through AGA contained a similar exclusion.

Under Tennessee law, an insured, upon receipt of the policy, is conclusively presumed to have read, understood and assented to all provisions of the policy. Norton requested a property and commercial liability policy, and AGA procured a property and commercial liability policy as requested. An insurance agent does not owe a duty to sell customers more coverage than requested or selected. The agent’s obligation to the customer ends when the coverage requested by the customer is obtained

Norton received renewal notices and policies over 20 years, detailing the scope of his commercial liability coverage, Norton is presumed, as a matter of law, to possess full knowledge of the coverage provisions, irrespective of whether he actually read the policies. Tennessee law is clear that “in the absence of fraud or mistake, an insured cannot claim that he is not bound by the contract of insurance, or certain provisions thereof, because he has not read it, or is otherwise ignorant of, or unacquainted with its provisions.” Webber v. State Farm Auto. Ins. Co., 49 S.W.3d 265, 274 (Tenn.2001).

Summary judgment was granted for both the insurer and the broker.

ZALMA OPINION

Over the last 42 years I have asked insureds, under oath, if they read and understood their policy. Only two answered “yes” and further questioning proved both lied. In this case Norton admitted he had not read his policy and its renewals over a 20 year period and still claimed he was entitled to assault and batter coverage and dram shop coverage. The policy issued to him was clear and unambiguous and he eventually gave up his case against the insurer and demanded the broker pay for not reading his mind and obtaining the coverage he needed for the first time after the death. The court, wisely, did not buy his argument.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is Drunken Brawl Resulting In Death Covered?

MCS-90 Controls

Insured May Sue on Behalf of Subrogated Insurer

Insurers of people operating trucks in interstate commerce are required to add to their policy a federally mandated endorsement known as the MCS-90 that expands the coverage available under the policy and requires the insurer to insure all vehicles operated by its insured even if the vehicle is not identified in the poicy.

This insurance dispute, raised by Tri–National, Inc. v. Yelder ,— F.3d —-, 2015 WL 1260491 (C.A.8 (Mo.) 3/20/15)  presented an issue of first impression in the Eighth Circuit  whether the federally mandated Motor Carrier Act (MCA) of 1980 and the MCS–90 endorsement for motor carriers required by the statute, requires a tortfeasor’s insurer to compensate an injured party when the injured party has already been compensated by its own insurer. The district court decided the MCS–90 endorsement requires such compensation and the insurer that issued the MCS-90 appealed.

BACKGROUND

On June 14, 2007, while operating a semi tractor and trailer, Larry D. Yelder Sr., an employee of Yelder–N–Son Trucking, Inc. (collectively, Yelder defendants), collided with a Tri–National, Inc. truck, causing extensive property damage. Tri–National filed a claim with its insurer, Harco Insurance Company, which paid Tri–National $91,100 and retained a subrogation interest in the claim.

At the time of the accident, the Yelder defendants were insured by Canal Insurance Company (Canal policy), which included an MCS–90 endorsement. In 2010, in the District Court for the Middle District of Alabama, Canal sought a declaratory judgment against the Yelder defendants and Harco, among others, declaring (1) Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy, and (2) the MCS–90 endorsement did not require Canal to satisfy Harco’s subrogation claim. The Alabama court entered default judgment against the Yelder defendants only, stating Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy, but the Alabama court made no declaration about the MCS–90 endorsement.

At a pretrial conference, Harco represented to the Alabama court that it was “not [Harco’s] intention to ever make a claim against [Canal],” and that it “would be Tri–National who would go after Canal, not Harco.” The Alabama district court dismissed Harco without prejudice “[b]y agreement of the parties made during a pretrial conference.”

Tri–National sued the Yelder defendants in Missouri state court and in July 2012 obtained a $91,100 default judgment. In November 2012, Tri–National filed a petition for equitable garnishment in Missouri state court against Canal in an effort to collect on the Missouri state court’s default judgment. According to Tri–National, the decision to file the petition was Harco’s, Tri–National had no input in the decision, and any proceeds from the garnishment action are “supposed to go directly to Harco.”

On opposing motions for summary judgment, the district court granted Tri–National’s motion and denied Canal’s. Canal claimed the district court erred by finding (1) Tri–National was the real party in interest, rather than its insurer, Harco; (2) the Alabama dismissal did not bar Tri–National’s suit for equitable garnishment in Missouri; and (3) the MCS–90 endorsement required Canal to satisfy Tri–National’s default judgment against the Yelder defendants.

DISCUSSION

Although Tri–National received $91,100 in payment for its loss from Harco, Tri–National, not Harco, holds the default judgment from the Missouri state court against the Yelder defendants. In Missouri, by statute, Tri–National, as the judgment creditor may proceed in equity against the Yelder defendants and Canal to reach and apply the insurance money to the satisfaction of the judgment and Harco may not. Missouri, unlike many states, provides that the legal title to the cause of action remains in the insured, and that the insurer’s only interest is an equitable right to subrogation.  The exclusive right to pursue the tortfeasor remains with the insured, which holds the proceeds for the subrogee insurer.

The general rule in federal court is that if an insurer has paid the entire claim of its insured, the insurer is the real party in interest under Federal Rule of Civil Procedure 17(a) and must sue in its own name. However, Canal is at no risk of being subjected to more than one suit here and the Eighth Circuit, therefore, concluded that Tri–National was the real party in interest.

Alabama Litigation

The Alabama court granted a default judgment in favor of Canal as to the Yelder defendants only, stating Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy. It made no determination on the merits as to Canal’s obligations under the MCS–90 endorsement to Tri–National (who was not a party to the suit) or even to Harco (who was a party). Secondly the Alabama court dismissed Harco without prejudice “[b]y agreement of the parties,” with the expressed understanding that “Tri–National is not a party so they can still sue [Canal].” Therefore, the Alabama court did not render a prior final judgment on the merits as to Tri–National’s present claim on the MCS–90 endorsement issue and therefore Tri–National’s claim is not barred. The effect of a voluntary dismissal without prejudice renders the proceedings a nullity and leave the parties as if the action had never been brought.

The MCS–90 Endorsement

Canal argues the district court erred by finding the MCS–90 endorsement obligated Canal to reimburse Tri–National for its losses.

Congress enacted the MCA, in part, to address abuses that had arisen in the interstate trucking industry which threatened public safety, where motor carriers attempted to avoid financial responsibility for accidents that occurred while goods were being transported in interstate commerce. The Secretary of Transportation issued a regulation mandating that every liability insurance policy covering a “motor carrier” contain the MCS–90 endorsement. The MCS–90 provides a broad guaranty that the insurer will pay certain judgments incurred by the insured regardless of whether the motor vehicle involved is specifically described in the policy or whether the loss was otherwise excluded by the terms of the policy.

The MCS–90 endorsement states: “In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles … [under the] Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere….¶ It is further understood and agreed that, upon failure of the company to pay any final judgment recovered against the insured as provided herein, the judgment creditor may maintain an action in any court of competent jurisdiction against the company to compel such payment.”

Previously, in a controversy among tortfeasors’ insurers, one of whom purchased an assignment of the injured party’s judgment against the tortfeasor and then sought contribution from the other tortfeasors’ insurers, the Eighth Circuit stated that a policy “ensuring speedy satisfaction of judgments attributed to negligent truckers[ ] is best served by a rule that allows ultimate financial burdens to be allocated after injured members of the public are compensated.”   Redland Ins. Co. v. Shelter Mut. Ins. Co., 193 F.3d 1021, 1022 (8th Cir.1999). Here too, we do not want to “encourage insurers” like Harco to engage in wrangling over such allocations before the public is compensated, rather than satisfy Tri–National’s claim from the outset, as Harco did in this case.

We also note that under the MCS–90 endorsement, Canal has the right—and Harco does not—to demand reimbursement from the Yelder defendants.

The Eighth Circuit concluded that the fact Harco satisfied Tri–National’s claim does not preclude Tri–National from asserting its rights as a member of the general public under the MCS–90 endorsement. It agreed with the district court that the circumstance of Tri–National carrying its own insurance with Harco does not absolve Canal of its obligations under the MCS–90 endorsement.

ZALMA OPINION

The MCS-90 is a powerful tool for those who are injured by a trucker involved in interstate commerce. It takes away the opportunity to deny coverage just because the vehicle is not listed on the policy and greatly expands the exposure faced by the insurer. Because truckers sometimes lie to their insurer the statute allows it to recover payments from its insured if it pays a judgment and should encourage insurers of interstate truckers to underwrite its risks carefully.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on MCS-90 Controls

Captive Agent Must Use Ordinary Care

Should a Captive Agent be Treated Differently Than Other Insurance Agents

Captive agents are only allowed to sell products from the insurer with whom it has contracted. As a result the markets available to them are limited since most insurers that use captive agents limit the type of insurance they can sell. Regardless, the captive agent owes a duty to the insured to acquire the insurance they ask for if available from the insurer with whom the contract.

The Supreme Court of Illinois was asked to determine whether an insurance company’s agent had a duty to exercise ordinary care and skill in procuring the specific insurance coverage requested by his customer. The appellate court held section 2–2201 of the Code of Civil Procedure (Code) (735 ILCS 5/2–2201 (West 2010)), imposes a duty on an insurance agent to act with ordinary care under the circumstances presented in this case. In Skaperdas v. Country Cas. Ins. Co., — N.E.3d —-, 2015 IL 117021, 2015 WL 1255014 (Ill., 3/19/15) the Supreme Court analyzed the statute and state court precedent before deciding the obligation owed by a captive agent to the insured.

BACKGROUND

In 2006, Country Casualty Insurance Company, through its agent Tom Lessaris, issued an automobile insurance policy to Steven A. Skaperdas. Skaperdas’s fiancée, Valerie R. Day, was subsequently involved in an accident while driving one of his vehicles. Country Casualty covered the loss but required Skaperdas to change his policy to include Day as an additional driver.

Skaperdas met with Lessaris to request coverage for Day under the insurance policy. Lessaris prepared the policy, but identified only Skaperdas as a named insured. Day was not included as a named insured under the policy. The declarations page for the policy, however, identified the driver as a “female, 30–64.”

Following issuance of the policy, Day’s minor son, Jonathon Jackson, was struck by a vehicle while riding his bicycle and seriously injured. The driver’s automobile insurance policy limit of $25,000 was insufficient to cover Jackson’s medical expenses. Plaintiffs, therefore, made a demand for underinsured motorist coverage under the Country Casualty policy. Country Casualty denied the claim on the ground that neither Day nor Jackson was listed as a named insured on the policy.

Skaperdas and Day, on behalf of herself and as representative of Jackson, filed a complaint alleging in count I that Lessaris was negligent in failing to procure the insurance coverage requested by Skaperdas. Plaintiffs alleged Lessaris breached his duty to exercise ordinary care and skill in renewing, procuring, binding, and placing the requested insurance coverage as required by the code. In count II, plaintiffs alleged Country Casualty was responsible for the acts or omissions of its agent under the doctrine of respondeat superior.

Lessaris moved to dismiss the negligence claim. Lessaris claimed he did not owe plaintiffs a duty of care in procuring the requested insurance coverage. Country Casualty also filed a motion to dismiss the claim based on respondeat superior, asserting that it was not liable for the alleged negligence of Lessaris because he did not owe plaintiffs a duty.

The appellate court held that a plain reading of the statute together with the definition of “insurance producer” established that “any person required to be licensed to sell, solicit, or negotiate insurance has a duty to exercise ordinary care in procuring insurance.” Accordingly, the appellate court concluded that as an insurance producer, Lessaris owed plaintiffs a duty of care in procuring insurance coverage for them. The appellate court, therefore, reversed the trial court’s dismissal of counts I and II of plaintiffs’ complaint and remanded for further proceedings.

ANALYSIS

On appeal to this court, Lessaris contends that the statute does not impose a duty of ordinary care on a “captive insurance agent” to procure a specific type or amount of coverage for a client. A captive agent of an insurance company owes a duty to the company, not to the insured. Lessaris argues that only insurance brokers owe a fiduciary duty to an insured by virtue of being employed by the insured, and the statute is intended to limit the liability of insurance brokers in a fiduciary relationship. Thus, according to Lessaris, the statute applies only to insurance brokers. Lessaris contends the statute is not intended to create a new duty for captive agents to insureds. Accordingly, as a captive agent of Country Casualty, he owed no duty to plaintiffs.

In interpreting a statute, no part should be rendered meaningless or superfluous.
Section 2–2201 of the Code provides, in pertinent part: “Ordinary care; civil liability. ¶  (a) An insurance producer, registered firm, and limited insurance representative shall exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.”

This court has observed that insurance law distinguishes between an agent and a broker, stating “‘A broker is an individual who procures insurance and acts as a middleman between the insured and the insurer, who solicits insurance business from the public under no employment from any special company and who, having secured an order, places the insurance with the company selected by the insured, or in the absence of any selection by the insured, with a company he selects himself. [Citation.] An agent is an individual who has a fixed and permanent relation to the companies he represents and who has certain duties and allegiances to such companies.’” Zannini v. Reliance Insurance Co. of Illinois, Inc., 147 Ill.2d 437, 451 (1992).

The terms of subsection (a) may reasonably be applied to both captive agents and brokers. According to subsection (a), an insurance producer must exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured. The Illinois Supreme Court has long held that “‘every person owes a duty of ordinary care to all others to guard against injuries which naturally flow as a reasonably probable and foreseeable consequence of an act, and such a duty does not depend upon contract, privity of interest or the proximity of relationship, but extends to remote and unknown persons.’”  Therefore the statute imposes a duty that requires an insurance producer to exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.

The statute does not require an agent to obtain the best possible coverage for a customer, but only requires the agent to exercise ordinary care and skill in obtaining the coverage requested by the insured or proposed insured. If an agent’s company does not offer the coverage requested, the agent may satisfy the duty by simply notifying the customer that he or she should look elsewhere for the requested coverage.

In ruling on a section 2–619 motion to dismiss, the well-pleaded allegations of a complaint must be taken as true. Plaintiffs allege Lessaris failed to exercise ordinary care in procuring the insurance coverage they specifically requested. The declarations page showing the addition of a driver “female, 30–64” indicates that Skaperdas actually requested the extension of coverage to Day. Plaintiffs allege Country Casualty required Skaperdas to add Day as an additional driver on the policy after she was involved in an accident while driving one of his vehicles. Taken as true, those allegations show that a specific request for coverage was made in this case.

ZALMA OPINION

Insurance agents, whether independent or captive, like every person in the United States owe a duty of ordinary care to not cause harm to another. It is the general duty owed by every person to every other person. An captive insurance agent is not absolved of that duty simply because he or she is a captive of an insurer or by a convoluted interpretation of a statute. In this case the court assumes that the pleadings are true. The plaintiffs will still need to prove that the agent failed to exercise ordinary care and provide the coverage requested.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Captive Agent Must Use Ordinary Care

No Way to Avoid Workers’ Compensation

On The Books or Not Employee Entitled to Workers’ Compensation

It is axiomatic that workers’ compensation benefits are the sole and exclusive remedy of an employee against his employer for injuries in the course of employment. This precludes suits against an employer for injuries in the course of employment. It also prevents an employer from providing workers’ compensation benefits by keeping the employee off the books, paying the employee in cash, and avoiding the need to withhold taxes, social security, and other government mandated deductions required of honest employers.

