The Limits on An Insurance Agent’s Duty

Broker’s or Agent’s Duty Not Unlimited

When a person demands a particular amount of insurance coverage, when the agent obtains the coverage demanded, and then there is a loss where coverage is inadequate buyer’s remorse sets in and litigation is commenced. In Duffy v. Certain Underwriters at Lloyd’s of London Subscribing to Policy Number 09ASC185004, Not Reported in A.3d, 2014 WL 3557861 (N.J.Super.A.D. 2014) a New Jersey appellate court was faced with a need to resolve a dispute between a dissapointed insured and her broker.

FACTS

Plaintiff owned three residential dwellings: her primary home in Trenton; a small beach bungalow in Seaside Park; and a three-story Victorian home in Ocean Grove. The Ocean Grove property suffered an electrical fire and is the subject of the litigation (the property). Plaintiff procured a homeowner’s policy issued by Lloyd’s of London (the policy), insuring the home against property and casualty losses. The amount of coverage available through the policy was $150,000. The amount of fire damage exceeded the policy limits. Plaintiff filed her complaint alleging defendant’s procurement of inadequate insurance coverage constituted professional negligence and caused her loss.

Defendant began as plaintiff’s insurance broker in 1996, when it acquired another insurance agency that had been servicing plaintiff’s needs. In 2002, plaintiff received a notice from Newark Insurance Company (Newark) that her homeowner’s insurance would not be renewed effective March 10, 2003. Plaintiff contacted defendant and spoke to Patricia Browne, a licensed insurance producer and defendant’s Eatontown office manager, who ultimately placed plaintiff’s new coverage.

During her deposition, Browne testified the policy with Lloyd’s, that she never met plaintiff, but spoke to her approximately three or four times regarding the property and the desired coverage.

Plaintiff expressed she “wanted those homes to remain covered under the amount that was on the policy at that time [,]” that is, under the Newark policy, because they were second homes and unencumbered by mortgages.

Regarding the property, Browne testified she asked plaintiff for the total square footage of the dwelling, the age of the property, the number of rooms, its distance from a fire hydrant and from a fire department. Browne stated plaintiff told her the property totaled 900 square feet (it was actually closer to 1900 square feet) and advised the home was built in 1955 (when it was constructed in approximately 1875). Brown used a calculator provided by another insurer to determine that $150,000 was adequate for a 900 square foot dwelling.

Browne sent plaintiff the drafted homeowner’s application and requested she correct any errors. Plaintiff signed and returned her application for insurance. Browne advised the company may ask plaintiff to confirm the adequacy of the coverage each year.

The policy with Lloyd’s included: (1) dwelling in the amount of $150,000; (2) other structures in the amount of $15,000; (3) personal property in the amount of $25,000; and (4) loss of use in the amount of $30,000. The annual premium was $833.27. The policy was renewed each year thereafter, utilizing the same coverage limits and was in place when the fire loss occurred.

After the fire plaintiff obtained an estimate, which reported the property’s repair and restoration cost at approximately $460,000. Plaintiff filed her professional negligence action against Lloyd’s and defendant. Ultimately, Lloyd’s tendered the policy limits, with accrued interest, in satisfaction of plaintiff’s claim. The action proceeded against defendant.

TRIAL COURT DECISION

Plaintiff alleged defendant breached its fiduciary duty to protect her interests. Plaintiff believed Browne confused the square footage of the beach bungalow, which is 936 square feet, and suggested this error resulted in the inadequate protection for the property. Defendant moved for summary judgment. Focusing on whether defendant had a duty that was breached and proximately cause plaintiff’s loss, the judge concluded that although an insurance broker has a duty to act with reasonable skill and diligence, the duty is not unlimited, and did not include an obligation “to advise an insured to consider higher amounts of homeowner’s insurance.”

ANALYSIS

In this matter, plaintiff identifies the defense expert’s deposition as the only discovery not completed. The expert’s opinion as to the duty defendant owed plaintiff had already been articulated in his written report, which offered no independent information related to the facts surrounding the amount of homeowner’s insurance sought by plaintiff. The motion judge properly found plaintiff could not identify any facts expected to be obtained during the expert’s deposition that would obviate consideration of summary judgment.

It is well-settled that to render a person liable on the theory of negligence there must be some breach of duty, by action or inaction, on the part of the defendant to the individual complaining, the observance of which duty would have averted or avoided the injury. Determination of whether a duty exists turns on questions of fairness and policy. A court must weigh the relationship of the parties, the nature of the risk, and the public interest in the proposed solutions. The existence of a duty to exercise reasonable care to avoid a risk of harm to another is always a question of law left to the court not one of fact.

Insurance intermediaries in this State must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. The fiduciary relationship gives rise to a duty owed by the broker to the client to exercise good faith and reasonable skill in advising insureds.

One who holds himself or herself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him or her to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He or she is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available in the area in which his or her principal seeks to be protected. If he or she neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he or she undertook to supply, because of his or her failure to exercise the requisite skill or diligence, he or she becomes liable to his or her principal for the loss sustained thereby.

The scope of an insurance broker’s obligations to a prospective insured, is to procure the insurance; secure a policy that is neither void nor materially deficient; and provide the coverage he or she undertook to supply. However, the duty of a broker or agent is not unlimited.

The claim asserted is based on the broker’s negligent failure to procure the appropriate coverage. However, there is no evidence presented by the plaintiff showing plaintiff requested a replacement policy. In fact, there is no evidence at odds with Browne’s testimony plaintiff sought coverage similar to her Newark policy; advised the $150,000 coverage was adequate because the home was unencumbered; or expressed a concern to avoid possible modifications in coverage because of the concomitant increase in premiums. In addition, when plaintiff received the policy, which stated the total coverage, she did not object when it was first issued or at the time of subsequent renewals. The amount of coverage is clearly and prominently stated and easily understood. If plaintiff was dissatisfied with the extent of coverage, she failed to exercise the opportunity to raise such concerns with each annual renewal.

Absent a special relationship, there is no common law duty of a carrier or its agents to advise an insured concerning the possible need for higher policy limits upon renewal.

The appellate court refused to enlarge the scope of duty requested by the plaintiff.  A broker’s liability is not unbounded and in the area of homeowner’s insurance the Legislature should construct the parameters of responsibility, not the courts.  Agents and brokers are not required to inform clients their present coverage is inadequate or calculate the replacement value of the home in circumstances where the insured does not request or desire such service.

ZALMA OPINION

Insurance agents and brokers are not clairvoyant.  They have no duty to place insurance that may be needed in the future without a request or information from the insured. In this case the insured insisted on only $150,000 coverage for the dwelling to avoid an increase in premium. It was only after the fire and receipt of a repair estimate that the plaintiff decided she needed more coverage. Buyer’s remorse is not sufficient to hold an agent responsible for the error of the insured who blatantly lied to the insurer about the age of the dwelling and its size.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Corporation and Sole Owner are Separate Entities

A Court May Not Draft a Better Insurance Policy Than The One Purchased

As the U.S. Supreme Court has recently affirmed in Burwell v. Hobby Lobby Stores, Inc., — S.Ct. —-, 2014 WL 2921709 (U.S.), 123 Fair Empl.Prac.Cas. (BNA) 621, a corporation is a “person” standing alone and separate from its individual owners. Insurance issued to a corporation insures the corporation and not the individual owners of the corporation for their individual torts.

In Harleysville Ins. Co. of New Jersey v. Burnett, Not Reported in A.3d, 2014 WL 3557692 (N.J.Super.A.D., 7-2014) a New Jersey appellate court was asked to rule that a corporate policy provided insurance for a risk the policy did not take. Plaintiff Harleysville Insurance Company of New Jersey (Harleysville) appealed from the trial court order denying its motion for summary judgment and granting the cross-motions of defendants Penn National Mutual Casualty Insurance Company (Penn) and Rochdale Insurance Company (Rochdale), dismissing its complaint with prejudice.

FACTS

Harleysville provided homeowners’ insurance to defendants William and Anita Burnett for their residential property located in Monmouth Junction. William also operated a truck rental and asphalt paving business, WR Burnett, Inc. (WR Burnett) on the property. William was the sole owner of this business. The Burnetts entered into a lease agreement with WR Burnett for its use of a portion of their property, but that lease agreement did not become effective until January 1, 2010.

On June 24, 2009, defendant Jeffrey Casey, an employee of WR Burnett, sustained injuries when a tree fell on him as he was taking a cigarette break. At the time the tree fell on Jeffrey, William and his cousin, Philip Jackson, who was not a WR Burnett employee, were cutting down dead trees on the property to allow for additional space to store trucks.
Jeffrey and his wife, Sarah, commenced a personal injury action against the Burnetts asserting that their negligence caused the resulting injuries they each sustained. The complaint did not name the corporation, WR Burnett. In October 2009 Harleysville offered to defend the Burnetts in this action, but reserved its right to deny coverage under the business pursuits exclusion.

In December 2010, while this action was pending, Jeffrey filed a worker’s compensation petition with WR Burnett’s employer’s liability insurer, Rochdale. Under that policy, Rochdale agreed that it would pay damages to its insured “because of bodily injury to your employee that arises out of and in the course of employment, claimed against you in a capacity other than as employer.” Rochdale answered the petition, admitting that “a compensable accident took place” but denied that Jeffrey suffered permanent disability and put him to his proofs.

On January 20, 2011, Harleysville filed a motion for summary judgment in the Caseys’ personal injury action, arguing that the cause of action was barred by the exclusivity provisions of the Worker’s Compensation Act. Judge John J. Coyle, Jr. denied the motion, finding an issue of fact existed as to whether William removed the trees in his capacity as a business owner or a landowner. That factual dispute, however, was never resolved because the Caseys and the Burnetts entered into a settlement agreement on May 24, 2011. The agreement did not preclude Jeffrey from continuing to pursue his worker’s compensation claim. In addition, the agreement did not preclude Harleysville from continuing to pursue its declaratory judgment action it instituted against Rochdale and Penn in January 2011. The Burnetts, under the agreement, assigned to Harleysville all of their rights and claims, “whether contractual, contribution, indemnity, or in tort, that the Burnetts had, currently have, or will have, against any current or future parties to the Coverage Action, including but not limited to [Rochdale] and [Penn]….”

Harleysville subsequently filed a summary judgment motion. Penn and Rochdale filed cross-motions for summary judgment. Rochdale argued the insured under its policy was WR Burnett, not the Burnetts, who were sued in their individual capacities in the underlying action; consequently, it had no obligation to defend them. Penn argued it was entitled to summary judgment because Jeffrey contended he was acting within the scope of his employment at the time he sustained his injuries and its policy expressly excluded coverage for bodily injuries sustained during the course of employment.

The trial judge explained that the parties framed the issue before the court as whether William, when removing trees on his property, was acting as a homeowner or business owner. The judge concluded this question was irrelevant because Harleysville was not entitled to recover in either instance. If William had been acting within his capacity as a landowner, Harleysville would not be entitled to summary judgment and would be responsible for bearing the defense costs the Burnetts incurred, as their homeowner’s insurer. Also the Caseys sued William individually and not in his corporate capacity; however, even if William were acting in his corporate capacity, Rochdale would have a complete defense in the form of the worker’s compensation statute’s exclusivity bar.

ANALYSIS

An ambiguous insurance policy is ordinarily resolved as a question of law, in favor of the insured. The policy is interpreted liberally to afford coverage to the “fullest extent that fair interpretation will allow.” When the language of an insurance policy is clear, we must enforce its terms as written. A court may not draft a better insurance policy than the one purchased, regardless of concern for the inured parties.

Where a corporation is the named insured in an insurance policy, New Jersey courts have found that the individual owners of the corporation are not implicitly insured. A professional corporation and its sole owner are separate entities and the immunity of the workers’ compensation laws that shields the corporation from tort liability to employees does not extend to the owner of the corporation. A corporation is an entity which is also separate from its stockholders and in the absence of fraud or injustice, courts generally will not pierce the corporate veil to impose liability on the corporate principals.

In reviewing and interpreting the plain language of the Rochdale policy, the terms of the policy are not ambiguous. The named insured is WR Burnett. Although Burnett is the sole owner of WR Burnett, the corporation is an entity separate and distinct from William, who Jeffrey sued in his individual capacity.  No reading of the Rochdale policy could lead to the conclusion that its terms were intended to apply to principals, shareholders, and employees of WR Burnett.

The appellate court found no merit in Harleysville’s contention the trial court erred in failing to give credence to its business risk exclusion, which precludes coverage for the benefit of its insured for personal injuries sustained which arise out of  “or in connection with a ‘business’ engaged in by an ‘insured.’ This exclusion applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the ‘business[.]’”

The Rochdale policy insured the corporation, not William. In short, Rochdale was under no obligation to defend and indemnify the Burnetts. In light of this conclusion, the trial court properly determined Rochdale was under no duty to reimburse Harleysville for legal fees and costs it incurred in defending the Burnetts in the underlying action.

ZALMA OPINION

The injured person and his counsel were intelligent and prudent. Since he was injured by a falling tree cut down by the individual defendant who was the sole owner of the corporation for which he worked, he sued the individual and separately demanded benefits from his employer’s workers’ compensation insurer. He recognized, as the insurers did not, that he was dealing with two different entities. His employer was a corporation and he was injured in the course and scope of his employment. The individuals, cutting down the tree, were negligent and he sued them in their individual capacity.

The insurers imprudently sought to change the wording of the insurance policies to obtain indemnity from another insurer that did not insure the risks claimed. The court, recognizing the difference between an individual and a corporation, produced justice and made the insurers pay for the risks they agreed to pay and nothing more.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Judges Cannot Make Law

Failure to Submit Proof of Loss

Fatal to Claim

Since the beginning of first party property insurance insureds were required to submit to their insurer a sworn statement in proof of loss before they had any entitlement to the benefits of the insurance. The standard fire insurance policy, over a century old and adopted in almost every state, requires the insured to submit a sworn proof of loss no later than 60 days after the fire. When the federal government established the national flood insurance program it adopted language similar to that provided by the standard fire policy.

Many states, after finding the proof of loss requirement to be draconian, have by statute and court decision, provided excuses for the failure to submit a proof of loss within the 60 day limit. Those cases require that the failure prejudice the rights of the insurer. Further, insurers, seeking to make it easier for an insured to present a claim, have modified their insurance policies to only require the proof of loss within 60 days after the insurer requires the submission of a proof of loss.

The Eighth Circuit Court of Appeal was called upon to deal with a flood insurance claim where the insured, whose home of more than 50 years, was destroyed by flood. In Stoner v. Southern Farm Bureau Cas. Ins. Co. — F.3d —-, 2014 WL 3398377 (C.A.8 (Ark.)) Mrs. Stone suffered serious damage to her home but she did not submit the one-page proof of loss form required by the federal standard flood insurance policy. See 44 C.F.R. pt. 61, app. A(1), art. VII(J)(4); Federal Emergency Management Agency (FEMA), Proof of Loss, Form No. 086–0–9 (Oct.2010).  [See the Flood Handbook here.] The handbook provides, in part:

Your official claim for damages is called a Proof of Loss.This must be fully completed and signed and in the hands of your insurance company within 60 days after the loss occurs. The Proof of Loss includes a detailed estimate to replace or repair the damaged property. In most cases, the adjuster, as a courtesy, will provide you with a suggested Proof of Loss. However, you are responsible for making sure that it is complete, accurate and filed in a timely manner.

When people seek benefits from a taxpayer-funded program, it is fair to require them to fill out the correct form. As Judge Richard S. Arnold said in his elegantly straightforward way, judges cannot “make law because we think a certain rule of law is a good thing.” Richard S. Arnold, Address at the Eighth Circuit Judicial Conference: The Art of Judging (Aug. 8, 2002).

Despite the court’s sympathy for Mrs. Jennie Stoner’s loss, whose home of 50 years suffered significant damage from flooding of the White River in Phillips County, Arkansas, we must follow the law.

In accordance with explicit federal law governing the National Flood Insurance Program, the Eighth Circuit reversed and remanded the case for entry of judgment in favor of Farm Bureau. Exercising the discretion provided to the court under Federal Rule of Appellate Procedure 39(a), it declined to tax Farm Bureau’s costs against Mrs. Stoner.

ZALMA OPINION

Because judges are lawyers they often tend to write lengthy opinions that confuse more than elucidate. Chief Judge William J. Riley, sitting in Omaha, Nebraska, who wrote this opinion, said everything that was needed in this case in a few paragraphs.

Judges interpret, they do not make, law. The National Flood Insurance Program requires an insured to produce a sworn statement in proof of loss within 60 days of damage by flood. Mrs. Stoner failed to submit the required form. As a result she gets nothing.

It is important for every person with flood insurance, every lawyer and public adjuster who represents an insured with a flood loss, to comply with the requirements of the policy or face an unhappy insured who can never recover for the loss. If Mrs. Stoner was represented by a lawyer or public adjuster who failed to help her submit her proof of loss, she is not without a remedy. She can sue her lawyer or public adjuster. If not she is out of luck. She will recover nothing and has no remedy other than free money from FEMA as a victim of a flood. She should have read the conditions of her flood insurance policy and would have avoided this problem.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Limits of Claim Made & Reported Policy

Failure to Report Claim Promptly Fatal

It does not take a brain surgeon to understand that when a policy requires a claim to be made against the insured and reported to the insurer within the policy period waiting years to report the claim will defeat coverage.

FACTS

In LeCuyer v. West Bend Mut. Ins. Co., Not Reported in N.W.2d, 2014 WL 3396491 (Minn.App, July 14, 2014),  Samantha LeCuyer obtained a money judgment against her former employer for sexual-harassment retaliation but did not collect. She informed the employer’s former insurer, West Bend Mutual Insurance Company, of the judgment nearly two years after the employer’s policy expired, and she sought a declaratory judgment that would require West Bend to pay her the judgment amount. The district court granted summary judgment in favor of West Bend.

Samantha LeCuyer worked as a security guard for Wolf Protective Services beginning in August 2008. LeCuyer felt that two of her coworkers sexually harassed her. She complained to supervisors in September and October, and the company terminated her employment in December. LeCuyer sent a letter to the company on January 13, 2009, outlining her claims. Wolf’s counsel responded by letter stating that Wolf would review its insurance policies and consider whether to submit a claim to its insurer. Wolf never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims. LeCuyer sued in April, alleging the company violated the Minnesota Human Rights Act. Wolf retained new counsel but still never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims.

Wolf filed an answer to LeCuyer’s suit. Wolf’s new counsel withdrew soon afterward, and Wolf did not retain another attorney. The district court conducted a bench trial in 2010. Wolf did not appear. The district court entered a default judgment against Wolf for $520,693.

LeCuyer eventually discovered that an affiliate of West Bend Mutual Insurance had issued Wolf an insurance policy covering employment practices. The policy commenced on July 25, 2008 and ended on July 25, 2009. She wrote to West Bend on June 2, 2011, informing it of the default judgment against Wolf and requesting a copy of the policy. West Bend responded that it had received no previous notice of the claim or the judgment and that it had cancelled Wolf’s policy in October 2008 because Wolf had stopped paying premiums. It informed LeCuyer that Wolf’s policy had been a claims-made policy, which covered only claims made during the coverage period.

DECISION

LeCuyer argues that she satisfied the notice provision of the insurance policy, making insurance coverage available to pay the damages ascribed to Wolf, because she reported the claim of harassment to Wolf. The parties agree that Wolf’s insurance policy with West Bend controls the primary question in this appeal. The policy disclaims any obligation to provide coverage beyond its specific terms. It promises to “pay on behalf of the insured for ‘damages’ … arising out of any ‘employment practices’ to which this insurance applies,” but it states that West Bend will cover an employee’s damages claim against Wolf “only if … [a] ‘claim’ is both … made against any insured, in accordance with paragraph 3 below, during the policy period … and [r]eported to us … during the policy period or within thirty … days thereafter.” (Emphasis added).

The policy explains that a claim is made “[w]hen notice of such ‘claim’ is received and recorded by [Wolf] or by [West Bend], whichever comes first.” West Bend is therefore liable to pay the judgment against Wolf only if West Bend received notice of LeCuyer’s claim according to the policy’s preconditions.

LeCuyer must carry the burden. She must convince the court after it reads the policy as a whole while giving effect to the plain and ordinary meaning of its terms, that coverage applies. To do so, LeCuyer, as the party asserting coverage, must establish a prima facie case that the policy applies. The Minnesota court concluded that LeCuyer did not meet this burden. It noted that the policy was written to be effective for one year beginning July 25, 2008. West Bend asserts that it cancelled Wolf’s policy October 16, 2008, for nonpayment of premiums. LeCuyer did not report her sexual harassment claim to West Bend until her June 2011 letter. The claim was therefore not “reported to” West Bend until almost two years after the policy ended on its own terms. Because the policy covers only claims made and reported to West Bend “during the policy period or within thirty … days thereafter,” the June 2011 notice was too little and too late to trigger coverage.

The policy requires both a claim and a report to the insurer before coverage can apply. The policy clearly does not cover any claims not reported to West Bend within the policy period. Because neither Wolf nor LeCuyer reported the claim to West Bend within the period mandated under the policy, the policy unambiguously provides no coverage.

LeCuyer’s, grasping at straws, presented as a final argument that Minnesota law requires West Bend to cover the judgment against Wolf because Wolf is bankrupt, insolvent, or dissolved. She bases this argument solely on Minnesota Statutes section 60A.08, subdivision 6 (2012), which specifies that all Minnesota insurance policies: “shall, notwithstanding anything in the policy to the contrary, be deemed to contain the following condition: ¶ The bankruptcy, insolvency, or dissolution of the insured shall not relieve the insurer of any of its obligations under this policy, and in case an execution against the insured on a final judgment is returned unsatisfied, then such judgment creditor shall have a right of action on this policy against the company to the same extent that the insured would have, had the insured paid the final judgment.”

LeCuyer urges that this statute embodies a public policy of guaranteeing insurance coverage to individuals with claims against insolvent entities. West Bend’s insurance contract contains a provision substantially similar to the statutory clause. Wolf’s insurance policy adheres to Minnesota law. Neither the policy nor the statute require coverage. The statute and Wolf’s insurance policy provide only that bankruptcy or insolvency will not relieve West Bend of its obligations “under this policy.” It does not create any new obligations beyond those required under the policy.

Even if LeCuyer had presented evidence that Wolf was bankrupt or insolvent when LeCuyer filed her lawsuit, the policy does not impose coverage simply if Wolf is bankrupt or insolvent. For coverage to apply Wolf or LeCuyer must first report the claim to West Bend during the policy period and establish that the tort occurred during the policy period. This LeCuyer could not do and, as a result, her claim, suit and appeal failed.

ZALMA OPINION

Claims made and reported policies are less expensive than other policies because their exposure is limited to a specified period of time for a claim to be both made and reported. LeCuyer had the ability to report the claim promptly to West Bend had she, through her lawyers, while Wolf actively participated in the lawsuit, or in a judgment debtor exam after she obtained a judgment, learned the identity of the West Bend and its policy. She did not learn of its existence for more than two years. Her judgment can be framed and put on a wall but its value against a bankrupt defendant is nil.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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When Is a House “Wholly Destroyed?”

Valued Policy Law Problems

Valued policy laws require an insurer to pay the limits of liability of a policy regardless of the actual cash value, actual cost to repair or actual replacement value of a property. As a result it provides an incentive to an insured to have the property, after a covered loss, declared a total loss. Many states have refused to enact valued policy laws to avoid the temptation to buy a distressed property, buy excessive insurance, and then cause a total loss recognizing that the valued policy laws create a moral or morale hazard to increase the risk of loss.

In Behrndt v. Austin Mut. Ins. Co., Slip Copy, 2014 WL 3407305 (Wis.App.) the Wisconsin Court of Appeal was called upon to resolve a dispute over the application of the Wisconsin valued policy law.

FACTS

After their home was damaged by a fire, Cole and Ashley Behrndt sued Austin Mutual Insurance Company, alleging they were entitled to the face value of their homeowners insurance policy because their property was a total loss under the valued policy law.  The circuit court granted summary judgment in favor of Austin Mutual. On appeal, the Behrndts argue Austin Mutual is not entitled to summary judgment because their house was a total loss and because Austin Mutual should be equitably estopped from arguing their property was not a total loss.

BACKGROUND

In July 2008, the Behrndts purchased a home prior to a foreclosure for $132,000. Believing they purchased the house below market value, the Behrndts wanted to insure the house for $150,000 or $175,000, and they purchased a homeowners insurance policy from Austin Mutual. In late 2008, after determining the replacement cost of the Behrndts’ home was greater than their current policy, Austin Mutual increased the value of the Behrndts’ policy. The Behrndts accepted this increase and paid the increased premiums accordingly.

A fire damaged the Behrndts’ home on November 25, 2011. At the time of the fire, the homeowners insurance policy issued by Austin Mutual had a face value of $263,500. le, Austin Mutual hired: adjustor Michael Heck, to adjust the Behrndts’ loss; structural engineer Geoffrey Jillson, to inspect and evaluate the structural integrity of the Behrndts’ home and any building code issues; and licensed contractor Rene Bockart, to evaluate the scope of and damage to the Behrndts’ house.

Heck averred that, from the outside of the home, there was no indication that a fire had occurred other than some smoking of the windows. The fire damage was not apparent until he entered the structure. Heck opined, “The foundation, roof and outer walls did not sustain any damage. There was some fire damage on the interior of the dwelling, but the majority of the repairs will be for remediation due to smoke damage.” Jillson reached similar conclusions as did Bockart. Bockart estimated that the actual cash value of repair was $120,275.11 and the replacement value was $147,579.55.

Based on the opinions of Heck, Jillson, and Bockart, Austin Mutual appealed the Town’s raze order. A special board meeting was held on January 19, 2012. After viewing the structure and hearing the evidence presented by Austin Mutual and the Behrndts, the Town overturned the raze order. Austin Mutual tendered a check to the Behrndts in the amount of $120,257.11. The Behrndts continued to dispute the amount of the loss. Austin Mutual invoked the appraisal provisions of the Behrndts’ insurance policy.  The appraisal panel determined the property could be repaired and determined the actual cash value of the repairs was $100,476.35 and the replacement cost value was $154,579.

The Behrndts then brought the present suit against Austin Mutual, alleging they were entitled to the face value of the policy, or $263,500, because their house was a “total loss.” The Behrndts contended their house was a total loss because the cost of repair exceeded the house’s pre-fire value.

Austin Mutual moved for summary judgment. It argued the cost of repair compared to the property’s pre-fire value is not the standard for determining a “total loss” in Wisconsin. Austin Mutual asserted a property is considered a total loss only if it is “wholly destroyed.” Since the Behrndts’ house was not “wholly destroyed” because the property’s specific character as a house was still recognizable and the evidence showed the house was repairable, it refused to pay the policy limit. The circuit court granted summary judgment in favor of Austin Mutual.

DISCUSSION

Valued Policy Law

Originally enacted in 1874, the valued policy law requires insurers to pay the policy limits, not the actual amount of a loss, to an insured if the property has been “wholly destroyed.” The law was designed to discourage owners from over-insuring property while simultaneously thwarting insurers from collecting excessive premiums. The valued policy law provides: “Total loss. Whenever any policy insures real property that is owned and occupied by the insured primarily as a dwelling and the property is wholly destroyed, without criminal fault on the part of the insured or the insured’s assigns, the amount of the loss shall be taken conclusively to be the policy limits of the policy insuring the property.”

“Wholly destroyed” under the valued policy law does not mean that the material of which the building is composed shall be annihilated or reduced to a shapeless mass, rather, when its specific character as a structure no longer remains and there is nothing left but the cellar walls and a dilapidated foundation, the loss is total within the meaning of the statute.

Wholly destroyed does not mean an absolute extinction of the building; that the test is whether the building has lost its identity and specific character, so that it can be no longer called a building. There cannot be a total loss so long as the remnant of the structure standing is reasonably adapted for use as a basis upon which to restore the building to the condition in which it was before the fire and whether a reasonably prudent owner, uninsured, desiring such a structure as the one in question was before the fire, would in proceeding to restore it to its original condition utilize such remnant as such basis.

The Wisconsin statute does not independently establish that the cost of repair compared to the property’s value determines whether the property is “wholly destroyed.”  In this case, although the Town of Crystal Lake building inspector issued a raze order, the town board overturned that order following a hearing in which the board visited the Behrndts’ property and Austin Mutual presented evidence showing the property was repairable.  Because the town did not prevent the Behrndts from repairing the property, the Behrndts cannot argue they suffered a constructive total loss.

Pursuant to Wisconsin jurisprudence a property is “wholly destroyed” under the statute if the identity of the structure as a building is destroyed so that its specific character as such no longer remains.  The cost of repair compared to the property’s pre-fire value is irrelevant when determining whether a property is “wholly destroyed.”

Equitable Estoppel

The Behrndts also argue Austin Mutual should be equitably estopped from arguing “the home is not wholly destroyed.” Austin Mutual acted to increase the amount of insurance coverage based on its replacement cost analysis; the Behrndts relied on Austin Mutual’s assessment and paid the corresponding increased premium amount; and their reliance was to the Behrndts’ detriment because Austin Mutual is now arguing “it should not pay the face value of the policy despite that the home is wholly destroyed and costs double its value to repair.” They assert Austin Mutual should be equitably estopped from arguing “that because the house can be fixed for less than the amount of coverage, the house cannot be deemed wholly destroyed[.]”Austin Mutual, contrary to the Behrndts argument, is arguing the valued policy law is inapplicable because the structure and the identity of the house remains and therefore the house is not “wholly destroyed.”

More importantly, the Behrndts have not proven they paid the premiums to their detriment. They contracted for, and received the benefit of, an insurance policy in an amount sufficient to compensate them had there been a total loss to their property. They were then compensated for the cost of repairing their home. As Austin Mutual points out, “the fact that the cost to repair the home, the structure of which is still intact, was $154,579 shows that had the policy limit not been increased, the amount would not be adequate if the home was actually totally destroyed or more extensively damaged.” Since the Behrndts have not established by clear, satisfactory, and convincing evidence that Austin Mutual the court concluded it should not be equitably estopped from arguing the property is not a total loss.

ZALMA OPINION

The Behrndts’ policy provided sufficient funds to rebuild their home new for old. Its fair market value, once rebuilt, would increase. The valued policy law in this case tempted the Behrndts to seek to profit from their insurance since, if they could collect the full limit of the policy, they would have had sufficient funds to totally rebuild the house, new for old, and collect a bonus of over $100,000. In so doing the purpose of the law would have been thwarted. The court recognized that fact and prevented the abuse of the insurer and the valued policy law.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Resolve Disputes Informally & Avoid Litigation

Best to Limit Demands for Defense to Those Insurers Who Name You as an Insured or Additional Insured

When lawsuits are filed the parties attempt to get as much insurance protection as is possible. Sometimes they even seek coverage from the insurer of the plaintiff thereby putting the insurer on both sides of a lawsuit. As a result confusion often reigns, courts are confused, orders are issued, and appeals filed. No one is happy with the results. The Supreme Court, Appellate Division, Second Department, New York, was drawn into such a dispute, and as is the wont of New York appellate decisions, resolved the issues with a brief that was actually brief.

FACTS

The New York State Thruway Authority (“NYTA”) sued Ketco, Inc. for a judgment declaring that  Ketco, Inc. is obligated to defend and indemnify the NYTA in four underlying actions pending in the Court of Claims. St. Paul Travelers and Travelers Property & Casualty Co., formerly known as Travelers Indemnity Company of Illinois (Collectively “Travelers”), appeal from so much of an order of the Supreme Court, Orange County as denied their motion to dismiss the amended third-party complaint insofar as asserted against them and granted that branch of the cross motion of the Ketco, Inc., which was for summary judgment declaring that they were obligated to defend and indemnify it in this action pursuant to certain insurance policies issued by them to the NYTA and to Ketco, Inc. and pursuant to the commercial general liability policy which they issued to Conrad Geoscience Corp.

ANALYSIS

The party claiming insurance coverage bears the burden of proving entitlement. Here Ketco, Inc. (hereinafter Ketco), met its burden with respect to the policies issued to it by Travelers and for “umbrella” coverage. However, 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.  The appellate court agreed with the Travelers insurers’ contention that the Supreme Court erred in determining that they were obligated to defend and indemnify Ketco in this action pursuant to the terms of the Travelers policy issued to the NYTA (hereinafter the Thruway Policy). As Ketco itself correctly concedes it is neither an insured nor an additional insured under the Thruway Policy. Accordingly, the Supreme Court incorrectly determined that Travelers were obligated to defend and indemnify Ketco under the Thruway Policy in this action.

The trial court also erred in granting that branch of Ketco’s cross motion which was for summary judgment declaring that the Travelers insurers were obligated to defend and indemnify it in this action pursuant to a commercial general liability policy issued to Conrad Geoscience Corp., which names Ketco as an additional insured under specified conditions. Under the circumstances of this case, triable issues of fact exist as to whether Ketco qualifies as an additional insured under that policy.

In New York State Thruway Authority v. Ketco, Inc. — N.Y.S.2d —-, 2014 WL 3265718 (N.Y.A.D. 2 Dept.), 2014 N.Y. Slip Op. 05164 the Supreme Court, Appellate Division, Second Department, New York resolved the dispute. In so doing the appellate court deleted the provision of the trial court order  denying that branch of the motion of Travelers to dismiss so much of the amended third-party complaint as sought a judgment declaring that they are obligated to defend and indemnify Ketco, Inc. pursuant to the insurance policy they issued to the NYTA and substituting therefor a provision granting that branch of the motion. In addition  by deleting the provision thereof granting those branches of the cross motion of Ketco, Inc. declaring pursuant to an insurance policy which they issued to the NYTA and an insurance policy they issued to Conrad Geoscience Corp. and substituting therefor a provision denying those branches of the cross motion.

Travelers are not obligated to defend or indemnify NYTA in this action pursuant to the insurance policy they issued to Ketco, Inc. and are obligated to defend and indemnify plaintiff, Ketco, Inc., in this action, pursuant to the insurance policies they issued to Ketco, Inc.

Since the action is, in part, a declaratory judgment action, the appellate court sent the matter back to the Supreme Court, Orange County, for the entry of a judgment declaring that the Travelers insurers are not obligated to defend and indemnify Ketco in this action under the terms of the Thruway Policy and are obligated to defend and indemnify Ketco in the main action under the terms of the policies issued to Ketco including that where they were named an additional insured to the policy issued to Conrad Geoscience Corp.

ZALMA OPINION

Insurance is nothing more than a contract where the insurer makes certain promises to people or entities the insurer agrees to defend and indemnify. When an insurer issues a third-party liability insurance policy it promises to defend and indemnify those people or entities it names on the policy to certain described risks of loss. In this case Ketco asked the insurer of the plaintiff to defend and indemnify it against the risks of loss created by the NYTA’s suit against Ketco. It convinced the trial court only to find the decision reversed because it was not named on the policy and because Travelers, in the policy it issued to NYTA, did not name Ketco. However, Travelers, in a different policy it issued to Conrad Geoscience Corp. that named Ketco as an additional insured, had to defend Ketco. Travelers won one and lost one in this case.

Based on the facts recited by the appellate court it would have been been in the best interest of the parties and the insurers to sit down together, or with a mediator, read the policies and the facts of the lawsuits, and agreed to the solution that the appellate court reached. Litigation resolves disputes that cannot be resolved amicably. It is expensive and often unnecessary. Insurers and parties claiming under insurance policies should not be quick to pull the litigation trigger, speak to each other like adults, and save enormous litigation expenses. I know I sound like Pollyanna, but if more people and counsel follow this simple advice money will be saved and the clients will appreciate their lawyers for saving expense and use the lawyers more often.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Fraudsters Find Fraud Expensive

In the fourteenth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on July 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Use of Cappers Can Be Expensive.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.    More About Ecuadorian Judgment & Fraud.
4.    UK Find Insurance Fraud at a Record High.
5.    Who do you Trust?
6.    The End of Indemnity Insurance Corporation, RRG
7.    California Commissioner Sued by UnitedHealth Over Fine

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

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:

•    Contract Language Controls
•    Is Insurance an Asset of the Insured?
•    Must Insured First Prove Prima Facie Case?
•    Other Insurance Clause Raises Actual Controversy
•    Insurers Must Avoid the Gastonette
•    Facts Rule Coverage
•    The Insurance Fraud Deskbook
•    Hobby Lobby & Quasi-Insurance
•    Direct Action Statute Does Not Mandate Coverage
•    Use Of Cappers Can Be Expensive
•    Some Success for Fraud Fighters
•    Again the Supreme Court Fails to Note that the ACA is not Insurance
•    The Art of the Interview
•    Conflict Needed for Independent Counsel
•    Creative Pleading Fails to Convince
•    Health Insurance Fraud Conviction Stands
•    Builder’s Risk Policy Covers Damage only to Structure as Built
•    You Must Comply With California Regulations by September 1
•    Not Nice To Lie to Your Insurer
•    MCS 90 and Interstate Commerce

NEW! From the ABA:

The Insurance Fraud Deskbook
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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

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.

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

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

 

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Contract Language Controls

Fire Insurance Is a Contract of Personal Indemnity

First party property insurance does not insure the property but insures a person or entity against certain defined risks of loss to identified property. Strangers to the contract of insurance, regardless of their interest in the property that is the subject of the insurance, usually have no rights against the insurance policy.

Appellant Wallace Debes lost his suit against General Star Indemnity Company (“General Star”) because, among other things, he was not named in the policy.

FACTUAL BACKGROUND

Debes owns commercial property located in Beaumont, Texas. In February 2004, Debes entered into a written lease with Cahoots Entertainment, Inc. (“Cahoots”), wherein Cahoots agreed to lease the property from Debes. Debes signed the lease as the landlord, and Brian O’Quinn, in his capacity as the president of Cahoots, signed the lease as the tenant. In addition, Brian O’Quinn and his father, Jeffrey O’Quinn, each executed a personal guaranty of the lease.

With the exception of a two-week period during which the building on the property was closed for renovations, Cahoots operated “Alibi’s” night club on the property continuously from June 7, 2004 until July 4, 2011. On July 4, 2011, a fire occurred in the building on the property, causing substantial damage to the building and its contents.

Danna O’Quinn, the wife of Brian O’Quinn, purchased a commercial property insurance policy from General Star, which covered the premises when the fire occurred. Danna is neither an officer nor director of Cahoots. She is also not a party to or a guarantor of the lease. The policy identifies “DANNA O’QUINN DBA: ALIBI’S” as the “Named Insured.” No other person or entity is identified as a named insured or additional insured in the policy or in any endorsement to the policy.

After the fire, Danna made a claim under the policy for certain losses to improvements to the building and for the loss of personal property. General Star adjusted the claim and paid Danna $429,211.93 in damages. Debes also made a claim under the policy for damages to the building from the fire and demanded payment from General Star, but General Star denied coverage on his claim.

Debes subsequently filed suit against General Star for breach of contract, alleging that General Star failed to compensate him under the policy for his property losses due to the fire. Debes also asserted breach of contract claims against Cahoots, Brian O’Quinn, Danna O’Quinn, and Jeffrey O’Quinn.

Issue Presented

In one two-part issue, Debes argues that the trial court erred in granting summary judgment in favor of General Star on his breach of contract claim because Debes is an intended third-party beneficiary under the insurance contract between General Star and Danna O’Quinn.

Discussion

In Texas, “standing” denotes the presence of a real controversy between the parties that will actually be determined by the judicial declaration sought. Standing is a necessary component of subject matter jurisdiction, without which a court lacks authority to hear a case. To establish standing to assert a claim for breach of contract, a party must prove its privity to the agreement or that it is a third-party beneficiary.

Privity under the Insurance Policy

Privity is established by proving that the defendant was a party to an enforceable contract with either the plaintiff or a party who assigned its cause of action to the plaintiff. The summary judgment evidence establishes that Debes is not a party to the insurance contract. Generally, a property-insurance policy is a personal contract between the insured and the insurer. Debes is not identified in the policy or in any endorsement to the policy as a named insured or an additional insured, and Debes has not presented any argument or evidence to otherwise support a finding that he is a named or additional insured under the policy.

During its investigation of Danna’s insurance claim, General Star examined Danna under oath. General Star attached the transcript of the examination as an exhibit to its motion for summary judgment. Danna’s testimony during the examination establishes that she has never entered into a contract with Debes.

Third–Party Beneficiary Status

In Texas, a third party may enforce a contract made between other parties only if the parties to the contract intended to secure some benefit to the third party, and only if the contracting parties entered into the contract directly for the third party’s benefit. In determining whether a third party can enforce a contract, the intention of the contracting parties is controlling. A court will not create a third-party beneficiary contract by implication.

In the present case, Debes argues that he is a creditor beneficiary to the insurance policy. A creditor beneficiary is one to whom the performance promised will come in satisfaction of a legal duty owed to him by the promisee of the agreement.  The legal duty owed to the third party may be an indebtedness, a contractual obligation, or other legally enforceable commitment. To qualify as a creditor beneficiary, the maker of the contract must not only have intended to confer a benefit upon the third party but it also must have intended for the third-party to have the right to enforce the agreement. Unless both intents are clearly and fully exhibited in the four corners of contract, the third party remains no more than an incidental beneficiary to the contract.

Reviewing the insurance policy as a whole the court concluded that the policy does not contain any language that clearly and fully spells out an intent on behalf of General Star and Danna to confer a direct benefit on Debes. In this respect, the insurer reserves the right — but assumes no obligation — to adjust losses with and pay an owner of covered property who is not a named insured. Rather, the provision confers a right on the insurer by giving the insurer the option of paying the owners of covered property, even if the owners are not named insureds, and providing that such payments will satisfy the named insured’s claim for the owner’s property.

Debes failed to identify or present evidence of a legal obligation owed by Danna to Debes. Danna is neither a party nor a guarantor to the lease. The lease, therefore, does not impose any contractual obligation, including an obligation to purchase insurance coverage, on Danna. Further, General Star presented summary judgment evidence establishing that Danna has never entered into a contractual relationship with Debes at any time.

General Star has established as a matter of law that Debes was not in contractual privity with General Star and was not a third-party beneficiary to the insurance policy. Debes, therefore, lacked standing to bring a claim against General Star for breach of the insurance contract. The appellate court concluded that the trial court properly granted summary judgment in favor of General Star on Debes’s breach of contract claim and affirmed the trial court’s order.

ZALMA OPINION

Commercial leases require that the people who enter into the lease agreements understand insurance. In this case Debes only required that Cahoots maintain fire insurance. He did not require that the insurance obtained by Cahoots name him as an insured or an additional insured to protect his interest in the property. Perhaps, ignorant of insurance, he believed the policy obtained covered his building. Whatever his secret belief Debes was not an insured or an additional insured. Debes probably has a case on the lease agreement against Cahoots but not against General Star.

Since insurance is a contract of personal indemnity the only person with a right to recover under the policy was Danna O’Quinn dba Cahoots. Why, after an examination under oath, General Star paid her is beyond me since she did not do business as Cahoots but it was owned an operated by a contract.  In addition to a the need to be named as an insured, the insured must have an insurable interest in the property. Since Cahoots is a corporation in which Danna O’Quinn is not a shareholder, officer or director, the court could have found that she had no insurable interest in the property. I can only assume that the EUO showed some interest that required General Star to pay but it makes no sense to name a corporate insured in the name of an individual doing business as something that is truly a corporation.

 

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Is Insurance an Asset of the Insured?

Make A Claim or Lose All Rights

Banks become insolvent for many reasons. Most common reason for failure is incompetence. A corollary to incompetence is allowing an employee to steal money from the bank over a period of time. That type of loss is usually insurable by a bankers blanket bond or similar employee theft insurance.

In  Summerhaze Co., L.C. v. Federal Deposit Ins. Corp., — P.3d —-, 2014 WL 3057301 (Utah), 2014 UT 28, the Utah Supreme Court dealt with an issue relating to a suit against a failed bank that was in charge of the Federal Deposit Insurance Corporation (FDIC) who claimed the court had no jurisdiction because the plaintiffs failed to make claim timely.

FACTS

Plaintiffs Summerhaze Company, L.C; Antion Financial, L.C; Mr. Douglas M. Durbano; Durbano Development, L.C; Durbano Law Firm, P.C.; and, Durbano Properties, L.C. (collectively Plaintiffs) appeal from the entry of summary judgment in favor of the FDIC, successor to America West Bank, L.C. (Bank). The Supreme Court of Utah was asked to decide whether the district court erred when it concluded that it lacked subject matter jurisdiction over the Plaintiffs’ claims after determining that Plaintiffs failed to exhaust the administrative claims review process made available to them by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Additionally, Plaintiffs claim that the district court’s dismissal for lack of subject matter jurisdiction denied them due process of the law under both the United States and Utah Constitutions.

The Bank was insured by BancInsure, Inc. under a Financial Institution Bond (Bond). The Bond was an indemnity policy. Under its terms, the Bank would be indemnified in the event of losses occasioned by employee dishonesty, forgery or alteration of negotiable instruments, unauthorized signatures and endorsements, and claims expenses, among other things. The maximum coverage under the Bond was $2,000,000. Plaintiffs filed their complaint “in order to trigger the bond coverage of [the Bank's] bonding company, BancInsure, Inc.”

On January 9, 2009, before the Plaintiffs filed their complaint, the Bank filed a declaratory judgment action against BancInsure seeking to establish that the Bank was entitled to coverage under the Bond for the losses claimed by the Plaintiffs. On May 1, 2009, the Utah Department of Financial Institutions (UDFI) closed the Bank and appointed the FDIC as receiver, because the UDFI determined the Bank had failed and was operating in an unsafe manner.

Several weeks after the plaintiffs sued, the FDIC filed a motion to dismiss alleging that the district court lacked subject matter jurisdiction because the Plaintiffs had failed to comply with FIRREA. The district court granted the FDIC’s motion to dismiss and ruled that the court was deprived of subject matter jurisdiction because the Plaintiffs failed to file a timely proof of claim, as mandated by FIRREA. Plaintiffs filed a timely notice of appeal.
ANALYSIS

FIRREA was passed in response to the financial crisis of the 1980s. To aid in the winding up of and disposal of claims against a failed financial institution, FIRREA created an administrative claims review process for institutions in receivership.

Failure to Exhaust FIRREA’s Administrative Claims Process Divests a Court of Jurisdiction Over Prereceivership Claims.

Plaintiffs argued that, under 12 U.S.C. § 1821(d)(13)(D), the Bond is not an asset of the Bank or the FDIC, and thus FIRREA is inapplicable to their claim. The threshold question is not whether Plaintiffs would ultimately collect from the Bond; rather, it is whether the Bond is an asset of the Bank. FIRREA states that no court has jurisdiction over any claim to or action against the assets of a bank in receivership. The term “asset” is not defined in the statute. However, the ordinary meaning of “asset” is broad. It is defined as an item that is owned and has value or all the property of a person available for paying debts or for distribution.

Insurance policies that a bank purchased and under which it is an insured fall neatly within the definition of assets. An insurance policy is valuable to the owner of the policy even though the owner of the policy may never be entitled to recover under the policy. Additionally, the broad meaning of “asset” can include liability insurance, as one purpose of liability insurance is to protect other assets against tort claims. For these reasons, the Supreme Court concluded that the plain meaning of “asset” contained in section 1821(d)(13)(D)(i) includes the insurance policy purchased by the Bank from BancInsure.

The statute applies to creditors’ claims, consumer protection claims, and “claims which are or should be covered by insurance. This provision also distinguishes claims on their factual bases and does not make any distinction based on the identity of the party from whom relief is sought.

Plaintiffs filed claims against the Bank. The claims included allegations of improper acceptance of unauthorized signatures, negligence, and liability under a theory of respondeat superior. These claims stemmed from losses suffered due to embezzlement by a Bank employee. Thus, the claims relate to an “act or omission” of the Bank—an institution for which the FDIC was appointed receiver—or the Bank’s employee. The fact that Plaintiffs sought payment from the Bond is irrelevant. The Plaintiffs’ claims are squarely within the ambit of FIRREA.

The Supreme Court concluded that because the bond was an asset of the bank compliance with FIRREA’s administrative claims review process is mandatory to vest the district court with subject matter jurisdiction.

Since plaintiffs’ claims were subject to FIRREA’s administrative claims review, the plaintiffs’ were required to exhaust their administrative remedies, and no exception applied. Plaintiffs failed to comply with the administrative exhaustion requirements of the statute, failed to file a claim at all within the time required after receipt of notice, and failed to comply with the statute. Therefore, the plaintiffs’ failure deprived the district court of subject matter jurisdiction.

ZALMA OPINION

Insurance against torts – like the claims the plaintiffs’ made against the bank – are assets of the bank because they protect the banks assets that would necessarily be exhausted if it had to pay from its own funds to defend a tort lawsuit or pay damages to a plaintiff alleging tort damages as a result of an action of the bank. The plaintiffs pursued their claim properly but were caught in their own sloth when, during the pendency of the claim process the state of Utah declared the bank insolvent.  That put them under the control of FIRREA and its requirement for administrative claim review. They failed to comply and as a result they lost the right to seek funds from the bank and the insurer who became an asset of the FDIC.

The non-lawyer plaintiffs are not without a remedy. Their lawyers knew, or should have known, of the requirements for administrative remedies.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Must Insured First Prove Prima Facie Case?

An LLC is not an Employee

When an insured acquires an  insurance policy the insured promises, among other things, to first prove that when presenting a claim for indemnity the Insured will establish a prima facie (on its face) case that coverage is available. In Network F.O.B., Inc. v. Great American Ins. Co. of New York, Slip Copy, 2014 WL 3048369 (D.Minn.) the District Court for the District of Minnesota was asked to rule upon the motion for summary judgment by defendant Great American Insurance Company of New York (Great American) who claimed there were no facts that would support the claim.

BACKGROUND

This suit arose out of the theft of funds by non-party Laura Schwartz from her employer, plaintiff Network F.O .B., Inc. (Network). Schwartz worked for Network as a billing and bookkeeping clerk and, at all times relevant to the instant dispute, was classified as an independent contractor for tax purposes.

Schwartz’s employment was initially governed by an Independent Contractor Agreement (2006 Agreement), which was signed by Network and Schwartz in her individual capacity. Schwartz established an LLC, LM ENT Services (LM ENT), which executed a new Independent Contractor Agreement (2009 Agreement) with Network. Schwartz engaged in numerous fraudulent transactions and stole approximately $183,000 from Network.  Eventually Schwartz was convicted of six counts of theft by swindle.

Great American provided insurance coverage to Network for business, property and commercial operations pursuant to an insurance contract (Policy). The Policy provided coverage for “loss of or damage to money, securities and other property resulting directly from theft committed by an employee.” Network tendered a claim to Great American for its losses resulting from the theft by Schwartz. Great American informed Network that the claim was not covered by the Policy because Schwartz was not an “employee” of Network within the meaning of the Policy.