In De Los Santos v. Butkovich, — N.Y.S.3d —-, 2015 WL 1213494 (N.Y.A.D. 2 Dept., 3/18/15), the defendants, in support of their motion for summary judgment, presented evidence that the plaintiff was an employee of the defendant N.B. Painting and Decorating Corp. (hereinafter N.B. Painting), who was injured in the course of his employment, and that N.B Painting maintained a Workers’ Compensation policy on the date of the accident.

Accordingly, the defendants established prima facie that the exclusivity provisions of Workers’ Compensation Law § 11 barred the plaintiff from seeking a recovery in tort against N.B. Painting.

All employees of an employer are deemed covered by the employer’s workers’ compensation policy, regardless of whether an employee may have been working “off the books,” where the employer has secured a policy of insurance coverage. Consider, for example Baljit v. Suzy’s Dept. Store, 211 A.D.2d 555, 555 and Vargas v. Crown Container Co ., Inc., 114 AD3d 762, 764) that support the position.

Accordingly, the trial court should have granted that branch of the defendants’ motion which was for summary judgment dismissing the complaint insofar as asserted against the defendant N.B. Painting.

ZALMA OPINION

The New York Supreme Court, Appellate Division, in another of its wonderful brief and to the point opinions made it clear that an employee – whether officially on the books with his taxes withheld – is still an employee entitled to workers’ compensation benefits.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Way to Avoid Workers’ Compensation

Silica Dust Is a Pollutant

Pollution & Faulty Workmanship Destroy Coverage for Property Loss

No insurance policy covers an insured against every possible risk of loss. “All Risk” policies do not cover every potential risk of loss to property. All contain exclusions that limit the agreement to indemnify the insured against certain categories of risk. Defendants issued a first-party insurance policy to plaintiff covering certain of plaintiff’s property, including a building in a government complex containing real property owned by plaintiff, the State and the City of Binghamton.

FACTS

During construction on a parking garage underneath a building that plaintiff owns, and during the policy’s coverage period, construction work caused silica dust to migrate up an elevator shaft and disperse into all of the floors in plaintiff’s building.

THE TRIAL COURT

In Broome County v. Travelers Indem. Co., — N.Y.S.2d —-, 125 A.D.3d 1241, 2015 WL 790256 (N.Y.A.D. 3 Dept., 2/26/15), 2015 N.Y. Slip Op. 01697, after defendants disclaimed coverage for this incident, plaintiff sued alleging that the property damage resulting from the spread of silica dust was a loss covered under the policy. Defendants moved for summary judgment dismissing the complaint and plaintiff cross-moved for summary judgment establishing coverage as a matter of law.

The Supreme Court (trial court in New York) found that a pollution exclusion in the policy did not bar coverage, but that there were issues of fact as to whether a faulty workmanship exclusion barred coverage.

ANALYSIS

An insurer seeking to invoke a policy exclusion must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. To determine whether a policy provision is ambiguous, courts are guided by “the reasonable expectations of the average insured upon reading the policy” The meaning of any part of such a policy must be determined upon consideration of the policy as a whole. In addition, an insurance contract should not be read so that some provisions are rendered meaningless. Upon applying these rules of construction, if an insurance policy’s meaning is not clear or is subject to different reasonable interpretations, such an ambiguity must be resolved in favor of the insured. However, if the exclusions are clear and unambiguous they must be enforced.

The appellate court concluded that the defendants were entitled to summary judgment based on the pollution exclusion clause. Pursuant to that exclusion in the policy, defendants will not cover loss resulting from the “[d]ischarge, dispersal, seepage, migration, release or escape of ‘pollutants.’” As defined in the policy, “‘[p]ollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, waste and any unhealthy or hazardous building materials (including but not limited to asbestos and lead products or materials containing lead).”

The record contained unrebutted evidence that silica dust can cause lung disease and respiratory problems, placing such dust within the policy definition of a pollutant as “unhealthy or hazardous building material[ ],” as well as a “solid … irritant or contaminant”.

The words “[d]ischarge, dispersal, seepage, migration, release or escape” are read as not intended to describe short migratory events where the relevant contaminant remains on the plaintiff’s property and does damage to it. If the exclusion was limited to the insured’s property, the exclusion would have no significance at all in this first-party policy. This is especially true when applied to the portion of the definition of pollutants addressing “building materials” including asbestos and lead paint. Applying the only reasonable reading that gives the pollution exclusion here a meaning under a first-party insurance policy, that exclusion precludes coverage for the loss at issue (see Space v. Farm Family Mut. Ins. Co., 235 A.D.2d 797, 798–799 [1997]; and American Heritage Realty Partnership v. LaVoy, 209 A.D.2d at 750, 618 N.Y.S.2d 125).

Defendants are also entitled to summary judgment dismissing the complaint based on the faulty workmanship clause.

The policy exclusion for faulty workmanship states that defendants “will not pay for loss or damage caused by or resulting from … [f]aulty, inadequate or defective … (2) … workmanship, repair, construction, renovation [or] remodeling.” Plaintiff conceded, in its response to interrogatories, that the loss here resulted from the absence of adequate protective barriers to prevent construction dust from infiltrating the elevator shaft and the building. The unrebutted record evidence establishes that a flawed process on the part of the contractors led to the loss at issue.

The average insured would reasonably expect the exclusion to apply to faulty workmanship whether it was caused by a flawed process or measured by the flawed quality of the finished product (see Wider v. Heritage Maintenance, Inc., 14 Misc.3d 963, 974–975 [2007]; Schultz v. Erie Ins. Group, 754 N.E.2d 971, 976–977 [Ind Ct App 2001]; see also Village of Potsdam v. Home Indem. Co., 52 A.D.2d 278, 280 [1976]; compare Maxwell v. State Farm Mut. Auto. Ins. Co., 92 A.D.2d 1049, 1050 [1983]; but see Allstate Ins. Co. v. Smith, 929 F.2d 447, 449–450 [9th Cir1991] ).

Additionally, the ensuing loss exception does not apply here. “Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk” (Narob Dev. Corp. v. Insurance Co. of N. Am., 219 A.D.2d 454, 454 [1995], lv denied 87 N.Y.2d 804 [1995] [citations omitted] ).

The faulty workmanship here was the failure to erect adequate dust barriers, and the resulting loss came from the spread of dust. Thus, the loss was directly related to the original excluded risk. Inasmuch as no ambiguity exists in the faulty workmanship exclusion, plaintiff has conceded that the loss was caused by a flawed construction process and no exception applies, the faulty workmanship clause precludes coverage for the loss at issue. Hence, defendants are entitled to dismissal of the complaint.

ZALMA OPINION

This case, in addition to holding that a clear and unambiguous policy exclusion, must be enforced, also notes that there is no requirement to describe every possible pollutant in a pollution exclusion. Although it did not mention the words “silica dust” the court had no problem establishing that it was a pollutant. In the decision the New York Supreme Court, Appellate Division, Third Judicial Department, held that the silica exposure fit the definition of a “unhealthy or hazardous building material” in the policy’s pollution exclusion. In addition it also held that the faulty workmanship exclusion applied since the plaintiff admitted that the cause was failure to block the dust from migrating to the building.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Silica Dust Is a Pollutant

The Equitable Remedy of Rescission

A Tool to Defeat Fraud

Most insurance fraud perpetrators know crime but have no knowledge of insurance. It is difficult to prove fraud in the presentation of a claim. It is relatively easy, on the other hand, to rescind a policy if the fraudster lies to get the insurance in the first place.

Rescission

Rescission is an equitable remedy as ancient as the common law of Britain. (Carter v. Boehm, S.C. 1 Bl.593, 3 Burr 1906, British House of Lords, 11th May 1766)

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 approved in 1789.

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 to apply fairness to the insurance contract and allow an insurer to void a contract and allowed courts to refuse to enforce such a contract entered into by misrepresentation or concealment of material facts.

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 most states 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 simply an innocent misrepresentation or concealment 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. Some states, like California, follow the ancient equitable remedies and have codified the right to rescission of insurance contracts. The legislative right to rescission arose because legislatures 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. Other states have imposed limitations on insurers in their state and make the ability to rescind a contract of insurance more difficult than it was under the common law.

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. Rescission without a thorough investigation is dangerous. 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.

One plaintiffs’ lawyer became wealthy when he learned that claims people were given a rubber stamp that said “RESCISSION” and had no idea what it was. He would take the claims person’s deposition and ask them to spell the word. When the claims person failed his bad faith case was established. When they spelled the word correctly, he would ask the adjuster to state the elements necessary to effect a rescission. Almost none could answer.

California, with a Draconian rescission law, still make it 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 proven, of extra-contractual torts. (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 184, 243 Cal. Rptr. 639.)

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.

Bases for Rescission

The primary bases for rescission are:

  1. misrepresentation or material fact(s),
  2. concealment of material fact(s),
  3. mistake of material fact(s),
  4. mistake of law,

ZALMA OPINION

Rescission is an important remedy available to both parties to an insurance contract. It should be used with care and the advice of competent counsel. This article was adopted from my e-book on rescission and is available at http://www.zalma.com/zalmabooks.htm.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on The Equitable Remedy of Rescission

Interview Techniques

The following article dealing with interview techniques is adapted from my E-Book, “Getting the Whole Truth” available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.  It will provide you with a few ideas for obtaining the truth in every interview, deposition, examination under oath, or interrogation.

Misdirection and Indirect Questioning

Every professional interviewer is adept at using the technique of indirect questioning to obtain information. Indirect questioning is often the best technique, and sometimes the only one that will work. The professional poses what appear to be innocuous questions in a way that conceals the real purpose behind them. Such questions are acutely purposeful, but are designed to appear unimportant, as if the interviewer is just making friendly conversation. From the point of view of the subject, they should appear to have little or no bearing on the case.

Like a real-life Lieutenant Columbo, however, the skilled interviewer operates with the knowledge that seemingly inept, offhand, casually delivered questions frequently help produce information that leads to the truth.

The professional gains proficiency in this technique by constantly developing a taste and a talent for small talk. You can conduct informal information-gathering interviews with subjects anywhere, whether they be chats in hallways or conversations at the coffee machine . . . wherever the subject does not expect or believe the interaction to be of the “official” interview type.

Indirect questioning involves two commingled factors: word phrasing and delivery.

Delivery

The importance of your choice of words, and the effect of your delivery, can be illustrated by the variety of uses to which a common word like “you” can be put. That word, when shouted in your direction in a strange town by a police officer, would make you feel apprehensive and compel you to stop in your tracks. “You” uttered sweetly by one lover to another would convey a completely different meaning. The word is the same. The delivery is the important difference.

The interviewer’s expression of indifference will prick the ego of the person interviewed who is suspected of being an embezzler or fraud perpetrator and cause him or her to explain how effective he or she was at committing the fraud. Details on how the embezzlement was perpetrated will flow from the person interviewed before he or she realizes that wrongdoing was admitted.

Word Choice and Phrasing

The skilled interviewer should try to inject into an interview the relevant terminology that insurance professionals (or art appraisers, or construction engineers, as the case may be) would be conversant with. If the person interviewed understands what the interviewer is referring to, that establishes that he or she is not unknowledgeable in the field.

The interviewer, by a studied facility with word choice and a subtle sense of phrasing, can convey to the subject that he or she doubts the expertise claimed by the subject, without insulting him or her. Face with such articulate delivery, the subject will be anxious to match the interviewer with his or her own demonstration of specialized expertise in order to prove competence. Even the person making a fraudulent claim of art theft will be eager to show off his or her years of art expertise.

The Backhanded Compliment

In comedies, we laugh when we see actors barricading a door by piling on chairs, tables, and sofas to keep out an assailant who then comes through an open window. This is very similar to the techniques of misdirection that a skilled interviewer uses to divert attention or throw a subject off guard.

As an interviewer walks into a room to conduct an investigation into a burglary case, he senses immediate antagonism from the person to be interviewed.

“I don’t know why they consider you a suspect,” the interviewer leads. “This is way out of your line. This job took guts and brains. Taken were diamonds, a mink jacket, and expensive stuff an amateur like you wouldn’t know how to pawn or fence. Look at you! In those clothes you look so damn seedy you should be arrested for vagrancy!”

“Like hell,” the subject responds, to his immediate regret and ultimate detriment. “That night I had on my good suit.”

The prideful subject, clearly more concerned with a perceived insult contained in the interviewer’s cleverly delivered misdirection than with keeping mum, lets down his guard. Tricked by a simple ruse, despite all intentions to the contrary, he admits participation in the crime. One second too late he realizes he fell into the trap that can be set by carefully delivered misdirection.

Make Only Promises You Can Keep

The professional never makes a promise that he or she knows cannot be fulfilled. An interviewer will lose all credibility if the subject perceives that the interviewer does not have the power to effect terms or conditions that he or she vows are guaranteed.

Just as a physician will never promise a patient a cure, the professional dealing with an insurance claim will never promise the claimant that giving a confession will result in payment. When interviewing for an embezzlement case, no professional will ever promise criminal immunity.

If asked, the interviewer must say, “I have no power to make any promises in regard to payment of a claim, immunity from prosecution, or a lesser sentence if you decide to tell the truth.

“I could tell you that you won’t be arrested or go to jail, but that would be lying to you. I haven’t told you any lies here today, and I’m not going to start now. Those things are out of my hands. I’m only here to find out exactly what happened.”

The subject may be looking for assurance and promises, but if the interviewer is “caught out’” in a meaningless promise all his or her hard work will be for naught.

When an interviewer honestly tells the subject at the outset that promises of leniency from other authorities cannot be made, the subject enters the interview knowing that the interviewer is not going to attempt tricks or practice deception. This may overcome the criminal subject’s natural distrust of investigators. With his or her trust in the interviewer reinforced, he or she becomes more and more likely to tell the truth with every urging on the interviewer’s part.

The tone conveyed is as important as the words spoken. The person interviewed must be convinced that the interviewer is interested only in him and in saving him or her from even more serious problems.

An insurance agent or broker should never promise to get the person interviewed a policy that “covers everything.” Rather, the professional, in the role of broker or agent, should tell the potential insured, “I will try to get you the best policy I can. No policy covers everything. Some cover more than others. With total information—absolute truth—I can get you the best coverage available.”

This type of prudence is not for purposes of interview strategy alone: if false promises are made, the insured could later bind the insurer to coverage not intended and a lawsuit, in the event of a loss from a peril not covered by the policy, could ensue. The hard-won truth will become legally and practically tainted, and the hours of interview time will be rendered less than useless.

The interviewer who makes a false promise is simply dishonest, and will be perceived as such. This is especially true in cases where a person confesses to some criminal activity after being promised leniency or a “not guilty” decision. In the courts, prosecutors are not allowed to use confessions gained in this manner. A prudent judge, learning how the confession was obtained, will dismiss the case. The US is a litigious society, and it is common knowledge that false promises made to gain information will destroy a legitimate defense in a jury trial, too, once it becomes apparent that the investigating party acted unprofessionally.

ZALMA OPINION

Everyone dealing with insurance must be adept at interviewing whether an agent, broker, claims representative, lawyer, underwriter or executive. Information is the essence of insurance and must be obtained at the beginning when a policy is offered to an insured and when a claim has been made.  The insurer that gets full and honest information will have an advantage over the insurer that does not.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Interview Techniques

When Is an Exclusion “Conspicuous, Plain and Clear”

There is no Duty to Defend if There is no Potential for Coverage

Insurance policies must be interpreted with care. Since they are contracts of adhesion they are usually interpreted with a bias towards providing coverage for the insured. When an insured provides the information necessary to convince a court that there is a potential for coverage unless the insurer can prove that a conspicuous, plain and clear exclusion defeats coverage.

When a toymaker used Mr. Fuller’s name and designs without permission – or payment of a license fee – to build and sell toys based on the geodesic dome design and other efforts of Mr. Fuller owned by its estate, the estate sued the toy maker. The toymaker sought coverage from its insurer who refused to defend or indemnify the toymaker. It dissolved and assigned its rights against its insurer to the estate who tried to get insurance funds in Alterra Excess and Surplus Insurance Company v. Estate of Fuller, — Cal.Rptr.3d —-, 2015 WL 1054972 (Cal.App. 1 Dist., 3/9/15).

The Estate of Buckminster Fuller (Estate) appealed from a judgment on the pleadings holding that Alterra Excess and Surplus Insurance Company (Alterra) had no duty to defend, and therefore no duty to indemnify, its insured in an action brought by the Estate against the insured. The basis of the judgment was that an exclusion in the Alterra policy, referred to by all below as the “intellectual property” exclusion, applied to preclude any obligation on the part of Alterra. We reach the same conclusion, and we affirm.

BACKGROUND

R. Buckminster Fuller, nicknamed “Bucky” (Fuller), was a celebrated designer, author, and inventor. He was credited with many, and diverse, creations, and was particularly well known for popularizing the geodesic dome. He died in 1983. According to the Estate’s own pleadings, in 1985 it registered its claim as the successor-in-interest to all of Fuller’s rights, and has “licensed those rights on many occasions. In 2004, the U.S. Postal Service licensed the rights to Bucky’s image for a postage stamp. In 2003, Xerox Corporation licensed rights to Bucky’s name and likeness.” In short, it appears that various commercial enterprises have used Fuller, and perhaps his nickname, to assist in the marketing of their product.

At some point, Maxfield & Overton Holdings, LLC (Maxfield) entered the picture, attempting to do just that—apparently without permission or payment. Specifically: Beginning at least as early as 2009, Maxfield manufactured and distributed several products under the Buckyball and related trademarks. Again according to the Estate’s pleadings, these items included several variations on Buckyballs, Buckyball gift packs, Buckycubes, Bucky sidekick, and The Big Book of Bucky. Buckyballs are 216 round rare earth magnets packaged in a cube shape. The packaging states: Buckyballs by Zoomdoggle. The included Quick State Guide demonstrates several shapes that can be made with the round magnets.

The Big Book of Bucky is a paperback book which provides instructions on how to make various shapes with Buckyballs. The book states: ‘Buckyballs were named for Buckminster Fuller.’ After briefly summarizing Bucky’s accomplishments, it states: ‘He was smart, He was crazy. He was fun. Remind you of anything?’

The Underlying Action

On May 18, 2012, the Estate filed an action against Maxfield in the United States District Court, Northern District of California: Estate of Buckminster Fuller v. Maxfield & Oberton Holdings, LLC, Case No.: 5–12–CV–02570.

Maxfield tendered defense of the underlying action to Alterra, which agreed to defend under a reservation of rights and appointed Cumis counsel to defend the case. Soon thereafter Alterra filed the second lawsuit involved here: the action for declaratory relief.
The Estate received an Assignment of Claims as part of a settlement with the [Maxfield] Liquidating Trust.

Pursuant to the Delaware Limited Liability Act (18 Del. Code, § 803), Maxfield’s dissolution prohibited it from defending any action. In light of this, Cumis counsel withdrew, leaving Maxfield unrepresented. At this point, Alterra intervened in the underlying action to defend Maxfield’s position. The underlying action has since been stayed pending resolution of this coverage action.

DISCUSSION

A duty to defend exists whenever the lawsuit against the insured seeks damages on any theory that, if proved, would be covered by the policy. Thus, a defense is excused only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Thus, an insurer may have a duty to defend even when it ultimately has no obligation to indemnify, either because no damages are awarded in the underlying action or because the actual judgment is for damages not covered by the policy.

Those liberal, pro-insured rules notwithstanding, there is no duty to defend if there is no potential for coverage. As the leading California insurance treatise puts it, “The insurer’s duty to defend does not extend to claims for which there is no potential for liability coverage. This includes claims falling outside the scope of the insuring clause, or within an express exclusion from coverage, or barred by statutory or public policy limitations. ‘The insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage’ [Citations.].” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2014) § 7:537, pp. 7B–16–17 (Croskey).)

As our Supreme Court put it in its most recent pronouncement on the subject: “In determining whether a claim creates the potential for coverage under an insurance policy, ‘we are guided by the principle that interpretation of an insurance policy is a question of law.’ [Citation.] ‘Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.)’ [Citation.] In determining this intent, ‘[t]he rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it.’ [Citation.] We consider the ‘ “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,” unless “used by the parties in a technical sense or a special meaning is given to them by usage.” ’ [Citation.] We must also ‘interpret the language in context, with regard to its intended function in the policy.’ [Citation.]” (Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 288, 172 Cal.Rptr.3d 653, 326 P.3d 253.)

The Policy

The policy contained, as part of a standard form:

“2. Exclusions

“i. Infringement Of Copyright, Patent, Trademark Or Trade Secret

“ ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement’. [¶] However, this exclusion does not apply to infringement, in your ‘advertisement’, of copyright, trade dress or slogan.”

Trial Court Decision

The trial court held that Alterra had no obligation under the policy because exclusion i, which the court called the “intellectual property exclusion,” applied here.

DECISION

The exclusion is on an Insurance Services Office (ISO) industry form (CG 00 01 12 07). The exclusion appears under a bold-faced heading “Exclusions,” with each exclusion having its own bold-faced title.

These factors satisfy the “conspicuous, plain and clear” test for exclusions, i.e., that they be positioned in a place and printed in a form that will attract the reader’s attention. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 184, 231 Cal.Rptr. 791, disapproved on other grounds in Buss v. Superior Court (1997) 16 Cal.4th 35, 50, fn. 12, 65 Cal.Rptr.2d 366, 939 P.2d 766; see National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380, 384, 131 Cal.Rptr. 42, 551 P.2d 362 [exclusion located under a bold-faced heading entitled “Exclusions” and appearing in the same style of print found elsewhere in the policy].)

Finally, the Estate asserts the words “other intellectual property rights” in the exclusion cannot apply as they are “buried in an inconspicuous part of a single paragraph in small type in a 39 page contract.” This ignores that courts applying the exclusion have never criticized the exclusion on this basis. And, as noted, the title of the exclusion starts with the word “Infringement”—in boldface yet—the very conduct the Estate itself alleged against Maxfield. Exclusion i. is conspicuous, plain, and clear.

ZALMA OPINION

Conspicuous, plain and clear exclusions must be enforced. The California court did just that. Although the estate was harmed by Maxfield’s actions they are judgment proof since the corporation was dissolved and the only possibility for recovering damages was the insurance policy. They made a yeoman-like effort to gain the insurance coverage but could not, nor should it, be allowed in face of the conspicuous, plain and clear policy exclusion.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Is an Exclusion “Conspicuous, Plain and Clear”

Zalma’s Insurance Fraud Letter – March 15, 2015

 Fraud by Insurers

In the sixth issue of its 19th  year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on March 15, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Did 60 Minutes Reveal Fraud by Flood Insurers?
2.    IRC Estimates Auto Injury Fraud & Buildup Adds Up to $7.7 Billion Excess Claims
3.    Dentist Loses License for Only Two Years for Medicaid Fraud
4.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Must Be Named as Insured On Date of Loss To Recover – March 13, 2015
2.    No Cover for Incorrectly Performed Work – March 12, 2015
3.    Cancellation Waives Right to Rescind – March 11, 2015
4.    Broad Exclusion – if Plain – Applies – March 10, 2015
5.    Buyer’s Remorse – March 9, 2015
6.    To Stack or Not to Stack, That is the Question – March 6, 2015
7.    Must there be More Than Damage to a Structure to be Structural Damage? – March 4, 2015
8.    Should Fraud Be Insurable? – March 3, 2015
9.    Only Stupid Fraudsters Get Caught – March 1, 2015
10.    Innocent Mortgagee Collect – Spouse Not Innocent – February 27, 2015
11.    Plea of Guilty to Insurance Fraud Stands – February 26, 2015
12.    Does “Notice-Prejudice Rule” Apply to Claims Made Policy? – February 25, 2015
13.    Rescission Means Policy Never Existed – February 24, 2015
14.    Any Insured Can Change Limits – February 23, 2015
15.    Insurance Irrelevant to Subrogation Action – February 23, 2015
16.    Can Insured Profit as an Additional Insured? – February 19, 2015
17.    Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation – February 19, 2015
18.    Comply With Insurance Condition or Lose – February 18, 2015
19.    Insurance Policy Means What It Says – February 17, 2015
20.    Passover 2015 February 16, 2015

New From Barry & Thea Zalma

Passover is a time when every Jewish father and mother tell their children the story of the Exodus of the Jews from slavery in Egypt. It is a story that Jewish people have told every year for more than 3,000 years. It is a very personal story and applies to each of us as if we were the people who lived it so long ago.

It is a story never to be forgotten. For those of us who have assimilated into the United States and who do not speak Hebrew my wife and I wrote an English only Passover story so that we and our children and grandchildren will understand the story of Passover without a great deal of ritual.

It is available for a small price as a 15 page e-book. If you purchase the e-book you have our permission to print as many copies as you need to conduct your own Passover Seder. It will be available at http://www.zalma.com/zalmabooks.htm until Passover and then will be deleted.

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – March 15, 2015

Must Be Named as Insured On Date of Loss To Recover

Mortgagee Not Required to Buy Liability Insurance for Borrower

Insurance companies only sell the insurance requested by the insured not the insurance that the insured should have purchased. Mortgagees, who require insurance on the property that was security for a loan requires that the mortgagor purchase hazard insurance to protect the mortgagee against loss of its security by fire or some other hazard. To assist its customers most lenders will keep an escrow account to be certain that premium for the hazard insurance is paid.

In Dichira v. Nawid, — N.Y.S.3d —-, 2015 WL 1035921 (N.Y.A.D. 2 Dept., 3/11/2015), 2015 N.Y. Slip Op. 01921 a New York appellate court was asked to reverse a judgment of the trial court, called the Supreme Court in New York, when an insured claimed his mortgagee should have purchased liability insurance as part of the escrow account he set up to pay premium for first party property insurance.

FACTS

In an action to recover damages for personal injuries and a related third-party action,  plaintiff appeals from an order of the trial court, the Supreme Court, Kings County, that granted summary judgment for Countrywide Home Loan (Countrywide) dismissing the complaint asserted against it, and granted the separate motion of Tower Insurance Company for summary judgment dismissing the complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify him in the main action.

The plaintiff sued the defendant and third-party plaintiff Muhammad U. Nawid to recover damages for personal injuries allegedly sustained on April 16, 2008, when the plaintiff tripped and fell on the sidewalk in front of Nawid’s property. Nawid sued, among others, his mortgagee, Countrywide and Tower Insurance Company (Tower). Nawid alleged that he had obtained liability insurance coverage for the property from Tower when he purchased the property in 2006. He alleged that after purchasing the property he made timely payments into an escrow account with Countrywide that was to be used, among other things, to pay insurance premiums, and that Countrywide had negligently failed to pay the insurance premiums.

ANALYSIS

Tower established its prima facie entitlement to judgment as a matter of law by demonstrating that it never issued an insurance policy for the subject property, and that its affiliate, Castlepoint Insurance Company, issued an insurance policy to Nawid for the subject property which only became effective on June 13, 2008, two months after the accident. “A party is not entitled to coverage if it is not named as an insured or additional insured on the face of the policy as of the date of the accident for which coverage is sought” (York Restoration Corp. v. Solty’s Constr., Inc., 79 AD3d 861, 862).

Since Countrywide established its prima facie entitlement to judgment as a matter of law by demonstrating that the insurance premiums that were to be paid from the escrow account related to a policy of hazard insurance, not the policy of liability insurance that Nawid claimed to have procured. Countrywide further demonstrated that the relationship between it and Nawid was based entirely on a contract, that it did not have a contractual duty to maintain liability insurance on the subject property, and that it did not engage in any conduct which gave rise to a legal duty independent of the contract.

“In the absence of an agreement to the contrary, the mortgagee is under no obligation to insure the mortgaged premises” (Beckford v. Empire Mut. Ins. Group, 135 A.D.2d 228, 232).

Accordingly, the Supreme Court properly granted Countrywide’s motion for summary judgment dismissing the third-party complaint insofar as asserted against it, and that branch of Tower’s separate motion for summary judgment dismissing the third-party complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify Nawid in the main action.

Since the third-party action is, in part, a declaratory judgment action, the appellate court remanded the matter to the Supreme Court, Kings County, for the entry of judgment declaring that Tower is not obligated to defend or indemnify Nawid in the main action.

ZALMA OPINION

If a person desires to be insured against the risk of loss for injuries to third persons it is imperative that a policy of liability insurance be acquired before a loss. Mr. Nawid bought liability insurance two months after the accident. He entered into a contract with Contrywide to pay premium for hazard insurance, not liability insurance thus no action against Countrywide. The appellate court made it clear that Nawid could not change a fire policy into a liability policy.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Must Be Named as Insured On Date of Loss To Recover

No Cover for Incorrectly Performed Work

Insurance is Not a Guarantee of Good Workmanship

Contractors and developers purchase insurance to protect against bodily injury or property damage caused by their negligence. It does not, nor could it do so and still be insurance, guarantee the quality of workmanship of the insured. The policies clearly exclude damages arising out of work performed by the insureds or their contractors or subcontractors, and work that had to be restored, repaired, or replaced because it was incorrectly performed. If such could be insured a contractor need only do a bad job for little money and then require its insurer to do the job right.

The state of New York’s appellate courts are famous for writing opinions that get to the point quickly and without a great deal of surplusage. The decision in Erie Ins. Co. v. Nick Radtke, Inc., — N.Y.S.3d —-, 2015 WL 1035911 (N.Y.A.D. 2 Dept., 3/11/15) is a perfect example of that fact by looking at the trial court opinion, stating the law of the case, and ruling in less than a page.