DISCUSSION

Insurance Coverage

State law governs the interpretation of insurance policies. The parties agreed that Minnesota law governs this action. In Minnesota, the interpretation of an insurance policy is a question of law. Under Minnesota law, the insured has the initial burden of establishing a prima facie case of coverage.

The policy defines the key term, “employee” since only theft by an employee is covered. It states that “‘Employee’ means: (1) any natural person: (a) while in your service and for the first 30 days immediately after termination of service …; (b) who you compensate directly by salary, wages or commissions; and (c) who you have the right to direct and control while performing services for you … ¶ (b) ‘Employee’ does not mean any agent, broker, factor, commission merchant, consignee, independent contractor or representative of the same general character not specified in paragraph 5.a.”

Network argues that because Schwartz, a natural person, committed and was convicted of the underlying theft, the court need not consider the fact that her employment relationship with Network flowed through a corporate entity. It was undisputed that Schwartz established LM ENT as an LLC. Thereafter, Network and LM ENT executed the 2009 Agreement, which detailed their relationship and identified LM ENT as an independent contractor. Thus, the proper analysis is whether LM ENT— not Schwartz — was an employee of Network as defined by the Policy since the theft was by Schwartz acting as LM ENT.

The Policy provides coverage only for the activities of those workers who are natural persons. If all potential “employees” were natural persons, however, such a provision would be superfluous. The provision contemplates and rejects a definition of “employee” that includes non-natural entities, such as an LLC. As a result, LM ENT — as an LLC rather than a natural person — was not an employee within the scope of the Policy at issue in this case. Therefore, Network cannot establish a prima facie case of coverage. Neither  LM ENT is not, nor can it be, a natural person. Summary judgment is warranted.

ZALMA OPINION

If Network wanted coverage for the actions of Schwartz acting as LM ENT it needed a different policy than the one it purchased. It needed one that insured against theft by employees or by independent contractors retained to deal with the funds of the insured. It bought a limited coverage and could not convince the trial court to stretch the meaning of the policy from “employee” to any person or entity that steals from it.

It took a certain amount of chutzpah (Yiddish for unmitigated gall) to argue that a limited liability company is a natural person and was intended to be insured by the insurer. The District Court simply refused to fall for the argument and simply read the policy as written.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Other Insurance Clause Raises Actual Controversy

Self Insured & Insurer “Other Insurance Clause”

When two or more insurers agree to insure against the same risk of loss disputes often arise as to which insurer must pay on a primary basis, which is excess or whether they must share the liability of the insured on a pro rata basis. In Cinoman v. University of North Carolina — S.E.2d —-, 2014 WL 2937050 (N.C.App.) the North Carolina Court of Appeal was called upon to resolve the dispute, not once but twice. In its final review of the case the court made its final order.

FACTS

Plaintiffs Michael I. Cinoman, M.D. and Medical Mutual Insurance Company of North Carolina (“MMIC”) appeal from an order granting UNC defendants’ motion to stay this declaratory action pending a final resolution of the underlying malpractice action.

In February 1999, Dr. Cinoman served as a temporary attending physician for full-time rotations in the University of North Carolina Hospitals at Chapel Hill Pediatric Intensive Care Unit (“UNC–PICU”) as part of an agreement to assist UNC defendants with a staffing shortage in the UNC–PICU. On 21 June 2007, Thomas M. Stern, as guardian ad litem for Armani Wakefall, initiated a medical malpractice action against Dr. Cinoman and others for damages allegedly incurred by Wakefall as a result of negligent treatment she received at the UNC–PICU in February 1999 (“underlying malpractice action”).

Dr. Cinoman is insured under a professional liability insurance policy issued by MMIC, which has treated its coverage as broad enough to cover the claims asserted against Dr. Cinoman in the underlying malpractice action. UNC defendants maintained that Dr. Cinoman is not entitled to coverage under the University of North Carolina Liability Insurance Trust Fund (“UNC–LITF”), which provides coverage for claims against employees and agents of UNC defendants, because he was not a full-time employee of UNC defendants at the time of the events giving rise to the underlying malpractice action.

In the absence of coverage by the UNC–LITF, the damages demanded in the underlying malpractice action allegedly exceed Dr. Cinoman’s professional liability insurance coverage.

Dr. Cinoman and MMIC filed this declaratory judgment action to determine whether he is entitled to coverage under the UNC–LITF, in addition to his coverage under the MMIC policy, and the relative liabilities of MMIC and the UNC–LITF. Plaintiffs and UNC defendants moved for summary judgment, and the trial court granted summary judgment in favor of UNC defendants. After the trial court decision was reversed the UNC defendants moved to stay further proceedings in the declaratory relief action pending the final resolution of the underlying malpractice action.

On appeal, it was claimed that the trial court erred by granting the stay based on its determination that no actual controversy exists as to the UNC–LITF’s duty to indemnify until the underlying malpractice action is finally resolved.

ANALYSIS

An actual controversy between adverse parties is a jurisdictional prerequisite for a declaratory judgment. An actual controversy exists where an insurer seeks a determination that primary coverage is not provided under its policy and is instead provided under policies issued by other insurers. No such controversy exists, however, in a declaratory judgment action to determine whether coverage is provided under an excess insurance policy where the underlying liability action has not yet been resolved.

When more than one insurance policy affords coverage for a loss, the “other insurance” clauses in the competing policies must be examined to determine which policy provides primary coverage and which policy provides excess coverage. An excess clause is a type of “other insurance” clause which “generally provides that if other valid and collectible insurance covers the occurrence in question, the excess policy will provide coverage only for liability above the maximum coverage of the primary policy or policies. An excess clause is distinguishable from a pro rata “other insurance” clause. Where a pro rata clause in one policy competes with an excess clause in another policy, the policy with the pro rata clause provides primary coverage, and the policy with the excess clause provides secondary coverage which will only be triggered if the limits of the policy containing the pro rata clause are first exhausted.

In general, there is no primary versus excess insurance policy relationship where a self-insurance program is at issue because self-insurance does not constitute other collectible insurance within the meaning of an insurance policy’s “other insurance” clause. Self-insurance is equivalent to a primary insurance policy, however, when the self-insurance expressly provides that it is primary to other insurance.

The UNC–LITF is a self-insurance program for professional liability, authorized by state statute. The plain language of the following “other insurance” clause in the UNC–LITF Memorandum of Coverage is controlling:

“When this agreement and other collectible insurance both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for a greater proportion of the loss than that stated in the applicable contribution provision below:

A. Contribution by Equal Shares. If all such other valid and collectible insurance provides for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than would be payable if each insurance company contributes an equal share until the share of each company equals the lowest applicable limit of liability under any one policy or the full amount of the loss is paid. With respect to any amount of loss not so paid, the remaining companies shall continue to contribute equal shares of the remaining amount of the loss until each such company has paid its limit in full or the full amount of the loss is paid.

B. Contribution by Limits. If any of such other insurance does not provide for contribution by equal shares, the Trust Fund shall not be liable for a greater proportion of such loss than the applicable limit of liability under this agreement for such loss bears to the total applicable limit of liability of all valid and collectible insurance against such loss.”

Nothing in this provision indicates that the UNC–LITF’s liability arises only after the limits of other collectible insurance policies have been exhausted. Rather, the provision provides that the UNC–LITF shares liability with other collectible insurance according to their respective limits. The pro rata clause means that the UNC–LITF provides primary coverage regardless of the terms of the MMIC policy.

Because the UNC–LITF affords primary coverage, an actual controversy exists as to the UNC–LITF’s duty to indemnify, and the trial court erred by granting the stay based on its determination that no such controversy exists pending a final resolution in the underlying malpractice action.

ZALMA OPINION

Other insurance clauses are important to every dispute between insurers. Although a self insured program like UNC–LITF is not insurance, when they write into their operational agreement an other insurance clause that requires UNC–LITF to share with other collectible insurance on a pro rata basis it creates a situation where it becomes “insurance” for the purpose of sharing the costs to defend or indemnify the insured. Therefore, hoist on its own petard, UNC–LITF created an actual controversy that must be tried to determine if it owes a share of Dr. Cinoman’s defense.

UNC–LITF could have avoided this decision and problem, if that is what it intended, by rewriting the other insurance clause to read:

When this agreement (which is not insurance) and collectible insurance, both apply to a loss on the same basis, whether primary, excess or contingent, the Trust Fund shall not be liable under this agreement for any costs of defense or indemnity until the other collectible insurance is exhausted.

UNC–LITF wrote their self-insurance program as if it was insurance and must, therefore, if coverage applies, share with MMIC on a pro rata basis.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Insurers Must Avoid the Gastonette

Insurer’s Duty is to the Insured

Insurance policies of all types have contribution or excess clauses. Sometimes the clauses conflict and when two insurers insure the same risk both will claim that the responsibility lies with the other. In Central States, Southeast and Southwest Areas Health and Welfare Fund v. First Agency, Inc. — F.3d —-, 2014 WL 2933225 (C.A.6 (Mich.)) Central States and Guarantee Trust both issued insurance coverage for the same claims.

Central States’ contract says that it will pay only if Guarantee Trust does not. Guarantee Trust’s contract insists that it will pay only if Central States does not. The Third Circuit Court of Appeal was called upon to break this “you first” paradox. The paradox has been called a gastonette [which can be defined as a dilatory “dance” in which each of two responsible parties waits until the other party acts – so that the delay seems interminable; esp., a standoff occurring when two courts simultaneously hear related claims arising from the same bases and delay acting while each court waits  for the other to act first. The term was coined by Judge Jon O. Newman in In re McLean Industries, Inc., 857 F.2d 88, 90 (2d Cir. 1988), on the model of  “After you, my dear Alphonse.” “No, after you, Gaston. Black's Law Dictionary 795 (10th ed.2014)].

BACKGROUND

Central States, an employee benefit plan governed by the Employee Retirement Income Security Act (ERISA), provides health insurance for Teamsters and their families. Guarantee Trust, an insurance company, provides sports injury insurance for student athletes. This case involves thirteen high school and college students, all athletes and all children of Teamsters. Each of them holds general health insurance from Central States and sports injury insurance from Guarantee Trust. Each suffered an injury while playing sports (most often football) between 2006 and 2009, after which they sought insurance coverage from both insurance companies. Each time Guarantee Trust refused to pay the athlete’s medical expenses. Each time Central States picked up the bill under protest.

Invoking one of ERISA’s civil enforcement provisions, 29 U.S.C. § 1132(a)(3)(B), Central States sued Guarantee Trust and First Agency (a company that administers Guarantee Trust’s insurance policies).

TRIAL COURT RULING

The district court ruled that, when Central States’ and Guarantee Trust’s coverage of student athletes overlap, Guarantee Trust must pay. It entered a declaratory judgment to that effect, ordered Guarantee Trust to reimburse Central States for the payouts to the thirteen students, and awarded Central States attorneys’ fees.

ANALYSIS

Which company should pay for the students’ medical expenses? Central States’ contract answers the question one way. In a provision captioned “Coordination of Benefits,” the contract lists rules that determine which insurer has “primary responsibility” when plans overlap. Under one of these rules, whichever insurer covers the insured “other than as a Dependent” has primary responsibility. Central States covers the thirteen students as dependents. The students have insurance because they are children of Teamsters. Guarantee Trust, by contrast, covers the thirteen students “other than as … [d]ependent[s].”  The students have insurance in their own names. So under Central States’ contract, Guarantee Trust must pay for the students’ medical expenses up to its maximum before Central States will contribute anything.

Guarantee Trust’s contract answers the question another way. The contract contains a blanket coordination-of-benefits rule. If insurance provided by Guarantee Trust overlaps with insurance provided by anyone else, the other insurer always has primary responsibility. So under Guarantee Trust’s contract, Central States must pay for the students’ medical expenses up to its maximum before Guarantee Trust will contribute anything. Therefore, the two insurers dance a gastonette with one insurance company saying: “You first, Central States.” To which the other responded: “After you, Guarantee Trust.”

If an ERISA plan and an insurance policy “contain conflicting coordination of benefits clauses,” as a matter of federal common law “the terms of the ERISA plan, including its [coordination of benefits] clause, must be given full effect.” [Auto Owners Ins. Co. v. Thorn Apple Valley, Inc., 31 F.3d 371, 374 (6th Cir.1994)]. In this case, the terms of the ERISA plan — Central States’ plan — say that Guarantee Trust has primary responsibility for the students’ expenses.

Guarantee Trust’s policy does not provide excess insurance, at least not pure excess insurance. An excess policy has a fixed threshold below which it never applies. If the insured has no other policy, Guarantee Trust’s policy covers all of his losses, however small.

ERISA’s byzantine system of employee benefits would not work unless courts respect the written terms of ERISA plans. The importance of enforcing the plan’s terms, its coordination clauses included, does not shrink when the other insurance policy in the picture provides excess coverage in this way.

The next worst thing to having no insurance at all is having two insurance companies cover the same claim. Coverage overlaps often prompt years of fighting about who must pay, a battle that can delay payment to the insured or the hospital. The Third Circuit concluded that it is best to keep rules about coordinating insurance benefits as simple as possible.

EHere, in the absence of Central States’ plan, Guarantee Trust’s policy would cover the sports injuries at hand without question. The ERISA plan insists that the policy keep doing in that plan’s presence what it would do in that plan’s absence.  The district court got it right when it held that primary responsibility for the sports injuries in this case falls on Guarantee Trust, not Central States.

As for the merits, Central States filed this lawsuit under a provision of ERISA that allows it “to obtain … appropriate equitable relief … to enforce any provisions of this [Act] or the terms of the plan.” [29 U.S.C. § 1132(a)(3)(B).] The judgment directing Guarantee Trust to pay Central States can thus stand only if it provides “equitable relief” as opposed to legal relief.

The district court’s money judgment, ordering Guarantee Trust to pay Central States around $112,000, looks by all appearances like an award of money damages. And money damages, the paradigm of legal relief, lie beyond the radius the statute.

The court ordered Guarantee Trust to pay money, and Guarantee Trust can satisfy that obligation by dipping into any pot it chooses. That means Central States sought legal rather than equitable restitution.

The Act says nothing either way about coordinating benefits, and purposes and policies have their place when filling the gap. The Act by contrast says something about what relief a plaintiff can get in lawsuits under the statute: He can get only equitable relief.

Under the Act, the district court in its discretion may allow a reasonable attorney’s fee to either party. The statute gives district courts more leeway to shift fees than the American Rule, the common-law principle that allows fee awards only in rare cases. The district court addressed all of the relevant factors with care. Its conclusion does not amount to an abuse of discretion.

Declaratory relief was affirmed, Guarantee Trust is primarily responsible for the expenses of the injured students and the attorneys fees ordered were also affirmed. The money judgment was reversed because the ERISA plan did not have the right to legal remedies. Both of the dancers lost and in the future Guarantee Trust will be compelled to pay for such injuries as if the Central States ERISA plan did not exist.

ZALMA OPINION

The prudent insurer will never dance the gastonette. When a dispute arises between two insurers, both of whom believe the other is primary and it is excess, should enter into a prompt agreement to share in the cost of protecting the insured without waiving the right to dispute who owes what to whom in a separate litigation. Central States, without such an agreement, paid the expenses because Guarantee Trust wrongfully refused. This suit resulted. Had they agreed they could have submitted the dispute to a District Court or an impartial arbitrator who could have decided who was on first and that either Gaston or Alphonse must pay.

This case should never have happened. Central States and Guarantee Trust should have worked together and avoided the litigation. No one wins, and the insured often loses, when insurers dance the gastonette.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Facts Rule Coverage

Pollution Exclusion Effective

Insurers do not want to cover pollution under a basic automobile insurance policy. In their generosity they take on the liability of their insureds if, as a result of a collision or upset of an insured vehicle, some pollution occurs. That does not, however give coverage for  every incident of pollution related to a vehicle.

The plaintiffs, Frank Izdebski, doing business as the sole proprietor of United Energy Oil Company (United), and National Equity Properties, Inc. (National), appealed summary judgments entered against them in their consolidated cases seeking a declaration that United’s policy with Hanover Insurance Company (insurer) covered damage from an oil spill. In Izdebski v. Hanover Ins. Group, Inc., Slip Copy, 2014 WL 2973681 (Mass.App.Ct.) the Massachusetts Court of Appeal resolved the dispute.

BACKGROUND

Izdebski delivered 1,000 gallons of heating oil from his oil truck to a commercial building owned by National in New Bedford. The oil was transferred from the truck to the oil storage tank by a pump. In the process of the transfer, Izdebski overfilled the oil storage tank, and oil seeped out through a vent pipe from the oil storage tank onto the ground behind the building.

At the time of the spill, United’s oil truck was covered under a business auto insurance policy issued by the insurer, Hanover, whose claims adjuster determined that its responsibility for damage caused by the spill was limited to the $5,000 required by the Massachusetts mandatory endorsement, and otherwise was foreclosed under the pollution exclusion clause in the policy. The insurer issued a check to United for $5,000.

United filed a complaint seeking a declaratory judgment, alleging that the policy provided liability coverage of one million dollars and that it was entitled to recover for the clean-up of the oil spill and property damage payment to National. National also filed an amended complaint for declaratory judgment and other relief against the insurer. The insurer counterclaimed for declaratory judgment, asserting that any coverage was limited to the $5,000 that had already been paid; the insurer later moved for summary judgment in both cases, arguing that the policy contained an exclusion for pollution damage such as the oil spill and that none of the exceptions to that exclusion applied.

The judge allowed the insurer’s motions for summary judgment on the basis of the pollution exclusion clause. The policy’s pollution exclusion clause (paragraph 11) provides that coverage does not extend to any property damage: “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’: ¶ “a. That are, or that are contained in any property that is: ¶ (1) Being transported or towed by, handled, or handled for movement into, onto or from, the covered ‘auto’; ¶ (2) Otherwise in the course of transit by or on behalf of the ‘insured’; or ¶ (3) Being stored, disposed of treated or processed in or upon the covered ‘auto’; ¶ … [or] ¶ “c. After the ‘pollutants’ or any property in which the ‘pollutants’ are contained are moved from the covered ‘auto’ to the place where they are finally delivered, disposed of or abandoned by the ‘insured.’”

DISCUSSION

Language in an insurance policy must be given its ordinary meaning and construed in the sense that the insured will reasonably understand to be the scope of his coverage. Exclusionary clauses must be strictly construed against the insurer so as not to defeat any intended coverage or diminish the protection purchased by the insured.

It is undisputed that United’s truck is the covered “auto” under the policy and that the heating oil is a pollutant. It is also agreed that the spilled oil did not leak from the truck or from the pump attached to the truck while the oil was being transferred into National’s oil storage tank during delivery.

The Massachusetts court of appeal agreed with the motion judge that the polluting accident in this case comes under paragraph (a) of the pollution exclusion, because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination. The oil was therefore, being “handled for movement … from, the covered “auto.” The plaintiffs’ argument that paragraph (a) does not apply because the oil had reached its final destination—or that the oil that was displaced was the oil already in the tank before Izdebski began to fill it ignores that the expression “arising out of,” both in coverage and exclusionary clauses, must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. The phrase “arising out of” must be read expansively and has a broad meaning analogous to “but for” causation.

Paragraph 11c. Of the Pollution Exclusion

Paragraph (c) of the pollution exclusion provides that the policy will not cover “‘property damage’ arising out of the actual … discharge, … release or escape of ‘pollutants’” once they have been “finally delivered.” This paragraph applies because the oil spill occurred after the oil had been moved from the covered auto to the place [National's oil storage tank] where it was finally delivered by United. In fact, the plaintiffs concede that the oil spilled had been finally delivered by the insured to the customer and the release of oil occurred after delivery. They therefore agree that this exclusion may be applicable to the release of pollutants in this case.

However, the plaintiffs also argue that the exception to the paragraph (c) exclusion applies here. That exception provides that the exclusion does not apply:  “to ‘accidents’ that occur away from premises owned by or rented to an insured with respect to pollutants not in or upon a covered auto if: “(1) The ‘pollutants’ or any property in which the ‘pollutants’ are contained are upset, overturned or damage[d] as a result of the maintenance or use of a covered ‘auto’; and ¶ (2) The discharge, dispersal, seepage, migration, release or escape of the ‘pollutants’ is caused directly by such upset, overturn, or damage.’” (Emphases deleted)

It follows that a fair reading of the exception is that it is intended to provide coverage for an accidental oil spill in the event that United’s truck, the covered auto, is “upset, overturned or damaged” while away from United’s premises. Here, National’s property damage occurred as a result of oil seeping out of its oil tank vent pipe after the oil, or the “pollutant,” was delivered into National’s storage tank. It was not caused by oil “upset” or “overturned” or even “damaged” by the maintenance or use of United’s delivery truck. It was caused because the tank was overfilled. The plaintiffs’ argument that the oil in National’s storage tank was “upset” by the pumping in of new oil from United’s truck strains the wording and would force the court to rewrite a policy previously agreed to by the insured and Hannover.

CONCLUSION

The appellate court ordered the trial court, therefore, to modify its judgment to include a declaration that the business auto insurance policy issued by Hanover to United does not provide coverage to United or National for the property damage claims from the oil spill that occurred from Izdebski’s delivery beyond the $5,000 required by the Massachusetts mandatory endorsement.

ZALMA OPINION

Insurance policy wording must be interpreted to provide the coverages that the words of the policy indicate was the intent of the parties. In this case it was clear that Hanover only agreed to insure pollution that resulted from an overturn, collision or other accidental damage to the coverage “auto,” the oil tanker, that was the insured auto. Since the facts were agreed that there was no damage to the tanker and the only cause of damage was the fact that Izdebski overfilled the storage tank, the pollution exclusion applied and the exceptions did not. Izdebski was entitled only to the $5,000 mandatory coverage and would have to pay out of his pocket for any costs in excess as a result of negligent acts for which his insurer did not agree to indemnify him.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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The Insurance Fraud Deskbook

 

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The Insurance Fraud Deskbook
Author(s):
Barry Zalma
Sponsor(s):
Tort Trial and Insurance Practice Section
Publisher(s):
ABA Book Publishing

ISBN: 978-1-62722-676-9
Product Code: 5190506
2014, 638 pages, 7 x 10

This book is written for individuals who are focused on the effort to reduce expensive and pervasive occurrences of insurance fraud. Lawyers who represent insurers, claims personnel, prosecutors and their investigators can all benefit from this exhaustive resource.

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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allows claims personnel and their lawyers to understand what errors would cause a defeat or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit, and insurance company management to attain the information needed to deal with state investigators and prosecutors.

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.

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Hobby Lobby & Quasi-Insurance

 The ACA Is Not A Law About Insurance

It is commonly recognized that an insurance company has the unquestioned right to determine who it would insure and what risks it agreed to take. Similarly, people who are insured have the right to decide what insurance protection they wish to acquire, the coverages they decide they need and the insurer with whom they wish to contract. That was the case until the enactment of the Patient Protection and Affordable Care Act of 2010 (ACA), 124 Stat. 119. The ACA granted the Department of Health and Human Services (HHS) the right to require businesses to purchase health insurance in the amounts, and covering the risks, required by the HHS thereby inserting HHS into the personal negotiations between the insured and insurer.

Insurance is a contract where a person agrees to indemnify another for consideration against certain described risks of loss that are either contingent or unknown at the time the insurance contract is agreed. Insurance contracts vary with the needs of the parties. I have  in my office over 17 linear feet of insurance policy forms that I have collected over the last 47 years. Insurance is not, nor should it be, cookie cutter identical. It should meet the needs of the person seeking insurance and the insurer.

One of those regulations required employers to purchase insurance that covered 20 different categories of birth control, four of which are abortifacients that would destroy a fertilized egg. To do so violates the deeply held religious beliefs of those who consider a human life to start at conception.

In Burwell v. Hobby Lobby Stores, Inc., — S.Ct. —-, 2014 WL 2921709 (U.S.), 123 Fair Empl.Prac.Cas. (BNA) 621 the US Supreme Court was called upon to make the ACA and the Religious Freedom Restoration Act of 1993 (RFRA), 107 Stat. 1488, 42 U.S.C. § 2000bb et seq., work without one violating the other.

The Holding

The Supreme Court, Justice Alito, held that:

(1)           “person,” within meaning of RFRA’s protection of a person’s exercise of religion, includes for-profit corporations;

(2)           the HHS contraceptives mandate, as applied to for-profit closely held corporations, substantially burdened the exercise of religion, for purposes of RFRA; and

(3)           the HHS contraceptives mandate did not satisfy RFRA’s least-restrictive-means requirement.

The RFRA does not permit the United States Department of Health and Human Services (HHS) to demand that three closely held corporations provide health-insurance coverage for methods of contraception that violate the sincerely held religious beliefs of the companies’ owners. The Supreme Court held that the regulations that imposing this obligation violate RFRA, which prohibits the Federal Government from taking any action that substantially burdens the exercise of religion unless that action constitutes the least restrictive means of serving a compelling government interest.

Analysis by Supreme Court

The court rejected HHS’s argument that the owners of the companies forfeited all RFRA protection when they decided to organize their businesses as corporations rather than sole proprietorships or general partnerships. The plain terms of RFRA make it perfectly clear that Congress did not discriminate in this way against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs.

The owners of the businesses have religious objections to abortion, and according to their religious beliefs the four contraceptive methods at issue are abortifacients. If the owners comply with the HHS mandate, they believe they will be facilitating abortions, and if they do not comply, they will pay a very heavy price—as much as $1.3 million per day, or about $475 million per year, in the case of one of the companies. If these consequences do not amount to a substantial burden, it is hard to see what would.

Under RFRA, a Government action that imposes a substantial burden on religious exercise must serve a compelling government interest, and we assume that the HHS regulations satisfy this requirement. But in order for the HHS mandate to be sustained, it must also constitute the least restrictive means of serving that interest, and the mandate plainly fails that test. There are other ways in which Congress or HHS could equally ensure that every woman has cost-free access to the particular contraceptives at issue here and, indeed, to all FDA-approved contraceptives.

The Supreme Court did not hold that for-profit corporations and other commercial enterprises can opt out of any law (saving only tax laws) they judge incompatible with their sincerely held religious beliefs.

Congress enacted RFRA in 1993 in order to provide very broad protection for religious liberty.

At issue in these cases are HHS regulations promulgated under the ACA. ACA generally requires employers with 50 or more full-time employees to offer “a group health plan or group health insurance coverage” that provides “minimum essential coverage.” 26 U.S.C. § 5000A(f)(2); §§ 4980H(a), (c)(2). Any covered employer that does not provide such coverage must pay a substantial price. Specifically, if a covered employer provides group health insurance but its plan fails to comply with ACA’s group-health-plan requirements, the employer may be required to pay $100 per day for each affected “individual.” §§ 4980D(a)-(b). And if the employer decides to stop providing health insurance altogether and at least one full-time employee enrolls in a health plan and qualifies for a subsidy on one of the government-run ACA exchanges, the employer must pay $2,000 per year for each of its full-time employees. §§ 4980H(a), (c)(1).

Unless an exception applies, ACA requires an employer’s group health plan or group-health-insurance coverage to furnish “preventive care and screenings” for women without “any cost sharing requirements.” 42 U.S.C. § 300gg–13(a)(4). Congress itself, however, did not specify what types of preventive care must be covered. Instead, Congress authorized the Health Resources and Services Administration (HRSA), a component of HHS, to make that important and sensitive decision. The HRSA applied Guidelines that nonexempt employers are generally required to provide “coverage, without cost sharing” for “[a]ll Food and Drug Administration [ (FDA) ] approved contraceptive methods, sterilization procedures, and patient education and counseling.” 77 Fed.Reg. 8725 (internal quotation marks omitted). Although many of the required, FDA-approved methods of contraception work by preventing the fertilization of an egg, four of those methods (those specifically at issue in these cases) may have the effect of preventing an already fertilized egg from developing any further by inhibiting its attachment to the uterus.

The Hahns and Conestoga sued HHS and other federal officials and agencies under RFRA and the Free Exercise Clause of the First Amendment, seeking to enjoin application of ACA’s contraceptive mandate insofar as it requires them to provide health-insurance coverage for four FDA-approved contraceptives that may operate after the fertilization of an egg. In opposing the requirement to provide coverage for the contraceptives to which they object, the Hahns argued that “it is immoral and sinful for [them] to intentionally participate in, pay for, facilitate, or otherwise support these drugs.”

RFRA prohibits the “Government [from] substantially burden[ing] a person’s exercise of religion even if the burden results from a rule of general applicability” unless the Government “demonstrates that application of the burden to the person—(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.” 42 U.S.C. §§ 2000bb–1(a), (b) (emphasis added). The first question that we must address is whether this provision applies to regulations that govern the activities of for-profit corporations like Hobby Lobby, Conestoga, and Mardel.

Congress provided protection for people like the Hahns and Greens by employing a familiar legal fiction: It included corporations within RFRA’s definition of “persons.” But it is important to keep in mind that the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends.

RFRA applies to “a person’s” exercise of religion, 42 U.S.C. §§ 2000bb–1(a), (b), and RFRA itself does not define the term “person.” The Supreme Court, therefore looked to the Dictionary Act, to determine the meaning of “any Act of Congress, unless the context indicates otherwise.” 1 U.S.C. § 1. Under the Dictionary Act, “the wor[d] ‘person’ … include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.”; see FCC v. AT & T Inc., 562 U.S. ––––, –––– (2011) (slip op., at 6)

According to HHS these corporations are not protected by RFRA because they cannot exercise religion. Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations § 4:1, p. 224 (3d ed.2010) (emphasis added); see 1A W. Fletcher, Cyclopedia of the Law of Corporations § 102 (rev. ed.2010). While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.

It is quite a stretch to argue that RFRA, a law enacted to provide very broad protection for religious liberty, left for-profit corporations unprotected simply because a majority of the Justices did not find it necessary to decide whether the kosher market’s corporate status barred it from raising a free-exercise claim. The Supreme Court concluded that a federal regulation’s restriction on the activities of a for-profit closely held corporation must comply with RFRA.

The Hahns and Greens believe that providing the coverage demanded by the HHS regulations is connected to the destruction of an embryo in a way that is sufficient to make it immoral for them to provide the coverage. Repeatedly and in many different contexts, the Supreme Court has warned that courts must not presume to determine the plausibility of a religious claim.

The contraceptive mandate, as applied to closely held corporations, violates RFRA. Our decision on that statutory question makes it unnecessary to reach the First Amendment claim raised by Conestoga and the Hahns.

 ZALMA OPINION

This is obviously a serious and important decision regarding religious freedom. What it fails to do is to recognize that the ACA forces insurers and buyers of insurance to buy insurance compelled by the HHS.

Insurance is a product. When an insurance contract is agreed by the insured and the insurer promises are made that effect the finances and property of the person insured and the insurer. Compelling, by statute, a person to buy a particular kind of insurance appears to deprive both the insurer and the insured of “property, without due process of law; nor shall private property be taken for public use, without just compensation.” If, as I believe, insurance is property, taking away the insurance policy held by Hobby Lobby before the enactment of the ACA and requiring it to buy a different policy, without just compensation is a violation of the Fifth Amendment to the U.S. Constitution not considered by the parties or the court.

In addition, since the ACA requires the insurers to provide insurance for people suffering from medical conditions that existed before the insurance came into effect, is changing the meaning of the term insurance. A pre-existing condition cannot be fortuitous, it cannot be contingent or unknown at the time the policy was acquired, and therefore what the ACA requires is not insurance. It is a law that makes commercial entities provide a governmentally mandated entitlement to certain members of the public. Insurance companies are not agents of nor are they part of the U.S. government and should not be required by law to issue quasi insurance to individuals who were not actuarially viable for  insurance any more than it would be proper to require insurers to issue fire insurance for, and to pay for fire losses, after the fire destroyed a building.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

 

 

 

 

 

 

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Direct Action Statute Does Not Mandate Coverage

Claims Made & Reported Not Changed by Direct Action Statute

Louisiana has a direct action statute that allows plaintiffs to make an insurer as well as its insured the defendant in a tort law suit. The statute was called into play by a plaintiff whose defendant failed to give notice to its insurer by amending its suit to include the insurer on a date after the claim was made and after the policy expired. The plaintiff convinced an appellate court that the direct action statute emasculated the claims made and reported provisions of the policy. In Gorman v. City Of Opelousas, — So.3d —-, 2014 WL 2937129 (La.), 2013-1734 (La. 7/1/14) the Louisiana Supreme Court resolved the dispute.

FACTS AND PROCEDURAL HISTORY

On September 28, 2009, Brian Armstrong (Armstrong) was incarcerated at the city jail in Opelousas when he was allegedly beaten by two other inmates. He later died. On September 27, 2010, Armstrong’s mother, Joyce Gorman (Gorman), filed a survival action and a wrongful death action against the city of Opelousas and its police department (collectively the City). After being served with the petition, the City filed an answer.

In December 2010 (more than a year after filing suit), Gorman directed discovery to the City seeking the identity of its insurer and requesting a copy of any applicable insurance policy. The City, only after being ordered to do so, identified Lexington Insurance Company (Lexington) as its insurer. Gorman then filed an amended petition on September 7, 2011, naming Lexington as an additional defendant. Lexington filed a motion for summary judgment, seeking to have Gorman’s direct action claim against it dismissed based on lack of coverage because her claim had not been reported to Lexington within the policy’s stated time limit.

The Lexington policy provided:

NOTICE: THIS IS A CLAIMS MADE POLICY. COVERAGE IS LIMITED GENERALLY TO LIABILITY FOR CLAIMS FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO U.S. WHILE THE COVERAGE IS IN FORCE. PLEASE REVIEW THE POLICY CAREFULLY AND DISCUSS POLICY COVERAGE WITH YOUR INSURANCE AGENT OR BROKER.

In relevant part, the policy further stated:
SECTION I. INSURING AGREEMENT
A. We shall pay those amounts that the Insured becomes legally obligated to pay to compensate others for bodily injury, property damage, or personal injury arising out of the Insured’s wrongful act. The wrongful act shall take place on or after the retroactive date, but before the end of the policy period, and shall arise solely in your capacity as a law enforcement agency. A claim for a wrongful act shall be first made against the Insured and reported to us in writing during the policy period or any extended reporting period we provide under this policy. (emphasis omitted)

The pertinent policy period was 12:01 A.M., standard time at the address of the Named Insured as stated herein from 04/17/2010 to 04/17/2011.

DISCUSSION

An insurance policy is a contract between the insured and insurer and has the effect of law between them. The role of the judiciary in interpreting an insurance contract is to ascertain the common intent of the insured and insurer as reflected by the words in the policy. When the words of an insurance contract are clear and explicit and lead to no absurd consequences, courts must enforce the contract as written and may make no further interpretation in search of the parties’ intent. Where a policy unambiguously and clearly limits coverage to claims made and reported during the policy period, such limitation of liability is not per se impermissible.

Lexington agreed to pay claims on behalf of the City if three conditions occur:

1) the wrongful act occurs on or after the retroactive date of the policy, but before the end of the policy period;

2) the claim for the wrongful act is first made against the City during the policy period; and

3) the claim is reported to Lexington in writing during the policy period.

Satisfaction of all three conditions is required for coverage under the Lexington policy. The City was undisputedly informed that Lexington’s liability is limited by these terms.
Coverage under the Lexington policy was effective only if Gorman’s claim was both made and reported within the applicable policy period. Under this type of policy, the risk of a claim incurred but not made, as well as a claim made but not reported, is shifted to the insured. The purpose of the reporting requirement in a claims-made policy is to define the scope of coverage purchased by the insured by providing a certain date after which an insurer knows it is no longer liable under the policy.

Although the September 28, 2009 wrongful act occurred after April 17, 2005 and before April 17, 2011, and Gorman’s September 27, 2010 claim was made between April 17, 2010 and April 17, 2011, as required, Gorman’s claim was not reported to Lexington until September 22, 2011, which is after the policy period expired on April 17, 2011. The occurrence of only the first two of the policy’s required conditions was insufficient to trigger coverage. Absent a timely reporting, one of the conditions needed to trigger coverage under the applicable Lexington policy did not occur. Therefore, the Lexington policy did not provide coverage to the City for the wrongful act alleged by Gorman.

Gorman’s right to sue Lexington arises out of the Direct Action Statute, which provides that an injured person, at his or her option, “shall have a right of direct action against the insurer within the terms and limits of the policy.” La. R.S. 22:1269(B)(1). Louisiana R.S. 22:1269(D) further provides: “It is also the intent of this Section that all liability policies within their terms and limits are executed for the benefit of all injured persons and their survivors or heirs to whom the insured is liable; and, that it is the purpose of all liability policies to give protection and coverage to all insureds, whether they are named insured or additional insureds under the omnibus clause, for any legal liability the insured may have as or for a tortfeasor within the terms and limits of the policy.”

In effect, the insured received what he paid for by the present policy, with premiums presumably reduced to reflect the limited coverage. The direct action statute does not mandate coverage. Rather, it prohibits any condition, stipulation or agreement in an insurance contract from limiting a right of action against the insurer to a period of less than one year from the time when the cause of action accrues. The statute was not violated as the claims-made coverage provision did not impermissibly limit plaintiff’s cause of action.

Gorman was not deprived of her rights under the Direct Action Statute, as that statute does not extend any greater right to the injured third party who was damaged by the insured. Gorman asked the Supreme Court to convert the City’s claims-made-and-reported policy into an occurrence policy, resulting in the judicial modification of the bargained-for exchange between the insurer and insured. The Supreme Court refused.

The court could think of no logical reason why the City would not report a claim for which it apparently purchased insurance coverage, it refused under the facts of this case to hold the insurer liable for the City’s failure to report the claim as required by the Lexington policy. A contrary finding would, where there is no evidence of fraud or collusion, punish the insurer for the inactions of its insured.

Although insurance policies “are executed for the benefit of all injured persons,” such protection is limited by the “terms and limits of the policy.”

CONCLUSION

The Supreme Court concluded that the provisions of the Lexington policy are undisputedly clear and unambiguous. Provisions on the making and reporting of claims in a claims-made-and-reported policy are not impermissible as against public policy. Under the City’s policy, the event and peril insured against is based on making and reporting of the claim within the period specified by the policy. The City’s failure to report Gorman’s claim to Lexington during the applicable policy period as required precludes coverage. Absent coverage, Gorman was not deprived of a right under the Direct Action Statute. Therefore, the trial court correctly granted summary judgment in favor of Lexington as to the City and Gorman, and the appellate court erred in reversing summary judgment relative to Gorman.

ZALMA OPINION

Although it empathized with Ms. Gorman’s inability to fund a judgment against the city with an insurance policy, and although it could not understand the stupidity of the city in not reporting the claim to its insurer, the Supreme Court of Louisiana refused to rewrite an insurance policy. Insurers have the right to choose who it will insure and for what risks. Courts do not have the right to change contracts made by the parties.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

Use Of Cappers Can Be Expensive

Drug Companies Should Not Use Cappers to Sell Prescription Drugs

Successful writs of mandate are as rare as snow fall in the Sahara. When they are granted a serious error of law was found necessary to be cured. The California Court of Appeal bucked tradition and granted a writ of mandate to compel trial on damages available against those who use cappers and runners.

A petition for a writ of mandate arose out of a qui tam action against Bristol–Myers Squibb Co. (BMS) to impose civil penalties for violation of the California Insurance Fraud Prevention Act (IFPA), Insurance Code section 1871 et seq. The relators alleged that Bristol–Myers employed runners and cappers to induce physicians to prescribe its drugs to their patients. The trial court concluded that proof of liability under Insurance Code section 1871.7, a part of the IFPA, requires: (1) that a claim for payment be presented to an insurer; (2) that the claim must itself be fraudulent, containing express misstatements of fact; and (3) that the claim would not have been presented but for Bristol–Myers’ unlawful conduct. Petitioners contend that the order unduly limits the application of section 1871.7

In State ex rel. Wilson v. Superior Court, — Cal.Rptr.3d —-, 2014 WL 2918872 (Cal.App. 2 Dist.) Michael Wilson, a former Bristol–Meyers Squibb Co. sales representative, on behalf of the People of the State of California, filed the underlying qui tam action against BMS. Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which means he “who pursues this action on our Lord the King’s behalf as well as his own.”

The lawsuit alleges, in a factually detailed pleading, that in marketing its drugs, BMS engaged in a course of illegal and fraudulent conduct aimed at doctors, health care providers, pharmacists, and insurance companies. The suit alleges BMS specifically targeted these benefits to physicians who had large numbers of patients enrolled in private health insurance plans, and instructed its sales representatives to hold the targeted physicians responsible for increased prescriptions—expressly characterizing this as “shaking the doctors down.”

The IFPA

This petition concerns the proof required to establish a violation of subdivision (a) of Insurance Code section 1871.7, a portion of the IFPA that relates to health insurance and workers’ compensation insurance fraud.  Subdivision (a) makes it unlawful to knowingly employ runners or cappers to procure clients or patients to obtain insurance benefits.  Subdivision (b) prescribes civil penalties and other remedies for violation of either subdivision (a) or Penal Code sections 549, 550, or 551, which target insurance and workers’ compensation fraud.

The Summary Adjudication Ruling

The trial court looked to subdivision (b)’s final sentence, which states that “[t]he penalty prescribed in [subdivision (b)] shall be assessed for each fraudulent claim presented to an insurance company … and not for each violation.” (Italics added.) The court held that under that language it is not enough to prove that the unlawful conduct was a substantial factor resulting in the prescription. The court held this language permits the assessment of penalties only if the prescription would not have been written but for the unlawful conduct; that the prescriptions must be shown on a prescription-by-prescription and claim-by-claim basis to have been a quid pro quo for value provided by BMS; and that the resulting claim must be independently fraudulent and not merely unlawful, containing on its face an express misstatement of fact.

DISCUSSION

For the assessment of civil penalties subdivision (b) requires proof of claims that are in some manner deceitful.

The final sentence of subdivision (b) limits the assessment of its penalties to something less than “every person” who is guilty of the unlawful conduct. Under it, the “penalty prescribed in this paragraph” may be assessed only “for each fraudulent claim presented to an insurance company,” and not for each act that violates subdivision (a) or the incorporated penal provisions. The “penalty prescribed in this paragraph” is the “civil penalty of not less than five thousand dollars ($5,000) nor more than ten thousand dollars ($10,000),” and the “assessment of not more than three times the amount of each claim for compensation….” But it does not encompass the “other equitable relief” that is authorized by subdivision (b), including injunction, disgorgement, costs, and attorneys fees, nor the “other penalties that may be prescribed by law.” In adding the final sentence to subdivision (b), the Legislature could (and presumably did) conclude that the employment of runners and cappers that does not result in claims, or that results only in non-fraudulent claims, may appropriately be remedied by equitable devices, but that when the result is the presentation of fraudulent claims, the additional consequence of subdivision (b)’s monetary penalties is justified.

The Court of Appeal concluded that the words “fraudulent claim” in subdivision (b) do not justify the trial court’s narrow interpretation, which limits actionable claims to those that contain express misstatements of fact. Where words of common usage have more than one meaning, the one which will best attain the purposes of the statute should be adopted.

Subdivision (a) identifies certain running and capping activities as unlawful without regard to whether the resulting services are competently rendered. Running and capping activities are disfavored and unlawful not just because they may often result in services that are excessive or unnecessary, but also because their purpose is to obtain the benefits that otherwise might have gone to others who did not use the prohibited methods.

Upon proof of a cause of action for deceit, the plaintiffs would be entitled to the damages resulting from the defendant’s wrongful conduct. Subdivision (b) is not a substitute for a civil tort action for deceit. It provides civil penalties for conduct that is made unlawful by other provisions of law.

The plaintiffs in an action for its penalties are not direct victims. They did not rely on any misstatements or nondisclosures. They suffered no resulting harm—apart from that suffered by insurance policyholders and society as a whole.

California law recognizes many circumstances in which the proof required to show fraud requires far less than would be required to establish a civil cause of action for fraud. The “fraudulent claim” requirement does not limit the availability of the equitable and other remedies available under subdivision (b); but it does limit the imposition of subdivision (b)’s civil penalties to proof of claims that have a causal relationship to the unlawful conduct, and that are in some manner deceitful.

While the plaintiffs are required to show a causal relationship between the unlawful conduct and the resulting claims, at this stage of the case—before the defendants have filed an answer, before discovery, and before the identification of the evidence—it would be premature to conclude that proof of causation necessarily requires proof that the prescriptions would not have been written in the absence of the unlawful conduct. Causation may in many instances be inferred from evidence that does not itself constitute direct evidence of reliance on an individual basis.

The court of appeal concluded, therefore, that the trial court erred by concluding:

(1) that in no case can conduct be actionable under subdivision (b) without proof that a prescription was written and a fraudulent claim presented to an insurer as a result of the unlawful conduct;

(2) that in order to justify assessment of monetary penalties under subdivision (b) the proof must necessarily establish that the prescription for which payment is claimed would not have been written and the claim for payment would not have been presented but for BMS’s unlawful conduct; and

(3) that in order to justify assessment of monetary penalties under subdivision (b) the proof must necessarily establish that the claim contains on its face an affirmative misstatement of fact.

The Court of Appeal granted the petition for writ of mandate and instructed the trial court to set aside its ruling on the motion for summary adjudication and to enter a modified ruling that comports with this opinion.

ZALMA OPINION

The IFPA was enacted because the state of California recognized how seriously insurance fraud acted to cause damage to the people of the state. In this case it is alleged that a major drug company was involved in a scheme to defraud insurers by bribing or otherwise compensating doctors to prescribe BMS drugs to multiple patients who did not require treatment with the drugs. If proved, when the case finally goes to trial, BMS will be subject to hundreds of fines between $5,000 and $10,000 for each fraudulently prescribed drug.

The trial court attempted to make it more difficult to proceed against the drug company and the Court of Appeal, therefore, found it necessary to issue a rare writ of mandate, to compel the trial court to allow the parties present the appropriate evidence and determine the appropriate fines for such wrongful conduct.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Some Success for Fraud Fighters

Zalma’s Insurance Fraud Letter –

July 1, 2014

FLAG-US

 

 

 

 

 

Happy Independence Day

In the lucky thirteenth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on July 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Arson for Profit Results in a 30 Year Sentence.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.    Insurance Fraud Conviction Affirmed.
4.    Virginia SIU Investigator of the Year
5.    An Insurance Criminal Taught to Seek More

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

•    The Art of the Interview
•    Conflict Needed for Independent Counsel
•    Creative Pleading Fails to Convince
•    Health Insurance Fraud Conviction Stands
•    Builder’s Risk Policy Covers Damage only to Structure as Built
•    You Must Comply With California Regulations by September 1
•    Not Nice To Lie to Your Insurer
•    MCS 90 and Interstate Commerce
•    The Insurance Fraud Deskbook
•    Sex Offender Can’t Get Insurance for Erectile Disfunction
•    Resident of Household Exclusion
•    Outlaw Loses
•    Only Coverage for Insured Person
•    Diminution in Value & Insurance
•    Insurance Fraud & Weapons to Fight Fraud
•    Knowledge of Insurance is Required to Adequately Investigate Insurance Fraud
•     For Fun June 16, 2014
•     “Insurance Fraud Deskbook” Now Available
•    Use of Vehicle
•    Medical Services True Value

Zalma on Insurance

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

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

NEW! From the ABA:

The Insurance Fraud Deskbook
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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available sometime in June 2014 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.

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.

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

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Again the Supreme Court Fails to Note that the ACA is not Insurance

No Right To Compel Purchase of Insurance That Violates Religious Belief

Justice Alito wrote the opinion for the majority concerning the regulations written as part of the Affordable Care Act or Obama care. Some quotes from the opinion follow. You can read the entire opinion at http://www.supremecourt.gov/opinions/13pdf/13-354_olp1.pdf

Because the contraceptive mandate forces them to pay an enormous sum of money—as much as $475 million per year in the case of Hobby Lobby—if they insist on providing insurance coverage in accordance with their religious beliefs, the mandate clearly imposes a substantial burden on those beliefs.
* * *
Since the HHS contraceptive mandate imposes a substantial
burden on the exercise of religion, we must move
on and decide whether HHS has shown that the mandate
both “(1) is in furtherance of a compelling governmental
interest; and (2) is the least restrictive means of furthering
that compelling governmental interest.”
* * *
As we explain, see infra, at 43-44, the Government can readily arrange for other methods of providing contraceptives, without cost sharing, to employees who are unable to obtain them under their health-insurance plans due to their employers’ religious objections.

* * *

It is HHS’s apparent belief that no insurance-coverage
mandate would violate RFRA—no matter how significantly
it impinges on the religious liberties of employers—that
would lead to intolerable consequences.

* * *

ACA does not create a large national pool of tax revenue for use in purchasing healthcare coverage. Rather, individual employers like the plaintiffs purchase insurance for their own employees. And contrary to the principal dissent’s characterization, the employers’ contributions do not necessarily funnel into “undifferentiated funds.”

* * *

The contraceptive mandate, as applied to closely held
corporations, violates RFRA.

Justice Kennedy, concurring:

As to RFRA’s first requirement, the Department of Health and Human Services (HHS) makes the case that the mandate serves the Government’s compelling interest in providing insurance coverage that is necessary to protect the health of female employees, coverage that is significantly more costly than for a male employee. Ante, at39; see, e.g., Brief for HHS in No. 13-354, pp. 14-15.There are many medical conditions for which pregnancy is contraindicated. See, e.g., id., at 47. It is important to confirm that a premise of the Court’s opinion is its assumption
that the HHS regulation here at issue furthers al egitimate and compelling interest in the health of female employees.

* * *

On this record and as explained by the Court, the Government has not met its burden of showing that it cannot accommodate the plaintiffs’ similar religious objections under this established framework. RFRA is inconsistent with the insistence of an agency such as HHS on distinguishing between different religious believers—burdening one while accommodating the other—when it may treat both equally by offering both of them the same accommodation.

* * *

Among the reasons the United States is so open, so tolerant, and so free is that no person may be restricted or demeaned by government in exercising his or her religion. Yet neither may that same exercise unduly restrict other persons, such as employees, in protecting their own interests, interests the law deems compelling.In these cases the means to reconcile those two priorities are at hand in the existing accommodation the Government has designed, identified, and used for circumstances
closely parallel to those presented here. RFRA requires the Government to use this less restrictive means. As the Court explains, this existing model, designed precisely for this problem, might well suffice to distinguish the instant cases from many others in which it is more difficult and expensive to accommodate a governmental program to countless religious claims based on an alleged statutory right of free exercise.

ZALMA OPINION

Although I have no question that the majority was correct in protecting the religious freedom of the owners of Hobby Lobby in accordance with the mandate of the First Amendment to the U.S. Constitution, I continue to be upset that no one has argued to the Supreme Court that the ACA is not a law creating an insurance system but is rather an entitlement to what the ACA calls “insurance”. In fact, the ACA has nothing to do with insurance and, by definition, prevents insurance from acting as insurance. Insurance requires that it provides indemnity for a contingent or unknown event. The ACA requires, on the other hand, that insurers provide indemnity to people with known problems that preexisted the issuance of the policy. By so doing they are making insurance companies an agency of the government requiring them to do something that is not insurance.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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The Art of the Interview

The Interview Is an Essential Part of Every Insurance Claim

Every insurance claim begins with the interview of the person insured to learn who was involved, what happened, when it happened, where it happened, why it happened and how it happened. Every person involved in the claim process recognizes the need to conduct a thorough and informative interview.