In a suit seeking a judgment declaring that the plaintiff is not obligated to defend or indemnify the defendant Nick Radtke, Incorporated, in an underlying action entitled Vela v S.E. Home Builders, Inc., pending in the Supreme Court, Orange County, New York, and a third-party action for a judgment declaring that the third-party defendants are obligated to indemnify the defendants S.E. Home Builders, Inc., and Joseph Radtke in the same underlying action, the insured appealed from a judgment of the Supreme Court, Orange County which declared that (1) the plaintiff is not obligated to defend, indemnify, or otherwise provide insurance coverage for the defendant Nick Radtke, Incorporated or any other person or entity for claims against the defendant Nick Radtke, Incorporated in the underlying action, and (2) the third-party defendants are not obligated to defend, indemnify, or otherwise provide coverage for or to the defendant S.E. Home Builders, Inc., or any other person for claims against the defendants S.E. Home Builders, Inc., or Joseph Radtke in the underlying action.

DECISION & ORDER

Michael Vela commenced an action (hereinafter the underlying action) against, among others, S.E. Home Builders, Inc., Joseph Radtke, and Nick Radtke, Incorporated, to recover damages arising from a home construction project. The plaintiff, Erie Insurance Company, then commenced this action seeking a judgment declaring that it is not obligated to defend or indemnify its insured, Radtke in the underlying action. Vela then commenced a third-party action against Essex Insurance Company, Inc., and Markel Services, Incorporated, seeking a judgment declaring that they are obligated to defend and indemnify their insureds, S.E. Home Builders, Inc., and Joseph Radtke, in the underlying action.

On their respective motions for summary judgment, the plaintiff and the insurers each established their prima facie entitlement to judgment as a matter of law declaring that they are not obligated to defend and indemnify their respective insureds in the underlying action by submitting the subject insurance policies.

These polices established, prima facie, that Vela’s claim of coverage was excluded under exclusion (2)(j)(5), which applies to damages arising out of work performed by the insureds or their contractors or subcontractors, and exclusion (2)(j)(6), which applies to work that had to be restored, repaired, or replaced because it was incorrectly performed. Vela failed to raise a triable issue of fact. Therefore, the Supreme Court (trial court) properly granted summary judgment to the insurers, denied summary judgment to Vela, and entered a judgment making the appropriate declarations.

ZALMA OPINION

As I have said many times in this place insurance is a contract that agrees to indemnify the insured for damages resulting from a contingent or unknown event.  When a contractor does a bad job that requires restoration, repair or replacement of the work because it was incorrectly performed it is not contingent or unknown and it is clearly and unambiguously excluded.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Cover for Incorrectly Performed Work

Cancellation Waives Right to Rescind

Cancellation is Anathema to Rescission When Grounds for Rescission Exist

When a person obtains a policy of insurance by means of a material misrepresentation an insurer has two options available to it when it learns of the misrepresentation: (1) It can rescind the policy from its inception and return all premium collected; (2) It can cancel the policy, retain the premium and pay all claims up to the date of cancellation. Both options are fraught with danger. If improperly rescinded the insurer faces tort and punitive damages. If it cancels it faces paying excessive claims it could have avoided if the policy was rescinded. It should be obvious that once a misrepresentation is discovered the insurer must do a thorough investigation to find if the right to rescind exists and if so it must promptly elect rescission.

In DuBeck v. California Physicians’ Service, — Cal.Rptr.3d —-, 2015 WL 970699 (Cal.App. 2 Dist., 3/5/15) the insurer selected the cancellation option because it had paid out claims in an amount less than the premium collected. When it was sued, two years later, it asserted its right to rescind and the trial court agreed. The insured appealed to the California Court of Appeal.

FACTUAL BACKGROUND

The insured submitted the signed application to Blue Shield on February 16, 2005. The insured incorrectly checked “No” in answer to questions on the application seeking health insurance although she knew, since she signed the application five days after visiting an health care provider for a lump in her breast.

Blue Shield issued a policy dated April 1, 2005. The policy contained cancellation and termination provisions allowing cancellation for deception or fraud in obtaining the policy.

Under the policy, pre-existing conditions were covered only after the insured had been “continuously covered for six (6) consecutive months, including [the] waiting period,” which began “on the date [Blue Shield] receive[d] your application.” The policy defined “pre-existing condition” as “ ‘an illness, injury, or condition … which existed during the six (6) months prior to the Effective Date with [Blue Shield] if, during that time, any medical advice, diagnosis, care or treatment was recommended or received from [a] licensed health practitioner.’ ” (Caps deleted.)

On September 8, 2006, approximately 17 months after issuing the policy, Blue Shield sent appellant a letter canceling it. The letter explained that Blue Shield had recently discovered that on February 11, 2005, appellant had been seen at the Breast Center and undergone a fine needle aspiration procedure on a mass in her breast, and that on that same date, she had scheduled a mammogram, an ultrasound and a consultation with a surgeon. The letter stated that had Blue Shield been aware of these facts, it would not have approved her application.

Although it stated standard grounds for rescission in California the letter went on to state that Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006. On the same date it sent the cancellation letter, Blue Shield sent appellant a “Certificate of Creditable Coverage” confirming that her coverage “began: 04/01/2005” and “ended: 09/08/2006.” The Certificate stated that it was “evidence of your coverage under this plan.”

Two years later, the insured sued Blue Shield. The operative second amended complaint alleged that commencing in April and May 2005, Blue Shield began receiving claims for the medical services being provided to appellant, which Blue Shield rejected as falling under the pre-existing condition exclusion of the policy.  By this time, appellant had been diagnosed with leukemia. The SAC contended that by delaying and canceling the policy, Blue Shield was able to collect and retain $19,600 in premiums, $5,450 more than it had paid to medical providers on appellant’s behalf.

The trial court granted summary judgment, finding that appellant’s application for insurance contained material misrepresentations, and that such misrepresentations were willful. The court concluded that Blue Shield was entitled to rescind, and that the policy was extinguished by such rescission.

DISCUSSION

Rescission of contracts is governed by  the California Civil Code that requires a party who desires to effect a rescission must promptly upon discovering the facts which entitle him to rescind give notice of rescission to the party as to whom he rescinds and restore or offer to restore everything of value which he has received from the other party under the contract; delay in seeking rescission may result in forfeiture of the right to rescind where the delay results in prejudice to the other party.

An insurer has the right to rescind a policy when the insured has misrepresented or concealed material information in seeking to obtain insurance. (Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60, 75, 103 Cal.Rptr.3d 906; TIG Ins. Co. of Michigan v. Homestore, Inc. (2006) 137 Cal.App.4th 749, 755–756, 40 Cal.Rptr.3d 528.) That right, like any other, can be waived.

When an insurance company, with full knowledge of all the facts, enters into negotiations and relations with the assured, recognizing the continued validity of the policy, the right to a forfeiture for any previous default which may be asserted is waived. This test for waiver in the context of insurance contracts comports with the general rule for finding a waiver.

The Court of Appeal concluded that Blue Shield’s conduct was wholly inconsistent with the assertion of its known right to rescind. It is undisputed that by September 8, 2006, Blue Shield was aware of the pertinent information and, consistent with its corporate policy, elected to cancel, rather than rescind, appellant’s policy. It communicated this election directly to appellant, along with assurances that the cancellation was “prospective,” leaving her entitled to all benefits of the policy from April 2005 to September 2006.

Had Blue Shield asserted a right to rescind in 2006, appellant would not have incurred the effort and expense of attempting to enforce rights Blue Shield itself assured her she had, viz., the right to have “[a]ny claims for covered services incurred before [September 8, 2006] … covered.” In waiting over two years to assert a right to rescind, while assuring appellant of her right to coverage during the period the policy was in effect and retaining her premiums for such coverage, Blue Shield engaged in conduct inconsistent with the intent to enforce the right as to induce a reasonable belief that it had been relinquished.

Appellant underwent breast cancer surgery five days after the effective date of the policy, and her medical providers began submitting bills for her treatment to Blue Shield shortly thereafter. In its June 2005 Explanation of Benefits, Blue Shield stated that the breast cancer “may have existed prior to the patient’s enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

By its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year. By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind.

ZALMA OPINION

Blue Shield did everything wrong to effect a rescission and still convinced a trial court of its right to rescind. Had it exercised the right shortly after the breast cancer surgery – which occurred five days after the policy was issued – it would have walked free of the insured’s claim and would have returned the premium. Instead it tried to be “nice” to its insured by cancelling the policy and keeping her premium only to find it may be obligated to pay to treat her for leukemia. If an insurer has a right to rescind and does not must be ready to pay all claims.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Cancellation Waives Right to Rescind

Broad Exclusion – if Plain – Applies

Computer Fraud Not the Same as Check Fraud

As Willie Sutton once said about why he robbed banks, “it’s where the money is.” Modern day bank robbers don’t use guns, they use computers, computer viruses, and make transfers of money from the bank to the account held by the thief without ever going near a bank. Insurers are loath to insure against the risk of computer fraud from individual bank accounts unless a major premium is paid. To prevent such losses to the insurer, theft by computer or other malicious computer code, is usually excluded.

In Metro Brokers, Inc. v. Transportation Ins. Co., — Fed.Appx. —-, 2015 WL 925301 (C.A.11 (Ga.)) Metro Brokers, Inc. (“Metro”) appealed the district court’s (1) grant of summary judgment in favor of Metro’s insurer, Transportation Insurance Company (“TIC”) and (2) denial of Metro’s motion for reconsideration claiming the exclusion was not enforceable.

FACTS

Metro is a real estate brokerage firm conducting business in Georgia. Metro maintained bank accounts with Fidelity Bank (“Bank”) and used the Bank’s online system to make payments from Metro’s accounts. On 10 December 2011, thieves logged into the Bank’s online banking system using a Metro employee’s access ID and password. Then, using a randomly generated single-transaction security code, the thieves authorized various payments—totaling over $188,000—from a Metro client escrow account to several other bank accounts. Over $154,000 of the stolen funds remains unrecovered.

Although the exact details of the theft are unknown, the parties agree that all available evidence suggests that the thieves used a key-logger virus known as “Zeus” (which was found on several Metro computers) to gain access to Metro employee access IDs and passwords.

Metro filed a claim for the loss under Metro’s insurance policy (“Policy”) with TIC. TIC denied coverage based on the Policy’s malicious-code and system-penetration exclusions. Metro, on the other hand, contends that the loss is not excluded and is covered by the Policy’s Fraud and Alteration (“F & A”) endorsement.

DISTRICT COURT DECISION

In two opinions, the district court concluded that the Policy did not cover Metro’s loss and, thus, that TIC was entitled to summary judgment on Metro’s breach of contract claim. The district court determined that Metro’s loss was not covered by the Policy’s F & A endorsement for two reasons: (1) the fraudulent electronic transfers did not involve a “check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain;” and (2) Metro’s loss fell within the Policy’s exclusions for losses caused by malicious code or system penetration. Because Metro’s claim was not covered under the Policy, the district court granted summary judgment for TIC on Metro’s claims for breach of contract and for bad faith.

ANALYSIS

The Eleventh Circuit, applying Georgia law, noted that an insurance policy is governed by the ordinary rules of contract construction. Whether the language in an insurance policy is ambiguous is a matter of law for the court to decide. Extrinsic evidence to explain ambiguity in a contract becomes admissible only when a contract remains ambiguous after the pertinent rules of construction have been applied.

The Policy’s F & A endorsement provided that TIC “will pay for loss resulting directly from ‘forgery’ or alteration of, on, or in any check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain….” The term “forgery” is defined in the Policy as “the signing of the name of another person or organization with intent to deceive.”

The electronic fund transfers in this case did not involve a “check, draft, promissory note, [or] bill of exchange.” The transfers also cannot be characterized as involving a “written promise, order or direction to pay” that was “similar ” to the three enumerated instruments.

Under both federal and Georgia law, electronic fund transfers are distinguished from—and treated differently from—fund transfers made by check, draft, or bill of exchange. In fact the Electronic Fund Transfer Act defines an “electronic fund transfer” as “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. [O.C.G.A. § 11–4A108]

Because Metro failed to demonstrate that its loss was covered under the Policy’s F & A endorsement, TIC was entitled to summary judgment on Metro’s breach of contract claim.

That the thieves (in some way) used a computer virus to commit their theft is undisputed. The Policy defines “malicious code” as including, among other things, “computer viruses.” Although Metro argues that the computer virus did not in fact “cause” the loss (because of the thieves’ intervening conduct), the Policy states unambiguously that it does not cover losses “caused directly or indirectly” by malicious code “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

Based on this broad (but plain) exclusionary language, the Eleventh Circuit concluded that Metro’s loss is excluded.

Because Metro’s loss is not covered by the Policy, Metro’s claims for both breach of contract and for bad faith must fail.

ZALMA OPINION

Every once in a while a court will read the plain language of an insurance policy and apply it. The Eleventh Circuit did so here even though it found that although the exclusion was broad it was plain and, as a result, effective.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Broad Exclusion – if Plain – Applies

Buyer’s Remorse

No Recourse From General Release

Construction defect litigation and arbitrations are complex, expensive and difficult. Suits are often settled only to find later that there were more defects not know about at the time of the settlement.  In Belasco v. Wells (2015) , Cal.App.4th, [No. B254525. Second Dist., Div. Five. Feb. 17, 2015.] the settling party, David Belasco, bought a newly constructed Manhattan Beach residence in 2004 from the builder defendant Gary Loren Wells. In 2006, Belasco filed a complaint against Wells with the Contractors State License Board (the Board) regarding alleged construction defects. Belasco and Wells settled the dispute in 2006 by written agreement, with Wells paying $25,000 and Belasco executing a release and a Civil Code section 1524 waiver of all known or unknown claims.

In 2012, six years after signing the settlement, Belasco, a lawyer filed suit against Wells, Wells’s surety American Contractors Indemnity Company (American Contractors), and Glenn Hatch, based on an alleged defect in the roof that Belasco discovered in 2011.

The trial court granted summary judgment in favor of Wells and American Contractors, ruling that the action was barred as a matter of law by the 2006 settlement that included a release and waiver of all claims, known or unknown, in connection with the construction of the property. Belasco filed a timely notice of appeal, which he served on all defendants.

Belasco contends the trial court erred in granting summary judgment because:

(1) the general release and section 1542 waiver in the 2006 settlement agreement for patent construction defects is not a “reasonable release” of a subsequent claim for latent construction defects within the meaning of section 929 and the Right to Repair Act (the Act);

(2) a reasonable release can only apply to a “particular violation” and not to a latent defect under the language of section 945.5, subdivision (f), and the 2006 settlement was too vague to be a valid because it does not reference a “particular violation;”

(3) section 932 specifically authorizes an action on “[s]ubsequently discovered claims of unmet standards;”

(4) public policy prohibits use of a general release and section 1542 waiver to bar a subsequent claim for latent residential construction defects; and

(5) a genuine issue of material fact exists concerning Belasco’s fraud and negligence claims that would have voided the settlement pursuant to section 1668.