Interviewing is an art because the interviewer creates, with words, a situation where the person being interviewed is unaware that he or she is the subject of an interview. The appealing picture drawn by the interviewer encourages the subject to provide the information needed by the interviewer.

To accomplish the task and get to the truth, the person gathering information must do as much as possible to make the setting ideal for an interview. When provided with a comfortable environment, the person who has the information will be much more amenable to be forthcoming with the needed facts.

The room where the interview is to take place would be best decorated in warm colors or neutral pastels, and furnished with comfortable and ‘friendly’ chairs or sofas. In a non-criminal context, as often as possible, the professional will conduct the interview in the home of the person interviewed. The professional should take care not to place physical restrictions on the interview setting. The interviewer will never:

o    Require a man to wear a tie

o    Require a woman to wear heels.

o    Require a desk or other ‘barrier’ be placed between the participants.

o    Require a darkened room or harsh lighting.

o    Require the room temperature to be uncomfortably high or low.

In a manner directly opposite to that of a police interrogation, the interviewer should always have coffee, water or soft drinks available to person being interviewed. Any chair provided should always be a comfortable one. The attitude and demeanor of the person gathering the information should, likewise, always be friendly, calm, conciliatory, flattering, inoffensive, congenial, and curious.

Establish Rapport

The interviewer should convince subject, by both words and appearance, that he or she has an all consuming desire for information. Ideally, the subject should be made to feel the need to slake the interviewer’s thirst for knowledge, as if bringing water to a person lost in the desert.

Professionals must do more than gather information. A professional uses the interview as a scientist might use an experiment: to observe and classify facts. The chalk board in Edward Lloyd’s coffee shop would have been useless unless the information posted there was classified into a format that was useful to his customers, the Underwriters who needed the information to decide whether or not to undertake risks on shipments by sea.

The professional gathers the information gained through the interview, collates and classifies it until it can be used to evaluate risk, make a business decision or otherwise order the processes of life.

The professional must remember that the most important aspect of any profession is gathering sufficient information to make an intelligent decision with regard to a risk. The mother who wants to know where her child has been is gaining information to make decisions about risks the child faces. The insurance underwriter who asks a prospective insured about the materials used in the construction of a building is gathering information to decide whether to accept or reject a risk. The businessman who interviews his sales staff is gathering information to decide whether to take a risk on a new product. And the manufacturer who interviews his suppliers is gathering information on whether to take a risk on a new manufacturing plant.

Learn Effective Interview Techniques, Then Practice Them

When it comes to interviewing, experience, by itself, is not enough. The interviewer must first know the fundamentals and principles that form the art. An interviewer needs to understand the techniques of interviewing before starting an interview as much a surgeon needs to know anatomy before beginning surgery. Trial-and-error learning will not teach surgery. An untrained person with a scalpel can never perform an adequate appendectomy no matter how often he tries. Without a thorough knowledge of anatomy he will not even find the appendix.

Practice, without applied knowledge, then, will cause more harm than good. Professionals can rarely learn to gather information by experience alone. As the study of anatomy is to the student surgeon, so the fundamentals of the art of the interview are to the professional. The professional must first understand the anatomy of the interview.

If the professional does not know the fundamentals and principles of interviewing – and when to apply them – he or she will not advance beyond the level of a novice. The information gathered will be inadequate. The information gathered will be incomplete. The information gathered will be untrustworthy.

Many interviewers are novices at gathering information without realizing it. If they have even a few random instances of success they can come to feel they are good interviewers. But it is only through the application of the fundamentals, and a realization of the cause-and-effect relationship of the fundamentals with the resulting information, that the professional can truly realize his or her potential as an interviewer.

Beware the “Expert System”

For centuries insurers have attempted to make the work of their personnel easy. Insurance agents are provided blank applications and proposal forms. Adjusters are supplied with lists of questions to ask insureds and claimants. Underwriters are given manuals to help them collate the information they have. More recently, software programs called “expert systems,” have been introduced. The software consists of the combined input of several experienced insurance underwriters and professionals in other businesses.

The person using the software merely keys in the facts, and the software makes a decision concerning suitability of risk and premiums to be charged, based on the experience of many underwriters.

The “expert systems” have a fatal flaw: they assume the information keyed into the computer is correct. Because the convenience of the new expert systems allows insurers to hire less experienced underwriters, there is a tendency to ask fewer questions, and the underwriter is not taking risk but just operating software. Using expert systems change the profession of underwriting to nothing more data processing.

The user of an “expert system” is not even called upon to gather information, let alone to make a decision. The thinking, risk taking, human underwriter is replaced by a calculator. Information not included in the “expert system” is simply ignored to the detriment of the insurer when using the so-called “expert system.”

Individual information gathering and critical judgment are not exercised. Successful concealment and misrepresentation by an insured becomes simple. Insurance fraud is encouraged. Judgment is replaced by calculation. Facts are replaced by uncorroborated representations.

How far the professional advances in the art of interviewing depends on the effort the professional puts into conducting the interview and the person interviewed. To become a professional one must cultivate an insatiable curiosity. The interviewer should constantly study and experiment with various techniques that may not have been tried before. Most importantly the interviewer must understand that he or she must listen and never interrupt a narrative.

It may take more time to create rapport and gain the confidence of the subject than it will to obtain the information you’re seeking

The most important role in any interview is the role of the interviewer. Unless the interviewer can genuinely convince people that he or she is interested in their welfare and that it is to their advantage to confide in the interviewer, poor results will follow. The interviewer will be unable to complete a competent interview unless the person being interviewed is convinced that the professional is sincerely attempting to arrive at the truth.
The interviewer must keep his or her emotions in check. Even if the interviewer is empathetic to the unfortunate plight of the subject, controlling emotions is absolutely necessary to achieving a successful interview. The interviewer’s positive empathy for the person interviewed should never be over-extended such that it could be misread as a sign of sympathy.

Anyone, when interacting with any other person, is sharing information, but when two individuals are comfortable with these interviewing techniques, neither person feels the need to press for information. A wealth of detailed information is allowed to pass between them, resulting in a satisfying communication, and more importantly, a successful interview.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available for pre-order.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

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Conflict Needed for Independent Counsel

Reservation Of Rights Is Not Enough for Independent Counsel

Ever since the California Court of Appeal decided San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis) insureds who received a reservation of rights letter from their insurer have demanded that their insurer pay an attorney of their choice claiming the reservation created a conflict of interest between the lawyer appointed and his two clients, the insured and the insurer. They have found, much to the shock of the independent lawyer who will not be paid by the insurer, that the insurer will not always agree to pay for independent counsel.

In William Graper  v. Mid-continent Casualty Company, No. 13-20099, USCA Fifth, (June 24, 2014), William Graper and Ben B. Floyd (the “Insureds”) appealed a district court’s grant of summary judgment in favor of Mid-Continent Casualty Company (“Mid-Continent). The Insureds filed suit against Mid-Continent alleging that it failed in its obligation to defend them when it refused to pay the fees of the Insureds’ chosen attorney who represented them in an underlying lawsuit brought against them by Kipp Flores Architects (“KFA”). Mid-Continent argued that it fulfilled its duty to defend the Insureds by tendering its selected counsel to defend the suit. The Insureds argued that a disqualifying conflict of interest arose between them and Mid-Continent, entitling them to their choice of counsel at Mid-Continent’s expense.

KFA filed a lawsuit against Hallmark, Mid-Continent’s insured, and Joe Partain, as a principal of the company, alleging that Hallmark had violated several of its copyright rights in several architectural designs. KFA’s complaint alleged that Hallmark used KFA’s copyrighted designs when constructing homes and used those same designs in promotional materials. It further alleged that once KFA discovered Hallmark’s infringing conduct, it sent a cease and desist letter to Hallmark; notwithstanding this letter, Hallmark’s infringing conduct continued.

Following KFA’s filing of its complaint, the Insureds tendered the claim to Mid-Continent. After a preliminary investigation, Mid-Continent agreed to defend the Insureds subject to a reservation of rights.  Two of the potential bases for exclusion included: (1) that the injury may not have occurred during policy coverage dates and (2) that the infringing conduct may have been intentional or willful.

After receiving this reservation of rights, the Insureds notified Mid-Continent that they would select their own counsel because they believed there was a disqualifying conflict of interest between them and any counsel Mid-Continent chose. Mid-Continent offered its own counsel to defend the Insureds but refused to fund their defense if they insisted on hiring their own counsel.

The Insureds refused Mid-Continent’s tender and elected to continue defending the KFA suit with their own counsel. They later filed a declaratory action in Texas state court seeking a determination of their rights and powers under the successive insurance policies. The district court held that no disqualifying conflict of interest existed between the Insureds and Mid-Continent, and that Mid-Continent had fulfilled its duty to defend when it tendered its chosen counsel to represent the Insureds.

The Fifth Circuit observed that it recently upheld an award of 3.2 million dollars in favor of KFA in its underlying suit against the Insureds. The only issue in this appeal is whether Mid-Continent was obligated to pay for the Insureds’ selected counsel to defend the KFA claims.

When an insured is sued and the petition contains allegations which, when fairly and reasonably construed, state a cause of action that is potentially covered by the policy, then the insurer has a duty to defend the insured in the underlying lawsuit. Because, in Texas, the duty to defend is based solely upon allegations in the pleadings, it is broader than the duty to indemnify and, in certain cases, an insurer may have had a duty to defend even when it is later found that coverage (the duty to indemnify) does not exist.  Ordinarily, however, if the duty to defend arises, liability insurance policies grant the insurer complete, exclusive control of the defense. This authority includes the right to select counsel to defend the lawsuit.

Texas law is controlling. The principal case on such conflicts of interest as are raised in this appeal is N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004). Davalos recognizes that an insurer’s issuance of a reservation of rights can “create[] a potential conflict of interest.”  The reservation of rights, however, “does not, by itself, create a conflict between the insured and insurer; it only recognizes the possibility that such a conflict may arise in the future.”

Mid-Continent, the insurer, reserved the right to deny coverage of the underlying copyright infringement claims on grounds that the alleged acts of infringement against the Insureds “occurred” outside the time the policy was in effect; the Insureds are defending KFA’s copyright claims on grounds that the claims “accrued” outside the applicable time provided by the statute of limitations. The Insureds argue that the timing related to coverage of the claims and timing relating to accrual of the claims run on the same factual track, which creates a disqualifiable conflict because adjudication of many of the same facts will determine both the Insureds’ liability and the Insureds’ coverage. Closer scrutiny of the Insureds’ argument shows that it misconceives which facts are necessary to adjudicate the Insureds’ defense that the statute of limitations bars KFA’s claims.

Davalos explicitly rejects the notion that an insured is entitled to select its own counsel merely because the potential for a conflict of interest exists. Here, as between occurrence and accrual, we have two different concepts; an occurrence determines the date of the actual injury and accrual determines the date of the discovery of the injury. The only common fact between the timing of these two determinations is that the occurrence inevitably occurred before the discovery. Under the Davalos same facts test, there is no disqualifiable conflict of interest between the Insureds and Mid-Continent in litigating the statute of limitations defense.

There is a second “same” fact that the Insureds argue creates a disqualifying conflict of interest; that is the willfulness of the Insureds’ conduct. The question of willfulness arises under the policy exclusion for knowing conduct that violates the rights of another. In this respect, KFA alternatively pled for statutory damages under 17 U.S.C. § 504(c). Section 504(c) allows a copyright owner to receive an award of “not less than $750 or more than $30,000″ for each incident of infringement.

It is significant, however, that the exclusionary provision in Mid-Continent’s policy extends only to knowing violations of the rights of another. A finding of willfulness in the underlying suit would not adjudicate the fact of whether the infringement was knowing because a finding of willfulness under the Copyright Act does not require proof of knowing conduct.

An application of the Davalos “same facts” standard evidences no conflict here. The underlying trial court’s determination that there was a willful violation of KFA’s copyright under § 504(c)(2) would not settle the issue of whether that violation was knowing; a violation can amount to reckless conduct and still be willful under the statute. Because the infringement could be willful conduct under § 504(c)(2), entitling KFA to enhanced damages, without a finding of knowing infringement thereby excluding coverage, there is no disqualifying conflict of interest under Davalos.

A finding that there was no disqualifying conflict of interest entitled Mid-Continent to summary judgment on both the Insureds’ breach of contract claim and its claim under the Texas Insurance Code. Accordingly, the district court’s final judgment granting Mid-Continent’s motion for summary judgment was affirmed.

ZALMA OPINION

The Cumis decision was a landmark case allowing insured’s to protect themselves, at the expense of their insurer, from insurers taking advantage of the insured’s rights by hiring counsel who could possibly direct the litigation to facts that would deprive the insured of coverage. Of course, in so doing, it needed to conclude that lawyers hired by insurers to defend their insured, had no ethics and would work to deprive the lawyer’s client of his, her or its right to defense and indemnity.

This case found there was no real conflict and is a reasonable limitation on the Cumis doctrine which was, in California until a limiting statute was enacted, abused by so-called independent counsel.

If there is a real conflict independent counsel can be appointed and watched over by appointed counsel but this should be done sparingly and only when the conflict is obvious.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Creative Pleading Fails to Convince

Demand for Money Not an Equitable Remedy

Before the founding of the United States courts in Britain were divided into law courts (that dealt with money damages) and courts of equity (usually operated by clerics, that dealt with fairness). As time progressed the two courts were combined and modern judges sit in both law and equity cases. However, the remedies available in equity are different than the remedies available in a law court. Courts of equity usually never enter judgments awarding money damages.

ERISA is a federal statute that controls health insurance plans that fulfill the requirements of the ERISA statute. In Central States, Southeast and Southwest Areas Health and Welfare Fund, an Employee Welfare Benefit Plan, by Arthur H. Bunte, Jr., a Trustee thereof, in his representative capacity v. Health Special Risk, Incorporated; Markel Insurance Company; Federal Insurance Company; Ace American Insurance Company, No. 13-10705 (June 23, 2014) Plaintiff, a large ERISA provider, seeks a declaration that Defendants, three independent, non-ERISA insurance providers are bound by the terms of the ERISA plan and primarily liable for injuries sustained by individuals covered by the parties. Because ERISA only allows the plan to sue in equity, and since the district court fond all of the plaintiff’s claims were claims for money damages, granted Defendants’ motion to dismiss for failing to seek equitable relief under ERISA § 502(a)(3).

FACTS

Eleven individuals insured by Central States (the “insureds”) were injured while participating in various activities. In addition to having insurance from Central States, all eleven members were also covered by insurance policies from either Markel Insurance Company, Federal Insurance Company, or Ace American Insurance Company, none of which policies are an ERISA plan. Defendant Health Special Risk, Inc. (“HRS”) is the third-party administrator for each of the independent insurance companies (collectively with HRS, “Defendants”) and is responsible for administering the claims under their various policies.

Central States and the Insurer Defendants can’t agree on which is primarily responsible for the medical bills that resulted from their insureds’ injuries. At the time of their injury, the insureds were covered both as dependents of Central States plan members and by Defendants. Central States paid the claims directly to the medical care providers and sought reimbursement from the Defendants, who refused payment on the grounds that their policies only provided “excess accidental injury coverage,” making them only secondarily liable once the insureds’ primary coverage was exhausted.

APPEAL

Central States essentially raises three issues on appeal.

First, Central States asks this court to find that § 502(a)(3) allows the type of equitable relief requested in the amended complaint.

Second, Central States requests that this court recognize a federal common law cause of action for unjust enrichment to fill the gap in ERISA’s statutory scheme.

Thired, Central States argues that it successfully stated a claim for declaratory judgment-without a request for money-under § 502 and is entitled to a determination of liability.

DISCUSSION

Central States failed to state a claim for equitable relief as required by ERISA § 502(a)(3). Central States seeks to bind Defendants-with whom it has no contractual or business relationship to its ERISA Plan’s COB provisions, which provide that Defendants are primarily responsible for paying the insureds’ medical bills.

As the Plan fiduciary, Central States is entitled to bring an action to “enforce . . . the terms of the plan.” However, the text of ERISA makes it clear that the relief sought must be “appropriate equitable relief,” not legal relief. Ever since its decision in Mertens v. Hewitt Associates, 508 U.S. 248, 256 (1993), the U.S. Supreme Court has repeatedly defined “appropriate equitable relief” as “those categories of relief that were typically available in equity.” Equitable relief is contrasted with “legal relief,” which constitutes claims seeking nothing other than compensatory damages. The classic form of purely legal relief is money damages.

To comply with the requirements of § 502(a)(3), the six counts of Central States’ amended complaint are framed as equitable relief. Despite this, each count actually requests monetary damages. For example each seek money damages in counts labeled with words of equity: Count 1, Unpaid and Future Expenses; Count 2, requesting an “injunction requiring the Defendants to pay covered medical expenses”; Count 3, Restitution of Payments Made; Count 4, Equitable Lien / Constructive Trust to enforce Central States’ equitable liens in the identifiable” amounts claimed owed by each Insurer Defendant; Count 5, Subrogation; Count 6, Unjust Enrichment requesting a grant of money judgment.

The Fifth Circuit made clear that simply framing a claim as equitable relief is insufficient to escape a determination that the relief sought is legal.  An injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation, was not typically available in equity. Attempts to recharacterize a desired § 502(a)(3) remedy as a purely equitable form of relief, like an injunction, have been consistently rejected.

Central States’ claims for monetary relief will be considered equitable only if they fit into one of the few categories of “typical equitable relief” that allow for money damages.

Plaintiff’s injunctive relief argument, framed as defendant’s failure to reimburse the plan, was perfunctorily dismissed by the trial court, which held that an injunction to compel the payment of money past due under a contract, or specific performance of a past due monetary obligation, was not typically available in equity.

Typically, equitable restitution was sought in the form of a constructive trust or equitable lien, where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.

ERISA § 502(a)(3) only allows claims for the types of equitable relief typically available in equity. Money damages are not typically available in equity. .

CENTRAL STATES’ CLAIMS REQUEST RELIEF NOT TYPICALLY AVAILABLE IN EQUITY

Because Central States requests money damages, it must demonstrate that its claims fall within those categories of relief that were typically available in equity. Defendants argue that all six counts should be dismissed for requesting impermissible legal relief.

Central States argues that the Court has established that Plan rules should be enforced against Defendants – who are not parties to the ERISA Plan – because the plan’s rights would not be diminished by equitable defenses and when the express contract term contradicts the equitable rule, the agreement must govern. ERISA-plan provisions do not create constructive trusts and equitable liens by the mere fact of their existence. Liens and trusts are created by the agreement between the parties to deliver assets. There was no such agreement.

Central States describes Defendants as “constructive trustees,” defined as those who “hold[] property in constructive trust for the benefit of the beneficiary and [are] under a duty to account for the funds [they] hold in constructive trust.”

Central States argues that Defendants exercised discretion over the Plan’s assets by refusing to reimburse Central States for its medical bills, thereby forcing Central States to expend funds to pay medical bills which were not its responsibility to pay. The Defendants cannot be said to exercise “the power of free decision-making” over Central States’ assets.

Defendants have no say in the management of the Plan, its administration, or its assets, as they could no more have ordered the claims paid than ordered them denied. Further, they have no duties or responsibilities to the Plan: there is no evidence that they maintain records for Central States, disclose information on its behalf, check for conflicts of interest, or have any say in the investment of assets. It cannot even be said that Defendants “forced” Central States to pay these claims; that decision was made without consulting Defendants.

Because Central States cannot establish that the basis of their claim is equitable, the Fifth Circuit affirmed the district court’s dismissal of Counts II-IV for failure to state a claim.

THE LIMITATION SET BY CONGRESS

Congress, in drafting § 502(a)(3)(B) to allow only “equitable relief,” specifically contemplated the possibility of extending to plan fiduciaries a right to sue a participant for money damages and chose instead to limit fiduciaries’ remedies to those typically available in equity. Central States’ objection that it will be left without a remedy is unavailing. It has whatever “appropriate equitable relief” it can bring to enforce the provisions of the Plan. The only limitation is that they have to be equitable, which is Congress’s intent, not a gap.

ZALMA OPINION

The plaintiff, tried to change the law by creative pleading. It sought money damages from each of the insurance companies by claiming that each claim it was making was actually a claim for equitable relief. The Fifth Circuit refused to accept the plaintiffs arguments, read through the creative pleading, and affirmed the dismissal.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Health Insurance Fraud Conviction Stands

Jail for False Health Insurance Claims

Because Medicare and Medicaid pay health care providers promptly and without any inquiry into the probity of the claim health insurance fraud is a fairly easy crime to commit with little chance of being arrested or convicted. Perhaps that is the reason why the extent of health insurance fraud is counted in billions of dollars.

In United States of America v. Eddie Wayne Louthian, No. 13-4231 (4th DCA, June 23, 2014) the Fourth Circuit Court of Appeal was faced with an attempt by a convicted health insurance criminal to avoid a 48 month sentence of forfeiture of nearly $1 million of his assets.

Eddie Wayne Louthian, Sr., was convicted in the Western District of Virginia of multiple offenses arising from a health care fraud scheme. On appeal, Louthian challenged each of his convictions, as well as the district court’s forty-eight-month sentence and forfeiture order.

Between 2005 and 2011, Louthian was President and Business Manager of the Saltville Rescue Squad, Inc. (the “Squad”), headquartered in Saltville, Virginia. The Squad provided ambulance transport for medical emergencies and non-emergency transportation for dialysis patients. The Squad billed Medicare and certain private insurers, including Anthem Blue Cross/Blue Shield (“Anthem”), for its services.

The Medicare system provides insurance coverage for ambulance transportation to and from dialysis centers when conveyance by other means would endanger a patient’s health. Before authorizing payments for recurring, non-emergency transports, Medicare requires the issuance of a physician certification statement, also known as a Certificate of Medical Necessity (“CMN”).

The Medicare system is administered to ensure that claims for dialysis transports are paid to providers as quickly as possible. When such a claim is filed electronically, it must be paid within fifteen days of receipt. If a claim is filed on paper, it must be paid within twenty-nine days. Because of the large volume of such claims for Medicare payments, little or no inquiry is made into the validity of claims as they are received. If a paid claim is ultimately suspected of having been fraudulently submitted, the authorities will investigate and pursue an appropriate reimbursement, in addition to potential criminal charges.

In April 2008, the Medicare Fraud Control Unit of the Virginia Attorney General’s Office (the “Fraud Unit” or the “Unit”) began investigating the Squad’s activities. The Fraud Unit suspected that the Squad was engaged in a scheme to falsely bill Medicare and private insurers for services that were not medically necessary. The Unit’s investigation focused on the Squad’s billings for services to three dialysis patients. The Squad provided round-trip ambulance transportation for those patients, up to three times per week, between their Saltville homes and a dialysis center in Abingdon, Virginia, about twenty miles away. For each such transport, the Squad billed Medicare approximately $1,200 to $1,500. The Squad would also bill Anthem, which was a secondary insurer for each of the three patients.

The Unit, working with the United States Attorney unearthed evidence that Louthian and other Squad employees had forged, altered, and lied about the three patients’ medical conditions on documents submitted to support the Squad’s requests for payments.

On January 17, 2012, Louthian, Squad employee Monica Hicks, and the Squad itself were indicted by the grand jury. The jury trial of Louthian and the Squad, which began in Abingdon on September 10, 2012, lasted for about ten days.

The jury was presented evidence that at Louthian’s direction Squad employees and volunteers engaged in a pattern of forging and altering CMNs, recording false information on call sheets, and making other material misrepresentations that Louthian hoped would get the transports paid.

Several Squad employees testified that they were instructed by Louthian to embellish call sheets with fabricated details. Squad employees were instructed to use words like “non-ambulatory,” even when the patients could walk, and that Louthian told her to report that one patient was “partially blind,” even though the employee had seen the patient driving her own vehicle.

Louthian was convicted on seven counts. A sentencing hearing was based on a presentence report (“PSR”) that grouped his seven convictions and calculated a total offense level of 32 with a criminal history category of I. As a result, Louthian’s advisory Guidelines range was 121 to 151 months of imprisonment. Louthian objected to most of the findings. The district court rejected each of Louthian’s objections and adopted the PSR.

The court varied downward from the advisory Guidelines range and imposed seven concurrent prison terms of forty-eight months each. On March 21, 2013, the court entered its criminal judgment, incorporating the preliminary order of forfeiture.

ANALYSIS

An appellate court will sustain a guilty verdict if there is substantial evidence, taking the view most favorable to the Government, to support it. Substantial evidence exists if there is evidence that a reasonable finder of fact could accept as adequate and sufficient to support a conclusion of a defendant’s guilt beyond a reasonable doubt. The appellate court always defers to the jury’s determinations of credibility and resolutions of conflicts in the evidence, as they are within the sole province of the jury and are not susceptible to judicial review.

In order to prove the conspiracy to commit health care fraud the government was required to show an unlawful agreement between Louthian and at least one other person to commit health care fraud. The substantive health care fraud offense required proof that Louthian had knowingly and willfully executed a scheme to defraud any health care benefit program; or to obtain, by means of false or fraudulent representations any of the money of any health care benefit program in connection with the delivery of or payment for health care benefits, items, or services. Finally, the four false statement charges required proof that Louthian knowingly and willfully made materially false or fraudulent statements in connection with the delivery of or payment for health care benefits, items, or services.

Louthian was not convicted of providing services to individuals who did not qualify for insurance reimbursements. His convictions were based upon false and fraudulent statements to Medicare and Anthem to secure payments for the dialysis transports. Louthian and those under his supervision falsely advised Medicare and Anthem that at least three patients needed ambulance transportation because they were bedridden. The trial evidence was more than sufficient to support the jury’s finding that such representations were untrue. The prosecution presented video, photographic, and testimonial evidence illustrating that the Squad’s dialysis transport patients were able to stand, walk, drive, shop, garden, and perform manual labor, among other things.

Louthian also challenged his below-Guidelines sentence of forty-eight months as being excessive, in view of his age, poor health, and lack of a criminal history. The trial court considered Louthian’s request for a downward departure under the Guidelines, but concluded that none was appropriate. Because the court understood its authority, but declined to exercise it on the facts of this case, Louthian cannot contest on appeal the court’s failure to depart downward.

To the extent that Louthian challenged his sentence as otherwise unreasonable, the appellate court was unmoved. A criminal forfeiture of tainted assets in a health care fraud proceeding is mandatory. See 18 U.S.C. § 982(a)(7) that provides that “[T]he court . . . shall order the person to forfeit property, real or personal, that constitutes, or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense.”  In this situation, it is apparent that the prosecution and the court adhered to the applicable procedures.

ZALMA OPINION

Health insurance fraud is rampant across the United States. Prosecutors are underfunded and limit their investigations of health insurance, Medicare and Medicaid fraud to major cities with less populous areas being free of investigation and prosecution.

Since the convictions and $1 million forfeiture only related to three patients Louthian there is a high probability that more patients were fraudulently transported and the amount stolen was a great deal greater than the amount taken and Louthian had sufficient assets to pay counsel to go forward with this appeal.

This case is evidence that Medicare, Medicaid and insurers should not pay all claims presented promptly without some investigation or, before accepting a person or entity as a provider, a thorough investigation of the provider. If not, the crime will continue successfully until the government programs and insurance companies run out of money to pay them.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Builder’s Risk Policy Covers Damage only to Structure as Built

No Bad Faith If Actions of Insurer is Fairly Debatable

Glacier Construction Co. (Glacier) appealed a district court’s order on summary judgment limiting its recovery under a builder’s risk insurance policy (Policy) issued by Travelers Property Casualty Co. (Travelers). Glacier also appealed the grant of summary judgment in favor of Travelers on its claim for bad-faith denial of insurance coverage, as well as the court’s jury instruction on the nature and scope of damages recoverable under the Policy. Travelers filed a cross appeal asserting that none of Glacier’s claimed damages were covered by the Policy. In Glacier Construction Company, a Colorado corporation v. Travelers Property Casualty Company of America, Nos. 12-1503 & 12-1514 (USCA 10th, June 20, 2014) the Tenth Circuit Court of Appeal resolved the dispute.

BACKGROUND

In early 2009, Glacier contracted with the City of Aurora, Colorado, to construct a new wastewater pumping facility. Before construction could begin, excess water had to be removed from the site by a process called “dewatering.” To accomplish the necessary dewatering, Glacier installed four submersible wells and pumps which performed as designed and expected until May and June 2009, when above-average rainfall caused them to fail. Soil got into the original wells/pumps due to the type of soil and the amount of erosion and sediment. As a result, Glacier developed a second dewatering plan that included replacement wells/pumps, and added shoring, engineering tie-backs, and a well-point system. Glacier made a claim on the Policy for the additional costs it incurred to dewater the site, which Travelers denied.

The relevant Policy terms provided coverage for direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.

Glacier filed suit to recover from Travelers all of the costs for the second dewatering plan. The parties eventually filed cross-motions for summary judgment. Travelers argued that the Policy did not cover any of the expenses Glacier incurred due to the failure of the original wells/pumps. The district court rejected that argument, however, and ruled that the Policy covered the “cost of repairing and reworking [the original] four wells and pumps.” It also concluded that Glacier’s claim is limited to those costs.  Based on that ruling, Travelers asserted that the covered costs totaled $9,142.25, while Glacier claimed that its covered costs were $473,884.31.

In a separate order, the district court granted summary judgment to Travelers on Glacier’s claim that Travelers denied coverage in bad faith. The case proceeded to a jury trial to determine the amount of the covered costs. The jury returned a verdict in Glacier’s favor in the amount of $9,142.25 plus post-judgment interest and costs.

POLICY COVERAGE

Travelers relies on the policy language providing coverage for “direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.” Travelers contended that the district court erred in concluding that the original wells/pumps were Covered Property, that they sustained physical damage, and that the damage was from a Covered Cause of Loss.

“Covered Property” refers to “[b]uildings or structures including temporary structures while being constructed, erected, or fabricated at the ‘job site,’ [and] “[p]roperty that will become a permanent part of the buildings or structures at the ‘job site.’” The Policy covered “temporary structures” and the original wells/pumps did not fall within the Policy exclusions. Consequently, the Tenth Circuit agreed with the district court that the original wells/pumps “were temporary structures constituting covered property.”

Travelers next asserts that the original wells/pumps did not sustain physical damage from a covered cause of loss. According to Travelers, to be covered the loss had to be caused by a “casualty, catastrophe, or disaster.” Travelers contends that the rainfall did not qualify because for the period May through August the rains were only 10% above average. But Glacier presented evidence that the damage was caused by above-average rain that fell in surges, so averaging the rainfall over a several-month period was not relevant. The Tenth Circuit concluded that heavy rains were within the Policy coverage. An “occurrence sufficient to trigger coverage … need not be sudden, but must be a specific accident or happening … A long term exposure to a harmful condition that results in damage or injury may be an occurrence.” [Hoang v. Assurance Co. of Am., 149 P.3d 798, 802 (Colo. 2007)] (en banc) (citation omitted) (construing an “occurrence” policy).

The evidence showed that it was the surging rain that caused the soil to erode and get into the original wells/pumps, causing them to fail. The heavy rains were within the Policy coverage.

Travelers further argues that the original wells/pumps did not require repair due to a covered event, but rather, they required only maintenance due to normal wear and tear, an expense not covered by the Policy. But the witnesses, including Travelers’ expert witness, discussed the necessary repairs to the original wells/pumps caused by the surging rains and eroding soil.

Lastly, Travelers asserts that the damage to the original wells/pumps was caused by the faulty or negligent soils report. Glacier stated that part of the need for repairs to the original wells/pumps was caused by the discovery of soils different from those identified in the soils report. Therefore, Travelers argues that the soils report, not the rains or other events, was responsible for the damage. Travelers invokes a Policy exclusion for loss or damage caused by “[o]mission in, or faulty, inadequate or defective . . . [p]lanning, zoning, development, surveying, siting, design or specifications.”  Unfortunately, for Travelers, the Tenth Circuity concluded that the mere assumption that the soils report was faulty or negligent, without evidence to support this assumption, is insufficient to carry its burden to establish the applicability of the exclusion from coverage. It might have succeeded if it presented the testimony of an expert that the soils report was faulty or negligent, why it was, and what it should have shown Glacier before it began work.

The relevant Policy clause covered costs necessary to re-excavate the site, re-prepare the site, re-grade the land, or re-perform similar work. The ordinary and accepted sense of the Policy terms limited coverage to correction of work previously done.

The Policy did not cover the expense of a new dewatering design and the costs to implement that design. To read the Policy as Glacier advocates would encourage a builder to economize on an initial dewatering plan and later require the insurer to pay for a more elaborate plan. To do so would misallocate the construction expense between the construction company and the insurer. First party property insurance, like builders risk, only exists to indemnify not to create something new and different after the loss. Therefore, as a matter of law, the Policy coverage was limited to the repair and reworking of the original wells/pumps, as determined by the district court.

CLAIM OF BAD-FAITH DENIAL OF COVERAGE

Finally, the Tenth Circuit dealt with Glacier’s claim that Travelers denied its claim for Policy coverage in bad faith.

In a first-party insurance contract, to establish a bad-faith claim, the insured must prove that the insurer acted unreasonably under the circumstances and that the insurer either knowingly or recklessly disregarded the validity of the insured’s claim. The insurer’s conduct is evaluated objectively to determine whether a reasonable person would find that the insurer’s justification for denying or delaying payment of a claim was “fairly debatable” (i.e., if reasonable minds could disagree as to the coverage-determining facts or law.) Resort to a judicial forum does not necessarily evince bad faith or unfair dealing, regardless of the outcome of the proceeding.  Even a mistaken belief about whether a claim is compensable can be within the scope of permissible challenge.

Applying the appropriate standards, the Tenth Circuit concluded that no reasonable jury could have found on the evidence presented that Travelers’ claim-denial conduct unreasonably delayed or denied Glacier’s claim. This determination is fatal to both the statutory and common law claims. Summary judgment in Travelers’ favor was therefore appropriate on Glacier’s bad-faith claims.

ZALMA OPINION

Insurance is a contract of indemnity. No one should be able to profit from a first party property insurance policy. At most, after a covered loss, the insurer need only pay to indemnify the insured – that is – place the insured in the same position it was in before the loss. It was overreaching for Glacier to seek more than the actual damage to what it constructed but to pay for a new plan and addition work.

As to the claim of bad faith it was essential that Glacier prove wrongdoing on the part of Travelers. Merely taking a colorable position in denying the claim is evidence of good faith and that the issues raised were fairly debatable or that there was a genuine dispute between Travelers and Glacier.

Travelers could have avoided the claim in its entirety if it retained an appropriate soils engineering expert to prove that the true cause of the loss was the poor soils report. Of course, the cost of such an expert might have exceeded the amount of the judgment.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

You Must Comply With California Regulations by September 1

California Fair Claims And SIU Regulations Require Annual Training

Fair Claims Settlement Practices Regulations

All insurers doing business in California must comply with the requirements of California Fair Claims Settlement Practices Regulations (the “Regulations”) or face the ire of, and attempts at financial punishment from the California Department of Insurance (“CDOI”). That punishment is now in question because some courageous insurers fought the CDOI and succeeded before an administrative law judge.

Regardless of difficulties in assessing punishment the state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath or that the claims person has read and understood the Regulations.
It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should be familiar with the Regulations since they set a minimum standard for claims handling.

Whether the insurer fulfilled the requirements or not can assist the lawyer in evaluating the exposure faced by an insurer or policyholder client. The existence of compliance with the Regulations is important to the evaluation of a claim for breach of the covenant of good faith and fair dealing and evaluation of a claim of damages resulting from the tort of bad faith.

In 1993, the California Department of Insurance started the regulatory process to control, through regulatory micromanagement, claims handling in the state of California. The first version of what was then called the “Unfair Claims Settlement Practices Regulations” were issued to comply with the direction of the California Supreme Court made as part of the ruling in a case known as Moradi Shalal that concluded: “Neither section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).” The Supreme Court concluded that enforcement was the obligation of the CDOI.

The CDOI, five years after receiving instruction from the Supreme Court, issued the first version of the Regulations in 1993 and modified the Regulations in 1996, 1997, 2004, 2007 and 2009. The 1997 changes renamed the Regulations the “California Fair Claims Settlement Practices Regulations,” which name remains.

The Regulations imposed on all insurance personnel a detailed laundry list of actions the CDOI considered wrongful or in violation of the Fair Claims Practices Act, California Insurance Code Section 790.03(h).

The Regulations impose on all insurance claims personnel the requirement that they read and understand the Regulations or attend an annual training program no later than September 1 of each year. They require that insurers ascertain that every employee involved in any way in the claims process is trained about the Regulations or has submitted a sworn statement that he or she has read and understands the Regulations. The Regulations even require that the insurance claims managing executive attest, under oath, that each employee has been trained with regard to and/or understands the Regulations. This requirement must be complied with in order to avoid the possibility of administrative penalties upon the insurer or prosecution of the officer for perjury.

The Insurance Code, contrary to the statement in the Regulations, does not hold that a single act is a violation of Insurance Code Section 790.03(h). Rather, the Code requires that the wrongful acts be committed with such frequency as to indicate a general business practice.

This Preamble is a statement by the CDOI to broaden the effect of the Insurance Code, to give the CDOI power to enforce the mandate, and to allow it to punish insurers for single wrongful acts. The Regulations, by changing the meaning of the California Insurance Code for the purposes of enforcement, was designed to force insurers to be more careful than the Legislature mandated. Under the Regulations, therefore, a single violation is enough to require punishment of the insurer or the licensee by the CDOI. Whether an insurer is willing to challenge enforcement of this requirement that is more stringent than the Insurance Code requirement is yet to be seen. One insurer challenged the requirement and won.

The Administrative Law Judge ruled, in part:

All allegations seeking civil penalties pursuant to the authority of Insurance Code sections 790.03, subdivision (h) and 790.035, based exclusively upon alleged violations of the Fair Settlement Practices Regulations … are dismissed with prejudice. … [the] Regulation, section 2695.1, subdivision (a) …  seeks … to add all the acts, omissions and practices set forth in the Fair Settlement Practices Regulations to the 16 actionable unlawful settlement practices detailed by the Legislature in Insurance Code section 790.03, subdivision (h), without following the exclusive process for doing so set forth in Insurance Code section 790.06.  [T]he Fair Settlement Practices Regulations impermissibly seek to establish new standards and duties constituting unfair methods of competition and unfair and deceptive acts or practices in the business of insurance within the meaning of Insurance Code section 790.03, subdivision (h), and then seek to penalize respondents for failure to meet the standards, all in derogation of the precedent process required by Insurance Code section 790.06. (Emphasis added)

Details for compliance with the Regulations and how to fight impermissible punishment see Zalma on California Fair Claims Settlement Practices Regulations – 2013 available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.

The California SIU Regulations

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

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 emergency regulations, as amended in 2003, 2004, and 2005, requiring all insurers who do business in the state of California to maintain or retain a special fraud investigation unit (SIU) and a plan to defeat fraudulent insurance claims (the SIU Regulations). The SIU Regulations were approved in their final form in October 2005. The SIU Regulations attempt to micro manage the work of insurance company efforts against insurance fraud.

The CDOI has audited hundreds of 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. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can result in a fine from $500,000 to $1 million.

By following the training recommendations in Zalma On California SIU insurers can inoculate themselves against the potential for paying enormous fines to the CDOI. In addition, a recent ruling by an adminstrative law judge may provide insurers with weapons sufficient to reduce if not totally avoid payment of fines for violation of the SIU Regulations.

The majority of California licensed insurers are required by California Insurance Code Sections 1875.20-24 and California Code of Regulations, Title 10, Section 2698.30-43 to establish and maintain Special Investigative Units (SIU).

All insurers admitted to practice insurance business in California must recognize that by the SIU Regulations the California Department of Insurance (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. The purpose of this chapter is to assist California insurers to fulfill the obligations to comply with the SIU Regulations.

When deciding who needs to be trained California Insurers should recognize that the SIU Regulations, originally enacted as Emergency Regulations in 2003 had been renewed for three consecutive years as emergency regulations. All insurers are obligated to comply. Insurers, their lawyers, and all independent claims handlers must understand that 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).]

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.

The methods to train, and an outline of a training course for integral anti-fraud personnel, are available in my e-book Zalma on California SIU Regulations available from ClaimSchool at http://www.zalma.com/zalmabooks.htm.

Training and compliance must be completed by September 1, 2014 and September 1 of each year thereafter.

If you comply with the California Regulations you will probably be found to have complied with the Regulations of other states.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

Not Nice To Lie to Your Insurer

Misrepresentation Of Material Fact Ground for Claim Denial

After an alleged jewelry theft Allstate Property and Casualty Insurance Company (Allstate) denied a claim, filed a complaint for declaratory relief and then filed a motion for partial summary judgment. In Allstate Property and Casualty Insurance Company vs. Kiarash Mirkia, Poupak Ziaei, et al, 2:12-cv-01288-RCJ-PAL (USDC, Nevada, June 19, 2014) Defendant/Counterclaimants Kiarash Mirkia and Poupak Ziaei’s were before the District Court on its counterclaims for bad faith, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair claims practices.

BACKGROUND

In July 2012, Allstate Property and Casualty Insurance Company (“Allstate”) filed a declaratory relief action in this Court based on diversity jurisdiction against Kiarash Mirkia (“Mirkia”) and Poupak Ziaei (“Ziaei”), husband and wife (collectively, “Defendants”).

In early December 2011, Defendants contacted Allstate agent Walid Khuraibet (“Khuraibet”) to procure a homeowner’s policy (the “Policy”) to provide building and content coverage for the Property.  The application for insurance stated that “[t]o the best of my knowledge the statements made on this application . . . are true . . . . The Company may recomputed [sic] the premium shown if the statements made herein are not true. In the event of any material misrepresentation or concealment made by me or with my knowledge in connection with this application, the Company may deem this binder and any policy issued pursuant to this application, void.”  Shortly thereafter, Allstate issued Defendants a homeowner’s.  The Policy included personal property limits of $1,038,104 and included extended coverage for scheduled personal property with limits of $142,200 for “jewelry.”

Mirkia reported the theft of jewelry and expensive sunglasses, which apparently occurred on January 30, 2012, to Allstate.  Prior to the theft, Defendants terminated their au pair after only two weeks of employment.  They discovered the theft an hour after the au pair left the premises. Allstate took Mirkia’s examination under oath.  Based on its investigation, Allstate determined that Mirkia had misrepresented and concealed the true facts and circumstances surrounding his ownership of the Property and denied coverage.

The following facts were also undisputed: (1) the “alleged loss occurred on the same day in which the alleged thief called the police indicating she was being held against her will by Dr. Mirkia and asked the police to search her bags”; (2) the “alleged loss is not the first time that Dr. Mirkia or his wife have alleged that either their nannies or house-keepers have stolen from them”; (3) the “alleged loss occurred when over $180,000 worth of jewelry was left in an unlocked drawer where an unsupervised nanny had full access”; (4) the “alleged loss occurred just 23 days after the last piece of expensive jewelry was scheduled”; and (5) the “[police detective] assigned to this loss had suspicions that the loss never actually occurred and suspended his investigation.”

Allstate asserted two causes of action: First that it is entitled to rescission of the insurance contract because it issued the policy in reliance on material false statements, factual misrepresentations, and omissions, which deceived Allstate into accepting the risk at a certain premium.  Allstate established that if it had known the true facts, it would not have issued the Policy.  Instead, it claims, a properly issued renter’s policy would have included different terms, including a different premium and mandatory lower coverage limits for the jewelry.  Accordingly, Allstate contends, it is entitled to rescission of the policy ab initio, and it therefore has no contractual duty to indemnify Defendants for the January 30, 2012 theft claim.

In November 2012, Defendants filed an answer to the complaint, a counterclaim against Allstate. The counterclaim and third-party complaint alleged that Allstate and Legacy were vicariously liable for Khuraibet’s conduct and that Khuraibet was the alter ego of Legacy.

After a short period of work the insureds claimed that the au pair left Defendant’s employment and took some of their jewelry with her. Within an hour of the au pair leaving, Ziaei discovered the theft, and the couple called the police and filed a report.

After several months of “investigation,” Allstate informed Defendants that it was denying their claim “based on a purported misrepresentation on [their] insurance policy and/or personal property floater.”  Allstate sent a denial letter to Defendants on July 19, 2012, and initiated this lawsuit on the same day.

Defendants assert nine causes of action: that Allstate denied their claim in bad faith; a claim for breach of contract against Allstate, Khuraibet, and Legacy; breach of the implied covenant of good faith and fair dealing; unjust enrichment; gross negligence; negligent misrepresentation; fraudulent misrepresentation; alter ego liability against Khuraibet as the owner of Legacy; and a claim under Nevada’s Unfair Claims Practices Act.  Defendants further allege that Allstate and Legacy are vicariously liable for Khuraibet’s conduct.

ANALYSIS

An insurer fails to act in good faith when it refuses without proper cause to compensate the insured for a loss covered by the policy. Such conduct is a breach of the covenant of good faith and fair dealing, and constitutes actionable bad faith.

To establish a prima facie case of bad-faith refusal to pay an insurance claim, the plaintiff must establish that the insurer had no reasonable basis for disputing coverage, and that the insurer knew or recklessly disregarded the fact that there was no reasonable basis for disputing coverage. The vital element is the insurance company’s wrongful conduct, not merely in denying a claim incorrectly and, therefore, without proper cause, but in denying the claim wrongfully, without any reasonable basis or with the knowledge that it is denying a rightful claim.

In order to defeat Allstate’s motion as to the bad faith claims, Defendants must show that there is, in fact, a genuine dispute as to whether Allstate knowingly or recklessly denied coverage without any reasonable basis. Defendants failed to carry this burden.

Faced with such undisputed facts, no reasonable jury could conclude that Allstate lacked any reasonable basis for disputing coverage. Furthermore the decision to deny coverage was plainly reasonable under the controlling Nevada statutes, including that: “All statements and descriptions in any application for an insurance policy or annuity contract, by or in behalf of the insured or annuitant, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under the policy or contract unless either: 1. Fraudulent; 2. Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or 3. The insurer in good faith would either not have issued the policy or contract, or would not have issued it at the same premium rate, or would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or contract or otherwise.”

Allstate has shown that if it had known that Defendants were renters, rather than homeowners, its own risk management policy would have required issuing its renters policy, under which scheduled personal property is subject to a $15,000, per-item coverage limit. Under these underwriting guidelines, Allstate could not have insured the expensive jewelry presently at issue.

The factual disputes Defendants describe are almost certainly material to the breach of contract claim; however, Allstate has not moved for summary judgment on that claim, and the disputed facts are irrelevant to the bad faith claim presently at issue. Allstate is therefore entitled to summary judgment as to the bad faith claims.

Unfair Claims Practices

Nevada’s unfair trade practices statute designates certain insurance company activities as unfair practices and permits a private right of action by an insured against an insurer. The protections of the statute are broader than the tort of bad faith and extend to the processing of the claim.

When determining if a genuine factual issue exists a trial judge must bear in mind the actual quantum and quality of proof necessary to support liability. A scintilla of evidence, or evidence that is merely colorable or not significantly probative, is not sufficient to present a genuine issue as to a material fact. A court cannot conclude that the mere existence of an expert report or deposition operates as a per se bar to summary judgment. Instead, the court must consider whether the evidence presented in the affidavits is of sufficient caliber and quantity to support a jury verdict for the nonmovant. The Court concluded, therefore, that Defendants have failed to demonstrate the existence of a genuine dispute as to their claim for unfair claims practices and Allstate is therefore entitled to summary judgment.

As a result of its analysis the District Court ordered that Allstate’s partial motion for summary judgment is granted. The Court entered summary judgment in favor of Allstate, Khuraibet, and Legacy on the following counterclaims: (1) bad faith; (3) breach of the implied covenant of good faith and fair dealing; (4) unjust enrichment; and (8) unfair claims practices. The remaining issues are to be tried or subject to a new motion for summary judgment.

ZALMA OPINION

The evidence presented to the court established that the insureds misrepresented material facts at the time they applied for the insurance. That would have been sufficient evidence, had it been the subject of the motion for summary judgment, to declare the policy void from its inception and eliminated all of the other causes of action. Regardless, by its successful motion Allstate has taken the guts out of the insured’s case and limited the case to breach of contract. I expect a new motion for summary judgment on the rescission ground or a quick settlement for the cost of bringing the next motion.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

MCS 90 and Interstate Commerce

Running a Personal Errand is Not Operating “For Hire”

Trucks operating in interstate commerce are required to maintain federally mandated minimum insurance coverage to protect the public whether the vehicle is identified in the policy or not.  An MCS-90 endorsement is a standard endorsement required to be included in a commercial motor carrier’s insurance policy by the Motor Carrier Act of 1980 (MCA), 49 U.S.C. § 10101 et seq., and the regulations promulgated thereunder, 49 C.F.R. § 387.15 et seq. Disputes arise often over whether an MCS-90 endorsement applies when the vehicle is engaged in activities other than interstate commerce or for hire.

In Renee Martinez v. Empire Fire and Marine Insurance Company,  2014.CT.0000709, (June 24, 2014) Martinez filed an action to recover proceeds allegedly due under an automobile liability insurance issued by Empire Fire and Marine Insurance Company (“Empire”), and for other relief, brought to the Superior Court who granted the defendant’s motion for summary judgment from which the plaintiff appealed.

THE DISPUTE

The plaintiff, Renee Martinez, appeals from the summary judgment rendered by the trial court in favor of the defendant. The plaintiff sought to recover under an insurance policy that Empire  had issued to Tony’s Long Wharf Transport, LLC (Tony’s), a towing company registered as an interstate motor carrier. The plaintiff previously had obtained a judgment against Tony’s for personal injuries she sustained in a motor vehicle accident involving her vehicle and a truck owned by Tony’s and driven by one of its employees. At issue before the trial court on summary judgment was whether the federally mandated MCS-90 endorsement attached to the insurance policy was triggered, so as to obligate the Empire to pay the judgment rendered against its insured.  The trial court found the MCS-90 endorsement did not apply. The plaintiff also argues that the public policy of protecting innocent motorists from negligent motor carriers mandates the enforcement of the MCS-90 endorsement in this case.

FACTS

On April 11, 2006, the plaintiff was involved in an automobile collision with a 2000 Ford F-450 Dynamic Wrecker (truck) owned by Tony’s. The truck was being operated by Edward Reynolds, who at the time was employed by Tony’s as a heavy-duty truck mechanic. At the time of the collision, Reynolds was retrieving motor vehicle parts from a facility in Hamden, which he then was to transport to Tony’s facility in New Haven. Reynolds was to use those motor vehicle parts to repair other vehicles owned by Tony’s at the New Haven facility.

On May 5, 2010, the court rendered judgment against Tony’s and awarded to the plaintiff damages in the amount of $693,025.69, plus costs. The judgment was not satisfied within thirty days of the date it was rendered because, in a letter to Tony’s dated April 26, 2006, Empire had denied liability coverage under an insurance policy that it had issued to Tony’s prior to the collision.

The insurance policy at issue in this appeal is a Commercial Lines Policy, effective April 27, 2005 through April 27, 2006. Although the truck originally was listed on the schedule of covered vehicles of the policy, it later had been removed, at the request of Tony’s, by way of an endorsement. The effective date of the truck’s removal from the policy was more than six months before the collision. Nevertheless, a federally mandated MCS-90 endorsement was attached to the policy. The MCS-90 endorsement provides that: “[Empire] . . . 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 subject to the financial responsibility requirements of [the MCA]….”

The plaintiff brought the underlying action, as a judgment creditor, against Empire, as an insurer, pursuant to Connecticut statutes.  The plaintiff concluded that she was subrogated to the rights of Tony’s as against Empire for its failure to pay the underlying judgment, and that Empire, therefore, is liable to her for the unpaid balance.

Empire moved for summary judgment, asserting that the truck had been removed from the insurance policy as a covered vehicle prior to the collision. She argued that the MCS-90 endorsement attached to the policy was triggered. The trial court found that because there was no genuine issue of material fact that Tony’s was not transporting goods in interstate commerce at the time of the accident the MCS-90 endorsement was not triggered so as to obligate Empire to pay the judgment rendered against its insured.

DISCUSSION

Federal law applies to the operation and effect of the MCS-90 endorsement. Congress enacted the MCA to deregulate the trucking industry, increase competition, reduce entry barriers, and improve quality of service. To that end, the MCA provides that a commercial motor carrier may operate only if registered to do so.

The MCS-90 endorsement is intended to impose a surety obligation on the motor carrier’s insurer. The MCS-90 provides a broad guaranty that the insurer will pay certain judgments 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 great weight of authority throughout the country is that the analysis must consider whether the vehicle was presently engaged in the transportation of property in interstate commerce. The weight of authority supports the conclusion that the MCS-90 does not cover vehicles when they are not presently transporting property in interstate commerce.

An insurer’s obligation to pay a judgment recovered against its insured pursuant to an MCS-90 endorsement is triggered only when two elements are satisfied when: (1) the underlying insurance policy to which the endorsement is attached does not otherwise provide coverage, and (2) either no other insurer is available to satisfy the judgment against the motor carrier, or the motor carrier’s insurance coverage is insufficient to satisfy the federally-prescribed minimum levels of financial responsibility.

The sole issue before the appellate court was whether there is a disputed issue of material fact that the truck was operating as a for-hire motor carrier transporting property in interstate commerce at the time of the collision. The appellate court agreed with Empire that the court improperly found that Tony’s was operating the vehicle “for-hire” at the time of the accident. To be considered a “for-hire carriage,” the insured had to be in the “business of transporting, for compensation, the goods or property of another” at the time of the accident.

The appellate court concluded that in the present case the trial court correctly noted that undisputed evidence indicated Tony’s employee was being compensated to transport the motor vehicle parts. There is no dispute, however, that Tony’s, as the actual insured, was not being compensated for the transport of the motor vehicle parts. That is, the insured, through its employee, was transporting its own property, for its own benefit, without being compensated by any third party. Tony’s was neither transporting goods for the general public, nor was it transporting goods in fulfillment of a contract at the time the collision occurred. Empire’s insured, through its employee, simply retrieved motor vehicle parts in Hamden, to be delivered to New Haven, where they ultimately were to be used for repairing other vehicles owned by the insured.

Under these circumstances, where the insured effectively was undertaking a personal errand, the appellate court could not construe Tony’s to have been operating its vehicle “for-hire” at the time the collision occurred.

The MCS-90 endorsement was intended to ensure that the public be adequately protected when a licensed carrier uses a vehicle to transport goods.  However, the purpose of the MCS-90 endorsement is to protect the public from negligent motor carriers while they are engaged in the transportation of property, for-hire, in interstate commerce. Tony’s was not operating for-hire at the time the accident occurred, and, therefore, this is not an instance in which Congress intended that the MCS-90 endorsement provide coverage.

Congress and the appropriate regulatory agencies could broaden and clarify the relevant language now in place to provide coverage in factual scenarios similar to the one in this matter, it did not.

In light of our conclusion that the truck in question was not operating for-hire when the collision occurred, the MCS-90 endorsement attached to the policy was not triggered and Empire, as a matter of law and in the absence of any genuine issue of material fact, was not required to pay the judgment rendered against its insured.

ZALMA OPINION

Ms. Martinez is not without a remedy. She can execute her judgment against the assets of Tony’s. She cannot recover from Empire because the risk of loss that resulted in the injury causing event was not a risk that was taken by Empire. Had Tony’s not removed the vehicle from coverage it would have existed at the time of the accident. It did not and since the accident happened in the course of a personal errand there was no coverage under the MCS-90 endorsement.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

The Insurance Fraud Deskbook

I am pleased to report that the American Bar Association, Tort & Insurance Section has published my newest book: “The Insurance Fraud Deskbook”.

The Insurance Fraud Deskbook
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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available sometime in June 2014 and for pre-order from http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

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Sex Offender Can’t Get Insurance for Erectile Disfunction

Insurance is Not a Constitutional Right

Insurance is a contract between an insurer and insured. It is a commercial agreement based upon the utmost good faith between the parties to the contract. No one is compelled to buy insurance. No insurer is compelled by law to insure a person or entity it does not wish to insure. The insurer has an unquestioned right to choose who it will insure and at what price.

Statutes are enacted to protect the public. Some are clear and unambiguous. Some are not. Some statutes are fair and some are not. When a person is convicted of a crime he or she loses some of their rights. When a person enters into a plea agreement with a court to avoid jail he or she agrees, as a condition of probation to limit some activities that non-criminal citizens may engage in at their own discretion.

In John Doe v. Andrew Cuomo, as Governor of the State of New York, in his official and individual capacity, M. Sean Byrne, as Acting Commissioner of the State of New York Division of Criminal Justice Services, in his official and individual capacity, Defendants-Appellees, Docket No. (June 16, 2014) the fictitiously named John Doe tried to limit the restrictions place on his probation agreement and deem unconstitutional a New York state statute.

THE APPEAL

John Doe appealed from a judgment of the United States District Court for the Eastern District of New York (Amon, C.J.) granting summary judgment in favor of defendants New York State Governor Andrew Cuomo and Acting Commissioner of the State of New York Division of Criminal Justice Services M. Sean Byrne. Doe brought an as-applied constitutional challenge to the enforcement of amendments to the notification and registration requirements of the New York State Sex Offender Registration Act (“SORA”). The amendments post-dated Doe’s plea of guilty to misdemeanor attempted possession of a sexual performance by a child, for which he was classified as a level-one sex offender under SORA.

BACKGROUND

In 1999, after he was arrested for downloading six images depicting child pornography, Doe pleaded guilty in Queens County Criminal Court to one count of attempted possession of a sexual performance by a child, a class A misdemeanor.

For a full decade, Doe complied with the conditions of his probation and his obligations under SORA. Then, in 2009, he petitioned the Queens County Criminal Court pursuant to the amended § 168-o to relieve him of his registration requirements, to strike his name from the sex offender registry maintained by DCJS, and to enjoin DCJS from publishing his identity to other government entities or the public.

He claimed his right of privacy was violated because the SORA provisions precluded him, as a registered offender, from obtaining insurance coverage or health benefits for erectile dysfunction, an understandable restriction on a sex offender.

DISCUSSION

The Second Circuit was unpersuaded by Doe’s efforts to characterize SORA’s registration provisions as punitive. Initially, “the legislature enacted the registration provisions primarily to serve the nonpunitive purpose of enhancing future law enforcement efforts.” Doe’s complaint alleged that, just prior to entering the plea, Doe was assured by the court that he would be permitted to petition for release from registration as the statute explicitly permitted at that time.  However, the court could not construe the State court’s comment during the plea and sentencing proceedings that it would allow Doe to petition the court as to registration, reporting requirements and release relief at some future point as a representation that SORA would never be amended.

Equal Protection and Fourth Amendment Challenges

As a self-described “demonstrably non-dangerous offender,” Doe contends that his continued inclusion in the New York sex offender registry beyond ten years violates his right to equal protection because it is not rationally related to the Act’s aims of protecting the public.

Doe argues that the District Court erred in holding that he lacked standing to mount a substantive due process challenge to those SORA provisions he contends infringed his rights to privacy and to travel. Even assuming, without deciding, that the SORA provisions precluding registered offenders from obtaining insurance coverage or health benefits for erectile dysfunction implicate Doe’s privacy rights in intimate affairs, Doe failed to allege any injury as a result of those provisions, and no injury may reasonably be inferred. Nor did Doe allege that SORA prevented him from changing residence, obtaining employment, or using public facilities in violation of his right to travel.

Lastly, Doe argues that the registration requirements violate his Fourth Amendment right to be free from unreasonable searches and seizures. Even if it is assumed, for argument, that SORA’s requirements subject Doe to a search or seizure for Fourth Amendment purposes, there is no evidence that any such search or seizure is unreasonable. Here, any searches or seizures required by SORA serve special needs-such as the protection of potential future victims and the solving of crimes in the future-and purport neither to facilitate the investigation of any specific crime nor primarily to serve a general interest in crime control. Moreover, the degree of intrusion on convicted sex offenders is reasonable in relation to the interests advanced by SORA.

ZALMA OPINION

As much as insurance practitioners and insurers would like insurance to be a constitutional right compelling every person to buy insurance and add to the profits of the shareholders of insurers, it is not. Insurance is nothing more than a contract between the parties. For that reason, Doe’s claim that he had a right – as a sex offender – to insurance for erectile dysfunction failed.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Resident of Household Exclusion

Objectively Reasonable Conclusion Establishes Good Faith Claim Handling

Eddlee Peet obtained a wrongful death judgment against his brother-in-law, Mark Doyle, who had caused the death of plaintiff’s two-year-old son, Anthony. At the time of Anthony’s death, plaintiff and Anthony’s mother were both incarcerated, and Anthony was living at Doyle’s residence.

After obtaining the wrongful death judgment against Doyle, plaintiff sought recovery from State Farm General Insurance Company (State Farm), which had provided Doyle with a homeowner’s insurance policy at the time of Anthony’s death. Citing the insurance policy’s resident relative exclusion provision, State Farm denied coverage for Anthony’s death.
Plaintiff then filed a complaint against State Farm, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. State Farm subsequently moved for summary judgment, arguing that as a matter of law Anthony’s death was not covered because of the resident relative exclusion provision of the insurance policy. The trial court granted summary judgment in favor of State Farm. In Peet v. State Farm General Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 2738355 (June 17, 2014,  Cal.App. 6 Dist.)  the California Court of Appeal resolved the dispute.

BACKGROUND

Anthony Cardinale–Peet was the son of plaintiff and Joselyn Cardinale.  Sometime around July of 2002, Joselyn kicked plaintiff out of her house. At the time, Joselyn had a restraining order against plaintiff. For the next few months, Anthony lived exclusively with Joselyn, although no custody order was ever issued.
Anthony Begins Living With the Doyles

In late October of 2002, Anthony was living with Joselyn at a house owned by her parents. On or about October 26, 2002, Joselyn was arrested. Plaintiff was present during the arrest. Joselyn told plaintiff to take Anthony and not give him “to nobody.”  Plaintiff packed some of Anthony’s clothes and took Anthony to stay with him at the home of Joyce Peet, who was plaintiff’s mother and Anthony’s grandmother. In preparing to have Anthony stay with him and his mother, plaintiff packed “a few things” for “a few nights.”  At Joyce’s house, Anthony slept on a couch.

At the Doyles’ home, Anthony had his own bed in a bedroom that he shared with the Doyles’ sons. He had his own playpen and toys there. The Doyles provided Anthony with food, clothing, and baths. They were Anthony’s sole financial support and considered him a part of their household. On December 1, 2002, Maria took Anthony for medical treatment of a possible ear infection. The Doyles brought Anthony to visit Joselyn in jail twice, and they brought him to court for Joselyn’s sentencing hearing on December 6, 2002.

Joselyn and plaintiff planned to leave Anthony with the Doyles until one of them was out of jail. They had an understanding that “whoever got out first was going to get Anthony.” They both remained incarcerated through January of 2003.

Anthony’s Death

On the morning of January 10, 2003, Doyle and Anthony fell asleep on a bed. Maria spoke to Doyle at about 11:45 a.m. and then drove home. She arrived home at about 12:05 p.m. and saw Doyle and Anthony on the bed. Anthony was lying on his back, with a pillow over his face. Doyle’s arm was across the pillow. When Maria moved the pillow, she realized that Anthony was not breathing. She screamed. Doyle woke up and realized he had rolled on top of Anthony. Joselyn was interviewed by the police following Anthony’s death. Joselyn indicated she had been worried about Anthony staying with the Doyles because of the amount of medications that Doyle took. However, she acknowledged that she had not done anything to stop Anthony from staying with the Doyles.

The Insurance Policy and Claim Investigation

At the time of Anthony’s death, Doyle had a homeowner’s insurance policy through State Farm. The policy defined “ ‘insured’ “ as “you and, if residents of your household: [¶] a. your relatives; and [¶] b. any other person under the age of 21 who is in the care of a person described above.” The policy excluded coverage for “bodily injury to you or any insured within the meaning of part a. or b. of the definition of insured.” (Emphasis omitted.) State Farm claims representative Stephanie Pastor was assigned to investigate the claim.

Pastor first spoke with Maria Cardinale–Doyle, who stated that she and her husband had been “taking care” of Anthony at the time of his death, while Anthony’s mother was incarcerated. Based on the police reports and her conversations with the Doyles, Pastor recommended that State Farm deny coverage based on the resident relative exclusion provision of the Doyles’ policy. State Farm notified plaintiff, through his attorney, of that decision.

LEGAL PROCEEDINGS

On July 23, 2009, plaintiff obtained a default judgment of $750,000 in the wrongful death action against Doyle. Plaintiff subsequently sent a demand letter to State Farm. State Farm reviewed the file again, then informed plaintiff that it still maintained that Doyle’s homeowner’s policy did not cover Anthony’s death.

State Farm filed a motion for summary judgment that the trial court granted. In its order granting summary judgment, the trial court found that State Farm had no duty to defend or indemnify Doyle because of the insurance policy’s resident relative exclusion clause. The court found that “the objective facts regarding Anthony’s physical living arrangements” were undisputed and showed that Anthony resided “exclusively and continuously” with the Doyles from the end of October 2002 until the date of his death.

DISCUSSION — INTERPRETATION OF INSURANCE POLICIES

The rules on interpretation of insurance agreements are well-established. In general, interpretation of an insurance policy is a question of law. The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation.  Such intent is to be inferred, if possible, solely from the written provisions of the contract.  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 controls judicial interpretation.

Resident Relative Exclusion Clauses

A number of California cases have considered the meaning of the term “resident” in the context of an insurance policy’s resident relative exclusion clause. California courts have held that the term “resident” is not “inherently ambiguous” although it may be ambiguous in a particular context.  The meaning of the term resident varies according to the circumstances and facts of the case.

The evidence presented in support of State Farm’s motion for summary judgment showed that Anthony “‘regularly spen[t] time in the household in question.’”  Indeed, Anthony did not spend time in any other household from late October or early November of 2002 until his death on January 10, 2003. After plaintiff’s arrest in the middle of November 2002, the Doyle household was the only place Anthony lived and the Doyles were his only caregivers. The Doyles’ household was not merely “‘a place of infrequent and irregular visits [.]’”

Although the Doyles’ household may not have been Anthony’s “permanent residence,” it was his residence prior to and at the time of his death. The determination of a child’s residence depends on objective factors such as the amount of time spent in a particular household and the regularity and frequency of the child’s visits to the household. The record did not support plaintiff’s claims that Anthony was “abduct [ed]” by the Doyles and that it would lead to “absurd results” if “kidnappers could abduct and hold a child” but not be insured for their negligence that results in the child’s death. There is no evidence that this was a kidnapping or abduction.

The undisputed evidence demonstrates that plaintiff explicitly agreed that the Doyles could take Anthony for the weekend and that he implicitly agreed to allow them to keep Anthony, since he did not demand Anthony’s return or take any legal action to require the Doyles to return Anthony to him. Plaintiff even told the police, following Anthony’s death, that it was “alright with him” that the Doyles had kept Anthony at their residence.

The trial court did not err by granting summary judgment as to plaintiff’s claim that State Farm breached its contract by failing to provide insurance coverage for Anthony’s death.

BAD FAITH CLAIM

Plaintiff contends the trial court erred by granting summary judgment as to his claim that State Farm breached the implied covenant of good faith and fair dealing.
An insurer cannot be liable for bad faith if its coverage decision under the applicable polices is subsequently determined to be objectively reasonable.  At most, State Farm would have determined whether plaintiff and Joselyn wanted Anthony to reside somewhere other than with the Doyles while they were incarcerated. As explained above, such evidence of the parents’ wishes or intent would not have been sufficient to overcome the objective facts establishing that Anthony actually resided with the Doyles.

Since State Farm’s coverage decision was objectively reasonable, there is no triable issue of material fact concerning its alleged breach of the implied covenant of good faith and fair dealing.

ZALMA OPINION

Insurance policies must be interpreted logically and based on the commonly understood meaning of the words. When the court found that two-year-old Anthony resided with the Doyles the objectively reasonable decision of State Farm to deny coverage was a logical and fair interpretation of the contract. The wild allegation of kidnapping made by the  incarcerated birth parents was unbelievable and not supported by the evidence.

Simply denying a claim does not support a bad faith claim. There can never be bad faith when the objectively reasonable decision was based on a thorough investigation and the admissions of the parties.

Every insurer faced with a claim of bad faith must first conduct a thorough investigation before making a decision to deny a claim. State Farm avoided the bad faith suit by conducting a thorough investigation.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Outlaw Loses

Not Insurance — But Interesting Jurisdiction Case

In Outlaw v. United States – Fed.Cl. – –, 2014 WL 2767277 (Fed.Cl.), the United States Court of Federal Claims, dealt with a breach of contract claim based on the alleged breach of a July 27, 2011 Negotiated Settlement Agreement (July 27, 2011 NSA) between James F. Outlaw (plaintiff or Mr. Outlaw) and the U.S. Department of the Army (defendant or the Army).

Defendant moved for dismissal for lack of subject matter jurisdiction, alleging that because the July 27, 2011 NSA does not provide for money damages as a remedy for an asserted breach, Mr. Outlaw cannot meet the jurisdictional requirement that his claim must be money mandating.

Mr. Outlaw responds that several provisions in the NSA provide for the payment of monies to him, and thus, the jurisdictional requirement is satisfied. Alternatively, Mr. Outlaw alleges that the July 27, 2011 NSA is invalid due to fraud.

Background

Plaintiff filed his complaint in the court of claims on October 23, 2013. Plaintiff brings his claim without the assistance of counsel. Mr. Outlaw filed five exhibits with his Complaint. Mr. Outlaw also filed five exhibits with his opposition.

Mr. Outlaw and the Army entered into the July 27, 2011 NSA to settle a discrimination complaint filed by Mr. Outlaw with the United States Equal Employment Opportunity Commission (EEOC). The July 27, 2011 NSA provided that the Army would make a lump sum payment to Mr. Outlaw, reverse his February 18, 2011 removal from Federal Service, and purge certain paperwork from his official personnel file regarding his absence without leave from November 2, 2010 to February 18, 2011.

In return, Mr. Outlaw agreed to withdraw his EEOC complaint and to voluntarily retire from Federal Service effective November 1, 2010. The July 27, 2011 NSA also set forth a process by which Mr. Outlaw could complain of any alleged breach by the Army. In fact, the parties agreed that Mr. Outlaw’s sole remedy for an alleged agency breach of this Settlement Agreement is to request that the terms of the Settlement Agreement allegedly breached be implemented.

Legal Standards

Complaints filed by pro se plaintiffs are held to less stringent standards than formal pleadings drafted by lawyers. Nevertheless, the leniency afforded to a pro se litigant with respect to mere formalities does not relieve his burden to meet jurisdictional requirements. The court may question its own subject-matter jurisdiction at any time.

Discussion

Mr. Outlaw’s allegations in his complaint vary somewhat from the assertions he made in his opposition to defendant’s motion to dismiss, and from the statements he made during a telephonic status conference conducted by the court regarding what claim he intended to bring. Construing Mr. Outlaw’s allegations in his complaint liberally, as the court is obliged to do for a pro se plaintiff,  the court understands Mr. Outlaw to be asking for: (1) review of a Merit Systems Protection Board Final Order, as well as the two preceding Initial Decisions, and a finding that they were in error; (2) review of the July 27, 2011 NSA and a finding that it is invalid and/or fraudulent; and (3) review of the July 27, 2011 NSA and a finding that the Army breached it.

Yet in his opposition. Mr. Outlaw states that he does “not allege ‘breach of a settlement agreement’ in this case, thus Defendant’s arguments referenc[ing] settlement [agreement] breach are moot.”  Mr. Outlaw further states that he opposes defendant’s motion to dismiss, “because [his claim] is based on a Settlement Agreement which is ‘Invalid/fraudulent and Unenforceable.” ’ He “now ask[s] the Court to review” that settlement agreement.

Mr. Outlaw agree[s] that his complaint is effectively a challenge to the July 27, 2011 Negotiated Settlement Agreement (NSA) he executed with defendant. But he asserts that the settlement agreement is invalid, and further, that this court has jurisdiction to consider his claim because the NSA contains several provisions directing the payment of money.

The court has no jurisdiction to review the October 19, 2012 MSPB Final Order, the March 7, 2012 Initial Decision,  or the April 6, 2012 Initial Decision. To the extent that Mr. Outlaw requests that this court review a decision or order issued by either the Merit Systems Protection Board or a MSPB Administrative Judge, the claim is dismissed for lack of subject matter jurisdiction.

Review of the July 27, 2011 NSA to Determine Whether It Is Invalid and/or Fraudulent
The claims of fraud, invalidity, and coercion that Mr. Outlaw now makes in this court are the same allegations that Mr. Outlaw made in one of his two appeals before the MSPB, which was the subject of the April 6, 2012 Initial Decision issued by an Administrative Judge.

To the extent that Mr. Outlaw alleges a breach of contract claim for the July 27, 2011 NSA, the claim is dismissed for lack of subject matter jurisdiction.

ZALMA OPINION

The unfortunately named Mr. Outlaw made the classic error of representing himself and proving that he had a fool for a client. The court, because he was a pro se plaintiff, gave Mr. Outlaw the benefit of every doubt but could not find how it had jurisdiction after he entered into a contract with the Army that eliminated that right.

He got the settlement he wanted and changed his mind after executing the agreement. There was just no reason for the court to consider his action or take jurisdiction that it did not have, even if it sympathized with Mr. Outlaw’s position.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Only Coverage for Insured Person

Permissive User Not Intended Insured of Umbrella Policy

On October 10, 2010, Levina Rice suffered significant injuries as a passenger in a one-vehicle automobile accident in Bates County, Missouri. Rice’s son-in-law, Howard Wiebe, drove the vehicle, which was owned by Rice’s daughter and son-in-law, Sherry and Timothy Underwood. Both Wiebe and the Underwoods were covered by auto liability policies in effect at the time of the accident. The insurers for each of those policies paid Rice their respective policy limits, a total of $350,000.

The Underwoods also had purchased a personal umbrella insurance policy issued by Allstate Indemnity Company (Allstate Indemnity). Pursuant to a settlement agreement among Allstate Indemnity, Rice, Wiebe, and the two primary auto liability insurers, Allstate Indemnity sought a declaratory judgment in the district court delineating its duties under the umbrella policy, if any, to Wiebe. Allstate Indemnity and Rice both moved for summary judgment. The district court granted Allstate Indemnity’s motion and denied Rice’s motion, concluding Wiebe was not an “insured person” under the umbrella policy. Rice appealed.

BACKGROUND

At the time of Rice’s accident, the Underwoods were the named insureds of an auto policy (auto policy) issued by Allstate Fire and Casualty Insurance Company (Allstate Fire and Casualty), a distinct entity from Allstate Indemnity. The auto policy’s bodily injury coverage was limited to $250,000 per person. Wiebe was the named insured of a Farmers Insurance Company (Farmers) auto liability policy with coverage limited to $100,000 per person. Pursuant to these policies, Allstate Fire and Casualty paid Rice $250,000, and Farmers paid Rice $100,000.

At the time of the accident, the Underwoods also were the named insureds of a “Personal Umbrella Policy” (umbrella policy) issued by Allstate Indemnity. The umbrella policy required underlying auto bodily injury insurance coverage of $250,000 per person and limited excess liability to $1,000,000 for each occurrence. The umbrella policy “provides only excess insurance. It does not contribute with any Required Underlying Insurance or other insurance which applies to an occurrence.” Under the umbrella policy, Allstate Indemnity was required to pay only that amount of damages which exceeds the sum of: “1. the limits of liability of any Required Underlying Insurance which apply to the occurrence; plus  ¶2. the limits of any other liability insurance available to an insured person which apply to the occurrence.”

DISCUSSION

Interpretation of an insurance policy is a matter of state law. The parties agree Missouri law controls this diversity case. When interpreting the terms of an insurance policy, the Supreme Court of Missouri applies the meaning that would be understood by an ordinary person of average understanding purchasing the insurance. Clear and unambiguous language in an insurance policy should be given its plain meaning. If the policy is ambiguous, it will be construed against the insurer. An ambiguity exists when there is duplicity, indistinctness, or uncertainty in the meaning of the language in the policy. Language is ambiguous if it is reasonably open to different constructions. Absent an ambiguity, an insurance policy must be enforced according to its terms.

Allstate Indemnity Umbrella Policy

In the district court, Rice argued that Wiebe, as a permissive user, was an “insured person” under the umbrella policy. Rice now declares in her reply brief that she does not argue that permissive user Howard Wiebe met the technical definition of an “insured person” under the umbrella policy issued to the Underwoods. Her focus on appeal is directed instead to Wiebe’s status as a “permissive user.”

Under the umbrella policy’s “Excess Liability Insurance Coverage XL” (XL coverage), “Allstate [Indemnity] will pay damages which an insured person becomes legally obligated to pay because of bodily injury, personal injury or property damage, subject to the terms, conditions and limits of this policy. Bodily injury, personal injury and property damage must arise from a covered occurrence.”

The disputed question is whether the accident was a “covered occurrence” meriting XL protection. Rice maintains it was, because Wiebe was a permissive user of the Underwoods’ vehicle and the accident arose out of such permissive use. This may be true. However, it is not the only requirement for XL coverage. The XL coverage obligates Allstate Indemnity to “pay damages which an insured person becomes legally obligated to pay because of bodily injury.” (Italics added by the court).  The court could find no such damages in this case. Rice declared and agreed in the settlement agreement that there is no allegation or evidence of negligence or fault on the part of the Underwoods regarding any injuries or damages resulting from Rice’s accident. Rice does not offer any plausible legal theory applicable in the state of Missouri that would render the Underwoods legally responsible for Wiebe’s negligence. Unlike some states, Missouri does not generally impose vicarious liability on a vehicle owner for the negligence of another person operating the vehicle. In short, Rice has offered no factual or legal scenario under Missouri law — nor do we find one — by which the Underwoods would become legally obligated to pay damages to Rice under the facts of this case.

Allstate Indemnity’s XL coverage provisions explicitly and unambiguously protect against losses the insured person incurs — that is, protection for “damages which an insured person becomes legally obligated to pay.” Not every conceivable loss is covered. The XL coverage delineates a specified, numbered subset of three “covered occurrence[s]” in the clause entitled “Losses We Cover Under Coverage XL.” Rice would have the umbrella policy’s XL coverage insure not only the “legal obligations” of the Underwoods, but also the legal obligations of an unlimited pool of permissive-user tortfeasors.

This interpretation contradicts the very purpose of umbrella insurance, as interpreted by the Missouri courts: “While a primary insurance policy provides ‘the first layer of insurance coverage,’ an umbrella policy is used to provide ‘specific coverage above an underlying limit of primary insurance.’” The purpose for writing an umbrella policy in addition to a primary policy is  to protect the insured against liability for catastrophic losses that would exceed the limits of affordable primary coverage. Allstate Indemnity is not responsible for the fact Wiebe had not purchased any excess insurance for his own protection against liability for catastrophic loss.

CONCLUSION

Because the plain language in the Underwoods’ Allstate Indemnity umbrella policy provides XL coverage only for the legal obligations of insured persons, and Wiebe is not an insured person under the umbrella policy, the judgment was affirmed.

ZALMA OPINION

In common auto insurance a permissive user of a vehicle is covered by the owner’s insurance policy. As a result Wiebe was insured by the primary insurance. However, Umbrella insurance is personal, in Missouri, to the persons qualified as an “insured person” and since Wiebe did not fit that definition he was not entitled to the umbrella coverage since he was not an insured person.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Diminution in Value & Insurance

Adjusting Claims Of Diminution

 

Since 2001 the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) there has been serious concern in the insurance industry about how a court could change the wording of an insurance policy agreed to by the insurer and the insured.

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired Zalma on Diminution In Value Damages – 2013  was created to assist insurance professionals to answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It was designed to allow the reader to find the answer in the appropriate jurisdiction when asked what is the proper measure of damage:

•    Is it cost of repair?
•    Is it the difference between fair market value before and fair market value after it is damaged?
•    Is it the cost of repair plus stigma damages?
•    Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged?
•    Is it something in the middle?
•    Is it none of the above?
•    Is it all of the above?

The answer to the questions depends on the state where the claim is presented and, when insurance is involved, the wording of the policy.

The subject of diminution of value damages when applied to insurance claims caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay to the insured what was promised: the cost of repair using material of like kind and quality. It also caused concern to appraisers, adjusters, lawyers and every person who were called upon to deal with claims of property damage and the limitations of a policy of insurance.

Insurance policies, by definition, promise to indemnify the person(s) insured against certain specified risks of accidental loss that is either contingent or unknown at the time the policy is acquired. The methodology used to establish the appropriate amount to indemnify the injured party for damage to his or her property seems different in each decision. When called upon to determine which measure of damages is to be used tends to be different from state to state and from U.S. District Court of Appeal to District Court of Appeal. Determining the amount of indemnity recoverable – whether cost of repair, diminution in value or some combination of both – also varies from jurisdiction to jurisdiction.

Zalma on Diminution In Value Damages – 2013 provides an analysis of the decisions of the appellate courts of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court.
Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and deals with the issue of establishing the amount of loss to property in each jurisdiction that has written on the issue.

The E-book covers in detail how each of the jurisdictions who have been asked to do so determine recovery of insurance proceeds for damage to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, whether insured or not, to determine how to calculate what they must pay to those whose property is damaged by their actions.

Insurance and Diminution of Value Claims

Since insurance was invented in ancient Sumeria when insurance policies were written on clay tablets there have been disputes between the insured and the insurer. Since tort law first came into existence before the writing of the Old Testament there have been disputes between the tortfeasor and the victim as to the extent of the damages recoverable.
Insurers and their insureds continue to struggle with establishing a fair method to properly compensate the person insured for the property lost or damaged as a result of a peril insured against. Insurance, by definition, is a contract where one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The key item of dispute is to determine 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, in 1915, said: “Indemnity means an obligation to make good a loss…”
On its face, calculating indemnity seems to be a simple task. As the cases in Zalma on Diminution of Value Damages – 2013 are reviewed, the reader will understand that the task is not as simple as it seems. The reader, after reviewing the cases, will be in a position to understand why diminution in value is a concept that has given litigants, insurers and courts serious concerns and has generated what seems to be a constant deluge of litigation.
Since few jurisdictions agree completely on the method to properly compute damages or to properly indemnify the persons insured by an insurance policy courts have considered diminution in value of property damaged in an accident and repaired justify as one method of reaching true indemnity.

Common sense indicates that 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 or the amount promised by an insurance policy.  The proper measure is often difficult to determine and no single measure fits every type of damage. The measure of damages, true indemnity, seldom fit into a hard rule of thumb. Every possible means of providing complete indemnity can be, and is, considered 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.  Each court should reach the result of true indemnity. However, the diversity of opinion is the rule rather than the exception and that is the reason Zalma on Diminution of Value Damages – 2013  was created.

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 are silent and only promise repair or actual cash value, insurers believed it was unnecessary to even mention in the policy the difference in value before the accident and the value after repairs are completed.

No promise was made to pay for more than actual cash value or the cost of repair, whichever is less. The issue was with regard to damage to automobiles and loss in value after repairs were completed 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”).   Mabry raised serious concern among insurers because it required payment of sums greater than that for which a premium was collected. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired.

Insurers believed the Mabry decision was a judicial rewriting of the wording of the policy. Lawyers for policyholders found it to be a means of giving true indemnity to their clients as well as an invitation to file multiple, profitable lawsuits against insurers. Mabry’s success in Georgia generated suits across the country seeking recovery for diminution of value from insurers and third-party-defendants. The attempt to convince other states to follow Georgia had limited success.

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 payment for the 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 policy’s wording, endorsements or definitions, that establish that the insurer does not intend to, nor will it, pay for diminution of value after the automobile was repaired while others have simply increased premium to cover the additional payments.

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 repaired vehicle or property. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired more than other types of property. The resale value of an automobile most likely will be less for one repaired after an accident than that for a comparable automobile that has not been damaged and repaired. This is not true, however, of all types of property. A 50-year-old house that is damaged by fire and rebuilt, new for old, will usually be more valuable than it was before the fire.

The fact of the accident and damage, even if repaired perfectly, results in a reduction — or “diminution”— in the resale value of the automobile causes those insured to claim they have not received what they were promised by the policy, true indemnity. Insurers counter that they never promised to provide a vehicle of the same value after an accident than the value it had before the accident. The insurer only promised to repair the vehicle using material of like kind and quality.

When real property is repaired replacing old material with new the resale value of the real property is often increased. No court I have been able to find has suggested that the insurer is entitled to a reduction in its payment for repair because the insured profits from the repair of a structure and is not, therefore, truly indemnified because the insurer promised to replace old with new and to even bring an old building up to modern codes at no cost to the person insured.

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 regulation from state insurance departments, statutes enacted by state legislatures and the holding of the various courts.

Although there appears to be nothing in insurance policy wording that even appears to contractually cover any reduction in market value of an automobile some courts, like the Supreme Court of Georgia, require that the insurer pay more than the cost of repair to achieve total indemnification. Most policies of insurance that insure property up to its actual cash value allow the insurer to deduct for “betterment” or depreciation. The burden of proof is on the insurer to demonstrate such depreciation or betterment is appropriate to indemnify the insured with money the value lost as a result of the insured casualty.

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 states nothing about compensating 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 include 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 an accurate method of providing true indemnity, 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.

Some states apply the rules strictly, some apply the general rule of fairness, 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 Insurance Services Office (“ISO”) has issued an endorsement, to avoid the diminution of value issue, that reads:

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

COVERAGE FOR DAMAGE TO YOUR AUTO EXCLUSION ENDORSEMENT

        With respect to the coverage provided by this endorsement, the provisions of the policy apply unless modified by the endorsement.

        I. Definitions

        The following definition is added:

        “Diminution in value” means the actual or perceived loss in market or resale value which results from a direct and accidental loss.

        II. Part D – Coverage For Damage To Your Auto
        The following exclusion is added:

        We will not pay for:

        Loss to “your covered auto” or any “non-owned auto” due to “diminution in value”.

        This endorsement must be attached to the Change Endorsement when issued after the policy is written. [Personal Auto form PP 13 01 12 99]

The E-book is available at http://www.zalma.com/zalmabooks.htm.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud & Weapons to Fight Fraud

Insurance Fraud & Weapons to Fight Fraud

© 2014
Barry Zalma, Esq., CFE

On June 16, 2014 I presented a talk to those attending the International Conference of the Association of Certified Fraud Investigators. The follow is taken from the paper I presented.

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number because most attempts at insurance fraud succeed. Insurance fraud experts estimate insurance fraud in the United States takes from the industry amounts equal to a low of $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected until they become greedy and the fraud becomes so obvious it cannot be ignored. CFEs can reduce the extent of insurance fraud because they are the best trained and most knowledgeable about fraud of all kinds and should recognize insurance as a major market for the services of a CFE.

No one will ever place an exact number on the amount lost to insurance fraud but everyone who has looked at the issue knows – whether based on their heart, their gut or empirical fact of convictions for the crime of insurance fraud – that the number is enormous.

Wherever insurance is written insurance fraud exists. It is an equal opportunity fraud committed by people of every race, religion or national origin.

Insurers who do not exercise serious anti-fraud efforts often complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud. No matter how seriously the insurers work to prove fraud the authorities ignore them. In response, police and prosecutors complain that the insurers do nothing that police and prosecutors can use to prosecute the crime of insurance fraud.

If the extent of insurance fraud is to be successful it is necessary that CFEs, insurers, prosecutors and police agencies work together as a team dedicated to reduce the crime of insurance fraud. To do each must know and apply the various weapons available to deal with suspected insurance fraud.

Insurers are compelled by state statute and Regulation to maintain Special Fraud Investigation Units, publish and fulfill a detailed anti-fraud program and train all of their anti-fraud personnel.  Compliance by insurers is less than constant across the industry. Some have effective fraud units while others simply identify one employee as its anti-fraud director although his or her work is almost totally adjusting claims and not investigating fraud. Those that employ the services of CFEs often have the most effective anti-fraud efforts.

Do Insurers Get Their Money’s Worth from Fighting Fraud?

The answer is “yes” and “no.” The more difficult question to answer is how to quantify the savings, if any.

What is Insurance Fraud?

Next to tax fraud, insurance fraud is the most practiced crime in the world. It is perpetrated by members of every race, religion, and nationality. It is found in every profession. The possibility of a tax-free profit, when coupled with the commonly held belief that criminal prosecution will probably not occur, is sometimes too difficult for normally honest people to resist.

Insurance fraud is a tort, a civil wrong. Black’s Law Dictionary, 6th Edition, defines fraud as:

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

In simple language, fraud can be defined as a lie told for the purpose of obtaining money from another who believes the lie to be true. Civil insurance fraud exists if an insured:

•     Makes a representation to the insurer that the insured knows is false;
•     conceals from the insurer a fact he or she knows is material to the insurer;
•     Makes a promise he or she does not intend to keep; and
•     makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.

Weapon 1: The Interview

The beginning of a thorough insurance fraud investigation is the interview. An interview is not an interrogation. It can be performed best by a CFE, an experienced insurance lawyer, a claims person or a private investigator. The interview should be informal. The interview is a structured conversation. Everyone has been interviewed. Everyone has, at some point in his or her life, interviewed someone.

By interviewing insureds, claimants and independent witnesses the CFE can obtain important background information on the witness that the CFE could not obtain by hours of investigation. Knowledge from sources of information will give the CFE the ability to detect prevarication and direct the interview toward truth.

Weapon 2: Rescission

Rescission is an equitable remedy that has existed since 1766. California, New York and a few other states have enacted statutes that follow a House of Lords decision, Carter v. Boehm, S.C. 1 Bl.593, 3 Burr 1906, 11th May 1766, and allow for rescission of a policy whenever the insurer is deceived even if the insured did not intend to deceive the insurer.

The remedy of rescission was created by the ecclesiastical courts of ancient England who were charged with reaching fair results rather than giving a money judgment. As courts of equity they voided contracts that were obtained by mistake, misrepresentation, concealment or fraud.

Facts raising rescission usually appear as part of a claims investigation. When a proposed insured lies to obtain the insurance the insurer may seek equity from the court and have the contract declared void from its inception. To do otherwise would be unfair and allow a fraud to profit from wrongful conduct.

Rescission is an important equitable remedy hoary with age. When an insurer learns it was deceived into insuring someone it would not have insured, it should be able to legitimately exercise the right provided to parties to an insurance contract without fear of a tort action. Rescission is not, as some members of the plaintiffs’ bar would have courts believe, post loss underwriting. Underwriting is based on a belief that the facts presented by an insured in an application is presented truthfully and with utmost good faith. When it is not, rescission is a method to put fairness into a contractual relationship and put the parties to the contract back in the place they were before the contract was made.
The insurer should analyze the findings of its thorough investigation, and obtain competent legal advice whether:

1.    it can rescind in writing, return the premium, and accept the costs of its investigation;

2.    it can rescind in writing, return the premium, and—if the evidence available warrants—file suit against the broker who presented the false application to recover its investigation and legal costs; or

3.    It can rescind in writing and file a declaratory relief to confirm the rescission and obtain restitution of expenses and legal fees incurred.

Weapon 3:  Computer Databases

Databases, such as those operated by the Insurance Services Office, Equifax, Lexis/Nexis or NICB, allow an investigator to collect information from public records. Searches of property or bankruptcy records, court filings, and any criminal conviction records can give a complete picture of the person under investigation. Uniform Commercial Code (UCC) filings will reveal security interests in personal property. Securities Exchange Commission (SEC) filings also contain information concerning business acquisitions, liabilities, and any significant pending lawsuits.

Credit bureaus are often a source of information concerning an insured’s or claimant’s credit history. When using this information, insurers must be aware of the potential applicability of the federal Fair Credit Reporting Act (FCRA) and the limitations this act places upon the use of credit reports.

Courts have recognized the value of index reports to insurers investigating claims. In Tucker v. Colonial Ins. Co., 195 Ga. App. 842 (1990), the claimant told his auto carrier that he only had one prior accident. However, an index bureau search revealed he had at least four, and further investigation revealed he had about 20 prior accidents. The auto carrier counter-sued for insurance fraud. The Georgia Appellate Court cited the index bureau1 report as strong evidence that the claimant was committing fraud, and that the jury in the claimant’s trial for insurance benefits under the auto policy was properly instructed on the fraud issue.

Weapon 4: Verify Information

The CFE must verify every material fact provided by the claimant or insured in the application for insurance and in the presentation of a claim.

If investigating a crime against the insured a major auto accident where police responded, or a fire the police or fire-cause investigators must be interviewed in person to learn if any suspects have been identified, arrests made, or property recovered, or if the police investigators have issued any supplemental reports.

A network of doctors and medical companies were allegedly involved in a scheme aimed to entice people from across the country to partake in unnecessary medical procedures to bill millions of dollars to the Blue Cross and Blue Shield insurance companies.

Even if the insurer catches the insured or claimant in the attempt and refuses to pay the fraudulent part of the claim, the entire policy is void. An insured or claimant who commits fraud in part of his or her claim loses the entire claim and cannot collect for the honest part of his claim because, regardless of size, fraud makes the entire policy voidable.

Weapon 5: Proactive Fraud Investigation

If fraud is suspected, further investigation techniques, conducted carefully and in compliance with local law, can be used. Some proactive investigative techniques follow:
Surveillance

If the initial investigation suggests that a fraudulent claim has been made, surveillance may be useful. Investigators follow or watch the insured, often photographing, filming, or videotaping to establish whether the claim is valid. Most often this technique is used to investigate claims in fraudulent bodily injury and workers’ compensation cases to prove that the insured or claimant is not injured as he or she claims.

Electronic Eavesdropping

Eavesdropping is an ancient practice which at common law was condemned as a nuisance.

Electronic eavesdropping is generally illegal under federal law, subject to two exceptions:

•    a business extension exception that applies to intercepts made by use of a business telephone extension in the ordinary course of business; and

•    Consent of at least one party to the conversation.

Some states require the consent of both parties to a recording others do not. Before recording is made with single-party consent, careful research of the law of the jurisdiction where the recording is to be made should be completed with the advice of competent counsel.

Weapon 6: The Examination Under Oath

An examination under oath is an oral interview taken under oath before a notary or certified shorthand reporter. The reasons for the examination under oath is to allow the insurer to cross-examine, as it were, the documents submitted by the insured in proof of his or her loss. [Claflin vs. Commonwealth Insurance Company of Boston, Mass. 110 U.S. 81, 94-95, 3 S.Ct. 507, 28 L.Ed. 76 (1884); Hickman vs. London Assurance Corp. 184 Cal. 524, 529-530, 195 P. 45 (1920).]

The New York Standard Fire Policy provides as follows:

“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…”

A false answer as to any matter of fact material to the inquiry, knowingly and wilfully made, with intent to deceive the insurer, would be fraudulent. The position taken by the U.S. Supreme Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945). In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgment 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.”

Weapon 7: The Insurer’s Right to Documents & Things is The Civil Equivalent of a Search Warrant

The Mississippi Supreme Court in Southern Guaranty Insurance Co. v. Dean, 252 Miss. 72, 172 So.2d 553 (1965) denied the insured recovery for failing to produce documents pertinent and material to her insurance and the loss. That documentation can be relevant to the insurance and have no relevance to the loss, but must still be produced.

Most Insureds (who have something to hide or who believe in taking stands on principal) will refuse to disclose tax returns. Usually they state the taxpayers’ privilege which is a court made protection in some states. The court made protection is against a court compelling production. The policy language acts as a waiver of the so-called privilege or protection against disclosing tax returns.

CFEs, like everyone else, can become frustrated. Every CFE, adjuster and fraud investigator have had “gut feelings” about a case that are not supported by the evidence. Before recommending the declination of an insurance claim the CFE must establish that he or she has collected sufficient admissible evidence that will establish the elements of civil fraud.

•    Violate the rights of an insured,
•    Falsely accuse someone of fraud, or
•    Succumb to frustration and create evidence of fraud that is false.

Such conduct can be dangerous to the insurer’s bottom line. In addition the individual employee may find himself or herself a defendant of a civil or criminal action. The only protection against the overzealous investigator or claims person is to properly train and support the insurer’s claims and anti-fraud personnel. An ethical fraud investigator will do a thorough and complete investigation. He or she will never accuse an insured of fraud without first obtaining sufficient information to defeat a civil case or cause a prosecutor to bring a criminal case or both.

Insurance fraud in the presentation of a claim, by definition, voids insurance. In 1884 the U.S. Supreme Court considered the issue and decided that a fraud in the presentation of a claim, even if it was not intended to deceive the insurer and would have had little effect on the indemnity paid, still caused the policy to be void and the claim to be denied.

In Claflin & Others v. Commonwealth Insurance Company.; Same v. Western Assurance Company.; Same v. Franklin Insurance Company, 110 U.S. 81; 3 S. Ct. 507; 28 L. Ed. 76; 1884 U.S. LEXIS 1661.

After a loss, Murphy assigned his claims against the several companies under the policies to the plaintiffs. Defendant insurers issued insurance policies on certain goods. Plaintiffs were assigned the goods and brought suits under the policies against defendants as assignees of the original insured. After determining that the lower court had jurisdiction over the matter, the court affirmed judgment for defendants because the record showed the assignor had made false statements and therefore plaintiff assignees could not prevail.

In any view, there was a fraud attempted upon the insurers; and it is not lessened because the motive that induced it was something in addition to the possible injury to them that it might work. The supposition proceeds upon the very ground of the false statement of a material matter, knowingly and wilfully made, with the intent to deceive the defendants in error; and it is no palliation of the fraud that Murphy did not mean thereby to prejudice them, but merely to promote his own personal interest in a matter not involved in the contract with them. By that contract the companies were entitled to know from him all the circumstances of his purchase of the property insured, including the amount of the price paid and in what manner payment was made; and false statements, wilfully made under oath, intended to conceal the truth on these points, constituted an attempted fraud by false swearing which was a breach of the conditions of the policy, and constituted a bar to the recovery of the insurance.

Intentional Misrepresentation

When an insured lies during the course of a claim investigation, like Murphy did in the Claflin case, the prudent insurer, if the lie is discovered, will declare the policy void and deny the claim. A lie in the course of a claim investigation is a clear breach of the covenant of good faith and fair dealing by the insured.

Almost every insurance policy issued in the United States has a clause equal to or similar to that in the New York Standard Fire Insurance policy, that like the standard fire policy in most states, provides, that provides in relevant part, as follows:

Concealment, fraud

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.

An insured who lied intentionally about a claim to prevent her criminally violent son from harming her physically sued the insurer who denied the claim when it learned she had lied to them. She failed to recover any benefits because the concealment or fraud provision of her policy effectively barred her claim.

In Cummings v. Fire Insurance Exchange, 202 Cal. App. 3d 1407, 249 Cal. Rptr. 568 (Cal.App.Dist.2 07/22/1988) Mary L. Cummings, (plaintiff), appealed from a summary judgment granted to defendant Fire Insurance Exchange (defendant) on her complaint seeking damages from defendant for its failure to pay a property damage claim and its allegedly malicious instigation of an unsuccessful criminal prosecution of plaintiff. Because the record demonstrates (1) that plaintiff knowingly and wilfully filed a false claim on a casualty policy issued by the defendant and (2) that defendant had a reasonable basis for believing that plaintiff had violated the law in so doing.

Claflin holds that the materiality of a statement is not defined and determined by the effect it has on the outcome of the investigation. Rather, a question and answer are material when they relate to the insured’s duty to give to the insurer all the information he has as well as other sources of information so that the insurer can make a determination of its obligations.

In Fine v. Bellefonte Underwriters Ins. Co. (2d Cir. 1984) 725 F.2d 179, 182-184 (citing Claflin), the court held that a statement is not material only if it relates to a matter which ultimately proves to be significant in the ultimate disposition of the claim. Rather, if the misrepresentation concerns a subject reasonably relevant to the insured’s investigation, and if a reasonable insurer would attach importance to the fact misrepresented, then it is material.

Plaintiff admits that she knew she was lying to the defendant and did so with the intent that defendant not find out the actual facts. Second, under Claflin, the intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured wilfully makes it with knowledge of its falsity. Thus, plaintiff’s intent to deceive was established as a matter of law.

This conclusion is in no way avoided by plaintiff’s contention that she was motivated to make such false statements by her very reasonable fear of her son. In the context of this case, that means that plaintiff’s motive of fear of her son’s violence was irrelevant to the question of whether she intended to deceive the defendant.

As plaintiff’s misrepresentations were material and were intentionally made with knowledge of their falsity and with the intent to deceive defendant, the trial court was correct in ruling that, as a matter of law, they were a defense to the breach of contract causes of action since they voided the insurance contract. Summary judgment was therefore proper.

Mrs. Cummings committed fraud under duress. She was frightened that if she told the truth to her insurer she would lose her life at the hands of her evil, violent son.

She later admitted that she lied to her insurer and that she did so with intent to deceive the insurer. That is why she had no case. She made a decision to lie. Whether she had a good reason to lie or not, she lied and she did so with knowledge of the lie with intent to deceive the insurer to its damage. Mrs. Cummings’ conduct, by definition, is common-law fraud.