ALLEGATIONS OF BELASCO’S 2012 COMPLAINT

Belasco’s complaint included causes of action for breach of contract, complaint on Contractor’s License Bond, fraud, and revocation/suspension of contractor’s license. Belasco alleged that his 2006 complaint against Wells with the Board was resolved by Wells agreeing to pay a sum of money to repair the property. A defect in the roof was unknown at the time of the settlement.

The first cause of action alleged that the defective roof breached the statutory warranty on new construction. The second cause of action alleged American Contractors is liable as Wells’s surety. The third cause of action, for fraud, alleged Wells falsely represented that the roof was installed by a competent, licensed roofer (Action Roofing), and that Wells intended to mislead Belasco, who justifiably relied on the representations when he agreed to buy the home. The fourth cause of action sought suspension or revocation of Wells’s contractor’s license under Business and Professions Code section 7106.

ANSWERS TO THE COMPLAINT

Wells entered a general denial of the allegations, and asserted 17 affirmative defenses. The ninth affirmative defense asserted that Belasco’s claims are barred by the 2006 release and waiver.

THE MOTION FOR SUMMARY JUDGMENT

Wells and American Contractors moved for summary judgment on the basis that Belasco’s 2012 action was barred by a 2006 settlement of Belasco’s prior complaint about Wells to the Board. In the prior settlement, Belasco signed a release and waiver of all known or unknown construction defects in the home in return for a cash settlement of $25,000.

After escrow closed, Belasco gave Wells’s agent, Glenn Hatch, a list of approximately 150 items improperly built on the property. Belasco filed a complaint against Wells with the Board regarding construction defects. An arbitration began in 2006 between Belasco and Wells, with both parties represented by counsel. Belasco is a patent attorney, licensed since 1995, whose practice includes a small amount of litigation. Three hours into the arbitration, and before a decision was reached, Wells offered to settle the dispute for $25,000, which Belasco accepted.

The settlement was memorialized in a writing signed by Belasco and his attorney. Belasco read and understood the agreement.

Section 3 of the settlement contained a section 1542 waiver and release, as follows: “It is understood and agreed that I and all future purchasers hereby EXPRESSLY WAIVE all rights under section 1542 of the Civil Code of California, which provides as follows: [¶] Certain Claims Not Affected by General Release . . . A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH DEBTOR.”

The California Court of Appeal recognized that the 2006 release was the reasonable result of an arms-length negotiation, with counsel on both sides, that settled Belasco’s 2006 claim and all other potential claims in return for a $25,000 payment by Wells. Belasco, an attorney, testified that he read and understood the terms each of the three sections in the release referring to broad waivers of claims before signing the agreement.

Because the law permits a release and waiver of unknown claims, there was no need for the parties to have contemplated an issue with the roof in 2006 when the settlement was signed. Belasco knowingly assumed the risk of unidentified construction by releasing Wells of all liability in return for $25,000.

DISCUSSION

In construing statutes, courts aim to ascertain the intent of the enacting legislative body so that they may adopt the construction that best effectuates the purpose of the law.  When the statutory text is ambiguous, or it otherwise fails to resolve the question of its intended meaning, courts look to the statute’s legislative history and the historical circumstances behind its enactment. Finally, the court may consider the likely effects of a proposed interpretation because where uncertainty exists consideration should be given to the consequences that will flow from a particular interpretation. Similarly, when interpreting the settlement agreement, the court must apply the general rules of contract interpretation. The goal of contractual interpretation is to determine and give effect to the mutual intention of the parties.

Belasco also argued that public policy prohibits a general release and section 1524 waiver as to subsequently discovered latent defects. Belasco reasons that allowing a release and section 1524 waiver allows a builder, such as Wells, to circumvent the purpose of the Act, which is to protect purchasers of new single family residences from patent and latent defects. Having specifically provided for negotiation of reasonable settlements in the context of cash payments, as opposed to the prohibition against releases in the context of repairs to settle a claim under the Act, it is apparent that there is no state policy that would prohibit a release and section 1524 waiver.

The clear and unambiguous waiver and release were not negated by fraud, because there was no fraudulent misrepresentation by Wells or reliance by Belasco. Belasco, an attorney who was represented by counsel, expressly acknowledged his understanding of the scope of the agreement. Belasco’s claim of fraud in connection with the 2006 release and section 1542 waiver was properly rejected by the trial court.

ZALMA OPINION

Contrary to Mr. Belasco’s arguments the intent of a general release are to resolve all known and unknown claims and give peace to the parties. Belasco found himself involved in an extensive and detailed litigation concerning his claim of 150 existing defects in the new home he purchased. He was offered, during the first day of testimony, a settlement that he accepted. Six years later he found a different defect and attempted to revive his suit and seek damages against the same parties he released. It failed because he knew what he signed, was a lawyer – albeit a patent lawyer – and was represented by counsel. His buyer’s remorse at signing the release were not grounds to avoid its effect.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Buyer’s Remorse

To Stack or Not to Stack, That is the Question

Can’t Change Policy After a Loss

When a person is seriously injured they work very hard to find a way to recover as much as possible from the insurance available. However, when, before the injury the insured only thought about the least expensive insurance available. With regard to uninsured motorist (UM) and underinsured motorist (UIM) insurance, courts have allowed insureds to stack coverages from multiple vehicles to increase the insurance limits available. Insurers, therefore, created anti-stacking provisions in their policies. Of course, litigation, pursued.

In Midwestern Indem. Co. v. Brooks, — F.3d —-, 2015 WL 855680 (C.A.8 (Mo.) 3/2/15) the Eighth Circuit was faced with a claim from Malissa Brooks to “stack” her underinsured motorist (UIM) coverage limits after a negligent driver struck Brooks as she rode her bicycle. Her insurer, Midwestern Indemnity Company (Midwestern), moved for summary judgment on the basis that Brooks’s policy unambiguously prohibits UIM coverage stacking. The district court agreed and granted summary judgment in Midwestern’s favor. Because Brooks’s policy clearly forbids stacking, and she appealed.

BACKGROUND

On September 19, 2011, Brooks was riding her bicycle when Clyde Lawrence negligently struck her with his car. Lawrence afterward passed away of unrelated causes. Brooks and her husband, Bradley Brooks, filed suit in Missouri state court against Lawrence’s estate (estate), which soon settled for the $50,000 limit of Lawrence’s auto insurance policy. In this settlement, the Brookses agreed not to seek additional recovery from Lawrence’s estate, heirs, or insurer, but the Brookses retained the right to seek recovery from Midwestern.

The Brookses’ auto insurance policy with Midwestern provides UIM bodily injury coverage for several vehicles. On the declarations page for the UIM endorsement, the policy states, “Insurance is provided where a premium entry is shown for the coverage.” This page lists “Underinsured Motorist Bodily Injury” with liability limits of $100,000 per-person and $300,000 per-accident. Next to this, a premium amount appears for each of five vehicles, indicating the Brookses pay five UIM premiums for UIM coverage, one for each of the five vehicles. After the Brookses settled with the Lawrence estate, Midwestern paid the Brookses $100,000, declaring this per-person limit is the maximum amount for a single application of the policy’s UIM coverage.

DISCUSSION

The Brookses argue the district court erred in reading their policy to limit their UIM coverage to $100,000, and the Brookses assert they should be permitted to stack the UIM coverage for their five covered vehicles.

As a matter of public policy, Missouri courts have invalidated attempts by insurance companies to prohibit the stacking of uninsured motorist coverage. But because Missouri does not require UIM coverage, the existence of the coverage and its ability to be stacked are determined by the contract entered between the insured and the insurer.

Although this anti-stacking limitation is unambiguous, if a policy has clauses that claim to prohibit stacking and also contain clauses that appear to authorize stacking, coverage is ambiguous and must be resolved in favor of the insured. We understand the Brookses to argue that elements of the UIM endorsement’s declarations page appear to authorize stacking, making the policy ambiguous on this point.

The declarations page reads, “Insurance is provided where a premium entry is shown for the coverage.” Because a premium entry is shown for each of five vehicles, the Brookses maintain they were promised a stack of five UIM coverage limits for any single accident. In their view, the payment of an additional premium for each additional vehicle must signify an increase in the coverage limit; otherwise, the Brookses believe, Midwestern is improperly charging them more in premiums despite providing no more coverage. As part of this argument, the Brookses contend that injuries to Brooks herself would also receive no broader coverage by adding more “covered autos”—she would be covered in whatever car she drives because UIM coverage is floating, personal accident insurance that follows the insured individual wherever she goes rather than insurance on a particular vehicle.

In this case, the declarations page only indicates the vehicles for which “[i]nsurance is provided,” giving readers no hint whether the indicated limits can be combined for a single accident. This is not enough, in view of the clear Limit of Liability provision, to create an ambiguity.

The court’s research revealed no Missouri case allowing stacking solely because multiple premiums were paid. In fact, cases from the Missouri Court of Appeals suggest clear policy language controls even in such situations. Because the policy expressly and unambiguously disallows stacking, the court concluded the claim is without merit.

ZALMA OPINION

As the Eighth Circuit made abundantly clear, merely insuring more than one automobile on a policy and charging a separate premium for each, is not an agreement to stack. Each vehicle was insured separately and each contained policy language specifically refusing to allow stacking of coverages. One limit was purchased for UIM coverage. No where in the policy did the language agree to allow the insured to quintuple the coverage they purchased and for which she did not pay premium.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on To Stack or Not to Stack, That is the Question

Must there be More Than Damage to a Structure to be Structural Damage?

Sturctural Damage Is  Damage Which Impedes the Structural Components from Supporting the Loads That They Are Intended to Support

Sinkholes are a serious problem in Florida. Without warning the earth beneath a structure simply opens up and swallows structures, cars and people. As a result homeowners policies in Florida, by statute, are required to insure against structural damage caused by a sinkhold.

In Hegel v. First Liberty Ins. Corp., — F.3d —-, 2015 WL 821146 (C.A.11 (Fla.) 2/27/15) the Eleventh Circuit Court of Appeal was asked by an insurer to reverse a trial court judgment finding that damage to the insured’s house was “structural damage” and thus covered by the insurance policy.

FACTS

Severin and Stephanie Hegel (the Hegels) sued The First Liberty Insurance Corporation (First Liberty) claiming improper denial of their claim for “sinkhole loss” that had been defined under their homeowner’s insurance policy as “structural damage to the building, including the foundation, caused by sinkhole activity.”  The Hegels claim that First Liberty improperly denied their claim for a “sinkhole loss.” First Liberty argued that the damage to the Hegels’ residence does not qualify as “structural damage,” a term that was not defined in either the policy or the version of the Florida sinkhole-insurance statute applicable to their claim. In February 2014, the district court granted summary judgment for the Hegels, finding that “structural damage” meant any “damage to the structure” and awarding them $166,518.17 in damages. First Liberty timely appealed.

BACKGROUND

The Hegels had a homeowner’s insurance policy with First Liberty for their Spring Hills, Florida residence. This policy insured against “Sinkhole Loss” as an exception to the policy’s exclusion for damage caused by earth movement. Under the policy, “Sinkhole Loss means structural damage to the building, including the foundation, caused by sinkhole activity.” (Emphasis added.)

The version of the Florida statute governing sinkhole insurance that was in effect in 2010 contained the same definition of “sinkhole loss” as the policy did, but similarly failed to define the term “structural damage.” See Fla. Stats. § 627.706(2)(c) (2005). Prior to the statute being substantially amended in 2005, however, the term “sinkhole loss” was defined as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property.” Fla. Stats. § 627.706(3) (1981) (emphasis added).

The Florida Building Code (2004), on the other hand, defined “structural” as it relates to buildings: “For purposes of this code, ‘structural’ shall mean any part, material or assembly of a building or structure which affects the safety of such building or structure and/or which supports any dead or designed live load and the removal of which part, material or assembly could cause, or be expected to cause, all or any portion to collapse or fail.”

THE DAMAGE AND ESTIMATES OF REPAIR

The Hegels allege that, on March 1, 2011, they “discovered damage to their home, including, but not limited to, progressive physical damage to the walls and floors of the residence.” They subsequently submitted a claim for their damages to First Liberty under their homeowner’s policy.

First Liberty retained Structural Engineering and Inspections, Inc. (SEI) to investigate the claim in September 2011. SEI concluded in a report that the Hegels’ residence “DOES NOT MEET the criteria for Structural Damage as defined by Florida Statutes § 627.706 [2011].” (Emphases in original.) The SEI report noted some cracking and other issues, but determined that nothing rose to the level of “structural damage” as defined in the 2011 version of the statute. In addition, SEI listed several possible causes for the observed damage that were unrelated to sinkholes, including differential settlements and ordinary concrete shrinkage.

First Liberty accordingly denied the Hegels’ claim in October 2011, stating that their residence “ha[d] not sustained structural damage to the building or foundation” and that the damage was “related to normal concrete shrinkage, differential settlement, and improper embedment of [the] foundation.”

In November 2011, the Hegels requested a neutral evaluation. Kevin Scott, the neutral evaluator engaged for the claim, issued a report in July 2012. His report concluded that the damage to the Hegels’ residence was “the result of a combination of factors, including sinkhole activity,” but that “the observed distresses to the house can primarily be attributed to minor differential settlement of the structure and normal shrinkage/drying characteristics of the masonry materials.”

ANALYSIS

On appeal, First Liberty sets forth two independent, alternative theories to support its argument that the district court’s contractual interpretation was erroneous:

(1) the plain meaning of “structural damage” cannot be any “damage to the structure” in the context of the contractual phrase “structural damage to the building”; and

(2) the insurance policy incorporates the definitions of “structural” under the Florida Building Code (2004) and “structural damage” as “clarified” by the 2011 amendment to Florida Statutes § 627.706, such that the term “structural damage” must mean more than any “damage to the structure.”

The Eleventh Circuit agreed with First Liberty that the plain meaning of “structural damage” cannot be simply any “damage to the structure” in the relevant context. The parties disagreed on what was the plain meaning of the term “structural damage”.

The Eleventh Circuit, however found no genuine ambiguity exists because construing “structural damage” to mean simply any “damage to the structure” in the context of the insurance policy “is facially unreasonable.” Terms and phrases cannot be viewed in isolation. Courts must construe an insurance contract in its entirety, striving to give every provision meaning and effect.

The district court awarded the Hegels damages for all subsurface and cosmetic repairs based on the parties’ stipulation that there was “physical damage to Plaintiffs’ home.” Because “structural damage” is necessary for the Hegels to recover under the policy, the court must have equated “physical damage to Plaintiffs’ home” with “structural damage to the building.” Equating the two, however, essentially defines “structural damage” as “physical damage” — an untenable result. Such a construction would render the word “structural” meaningless because all property damage is physical, thereby violating a foundational rule of contract construction that every word be given effect.