If you found this to be interesting consider my new book, The Insurance Fraud Deskbook available from the American Bar Association at Shop ABA.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Knowledge of Insurance is Required to Adequately Investigate Insurance Fraud

From The Insurance Fraud Deskbook

Before insurance fraud can be understood, it is important to understand what insurance is and how it works. Politicians continue to misunderstand insurance. Insurance is not a right awarded by the Constitution to every resident of the United States. It is a contract between an insurer and a person or corporation called the insured. Insurance is only a “contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.”

That is all insurance is: a contract.

It is a special type of contract where the insurer agrees to indemnify the insured against a loss, damage to property or liability as long as the event for which indemnity is sought is contingent or unknown at the time the insurance was acquired. A condition pre-existing the contract is not contingent or unknown. One should not be able to buy insurance against the fire loss of a home after it burns down. A person should not be able to buy medical care insurance to treat a cancer only after the cancer is diagnosed. Auto liability insurance purchased after an accident is not insurance and should not indemnify the insured for injuries caused.

Insurance fraud exists because its perpetrators wish to profit by failing to comply with the definition quoted above. Those who perpetrate insurance fraud intend to create the loss, damage or liability rather than join the pool of those who have no losses but wish to protect themselves against contingent or unknown events.

Because politicians and the public they serve do not understand what insurance is; because they do not understand what promises the insurers and insureds make to each other; and because premiums are paid annually but claims are rare, insurers are not liked. Insurance fraud in North America and Europe is rampant and almost universally unpunished.

It is the purpose ofthe recently published Insurance Fraud Deskbook available from the American Bar Association to provide information to those who are engaged in the effort to reduce insurance fraud. It will explain the elements of the crime and the tort to claims personnel. It will provide information for the lawyers representing insurers so that they can adequately advise their clients who are victims of the crime of insurance fraud. It will provide information for the prosecutors and their investigators about what is required to prove the crime.

By including the full text of decisions from courts of appeal and supreme courts across the country the reader can understand what happens after the investigation is completed in order to better complete the investigation. It allows claims personnel and their lawyers to understand what errors they might make that would cause a defeat or a not guilty verdict.

Since the effort to reduce insurance fraud requires the assistance of courts – both civil and criminal – the prudent fraud investigator, insurance adjuster, insurance attorney or insurance Special Investigation Units, and insurance management will have the information to deal with state investigators and prosecutors. It is also necessary to read the full text of decisions of the courts of appeal to fully understand the facts gathered by the investigators and prosecutors.
Next to tax fraud, insurance fraud is the most practiced crime in the world. It is perpetrated by members of every race, religion, and nationality. It is found in every profession. The possibility of a tax-free profit when coupled with the commonly held belief that criminal prosecution will probably not occur, is sometimes too difficult for normally honest people to resist.

As those in the insurance industry are aware, many insurance fraud cases go unreported, either because the victimized organizations do not recognize that they have been defrauded, because they choose not to report the crimes for fear of bad publicity, or simply because they do not want to deal with the repercussions and expenses attendant on insurers who report fraud to the appropriate authorities. If each insurer recognized that at least three percent of its gross premium goes to perpetrators of fraud the insurer might be willing to invest more money in its special fraud investigation units. Those who believe they can pass the cost of fraud on to the customers are mistaken. The truth is that fraud reduces the profit an insurer can make. Those who own stock in insurers should be complaining to the insurer about the lack of effort to protect the profits of the insurer and the dividends the shareholders are entitled to receive.

In simple language, fraud can be defined as a lie told for the purpose of obtaining money from another who believes the lie to be true. Civil insurance fraud exists if an insured:

•     makes a representation to the insurer that the insured knows is false;
•     conceals from the insurer a fact he or she knows is material to the insurer;
•     makes a promise he or she does not intend to keep; and
•     makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.

If you are interested in working to reduce insurance fraud you will find the Insurance Fraud Deskbook to be of assistance. It is available for pre-order at ShopABA.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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For Fun

Zalma Travels

 

I’m in San Antonio, Texas giving a talk on Insurance Fraud to the Association of Certified Fraud Examiners, today so I send a short story from my e-book, “Heads I Win, Tails You Lose” for your enjoyment.

 

Disaster Scum

Disasters bring out the best in people. Disasters bring out the worst in people. Some risk their lives and fortunes to help victims. Others risk prison to profit for the disaster.

After the January 17, 1994 Northridge earthquake insurance companies sent teams of experienced claims handlers and billions of dollars to Los Angeles county California to ease the effect of the earthquake on those of their customers prudent enough to buy earthquake insurance. Money was paid out quickly. Because of the extent of the disaster few controls were in place.
Those who prey on the hardship of others descended on Southern California as the plague of frogs descended upon Egypt when the Pharaoh refused to heed Moses’ warning.

Able Carpenter saw the earthquake as an opportunity to make an illegal fortune without effort. Able had worked for two months, before the earthquake, as a laborer on a construction project. He went door to door in Northridge convincing the residents whose homes were damaged that he would protect them from their evil insurers.

He offered each homeowner a profit on their insurance claim. Even after paying his fee their house would be improved and better than it was before the earthquake. He promised them Lanai’s, hot tubs, extra bedrooms and cash. He seemed to each of the homeowners to be too good to be true. They would survive the earthquake and make a profit.

Able had no concern that he was neither a licensed contractor, public adjuster nor attorney. He relied on the greed of his customers and their natural distrust of insurers.

Able had no concern for the needs of the people who put their trust in him. His only concern was money. He wanted to be rich.

Regardless of the extent of damage to the dwelling of his customer the estimate Able prepared would be the same. The structure needed to be totally rebuilt at a cost of $275 per square foot. He would submit contracts to the homeowner prepared on forms he bought at a local stationary store. He wrote on each contract a fictitious license number, knowing that the customer would never call to check. He negotiated with each insurance company adjuster. His fee was only 40% of the amount received. He promised each insured that he, as a general contractor, would build their home into a new, earthquake safe structure if they turned over to him the remaining 60%.

Even Able was surprised at the gullibility of his customers and the speed with which the insurers settled the claims. Within a month of the earthquake he had over 50 contracts signed by homeowners from Northridge to Van Nuys and from Sherman Oaks to Westlake. His estimates were never less than $500,000.
Within three months of the earthquake Able collected almost $10,000,000 in fees and $25 million in construction contracts. He had no interest in actually rebuilding the homes. He had explained to the customers who relied on him that he would start work as soon as material were available. He called them every day.

Able explained that the earthquake had destroyed much of his ability to obtain construction materials. He comforted them with promises of quick work once the materials arrived. Able had no concern that each of his customers, whose homes were not as damaged as he reported, were subject to prosecution for fraud. His only concern was money.

When the collections reached $10,000,000 Able deposited the money in a bank account on Grand Turk Island in the Bahamas, bought an airplane ticket and retired to a villa he purchased on the island. The remainder of the $10,000,000 he invested in mutual funds. Able Carpenter now lives comfortably on the dividends. His customers still have broken homes and insufficient funds to complete repairs.

The homeowners and the insurers were defrauded. Good faith claims handling hurt everyone but Able. Neither the homeowners nor the insurers had learned that when a deal sounds too good to be true it is.

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“Insurance Fraud Deskbook” Now Available

In the twelfth issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on June 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Barry Zalma to Speak on Insurance Fraud at CFE Conference in San Antonio on June 16, 2014.
2.    Another Lawyer Disbarred for Insurance Fraud.
3.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
4.    Careful Who is Made Beneficiary

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

•    Use of Vehicle
•    Medical Services True Value
•    Timely Disclaimer Law is Limited
•    The Need for a Contingent or Unknown Event
•    Intentional Tort
•    “Ball Tap” an Intentional Tort
•    No Cover For Poor Workmanship
•    Effect of “Assault & Battery” Exclusion
•    Vexatious Refusal to Pay
•    Duty to Defend Requires Suit or Functional Equivalent
•    Truck or Premises – That is the Question
•    Punch In Face Not An Occurrence
•    Fraud Increases
•    Reliance on Experts Raises Genuine Dispute
•    Don’t Lie to Your Insurance Company
•    No Sworn Proof of Loss – Insured Loses
•    Who’s on First?
•    Insurance Fraud is Not a Victimless Crime
•    Experts Wrongfully Excluded
•    Fortuity Rules Insurance Interpretation

Zalma on Insurance

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

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

NEW! From the ABA:

The Insurance Fraud Deskbook
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 thaey 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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

Available from 800-285-2221.

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.

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

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Use of Vehicle

Directing a Vehicle Can Be “Using” the Vehicle

The Supreme Court of Wisconsin was faced with a case of first impression – whether a police officer directing a vehicle was “using” the vehicle for purposes of uninsured and underinsured motorist coverage. In so doing it analyzed state and foreign authorities.

BACKGROUND

A deputy sheriff was struck by vehicle while assisting vehicle to enter lane of traffic at the airport. She sued the county‘s automobile insurer to recover underinsured-motorist (UIM) benefits. The Circuit Court, Milwaukee County, William Sosnay, J., granted insurer’s motion for summary judgment. Deputy sheriff appealed. The Court of Appeals reversed and remanded. The insurer appealed.

Rachelle Jackson, a Milwaukee County sheriff’s deputy, seeks coverage under her employer’s underinsured motorist policy. The policy pays sums owed by an underinsured tortfeasor to an insured person who is injured while “using an automobile within the scope of his or her employment or authority.” The policy defines “using” by saying it “has the meaning set forth in Wis. Stat. § 632.32.(2)(c)” and “includes driving, operating, manipulating, riding in and any other use.”

After Jackson gave the directions to the hotel, the driver asked, “How am I going to get back in traffic?” Jackson said she responded, “I’ll go in front of your car, and I’ll come around and help you get in traffic.” As Jackson walked on the pedestrian walkway in front of the car, the car “move[d] three or four feet” at about five miles per hour and hit her.

Jackson was injured while on duty by a driver to whom she had just given directions.  Jackson argues that under the policy’s definition of “using an automobile” and under case law broadly construing the word “using,” her actions with regard to the vehicle that hit her constituted using the vehicle because she was in essence controlling the vehicle. She testified in her deposition that at the time she was hit, she had already “asked” the driver to pull into the parking lane to speak with him, had spoken with him, and had started to “go in front of the car, walk in the walkway” when the driver pulled forward and hit her. She argues that the accident occurred while she was in the process of “manipulating” the car or while she was making some “other use” of the car. There is no assertion that she had stopped traffic or was guiding the driver into traffic at the time of the accident.

ANALYSIS

To determine the meaning of the insurance contract, the court first looks at the policy language itself. It then must turn to prior Wisconsin cases interpreting the statute and similar policy language, insurance treatises, and cases from other jurisdictions construing the same type of policy language.

Even though Wisconsin courts give the word “using,” in the context of insurance policies, quite a broad definition, the definition has limits. Other Wisconsin case law applies the definition: “employment for the purposes of the user.” After reviewing the types of purposes for which vehicles have been employed, the court could find none in which the control or use of the vehicle is as attenuated as it is here, given that at the time of the accident, Jackson had not begun to guide the vehicle into traffic.

However, even though the court could draw some general guidance from the cases, it recognized that no Wisconsin case directly applies.  For example, where the driver cannot see where he is going and completely trusts the guide to direct his movements, the guide can be considered a user because the actual driver is essentially an automaton, responding solely to the guide’s directions.  By comparison to that scenario, Jackson’s testimony was that the accident happened before she went to stop the traffic. Jackson, by her own undisputed testimony, was not controlling the car at the time of the accident and had not, in fact, begun to guide the vehicle into traffic.

The activities deemed to be “use” can range beyond ordinary transportation, but generally involve some closely related activity. For example an insurer could reasonably expect that a truck might be used for hunting, and that a hunter might use the truck bed as a platform from which to hunt; or that raising and lowering a platform using a truck and pulley constitutes “use” of the vehicle; or that reasonable and expected “use” of a van includes loading and unloading hunting equipment; or that “use” includes transportation of dogs in the bed of a vehicle; driver’s call and gesture to pedestrian subsequently hit while crossing the street a “use” of the vehicle; and that leaving a child in a vehicle during a brief errand reasonably consistent with inherent nature of vehicle.

The cases do not suggest that the term “use” must be read so expansively as to include a boundless number of activities. The courts below were correct that this scenario has not been addressed in Wisconsin in a “using a vehicle” case.

Jackson’s actions with regard to the vehicle and driver were not employing the vehicle for Jackson’s purposes; thus, from the outset, this case differs from “the variety of uses” that Wisconsin case law has recognized. It is reasonable to conclude that Jackson was not “using” the vehicle involved here.

Whether a person getting ready to direct a driver where to go is using the vehicle within the meaning of an insurance policy, such as the one at issue here, is a question that has not been clearly put to courts in other jurisdictions.  The Supreme Court, determining who constitutes a user of a vehicle it is generally required that if one who claims to be a user was not actually driving the vehicle, that individual must have exercised some form of control over it. Control is therefore the primary factor in determining whether signaling directions elevates an individual to the status of ‘user’ under an omnibus clause. Where the driver cannot see where he is going and completely trusts the guide to direct his movements, the guide can be considered a user because the actual driver is essentially an automaton, responding solely to the guide’s directions.

Such a rule is not inconsistent with holdings in prior cases, such as the holding that the insured need not be in direct contact with the vehicle to be using it. It is difficult and probably impossible to formulate an exact measure of the degree of control which a person not owning or driving the particular automobile must exercise over it in order to have the type of responsibility for its potential to do injury so as to be deemed entitled to the protection of automobile liability coverage. Obviously the expression ‘while using’ is intended to describe the appropriate relationship, but does not readily supply an answer in situations like that before the Wisconsin Supreme Court.

Jackson conveyed four points of information to the driver: a request to pull to the curb, directions to the hotel he was seeking, an offer to help him pull back into traffic, and an order to park the car after she was hit. She touched the vehicle as she tried to evade being hit.

Unlike the cases in which the person guiding or giving directions was “controlling” and therefore deemed a user of the vehicle, Jackson did not exercise such control over the vehicle to the extent that she essentially became the user. She was not communicating with, signaling, or exercising active control over the vehicle at the time of the injury.
Jackson cannot recover because the actions she took with regard to the vehicle that hit her do not constitute using a vehicle in any way that is consistent with interpretations of “use” in Wisconsin case law or with those of cases from other jurisdictions.

ZALMA OPINION

The Wisconsin Supreme Court made a wise and prudent conclusion to limit use to actual control of the vehicle. Since the Deputy was not in control of the vehicle the coverage did not apply. To do otherwise would make UIM coverage available for almost any accident involving an automobile.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Medical Services True Value

A Hospital’s Bill is not Always The Market Value of Services Rendered

Anyone who has reviewed a hospital bill in detail will be astonished by the amounts charged. A $20 charge for two aspirin is not unusual. I personally dealt with a case where a major hospital’s bill for treatment of an accident victim exceeded $2 million in detailed charges. Since the accident victim was a Medicare beneficiary the hospital accepted as full payment of its more than $2 million charge, about $230,000, after applying the terms and condition of the hospital’s contract with Medicare. Courts continue to be asked to require insurers and tortfeasors to pay to injured people the amount billed rather than the amount the hospital was willing to, or in fact, accepted.

In Children’s Hospital Central California v. Blue Cross of California, — Cal.Rptr.3d —-, 2014 WL 2590823, Cal.App. 5 Dist., June 10, 2014 (NO. F065603) the California Court of Appeal resolved a dispute between  Children’s Hospital Central California (Hospital), and Blue Cross of California and Blue Cross of California Partnership Plan, Inc. (Blue Cross), over the reasonable value of the poststabilization emergency medical services provided by Hospital to Medi-Cal beneficiaries enrolled in Blue Cross’s Medi-Cal managed care plan. The services at issue were rendered during a 10-month period when Hospital and Blue Cross did not have a written contract that covered those beneficiaries.

Blue Cross paid Hospital approximately $4.2 million based on the Medi-Cal rates paid by the government. However, Hospital demanded its full billed charges of $10.8 million. The jury found there was an implied-in-fact contract between Hospital and Blue Cross and awarded Hospital approximately $6.6 million, the difference between the full billed charges and the $4.2 million Blue Cross had already paid.

BACKGROUND

Hospital specializes in providing medical services to children. Approximately 75 percent of Hospital’s patients are in the Medi-Cal programs (California’s version of Medicaid). Hospital has a contract with the California Department of Health Care Services (DHCS), the responsible state agency, to render services to the majority of these Medi-Cal patients in the fee for service Medi-Cal plan. Under this program, Hospital is paid the average California Medical Assistance Commission (CMAC) rate for the geographic region for the services it performs.

However, Hospital also serves Medi-Cal patients who are enrolled in a Medi-Cal managed care plan. Unlike the fee for service plan, with a managed care plan the DHCS does not pay for services actually rendered. Rather, the DHCS pays a fixed rate per person per month to the health plan, whether or not services are rendered.

Up until July 2007, Hospital and Blue Cross had a written contract setting rates for inpatient and outpatient medical services provided to Blue Cross Medi-Cal beneficiaries.

There was a 10-month period during which Hospital and Blue Cross had no written contract. During this off-contract period, Hospital was required by federal and statet statute to provide emergency services to Blue Cross Medi-Cal beneficiaries. During the off-contract period, 896 Blue Cross Medi-Cal beneficiaries received emergency care at Hospital followed by post-stabilization inpatient medical services. Blue Cross paid Hospital for the emergency medical care at the average CMAC rate as required by statute. These payments are not in dispute. Hospital also submitted claims to Blue Cross for the post-stabilization services provided to the 896 Blue Cross Medi-Cal beneficiaries. Blue Cross paid those claims at the average CMAC rate of $1,275 per day.

Hospital sued seeking additional payments from Blue Cross. According to Hospital, this reasonable and customary value is the total amount of the charges it billed Blue Cross. Blue Cross denied Hospital’s allegations.

Hospital maintains a uniform schedule of the charges it bills for all procedures, services, and goods provided to patients. Hospital uses its charge master to create summary and itemized bills for each patient who receives services. The charges are the same for every patient.


Less than five percent of the payors paid Hospital the full billed charges.


At trial, Hospital supported its damages claim by presenting the amount of its full billed charges. Hospital’s expert witness, Michael Heil, testified that, when compared to other comparable hospitals, Hospital’s charges were generally in the midrange or below. Thus, the hospital argued its full billed charges represented the reasonable and customary value of the services provided.  For all hospitals, the billed charges are the highest amounts that are ever received for the services.

DISCUSSION

The Blue Cross Medi-Cal plan at issue is a health care service plan governed by the Knox-Keene Act that requires for-profit health care service plans to promptly reimburse emergency health care providers for both emergency medical services and authorized post-stabilization emergency medical services.

The “reasonable value” of the services has been described as the “going rate” for the services (Maglica v. Maglica (1998) 66 Cal.App.4th 442, 446) or the “reasonable market value at the current market prices” (Punton v. Sapp Bros. Construction Co. (1956) 143 Cal.App.2d 696, 701).

Evidence of a professional’s customary charges and earnings is relevant and admissible to demonstrate the value of the services rendered.  Hospital was required to demonstrate the reasonable value, i.e., market value, of the post-stabilization care it provided. This market value is not ascertainable from Hospital’s full billed charges alone.

The California Supreme Court has made clear that “[A] medical care provider’s billed price for particular services is not necessarily representative of either the cost of providing those services or their market value.” (Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541, 564.)  Rather, the full billed charges reflect what the provider unilaterally says what its services are worth. In a given case, the reasonable and customary amount that the health care service plan has a duty to pay might be the bill the medical provider submits, or the amount the health care service plan chooses to pay, or some amount in between.

Although Hospital’s full billed charges were relevant to the issue of the reasonable and customary value of the services, they were not determinative. Analogizing this situation to other quantum meruit cases, relevant evidence would include the full range of fees that Hospital both charges and accepts as payment for similar services. The reasonable value of the particular services that were provided is the price that a willing buyer will pay and a willing seller will accept in an arm’s length transaction.

Therefore, the trial court erred. Rather, the regulation relied on by the trial court set the minimum claims payment and dispute resolution standards.

Under settled quantum meruit principles, relevant evidence of the reasonable/market value of the services provided includes the full range of fees that Hospital both charges and accepts as payment.

The reasonable and practical way to value the post-stabilization services provided by Hospital is to analyze what is being paid and accepted in the market.

Parsing the costs for each service would be impractical. Under the circumstances caused by the trial court’s erroneous rulings discovery was curtailed and relevant and admissible evidence was excluded. The only measure of value before the jury was Hospital’s full billed charges. The jury should have been permitted to hear and consider evidence on the full range of fees that Hospital both charges and accepts as payment for similar services in determining the reasonable value of the post-stabilization services provided to the Blue Cross Medi-Cal beneficiaries.

ZALMA OPINION

This case is important because it applies the Howell decision to more than a tort case. It establishes that hospital bills – more what the hospital wishes it will be paid than what it is willing to accept for its services – are not the sole evidence of the value of the hospital’s services any more than the stated price for an “antique” in a South American open market is what the vendor will accept. Tort lawyers want to use the billed price to convince jurors to apply a multiplier to those charges to determine the value of pain and suffering. In so doing the jurors are deceived by being limited to their wish list billing rather than the true value of their services.

Whenever a party is presented a bill for medical services or hospital services the true value of those services should be determined by discovery like that the trial court refused to allow Blue Cross to learn enough to defend against the claim.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Timely Disclaimer Law is Limited

If Late Notice Don’t Wait to Disclaim

The Long Island Lighting Company, (LILCO) was advised it had polluted certain properties. It took its time to report the losses and potential losses to its insurers who also took a great deal of time to disclaim coverage.  In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc. — N.E.3d —-, 2014 WL 2573382 (N.Y.), 2014 N.Y. Slip Op. 04113, (June 10, 2014) Keyspan Gas East Corporation seeks a declaration that defendants-appellants Munich Reinsurance of America, Inc., Century Indemnity Company, and Northern Assurance Company of America have a duty to defend and indemnify Keyspan for liabilities associated with the investigation and remediation of environmental damage at manufactured gas plant (MGP) sites formerly owned or operated by plaintiff Long Island Lighting Company (LILCO). Defendants issued excess insurance policies to LILCO that required, as a threshold condition for coverage, LILCO to provide prompt notice of any occurrence that potentially implicated defendants’ duty of indemnification.

FACTS

In October and November 1994, LILCO notified defendants by letter about “environmental concern[s]” at retired MGP sites in Bay Shore and Hempstead. LILCO stated that, although no regulatory agencies had commenced a lawsuit or formal investigation, LILCO expected agency action would be “forthcoming” and that the extent of its potential liability “if any” could not yet be determined. LILCO also notified defendants that a neighboring property owner had brought a property damage claim against the company for environmental contamination allegedly caused by the Bay Shore MGP.

Over the following year, defendants sent letters to LILCO in which they generally reserved all rights and coverage defenses, including the defense of late notice. Defendants also requested additional information about the MGPs and, noting that LILCO was self-insured at the primary level, sought documentation indicating that LILCO’s coverage under the excess policies had been reached.

Between February 1995 and January 1996, LILCO provided supplemental disclosures to defendants about, among other things, LILCO’s investigation of environmental damage at the MGP sites and its dealings with various regulatory agencies over the past 15 years. LILCO also notified defendants when, in August 1995, the New York State Department of Environmental Conservation (DEC) served a formal demand requesting that LILCO conduct site investigations and, if necessary, remediate the Bay Shore and Hempstead MGP sites.

LILCO a declaratory judgment action in September 1997 almost three years after first giving notice of loss and claim. In their answers, defendants asserted late notice as an affirmative defense warranting denial of coverage. Defendants later moved for summary judgment based on late notice. After protracted procedural history the Supreme Court (trial court) granted summary judgment on the Bay Shore site and entered a declaration that defendants have no duty to defend or indemnify LILCO regarding those environmental damage claims, but denied summary judgment on the Hempstead site and five other MGP sites. The court held that, with the exception of the Bay Shore site, the reasonableness of LILCO’s delay in notifying defendants of environmental occurrences at its MGP sites presented a question of fact for the jury. The court also rejected LILCO’s claim that defendants waived their late-notice defense by failing to disclaim coverage prior to interposing their answers. Defendants appealed from the Supreme Court order only to the extent it denied summary judgment as to the Hempstead site.

The Appellate Division modified the Supreme Court order by denying summary judgment on the Bay Shore site and vacating the declaration, and otherwise affirmed. The court held that LILCO failed, as a matter of law, to provide timely notice under the policies of environmental contamination at both the Bay Shore and Hempstead MGP sites. The court nevertheless declined to award summary judgment to defendants “because issues of fact remain as to whether defendants waived their right to disclaim coverage based on late notice” by “fail[ing] to timely issue a disclaimer.” Although defendants specifically reserved their rights to assert a late-notice defense, the court determined that a jury should consider whether, based on the supplemental information provided by LILCO, defendants “possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability.”

Insurance Law § 3420(d)(2)

Insurance Law § 3420(d)(2) provides:

“If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”

The Legislature enacted section 3420(d)(2) to “aid injured parties” by encouraging the expeditious resolution of liability claims.  To effect this goal, the statute establishes an absolute rule that unduly delayed disclaimer of liability or denial of coverage violates the rights of the insured or the injured party. Where, as here, the underlying claim does not arise out of an accident involving bodily injury or death, the notice of disclaimer provisions set forth in Insurance Law § 3420(d) are inapplicable. In such cases, the insurer will not be barred from disclaiming coverage simply as a result of the passage of time, and its delay in giving notice of disclaimer should be considered under common-law waiver and/or estoppel principles.

DECISION

The Appellate Division erred when it held that defendants had a duty to disclaim coverage “as soon as reasonably possible” after they learned that LILCO’s notice was untimely under the policies. The environmental contamination claims at issue in this case do not fall within the scope of Insurance Law § 3420(d)(2), which the Legislature chose to limit to accidental death and bodily injury claims, and it is not for the courts to extend the statute’s prompt disclaimer requirement beyond its intended bounds.

The highest court in the state ordered the Appellate Division to determine whether the evidence supporting this defense is sufficient to defeat defendants’ motion for summary judgment based on LILCO’s failure, as a matter of law, to give timely notice under the policies. Specifically, the Appellate Division must consider if, under common-law principles, triable issues of fact exist whether defendants clearly manifested an intent to abandon their late-notice defense.

ZALMA OPINION

Statutes, like New York Insurance Law § 3420(d)(2) are interpreted as they are written giving meaning to the words used as commonly understood if not defined. Insurance Law § 3420(d)(2) was specifically limited to bodily injury type claims. Since only the environment was harmed by the alleged pollution and no person was injured the law did not apply and the insurer was not compelled, by statute, to disclaim coverage quickly. The reservation of rights letter, including a reservation of the right to disclaim coverage for late notice, should convince the Appellate Division that the insurers did not manifest, or even suggest, an intent to abandon their late-notice defense.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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The Need for a Contingent or Unknown Event

No Fortuity For Wrong that Started Before Policy

Insurance, as I have often repeated, only works if the facts that caused the insured to be sued, were contingent or unknown to the insured at the time the policy was acquired. An insured cannot knowingly act tortiously and knowingly cause damage to another, decide to continue the tortious conduct, and buy an insurance policy without disclosing the wrongful conduct to the insurer, to protect themselves against a future claim of damage.

In Street Surfing, LLC v. Great American E & S Insurance Company, — F.3d —-, 2014 WL 2576448 (United States Court of Appeals, Ninth Circuit, June 10, 2014, C.A.9 (Cal.)) the plaintiff sought general liability insurance, including advertising injury coverage, that defendant Great American E & S Insurance Company issued to plaintiff Street Surfing, LLC. The parties dispute whether those policies obligated Great American to defend Street Surfing in an action alleging trademark infringement, unfair competition and unfair business practices under federal and California law. The district court granted summary judgment in favor of Great American, concluding that the prior publication exclusion in the policies relieved Great American of any duty to defend.

BACKGROUND

Street Surfing began selling a two-wheeled, inline skateboard called the “Wave” to retail stores around December 2004. Less than a year after Street Surfing began doing business, it had already earned about $600,000 in sales. By 2007, Street Surfing also sold and advertised accessories for the Wave, such as “Lime Green Street Surfing Wheels for The Wave,” and the “New Ultimate Street Surfer Wheel Set.”

In August 2005, eight months after advertising the Wave, Street Surfing applied for general liability insurance coverage from Great American. Street Surfing’s application certified that its website address was “www.streetsurfing.com” and that the Wave displayed the Street Surfing logo. The application did not include a picture or any description of the logo. Great American granted the application and provided general liability insurance to Street Surfing from August 2005 until September 2007. This period spanned two policies, the 2005 policy (August 2005 until September 2006), and the 2006 policy (September 2006 until September 2007).

The policies covered, among other things, personal and advertising injury liability. That coverage was limited by several exclusions, including: (1) a prior publication exclusion, which disclaimed coverage for “‘[p]ersonal and advertising injury’ arising out of oral or written publication of material whose first publication took place before the beginning of the policy period” and other exclusions that became moot.

Rhyn Noll, who owned the registered trademark “Streetsurfer,” sued Street Surfing in June 2008, claiming trademark infringement, unfair competition and unfair trade practices under federal and California law. Street Surfing had known that Noll owned the “Streetsurfer” trademark since early 2005, and had unsuccessfully attempted to purchase the trademark around that time. In September 2008, Street Surfing submitted a claim for coverage to Great American and tendered Noll’s complaint. Great American denied Street Surfing’s claim, citing the exclusions and the amendments. The letter did not mention the prior publication exclusion, but it did reserve to Great American “the right to assert any and all other terms, provisions, conditions and/or exclusions set forth in its policy which may be applicable to the Noll action.”

Street Surfing settled with Noll in December 2009. Its only response to Great American’s second denial was to file suit in July 2011 seeking a declaration that Great American was obligated to defend and to settle the Noll action. When the parties filed cross-motions for summary judgment, the district court concluded that the prior publication exclusion relieved Great American of any duty to defend Street Surfing in the Noll action. It accordingly granted Great American’s motion for summary judgment, denied Street Surfing’s motion for partial summary judgment and entered judgment in favor of Great American.

DISCUSSION

Under California law, a general liability insurer “has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement. The duty to defend is, therefore, broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded.

To prevail, the insured need only show that the underlying claim may fall within policy coverage. The insurer must prove it cannot. These principles apply only to facts potentially giving rise to a duty to defend, however, not to doubts regarding the legal interpretation of policy terms.

The Noll Action Potentially Falls Within the Policies’ Coverage.

In resolving insurance coverage disputes, before considering exclusions, a court must examine the coverage provisions to determine whether a claim falls within the policy terms.

Although “Streetsurfer” arguably could be used as such a slogan, Street Surfing has not identified any instance of such a use that would have been readily ascertainable by Great American at the time the claim was filed, and specifically, nothing in the complaint or in the extrinsic evidence suggests that Noll ever used “Streetsurfer” as a slogan. The policies’ coverage extends only to Street Surfing’s infringement of another’s slogan. The Noll action potentially fell within the policies’ coverage, triggering Great American’s duty to defend under the advertising injury provision, but not under the slogan infringement provision.

The Prior Publication Exclusion Applies to the Noll Action.

The policies’ prior publication exclusion exempts from coverage “‘[p]ersonal and advertising injury’ arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.” The straightforward purpose of this exclusion is to “bar coverage” when the “wrongful behavior … beg[a]n prior to the effective date of the insurance policy.” [Taco Bell Corp. v. Cont'l Cas. Co., 388 F.3d 1069, 1072 (7th Cir.2004). The purpose of the prior publication exclusion is to preclude coverage for risks that have already materialized ....”

In the context of advertising injury coverage, an allegedly wrongful advertisement published before the coverage period triggers application of the prior publication exclusion. If this threshold showing is made, the exclusion bars coverage of injuries arising out of republication of that advertisement, or any substantially similar advertisement, during the policy period, because such later publications are part of a single, continuing wrong that began before the insurance policy went into effect.

Street Surfing Published at Least One Advertisement Using Noll's Advertising Idea Before Coverage Began.

The policies' prior publication exclusion is triggered only if the insured published allegedly injurious material before the beginning of the policy period. In this case, the potential coverage is for injuries arising out of “[t]he use of another’s advertising idea in [Street Surfing's] ‘advertisement.’” Affixing the Street Surfing logo to the Wave was an advertisement using Street Surfing’s brand name and logo. Because the Street Surfing logo was published on the Wave before coverage began, the prior publication exclusion bars coverage of injuries caused by that affixation during the policies’ coverage periods.

The Noll complaint does not mention any specific advertisements. If Street Surfing’s post-coverage publications were wrongful, that would be so for the same reason its pre-coverage advertisement was wrongful: they used Noll’s advertising idea in an advertisement. Street Surfing’s post-coverage advertisements are not fresh wrongs that escape application of the prior publication exclusion.

This case involves a company that began a wrongful course of conduct, obtained insurance coverage, continued its course of conduct, then sought a defense from its insurer when the injured party sued. Although “a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity,” the prior publication exclusion, strictly construed, serves to place reasonable limits on that broad duty.

ZALMA OPINION

No one likes paying premium for insurance. If every business had its way it would only buy an insurance policy the day before a loss occurs. Since clairvoyance is rare, prudent businesses buy liability insurance when the business starts and continues to carry that insurance until the business ceases operation. Street Surfing infringed a copyright, sold $600,000 worth of product with the infringing advertisement, and then bought insurance. Great American included in its policy a “prior publication” exclusion to protect against claims on the policy for losses that had occurred before the policy was issued. Although Street Surfing had not been sued when the policy was purchased they knew that they were exposed, knew that they had infringed, and even attempted to buy the copyright that they had infringed. Although the Ninth Circuit did not use the word, the reason for the “prior publication” exclusion and for its ultimate decision, was that the loss claimed was not fortuitous.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Intentional Tort

Child Theft an Intentional Tort

Sometimes people attempt to get insurance coverage for acts no reasonable person would expect an insurance policy that promised to indemnify the insured against fortuitous, unintended and contingent events. This is one of those situations. In Upasani v. State Farm General Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 2553386 (Cal.App. 4 Dist. Filed 6/6/2014) the California Court of Appeal was asked to compel an insurer to defend and indemnify people who stole a child and held him in India for 18 years away from his true parents.

INTRODUCTION

Meera Upasani and Mohan Upasani, policyholders of State Farm General Insurance Company and State Farm Fire and Casualty Company (collectively, State Farm), were sued for conspiring to aid a mother in abducting her son from his father. State Farm denied the Upasanis’ tender of the defense of that action because abduction claims were not covered claims under the terms of the State Farm policies. The Upasanis sued, and the trial court granted State Farm’s motion for summary judgment.

STATEMENT OF FACTS

Avinash Kulkarni filed a lawsuit against the Upasanis, among others, for violation of Civil Code section 49, subdivision (a), negligence per se, intentional infliction of emotional distress, and negligent infliction of emotional distress. Kulkarni alleged the Upasanis conspired with Kulkarni’s wife to abduct Kulkarni’s infant son to India. A jury returned a special verdict in favor of the Upasanis. Kulkarni appealed from the judgment entered against him; this court affirmed the judgment.

During the pendency of the underlying case, the Upasanis tendered the defense of the claims against them to their insurance carrier, State Farm. Three different condominium unitowners or homeowners policies covered the Upasanis during the period of time in which the acts alleged in Kulkarni’s complaint occurred. State Farm denied coverage because “[n]one of the allegations against [the Upasanis] arise out of accidental conduct; therefore, there is no occurrence and no duty to defend or indemnify [the Upasanis] in this action.”

DISCUSSION

The first question to be addressed in any case of breach of an insurance contract or insurance bad faith is whether the claimed loss was within the insuring agreement. The burden is on an insured to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage.

In its summary judgment motion, State Farm offered admissible evidence that in addition to Kulkarni’s complaint, the Upasanis, through counsel, had provided State Farm with copies of deposition transcripts and written discovery responses from the underlying case, and State Farm had reviewed all of those documents; the Upasanis did not dispute this.

The Upasanis did not dispute that all of Kulkarni’s allegations involved intentional, purposeful, and nonaccidental conduct by the Upasanis; specifically, Kulkarni alleged that his wife abducted their infant son and hid him from Kulkarni for almost 18 years, with the knowledge and help of the Upasanis, among others.

In opposition to the motion, the Upasanis offered evidence that Kulkarni failed to prove any intentional, purposeful, or nonaccidental conduct by the Upasanis; indeed, the Upasanis established Kulkarni failed to prove they committed any acts relating to the abduction of Kulkarni’s son.

An insurer’s duty to defend is evaluated in light of the complaint’s allegations, as well as extrinsic facts made known to the insurer at the time the claim is tendered. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.) There is no duty to defend if there is no potential for coverage.

In this case, State Farm established through admissible evidence that none of the causes of action asserted against the Upasanis by Kulkarni was within the scope of coverage because they did not allege any occurrence—that is, any accidental conduct by the Upasanis, resulting in bodily injury or property damage. An accident is an unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause, or something out of the usual course of events and which happens suddenly and unexpectedly and without design.

The actions alleged in the complaint or claimed in discovery were all nonaccidental, intentional, and purposeful.

California Penal Code section 278 provides: “Every person, not having a right to custody, who maliciously takes, entices away, keeps, withholds, or conceals any child with the intent to detain or conceal that child from a lawful custodian shall be punished by imprisonment in a county jail not exceeding one year, a fine not exceeding one thousand dollars ($1,000), or both that fine and imprisonment, or by imprisonment pursuant to subdivision (h) of Section 1170 for two, three, or four years, a fine not exceeding ten thousand dollars ($10,000), or both that fine and imprisonment.”

All the allegations in Kulkarni’s complaint, as supplemented by the discovery responses, established the only claims against the Upasanis were for conspiracy to abduct Kulkarni’s infant son. State Farm did not have a duty to provide coverage to the Upasanis because Kulkarni’s damages did not arise from bodily injury caused by an accidental occurrence.

The order analyzes all the claims as derivative of the claim that the Upasanis were part of a conspiracy to abduct Kulkarni’s son and to hide him from Kulkarni, which continued through 2008. Because a conspiracy cannot be created and operated accidentally, an accidental occurrence within the terms of the policies had not occurred. Moreover the causes of action sounding in negligence were based on allegations of intentional conduct.

In the underlying case, given the allegations in Kulkarni’s complaint, the discovery material provided to State Farm, and, ultimately, the testimony at trial, there were two different options as to the Upasanis’ conduct—either they conspired to abduct Kulkarni’s son, or they did not; accidental or negligent participation in the abduction of the child was not possible.

The opinion of the court of appeal was not affected by the Upasanis’ arguments regarding the definition of bodily injury in the State Farm policies. The definition of bodily injury in the Upasanis’ policies from March 20, 1993, to November 2012 (when the motion for summary judgment was filed) was as follows: “ ‘[B]odily injury’ means physical injury, sickness, or disease to a person. This includes required care, loss of services and death resulting therefrom. [¶] Bodily injury does not include: [¶] a. any of the following which are communicable: disease, bacteria, parasite, virus, or other organism, any of which are transmitted by any insured to any other person; [¶] b. the exposure to any such disease, bacteria, parasite, virus, or other organism by any insured to any other person; or [¶] c. emotional distress, mental anguish, humiliation, mental distress, mental injury, or any similar injury unless it arises out of actual physical injury to some person.” (Boldface omitted.)

Although Kulkarni alleged he had suffered “pain and suffering,” there were no allegations and there was no evidence that he had suffered bodily harm, physical injury, sickness, or disease as a result of the Upasanis’ alleged actions. Kulkarni’s injuries were emotional, not physical. The cases overwhelmingly hold that the phrase “bodily injury, sickness or disease” is plain and unambiguous and that coverage under the bodily injury clause is limited to physical injury to the body and does not include nonphysical, emotional or mental harm.

The Upasanis’ conduct was not otherwise covered by the State Farm policies, so Kulkarni’s claims for emotional distress damages are not covered because any damages flowing from noncovered losses that may lead to emotional distress cannot be used to expand coverage where none was intended or bargained for by the parties.

Both policies define bodily injury as physical injury, sickness, or disease to a person. The policies go on to state that bodily injury does not include emotional distress, mental anguish, humiliation, mental distress, mental injury, or any similar injury unless it arises out of actual physical injury to some person.” Simply put, to say something is “questionable” in a denial of coverage letter is not the same as conceding the issue.

ZALMA OPINION

Even though found not liable in the underlying action the entire action is totally couched in terms of intentional tort. Since insurance only applies to contingent or unknown events there can be no coverage for such a heinous intentional act of stealing a child and holding him away from his parent in India.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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“Ball Tap” an Intentional Tort

Intent to Injure Not Required to Avoid Claim

Children, especially in their teen years, are subject to unqualified urges to do clearly stupid things. Often, stupidity, results in intentional acts that cause unintended injury. In American Nat. Property and Cas. Companies v. Hearn, — A.3d —-, 2014 WL 2566279 (Pa. Super.June 9, 2014), 2014 PA Super 118, stupidity acted to eliminate insurance coverage for the injuries caused. After the trial court granted summary judgment in favor of the insurer, Clayton Russell and Stacey Marshall appealed the order granting summary judgment in favor of American National Property and Casualty Companies claiming that the intentional conduct that caused injury was intended but was not intended to cause but only short-lived discomfort.

FACTS

On the evening of September 15, 2006, Clayton Russell, Brandon Thomas Hearn, and a number of Clayton’s friends were “hanging out” in Clayton’s finished basement. Clayton was playing a game called “Dance, Dance Revolution.” According to the complaint, this video game includes a floor pad which connects to the television. While playing songs, the “dancer” is given instructions as to where to step on the pad and scores points for speed and accuracy. While playing this game, Clayton was struck in the groin from behind by Brandon Hearn. Clayton felt immediate pain which intensified during the night. The following day, Clayton’s mother, Stacey Marshall, took Clayton to the emergency room due to severe pain and swelling in Clayton’s groin area. Clayton was diagnosed with torsion of the left testicle and underwent emergency surgery. Diagnostic tests revealed that Clayton may be permanently infertile as a result of having been struck in the groin.

American National Property and Casualty Companies (“ANPAC”) filed a declaratory judgment complaint (“the Declaratory Judgment Action”) naming Thomas W. Hearn, Lynn A. Hearn, Brandon Thomas Hearn, Clayton Russell, and Stacey Marshall, as defendants. ANPAC issued a homeowner’s policy to Thomas W. Hearn and Lynn A. Hearn that was in effect at the time of the events described in the Underlying Complaint (“the Policy”). Thomas W. Hearn and Lynn A. Hearn are the parents of Brandon Hearn (“the Insureds”). Brandon Hearn (“Hearn” or “Underlying Defendant Hearn”), is the defendant named in the Underlying Complaint. In this Declaratory Judgment Action, ANPAC provided convincing evidence that any damages claimed by Plaintiffs in the Underlying Complaint were based upon intentional acts and, therefore, not covered under the Policy.

ANPAC filed a motion for summary judgment in the Declaratory Judgment Action (“the Motion”). The Court granted the Motion and found the Policy did not apply to the claims raised in the Underlying Complaint (“the Order”).

ANALYSIS

The proper construction of a policy of insurance is resolved as a matter of law in a declaratory judgment action.  Both the duty to defend and the duty to indemnify may be resolved in a declaratory judgment action. An insurer’s duties under an insurance policy are triggered by the language of the complaint against the insured. In determining whether an insurer’s duties are triggered, the factual allegations in the underlying complaint are taken as true and liberally construed in favor of the insured.

In Pennsylvania the obligation of an insurer to defend an action against the insured is fixed solely by the allegations in the underlying complaint. As long as a complaint alleges an injury which may be within the scope of the policy, the insurer must defend its insured until the claim is confined to a recovery the policy does not cover.

The underlying facts were not in dispute. Hearn hit Clayton in the groin with his forearm while Clayton was dancing, causing serious injuries. As explained below, the policy specifically excludes coverage for bodily injury which is expected or intended by any insured even if the actual injury is different than expected or intended. ANPAC contends that, because Hearn’s act of hitting Clayton in the groin was intentional conduct, the exclusion relieves ANPAC of any duty it otherwise has to insure, defend, and indemnify the insureds in the underlying action.

THE POLICY

‘”Occurrence” when used in Section II of this policy, means an accident, including exposure to conditions, which results in: a. bodily injury; or b. property damage during the policy period.”

The relevant exclusion states, “Coverage E—Personal Liability and Coverage F—Medical Payments to Others do not apply to bodily injury or property damage: a. which is expected or intended by any insured even if the actual injury or damage is different than expected or intended[.]” (Emphasis added)

The underlying complaint alleged that “[Hearn] came from under Clayton, hitting him in the groin with his forearm while Clayton’s back was turned and while he was dancing and distracted by the video game.”  The complaint alleged that, “[Hearn] intended to cause a harmful or offensive contact with Clayton’s body by striking him in his groin area on his genitals and testicles.” The underlying plaintiffs alleged that Hearn had specific intent to harm Clayton.  The complaint characterized the incident as an “unprovoked attack.”
Consistent with the allegations in the complaint, Hearn testified during his deposition that the act was intentional. According to Hearn, he snuck up behind Clayton and made a “ball tap motion,” putting his hand forward as though he were going to strike Clayton in the testicles. Hearn testified that, “in our little group, if you were doing something, like, kind of stupid, that’s what you-you would get a ball tap.”

Hearn’s act of hitting Clayton in the groin was clearly intentional. Hearn snuck up behind Clayton while his back was turned and hit him in the groin area with his forearm. Hearn testified that he only meant to cause Clayton momentary discomfort; however, the policy excludes coverage of bodily injuries resulting from intentional acts “even if the actual injury or damage is different than expected or intended.” As a rule general liability policies do not cover intentional torts and/or criminal acts, and must be clearly and unambiguously written to provide such coverage. The exclusionary clause also applies “even if the actual injury or damage is different than expected or intended.”

In addition the policy defines “occurrence” as “an accident.” Hearn’s intentionally striking Clayton in the testicles can hardly be described as an “accident.”  The willful and malicious assault alleged in the complaint is not an accident but rather is an intentional tort. As such, it is not covered by the policy and, therefore, the insurer owed no duty to defend.

A liability insurer will not be estopped to set up the defense that the insured’s loss was not covered by the insurance policy, notwithstanding the insurer’s participation in the defense of an action against the insured, if the insurer gives timely notice to the insured that it has not waived the benefit of its defense under the policy.

ZALMA OPINION

The insurer acted with utmost good faith. Although it was faced with a clear and unambiguous intentional act it defended its insured until a declaratory relief action could be resolved concerning its duty to defend. For that alone it should have been honored. Instead the insureds sought damages and appealed the summary judgment.

Insurers who exclude intentional acts should emulate ANPAC by including in their exclusion, if they do not do so already, the wording “even if the actual injury or damage is different than expected or intended” because every person who commits an intentional tort will claim he or she did not intend the harm and thereby raise an issue of fact that will not be resolved without a trial by jury.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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No Cover For Poor Workmanship

Property Damage Must Be to Other Than Contractor’s Work

Liability insurance is designed to protect an insured against liability when its conduct causes damage to property of others. It is not designed to protect the insured against poor workmanship or damages to his work or product. This is because the risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or products.

In John Flynn v. United Contractors Insurance Company, Cal.Rptr.3d, 2014 WL 2459715 (Cal.App. 4 Dist.) John Flynn, doing business as Flynn Company (Flynn), appeals from a judgment entered in favor of defendant United Contractors Insurance Company (United Contractors) after the trial court granted United Contractors’s motion for summary judgment. United Contractors provided a general liability insurance policy to Flynn between June 1, 2006 and June 1, 2007. During the policy period and for a period of time after the policy period ended, Flynn worked as a subcontractor providing glass and glazing work for the doors and windows on a residential project for which Oakhurst Builders was the general contractor. Later, Oakhurst Builders sued Flynn as a result of Flynn’s work on the project.

On appeal, Flynn contends that the trial court erred in relying on the “ongoing operations” exclusion. Specifically, Flynn asserts that this exclusion was not conspicuous, plain, and is thus unenforceable. Flynn also argues that the “ongoing operations” exclusion, when given the interpretation proposed by United Contractors, creates what amounts to illusory insurance coverage, because under that interpretation there would be virtually no coverage for any property damage at all, in view of the one-year policy period.

FACTUAL AND PROCEDURAL BACKGROUND

Factual Background

Oakhurst Builders was the general contractor on a residential construction project located in La Jolla, California. Pursuant to a subcontract entered into in August 2006, Oakhurst Builders retained Flynn to supply the glass, perform the glazing work, and install the windows and doors for the project. Flynn began work on the project in March 2007 and continued to work on the project into May 2008.

In December 2009, Oakhurst Builders filed a complaint against Flynn arising from Flynn’s work on the project. The complaint asserted five causes of action, including breach of contract, negligence, express indemnity, implied contractual indemnity, and contribution. The complaint generally alleged that Flynn had breached the contract between Oakhurst Builders and Flynn by failing to perform as required under the contract, including by failing to follow the plans and specifications as required under the contract.

Under the second cause of action for negligence, Oakhurst Builders alleged that Flynn failed to use reasonable care in selecting, installing and assembling the glass and related glazing work, and that, as a proximate result, some of the glass and related work was defective and failed, requiring its repair and replacement, including demolition of areas surrounding Flynn’s defective work. Oakhurst Builders further claimed that as a proximate result of Flynn’s defective work, it had incurred costs to investigate and repair the subject property, and also incurred the loss of use of the property.

The Insurance Policy

Flynn was insured under a general liability policy (the Policy) issued by United Contractors for the period between June 1, 2006 to June 1, 2007.

The Policy states:

“We have no duty to defend the named Insured or any other Insured against any Suit seeking damages for Bodily Injury or Property Damage to which this insurance does not apply.”

In the “EXCLUSIONS” section, the following exclusions appear:

“j. Damage to Property Exclusion,” the Policy excludes from coverage, “That particular part of real property on which You or any contractors or subcontractors working directly or indirectly on Your behalf are performing operations, if the Property Damage arises out of those operations.”

“k. Damage to Your Product Exclusion ” provides that “Property Damage to Your Product” is excluded from coverage.

“l. Damage to Your Work Exclusion,” the Policy excludes coverage for “Property Damage to Your Work or any part of it included in the products-completed operations hazard.”

Oakhurst Builders Tenders the Complaint to United Contractors

Flynn did not tender its defense to United Contractors after the complaint was filed. However, in May 2010, Oakhurst Builders tendered the complaint to United Contractors, arguing that it was an “additional insured” under the policy. Oakhurst Builders sought to have United Contractors “honor the additional insured provisions and the direct, first party claims being made [by Oakhurst Builders].” United Contractors treated the tender by Oakhurst Builders as a tender by Flynn.

United Contractors advised Flynn by letter that it would decline to provide a defense to Flynn in the Oakhurst Builders’s action, based on the allegations of the complaint.

DISCUSSION

While an appellate court must review a summary judgment motion by the same standards as the trial court, it must independently determine as a matter of law the construction and effect of the facts presented.