Florida courts commonly adopt the plain meaning of words contained in legal and non-legal dictionaries. “Structural” is an adjective, defined in the Oxford English Dictionary as “[f]orming a necessary part of the structure of a building or other construction, as distinct from its decoration or fittings.” The noun “structure,” on the other hand, is simply a synonym for a building. Based on these definitions, “damage to the structure” would encompass any physical damage to a building, even if only cosmetic, whereas “structural damage” would exclude damage to a building’s “decoration or fittings.” Although any structural damage would necessarily encompass damage to the building, the opposite is not necessarily true. For example, many types of lesser damage to a building would not be structural damage. To equate “structural damage” with any “damage to the structure,” as the district court did, was untenable.

Kevin Scott, the neutral evaluator and a professional engineer, defined the term as follows: “It’s damage which impedes the structural components from supporting the loads that they are intended to support. That is my engineering opinion of structural damage.”

ZALMA OPINION

Courts may not rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties.  Similarly, an insurer cannot, by failing to define the terms in a policy, insist upon a narrow, restrictive interpretation of the coverage provided. The independent expert found no sinkhole and no stuctural damage. He found cracks and some settling. The trial court erred by concluding that the damage seen, damage to the structure, was structural damage although the building was performing as defined and supporting the loads it was designed to support.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Must there be More Than Damage to a Structure to be Structural Damage?

Should Fraud Be Insurable?

Insurer Seeks Coverage From Its Insurers For Its Fraudulent Acts

Since insurance, by definition, only covers contingent or unknown events. Therefore, by definition intentional or fraudulent acts are not covered. Some insurers, in order to cross every “t” and dot every “i” include an intentional act exclusion to reiterate the common law.

Insurance companies often make unusual decisions when they dispute coverage where one insurer is an insured and others insure it against certain risks. In Cigna Corp. v. Executive Risk Indem., Inc., — A.3d —-, 2015 WL 836933 (Pa.Super.,2/27/15) more than ten years of litigation boiled down to a declaratory relief action seeking coverage for the insured insurer’s admittedly fraudulent acts concerning its employee retirement plan.

FACTS

Cigna Corporation appealed from the order granting summary judgment in favor of Executive Risk Indemnity, Inc. and Nutmeg Insurance Company (Appellees), and dismissing Cigna’s complaint with prejudice. Cigna sought a declaration of coverage under a fiduciary liability policy for ERISA violations found in an underlying federal class action. Appellees denied coverage under a policy exclusion for deliberately fraudulent or criminal acts or omissions. Cigna challenges the trial court’s application of the fraudulent acts exclusion.

This protracted course of litigation has extended longer than a decade. A more complete factual account is contained in Amara v. CIGNA Corp., 534 F.Supp.2d 288 (D.Conn.2008), and Amara v. CIGNA Corp., 559 F.Supp.2d 192 (D.Conn.2008), as well as the Supreme Court’s discussion of the case in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011).

In 1998 Cigna amended its retirement plan, retroactive to January 1, 1998. In simplified terms, Cigna converted its traditional defined benefit pension plan to a cash balance plan. Cigna assured plan participants in the notification materials that the conversion would not affect benefits accrued as of December 31, 1997. In fact, the conversion was presented as an enhanced benefit. Nevertheless, there is no dispute on appeal that under certain circumstances some plan participants would have their expected benefits or accruals reduced or frozen, in a process designated “wear away.” Furthermore, there is no dispute that to avoid an anticipated employee backlash at the wear away phenomenon (and the possible reduction in retirement benefits), Cigna withheld or declined to provide documentation which would have confirmed the risk of reduced benefits.

In 2001, plan participants brought a class action lawsuit on behalf of some 27,000 employees, alleging in essence that the plan amendments had the net effect of reducing benefits or benefit accruals for some plan participants in violation of ERISA. Eventually, Judge Mark R. Kravitz, of the federal district court in Connecticut, decided that Cigna’s changes were permitted under ERISA, but that Cigna or its affiliate pension plan had violated ERISA-required notice provisions by providing misleading summary plan descriptions (SPD’s) and Summaries of Material Modifications (SMM’s) in an apparent effort to forestall objections from plan participants. Judge Kravitz ruled, in part: “[I]n effectuating the conversion to the cash balance plan, CIGNA did not give a key notice to employees that is required by ERISA; and CIGNA’s summary plan descriptions and other materials were inadequate under ERISA and in some instances, downright misleading. … This is where CIGNA failed to fulfill its obligations; the company did not provide its employees with the information they needed to understand the conversion from a traditional defined benefit plan to a cash balance plan and its effect on their retirement benefits.” (emphasis added)

However, the United States Supreme Court vacated and remanded. See CIGNA Corp. v. Amara, 131 S.Ct. 1866 (U.S.2011). In reviewing whether the district court applied the correct legal standard for relief, the High Court reasoned, in part, that the district court relied on the wrong ERISA remedy provision.

CIGNA’s deficient notice led to its employees’ misunderstanding of the content of the contract, and CIGNA did not take steps to correct their mistake. Instead, CIGNA affirmatively misled and prevented employees from obtaining information that would have aided them in evaluating the distinctions between the old and new plans.

While no “single statement … accurately define[s] the equitable conception of fraud,” it generally consists of obtaining an undue advantage by means of some act or omission which is unconscientious or a violation of good faith.  Here, defendants misrepresented the terms of CIGNA’s new pension plan and actively prevented employees from learning the truth about the plan.

During the relevant time period, Cigna was insured under a multi-line insurance policy, including professional liability and fiduciary liability. The primary insurer was Certain Underwriters of Lloyd’s of London. Appellees were excess carriers whose obligations were determined on a follow-form basis to the Lloyd’s of London policy (i.e., tracking the terms, conditions, and exclusions of the primary Lloyd’s policy).

In 2012, Cigna filed the complaint seeking a declaratory judgment to declare coverage under the fiduciary liability provisions of the policy for claims made against it in the underlying class action. Appellees filed a motion for summary judgment. The trial court granted the motion for summary judgment, and dismissed Cigna’s complaint with prejudice.

THE APPEAL

Did the trial court commit an error of law or abuse of discretion in applying the “deliberately fraudulent acts” exclusion to preclude coverage under the Fiduciary Liability coverage part?

ANALYSIS

Whether [the insurer] breached a duty imposed by contract is a legal conclusion

In Pennsylvania the rule is firmly established that it is irrelevant whether or not the insured intended to be bound by the [policy’s] exclusion for intentional torts, since it is against the public policy of the Commonwealth of Pennsylvania to provide insurance coverage for intentional acts.

Notably, Cigna does not dispute that “the Liability Opinion,” Amara, supra (534 F.Supp.2d 288), found that its (Cigna’s) summary plan descriptions and summary of material modifications were “affirmatively and materially misleading.”

Under Pennsylvania law the court’s duty is to ascertain the intent of the parties as manifested in the language of the written instrument. In discharging this duty, the court must view the policy in its entirety, giving effect to all of its provisions. Moreover, an insurance policy, like every other written contract, must be read in its entirety and the intent of the policy is gathered from consideration of the entire instrument.
Cigna’s argument, in effect, would have the court of appeal (and the trial court) read the wrongful acts provision (providing coverage certain acts defined as “wrongful acts”) as negating the fraudulent acts exclusion. The plain meaning of the policy is that the fraudulent or criminal act exclusion operates as an exception to the more general wrongful acts coverage provision. The appellate court read the insurance policy in its entirety, not piecemeal, giving effect to all of its provisions.

The federal district court, and the Second Circuit in affirmance, expressly concluded that Cigna’s conduct was fraudulent.

In addition to an unequivocal finding of fraud in the Amara litigation, we observe that Cigna’s conduct, including affirmative efforts at concealment and intentionally misleading representations that the benefits under the previous plan would not be disturbed, would clearly qualify as fraudulent under Pennsylvania law.

On the issue of finality, the appellate court noted that under Pennsylvania law, the federal courts’ finding of fraud clearly constituted a final judgment.

Pennsylvania case law is unequivocal that reimbursement from insurance for intentional acts is against the public policy of the Commonwealth.  In the context of contracts for insurance, it is against the public policy of Pennsylvania to provide insurance coverage for intentional acts. Cigna attempts to distinguish numerous cases reflecting this policy, and draws a universal, albeit incorrect, conclusion that “there is no blanket public policy in Pennsylvania against insurance coverage for intentional acts.” The court of appeal could find no reason or basis to read an exception into the public policy under the facts of this case.

ZALMA OPINION

This case is an example of an insurer, caught defrauding its employees, sought to obtain from its insurers a coverage it would never have provided to any insured equally convicted of intentional fraud. To drag this dispute over a period of ten years to obtain coverage for intentional and fraudulent acts – acts that have been uninsurable since the inception of modern insurance in the 18th Century. Insurance is a contract of indemnity against damage caused by a contingent or unknown event. Since fraud is always intentional the finding of fraud made it impossible to insure against losses caused by fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Should Fraud Be Insurable?

Only Stupid Fraudsters Get Caught

    Zalma’s Insurance Fraud Letter

March 1, 2015

In the Fifth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on March 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

CURRENT ISSUE

The current issue of ZIFL reports on:

1.    Nine Prior Convictions for Insurance Fraud Had no Deterrent Effect
2.    New From Barry Zalma
a.    Ebooks
i.    Getting the Whole Truth
ii.    Random Thoughts on Insurance – Vol. III
b.    National Underwriter Publishes:
i.    Insurance Claims: A Comprehensive Guide;
ii.    Construction Defects Coverage Guide; and
iii.    Mold Claims Coverage Guide
iv.    All Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    The Insurance Fraud Deskbook
3.    The Biggest Legal Fraud in History
4.    Stupid Is as Stupid Does
5.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to shrink in 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

The last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Innocent Mortgagee Collect – Spouse Not Innocent – February 27, 2015
•    Plea of Guilty to Insurance Fraud Stands – February 26, 2015
•    Does “Notice-Prejudice Rule” Apply to Claims Made Policy? – February 25, 2015
•    Rescission Means Policy Never Existed – February 24, 2015
•    Any Insured Can Change Limits – February 23, 2015
•    Insurance Irrelevant to Subrogation Action – February 23, 2015
•    Can Insured Profit as an Additional Insured? – February 19, 2015
•    Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation – February 19, 2015
•    Comply With Insurance Condition or Lose – February 18, 2015
•    Insurance Policy Means What It Says February 17, 2015
•    B & T Zalma’s Passover 2015 – February 16, 2015
•    Discount for Ace Conference – February 16, 2015
•    Is Pool Pop-Out Excluded? – February 16, 2015
•    Insurance Fraud Fails Occasionally – February 15, 2015
•    Interviewing is an Art & Science – February 13, 2015
•    New E-Books from Barry Zalma – February 12, 2015
•    Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith – February 12, 2015
•    Misrepresent Material Fact – Lose Coverage – February 11, 2015
•    Mailing is All Needed to Perfect Nonrenewal – February 10, 2015
•    It Doesn’t Pay to Seek Penalties Not Owed – February 9, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Only Stupid Fraudsters Get Caught

Innocent Mortgagee Collect – Spouse Not Innocent

Going to Pot

How to Lose Fire Insurance Coverage

Members of the public think that the covenant of good faith and fair dealing only applies to the insurer and the insured can do whatever they want and hide important information from the insurer to avoid increased premium or loss of coverage. In Michigan endorsements added to homeowners policies require the insured to report any change in risk on penalty of losing coverage.

In Nationwide Mut. Fire Ins. Co. v. McDermott.. — Fed.Appx. —-, 2015 WL 756206 (C.A.6 (Mich.) 2/24/15) the insurer paid for a fire loss under a reservation of rights to the insured and mortgagee and then  sought recovery of what it paid to Kasey McDermott for  a fire loss caused by the intentional acts of a co-insured.

FACTS

On January 13, 2012, McDermott’s then-husband, Brien Mathews, accidentally started a fire—while manufacturing and smoking marijuana in their basement—that burned down their home.

McDermott’s insurer, Nationwide Mutual Fire Insurance Company, paid McDermott $160,209.50 for the loss. After learning that Mathews’ marijuana lab caused the fire, however, Nationwide challenged its liability through a declaratory action filed in district court. Following discovery, the district court held: (1) that the policy did not cover McDermott’s loss; and (2) that Nationwide was entitled to subrogation for payments made to McDermott following the fire before it learned of the fire’s cause. On appeal, McDermott challenges the denial of her insurance coverage and her liability to Nationwide for payments made.

In 2010, Brien Mathews, McDermott’s then-husband, became a licensed medical marijuana patient and caregiver pursuant to M.C.L. § 333.26421 et seq. After obtaining his “registry identification card,” Mathews worked “up to eight hours a day” to operate and expand his marijuana operation, an operation that, at the time of the fire, served four patients, including himself. From 2010 to 2012, Mathews spent upwards of $20,000 on lab equipment, purchasing dirt, fertilizer, and “[t]ons of lighting.” The operation took place almost exclusively in two rooms in the basement of McDermott’s home, though occasionally Mathews stored marijuana in the garage.

THE DANGER OF PRODUCING HONEY OIL

After Mathews began growing and distributing marijuana, he learned of a process known as “butane extraction,”  which involves drawing liquid butane through chopped marijuana leaves to extract THC and produce “honey oil,” a THC-rich substance users smoke. Honey oil would sell for four to eight times as much as marijuana. Mathews understood that butane extraction was risky, because “butane was highly flammable.” He knew that he “didn’t want to have any source of ignition around the butane.” He also knew “not to smoke” when he was using butane, and to keep it away from “open flame” and “any object that sparks.”

On January 13, 2012—the day of the fire—Mathews was performing butane extractions when a flame he had lit to smoke some of the honey oil ignited butane that had not yet evaporated. The resulting fire consumed the house and most of their possessions.

Although McDermott knew that Mathews had been growing marijuana in the basement, she claims that she did not know about the butane extractions or that butane was flammable.

At the time of the fire in January 2012, McDermott had a Nationwide Homeowner Policy that provided coverage for “accidental direct physical loss to [the] property” described therein. The policy specified which types of losses were not covered, such as those caused by an intentional act of the insured or those “occurring while hazard [was] increased by a means within the control and knowledge of an insured.” Further, by a Michigan Amendatory Endorsement to the policy, Nationwide informed McDermott that she had “a duty to notify [Nationwide] as soon as possible of any change which may affect the premium risk under th[e] policy,” including “changes … in the occupancy or use of the residence premises.”

The district court found that the policy did not cover McDermott’s losses because the fire was not an accident, and, in any event, McDermott was barred from recovery under the Increased Hazard exclusion; and as a result, Nationwide was entitled to subrogation in the amount of $139,841.04 for payments made on McDermott’s behalf.

INNOCENT CO-INSURED CLAIMS

McDermott challenges the district court’s ruling, arguing that, as an innocent co-insured under Michigan law, she is entitled to recover under the policy despite her then-husband’s conduct, and should not be “required to reimburse Nationwide.”