The Law Governing an Insurer’s Duty to Defend

Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor. A court may conclude that no duty to defend exists only where the underlying complaint can by no conceivable theory raise a single issue which would bring it within the policy coverage.

ANALYSIS

As various courts have explained, general liability policies for contractors are not designed to provide contractors and developers with coverage against claims their work is inferior or defective.  A general liability insurance policy is not designed to serve as a performance bond or an all risk policy.  Again, the risk of repairing defective materials used by the contractor or poor workmanship completed by the contractor is to be borne by the contractor, and not passed on to the general liability insurer.

The Court of Appeal noted that there is no allegation in the underlying complaint that Flynn’s allegedly defective work caused physical injury to some portion of the residence other than the windows, doors or related glazing work. Further, no evidence was provided in the defense of the motion for summary judgment that revealed such damage.

Exclusion “l ” excludes from coverage any property damage to Flynn’s own work. Neither the complaint or extrinsic evidence provides a basis to conclude that the allegation that some of the “glass and related work is defective and has failed” is anything but a direct reference to Flynn’s work.

The reference to “demolition of areas surrounding the defective work” alleges the need to demolish parts of the property that were not injured as a result of Flynn’s work. Rather, the portions referred to are areas of the property that had to be demolished in order to effectuate the repair and replacement of Flynn’s alleged defective work. The damages created by this type of demolition are clearly excluded from coverage under the Policy.

Because none of the facts stated or fairly inferable in the complaint suggest a claim potentially covered by the policy, and because there has been no showing that United Contractors knew or discovered other facts that would suggest potential coverage, United Contractors’s duty to defend did not arise.

ZALMA OPINION

Liability insurance is designed to protect insureds against damage they do to others. It is not, and can never be, protection against poor workmanship. To do otherwise would raise a moral hazard allowing a contractor to use shoddy materials and workmanship, profit from cutting corners on the contract, and then place the obligation to replace and repair the shoddy work on an insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Effect of “Assault & Battery” Exclusion

Entire Policy Must Be Read to Interpret Policy

Insurance policies, contrary to the belief of some members of the plaintiffs’ bar, are nothing more than a contract that needs to be interpreted like any other contract. In so doing the entire contract must be read to determine the intent of the parties to the contract.

In Certain Interested Underwriters at Lloyd’s, London v. Raymond C. LeMONS & others — N.E.3d —-, Mass.App.Ct. , 2014 WL 2463013 (Mass.App.Ct. June 4, 2014) an insurance coverage dispute was presented to the Massachusetts Court of Appeal to resolve a dispute that arose after an altercation that occurred in a tavern.

The issue presented was whether a Superior Court judge properly granted summary judgment in favor of the insurer upon concluding that the assault and battery exclusion in the policy relieved the insurer from any duty to defend or indemnify the tavern.

BACKGROUND

On or about February 22, 2001, several unidentified people attacked and injured Raymond C. LeMons (Raymond), a defendant in this declaratory judgment action, while he was a patron of Luigi’s V, Inc., doing business as Gigi’s Pub (Gigi’s). Gigi’s was insured through a commercial general liability policy issued by Certain Interested Underwriters at Lloyd’s, London (Lloyd’s). The policy featured an assault and battery exclusion, which excluded coverage in the following situation:

“a. Bodily injury or property damage:
“(1) Expected or intended from the standpoint of any insured; or
“(2) Arising out of an assault or battery, provoked or unprovoked, or out of any act or omission in connection with prevention or suppression of an assault or battery, committed by any Insured or an employee or agent of the insured.” (emphasis added)

Raymond C. LeMons and his wife, Kathleen E. LeMons (Kathleen) (collectively, LeMonses), brought suit against Gigi’s to recover for bodily injuries and loss of consortium on a theory of negligent security by Gigi’s. Lloyd’s initially assumed the defense of Gigi’s under a reservation of rights, but during the course of the litigation, Lloyd’s disclaimed its duty to defend or indemnify Gigi’s, citing the assault and battery exclusion in the policy. Thereafter a Superior Court judge approved a settlement between the LeMonses and Gigi’s, which included a payment of $1.2 million on the underlying claim and assigned all of Gigi’s rights against Lloyd’s to Kathleen as litigation trustee.

Meanwhile, Lloyd’s filed this action seeking a judgment declaring that it had no duty to defend or indemnify Gigi’s with respect to the attack on Raymond. The parties filed cross motions for summary judgment. Following a hearing, the judge granted summary judgment to Lloyd’s, reasoning that the assault and battery exclusion relieved Lloyd’s from a duty to defend or indemnify the tavern.

DISCUSSION

Interpretation of an insurance policy is a question of law to be determined by the court. The interpretation of an insurance contract is no different from the interpretation of any other contract, and an appellate court must construe the words of the policy in their usual and ordinary sense.

If free from ambiguity, an exclusionary clause, like all other provisions of an insurance contract, must be given its usual and ordinary meaning. The interpretation of the particular phrasing of the insurance exclusion at issue here is a matter of first impression in Massachusetts. In particular, the parties dispute the effect of the final phrase of the exclusion: “committed by any Insured or an employee or agent of the insured.”  They disagree about which of the antecedent phrases this wording restricts. The answer to that question determines whether the insurance coverage encompasses the claims pertaining to the injuries to Raymond.

Lloyd’s argues that the “committed by” language attaches only to the words “act or omission” that precede it. Lloyd’s reads the clause as excluding claims “arising out of an assault or battery, provoked or unprovoked”—no matter who committed that assault or battery—and as excluding an “act or omission” that was “committed by any Insured or an employee or agent of the insured.” Lloyd’s understands the “act or omission” language as excluding negligent security claims, which necessarily pertain to acts or omissions of the insured.

The LeMonses argued that the Assault and Battery Exclusion must apply only when an assault or battery is committed by an employee or agent of Gigi’s. According to this reading, claims arising from assaults or batteries by anyone other than an insured would be covered by the policy.

The court of appeal read the disputed exclusion clause to have two distinct parts. The first excludes coverage for injuries “[a]rising out of an assault or battery, provoked or unprovoked.” The second excludes coverage for injuries arising “out of any act or omission in connection with prevention or suppression of an assault or battery, committed by any Insured or an employee or agent of the insured.” Every word must be presumed to have been employed with a purpose and must be given meaning and effect whenever practicable.

The use of the words “arising out of” before assault and battery and, again, before any act or omission indicates that the two phrases are distinct and that words restricting the meaning of the former do not operate on the latter. The court read the comma before the words “committed by” as attaching the committed by language only to the words “act or omission.” Without the comma in that location, it might have appeared that the “committed by” wording applied to the words immediately before it, assault or battery. The comma confirms that the plain meaning of the part of the exclusion beginning with “act or omission” is to exclude negligent security claims from coverage.

The “act or omission” language was not necessary to exclude negligent security claims from coverage in Massachusetts.  Moreover, given that the language of the exclusion originated in a standard insurance form, using the additional language ensured that negligent security claims would be excluded from coverage across jurisdictions regardless of the jurisdiction’s interpretation of “arising out of an assault or battery.” Since negligent security claims were excluded by the language the use of additional language specifically addressing negligent security claims confirms that such claims are excluded in this case as well.

Finally the Court of Appeal concluded that the LeMonses’ reading of the exclusion defies common sense. They argue that the insurance policy covers claims that arise out of assaults or batteries by customers or other third parties, but excludes claims arising out of assaults or batteries committed by an employee or agent. It is hard to imagine that Lloyd’s would have drawn this line in drafting the contract. Far more sensible is Lloyd’s’ understanding—that the policy excludes coverage regardless who committed the assault or battery.

There is no ambiguity in the assault and battery exclusion in the insurance policy provided by Lloyd’s. The plain language of the exclusion, bolstered by the context of the insurance policy as a whole where the underlying claims stemmed from an assault and battery, is effective regardless who committed that assault and battery.

ZALMA OPINION

Again, a plaintiff with a large jury verdict gave up the opportunity to collect that judgment in favor of a chance to collect from an insurance company. By so doing the plaintiff lost whatever portion of the $1.2 million judgment it earned against Gigi’s and ended up with nothing.

A large judgment and serious injury does not guarantee that an insurance company will pay the judgment. Clear and unambiguous exclusions will normally be enforced by courts and should be enforced by every court. The plaintiffs gambled that their interpretation of the policy was more accurate than the interpretation of the Underwriters at Lloyd’s. They were wrong.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Vexatious Refusal to Pay

Bad Faith Conduct Is an Issue of Fact

Insurers make decisions with regard to claims based upon what they believe is a thorough investigation of the facts and application of those facts to the wording of the policy of insurance. Invariably, when an insurer denies a claim the person insured is upset and often files suit claiming that the insurer wrongfully denied the claim.

In Anthony Simone v. Nationwide Mutual Insurance Company, United States District Court, W.D. Missouri, 2014 WL 2435507 (W.D.Mo., May 30, 2014.), the United States District Court for the Western District of Missouri was faced with just such a case and was called upon to rule on a motion for summary judgment brought by the insurer.

In Missouri what is called the tort of bad faith in many states is called a vexatious refusal to pay. Regardless of title the issues are the same.

BACKGROUND

Nationwide issued an insurance policy to Anthony Simone covering a house in Liberty, Missouri. Anthony Simone did not live in the home, but rented the house to his sons and other individuals. Charlie Simone was the only tenant residing at the property and purchased a new home and began moving his belongings from the home in Liberty to his new home. Charlie Simone continued to go back and forth between the two houses until February 2012, when he was mostly moved out. The water at the North Ridge Avenue property was not turned off after Charlie moved out of the house. In either January or February 2012, a water pipe in the home froze causing the pipe to burst. This caused a significant amount of water to enter the home. As a result of this incident, plaintiff is claiming both foundation and structural damage to the home.

The Nationwide policy issued to Anthony Simone states in part:

“We insure for all risks of physical loss to the property described in Coverages A & B except: …
“(2) freezing of a plumbing, heating or air-conditioning system or of a household appliance, or by discharge, leakage or overflow from within the system or appliance caused by freezing, while the dwelling is vacant, unoccupied or being constructed unless you have used reasonable care to:
“(a) Maintain heat in the building, or
“(b) shut off the water supply and drain the system and appliances of water….
“(9) wear and tear; … settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings; …”

The Nationwide policy also states:

“We do not cover loss resulting directly or indirectly from:

“2. Earth Movement. Meaning any loss caused by, resulting from, contributed to, or aggravated by earthquake; landslide; mud flow; earth sinking, rising or shifting; volcanic eruption, meaning the eruption, explosion or effusion of a volcano; unless direct loss by:
“(1) fire;“(2) explosion other than the explosion of a volcano; or“(3) if an insured peril, breakage of glass or safety glazing material ensues and then we will pay only for the ensuing loss.”

Plaintiff reported the loss to Nationwide on March 6, 2012. After the loss was reported, two Nationwide employees inspected the property, Nationwide took a recorded statement from the plaintiff and gathered records of past utility payments for the property. Nationwide also hired Jeremy Van Leeuwen, a professional engineer to inspect the property. Mr. Van Leeuwen noted damage to the foundation, but concluded that the settlement and foundation problems occurred before the flooding event in the first part of 2012. Nationwide sent plaintiff a reservation of rights letter on March 9, 2012. On August 7, 2012, Nationwide denied plaintiff’s claim.

In the letter Nationwide stated, “[o]ur review showed that the heat was not maintained to your rental property which resulted in freezing of pipes and subsequent water damage. In addition, the settling to the home foundation is the result of on-going movement and issues.”

Plaintiff filed suit alleging that Nationwide breached the contract of insurance by failing to pay the full amount of the proceeds which were due under the policy and also alleged damages due to Nationwide’s vexatious refusal to pay. Nationwide removed the case to federal court on October 2, 2012. Nationwide filed a motion for summary judgment on plaintiff’s vexatious refusal to pay claim.

DISCUSSION

An insurer is permitted to question or contest its liability if it has reasonable cause to believe, and does believe, that it has no liability under the policy and that it has a meritorious defense. Where there is an open question of law or fact relating to a claim under an insurance policy, the insurer may insist upon a judicial determination of those questions without being penalized for vexatious refusal to pay. Generally, a question of reasonableness is a question of fact for the jury rather than a question of law for the court. However, the question of reasonableness can be determined as a matter of law based upon undisputed facts when reasonable minds could not differ, summary judgment is properly granted.

Nationwide argued that plaintiff’s claim for vexatious refusal to pay fails as a matter of law because there are open questions of fact and law upon which reasonable minds can differ, thus barring plaintiff’s claim for vexatious refusal. Plaintiff states that he has presented sufficient facts to create a submissible case on the issue of vexatious refusal to pay and defendant’s motion for summary judgment should be denied.

In Dhyne v. State Farm Fire & Cas. Co., 188 S.W.3d 454, 457 (Mo.banc 2006), the Court stated, “[t]o establish [a] claim for vexatious refusal to pay, [plaintiff] had to prove that: (1) she had an insurance policy with [the insurance company]; (2) [the insurance company] refused to pay; and (3) [the insurance company's] refusal was without reasonable cause or excuse.” “There may be no vexatious refusal where the insurer has reasonable cause to believe and does believe there is no liability under its policy and it has a meritorious defense.” Wood v. Safeco Ins. Co. of Am., 980 S.W.2d 43,55 (Mo.App.1998). Whether an insurer acted reasonably is a factual inquiry left to the province of the jury. As a general rule, questions of reasonableness are questions of fact, not law.

As a result the District Court found that there are disputed issues of material fact regarding whether Nationwide acted reasonably in denying plaintiff’s insurance claim. These disputed facts prevent the Court from granting defendant’s motion for summary judgment on plaintiff’s vexatious refusal to pay claim.

ZALMA OPINION

Insurers faced with a vexatious refusal to pay suit or a suit for the tort of bad faith are at a disadvantage in many courts because the tort is based upon factual findings that can seldom be proved by a motion for summary judgment. Because the issue is fact heavy it is necessary to either take the case to trial and prove to the trier of fact (either the judge or jury) and motions for summary judgment should only be brought when the insurer can prove there is no dispute as to the facts. Clearly an exclusion applied. It appears that Nationwide did a thorough investigation. But, because the insured could raise an issue of fact, whether based on convincing evidence or not, the court was obligated to reject the motion for summary judgment and put the parties to proof at trial.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Duty to Defend Requires Suit or Functional Equivalent

When is a Claim Is a “Suit?”

The Washington state Model Toxics Control Act (MTCA), chapter 70.105D RCW, imposes strict liability upon the owner or operator of contaminated property. Such strict liability may trigger the duty to indemnify under commercial liability policies even if no agency has taken or overtly threatened formal legal action. The Washington Court of Appeal, IN Gull Industries, Inc v. State Farm Fire and Casualty Company and Transamerica Insurance Group, et al — P.3d —-, 2014 WL 2457236 (June 2, 2014, Wash.App. Div. 1), was asked to decide what triggers a duty to defend “any suit” when the owner of contaminated property faces strict liability under the MTCA.

FACTS

The Department of Ecology (DOE) letter to Gull Industries Inc. acknowledged receipt of Gull’s voluntary report of contamination and intent to remediate. The letter did not communicate any explicit or implicit threat of immediate and severe consequences.

Gull owned a gas station in Sedro–Woolley. To insure itself against liability arising from the operation of this station, Gull obtained liability coverage with TIG for both bodily injury and property damage . Gull leased the Sedro–Woolley station to Hayes Johnson and Mary Johnson. Under the terms of the lease, the Johnsons were required to obtain liability insurance to cover the service station’s operations. The Johnsons obtained coverage from State Farm.

Here, the insurance policies at issue include the duty to defend against a “suit.” The State Farm policies stated:

        This Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of bodily injury or property damage, arising out of service station operations; and this Company shall have the right and the duty to defend any suit against the Insured seeking damages payable under the terms of this policy, even if any of the allegations of the suit are groundless, false or fraudulent; but this Company may make such investigation and settlement of any claim or suit as it deems expedient.

None of the policies defined the term “suit.”

In 1984, Gull investigated underground storage tanks at a number of Gull’s service stations. The investigation at the Sedro–Woolley station identified hydrocarbons in the soil adjacent to the underground storage tanks and revealed a continuous release of hydrocarbons during the period the Johnsons leased the station. As a result, Gull undertook voluntary remediation, including investigation and cleanup of the soil and groundwater.

Gull tendered its claims for defense and indemnification for the costs of the cleanup at the Sedro–Woolley station to TIG. TIG did not accept Gull’s tender. In March 2010, Gull tendered its claims as an additional insured under the Johnsons’ policy to State Farm. State Farm did not accept Gull’s tender.

Gull then sued TIG, State Farm, and 5 other insurers in Skagit County, asserting claims for declaratory judgment, breach of contract, breach of fiduciary duty, and bad faith relating to the Sedro–Woolley site. It also commenced a lawsuit in King County asserting claims for declaratory relief and damages against 19 insurance companies in connection with over 200 sites across Washington.

State Farm moved for partial summary judgment, arguing, in part, that it had no duty to defend. TIG joined State Farm’s motion on that issue. Gull opposed the motion, arguing that the duty to defend was triggered because it faced strict liability for environmental cleanup costs under the MTCA. The trial court granted State Farm and TIG’s motion, concluding they have no duty to defend Gull. Gull appealed.

ANALYSIS

Gull contends that because the MICA imposes strict liability, the duty to defend should arise whether or not an agency has sent any communications about the statute or cleanup obligations.

“Courts construe insurance policies as contracts.”  The court must examine the policy as a whole in determining the meaning of a particular term. A trial court must enforce the policy as written if the language is clear and unambiguous, and it may not create an ambiguity where none exists. If policy terms are not defined, then they are to be given their “plain, ordinary, and popular” meaning.

Language in an insurance policy is ambiguous if susceptible of two different but reasonable interpretations. The interpretation of an insurance contract is a question of law.

The MTCA compels a potentially liable person (PLP) to address environmental contamination through strict joint and several liability provisions, regardless of fault or intent. Under the MTCA, DOE identifies hazardous waste sites and either requires PLPs to clean up the waste or undertakes the cleanup itself and seeks reimbursement from the PLPs. DOE may issue a formal letter to a PLP outlining specific requirements for cleanup. A PLP who refuses to comply with an order compelling cleanup is liable for up to three times the cleanup costs incurred by DOE and a daily civil penalty.

The insurers argued that there must be an adversarial proceeding, or at least the threat of such a proceeding, before indemnification coverage exists.

Washington courts for the first time in this case addressed the issue of what constitutes a “suit” for the purpose of triggering the insurer’s duty to defend environmental liability claims against the insured. Nationally, whether administrative actions that fall short of an actual lawsuit constitute a “suit” triggering the insurer’s duty to defend environmental claims is a vigorously contested issue.

Even though environmental liability may be strict, it is only when the government actually proposes to enforce the law against a property owner that the latter will bear the consequences of strict liability. If the government decides for any reason (e.g., shortage of funds) not to pursue public rights, the property owner will avoid liability, no matter how dim his prospects on the law and the facts. Thus, absent serious pursuit of the public interest by the agency charged—what the district court, and other authorities, call “adversariness”— the factual expectancy of liability is too low to satisfy either the principle of indemnity or any plausible construction of the policy language.

The court of appeal concluded that in the state of Washington the undefined term “suit” is ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit. It makes no difference whether an insured voluntarily cleans up contamination or waits until after government intervention—it is liable either way.

However, it also concluded that, a strict reading of “suit” is not appropriate in this case.
The appellate court did not agree with Gull’s contention that liability under the MTCA alone, without any direct enforcement action by DOE, is the functional equivalent of a suit for the purposes of the duty to defend. Instead, the court of appeal held that an agency action must be adversarial or coercive in nature in order to qualify as the functional equivalent of a “suit.”

Here, they only communication Gull received was a letter from DOE acknowledging receipt of Gull’s notice that the property was contaminated and that it intended to pursue an independent voluntary cleanup. The DOE letter did not present an express or implied threat of immediate and severe consequences by reason of the contamination. Therefore, Gull did not meet its burden on summary judgment to establish there is the functional equivalent of a “suit” here, triggering the duty to defend,

Because DOE did not communicate an explicit or implicit threat of immediate and severe consequences by reason of the contamination of the Sedro–Woolley site, Gull was not faced with the functional equivalent of a suit. TIG and State Farm had no duty to defend.
The Court also found that the issue of whether State Farm and TIG owe Gull a duty of defense with respect to environmental contamination at the Sedro–Woolley site can be segregated from the other issues in this case and that an immediate appeal of that issue will not prevent the existing litigation from going forward.

ZALMA OPINION

The court, in reaching its decision that there was no duty to defend, made clear that there is no consensus across the country reviewing three different analyses used by different courts. Although the term “suit” in common usage refers to a formal litigation filed in a court. Washington now defines a “suit” as either litigation or the “functional equivalent” of a suit. Insurers, when faced with a toxic tort claim on an old policy without clear exclusions for pollution, should be careful when asked to defend a toxic contamination claim and determine whether there is an actual suit or the functional equivalent of a suit.

New policy wordings with a definition of “suit” will avoid this analysis. Any insurer doing business in Washington that issues policies without a definition of “suit” should consider adding endorsements defining the term.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Truck or Premises – That is the Question

When “Loading & Unloading” Is Not

Although Workers’ Compensation is an exclusive remedy, when the employer is also the owner of the real property that was claimed to be defective, allows an employee to sue his employer, not as his employer, but as the owner of the real property.

Seepaul Singh sued his employer Burlington Coat Factory of New Jersey, LLC, (Burlington), for personal injuries he suffered while cargo was being unloaded from a truck owned by defendant Jay Dee Fast Delivery Trucking (Jay) at Burlington’s loading dock.

Burlington’s insurer filed a declaratory judgment action against the owner of a truck and its insurance carrier, National Specialty Insurance Company (National). Plaintiff claimed it was entitled to a defense and indemnification under a Trucker’s Policy issued to Jay by National because the accident occurred while the truck was being unloaded while the injured person and the other defendants claimed the injury was due to a defect in the property and not the unloading or loading of the vehicle. The trial court granted defendants’ motion for summary judgment and dismissed plaintiff’s complaint.

FACTS

In BURLINGTON COAT FACTORY OF NEW JERSEY, L.L.C. v. JAY DEE TRUCKING, NATIONAL SPECIALTY INSURANCE COMPANY, SEEPAUL SINGH AND BHAGWANDAI SINGH — A.3d —-, 2014 WL 2440729 (N.J.Super.A.D.)  Singh contended that Burlington had previously used a dock plate to bridge the gap between its loading dock and any delivery truck parked at the dock to unload cargo. Three or four years before his accident, Burlington misplaced its dock plate, causing Singh and his co-workers to resort to placing “just any piece of board” they could find to bridge the gap between the dock and the back of a truck.

On the day of the accident, the driver of Jay’s truck backed up to the loading dock in preparation for unloading cargo. One of Burlington’s employees placed a piece of plywood measuring approximately five feet long, two feet wide, and three-quarters of an inch thick between the dock and the truck. The plywood was not secured or anchored in any way. Singh then went inside of the truck to scan boxes.

Although he was somewhat uncertain about how he was injured because “it happened so fast,” at his deposition Singh claimed that what “probably” occurred was that he stepped onto the piece of plywood and the board “slid.” He did specifically recall the board moving beneath his feet. After he slid, he briefly blacked out and when he regained consciousness, he was “hanging” in the space between the truck and the dock. In answers to interrogatories in the underlying matter, Burlington also claimed Singh fell between the truck and the loading dock.

On June 15, 2012, Burlington filed its complaint for declaratory judgment. On June 29, 2012, Burlington settled the underlying matter with Singh for $32,500. Defendants filed, and the trial court granted, their motion for summary judgment and dismissed the complaint.

ANALYSIS

In its brief, Burlington asserts National is obligated to provide a defense and indemnification in the underlying matter, as an accident must be covered by the auto insurance policy of a truck’s owner, where negligence is directly upon the act and preparation of the loading and unloading process of the truck at issue.

Here, the allegations of negligence that the owner of the premises failed to maintain its loading dock plate in proper condition or warn of its dangerous condition, is analogous to negligent maintenance of the loading dock itself and any liability for that condition would rest with the owner of the premises, and its insurer, Hartford. The appellate court was satisfied that the attempt to adjust the loading dock plate, although necessary to unload the truck, should not be construed to constitute a use of the vehicle.

Singh fell when he stepped onto an unsecured piece of plywood that shifted, causing him to lose his balance and fall. Burlington’s employees put the plywood in place to facilitate access to delivery trucks parked at the loading dock because, as Singh alleged, Burlington failed to provide a safe loading area by providing a docking plate. While the accident occurred during the unloading process, it was the placement of this unstable, makeshift device to bridge the gap between the dock and the Jay truck, that precipitated by Burlington’s failure to maintain the premises, that caused Singh to be injured.

Once it is determined that the fall was caused by the condition of the premises, the case is controlled by those cases which deny coverage under the loading/unloading clause because the accident arose not from the loading or unloading activities, but from the negligent acts of the owner of the premises where the accident occurred.

Burlington also claims an agreement between it and Jay obligates Jay to indemnify and hold Burlington harmless. The agreement states:

        [Jay] agrees to save [Burlington] and its personnel harmless and to indemnify them against any and all claims for all loss, expense liability or damage arising out of or in connection with the negligent performance of work under this agreement, except to the extent that any claim which is the result, either in whole or in part, of any negligent or deliberately injurious act or omission on the part of [Burlington], its employees or agents. (Emphasis added)

The agreement does not compel Jay to indemnify Burlington for Burlington’s own negligent or intentional acts; the agreement is unavailing to Burlington.

ZALMA OPINION

Although the accident that injured Mr. Singh happened while a truck was in the process of being unloaded, the proximate cause of his injury had nothing to do with the unloading of the truck. Rather, it was caused by the negligence of Burlington and its employees in failing to provide an effective dock plate. The sheet of plywood was clearly an inadequate replacement since it was not secured in any way to the dock.

Although case law is clear that the insurer of a truck when an injury occurs during its loading or unloading places the obligation on the trucks insurer in this case the reasoning should not, and did not, apply because the court recognized the true cause of the injury.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Punch In Face Not An Occurrence

Facts Establish Intent to Injure

Insurance, by definition, is a contract where the insurer promises to indemnify the insured against certain identified risk of loss due to a contingent or unknown event. That is, the damage claimed must be the result of a fortuitous event. A punch in the face is neither contingent nor is it unknown. It is a known act and not fortuitous or accidental.

In State Farm Fire and Casualty Company v. Stuart Housel Smith and Justin Bischof —  Fed.Appx. —-, 2014 WL 2267631 (C.A.9 (Alaska) May 13, 2014) the Ninth Circuit Court of Appeal was asked to reverse a judgment in favor of an insurer who rejected a claim for  injuries caused by a battery because the injury was intentional and not an accident. The injured and the insured argued that objective intent was not to injure the injured person, just to punch him.

ANALYSIS

Smith was punched in the face by Justin Bischoff and suffered injury. Bischoff was insured by State Farm Fire and Casualty Company (“State Farm”) appealed, without counsel, from the district court’s entry of summary judgment against him in plaintiff State Farm Fire’s diversity action seeking a declaratory judgment in connection with an insurance dispute.

The Ninth Circuit concluded that the district court properly granted summary judgment because under the plain language of the homeowners policy, the punching incident was not a covered “occurrence,” and Smith’s injuries were “expected or intended” by Bischof. In the insurance context, the doctrine of inferred intent applies where an “intentional act” and the harm are intrinsically tied so that the act necessarily resulted in the harm. There can be no covered “occurrence” even where the insured acted in self-defense and intentionally punched a third party in the face.

The word “occurrence,” defined as “an accident,” was intended to mean just that: an unexpected, unforeseeable event.

The Ninth Circuit, therefore, rejected, as unsupported, Smith’s contention that the district court mistakenly applied Ohio law and an objective intent standard.  When Bischof punched Smith in the face he obviously intended to hit him and knew or should have know that striking Smith in the face would cause him injury.

ZALMA OPINION

In California, insurance is defined by statute as “[A] contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” The definition of insurance across the country is similar if not identical to California Insurance Code Section 22 quoted above.

Bischof may have had a secret intent to not harm Smith when he punched him. However, the actual effect of the punch was to harm Smith and cause him injury. The Ninth Circuit applied, properly, the doctrine of inferred intent that holds that an “intentional act” and the harm are intrinsically tied so that the act necessarily resulted in the harm.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Fraud Increases

Zalma’s Insurance Fraud Letter

In the eleventh issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on June 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Barry Zalma to Speak on Insurance Fraud at CFE Conference in San Antonio on June 16, 2014.
2.    New Bill to Avoid Asbestos Claim Fraud
3.    New Book From Barry Zalma – “The Insurance Fraud Deskbook”
4.    Lawyer Suspended for Fraud.
5.    More on Chevron Ecuadorian Fraud.
6.    New Fraud Videos from NICB.
7.    More on Death Master File Suits.
8.    New Webinar, “Compliance with the Examination Under Oath Requirement of a Property Insurance Policy” presented by Instructor: Barry Zalma; Duration: 60 Minutes; Wednesday, May 7, 2014; 10:00 AM PDT | 01:00 PM EDT, Available from Online Compliance Panel at http://www.onlinecompliancepanel.com/ecommerce/webinar/~product_id=500306LIVE/~Barry_Zalma/~Compliance_with_the_Examination_Under_Oath_Requirement_of_a_Property_Insurance_Policy

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

•    Reliance on Experts Raises Genuine Dispute
•    Don’t Lie to Your Insurance Company
•    No Sworn Proof of Loss – Insured Loses
•    Who’s on First?
•    Insurance Fraud is Not a Victimless Crime
•    Experts Wrongfully Excluded
•    Fortuity Rules Insurance Interpretation
•    Breach of Warranty Eliminates Coverage
•    Opinion Not Defamatory
•    Separate Contract With Mortgagee
•    Insured Must Select Insurance Required
•    False Sales Presentation Punished
•    Application Is Not a Policy
•    Just for Fun
•    To Arbitrate or Not Arbitrate – That is the Question
•    WC Insurer’s Attempt to Avoid Benefits Fails
•    Family Exclusion Rules
•    The Importance of Proof of Mailing

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.

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.

NEW! From the ABA:

The Insurance Fraud Deskbook
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.

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

The book is being printed this month and should be available from the American Bar Association at 800-285-2221.

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.

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

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Reliance on Experts Raises Genuine Dispute

Failure to Cooperate With Insurer Defeats Bad Faith Claim

When a person is injured by an underinsured motorist (UIM) he promises to cooperate in the tort and medical investigation of the insurer. The insured should not, after failing or refusing to cooperate with the investigation of the insurer, then claim that the insurer’s lack of investigation was sufficient to prove the tort of bad faith.

In George Morello v. AMCO Insurance Company, Case No. 11-cv-06623-WHO, 2014 WL 2215754 (N.D.Cal. 5/29/2014), plaintiff George Morello, who is quadriplegic, was hit by a drunk driver while crossing a street in his wheelchair. He filed an UIM claim with his insurance company, defendant AMCO Insurance Company. He alleges that AMCO handled his underinsured motorist claim in bad faith because it unreasonably determined that any future medical care he required was due to his pre-existing quadriplegia, rather than the accident.

BACKGROUND

On March 26, 2008, Morello was hit by a drunk driver while crossing a street in his motorized wheelchair. He was transported by ambulance to the Stanford University Medical Center. An emergency medical technician prepared a pre-hospital care report stating that Morello was “conscious, alert and oriented” and that the technician did not observe any trauma. He was released from the hospital the following day with a diagnosis of three fractured ribs and a left adrenal lesion. His condition on discharge was “good.”

Gene Drakulich, Morello’s attorney at the time (and his brother-in-law) reported the accident to AMCO on April 3, 2008. On April 4, 2008, AMCO claim representative, Lula Weng, spoke to Drakulich over the phone and stated that she would like to meet with Morello. Drakulich stated that he would try to arrange a meeting over the following two weeks. Weng called Drakulich for status updates and to ask who would be representing Morello. On November 18, 2008, Drakulich faxed Weng a letter stating that Drakulich was no longer representing Morello and Simoncini & Associates notified Weng that it was representing Morello.

Four months later, on April 15, 2009, Simoncini & Associates, Morello’s new lawyer, faxed Baumann a letter advising that the insurance company for the driver had offered to settle Morello’s claim for Mercury’s policy limits of $15,000. It also stated that it was “still in the process of gathering the medical records, billing statements, and documents regarding the property damage.” The adjuster responded by fax the day he received the letter, stating that in order to make an uninsured motorist claim, Morello needed to provide AMCO with a copy of the release from Mercury, proof of its liability limits, and “all of the pertinent medical records and itemized medical billings pertaining to Mr. Morello’s injury.”

Six months passed before Simoncini & Associates faxed AMCO the requested release from Mercury and proof of liability limits. An accompanying letter said that Simoncini & Associates “will be forwarding to you under separate cover copies of all pertinent records including medical records regarding Mr. Morello’s injuries.”  The letter also read, “We hereby demand that the matter proceed to arbitration.”

Morello demanded the policy limits of $500,000 plus $5,000 medical pay, which included $209,000 to $297,000 in future medical expenses. Baumann evaluated Morello’s demand on March 12, 2010. He noted in his Claim Activity Log that Morello claimed $315,784 in “future medical specials.” Baumann wrote “not allowing” next to this figure. Baumann also discussed his evaluation with superiors. As a result of that discussion, AMCO decided to have Morello’s records reviewed by a Claims Medical Specialist, Sharon Powell, a registered nurse who reviews medical records for claims adjusters. Powell submitted a report on March 19, 2010.

Regarding Morello’s future care, Powell concluded that he “would have needed the same care he had prior to this loss with or without it.”  She recommended that the adjuster consider requesting additional medical records from Morello, including prior primary care and neurosurgeon records and Morello’s current treatment records.

The same day that Baumann received the signed medical records authorization, he submitted an order to receive Morello’s medical records. On October 21, 2010, Baumann faxed a letter to Simoncini & Associates stating that he was in the process of setting up an independent medical examination for Morello with a neurologist and asking for possible dates over the next few months. Dr. James Soong, a neurologist who specializes in spinal injuries, reviewed Morello’s medical records and conducted a physical examination of Morello on January 25, 2011. Dr. Soong concluded that “[f]urther medical treatment after three months would be attributed to [Morello's] preexisting spinal cord injury and would not be related to a rib fracture injury or soft tissue injury from this motor vehicle accident.”  Dr. Soong opined that Morello “has recovered from the effects of the motor vehicle accident to reach his baseline status and no additional permanent disability was found by me from the motor vehicle accident.”

The parties arbitrated Morello’s claim on September 6, 2012. On September 28, 2012, the arbitrator issued his findings in favor of Morello. The arbitrator found $2,083,879.40 in damages, but awarded Morello the policy limit of $485,000 ($500,000 limit minus $15,000 Morello received from the driver). AMCO immediately paid the $485,000 award.

LEGAL STANDARD

Summary judgment is proper if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.

Morello’s complaint alleges that AMCO “refused to honor the contract of insurance by failing to pay any sum for damages related to the subject motor vehicle accident.”  This claim fails. It is undisputed that AMCO paid the $485,000 awarded to Morello by the arbitrator.

The court concluded that AMCO’s refusal to pay until it was ordered to do so by the arbitrator does not constitute a breach of the insurance contract.

BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING

The implied covenant of good faith and fair dealing “is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party’s rights to the benefits of the agreement.” When benefits are due an insured, delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because they frustrate the insured’s right to receive the benefits of the contract in prompt compensation for losses.

The implied covenant of good faith and fair dealing obligates the insurer to make a thorough investigation of the insured’s claim for benefits. An insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial. An insurance company’s duty to conduct a thorough investigation includes searching for evidence which supports its insured’s claim.

Morello argued that AMCO violated its implied duties because it determined, without reasonable investigation, that the accident did not require future medical care for Morello apart from what Morello already required as a result of his pre-existing quadriplegia.

The court concluded that AMCO did not violate the implied covenant. AMCO conducted a reasonable investigation and did not delay unreasonably. AMCO’s and Morello’s disparate valuations of Morello’s loss reflected a genuine dispute. AMCO’s position was maintained on reasonable grounds and was supported by the opinions of three medical professionals, all of whom have experience with quadriplegic patients.

AMCO repeatedly requested Morello’s medical records and attempted to interview Morello beginning in April 2008, only days after it was first notified of the accident. Morello did not provide the requested medical authorizations until July 1, 2010, over two years later. Morello never scheduled the interview, despite repeated requests and his lawyer’s initial offer that he do so. At oral argument, counsel for Morello argued that AMCO was not “prejudiced” by Morello’s failure to respond to AMCO’s requests for his interview or to provide his medical records earlier. That is not the point. Morello has accused AMCO of failing to conduct a reasonable investigation into his claims, including by not interviewing him prior to his deposition.

AMCO’s determination that Morello did not require future care was not based on the adjuster’s initial assessment. Rather, AMCO conducted an investigation involving review of Morello’s available medical records and a physical examination of Morello. Three medical professionals concluded that Morello did not require future medical care related to the accident. For the reasons stated, Morello has not offered evidence from which a jury could reasonably conclude that AMCO handled Morello’s claim unreasonably. Morello’s claim for breach of the implied covenant fails. Summary Judgment was granted.

ZALMA OPINION

The covenant of good faith and fair dealing binds both the insured and the insurer to do nothing that would deprive the other of the benefits of the insurance contract. In this case Morello and his representatives failed to cooperate promptly with the investigation of AMCO and insisted on arbitration. AMCO properly relied on three medical experts and had a genuine dispute with Morello. When the arbitrator concluded in Morello’s favor they paid the award. There was no breach of contract or bad faith. At best there was a difference of opinion.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Don’t Lie to Your Insurance Company

Plaintiff Loses $581,234.90 Judgment by Taking Assignment from Defendant Against His Insurer

Unless the defendant has no assets that can satisfy a judgment it is always useless to take an assignment from the defendant against his insurer and give the defendant a satisfaction of judgment. In Remus Pericles v. MGA Insurance Company, Inc., — Fed.Appx. —-, 2014 WL 2198521 (C.A.11 (Fla.)) (May 28, 2014) taking an assignment prevented an injured plaintiff from collecting a judgment more than half a million dollars.

The trial court granted MGA Insurance Company, Inc.’s (“MGA”) motion for summary judgment on Pericles’s claims alleging breach of an insurance contract and common law bad faith.

FACTS

On October 4, 2007 an automobile accident in which a vehicle being driven by the son of Haikaz Bedros Alboyadjian collided with a bicycle being ridden by the plaintiff’s minor daughter, J.P.

From March 25, 2007 until September 25, 2007, the vehicle involved in the accident, a 1997 GMC Jimmy pick-up truck, was insured under an automobile liability policy through defendant MGA. The court referred to this policy as the “01 policy.” In addition to Alboyadjian, his son was a named insured on the 01 policy.

The September 25 Expiration of the Policy

After several notices to Alboyadjian that if he made the required payment of premium MGA would issue him a new policy, effective from September 25, 2007 until March 25, 2008 that would have been issued as the “02 policy.”  Alboyadjian received at least one of the notices. Nevertheless, he failed to timely make the minimum premium payments. Accordingly, on September 25, 2007, MGA sent Alboyadjian yet another notice, this one stating: “YOUR POLICY HAS EXPIRED!” Below this statement, the notice said: “Your automobile insurance policy, … 01 expired on 9/25/2007 at 12:01 a.m. Our records indicate the required down payment for renewal of this policy has not been received.”

After receiving this notice, Alboyadjian admitted he understood that the 01 policy was no longer in effect.

The October 4 Accident

The accident at issue occurred on October 4, 2007—nine days after the 01 policy expired. The site of the accident was just one street from Alboyadjian’s home and Alboyadjian learned about the accident shortly after it happened. Alboyadjian just ran to the scene.
Upon arriving, Alboyadjian learned that his son was uninjured, but that plaintiff Pericles’s daughter, J.P., had been hurt.

The Issuance of the 02 Policy

At around 9:15 AM, the very next day after the accident, Alboyadjian went to the office of his insurance agent and attempted to obtain a new insurance policy. Alboyadjian paid $452.00 to MGA. Before issuing the new policy, MGA required Alboyadjian to sign a “Request for Reinstatement” form. On this form, Alboyadjian stated:

I, Haikaz Alboyadjian, the named insured of the above policy, effective 10/5/07, warrant that there have been no accidents, damages or happenings whatsoever during the period from 9/25/07 12:01 a.m. to 10/5/07 (current date) 9:15 AM (current time) that have resulted or may result in claims against my insurance policy with MGA Insurance Company, Inc. for any loss and/or expense for which said company would be liable under the above numbered policy if it is reinstated. (emphasis added)

The above statement is the consideration for reinstatement of the above numbered policy as of the cancellation if acceptable to MGA Insurance Company, Inc.  Alboyadjian signed the form and did not inform MGA of the October 4 accident.

After Alboyadjian signed the Request for Reinstatement and made the premium payment, MGA issued him a new policy-the 02 policy-retroactively effective from September 25, 2007 until March 25, 2008. Accordingly, there was no lapse in Alboyadjian’s coverage between September 25 and October 5.

The Plaintiff’s Claim and State Court Complaint

On October 12, 2007, MGA learned that plaintiff Pericles had filed a claim under Alboyadjian’s policy for injuries his daughter sustained during the October 4 accident. A few days later, MGA sent Alboyadjian a letter informing him that it would “not be able to honor [the] claim and or provide a defense in this matter.” MGA’s reason for declining the claim was that Alboyadjian’s policy—the 01 policy—“expired prior to the date of loss.”

Thereafter, plaintiff Pericles filed a complaint in Florida state court against Alboyadjian seeking to recover for his daughter’s injuries. After a bench trial, Pericles obtained a judgment against Alboyadjian for $581,234.90. Thereafter, Alboyadjian assigned to Pericles, who knew of the reasons for MGA’s denial of coverage, his rights under his insurance policy.

District Court Proceedings

Pericles then sued MGA in Florida state court.

After discovery, both parties moved for summary judgment. The district court held a hearing and then granted defendant MGA’s motion for summary judgment, denied Pericles’s motion, and entered judgment in favor of MGA.

DISCUSSION

The only issue on appeal is whether MGA could, under the policy, deny the October 4–accident claim and was thus entitled to summary judgment.

Summary judgment is appropriate only if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. In this diversity action involving the interpretation of an insurance contract, the appellate court was required to apply Florida law.  Under Florida law, a policy is interpreted pursuant to its plain meaning, with any ambiguities construed against the insurer and in favor of coverage.

Pericles’s complaint alleged that MGA breached its contract with Alboyadjian by denying the claim resulting from the October 4 accident. But, the unambiguous policy language permitted MGA to deny a claim if Alboyadjian “concealed or misrepresented any material fact or … attempted fraud … touching upon any matter relating to this insurance … whether before or after a Loss.”

Alboyadjian made a material misrepresentation. Therefore MGA could deny the claim. Specifically, Alboyadjian signed the Request for Reinstatement. The evidence in the record showed that Alboyadjian knew that statement to be false at the time he signed the Request for Reinstatement. Just the day before Alboyadjian signed the statement, he was at the scene of the accident at issue. Alboyadjian could not have reasonably believed that there had been no accidents that may result in claims against his insurance policy.

Under Florida law, a misrepresentation, omission, concealment of fact, or incorrect statement in an application for an insurance policy can prevent recovery under the policy if the misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer.

Misrepresentations need not be knowingly made in order to void an insurance policy. It is undisputed that Alboyadjian made a misrepresentation and that the misrepresentation was material. As the district court pointed out, whether Alboyadjian subjectively believed that a claim could result from the October 4 accident goes to whether he intended to misrepresent events, and Alboyadjian’s subjective intent is irrelevant to the analysis since the insurer was deceived.

Alboyadjian answered falsely. MGA was justified in denying coverage for this accident.  This case involves a policy that actually expired at the end of its term and an insurer issuing a new policy, which applied retroactively and prospectively, after accepting a renewal payment.

Because of the misrepresentation MGA could deny coverage for the October 4 accident without cancelling the policy and refunding Alboyadjian’s premium payment or any portion thereof. Under Florida law, when a misrepresentation in a policy application does not go to the entirety of coverage, an insurer may choose to deny a claim due to the misrepresentation without cancelling the policy and refunding a premium payment.  This is because, as is the case here, MGA never assumed the risk of an undisclosed accident which occurred prior to October 5, whereas Alboyadjian received benefits under the policy for any subsequent accidents. To require the insurer to return the premium to the insured where the materially false statement or omission results in a denial of coverage only for a risk never assumed by the insurer or paid for by the insured is to give the insured an undeserved windfall-coverage for nothing.

Among the benefits Alboyadjian received for the retroactive application of the new 02 policy were: (1) MGA did not report to the Florida Department of Highway Safety and Motor Vehicles (“DMV”) that Alboyadjian’s insurance was expired during September 2007 to March 2008, and thus the DMV did not fine Alboyadjian for a lapse of coverage; and (2) Alboyadjian was eligible for a discount from MGA for that new policy based on prior continuous coverage.

ZALMA OPINION

If Pericles or the lawyers for Pericles knew that Alboyadjian had lied to his insurer to get his policy reinstated – and it appears they did since they had the response from MGA before trial of the tort case – they knew or should have know that MGA had an effective and almost impossible to defeat defense. Insurance obtained by fraud is void from its inception or voidable at the request of the insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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No Sworn Proof of Loss – Insured Loses

Failure of Condition Precedent Defeats Suit Against Insurer

When a person acquires a homeowners policy a promise is made by the insured that, among other things, the insured will submit to the insurer a sworn statement in proof of loss. Almost every first party property insurance policy, and every homeowners policy, issued in the United States contains a condition precedent, a promise, that requires the insured to submit to the insurer a sworn statement in proof of loss either within 60 days of the loss or within 60 days of the demand from the insurer that the insured submit a proof of loss.

Failure to submit a sworn statement in proof of loss to the insurer is considered a breach of a material condition precedent to filing suit against the insurer. Many courts temper the condition by requiring the insurer to prove that the failure to submit the proof of loss in a timely fashion prejudiced the insurer’s rights. Obviously, if no formal claim is presented, the insurer has no way of knowing what the insured claims nor can it properly investigate the claim. In such a case prejudice is axiomatic.

In Richard Palkimas  v. State Farm Fire and Casualty Company, — A.3d —-, 2014 WL 2199815 (Conn.App. 06/03/2014) Palkimas sued State Farm for breach of contract, for the defendant’s failure to provide coverage for damage caused to the plaintiff’s home by a ruptured sanitary pipe. The court rendered summary judgment in favor of the defendant on the ground that the plaintiff failed to submit a proof of loss as required under the insurance contract. The plaintiff claims that the court improperly rendered summary judgment in favor of the defendant because the defendant failed to prove that it was prejudiced by the plaintiff’s failure to submit a proof of loss.

FACTS

At the time of the incident in question, the plaintiff had a homeowners insurance policy issued by the defendant. In September, 2006, the plaintiff suffered damage to his property “when workers negligently used a toilet that had been blocked off resulting in a buildup of sewage, and the breaking and rupturing of a sanitary pipe, as well as the spreading of sewage and fecal matter throughout the home.” In January, 2007, while attempting to repair the damaged sanitary pipe, the plaintiff discovered that “freezing temperatures caused substantial damage to [his] home, including fracturing of the plaster walls and building structure.”

The plaintiff notified the defendant of the two claimed losses, but never filed a proof of loss for those claims. With respect to the claimed loss from September, 2006, the plaintiff hired a public adjustor, Allen Sabel, to negotiate with the defendant on his behalf. The defendant ultimately denied coverage for both claimed losses and damages, citing the plaintiff’s failure to submit a proof of loss as required under the policy.

The proof of loss provision set forth in the insurance policy provides as follows: “After a loss to which this insurance may apply, you shall see that the following duties are performed … e. submit to us, within 60 days after the loss, your signed, sworn proof of loss…” In addition, the policy barred suit until all conditions had been met.

The plaintiff also brought an action against Sabel, Sabel Adjustors, LLC, and Sabel & Associates, Inc. (Sabel defendants), alleging failure to negotiate with the insurance companies—the defendant and Nationwide Insurance Company—on the plaintiff’s behalf. He brought another action against Nationwide Insurance Company and Oscar Fernandez, alleging that Fernandez and his workers negligently caused the damage to the plaintiff’s home whose situation was not the subject of the appeal.

State Farm filed a motion for summary judgment claiming that it was entitled to judgment as a matter of law because the plaintiff breached a condition precedent of coverage by failing to submit a proof of loss. The Sabel defendants filed a memorandum of law in opposition to the defendant’s motion for summary judgment, claiming that summary judgment was not warranted because there remained a genuine issue of material fact as to whether the defendant was prejudiced by the plaintiff’s failure to submit a proof of loss. The plaintiff subsequently filed a supplementary brief in opposition to the defendant’s motion for summary judgment fully adopting the arguments set forth in the Sabel defendants’ memorandum of law in opposition to the defendant’s motion for summary judgment.

TRIAL COURT DECISION

The trial court issued a memorandum of decision granting the defendant’s motion for summary judgment. In reaching its decision, the court determined that “an insured must file a proof of loss prior to making a claim against his insurance company and prior to bringing suit if the insurance company denies the claim, but if the insured belatedly submits a proof of loss and the policy does not specifically state that doing so is grounds for denial, the insurer must prove that the late submission caused some prejudice. The court found that this is not a case in which the plaintiff belatedly submitted a proof of loss; rather, it is a case in which the plaintiff never submitted a proof of loss, and, thus, the defendant’s burden to prove prejudice never arose. The court concluded, therefore, that the plaintiff failed to satisfy a condition precedent of the insurance policy, and, accordingly, granted the defendant’s motion for summary judgment.

ANALYSIS

The plaintiff claims that the court improperly granted the defendant’s motion for summary judgment because “[a]n insurer has the burden of proving prejudice when it refuses to compensate for a covered loss on the ground that the insured failed to submit a sworn proof of loss statement.” He contends, therefore, that because there remains a genuine issue of material fact as to whether the defendant was prejudiced, summary judgment was not warranted.

The Court of Appeal’s decision turned on the distinction between a delayed filing of a proof of loss and a failure to file a proof of loss. The plaintiff does not dispute the fact that he failed to submit to the defendant a proof of loss as required under the insurance policy. This concession is fatal to his claim on appeal, as the appellate court could not find any case law that requires an insurer to prove prejudice following an insured’s failure to submit a proof of loss under an insurance policy.

In light of the plaintiff’s failure to provide any persuasive support for his claim on appeal, the Court of Appeal concluded that the trial court properly granted the defendant’s motion for summary judgment.

ZALMA OPINION

The importance of a proof of loss, as a key promise made by every insured, is hoary with age. The New York Standard Insurance Policy, first enacted into law in the 19th Century, required that “within 60 days after the loss … the insured shall render to this company a proof of loss, signed and sworn to by the insured, stating the knowledge and belief of the insured…” stating the cause and amount of loss and claim. In this case the insured, who suffered a serious and disgusting loss with his home covered in human excrement, with the aid of a professional public adjuster, broke one of the most important promises he made when he bought the policy. His failure to fulfill the promise made it impossible for the insurer to properly investigate his loss and claim to its prejudice. However, since he never filed a proof of loss, there was no need to prove prejudice – as obvious as it was – since the promise was broken.

The insured, of course, is not without a remedy. He has sued, and should succeed in that suit, against the public adjuster and the person responsible for the loss.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Who’s on First?

Contract Language Determines Which Insurer is Primary

Construction contracts are rife with requirements that subcontractors and contractors make the owner and general contractor additional insureds on the subcontractors and contractors liability insurance. It is a well worn method of shifting the risk of loss. Every party wants their policy to be excess and the other parties’ policies to be primary. As a result the various insurers often litigate who is to be the primary insurer, if their are multiple insurers whether they must share in the cost of defense and indemnity, and who is to be excess.

In Certain Underwriters at Lloyd’s, London, Subscribing to Certificate No. CRCC001448 v. Central Mutual Insurance Company, — N.E.3d —- 2014 WL 2155461 2014 IL App (1st) 133145 (May 23, 2014), the General contractor Golden Nail Builders, Inc. (Builders), was the named insured on a commercial general liability insurance policy it obtained from Certain Underwriters at Lloyd’s London (Underwriters) and an additional insured on a commercial general liability insurance policy that subcontractor Erik Electric Service, Inc. (Erik Electric), obtained from Central Mutual Insurance Company (CMIC). When an employee of a sub-subcontractor was injured on a home construction site, the two insurers disagreed as to which was the primary insurer and which was the excess insurer. The disagreement arose because although Erik Electric was contractually required to maintain insurance coverage for Builders as an additional insured, the subcontractor agreement did not specify that the additional coverage be primary or excess.

Underwriters filed a declaratory judgment action seeking a declaration that it was the excess insurer. However, on cross-motions for summary judgment, CMIC persuasively argued that the circumstances were nearly identical to those in River Village I LLC v. Central Insurance Cos., 396 Ill. App. 3d 480, 483, 919 N.E.2d 426, 428 (2009), in which the court determined the additional coverage at issue there was excess because (a) the agreement between the general contractor and subcontractor was silent as to whether the additional coverage obtained for the general contractor was to be primary or excess and (b) the “other insurance” clause in the subcontractor’s insurance policy stated that coverage would be excess “unless a contract requires that this insurance be *** primary.”

Underwriters appealed.

FACTS

Builders and Erik Electric are Chicago companies that entered into a subcontractor agreement.  The agreement provided for subcontractor Erik Electric to “maintain coverage” for the duration of its project with contractor Builders, that the coverage limits of the liability insurance would be no less than $1 million, and that Builders “will be included as [an] Additional Insured.” The subcontractor agreement did not specify whether the additional insured coverage provided to Builders needed to be primary or excess insurance.

Primary insurance coverage is coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of an event that gives rise to liability. A primary insurer provides “‘first dollar’” coverage up to the limits of its policy. In contrast with primary insurance, excess insurance coverage is a secondary layer which protects an insured when a judgment or settlement exceeds the primary policy’s limits of liability. A secondary insurer covers the same risks as the primary insurer but under the terms of an excess policy, the secondary insurer’s liability attaches only after a predetermined amount of primary coverage has been exhausted. Put another way, an excess policy does not broaden the underlying coverage, it increases the amount of coverage available to compensate for a loss.

Builders and Casagrande Architects were sued by electrician Pawel Bawol and in a first amended complaint Bawol added Erik Electric as a defendant. Bawol alleged that he was severely injured due to the defendants’ negligence while he was in the employ of an electrical sub-subcontractor and assisting Builders with the construction of a single-family. Bawol alleged he was hurt when he fell from a ramp made of piled masonry debris that tradesmen were to use when entering or leaving through the front door of the house under construction.

Builders tendered its defense of Bawol’s suit to Underwriters and Underwriters accepted the defense subject to a reservation of rights. Builders’ defense attorney then tendered Builders’ defense to CMIC. As a result of silence from Builders CMIC declined coverage based on CMIC’s policy language. Underwriters sent a detailed letter in which it “re-tender[ed]” Builders’ defense and explained why it considered CMIC to be the primary insurer and liable for indemnifying Underwriters for opposing the Bawol suit. CMIC declined the “re-tender.”

Underwriters then initiated this declaratory judgment action. After briefing and oral arguments, the circuit court granted in part Underwriter’s motion for summary judgment, based on the court’s finding that CMIC owed additional insured coverage to Builders. The court also, however, granted in part CMIC’s motion for summary judgment, based on the court’s findings that the CMIC coverage was excess only.

ANALYSIS

The construction of an insurance policy and the determination of contractual rights are questions of law that are appropriately addressed through the summary judgment process. Summary Judgment is a proper and expeditious means of disposing of a lawsuit when the moving party’s right to judgment is clear and free from doubt and the moving party is entitled to judgment as a matter of law. If the words used in an insurance contract, when given their plain and ordinary meaning, are unambiguous, then a court must apply the terms of the policy as written.

“Other insurance” clauses came about in response to the targeted tender doctrine. The targeted tender doctrine allows an insured who is covered by multiple and concurrent primary insurance policies to select, or target, which insurer he wants to defend and indemnify him regarding a specific claim.  The insured essentially can choose which insurer among his several co-insurers will participate in the claim against him. In an effort to override this right of the insured to choose among co-insurers, insurers developed “other insurance” excess provisions in their policies. These provisions attempt to render otherwise primary insurance into excess insurance. In such instances, the “other insurance” excess provision requires the insured to exhaust the policy limits of the other co-insurers before being able to trigger a defense and indemnification duty in that insurer.

The contract between Underwriters and Builders indicates the insurance coverage is primary unless there is other primary insurance available to Builders.

The Underwriters’ policy plainly states that Underwriters is the primary insurer, but if other primary insurance is available, then the Underwriters coverage will become excess, and the CMIC policy plainly states that CMIC is the excess insurer unless a condition precedent is met: there is a contract requiring CMIC to be the primary insurer.

The subcontractor agreement between Builders and Erik Electric is undisputedly silent as to whether the coverage provided to Builders as an additional insured will be primary or excess insurance. The clear and unambiguous condition precedent language in the CMIC policy was not satisfied and the CMIC policy provides only excess coverage to Builders for the Bawol lawsuit. It is also clear and unambiguous that Underwriters agreed to provide primary coverage in all instances except where it is shown that other primary coverage is available and that because there is no other primary insurance available, Underwriters is the primary insurer to Builders.

The appellate court noted that the estoppel doctrine is not relevant in this case where the CMIC coverage was excess only and did not obligate CMIC to defend the Bawol suit. The principle that Underwriters are relying upon is not applicable to the facts of this case. CMIC did not breach a duty to defend and is not estopped from asserting policy defenses to coverage.

The record indicates that the Bawol defense was tendered to CMIC and that CMIC responded promptly with three letters, all of which were ignored. It was not necessary for CMIC to initiate a separate declaratory judgment action. The estoppel doctrine is not meant to provoke a race to the courthouse and the insured should not be able to estop the insurer from asserting policy defenses merely because the insured was the first to the courthouse with a complaint for declaratory judgment.

ZALMA OPINION

How insurance is applied always begins with an analysis of the policy wording. In this case the policy wording referred, for its analysis, to the construction contract. Since the CMIC policy could only be primary if the construction contract stated that the additional insurance provided by its subcontractor’s insurer, Underwriters, was to be primary. The contract did not do so and as a result the CMIC policy was clearly excess and only owed an obligation to the tort defendants if the primary policy was exhausted.

The lesson, for all contractors, owners, builders and developers is to include in the construction contract that it be named an additional insured and that the policy naming it as an additional insured agreed to be primary over any other valid insurance.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Insurance Fraud is Not a Victimless Crime

Life Insurance Motive for Murder

Life insurance is usually purchased to protect his or her spouse and children in the event of an untimely death. Sometimes life insurance is purchased for a malicious purpose. Insurers have paid benefits to a spouse after a murder only to find later that the beneficiary committed the murder to profit from the life insurance. Insurers must pay claims presented quickly while criminal investigators have many years to prosecute a crime. A belated prosecution may punish the criminal only to cost the insurer the benefits to which the criminal was not entitled.

Two defendants, tempted to commit murder by large life insurance policies, were convicted in the United States District Court for the Eastern District of Missouri of conspiracy to commit murder-for-hire and murder-for-hire, resulting in death. In U.S. v. Young, — F.3d —-, 2014 WL 2134579 (C.A.8 (Mo.)) the Third Circuit Court of Appeal was asked to reverse their conviction.

To prove conspiracy to commit murder for hire, the government must prove that the defendant (1) used or caused another to use the mail or a facility in interstate commerce, (2) with the intent that murder is committed, (3) for hire. [18 U.S.C.A. § 1958(a).]

After a six-day trial, a jury convicted Elain “Kay” Young and Katherine “Kathy” Mock of conspiracy to commit murder-for-hire, resulting in death, in violation of 18 U.S.C. § 1958 and murder-for-hire, resulting in death, in violation of 18 U.S.C. §§ 1958 and based on the death of Young’s husband. Young argues that the district court erroneously admitted into evidence coconspirator statements despite the lack of corroborating evidence as to the conspiracy’s existence; and admitted Mock’s out-of-court statements in violation of Young’s confrontation rights. Mock raises one issue unique to her, contending that the district court erroneously prohibited Mock from introducing Young’s subsequent inconsistent statement involving Mock’s whereabouts following the murder.

BACKGROUND

Young married Melvin Griesbauer in 2004. They lived together on a farm in northern Missouri. The farm had been in Young’s family for several years. Young bred dogs on the farm and befriended Mock through their common interest in the avocation.

Shortly after Young and Griesbauer married, the Missouri Army National Guard deployed Griesbauer to Iraq for nearly one year, beginning in October 2004. Immediately before and during his deployment, Young purchased multiple life insurance policies on Griesbauer that listed Young as the primary beneficiary. Under the policies, Young stood to receive over $1.1 million in the event of Griesbauer’s death.

Rita overheard Young tell Mock that Young was afraid of Griesbauer and intended on leaving him because he threatened to kill her. Mock agreed to help Young get away from Griesbauer. Two days later, Mock asked her son Thomas Ponder (“Thomas”) if he knew anyone that could kill somebody. Mock told him that Young wanted someone killed and was willing to pay $10,000. Mock told Thomas that Griesbauer was abusing Young, causing Mock to fear for Young’s safety. Thomas declined. Shortly thereafter Griesbauer was shot to death.

Approximately two years after Griesbauer’s death, Missouri authorities arrested Young and charged her in state court with first-degree murder.

While in custody, Young allegedly spoke with a jailhouse informant named Amanda Bax. The government called Bax to testify against Young. Bax testified that Young told her that she killed Griesbauer for insurance money because she was about to lose her farm. She also stated that Young told her she would “rather lose her husband than lose that farm.” Additionally, one of Young’s paramours, Kris Robbins, testified that Young proclaimed many times in relation to Griesbauer, “I would like to kill the son-of-a-bitch” and “I wish he was dead.”

A joint, six-day jury trial found Young and Mock guilty of both counts. The district court sentenced them both to two concurrent life sentences.

 DISCUSSION

The court admitted Mock’s out-of-court statements in violation of Young’s confrontation rights. Mock raises one issue unique to her, contending that the district court erroneously prohibited Mock from introducing Young’s subsequent inconsistent statement involving Mock’s whereabouts following the murder.

The testimony of a witness who had been solicited to kill a previous husband demonstrated Young’s intent, motive, knowledge, and plan for Griesbauer’s death, the district court’s instruction was proper where the district court instructed that Young was “on trial only for the crimes charged, and you may consider the evidence of prior acts only on the issue of motive, intent, knowledge, or plan.”

Federal Rule of Evidence 801(d)(2)(E) provides that a coconspirator’s out-of-court statement is not hearsay if the statement was made “during and in furtherance of the conspiracy.” A party may admit evidence pursuant to this Rule only if the party demonstrates a conspiracy between the declarant and the defendant.

The government provided substantial evidence of Young and Mock’s conspiracy outside of the statements themselves. This evidence includes their joint 911 call, their common alibi, their presence at the murder scene at the exclusion of all others, the clear lack of suicide or accident, the ski mask that Mock purchased that was found at the murder scene, Young’s disdain for Griesbauer, the note found in Young’s vehicle at her arrest, the life insurance policies, their financial distress, the additional $10,000 Young requested when she refinanced the farm, Mock’s belief that she would receive money soon, and Bax’s testimony relating to Young’s jailhouse statements. Furthermore, although some of the government’s evidence related to events that occurred after the events comprising Keri’s and Thomas’s testimonies, they nonetheless indicate the presence of a conspiracy at the time Mock solicited their help to kill Griesbauer. The government provided ample evidence of a conspiracy.

Young and Mock both contend that the district court erred by refusing to sever their trial pursuant to Federal Rule of Criminal Procedure 14(a), which provides, “If the joinder of … defendants … for trial appears to prejudice a defendant or the government, the court may order separate trials of counts, sever the defendants’ trials, or provide any other relief that justice requires.” This is especially true when the district court, like here, provides limiting instructions to the jury on the use of evidence against only one defendant. Generally, persons charged in a conspiracy should be tried together, especially when proof of the charges against the defendants is based upon the same evidence and acts A joint trial is preferable because it gives the jury the best perspective on all of the evidence and, therefore, increases the likelihood of a correct outcome.

Finally, Young and Mock both contend that the district court erred by denying their motion for judgment as a matter of law because, according to them, the evidence failed to establish that either party received valuable consideration for commission of the offense.

The government must prove three elements to convict a defendant for violating the substantive portion of 18 U.S.C. § 1958(a). These include that the defendant: “(1) used or caused another to use the mail or a facility in interstate commerce, (2) with the intent that murder is committed, (3) for hire.” The “for hire” element typically requires consideration or some form of bargained-for exchange. A quid pro quo contractual arrangement can satisfy the “for hire” element. Thus, the payment for the murder could consist, theoretically, of a promise to give a peppercorn.

Here, the government provided significant circumstantial evidence to support a jury verdict that Young promised to pay Mock money in consideration for Griesbauer’s murder. First, Keri’s and Thomas’s testimony reveal that Mock solicited others to murder Griesbauer for money on Young’s behalf. Second, Young insisted on receiving an extra $10,000 from her lender above that needed to pay off her debts on the farm mere hours before Griesbauer’s death. Third, Young had previously solicited Newlin to murder an ex-husband for exactly $10,000. Fourth, despite Mock’s financial hardships, she informed Ballard that she would soon be able to settle her debts with interest. Fifth, the defendants’ presence at the crime scene and overlapping alibis demonstrate the presence of a scheme to murder Griesbauer. Consequently, when one considers the evidence in a light most favorable to the jury verdict, this evidence leads to the reasonable inference that Young promised to pay Mock $10,000 to murder Griesbauer. Thus, the defendants’ argument must fail.

 ZALMA OPINION

Ms. Young must have been disappointed, after buying $1.1 million insurance on his life that he returned home safely from combat in Iraq. She had borrowed money in his name and probably still had the life insurance policies and a hatred for her husband that was tempered by the love for her farm. The evidence was damning and the motive was no less than $1.1 million.  The only question remaining was whether the insurers who paid Young after the death of Griesbauer ever recovered their money. Obviously, with life sentences, the chances of recovering from Young or Mock was slim.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

 

 

 

Posted in Zalma on Insurance | 1 Comment

Experts Wrongfully Excluded

Bad Faith & Expert Witnesses

After a flood occurred in the warehouse of a business that purchased and resold electronic parts, a dispute arose between the business and its insurer. The insured sued, alleging express breach of contract and breach of the implied covenant of good faith. The insurer moved for summary judgment. Without holding a Daubert hearing, the district court excluded the insured’s expert witnesses and granted summary judgment to the insurer, finding insufficient evidence that the flood caused damage to the insured’s inventory.

In Pyramid Technologies, Inc., Allied Public Adjusters, Inc.; Douglas W. Schroeder, Lien Claimant v. Hartford Casualty Insurance Company, United States Court of Appeals for the Ninth Circuit,  — F.3d —- 2014, WL 2086078 (May 19, 2014) the Ninth Circuit Court of Appeal expressed its disdain over the conduct of the trial court.

FACTS

Pyramid Technologies, Inc. (“Pyramid”) purchased an insurance policy (the “Policy”) from Hartford Casualty Insurance Company (“Hartford”). The Policy provides coverage limits of $1 million for building replacement costs, $5.5 million for business personal property replacement costs, and $3 million for lost business income and additional expenses due to the interruption of business operations. To trigger coverage for building or business personal property replacement costs, the Policy requires damage to property or its direct physical loss.

Pyramid purchased and resold electronic parts, many of which were out-of-date or not state-of-the-art. It did not test the inventory unless required to do so by a customer or prospective customer. Pyramid stored its inventory on shelves in a warehouse that did not have air conditioning or humidity control. Pyramid had approximately 52 million items in its warehouse at the time of the flood.

In the morning hours of August 11, 2005, Pyramid employees arrived at work to find the warehouse and certain other building locations flooded with one to two inches of water. Although the flood water did not reach the shelves on which inventory items were located, several employees saw visible condensation on packages in the lower three to four shelves.

Pyramid asked Hartford to test the inventory. Hartford’s expert, Peter Helms from Belfor USA Technical Services, visited the site after cleanup and, relying on humidity tests conducted after most of the water had been removed and drying equipment had been in place for more than 24 hours, determined that the humidity did not reach a level that could have caused damage to any of the inventory. Hartford refused to test the inventory, which would have cost more than $13 million to test every item. Hartford based its decision largely on Helms’ conclusion that the inventory was not damaged by the flood.

During routine inventory checks after the flood, Pyramid employees quarantined more than 250,000 items, looking for visible signs of corrosion, tarnish, or discoloration. In August 2007, Hartford finally agreed to conduct limited testing of a small subset of parts identified by Pyramid as being damaged.

Pyramid hired two additional experts, Del Mortenson and Ken Pytlewski, to evaluate the validity of Dr. Kumar’s report. By May 2010, approximately 17 million of Pyramid’s 52 million parts in inventory at the time of the flood had been sold, and approximately 35 million parts remained in Pyramid’s inventory. In October 2010, Pyramid sold most of its remaining inventory at a distress sale price of $125,000.

The district court did not hold oral argument on Hartford’s motion for summary judgment. Instead, on June 1, 2011, the district court granted summary judgment in favor of Hartford, sustained many of Hartford’s objections to the testimony of Mavusi, and excluded the expert reports of Spiegel, Mortenson, and Pytlewski.  The district court also concluded that even if these reports were admissible, they fail to raise a genuine dispute of material fact because they do not sufficiently address causation. The district court denied Pyramid’s motion for reconsideration.

DISCUSSION

Exclusion of Pyramid’s Expert Witnesses

Rule 702 of the Federal Rules of Evidence provides that expert opinion evidence is admissible if: (1) the witness is sufficiently qualified as an expert by knowledge, skill, experience, training, or education; (2) the scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (3) the testimony is based on sufficient facts or data; (4) the testimony is the product of reliable principles and methods; and (5) the expert has reliably applied the relevant principles and methods to the facts of the case. Fed. R. Evid. 702.

The trial court must assure that the expert testimony both rests on a reliable foundation and is relevant to the task at hand. Expert opinion testimony is relevant if the knowledge underlying it has a valid connection to the pertinent inquiry. And it is reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline. Shaky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion. Simply put the district court is not tasked with deciding whether the expert is right or wrong, just whether his testimony has substance such that it would be helpful to a jury.

After an expert establishes admissibility to the judge’s satisfaction, challenges that go to the weight of the evidence are within the province of a fact finder, not a trial court judge. A district court should not make credibility determinations that are reserved for the jury.

Spiegel is a certified restorer with the National Institute of Disaster Restoration. He is also a certified: (1) master restorer and water, fire and odor control journeyman with the Institute of Inspection, Cleaning, and Restoration; (2) indoor environmentalist and mold remediator with the Indoor Air Quality Association; and (3) Level I thermographer with the Infrared Training Center. Spiegel is also a general and specialty licensed contractor with the state of California and has 38 years of experience in property damage repair and more than 15 years of experience in construction defect investigation.

In addition, in preparing his report Spiegel conducted two site visits to Pyramid’s warehouse, interviewed several Pyramid employees who saw the water intrusion and its immediate aftermath, reviewed ServPro’s ambient condition measurements, and recorded his own ambient data during his visits, including data from a 5:30 a.m. visit designed to compare the difference in indoor and outdoor conditions when the warehouse was closed and locked (as it was during the flood). Spiegel also took digital photographs and electronic thermo-hygrometer readings, performed infrared imaging, reviewed to determine the weather conditions at a nearby airport at the time of the flood, and reviewed the Helms report. These facts and data constitute a sufficient basis for Spiegel’s expert report.

The record shows that the knowledge underlying Spiegel’s report has a reliable basis in the knowledge and experience of the relevant discipline, rendering his report reliable. Excluding the Spiegel report was both erroneous and prejudicial. As Spiegel opines, the humidity and condensation caused by the flood may have compromised the packaging and possibly the components themselves. This is admissible evidence from which causation and damage reasonably may be inferred.  Reliable expert testimony need only be relevant, and need not establish every element that the plaintiff must prove, in order to be admissible.

Pytlewski

Pytlewski was retained to review and comment on the report prepared by Hartford’s expert Dr. Kumar of SEAL Laboratories. The district court appears to have accepted Pytlewski as a qualified expert, excluding his report solely based on reliability. An expert opinion is reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline.

The Ninth Circuit found that the exclusion of Pytlewski’s report is prejudicial because his report provides evidence from which a fact finder could disregard the opinion of Dr. Kumar and reasonably infer damages and causation relating to the flood. Further, Pytlewski’s deposition testimony links the flood as at least a partial cause of the damage to Pyramid’s inventory. Thus, the district court abused its discretion in excluding Pytlewski’s expert report and testimony.

Mortenson

The district court also excluded the Mortenson report under Rule 702, stating it was not reliable, and under Rule 703, stating it was not based on facts or data known to Mortenson. Mortenson’s testimony that Dr. Kumar should not have used military standards and should have used commercial standards was not based on facts or data known to Mortenson and is inadmissible under Rule 703. Additionally, Mortenson’s testimony is not reliable because he did not have the knowledge or experience required under Rule 702 to permit him to give expert testimony in this matter. The exclusion of Mortenson’s report by the district court was not an abuse of discretion. (Kumho Tire Co. v. Carmichael, 526 U.S. 137, 153-54, 119 S. Ct. 1167, 143 L. Ed. 2d 238 (1999))

Grant of Summary Judgment Against Pyramid’s Claims

In its complaint, Pyramid alleges that Hartford breached its insurance contract and the implied covenant of good faith and fair dealing by: (1) failing properly to investigate and then improperly denying Pyramid’s claim for an alleged loss of inventory, including refusing to test the inventory; (2) failing properly to respond to the building restoration claim, including making a “low-ball” estimate for damage that was one-fourteenth of the value ultimately paid by Hartford and unreasonably delaying final payment on the restoration claim; and (3) refusing to pay for an alleged business interruption. Pyramid appeals the district court’s grant of summary judgment in favor of Hartford and against both of Pyramid’s claims.

It is undisputed that at least some of Pyramid’s inventory had visible corrosion, tarnish, or discoloration. Hartford’s expert Dr. Kumar identified visible corrosion, tarnish, or discoloration on more than 40% of the items he tested.  For example, State Farm Fire & Cas. Co. v. Superior Court, 215 Cal. App. 3d 1435, 264 Cal. Rptr. 269, 274-75 (Cal. Ct. App. 1989)) concluded that diminution of value is not a cause of a loss but a measure of damages.

There is evidence in the record that some customers returned a few parts because of corrosion. The failure of some parts and the return of other parts are evidence from which a jury reasonably could infer that Pyramid was harmed by the presence of corrosion on at least some of its inventory.

Additionally, if the inventory items were damaged by the flood, which Hartford admits was a covered event, the inability to sell the items due to the physical damage, regardless of whether those items would fail a Department of Defense test under military standards, would constitute a covered loss. Drawing all reasonable inferences in favor of Pyramid, a reasonable fact finder could find that some of the inventory items had moisture-related damage that diminished their market value. That diminution in market value is a recoverable measure of damages.

Causation

Under California law, the “efficient proximate cause” doctrine is “the preferred method for resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.” (Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 27 Cal. Rptr. 3d 648, 110 P.3d 903, 906 (Cal. 2005) (citations omitted)) The efficient proximate cause of a loss is the predominant, or most important cause of a loss. Coverage would not exist if the covered risk was simply a remote cause of the loss or if an excluded risk was the efficient proximate cause of the loss.  If more than one peril contributes to a loss, the question which is the efficient proximate cause generally is a factual matter for the jury to resolve.

The evidence in the record, including both the Spiegel report and the testimony by employees that they saw condensation on the packaging of the parts stored on the lower shelves, supports an inference that the humidity reached a high enough level during the flood to cause significant condensation on the packaging of the parts kept on the lower three or four shelves. There is also evidence that although Pyramid’s moisture-sensitive inventory was generally stored in moisture-proof packaging, most of that packaging was either unsealed or had been compromised by age or the high humidity levels, allowing moisture to reach the components. Pyramid’s employees testified that many of the moisture-proof packages were unsealed and some of those had been folded down and held closed only with a paperclip.

This is not a case where the party with the burden of proof at trial submitted “no evidence” from which causation could be inferred, thereby requiring summary judgment. There is sufficient evidence in the record, drawing all reasonable inferences in Pyramid’s favor, from which a reasonable jury could find by a preponderance of the evidence that the plaintiff is entitled to a favorable verdict. Whether those inferences should be drawn in favor of Pyramid after considering and weighing all of the evidence is for a jury to decide.

Pyramid’s Claim of Business Interruption

Pyramid failed to show that there are material issues of fact that it actually lost WMS business as a result of the flood. WMS’s quality control manager, Nick Savich, also participated in the site visit at Pyramid. Savich sent a letter to Pyramid after the visit, stating that WMS did not approve Pyramid as a supplier based on water intrusion. Savich testified at deposition, however, that if he had known that Pyramid did not have humidity control in its warehouse, that fact alone would have disqualified Pyramid as a supplier. To find for Pyramid on its claim of business interruption, a jury would need to speculate that WMS would not have discovered the fact that the warehouse did not have humidity control, that WMS quality control people would have signed off on Pyramid as a supplier, that Greco and Pyramid would have successfully negotiated pricing and other terms for many additional parts, and that Greco would have followed through with a large purchase. The record evidence does not support – and the law does not permit – such speculation.

Pyramid’s Claim of Good Faith and Fair Dealing

Under California law, to establish a breach of the implied covenant of good faith and fair dealing, “a plaintiff must show: (1) benefits due under the policy were withheld; and (2) the reason for withholding benefits was unreasonable or without proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001)

The reasonableness of an insurer’s conduct is ordinarily a question of fact. An insured’s claim of breach of the implied covenant of good faith and fair dealing may be dismissed on summary judgment if the defendant insurer can show that there was a “genuine dispute” as to liability.

The report of Pyramid’s insurance claim expert, support an inference that Hartford did not handle the claim in good faith. He opined that Hartford could not have reasonably concluded that Pyramid’s inventory was not damaged in the absence of any testing or investigation and should have conducted testing under the adjustment expense that accompanies every claim. The expert also concluded that Hartford was not responsive to the needs of Pyramid and failed to assist Pyramid as Hartford was obligated to do and that Hartford forced Pyramid to engage experts and conduct an investigation that should have been done by Hartford.

Summary judgment cannot be granted under the genuine dispute doctrine in a bad faith claim unless it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable-for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. Pyramid produced evidence from which a reasonable jury could draw more than one inference concerning Hartford’s conduct. Thus, summary judgment against Pyramid’s claim for breach of the implied covenant of good faith is inappropriate.

CONCLUSION

The district court abused its discretion in excluding the expert evidence of David Spiegel and Ken Pytlewski. Such evidence is admissible. The district court did not abuse its discretion in excluding the expert evidence of Del Mortenson. The district court erred in granting summary judgment against Pyramid’s claims because genuine disputes of material fact exist as to whether Hartford breached its contract with Pyramid and breached the implied covenant of good faith. To the extent such claims are premised on Pyramid’s business interruption theory, however, no material issues of fact exist, and the district court did not err in granting summary judgment against that theory of liability.

ZALMA OPINION

This is a multifaceted decision that covers important issues to everyone involved with first party property claims and points out – although the court did not mention it – a failure of competent underwriting that brought about unnecessary litigation.

First, the trial court failed to properly evaluate the experts presented in the motion for summary judgment and excluded the testimony of two, out of three, proposed experts whose qualifications were sufficient to allow testimony at trial and whose reports raised an issue of fact that was sufficient to defeat a motion for summary judgment.

Second, the trial court was found to be correct in refusing to allow a claim for business interruption since it was based on bare speculation.

Third, that that the “genuine dispute doctrine” did not apply because of the failure of the Hartford to do a thorough, prompt and effective investigation so that the plaintiff can take the opportunity to prove that the conduct of Hartford was tortious.

Fourth, it pointed out the importance of an effective and experienced claims handling expert in establishing a cause of action for the tort of bad faith and defeat a genuine dispute defense.

Finally, and not spoken to by the court, was the fact that Hartford failed to evaluate the risk before the policy was issued. They provided millions of dollars of coverage for parts that were not properly protected against moisture, that were obsolete and not necessarily marketable, and as such raised a morale hazard tempting the insured to allow a loss to occur.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Fortuity Rules Insurance Interpretation

No Fire Insurance For Preexisting Condition of Property

Every insurance contract is based on the concept of fortuity. Insurance must, by definition, only indemnify the insured against a contingent or unknown risk of loss. No one should be able to purchase insurance after a home burns to the ground by purchasing insurance after the fire. Preexisting conditions are anathema to insurance.

In Brown v. State Farm Fire & Cas. Co., Superior Court of Connecticut, Judicial District of Fairfield, WL 6924419, AC 35347  (December 24, 2012) a Connecticut appellate court was called upon to decide a breach of insurance contract action where the plaintiff, Ralston Brown, claims that the defendant, State Farm Fire and Casualty Company, wrongfully failed to cover the fire loss sustained to his dwelling in Bridgeport on April 21, 2006. The trial court rendered judgment for the defendant after a trial to the court on the merits. On appeal, the plaintiff claims that Judge Melville, the trial judge, erred in concluding that the plaintiff’s post-loss premium payment reinstated his insurance coverage prospectively only; and that Judge Melville erred in rendering judgment for the defendant after a trial on the merits, concluding that the homeowner’s insurance policy was not in effect on April 21, 2006, the date of the fire.

FACTS

The plaintiff purchased a homeowner’s insurance policy from the defendant on September 16, 2004, to be billed on a quarterly basis. The plaintiff purchased a business policy from the defendant on September 26, 2005. At the plaintiff’s request, the defendant agreed to bill the plaintiff quarterly on the same date for both policies, rather than on each policy’s anniversary date. He did not pay the full amount owed for that quarter.

On February 16, 2006, the plaintiff was billed $729.85 for the quarter beginning in March, 2006, payable on or before April 6, 2006. On March 22, 2006, the plaintiff was sent a cancellation notice indicating that his policies would be cancelled on April 6, 2006, if he failed to pay that amount by that date. The plaintiff did not tender payment prior to April 6, 2006. The plaintiff admitted to finding the cancellation notice in the debris left after the fire.

On April 21, 2006, the plaintiff’s dwelling was lost due to fire. After the fire, and upon discovering a cancellation notice sent from the defendant, dated March 22, 2006, the plaintiff mailed the defendant the missing payment. The defendant credited the plaintiff’s account $729.85 on April 22, 2006-the day after the fire. The court found that this payment reinstated the plaintiff’s policy, effective that day.

The plaintiff filed an insurance claim with the defendant for the fire loss to his dwelling, which it denied. The plaintiff thereafter filed a one count complaint alleging breach of contract against the defendant. After a bench trial, the court rendered judgment in favor of the defendant.

The plaintiff next argues that the defendant waived its right to deny coverage for the loss when it accepted payment after the April 21, 2006 fire and then declined to provide coverage retroactive to the date of loss. He contends that the court erred in concluding that the plaintiff’s post-loss premium payment operated to reinstate his coverage prospectively only.

ANALYSIS

This claim, one of first impression in Connecticut, presents a question of law.  Among the declarations in the insurance policy issued by the defendant to the plaintiff was the proviso: “You agree, by acceptance of this policy, that . . . you will pay premiums when due and comply with the provisions of the policy.” The policy further states: “We may cancel this policy only for the reasons stated in this condition. . . . (1) When you have not paid the premium, we may cancel at any time by notifying you at least 10 days before the date cancellation takes effect.” The cancellation notice sent to the plaintiff on March 22, 2006, with a cancellation date of April 6, 2006, states: “Should you wish to reinstate these policies, please forward your payment immediately. . . . If paid after [the] date and time [of cancellation] you will be informed whether your policies have been reinstated and if so, the exact date and time of reinstatement. There is no coverage between the date and time of cancellation and the date and time of reinstatement.”

Ignoring the policy language and the statements in the notice the plaintiff maintains that the defendant’s post-loss acceptance of his late premium payment obligated it to cover the loss sustained to his dwelling on April 21, 2006. The trial court disagreed. The trial court determined that the approach taken in a majority of jurisdictions represented the better view, and held that when a late payment is made on a lapsed insurance policy, the payment restores the policy only going forward fully. The reinstatement was prospective with regard to coverage and did not cover the fire loss which occurred on April 21, 2006.

This rule effectuates an important principle of insurance law: the concept of fortuity. It is a fundamental requirement in insurance law that the insurer will not pay for a loss unless the loss is “fortuitous,” meaning that the loss must be accidental in some sense. Losses that are certain to occur, or which have already occurred are not fortuitous. This principle explains why a person cannot suffer a loss and then subsequently purchase insurance to cover that loss. One procures insurance because he might suffer a future loss. A loss that has already occurred is not fortuitous-and is thus not insurable. Without such a rule, one could allow his coverage to lapse by not paying his premiums timely and then, upon suffering a loss, force his insurer to “buy a claim” by quickly making the missed premium payments to reinstate his lapsed coverage retroactively. Such a rule would allow the insured to consciously shift the burden of his known loss from himself onto his insurer, and, ultimately, onto those policy holders who have dutifully paid their premiums on time and maintained continuous insurance coverage.

Accordingly, when an insurance policy has been cancelled due to nonpayment of premiums, and the insured seeks to reinstate that policy, the insurer is within its rights to reinstate coverage effective only for losses going forward.

At trial, the plaintiff admitted that he failed to pay any part of this bill on or before the March 16, 2006 due date or the April 6, 2006 cancellation date. The court found that, due to nonpayment by the plaintiff, the homeowner’s policy was not in effect on April 21, 2006. The plaintiff introduced no evidence that his payment was made prior to the effective date of cancellation on April 6, 2006, or that any payment had been made before the fire occurred on April 21, 2006. Thus, the trial court properly rejected the plaintiff’s claim that this payment was made timely.

ZALMA OPINION

Mr. Brown, understandably thought that the late payment of premium was enough to avoid the requirement for fortuity because of the publicity surrounding the Affordable Care Act (“Obamacare”) that requires health insurers to insure people with preexisting conditions. Clearly, not buying health insurance until the person is sick, is similar to not buying fire insurance until the house burns. In both situations, as the court pointed out, such a rule would allow the insured shift the burden of his known loss from himself onto his insurer, and, ultimately, onto those policy holders who have dutifully paid their premiums on time and maintained continuous insurance coverage.

Mr. Brown’s argument would have changed fire insurance from a contract of indemnity to an entitlement. A government can do so, and has, but a state court cannot, and should not, change the meaning of a contract of insurance and turn insurers from a profit making business into an eleemosynary organization.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Breach of Warranty Eliminates Coverage

Fail to Set Alarm Can Defeat Claim

Mr. Justice Jay, sitting in the England and Wales High Court (Queen’s Bench Division) was called upon to resolve a dispute concerning the failure of an insured, Milton Furniture, Ltd. to maintain a fully functional burglar alarm on the premises. In a lengthy and detailed opinion, writing personally about his decision, in a form notable of British Jurists, ruled in Milton Furniture Ltd v Brit Insurance Ltd [2014] EWHC 965 (QB), England and Wales High Court (Queen’s Bench Division) (01 April 2014), URL: http://www.bailii.org/ew/cases/EWHC/QB/2014/965.html.

FACTS

Shortly before 01:00 on Saturday 9th April 2005 a catastrophic fire occurred at premises occupied by the Claimant known as Tournament Building (“the premises”). The Claimant’s core business is and has been at all material times the hiring out of furniture for exhibitions, and the vast majority of its stock was destroyed in the fire.

Pursuant to the terms of a Commercial Combined Insurance Policy (“the policy”), the Defendant agreed to provide the Claimant with insurance cover for the period 2nd December 2004 to 16th July 2005. Fire was a specified risk, and the policy covered loss or damage to stock in trade, loss of gross profit and increased cost of working, the indemnity period being 12 months. No issue arises as to the limits of cover. The Claimant’s claim for an indemnity under the policy has been repudiated by the Defendant.

In essence, the Defendant has resisted the claim for an indemnity on the principal grounds that the Claimant is in breach of two conditions precedent to its liability.

The Terms of the Contract of Insurance

The policy contained the following warranty:

PW1 Intruder Alarm Warranties

“It is a condition precedent to the liability of the Underwriters in respect of loss or damage caused by Theft and/or attempted Theft, that the Burglar Alarm shall have been put into full and proper operation whenever the premises referred to in this Schedule are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance under a maintenance contract with a member of NACOSS.”

PW3 Protections Warranty (No 2)

“It is warranted that all doors, windows and openings are protected by a NACOSS approved Direct Line, RedCARE or Dualcom alarm system.”

THE PRINCIPAL ISSUES IN THE CASE

1.Was the Claimant in breach of its obligations (“the whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended”) by not ensuring that the burglar alarm was in use at the material time?

2.  Was the Claimant in breach of the condition by causing or permitting the withdrawal of the monitoring of the burglar alarm?

FACTUAL NARRATIVE

The Intruder Alarm System (“IAS”) consisted of door and shutter contacts as well as 34 individual detectors fitted throughout the premises, including passive infra-red (“PIR”) and dual detectors (the latter being a combination of PIR and microwave technologies). The seat of the fire was well within the range of the infrared detectors. The IAS was, or had been, monitored at SECOM’s alarm receiving center.

USE OF THE BURGLAR ALARM

It is clear that, for all practical purposes, monitoring of the burglar alarm by SECOM ceased in February 2005.

THE NIGHT OF THE FIRE

Mr Hyams finished working at 18:30 on 8th April 2005 but he left the premises and returned at about 20:30. Mr Furley finished working at about 20:30. He carried out a security check of the warehouse in particular. The burglar alarm was not set that evening. Mr Furley’s evidence was that he was woken by the activation of an alarm, which must have been the fire alarm, at 00:46 on 9th April. He then woke up Mr Hyams, who was also alerted to the activation of the fire alarm by SECOM, who was still monitoring that alarm, apparently as a “goodwill gesture”.

The fire was started either by someone hiding within the building prior to the building being secured or it was started by someone with legitimate access to the premises.

The first relevant rule of construction is that the apparently literal meaning of the words in a warranty must be restricted if they produce a result inconsistent with a reasonable and business like interpretation of such a warranty. A warranty in a contract must, like a clause in any other commercial contract, receive a reasonable interpretation and must, if necessary, be read with such limitations and qualifications as will render it reasonable. The words used ought to be given the interpretation which, having regard to the context and circumstances, would be placed upon them by ordinary men of normal intelligence conversant with the subject matter of the insurance.

In the event of ambiguity it is trite law that insurance contracts must be construed against the insurer.  It is also clear law that a breach of a condition precedent by the insured is a defense to a claim for an indemnity under the policy regardless of causation of loss in the given circumstances.

One of the commercial purposes of the condition, possibly its primary purpose, was to enable insurers to insist on their being a burglar alarm with certain attributes.

The court refused to agree that the sole purpose of a burglar alarm is to reduce the risk in relation to theft or attempted theft. That is the core purpose of a burglar alarm, but it is not its sole purpose as might be a fire alarm. A burglar alarm protects premises against the risk of intrusion, including intrusion by the arsonist who set the fire.

The second issue is more difficult. The premise must be that there are two conditions precedent: the first (PW1) which applies only in the event of theft or attempted theft; the second (GC7) which is in general terms. The Claimant’s submission was that in a non-theft case GC7 applies but it should be “read down” so that its obligations are no more onerous than they would have been under PW1; the Defendant’s submission was either that PW1 should be seen as having no impact on GC7 at all, or that it should qualify GC7 solely in theft or attempted theft cases.

Justice Jay found that the better approach is to construe GC7 in such a way that the Claimant’s obligations as regards the use and monitoring of the burglar alarm (but not in other respects) are no more onerous than they would have been had this been a theft claim and PW1 been applicable. In other words, GC7 must be read down so that the insured is only required to set the alarm if the premises are left unattended. The monitoring obligation is the same under both provisions.

It follows that the answer to Issue (ii) is in the affirmative.

Issue (iii): Was the Claimant in breach of its obligations under the first part of GC7 (“the whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended”) by not ensuring that the burglar alarm was in use at the material time?

The first limb of GC7 is concerned with the circumstances of use, the second limb is separately concerned with the maintenance and/or retention of the protections regardless of actual use on a particular occasion.  GC7 should be seen as imposing separate and cumulative requirements.

Was the Claimant in breach of the second limb of GC7? The requirement under GC7 is not to withdraw or vary the protections. Knowledge must be a requirement of this provision. An insured is in breach of the second limb of GC7 if it acts or fails to act in such a way that there is a real risk that the adverse consequence might flow, namely (on the facts of the instant case) the cessation of the monitoring service. The Claimant must be held to be in breach of the second limb of GC7. The Claimant knew that the monitoring charge was payable in advance. It knew that it had not been paid for over six months. It knew that SECOM was not going to permit this situation to occur indefinitely.

The Claimant was reckless as to the risk that the monitoring service would be cut off, and rather buried its head in the metaphorical sand as regards this issue. So, and with a degree of reluctance, the court was compelled to answer Issue (iv) in the affirmative and in the Defendant’s favour.

Justice Jay could not properly find for the Claimant on the alarm monitoring issue. Mr and Mrs Hyams must understand that, regardless of their financial difficulties in early 2005, they were running too great a risk by failing to pay the SECOM monitoring charges. Harsh though it might seem, the Defendant was entitled to take this point and, having taken it, Justice Jay was compelled to find for the Defendant.

ZALMA OPINION

Although the U.K. and the U.S.A. are, to paraphrase Mr. Churchill, are two great countries divided by a common language, this case upholds the importance of conditions and warranties in an insurance policy. The plaintiffs, no matter how much Justice Jay empathized with their situation and loss, breached a material condition and material warranty in the policy. They recklessly failed to pay for alarm monitoring and failed to turn on the alarm that was the basis of the policy. U.S. courts, also, will enforce material conditions and warranties, although some will add a “prejudice” requirement. If Justice Jay had been called upon to find prejudice to the insurer I am certain he would since the alarm – had it been set – could have kept the arsonist from the building.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Opinion Not Defamatory

Defamation Requires Malice

Insurance industry publishers often publish their opinions concerning the financial viability of insurance companies. When the opinion is derogatory and the insurer believes it is false or misleading, litigation results.

In Regis Insurance Company v. A.M. Best Company, Inc., United States District Court Eastern District of Pennsylvania, Civil Action No. 10-3171 (May 20, 2014) the district court dealt with a suit brought by Regis Insurance Company (“Regis”) against A.M. Best Company, Inc. (“A.M. Best” or “Best”) for damages it allegedly suffered as a result of A.M. Best’s downgrade of Regis’ credit rating in early 2010. This matter proceeded to trial on May 20, 2013. After six days of Regis presenting its case in chief to the jury, A.M. Best moved for judgment as a matter of law. The Court granted the motion. Regis filed a Motion for New Trial and the court filed a detailed decision concerning the motion.

In reaching its decision the trial court noted that a rating, standing alone, is an opinion, as Best adamantly avers. A rating, unless patently baseless, has no inherent truth; it is merely an estimation, arrived at through application of Best’s methodologies, of the financial health of the rated organization. But in order for Best’s “ratings opinion” to be entitled to the protection generally afforded to opinions in defamation actions, Best’s methodologies must have actually been followed.

FACTUAL BACKGROUND

Regis’s Complaint alleged five counts against A.M. Best: (1) declaratory judgment, (2) defamation, (3) commercial disparagement, (4) tortious interference with contractual relations, and (5) tortious interference with prospective contractual relations. Regis voluntarily withdrew its claim for a declaratory judgment. The original Court’s ruling stated: “In considering the Rule 50 Motion, the Court is of the opinion that there is some issue as to whether or not there is sufficient evidence and I have to take the rating separate from the press release. As to the rating, the Court is of the opinion that this is … a situation of an opinion about which reasonable persons can differ, and I don’t find it a matter of false statements. But even assuming that the statements were false, the Court finds no evidence of reckless disregard or actual malice, which is necessary in order to proceed. … [The] Court finds that the evidence is insufficient on defamation and commercial disparagement as it relates to the rating and the press release for the claims to go to the jury.” That decision resulted in a motion for new trial.

MOTION FOR NEW TRIAL

A court may grant a new trial on the grounds of: (1) improper admission or exclusion of evidence; (2) improper instructions to the jury; (3) newly discovered evidence exists that would likely have altered the outcome of the trial; (4) improper conduct by an attorney or the court unfairly influenced the verdict; (5) the jury’s verdict is against the clear weight of the evidence; or (6) the verdict is so grossly excessive or inadequate as to shock the conscience. The overriding principle is that a court has the power and duty to order a new trial to prevent injustice.

DISCUSSION

In the instant matter, the only argument Regis advances in its Motion for New Trial is that the Court’s decision to grant A.M. Best’s Rule 50 motion was “wholly inconsistent with prior rulings” in this case. The Court ultimately deprived Regis of the right to have a jury determine these genuine issues of material fact.

The Court began its analysis by noting that, problematically, Regis’ theory of liability was something of a moving target that was difficult for the court to pin down. Up until the summary judgment stage, it was Regis’ position that both A.M. Best’s downgraded credit rating of Regis and the press release A.M. Best issued announcing that downgrade were capable of defamatory meaning. The Court endeavored to stress that there is a vital distinction that must be drawn between the rating itself and the press release.

Practically speaking, however, it matters little how democratic the ratings process was if the end result (the press release) is not as carefully considered as the ratings process itself. The public is not privy to the ratings process; all the public is privy to is the ultimate ratings decision, as communicated in the press release. The Court’s Opinion focused heavily on the wording of the press release because defamation requires publication and the press release is the only publication at issue. The viability of Regis’ defamation and commercial disparagement claims come[s] down to this single question: whether Best properly communicated to its audience the bases for its decision to downgrade Regis.

At trial Regis insisted that both the downgraded credit rating and the press release constituted defamation. Over the course of six days the vast majority of Regis’ evidence was devoted to proving that the ratings downgrade itself was improper; Regis only addressed the press release as an ancillary matter.

By the testimony it presented Regis sought to establish that nothing had changed at Regis at the time of the January 2010 downgrade.

REGIS’ EVIDENCE AT TRIAL WAS INSUFFICIENT TO PROVE DEFAMATION AND COMMERCIAL DISPARAGEMENT, AND THEREFORE JUDGMENT AS A MATTER OF LAW WAS APPROPRIATE

To prove defamation plaintiff must provide evidence that (1) The defamatory character of the communication.(2) Its publication by the defendant.(3) Its application to the plaintiff.(4) The understanding by the recipient of its defamatory meaning.(5) The understanding by the recipient of it as intended to be applied to the plaintiff.(6) Special harm resulting to the plaintiff from its publication.(7) Abuse of a conditionally privileged occasion.

Once a plaintiff establishes these elements, the defendant has the burden of proving the following, when relevant to the claim: (1) The truth of the defamatory communication.(2) The privileged character of the occasion on which it was published.(3) The character of the subject matter of defamatory comment as of public concern.

In order for Regis to have prevailed on either its defamation or commercial disparagement claims against A.M. Best, it would have to prove a false statement was made by A.M. Best either in connection with the rating or in connection with the press release. The court concluded that Regis failed on both accounts.

Two of Regis’ witnesses could only testify to damages allegedly resulting from the ratings downgrade. Establishing damages, however, accomplishes little if you have not first proven liability. In that regard, Regis elicited no testimony regarding whether Best had followed its own methodologies in reaching the ratings decision.

In sum, Regis presented no competent evidence that A.M. Best departed from its methodologies in rating Regis. As such there was no evidence from which a jury could conclude that the rating was anything other than an opinion, about which reasonable people could disagree. Because the rating is an opinion, it cannot be false and cannot serve as a basis for a defamation or a commercial disparagement claim.

THE PRESS RELEASE

Regis identified four statements in Best’s January 12, 2010 press release which it claimed were capable of defamatory meaning. Best’s press release was almost entirely devoid of context. When all the facts are disclosed, an opinion cannot be defamatory because the listener is able to evaluate the facts for himself and is free to disregard the conclusion the speaker made from these facts. But when an opinion discloses only some of the facts on which it based, it is capable of defamatory meaning and therefore actionable. The mere availability of better language, without more, would have been insufficient for a jury to find that the language actually used rises to the level of falsity or reckless disregard for the truth.

Regis presented no evidence at trial that any current or prospective client read the press release, and opted not to renew or purchase insurance with Regis due to its contents. Regis’ defamation and commercial disparagement claims must also fail because there was no evidence that anyone read the allegedly defamatory statement, and reputational harm resulted.

For the reasons set forth above, Regis’ Motion for New Trial is denied.

ZALMA OPINION

The court’s opinion was lengthy and detailed and I commend it to the reader to read it in full. However, the simple point is that the ratings issued by Best are, at most, its opinion. An opinion, unless stated with malice and an attempt to harm, can never be defamatory. Further, a press release, stating the opinion, is not actionable for the same reason. That, coupled with the fact that the plaintiff was unable to produce any evidence that the change in rating from B+ to B- caused it to lose a single account, forced the judge to enter judgment at the close of plaintiffs case.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Separate Contract With Mortgagee

The Standard or Union Mortgage Clause

First party property insurance policies usually insure the named insured and a mortgagee. Under a Standard or Union Mortgage Clause the insurer agrees to a separate contract with the mortgagee and that acts by the named insure/mortgagor do not effect coverage to the mortgagee.