ANALYSIS

The appellate court concluded that because McDermott failed to notify Nationwide of the change in use of her basement—notification expressly required by the policy—the district court correctly denied coverage. The “Michigan Amendatory Endorsement” to McDermott’s policy provided that McDermott had a duty to notify Nationwide as soon as possible of any change which may affect the premium risk under the policy, including, but not limited to, changes in the occupancy or use of the residence premises.

McDermott failed to fulfill the notification condition by not informing Nationwide of Mathews’ marijuana growing operation. During their depositions, both McDermott and Mathews admitted that they had not informed Nationwide that in 2010, Mathews set up a marijuana growing operation in their basement, effectively “changing” the use of the basement from an area “simply used for storage and [their] washer and dryer to an area where [Mathews was] manufacturing and processing marijuana.” Because McDermott failed to satisfy the notification condition in her policy and, by so doing, knowingly omitted—in her representations to Nationwide—a “material fact … during the policy period.” As a result she is not entitled to recovery and is obligated to reimburse Nationwide the money it paid to the mortgagee.

The ruling was required because Nationwide was not informed, as required by the policy, that:

1.  Mathews had approximately 28 marijuana plants growing in the basement.

2.  Two rooms in the basement had been converted into growing rooms—with one housing plants in the “vegetative state” and the other serving as the “flower room”.

3.  Mathews had spent upwards of $20,000 on lab equipment, including “[t]ons of lighting” and numerous cans of butane.

4.  According to Nationwide’s representative, had McDermott informed Nationwide of Mathews’ marijuana operation, Nationwide would have declined coverage altogether, because such an operation is an increased hazard and “an unacceptable risk.”

It is impossible to hold an insurance company liable for a risk it did not assume. [Auto–Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich.1992).] Because McDermott is not entitled to recover under the policy, Nationwide is also contractually entitled to subrogation.

The mortgage clause clearly and unambiguously provides, “[i]f [Nationwide] pay[s] the mortgagee for loss and den[ies] payment to you[,] … [Nationwide is] subrogated to all the rights of the mortgagee granted under the mortgage on the property.”

ZALMA OPINION

This case proves, without using the words, that the covenant of good faith and fair dealing applies equally to the insured as it does to the insurer. The insured was under a mandatory duty to advise the insurer that they were using a highly flammable substance – butane – in their basement as part of a marijuana growing and processing operation. Had the insurer known the true facts it would never have insured the risk. Since it paid the innocent mortgagee it was entitled to reimbursement from the insured’s including the claimed innocent spouse who failed to advise of the change in risk.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Innocent Mortgagee Collect – Spouse Not Innocent

Plea of Guilty to Insurance Fraud Stands

Insurance Fraud Results in Eight Years in Prison

When a party pleads guilty to multiple crimes in open court and with the advice of competent counsel he or she can expect to spend time in jail or prison and to have no opportunity to withdraw the plea. However, in People v. Dobson, Not Reported in Cal.Rptr.3d, 2015 WL 466810 (Cal.App. 4 Dist., 2/3/15), the defendant attempted to withdraw his plea after being sentenced to eight years in prison claiming that his lawyer was not competent to adequately represent him.

Defendant and appellant Randy Kenneth Dobson pled guilty to arson of an inhabited structure,  presenting a false insurance claim, presenting a false statement in conjunction with an insurance claim, possession of methamphetamine, and possession of drug paraphernalia. The trial court imposed the maximum it said it would consider, which was eight years in state prison. Defendant orally moved to withdraw his guilty plea, but the trial court denied the request. His sole contention on appeal is that this act constitutes an abuse of discretion.

FACTS

On December 26, 2011, a fire broke out at a mobilehome owned by codefendant Lori Jo Alhadeff. The Riverside County Fire Department extinguished the blaze. California Department of Forestry and Fire Prevention conducted an investigation in which it concluded that two people had been present in the residence prior to the fire. It determined that the fire was the result of arson.

Investigators found a glass pipe often used for smoking methamphetamine, which contained a white crystalline substance. Defendant, whom Alhadeff described as a “casual fling,” arrived at the scene of the fire on the day it occurred. When questioned by investigators, defendant stated he had been at Aldaheff’s residence the day before the fire but insisted he was only there for a couple of hours in the afternoon. He denied that the pipe belonged to either him or Alhadeff. He asserted he “wasn’t anywhere near” Alhadeff’s mobilehome when the fire began and was instead at a friend’s house playing ping-pong.

In addition to appearing at the scene of the fire and speaking to investigators, on the day of the fire defendant also left “several urgent messages” with Alhadeff’s insurer indicating that her house had burned down but that she was “too upset to call.” Approximately an hour after an insurance representative told defendant she could not answer his questions because he was not on the policy, defendant and Alhadeff appeared at the insurer’s office to file a claim. Defendant prompted Alhadeff to ask questions about valuing the claim at $554,000. Suspicious of the fire’s origin, the People obtained and executed a search warrant for defendant and Alhadeff’s hotel room, as well as the latter’s vehicle and residence was issued.

Among other items, officers seized “a document strategizing the insurance fraud, in what appears to be [defendant’s] handwriting”; glass pipes; a substance that later field-tested positive for methamphetamine; correspondence between defendant and Alhadeff “detailing how to execute the plan to obtain the insurance claim”; and a binder and folder containing insurance paperwork. At some point during the investigation, law enforcement even discovered “a lighter engraved with what is believed to be the inception date of the arson scheme.” Once in custody and Mirandized defendant admitted that he had helped Alhadeff with her insurance claim because she was “not very smart” and he had experience in handling similar claims because of a house fire.

At the preliminary hearing on March 1, 2013, defendant entered a plea of guilty on all counts. Defendant executed a plea form explicitly stating that the maximum sentence he could serve was 11 years two months, that his entitlement to formal probation would be “decided by the court,” and the term he would serve in custody would not exceed eight years in state prison.Defendant told the court that he had a “clear mind” and understood what was happening, he understood that a conviction would violate any probation or parole from previous cases, and he had no questions about the plea form he had executed. When the prosecutor asked if he had committed the acts alleged in each count, he answered, “Yes.” The court asked, “Given our discussion, how do you plead, Mr. Dobson, to each of these counts?” Again without questions or caveats, defendant answered, “Guilty, Your Honor.”

Defendant did not appear at his sentencing hearing, and a bench warrant issued. Later the trial court filed a letter defendant had written to the trial judge indicating that he had not appeared “because this case has been packed with police misconduct and attorney misconduct and would have sent me straight to prison where [he would be] unable to fight for what is true and correct.” He then asserted that defense counsel promised him probation, with no more than one year in jail if he pled guilty, and that “state prison ha[d] been removed from the table.” A hearing was held and defense counsel explained that he and his client were present because defendant had indicated “he wished to explore withdrawing his plea” on the ground of ineffective assistance of counsel.

Defense counsel provided a lengthy description of events preceding defendant’s entry of a guilty plea. The trial court then repeated that it had reviewed the transcript from the preliminary hearing and concluded that defendant received oral advisements that he could face eight years in prison.

ANALYSIS

Defendant contends he should have been allowed to withdraw his guilty plea because: (1) he only had a few minutes to confer with trial counsel regarding his charges and possible defenses; (2) his statement that he was not at the scene of the fire constitutes proof of factual innocence; (3) he did not understand the plea terms; and (4) he could not read the plea form because he lacked his eyeglasses. The appellate court held that the trial court did not abuse its discretion in finding that defendant failed to prove by clear and convincing evidence that either contention provided good cause to withdraw his plea. In fact, reviewing his arguments he had no evidence, just a panoply of whines.

To establish good cause to withdraw a plea it must be shown that defendant was operating under mistake, ignorance, or any other factor overcoming the exercise of his free judgment. However, a plea may not be withdrawn simply because the defendant has changed his mind.   In this case, defendant had ample opportunity to consider the terms of the deal the court offered him. He pled guilty nine months after initially pleading not guilty, and defense counsel stated that he and defendant “had discussed the case for months” before entry of a guilty plea. Also, the trial court told defendant multiple times that he could serve up to eight years in state prison if he pled guilty. The court could not see any clear and convincing evidence that defendant’s plea was insufficiently knowing and voluntary.

Contrary to Defendant’s claims, a person is guilty of arson when he or she willfully and maliciously sets fire to or burns or causes to be burned “or who aids, counsels, or procures the burning of, any structure, forest land, or property.”

Defendant made no objection when the court informed him he could face up to eight years in state prison, and he asked no questions before stating, “Guilty, Your Honor,” when asked what his current plea was.

ZALMA OPINION

The Defendant helped the victim of his arson with her claim because she was not too smart. He accepted a plea, failed to appear for his scheduled sentencing, claimed his lawyer was inadequate and claimed he had no idea what he was agreeing to since he couldn’t read the agreement without his glasses. Regardless, as the court noted, the agreement was read to him aloud and the judge advised the insured that he was guilty.
A person told by a judge that he could be sentenced to 8 years in jail should never plead guilty if he believes he is innocent when there is a court reporter available to take down every word spoken when his plea of guilty was taken in open court. Apparently Mr. Dobson was even less intelligent than the woman he convinced to try an arson for profit scheme. He will spend eight years in prison.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Plea of Guilty to Insurance Fraud Stands

Does “Notice-Prejudice Rule” Apply to Claims Made Policy?

Claims Made Policies Are Different From Occurrence Policies

An insured brought a state-court action against a claims-made directors and officers (D&O) liability insurer to recover for breach of contract in connection with insurer’s denial of claim for reimbursement of legal fees and settlement payment. Insurer removed case. The United States District Court for the District of Colorado granted insurer’s motion to dismiss. Insured appealed. The federal court certified questions to the Colorado Supreme Court about the application of the notice-prejudice rule to a claims made policy.Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests.

In Craft v. Philadelphia Indemnity Insurance Company, — P.3d —-, 2015 WL 658785 (Colo., 2/17/15) the Colorado Supreme Court noted that a claims-made policy covers only those claims brought against the insured during the policy period and reported to the insurer by a date certain, typically within a brief window following the expiration of the policy period. The date-certain notice requirement effectuates the parties’ arrangement and limits the insurer’s liability to those claims reported within the time specified.

In this case, the policy required the insured to give prompt notice of a claim; specifically, notice “as soon as practicable” after learning of the claim. The policy also required the insured to give notice of the claim by a date certain; specifically, “not later than 60 days” after the expiration of the policy. Near the end of the one-year policy period, a company officer was sued for alleged misrepresentations he made during a merger. Unaware of the insurance policy, the officer defended himself against the suit. When he learned of the policy, approximately sixteen months after the policy period had expired, he immediately contacted the insurer but did not receive a response. The officer later settled the suit. He then sued the insurer for denying coverage under the policy. The district court granted the motion to dismiss, rejecting the officer’s argument that the notice-prejudice rule applied to the claims-made policy issued by the insurer. The officer appealed, and the case is now before the Tenth Circuit who submitted questions to the Colorado Supreme Court.

THE QUESTIONS

(1) whether the notice-prejudice rule applies to claims-made liability policies in general; and

(2) if so, whether the rule applies to both types of notice requirements in those policies.

Craft v. Phila. Indem. Ins. Co., 560 Fed.Appx. 710, 715 (10th Cir. 2014). The Supreme Court limited its analysis to the date-certain notice requirement.

FACTS

Dean Craft, appellant in the Tenth Circuit Court of Appeals, was the principal shareholder and president of Campbell’s C–Ment Contracting, Inc. (“CCCI”). At the time he was sued, Craft did not know that CCCI and Suburban had purchased directors and officers liability insurance from appellee Philadelphia Indemnity Insurance Company (“Philadelphia”).

As an express condition precedent to coverage, the policy required the insured to provide written notice to Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired. The relevant policy period for this coverage was November 1, 2009 to November 1, 2010.

Craft did not learn of the insurance policy until March 2012, more than a year after the policy period in which the suit was filed had expired, nor did he or the company give notice to the insurer.

ANALYSIS

In resolving this issue, the Supreme Court reviewed the development of Colorado’s notice-prejudice rule and the salient differences between occurrence and claims-made liability insurance policies. In either type of policy, a “prompt” notice requirement protects the insurer’s interest in investigating and defending a claim. Unique to a claims-made policy, however, a “date-certain” notice requirement serves only to effectuate the agreed-upon temporal limits of coverage. Thus, to excuse notice given after the expiration of the reporting period would rewrite a fundamental term of the insurance contract.

An insurer is prejudiced by an insured’s breach of a policy requirement where the breach defeats the purposes of the requirement. Such a notice requirement protects the insurer’s opportunity to investigate and defend a claim adequately. Yet where the insurer in fact has that opportunity, the rationale for strict enforcement of such a notice requirement is absent.

In Colorado there is a presumption of prejudice to the insurer in instances where the insured provides notice after disposition of the liability case, the insured has the burden of going forward with evidence to dispel this presumption, if such evidence is presented, the presumption loses any probative force it may have, and it is then up to the insurer to go forward with the evidence that actual prejudice existed.

THE DIFFERENCES BETWEEN “OCCURRENCE” AND “CLAIMS MADE” POLICIES

The Colorado Division of Insurance defines an occurrence policy as “an insurance policy that provides liability coverage only for injury or damage that occurs during the policy term, regardless of when the claim is actually made.” 3 Colo. Code Regs. 702–5:5–1–8 (2014). A claims-made policy, by contrast, is “an insurance policy that provides coverage only if a claim is made during the policy period or any applicable extended reporting period.”  Thus, occurrence policies and claims-made policies are almost the mirror image of each other.  Claims-made policies provide only potential coverage because timely notice of the claim to the insurer is a prerequisite to coverage under such policies. In other words, coverage is triggered only if the insured provides timely notice of the claim.

THE REASONS FOR CLAIMS MADE POLICIES

Claims-made policies proliferated in the 1970s as a solution to the problems many insurers were facing in writing professional malpractice insurance policies. In setting premiums for occurrence policies, underwriters had difficulty predicting decades into the future considerations such as inflationary trends, jury verdicts that outpaced inflation, and new theories of liability. Faced with increasing costs of doing business, the typical insurer either had to raise premiums, offer fewer products, or withdraw from the professional liability insurance market altogether. With claims-made policies, however, the risk to the insurer passes when the policy period expires. Given this limitation, a more predictable rate structure could be assembled and justified for such policies, and, thus, rates bore a more reasonable relationship to the current fiscal situation in a given state.”

Both occurrence and claims-made policies typically contain a requirement that the insured notify the insurer of a claim or potential claim “promptly.”Claims-made policies typically contain a second type of notice requirement not found in occurrence policies: the requirement that the insured provide notice of a claim within the policy period or a defined reporting period thereafter. Such a date-certain notice requirement fulfills a very different function than a prompt notice requirement. The date-certain notice requirement defines the temporal boundaries of the policy’s basic coverage terms. For this reason, although excusing late notice and applying a prejudice requirement make sense in the context of a prompt notice requirement, extending such concepts to a date-certain notice requirement would defeat the fundamental concept on which coverage is premised.

The Supreme Court concluded that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy, so advised the Tenth Circuit, who now will invariably adopt the position of the Colorado Supreme Court and will affirm the District Court’s decision to rule against the insured.

ZALMA OPINION

The notice-prejudice rule has an important function with regard to an occurrence policy when prejudice cannot be shown. It has no place when it comes to a claims-made policy’s date-certain notice requirement since to do so would rewrite the policy and defeat the purpose of the contract.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Does “Notice-Prejudice Rule” Apply to Claims Made Policy?

Rescission Means Policy Never Existed

Innocent Co-Insured Doctrine Does Not Apply to Rescission

Legal malpractice insurance policies are purchased by one member of a law firm on behalf of all partners and associates in the firm. The application for insurance or renewal is the basis on which the insurer makes a decision to insure or not insure a lawyer or law firm. The concept of utmost good faith requires that the lawyer signing the application or otherwise seeking renewal of an insurance policy must be frank and totally honest in response to the inquiries made by the application.

In Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, — N.E.3d —-, 2015 IL 117096, 2015 WL 728111 (Ill., 2/20/15) the Illinois Supreme Court was called upon to decide the propriety of an appellate court decision applying the Innocent Co-Insured Doctrine to rescind a policy as to the lawyer who signed the application but force the policy to stay in effect as to all other lawyers in the firm.

THE DECLARATORY RELIEF ACTION

Plaintiff Illinois State Bar Association Mutual Insurance Company (ISBA Mutual) filed a complaint for rescission and other relief against the Law Office of Tuzzolino & Terpinas (firm); Sam Tuzzolino and Will Terpinas, Jr., partners in the firm; and Anthony (“Antonio”) Coletta, the plaintiff in an underlying legal malpractice action against Tuzzolino, Terpinas and the firm. In its complaint, ISBA Mutual sought rescission of the legal malpractice insurance policy it had issued to the firm, alleging that Tuzzolino’s material misrepresentation on an ISBA Mutual renewal application induced ISBA Mutual to issue the policy. Ruling on motions for summary judgment, the circuit court of Cook County granted ISBA Mutual’s motion and rescinded the policy. Terpinas and Coletta appealed that judgment, arguing the rescission should not apply to Terpinas. The appellate court agreed and reversed the judgment of rescission as to Terpinas. 2013 IL App (1st) 122660, ¶¶ 38, 46, 377 Ill.Dec. 299.

BACKGROUND

In the underlying legal malpractice action, Coletta alleged that Tuzzolino and the firm represented either Coletta or his home construction business in various legal matters from 2002 to 2008, and that Tuzzolino mishandled some of those matters, including the “Baja litigation.”

Tuzzolino also allegedly suggested that Coletta try to recover his losses by suing the lawyer who handled a Baja bankruptcy in 1999. Tuzzolino filed a legal malpractice action against the bankruptcy lawyer at the end of 2005, but the case was dismissed six months later on the ground that it was barred by the statute of repose for legal malpractice claims. Coletta alleged Tuzzolino failed to inform him that the suit had been dismissed, allowing Coletta to believe it was proceeding toward trial. Coletta alleged that in February 2008, after he learned the case had been dismissed, he confronted Tuzzolino with that knowledge. According to Coletta, Tuzzolino offered to pay him $670,000 to settle any potential claim for legal malpractice arising out of Tuzzolino’s work on the suits against the Baja coventurers and the bankruptcy attorney.

Less than three months later, shortly before the April 30, 2008, expiration of the firm’s 2007–08 legal malpractice policy with ISBA Mutual, Tuzzolino completed a Renewal Quote Invoice and Acceptance Form for the purchase of a policy meant to cover the firm during the 2008–09 policy year. Question No. 4 on the form asked: “Has any member of the firm become aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise to a claim that has not been reported?” Tuzzolino checked the “no” box corresponding to this question. He signed his name as “owner/partner” and dated the form April 29, 2008.

Terpinas allegedly learned of Tuzzolino’s malfeasance about a month later, on June 10, 2008, when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to ISBA Mutual. In May 2009 ISBA Mutual brought suit seeking rescission and other relief against Tuzzolino, Terpinas, the firm, and Coletta.

Terpinas and Coletta, but not the firm, appealed that judgment, arguing that Terpinas was an “innocent insured” who was not to blame for Tuzzolino’s misrepresentation and the policy should not have been rescinded as to him. The appellate court agreed with that argument and concluded that a common law “innocent insured doctrine” applied to misrepresentations made on the renewal application. The court held that this doctrine preserved Terpinas’s coverage even as Tuzzolino’s was properly rescinded.

ANALYSIS

The question presented is whether Illinois law allows rescission of an insurance policy in its entirety for a material misrepresentation on the written application.

Summary judgment is appropriate when the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law

Section 154 of the Insurance Code provides: “No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefor. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company.” (emphasis added)

The Supreme Court noted that section 154 expressly refers to misrepresentations “made by the insured or in his behalf” — that is, not necessarily by the insured personally.

ISBA Mutual points to Home Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir.1992), which observed that rescission of an insurance policy because of a misrepresentation on the application is distinctly different from the denial of insurance coverage because of excluded wrongdoing.

Rather than the innocent insured doctrine, Dunn concerned a “waiver of exclusion” clause in the policy that the insurer sought to rescind. Dunn involved a “crooked attorney” who obtained a legal malpractice policy for himself and the other attorneys associated with his firm, but “understandably” failed to disclose his own criminal activities on the policy application. One of the other attorneys in the firm, who had no involvement in the policy application or his colleague’s misrepresentation, was sued for legal malpractice unrelated to his colleague’s criminal activities. The insurer sought rescission of the policy due to the material misrepresentation on the application. The insured who was not involved in the misrepresentation, as well as the underlying malpractice plaintiffs, objected to the rescission of the policy as to that attorney, relying on the waiver-of-exclusion provision.

The Seventh Circuit found it irrelevant that no other attorney in the firm took part in the crooked attorney’s fraud, or even knew of it. “Though the other attorneys did not intend to deceive, the falsehood on the application is fatal. [The crooked attorney’s] misrepresentation caused [the insurer] to issue a policy to all the attorneys that otherwise would not have been forthcoming.”

The innocent insured doctrine does not apply in the rescission context. Unlike in rescission cases, the innocence of an insured matters a great deal when another insured’s wrongdoing triggers a policy exclusion, and a dispute arises over whether the insurer has a duty to defend the innocent insured under a policy that undisputedly was in effect. A misrepresentation on the policy application goes to the formation of the contract. The Supreme Court concluded that the appellate court erred in applying the innocent insured doctrine in this case. That doctrine is relevant to issues of policy exclusions and insurance.

However, the innocent insured doctrine is not suited to rescission and contract formation.
Section 154, which establishes public policy on the issue of rescission, allows rescission when the relevant requirements are met. When the requirements were satisfied rescission was proper and the court, granting rescission, establishes that the contract of insurance never came into force so there was no insured at all, let alone an innocent insured.

ZALMA OPINION

Rescission is an ancient equitable remedy allowing parties to an insurance contract to be placed in the status they were in before the policy came into effect because of fraud, material misrepresentation or concealment of material fact. In this case the insured who signed the application for insurance knew that a client was claiming he had committed malpractice, had made an offer to settle the potential malpractice claim, and still answered the question about potential claims in the negative. He intentionally misrepresented material facts and removed from the insurer the right to evaluate the risk it was asked to take. That fraud should not be honored. The Illinois Supreme Court agreed and rescinded the policy from its inception.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Rescission Means Policy Never Existed

Any Insured Can Change Limits

Jury’s Finding Is Affirmed

When two or more people are named insured’s on a policy of insurance any one may, by the terms of the contract of insurance, ask the insurer to amend or modify the policy. When a loss occurs, the remaining insured, who did not know of the change, will argue that the change should not be enforced because he or she was not aware of the change. This is especially so when the policy limits are reduced.

In Brown v. Government Employees Ins. Co., Not Reported in A.3d, 2014 WL 7882070 (N.J.Super.A.D., 2/17/15) a New Jersey appellate court was asked to reverse a trial court verdict in favor of the insurer and grant the plaintiff a new trial because the plaintiff did not agree to a reduction in policy limits.

FACTS

This litigation arises from the tragic accidental death of a young woman and her mother. On February 14, 2011, twenty-four-year-old Jaclyn McVaugh was driving her mother’s 2005 Mitsubishi Galant heading northbound on Key Road in Winslow Township when she rear-ended a Ford Expedition, causing her car to cross over the center lane and collide with a Honda “which was stopped or almost stopped in the southbound passing lane” of Key Road. McVaugh’s mother, Frances Mitchell–Brown, was seated in the front passenger seat; McVaugh’s three-year-old daughter was in a child-seat in the rear passenger compartment. Neither one of the adult occupants of the Mitsubishi were wearing their seatbelts. Both died. The child survived.

At the time of the accident, the Mitsubishi was insured by defendant Government Employees Insurance Company (GEICO). Plaintiff Randy Brown was married to Mitchell–Brown; McVaugh was his stepdaughter. Plaintiff and Mitchell–Brown were the only named insureds on the Mitsubishi policy issued by GEICO. Plaintiff sued GEICO claiming the coverage limit on the Mitsubishi policy was improperly reduced without the authorization of one of the two named insureds. The case was tried before a jury resulting in a verdict in favor of GEICO.

In June 2008, plaintiff purchased from GEICO an insurance policy for his own car, a 2005 Mitsubishi Gallant. Plaintiff testified that he worked in the automobile industry in various capacities for nearly thirty-seven years. He testified that his employment experience made him “absolutely” familiar with coverage limits and automobile insurance policies. Thus, he requested “maximum coverage” when he purchased his policy from GEICO.

The first auto policy GEICO issued to plaintiff had a six-month coverage period that began on June 17, 2008 and ended on December 17, 2008. Thereafter, the policy renewed in six-month intervals. The policy listed plaintiff and his wife Mitchell–Brown as the named insureds. In this capacity, each had the authority to unilaterally change the terms of the policy, including the coverage limit, without the other’s knowledge or approval.

In November 2010, GEICO records reflect certain specific changes were made to plaintiff’s Mitsubishi policy. Plaintiff does not dispute that the policy was amended. However, he contended before the jury that these changes or amendments to the policy were not made by one of the two named insureds.

During the November 24, 2010 phone call, the person identified as plaintiff’s wife made a number of changes to the policy. According to GEICO’s representative, records indicated that “ ‘Ms. Policyholder requests to add daughter Jaclyn McVaugh to policy.’ And ‘Jaclyn’s driver’s license is suspended. Advised policyholder to have daughter clear.’ “ Jaclyn’s vehicle, a 2001 Toyota Camry, also became insured under the policy, and Jaclyn’s email address, jaclyn_meah@yahoo.com, was added as a contact source. GEICO’s records indicate that new “I.D. cards [were] being mailed at 12:59 p.m …. for the 2001 Toyota.” The cards were mailed to plaintiff’s home and emailed to Jaclyn McVaugh’s personal email address.

One of the key changes made to the policy concerned the coverage. Bodily injury liability limits were reduced from $250,000/$500,000 to $15,000/$30,000, to take effect at the time of the policy renewal scheduled for December 17, 2010. With respect to PIP coverage  an automated coverage adjustment form was signed and effective date 12/17/10. That refers to the coverage selection form, the e-signed coverage selection form for the reduction of the PIP option from … 250,000 to … 15,000. The change in PIP coverage required the insured’s signature to take effect. According to GEICO records, “Randy Brown” e-signed the documents on the GEICO website.

Plaintiff testified and argued to the jury that this should be considered as evidence of an improper modification of the policy because he always used his middle initial when signing his name. In rebuttal, Lubow testified that it is not uncommon for policy holders to make changes.  Policy holders routinely drop coverages from $250,000/500,000 to $15,000/30,000.

A GEICO policy with a declarations page dated November 25, 2010, was mailed to plaintiff’s residence. Lubow explained that “[a] declarations page is issued by GEICO to its policyholders.  When the PIP coverage limits were subsequently lowered, the premium decreased to $892.50.

Without a competent evidential basis, plaintiff testified that he believed Jaclyn took his credit card and made the payment without his knowledge or consent. GEICO’s records indicate payments were made on plaintiff’s policy via credit card on at least three other occasions, including twice after the death of Jaclyn and plaintiff’s wife.

The jury returned a 7–1 verdict in favor of GEICO, finding it had not “improperly lowered the automobile insurance coverage limits for [plaintiff] and his wife, Frances Mitchell–Brown.” The trial judge thereafter denied plaintiff’s motion to set aside the jury’s verdict as against the weight of the evidence.

ANALYSIS

Plaintiff failed to provide or otherwise include in the appellate record either the trial judge’s written statement of reasons explaining the basis for his decision to deny plaintiff’s motion for a new trial, or a transcript containing the judge’s oral decision.

The appellate court is bound to defer to the trial court’s “feel of the case” derived from the judge’s personal observations of the witnesses’ testimony during the trial and other intangible factors that cannot be duplicated by or extracted from the examination of the transcribed record. The “feel of the case” is not just an empty shibboleth—it is the trial judge who sees and hears the witnesses and the attorneys, and who has a first-hand opportunity to assess their believability and their effect on the jury. It is the judge who sees the jurors wince, weep, snicker, avert their eyes, or shake their heads in disbelief. Those personal observations of all of the players is the feel of the case to which an appellate court defers.

Determining the credibility of a witness’ testimony is a function exclusively delegated to the jury. Given plaintiff’s failure to provide the appellate court with the trial judge’s reasons for denying his motion to set aside the jury’s verdict.

The appellate court emphasized that the jury considered the evidence presented by the parties over two days of trial. This evidence consisted primarily of the testimony from two witnesses: plaintiff and GEICO’s senior underwriter.

Based on this evidence, the jury found plaintiff did not prove, by a preponderance of the evidence, that GEICO improperly lowered the automobile insurance coverage limits in the policy issued to plaintiff and his wife, the late Frances Mitchell–Brown. It was undisputed that plaintiff and decedent were listed as the named insureds under the original policy. They were individually vested with the authority to unilaterally amend the coverage under the policy. GEICO provided competent evidence at trial and properly admitted documentary evidence, that plaintiff’s wife lowered the bodily injury liability coverage prior to the accident on February 14, 2011.

ZALMA OPINION

This is clearly a case of sour 20/20 hindsight. The plaintiff who suffered a severe loss of a wife and step-child learned after their death, that his wife had reduced the limits of their policy instead of keeping the high limits he had originally purchased. Of course, he never complained about the lower premium, until after the accident. Since the jury and judge saw the witnesses and ruled in favor of GEICO, the appellate court had no option but to affirm because the plaintiff produced no convincing evidence that GEICO did anything wrong when it accepted the wife’s request to reduce limits and premium.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Any Insured Can Change Limits

Insurance Irrelevant to Subrogation Action

Subrogation is Only Either a Tort