In SWE Homes, LP v. Wellington Insurance Company, — S.W.3d —- 2014, WL 1977254. NO. 14-12-01116-CV, May 15, 2014, the court of appeal was presented with the question of whether a standard mortgage clause in a residential insurance policy provides coverage to a mortgagee for a loss by fire when the policy also contained a vacancy clause and the mortgagor had left the property vacant. Mortgagee SWE Homes, LP appeals from the trial court’s grant of summary judgment favoring insurer Wellington Insurance Company, by which the court held that SWE’s loss was not covered.

FACTS

Edgar Sadberry purchased a residential property with a mortgage from SWE. He bought a Texas Dwelling Policy from Wellington covering the property and naming SWE as the mortgagee. The effective dates of the policy ran from August 11, 2010 until August 11, 2011. The policy covered losses from various hazards including fire. It further contained a Mortgage Clause, which reads in pertinent part as follows: “19. Mortgage Clause . . . .b. We will pay for any covered loss of or damage to buildings or structures to the mortgagee shown on the declarations page as interests appear. . . .d. If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgagee has the right to receive loss payment if the mortgagee…”

The policy also included as a condition a Vacancy Clause, which stated: “16. Vacancy. During the policy term, if an insured building is vacant for 60 consecutive days immediately before a loss, we will not be liable for a loss by the perils of fire and lightning or vandalism or malicious mischief. Coverage may be provided by endorsement to this policy.”

Sadberry’s property was damaged in a fire apparently set by an unknown arsonist on December 23, 2010. Sadberry made a claim on his insurance policy, but after he admitted the property had been left vacant for over a year prior to the fire, Wellington denied the claim under the policy’s Vacancy Clause.  SWE then filed a claim pursuant to the Mortgage Clause. When Wellington failed to respond, SWE filed suit. In its motion for summary judgment, Wellington argued that there was no “covered loss” – as required for a claim under the Mortgage Clause – because the property had been left vacant for over 60 consecutive days immediately before the loss occurred. In response, SWE argued that under the policy, coverage for the mortgagee could not be defeated by the mortgagor’s actions triggering the Vacancy Clause when SWE had no knowledge of those actions. The trial court granted Wellington’s motion.

Texas courts generally interpret insurance policies according to the general rules of contract interpretation.  A court’s primary goal is to determine the contracting parties’ intent as expressed by the policy’s written language interpreted through the application of established rules of construction. Contracts should be construed as a whole, harmonizing and giving effect to all of the provisions so that none are rendered meaningless, no single provision taken alone will be given controlling effect, and all the provisions will be considered with reference to the whole instrument.

In its sole issue, SWE contends that the trial court erred in granting summary judgment favoring Wellington. The parties’ only real dispute on appeal revolves around whether SWE’s claim under the Mortgage Clause is defeated by operation of the policy’s Vacancy Clause.

ANALYSIS

There are two common types of loss payable clauses in insurance policies relevant to our discussion. One is the “open” clause, which states simply that any loss is payable to the mortgagee “as its interest may appear.” Under the open clause, the mortgagee stands in the shoes of the insured. The other common type of loss payable clause, the “standard” mortgage clause, provides that “this insurance . . . shall not be invalidated by any act or neglect of the mortgagor.” Under the standard clause, the mortgagee has rights to recover even when the insured does not. The standard mortgage clause creates a separate contract between the insurer and the mortgagee, in this case Wellington and SWE.

Unquestionably, the policy covers damage from fire.  It is Wellington’s burden to prove an exclusion applicable to SWE. While under the Vacancy Clause, there is no coverage for Sadberry for fire damage when the property has remained vacant for the specified period, the clear import of the standard loss payable language in the policy means that the Vacancy Clause does not operate to defeat coverage for SWE as mortgagee, so long as SWE meets the required conditions, such as informing Wellington of any change in occupancy or substantial change in risk that was known to SWE. This is true because it was Sadberry’s actions as property owner that left the property vacant for the relevant time period and SWE had no knowledge of the vacancy.

Moreover, even if the interpretation proffered by Wellington and favored by the trial court were correct, the provisions barring coverage would be rendered void by operation of Texas Insurance Code section 862.055, which states: “(a) The interest of a mortgagee or trustee under a fire insurance contract covering property located in this state may not be invalidated by:(b) A provision of a contract that conflicts with Subsection (a) is void.”

Again, the Wellington policy clearly covered fire as a hazard. If, as Wellington contends, certain language in the Mortgage and Vacancy clauses operates together to deny fire coverage to SWE as mortgagee based on Sadberry’s action in leaving the property vacant, such provisions would be rendered void by operation of section 862.055.

The court of appeal found that the trial court erred in granting summary judgment favoring Wellington based on application of the Vacancy Clause.

ZALMA OPINION

This case should never have gone to trial. The policy wording was clear and unambiguous. The named insured had no coverage because he allowed the dwelling to be vacant for more than a year. The mortgagee, SWE, had no knowledge of the vacancy and properly made a claim under the Standard Mortgage Clause because, by its terms, it could not be responsible for acts of the mortgagor that defeated coverage.

The insurer is not without a remedy, however, and may suffer no loss when it pays SWE because the Standard mortgage clause also allows the insurer, when it pays, to take an assignment of the mortgage and collect from the owner or foreclose and sell the property to obtain reimbursement of the amounts paid.

The simple solution to avoid this litigation would have been a prompt adjustment of the claim filed by SWE, take title to the property by assignment, and collect the mortgage or foreclose and sell the land.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Insured Must Select Insurance Required

To Prove Agent’s Duty Expert Required

Insurance agents and brokers transact insurance with insurers on behalf of their client, the insured. The agent or broker have a general duty to procure the insurance required by the insured. They are not, usually, appraisers or valuers of property.

Deborah Dulaney appealed to the Supreme Court of Montana in Deborah Dulaney v. State Farm Fire and Casualty Insurance Company, and Shawn Ori, Agent, Defendants and Appellees, Supreme Court of Montana, 2014 WL 1900662, May 13, 2014— P.3d —-2014 MT 127. claiming that the trial court order granting summary judgment in favor of defendants State Farm Casualty Insurance Co. and insurance agent Shawn Ori was in error because the duty owed by an agent to an insured was common knowledge and an expert is not required.

BACKGROUND

Dulaney operated a floral shop in Whitehall from 2001 to 2006. During these years, her business was insured by a State Farm insurance policy, which she purchased from Ori. In November of 2007, after reopening her business in a new location, Dulaney met with Ori to discuss purchasing a policy for her new business. During this meeting, Dulaney told Ori that she needed insurance coverage for a new “huge” building she was renting, that her landlord required $1,000,000 in liability insurance, and that she needed to be adequately insured.

Dulaney claims that she told Ori that she had “absolutely no idea” of the value of the property she wanted insured, and that she wanted Ori to come out and see the business for himself. Dulaney maintains that she never asked for a specific amount of coverage, or told Ori to use the same coverage limit that she had for her former business. Ori, on the other hand, contends that during their meeting Dulaney “informed him that her former business property limit was sufficient for the business.”

Dulaney’s 2007 tax return valued her business property at $9,825. Dulaney maintains, however, that the value of her business greatly exceeded this amount.  When Dulaney and Ori met in November of 2007, an insurance application was prepared that indicated on its face a $20,000 coverage limit for business personal property and a $1,000,000 coverage limit for business liability. After obtaining the policy, Dulaney made significant purchases for her business, including a $10,000 walk-in cooler, a $2,000 espresso machine, and a $7,000 business software system. She did not contact Ori to inform him of these purchases, or any other added inventory or equipment. In 2008, Dulaney received a renewal notice from Ori, which again disclosed the limits of coverage under the policy.

In 2009, Dulaney’s floral shop was destroyed by a fire that started in a neighboring business. Dulaney sued the neighboring business, and the case was settled before it went to trial. State Farm paid Dulaney the maximum amount available under her policy, which was approximately $21,105. Dulaney maintains that Ori’s professional negligence caused her over $190,000 in damages to her business. She filed a complaint against Ori with the State of Montana Insurance Commissioner, which was dismissed. State Farm and Ori disclosed multiple expert witnesses that were to testify as to the standard of care required of an insurance agent. State Farm and Ori then filed a motion in limine to preclude Dulaney from calling an expert to testify on her behalf, arguing that she had missed the disclosure deadline imposed by the District Court’s scheduling order. Dulaney responded that she did not fail to disclose an expert witness, but that she “intentionally did not disclose an expert witness as she does not intend to use one.”

The District Court granted summary judgment in favor of State Farm and Ori. The District Court held that expert testimony was required to establish the standard of care to which Ori was required to conform.

DISCUSSION

Dulaney asserts a claim of professional negligence against Ori and State Farm. Four elements are required to prove a claim for negligence: (1) duty; (2) breach of duty; (3) causation; and (4) damages.  It is well established that if a plaintiff fails to offer proof of any one of the elements of a negligence claim, the negligence action fails and summary judgment in favor of the defendant is proper.

In this case, Dulaney claims that Ori had a duty to ascertain the value of Dulaney’s business property and inventory in order to make sure that her insurance policy would adequately cover her business assets. She asserts that Ori breached this duty, and that had Ori inspected her business, he would have advised her to purchase an insurance policy with a higher coverage limit.

To determine if a defendant breached a duty of care, a plaintiff must establish the standard of care by which to measure the defendant’s actions; in other words, she must establish the degree of prudence, attention, and caution the defendant must exercise in fulfilling that duty of care. Montana statutes require that if scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.

It is the rule in Montana that expert testimony is required as to the standard of care, and as to the professional’s violation of that standard of care, before a trier of fact may find such professional negligent.

Dulaney argued that the standard of care of an insurance agent procuring coverage is a matter of common knowledge, and does not involve overly technical, scientific, or specialized knowledge.

Because Dulaney did not make a request for specific coverage. Dulaney’s damages allegedly resulted from Ori’s failure to procure a policy that adequately covered her business assets-not from Ori’s failure to procure a specific type of policy that Dulaney indisputably requested. The question of duty requires the testimony of an expert witness to establish the relevant factors that an insurance agent should consider when procuring insurance coverage in these circumstances.

There exist in this case multiple factors in play that are sufficiently beyond the common experiences of jurors. Dulaney alleged in her complaint that her agent had “the legal duty” to ascertain the amount of insurance coverage she needed. She argued that it was incumbent upon Ori to view the contents of her store and determine the value of her personal property, inventory, and supplies. The Supreme Court noted that in denying her complaint the Insurance Commissioner concluded that it is the responsibility of the insured to determine the amount of coverage needed.

The only way for a jury to resolve whether an insurance agent placing a business policy had the legal duty to perform the tasks the plaintiff claims would be to receive expert testimony on the duties of an insurance agent under the circumstances. Among the questions that would be squarely before the jury are whether it is the obligation of the insured or the agent to place a value on an owner’s property and inventory, and whether it is incumbent on the insured or the agent to monitor the insured’s ongoing property acquisitions and periodically suggest an upgrade in coverage amounts. Because the answers to these questions would not be readily apparent to a layperson, expert testimony on the nature and extent of an agent’s duties was required.

Dulaney’s failure to obtain an expert witness necessarily results in an insufficiency of proof regarding duty, and prevents Dulaney from establishing a prima facie claim of negligence.

ZALMA OPINION

An insurance broker transacts insurance with, but not on behalf of an insurer. An insurance agent transacts insurance with and on behalf of an insurer. Both provide the insurance coverage the insured requires. Dulaney had the policy in hand with insufficient limits since she admitted she purchased new equipment valued in excess of the limits yet she allowed the policy to be renewed with the same low limits she had before she moved into larger quarters.

She attempted to pass her error on to her insurance agent who merely purchased the insurance for her that she ordered. The only way to hold the agent to such a duty would require Dulaney to prove that Ori claimed the expertise to determine the value of her property, told her what limits to purchase, and acted as a fiduciary. She did not obtain an expert to testify to the duty because no honorable or honest insurance expert would so testify without evidence that Ori took on a fiduciary relationship. Her contention that the duty of an insurance agent is “common knowledge” did not fly with the Supreme Court because the facts did not exist to show such a duty and the Supreme Court refused to create one where no facts supported it. Dulaney gambled by not retaining an expert and lost.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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False Sales Presentation Punished

Reasonable Expectations Trump Policy Wording

For more than 42 years I have asked people insured whether they read and understood their policy. Most laughed at me. Two answered “yes.” Both lied. Insurance contracts, written in Sesame Street English, easy to understand, are the least read contracts people agree to and purchase. Even more rare than people who read their insurance contract are situations where an appellate court reconsiders a decision and reverses itself.

In Ronald Nunn and Donald Vaden v.  Massachusetts Casualty Insurance Company, NKA Centre Life Insurance Company, Sun Life Assurance Company of Canada, United States Court of Appeals for the Second Circuit, 2014.C02.0000625 (05/2014) the Second Circuit Court of Appeal was asked to reconsider its earlier decision affirming a summary judgment and re-reviewed a summary judgment granted in favor of the insurers.

FACTS

Massachusetts Casualty Insurance Company (“MCIC”) petitioned the Second Circuit Court of Appeal for rehearing following its decision in Nunn v. Massachusetts Casualty Insurance Co., 743 F.3d 365 (2d Cir. 2014).

Ronald Nunn and Donald Vaden are former National Basketball Association (“NBA”) referees. In September 1996, Plaintiffs participated in a referee training camp in New Jersey and attended a union meeting hosted by the National Basketball Referees Association (the “NBRA”). At the meeting, Steven Lucas, a sales representative for Sun Life of Canada, the company MCIC had designated as its administrator for disability income products, gave a presentation about supplemental disability insurance offered by MCIC.  Lucas explained to Plaintiffs that their current insurance coverage might be insufficient if they became unable to work, but that he could offer supplemental disability insurance that “changes the taxable benefit to a tax free benefit. It changes the benefit period from 10 years to age 65. It covers you in your own occupation. If you can’t do your job you’re disabled.”  Lucas claimed that if the insured can’t be an official but can work in a store some place you go ahead and work there. He convinced them that if they can’t be an NBA official they would be paid until they are 65.

Within weeks of his presentation, Lucas sent each Plaintiff an application for supplemental coverage. Each completed the application with Lucas’ assistance over the phone. Within a few days of each other, Plaintiffs submitted applications through Lucas for the supplemental disability insurance policy he had described. Lucas signed both. Neither Plaintiff read the description of coverage prior to submitting their respective application. Plaintiffs received their copies of MCIC’s supplemental disability insurance policy, but again neither read the policy.  Although the definition for “total disability” in the policies began as Lucas had promised – providing coverage when the insured could not work in his or her occupation – that definition changed after 60 months of paid benefits.

During his deposition, Lucas agreed that the terms of the policy as he described them were not consistent with the terms of the policies that were sold to the NBA referees. He admitted that the policies’ “own-occupation period of the definition of disability” was “inconsistent” with the terms described in his presentation.  He did not tell the NBRA members that the policy he described was not actually available to them.

The Plaintiffs suffered injuries that ended their careers as NBA referees. Each began receiving monthly payments pursuant to their supplemental insurance policies; but after sixty months – Nunn was fifty-eight and Vaden fifty-five – the payments stopped. Because both Plaintiffs were able to work at other jobs – in fact, both continued working for the NBA in other capacities – MCIC ceased payment.

Both Plaintiffs claim that based on Lucas’ presentation, they expected to receive payments until age sixty-five. The referees filed suit seeking reformation to order that the policy promised at the presentation could be enforced. The trial court concluded that Plaintiffs were not entitled to reformation. In reaching this decision, the district court found that Pennsylvania law governed the substance of the contract. The court explained that under Pennsylvania law, courts generally give effect to the plain language of a contract, but if the insurer either unreasonably obscured the terms or outright deceived the insured, Pennsylvania law requires courts to interpret contracts based on the “reasonable expectations” of the insured. Because Plaintiffs had alleged neither fraud nor misrepresentation – which the court understood as prerequisites to the reasonable expectations doctrine – the trial court concluded that it must apply Pennsylvania’s general rule and look to the contract’s plain meaning without regard for Plaintiffs’ reasonable expectations.

ANALYSIS

Pennsylvania employs the reasonable expectations of the insured in some situations to govern contract interpretation. As in other jurisdictions, the default rule in Pennsylvania is to allow the language of an insurance policy to provide the best indication of the content of the parties’ reasonable expectations.  But unlike most jurisdictions, which will not look beyond the four corners of an unambiguous writing, Pennsylvania law instructs that trial and appellate courts examine the totality of the insurance transaction involved to ascertain the reasonable expectations of the consumer. Under Pennsylvania law when an insurer’s agent makes a representation with regard to coverage which is inconsistent with the later delivered policy, that inconsistency creates an ambiguity in that regard notwithstanding the clarity of the policy’s provisions and may entitle the insured to rely on the agent’s representation.

When the insurer elects to issue a policy differing from what the insured requested and paid for, there is clearly a duty to advise the insured of the changes so made. The burden is not on the insured to read the policy to discover such changes, or not read it at his peril.

Courts must be cautious about allowing insurance companies to abuse their position vis-a-vis their customers. Where the insurer or its agent creates in the insured a reasonable expectation of coverage that is not supported by the terms of the policy, that expectation will prevail over the language of the policy.

Reasonable expectations cases fall into two different categories. In one, “where one applies for a specific type of coverage and the insurer unilaterally limits that coverage, resulting in a policy quite different from what the insured requested,” the insured’s expectations are reasonable and therefore govern the contract. In the other, where “the insured received precisely the coverage that he requested but failed to read the policy to discover clauses that are the usual incident of the coverage applied for,” any other expectations are simply unreasonable.

Plaintiffs’ claims fall within the first category. Plaintiffs submitted sufficient evidence to create a material issue of fact as to whether Nunn and Vaden reasonably expected that the policies would provide coverage through age 65 as long as they were disabled from performing as referees, based on Lucas’ representations. Vaden and Nunn contend they never read their policies, instead assuming that each reiterated the terms Lucas had previously described to them. When they were subsequently injured and unable to work as NBA referees, they argue that, as Lucas had allegedly promised, they should have received payments until age sixty-five.

An insured’s failure to read the policy does not defeat his reasonable expectations. Pennsylvania law recognizes that consumers view an insurance agent as one possessing expertise in a complicated subject, and it is therefore not unreasonable for consumers to rely on the representations of the expert rather than on the contents of the insurance policy itself.

The district court erred in granting summary judgment to MCIC on Plaintiffs’ reformation claims.

ZALMA OPINION

The plaintiffs in this case, who admittedly did not read their policy, were given a gift by Pennsylvania law. By claiming that they relied totally on the false representations made by Lucas when he made during his sales presentation the had no reason to, nor duty to, read the policy. Had they read the policy they would have known that the coverage was not as represented and then they would have had no case.

Although the plaintiffs only sued for reformation they could easily have amended their suit to seek damages for fraud, misrepresentation, and concealment. Lucas admitted he lied when he made his presentation and the plaintiffs claimed they relied totally on his representations.

If they can prove their allegations the policy will be reformed and they will recover the benefits promised. If they amend their complaint, now that it has a new life, they may also seek damages in excess of the benefits promised by Lucas at the sales presentation.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Application Is Not a Policy

Application With Conditions Unmet Prevent Policy From Issuance

Life insurance policies are often issued only after certain conditions, like a medical examination, are met and an underwriter decides the appropriate premium. Premiums calculated by insurance agents are often preliminary and subject to modification after the medical exam and review of the application.

In Alfa Life Insurance Corporation and Brandon Morris v. Kimberly Colza, Supreme Court of Alabama, 2014 WL 1874703 (May 9, 2014) the Alabama Supreme Court was called upon to deal with a breach of contract and bad faith judgment in favor of a beneficiary of a policy that had not been issued at the time of death of her husband.

Alfa Life Insurance Corporation (“Alfa”) and Brandon Morris, an agent for Alfa, appealed the judgment in favor Kimberly Colza, the widow of Dante Colza. The application process for an Alfa life-insurance policy consists of three parts: the applicant’s completion of an application agreement, the applicant’s answering various health questions before a medical examiner, and the medical examiner’s report. At the close of the meeting, Morris provided Dante and Kimberly with a hard-copy document entitled “Applicant’s Copy of Notices – Authorization – Agreement – Receipt Signed Electronically” (hereinafter referred to as “the application agreement”). The application provided that “Any policy issued as a result of this Application shall constitute a single and entire contract of insurance. … Only the President, a Vice President, the Secretary or Actuary of the Company may waive or vary a contract provision or any of the Company’s rights or requirements and such waiver must be in writing. Only the Company’s Underwriters have any authority to accept or approve the insurance applied [for] or to pass upon insurability.”

At the close of the meeting, Kimberly wrote a check payable to Alfa for $103.70, the monthly Preferred Tobacco premium rate. Kimberly testified at trial that Morris informed them that Dante would be covered as soon as they gave Morris the check.

Dante was examined by the medical examiner on October 15, 2010. During the examination, Dante informed the medical examiner that his family had a history of heart disease and that he had had moving traffic violations within the past five years. On October 16, 2013, the day after he had his medical examination, Dante was killed in an accident. Two days later, Alfa received the medical examiner’s report, which indicated that Dante’s family had a history of heart disease, that Dante’s cholesterol was above 255, and that Dante had had moving traffic violations in the past five years.

In light of Dante’s high cholesterol level and his family history of heart disease, the Alfa underwriters determined that Dante was not eligible for the Preferred Tobacco rate for which he had applied; rather, the proper classification for Dante would have been the Standard Tobacco rate, which had a higher premium. Additionally, in light of Dante’s moving-vehicle violations, Dante was a greater risk to insure and a “rate-up” of $2.50 per $1,000 worth of coverage was required. The testimony at trial indicated that the new rate for the Standard Tobacco premium and the rate-up would have resulted in a monthly premium of $182.55 per month.

On October 25, 2010, Alfa notified Kimberly by letter that no life-insurance coverage was available for Dante’s death “because no policy was issued and the conditions of coverage under the conditional receipt were not met.”

Kimberly successfully sued Alfa and Morris.  After a trial, the jury found that Alfa had breached the contract and had in bad faith refused to pay the insurance benefits due pursuant to that contract and that Morris had negligently failed to procure insurance for Dante. The trial court entered a judgment in the amount of $440,674.94 against Alfa and in the amount of $100,000 against Morris. Alfa and Morris submitted motions for judgments as a matter of law at the close of the evidence and after the entry of the judgment. The trial court denied the motions. Alfa and Morris appealed.

ANALYSIS

The Bad Faith Claim

When reviewing a ruling on a motion for a JML [judgment as a matter of law], the Alabama Supreme Court looks to the ultimate question whether the nonmovant has presented sufficient evidence to allow the case to be submitted to the jury for a factual resolution.

Alfa contended that the trial court erred in denying its motions for a judgment as a matter of law because, it says, there was no written or oral contract between Alfa and Dante that obligated Alfa to pay life-insurance benefits to Kimberly. Specifically, Alfa maintains that because the conditions of the application agreement and the conditional receipt were not satisfied, a contract did not exist between Alfa and Dante obligating Alfa to pay Kimberly life-insurance proceeds when Dante died.

Alfa did not receive the report of Dante’s medical examination until two days after he died; thus, review of his application had not been completed at the time of his death, and the life-insurance policy for which he had applied had not been issued. The agreements provided to Dante and Kimberly stated that no insurance will become effective before the delivery and acceptance of a policy of insurance unless and until each and every one of the conditions are fulfilled exactly. The evidence indicated that Dante did not fulfill the conditions.

The evidence established that, because of Dante’s driving history and other factors, the Alfa underwriters determined that Dante was not insurable for the amount applied for without any modification as to the rate of premium. Dante’s failure to satisfy the conditions set forth in the plain, unambiguous language of the application and conditional receipt precluded coverage.

The application agreement clearly establishes that Morris, an agent for Alfa, did not have apparent authority to immediately bind Alfa. Because the record unequivocally establishes that Dante had not satisfied the terms and conditions set forth in the conditional receipt no contract existed requiring Alfa to pay insurance proceeds to Kimberly upon Dante’s death, Alfa was entitled to a judgment as a matter of law on this claim.

Moreover, because there was no written or oral contract between Alfa and Dante, Alfa is entitled to a judgment as a matter of law on Kimberly’s bad-faith-failure-to-pay claim. Proof of the existence of an insurance contract between the parties is a threshold requirement in a bad faith claim.

The Negligent Procurement Claim

The gravamen of Kimberly’s negligent-procurement claim is that Morris undertook a duty to procure immediate life-insurance coverage for Dante, that he breached that duty, and that his breach caused the resulting injury, that is, a lack of any life-insurance proceeds for Kimberly following Dante’s death before the completed policy could be issued. The agent contended that contributory negligence, as a matter of law, prevented her from proving a case.

The documents in this case clearly apprised the Colzas that Dante was not guaranteed immediate coverage upon submitting his application for life insurance to Morris. By not reading the documents, they took a risk and put themselves in danger’s way. The Supreme Court found it reasonable to conclude as a matter of law that, in this day and age, any adult of sound mind capable of executing a contract necessarily has a conscious appreciation of the risk associated with ignoring documents containing essential terms and conditions related to the transaction that is the subject of the contract. The Supreme Court held, therefore, that because the Colzas put themselves in danger’s way and had a conscious appreciation of the danger of suffering a monetary loss, in the event Dante died before the conditions for immediate coverage were met, any negligent-procurement claim is barred by the doctrine of contributory negligence.

Although an insured does not have an absolute duty to read their policy their failure to do so may amount to contributory negligence. Alfa and Morris were entitled to a judgment as a matter of law on those claims, and the trial court erred by submitting the claims to the jury for consideration.

ZALMA OPINION

Bad faith cases are often controlled by emotions. The jury, faced with a widow who paid a premium for what she believed to be a life insurance policy on her husband, was refused coverage and left without the benefit when her husband died. Facts like that faced by Kimberly cry out to a jury of laymen for a judgment in her favor.

Appellate courts, like the Alabama Supreme Court, must review the legal issues raised by the appeal without emotion. It saw the clear and unambiguous facts and concluded that there was no policy and that Dante and Kimberly were negligent for not reading the application and had no reason to believe the policy was immediately effective.

Of course, if a policy had been issued, Alpha could have rescinded since Dante lied on the application about his health condition and driving record.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Zalma’s Insurance Fraud Letter, May 15, 2014

Lawyers Pay To Stop Representing Fraud

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

The current issue of ZIFL reports on:

1.    Chevron & Ecuador Suit Settlement.
2.    New E-Books From Barry Zalma.
3.    TDI Announces Top 10 Insurance Fraud Cases of 2013.
4.    New Webinar, “Cmpliance With The Insurers’ Requirement to Investigate and Defeat Fraud.”

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

Zalma on Insurance

•    Just for Fun, The Robin Hood Syndrome
•    To Arbitrate or Not Arbitrate – That is the Question
•    WC Insurer’s Attempt to Avoid Benefits Fails
•    Family Exclusion Rules May
•    The Importance of Proof of Mailing
•    Insurance Fraud Scheme Charged as Conspiracy
•    Who’s on First?
•    HAPPY LAW DAY
•    Expert Must Explain Conclusions
•    Extortion to Get Insurance Commissions
•    Leaking Corpse Not Named Peril
•    Don’t Let a Viable Defendant Walk Free
•    Employment Practices & Exclusions
•    Rape Not Insurable Conduct
•    “Corrosion” Exclusion is Unambiguous
•    Don’t Be In a Hurry to Sue
•    Buyers Remorse
•    Arising Out of Use Required
•    Catch-22 & Trucking

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

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

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

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

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Just for Fun

The Robin Hood Syndrome

The story that follows is based on fact. 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

No one could be more popular than a person who steals from the rich to give to the poor. Since the Robin Hood legend was first told in Medieval England, the noble thief is the most popular fantasy.

The public perceives insurers to be rich. Insurers build the towers downtown. Insurers are perceived to take premiums from poor policyholders and never pay claims. When someone steals from an insurer the public cheers. They want to believe the thief is like the noble Robin Hood stealing from the rich to give to the poor. Their dislike for the insurer who refused to pay for the damage to their house when an earthquake struck clouds their judgment.

An insurance criminal is as much a thief as the person who uses a gun to take cash
out of the convenience store s register. The insurance industry, and every person
involved in it, must convince the public that Robin Hood is dead. The insurance
criminal does not steal from rich, impersonal insurance companies. The insurance
criminal steals from every person who buys insurance. Until the word gets out, the
public will continue to make the fortunes of criminals. It is inevitable that the person
we will call Robin Hood will continue to succeed. Crime against insurers pays well.

Robin was an affluent manufacturer of children s clothing. He lived in Beverly Hills in a modest two million-dollar home without a mortgage. His line was popular. His personal income was never less than six figures and in many years exceeded seven. He was popular. He hosted a regular poker game at his house that was attended by his wealthy neighbors. They always played nickel-dime poker and no one ever lost much money. They gathered for company and conversation.

One of the poker players was a lawyer who represented major corporations including insurance companies. During the poker game the lawyer could not relax. He seemed furious and whether he won or lost would slam his cards down on the table. Finally, one of the other players asked what was bothering him.

The jury system is totally out of control Coming from a lawyer they knew always tried cases before juries the statement was a shocking surprise. The players pressed the lawyer for more information. He said: “Yesterday, a jury in Compton came in with a $30,000,000 verdict against one of  my clients, Pay Fast Insurance. They asked me to see if the judgment can be set  aside on appeal. I think it can, at least partially. Its ridiculous. The insured  committed fraud. He had a legitimate burglary but he made claim for the theft of
more items that could possibly fit in his house. The jury even agreed, they found  that the claim he made was for twice what he lost. They still gave him punitivedamages. The jury thought the insurance company gave the insured a hard time. It s disgusting. They just want to punish all insurance companies even if they were right in rejecting the claim.”

I’m sure I can get the Court of Appeal to reduce the punitive damages since they re so out of proportion with the actual loss. I might even get them to reverse the judgment. It doesn’t matter. Pay Fast is so scared now they are paying any claim presented to them. They now pay the claims they know are fraudulent.

The poker players commiserated with the lawyer and the game went on without further discussion. Robin remembered the conversation. This was a lottery he would like to enter. The odds were much better than that given by the State and he had inside information.

The next morning he called his insurance broker and told him to move his insurance
from Fire Fighters Insurance to Pay Fast. He also doubled the limits of liability on
contents because he had purchased some new antique furniture and art works. He
did not, however, want the personal articles floater since he knew that would require
an appraisal and an itemized schedule of the items. He then started collecting
information on antiques and art with pages out of the Sotheby and Christie s auction
catalogues. When he gathered enough information, he instructed his secretary to
prepare a list of items with the descriptions and prices taken directly out of the
Sotheby and Christie s catalogues. All the items listed were generic such as a
Windsor chair or a Queen Anne desk. Paintings were never attributed to famous
artists but rather to schools such as the Venetian School circa 1500. Nothing was
specific. By the time his secretary finished the list totaled two million dollars. The
amount was $100,000 less than the limits of liability stated on his new homeowners
policy with Pay Fast Insurance Company.

Robin sent his wife and children for a week s holiday at their condominium in
Maui. He told them that he had a business meeting but would join them in a few
days. His house was protected by a silent central station reporting alarm system. The
alarm system, however, was only equipped with contacts on the doors and windows
and a single motion detector that looked down the central hallway. He moved a
grandfather clock directly in front of the motion detector making it ineffective.

In his backyard was a brick planter with a loose brick that he meant to have fixed
months before. Early one afternoon Robin took the loose brick and carefully broke
six window panes in the French door leading into the family room from the patio.
All of the glass fell into the house. He climbed through the hole and ground the
broken glass into his carpet. He went upstairs to the bedroom where his wife usually
keeps her jewelry and opened each of the drawers dropping the clothes stored there
on the floor. His personal office in the house had filing cabinets and he opened each
cabinet and removed papers. He picked up the small fire safe and put it in the trunk of his Lexus. He then locked up his house and set the alarm knowing that the broken
glass would have no effect. Robin drove to his office, installed the fire safe under
his desk and worked until his normal quitting time. Since his wife was not home and
there were no servants in the house he went to his club for dinner. He had dinner
with a friend who was also temporarily a bachelor and arrived at his home about
10:00 p.m. punched the code calmly into his alarm keypad disarming his alarm and
immediately dialed 911.

The Beverly Hills Police Department responded promptly and took a report of what appeared to be a burglary at Robin s residence. He told the police that at the recommendation of his insurance agent he had prepared an inventory of all his household goods. He promised to provide them a copy of the list the next day. He informed the officer that it appeared that all of his antiques and fine arts had been stolen. The thieves left his normal household furniture, furnishings, television sets and stereo equipment. They obviously knew what they wanted and took only what they wanted. He reported that his wife had taken all her jewelry with her to Maui. He told them that the jewelry was not stolen. The fire safe he used to hold his important records, including all of his purchase records, was taken. Apparently the thieves thought there was something of value in the safe.

Pay Fast assigned one of its more senior adjusters to investigate the claim. He
received from Robin the list of household goods whose total value was more than
three million dollars. Of that list Robin had checked off the items of antiques and
arts that never existed. He informed the adjuster that the items checked where the
only items stolen. He also informed the adjuster that he intended to sue his alarm
company. He was upset that they had not warned him about moving things in front
of the motion detector. He believed that, but for their negligence, the burglary would
not have succeeded. The adjuster reviewed the alarm company contract with Robin.
He explained to Robin that the maximum damages Robin could recover was
$250.00 because the contract had a liquidated damages clause. The adjuster told him
that insurance companies have attempted to break this liquidated damages clause
many times without success.

The adjuster asked for substantiation of the ownership of the items. Robin told the
adjuster that most of the items were bought from private parties at estate sales. He
kept all of his receipts and records in the safe that was stolen. He had no backup
except the inventory his insurance agent had told him to make at the time he bought
his policy from Pay Fast. Robin told the adjuster he was ready to sign a sworn
statement that he owned all of the items on the inventory that they were stolen. He
reminded the adjuster that his loss totaled almost two million dollars.

The adjuster was suspicious. The burglary was too neat. Too much was taken out
of the small hole in the patio door. Robin was cool and calm and did not even seem upset that his privacy had been violated. The total lack of records was a major indicator of a potential fraud. The family taking a vacation on Maui while the husband and father remained home was another indicator of fraud. The disabling of the infrared detectors that were part of the alarm system by Robin, supposedly without his knowledge, made the adjuster extremely suspicious.

The adjuster took the list of antiques and fine art to well-known appraisers all of
whom verified that if the descriptions were accurate the values stated were accurate.
If anything, the values stated were low auction prices rather than a normal
replacement value appraisals   for insurance purposes. The adjuster wanted to
compel the insured to testify under oath. He believed that a skilled lawyer will
destroy the insured s story and establish the fraud. He presented his opinions to his
claims manager. The claims manager was the same manager who made the decision
to deny the fraudulent claim that resulted in the thirty million dollar verdict Robin
learned about at the poker game. He knew, from the adjuster s report and the
recorded statement that the adjuster had taken from Robin there were at least three
major indicators of a fraudulent claim. He knew that under the law Pay Fast had the
right to compel the insured to appear for examination under oath. He was convinced
the insured could not prove such a large loss. Photographs the adjuster had taken of
the house showed no empty spaces. There were no shadows on the walls where
paintings supposedly hung. There were no marks on the floor where furniture had
supposedly sat before it was stolen.

The adjuster knew that Robin was a successful businessman. Robin made it clear
he knew on a first name basis the mayor of Beverly Hills and played poker with a
lawyer who often represented Pay Fast. He congratulated the adjuster on the
thoroughness of his investigation. He informed the adjuster that the request for
examination under oath would be proper but he could not recommend it unless
compelled to do so by the home office. The claims manager informed the adjuster
that he could not place Pay Fast Insurance Company in a position where it might
find itself paying another thirty million dollars punitive damages judgment. The
claims manager passed the adjuster s report to his the Pay Fast home office with a
recommendation that a proof of loss be issued and delivered to Robin for
$1,950,000 and also recommended that Pay Fast pay the insured.

The Home Office, still tender about the punitive damages judgment and recognizing that eighty percent of the payment would be paid by their reinsurers, agreed with the claims manager. A proof of loss was issued and a check for $1,950,000 was placed in Robin s hand the day he returned from his holiday on Maui.

When the adjuster delivered the check he was surprised to see that Robin was
disappointed. He asked Why? Robin replied: My neighbor told me about the thirty
million dollar verdicts. I was hoping you would deny my claim so I could sue you for bad faith. I don t need the money. I didn’t even like the antiques.

Robin succeeded in insurance fraud. His plan, however, failed. If Pay Fast had
exercised its rights under the policy, they would have denied the claim. He would
have sued. There was a good chance that he could convince a jury that he was the
original Robin Hood, the jury would give him his two million dollars plus multi
millions in punitive damages to punish Pay Fast Insurance Company for its refusal
to pay his obviously fraudulent claim. He didn t win the big lottery but he won a
small one. Robin robbed the rich insurer and all of its investors and enriched
himself further.

Although disappointed, Robin took the settlement check and bought a four thousand square foot weekend house on a golf course in Palm Springs. He found insurance fraud much easier than working.

In about three or four years, after he no longer has to report the loss on an insurance application, some unsuspecting insurer will find itself in the same position as Pay Fast. Robin will make another fraudulent claim and hope, this time, that the insurer will reject it so that he will hit the big jackpot of punitive damages.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This story was one chapter of my e-book, “Heads I Win, Tails You Lose,” available at http://www.zalma.com/zalmabooks.htm.

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

 

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Sorry

I’m in Washington DC to testify in an arbitration so I haven’t been able to post to the blog.

I’ll be back with summaries soon.

BZ

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To Arbitrate or Not Arbitrate – That is the Question

Fraud Is Not A Claim

No fault insurance plans like those in the state of New York and Florida, have become magnets for fraud perpetrators. By requiring payment of medical treatment claims within 30 days the insurer has little time to conduct a thorough investigation and avoid a potentially fraudulent claim. No fault insurance claims have become cash cows for less than honorable health care providers. Insurers are beginning to fight back by filing fraud and Racketeer Influenced and Corrupt Organizations Act (RICO) claims against the providers they believe have defrauded the insurers.

In one such case, Allstate Insurance Company v. M. D. David Mun and Nara Rehab Medical, P.C., May 06, 2014 — F.3d —- 2014 WL 1776007 , Docket No. 13-1424-cv (Second Circuit, May 6, 2014), the health care providers attempted to force Allstate into arbitration to avoid the damages allowed by fraud and RICO actions.

BACKGROUND

Allstate Insurance Company seeks recovery of payments to Dr. David Mun and Nara Rehab Medical, P.C. (collectively, “Defendants”) on the ground that they engaged in insurance fraud. The United States District Court for the Eastern District of New York denied Defendants’ motion to compel arbitration. On appeal, Defendants argued that the New York Insurance Law and the contract provision required by that law grant them the right to arbitrate Allstate’s claims.

New York’s no-fault insurance regime requires that an insurer pay up to $50,000 to cover necessary health expenses for each “covered person” under a “policy of liability insurance issued on a motor vehicle.”  Covered persons may assign their no-fault benefit rights to qualified health care providers, who then seek payment directly from the insurer.

Defendants billed Allstate about $500,000 for “Electrodiagnostic Testing” purportedly performed on covered persons between October 2007 and October 2011. Because Allstate is generally required to process each no-fault claim within 30 days of submission, or then be barred from asserting defenses in any subsequent suit or arbitration, Allstate relied on Defendants’ documentation and reimbursed the claims promptly.

In August 2012, Allstate filed suit against Defendants, alleging that they had fraudulently billed Allstate for testing that was fabricated or of no diagnostic value, and seeking recovery under theories of common law fraud and unjust enrichment, and under the  RICO statute.

Defendants moved to compel Allstate to arbitrate pursuant to the Federal Arbitration Act, the New York Insurance Law and the arbitration provision included in Allstate policies.

DISCUSSION

Section 5106 of the New York Insurance Law provides, in relevant part: “(a) Payments of first party benefits and additional first party benefits shall be made as the loss is incurred. Such benefits are overdue if not paid within thirty days after the claimant supplies proof of the fact and amount of loss sustained. . . .(b) Every insurer shall provide a claimant with the option of submitting any dispute involving the insurer’s liability to pay first party benefits, or additional first party benefits, the amount thereof or any other matter which may arise pursuant to subsection (a) of this section to arbitration pursuant to simplified procedures to be promulgated or approved by the superintendent. Such simplified procedures shall include an expedited eligibility hearing option, when required, to designate the insurer for first party benefits . . . .”

A regulation implementing § 5106(b) requires that a “policy of liability insurance issued” on a motor vehicle include the following provision: “Arbitration. In the event any person making a claim for first-party benefits and the Company do not agree regarding any matter relating to the claim, such person shall have the option of submitting such disagreement to arbitration pursuant to procedures promulgated or approved by the Superintendent of Financial Services.”

A court may not, however, when assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. The arbitration provision in the Allstate policies appears quite broad. It contemplates arbitration if the claimant and insurance company “do not agree regarding any matter relating to the claim.” But it is not as broad as it may seem.

An arbitrable dispute is one between the insurance company and a person making a claim for first-party benefits. The health care provider defendants are no longer “making a claim.” They made a claim; they made many claims. Those claims were promptly paid by Allstate. Allstate’s fraud suit therefore does not raise a dispute between it and a person “making a claim for first-party benefits.” The Second Circuit concluded, therefore, that the arbitration provision does not apply.

Because the Allstate policies are construed to conform to § 5106(b), the court was also required to decide whether arbitration under these circumstances is required by statute. Like the policy wording, § 5106(b) appears broad. It provides a right to arbitrate any dispute involving the insurer’s liability to pay first party benefits.

However, the statute only provides such an arbitration right only to a “claimant” embroiled in a “dispute involving the insurer’s liability to pay first party benefits.”  “Claimant” is not defined in the statute but necessarily references a person who claims something – in this case, first party benefits.

Defendants were “claimants” for “first party benefits” when they submitted their claims. If Allstate had disputed those claims without paying them promptly, disputes contemplated by the statute would have arisen. But Allstate paid Defendants’ claims in full. Now, years later, when Allstate seeks recovery for losses caused by Defendants’ alleged fraud, Defendants are no longer “claimants” asserting a right to first party benefits, and there is no “dispute involving the insurer’s liability to pay first party benefits.” This dispute involves the medical provider’s liability to the insurer, under a fraud theory, for what the provider already recovered in the claims process.

Section 5106 creates a no-fault “[f]air claims settlement” procedure. Subsection (a) defines when insurance companies must pay claims; subsection (b) makes arbitration available for disputes stemming from those claims. They work together to create a simple, efficient system that provides prompt compensation to accident victims without regard to fault, and in that way id intended to reduce costs for both courts and insureds. The primary aims of the no-fault system were to ensure prompt compensation for losses incurred by accident victims without regard to fault or negligence, to reduce the burden on the courts and to provide substantial premium savings to New York motorists. New York’s arbitration process for no-fault coverage is an expedited, simplified affair meant to work as quickly and efficiently as possible. Complex fraud and RICO claims, maturing years after the initial claimants were fully reimbursed, will never fit into the no fault system.

Allowing the providers to elect arbitration in these actions would also undercut anti-fraud measures that the New York legislature encouraged. The state requires insurers to file plans for the detection, investigation and prevention of fraudulent insurance activities. § 5106 allows insurers to actively combat fraud without impairing the system of prompt insurer reimbursement.

The weight of New York authority holds that the 30-day process in § 5106(a) does not constrain later insurer actions seeking recovery for fraud. New York courts hold that insurer fraud suits may be pressed long after the 30-day period for processing claims. And as § 5106(b) provides, the right to demand arbitration exists only during and within that process. It follows that Defendants have no right to elect arbitration of Allstate’s fraud claims under § 5106.

ZALMA OPINION

Insurance fraud is a very profitable criminal enterprise taking as much as $300 billion every year from the insurance industry and the insurance buying public. New York, and other states, require insurers to actively work to defeat fraud. The suit filed by Allstate against the health care providers in this case was filed to fulfill the obligation imposed on it by New York law to reduce the effect of insurance fraud.

The health care providers, hoping to get a friendly forum, tried to force the case to arbitration. The Second Circuit refused because the claims had already been paid and the suit brought by Allstate was for fraud and RICO not a dispute over a claim. If Allstate can prove its allegations the health care providers will be punished with a major judgment.

If the evidence establishes what Allstate alleges the state of New York should consider why it has not filed criminal charges against the health care providers. If the evidence is not there the trier of fact will send Allstate packing.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

WC Insurer’s Attempt to Avoid Benefits Fails

Workers’ Comp Insurer’s Rights to UIM Settlement Limited

In Louisiana, and many states, a workers’ compensation insurer is entitled to credit from settlements the employee may receive from a tortfeasor responsible for the employee’s injury. When the employee enters into a settlement agreement with the torfeasor he or she is required to consult with the employer or insurer for permission to enter into a settlement and may be required to give the employer/insurer a credit for the amount of the settlement or lose the right to compensation. In Advantage Personnel and Louisiana Safety Association of Timbermen v. Aaron L. Van Cleave, Court of Appeal of Louisiana First Circuit, No. 2013 CA 1618 (May 2, 2014) the employee entered into a settlement with an uninsured/underinsured motorist (UM/UIM) insurer without the permission of the employer. The employer and its insurer sought to cut off benefits or obtain a credit or offset of the amounts paid by the UIM insurer.

The workers’ compensation judge (WCJ) denied the request.

FACTS

Aaron L. Van Cleave sustained severe injuries in a head-on collision that occurred when an oncoming motorist crossed the centerline of a roadway and impacted a truck occupied by Van Cleave as a guest passenger. Van Cleave’s host driver, Allen Marchand, was killed in the accident. The adverse driver, Arthur Temple, was issued multiple citations, including operating a vehicle while intoxicated, and the investigating officer concluded that Temple’s actions were the cause of the accident.

The truck occupied by Van Cleave was insured by General Insurance Company of America pursuant to a policy of commercial automobile liability insurance. Van Cleave and Marchand’s family agreed to equally split the General Insurance UM/UIM policy limits of $1,000,000.00, and General Insurance issued Van Cleave a check in the amount of $500,000.00. Van Cleave and his wife later executed a settlement agreement that included a release of General Insurance and a release of the estate of Marchand, and his company, Marchand Machinery.

At the time of the accident, Van Cleave was in the course and scope of his employment with Advantage Personnel, who, through its workers’ compensation carrier, Louisiana Safety Association of Timbermen, began paying workers’ compensation benefits to and on behalf of Van Cleave. Advantage Personnel and Timbermen filed a “Disputed Claim for Compensation” asserting that under Louisiana statutes they were entitled to a credit against future benefits as a result of Van Cleave’s settlement or a complete forfeiture of future benefits because Van Cleave did not obtain written approval from Advantage Personnel or Timbermen before entering the settlement.

Both filed motions for summary judgment. Pursuant to written reasons for judgment, the WCJ found that Advantage Personnel and Timbermen had not met their burden of proving that Van Cleave forfeited his right to future workers’ compensation benefits or that the plaintiffs were entitled to a credit for the settlement, which the WCJ referred to as “the uninsured motorist settlement.” The court further found that the General Insurance policy clearly and unambiguously excluded Timbermen from receiving any type of direct or indirect benefit as a result of the UM settlement, and that the exclusion was not against public policy.

Advantage Personnel and Timbermen appealed.

LAW AND ANALYSIS

The statute at issue provides: “If a compromise with such third person is made by the employee or his dependents, the employer or insurer shall be liable to the employee or his dependents for any benefits under this Chapter which are in excess of the full amount paid by such third person, only after the employer or the insurer receives a dollar for dollar credit against the full amount paid in compromise, less attorney fees and costs paid by the employee in prosecution of the third party claim and only if written approval of such compromise is obtained from the employer or insurer by the employee or his dependent, at the time of or prior to such compromise.”

Under this provision, an employee is obligated to obtain written approval from the employer or compensation insurer of a compromise with a third person; and, if he fails to do so, the employee forfeits his right to future benefits. If the employee secures the required approval, he preserves his right to future benefits, but the employer and compensation insurer are entitled to a credit against the payment of future benefits in the amount of the settlement.

In the absence of a person’s “legal liability to pay damages,” an employee’s compromise with that person does not invoke the requirements or consequences of the statute.  Advantage Personnel and Timbermen argue that an allegation in the tort suit petition and the $500,000.00 settlement check are both conclusive evidence of Marchand and Marchand Machinery’s “legal liability to pay damages.” The court of appeal disagreed.

The allegation in the tort suit was not established by any evidence.  As a result, the cause of the air bag failing to deploy presented an unresolved issue of material fact.

The $500,000.00 check indicates on its face that it was issued under the “UIM” coverage, and Van Cleave attested in his affidavit that the settlement was under the UM portion of the General Insurance policy. Again, this evidence was sufficient to preclude summary judgment.

Advantage Personnel and Timbermen also contended that regardless of whether Marchand and Marchand Machinery are at fault for causing the accident, their mere release without Van Cleave first obtaining written approval is sufficient to warrant the application of the statute’s forfeiture clause. The evidence offered in connection with the motion for summary judgment does not establish as an undisputed fact that Marchand and Marchand Machinery were “third persons” legally liable to pay damages to Van Cleave. This issue of material fact precludes a summary judgment declaring that Van Cleave forfeited his right to future benefits by entering the settlement agreement and releasing Marchand and Marchand Machinery without the approval of Advantage Personnel or Timbermen.

General Insurance in its Capacity as UM Insurer

Advantage Personnel and Timbermen alternatively argued that even if the $500,000.00 payment to Van Cleave was completely under the UM coverage of the General Insurance policy, his execution of the settlement agreement releasing General Insurance triggers the application of the statute because General Insurance, as a UM insurer, is a “third person” legally liable for the compensable injury. In Louisiana a UM/UIM policy may validly exclude compensation reimbursement to a workers’ compensation insurer; and where such an exclusion exists, the compensation insurer has no cause of action for reimbursement against the employer’s UM/UIM insurer.

Contrary to the employer’s argument the court of appeal concluded that there was no rationale for requiring an employer’s approval of a settlement under the UM/UIM policy because to require approval of the settlement by an employer or compensation insurer that have no financial interest in the settlement would be serve no beneficial purpose. Penalizing the employee with a forfeiture of future benefits for failing to secure that approval that was not needed would be unconscionable.

Marchand was the driver of the insured vehicle, so any payment to his family under the policy was necessarily limited to the UM/UIM coverage. Marchand’s family had no claim to any proceeds under the liability coverage of the policy because that coverage protects Marchand (the insured driver) against claims by other parties; it does not provide first-party coverage for Marchand’s injuries. If payment was made under the liability coverages of the policy there would be no reason to share the benefits with Marchand’s family.

Based on the evidence presented, the lower court’s conclusion that the General Insurance policy contained UM/UIM coverage in the amount of $1,000,000,00 and that the UM policy limit was equally split between the Van Cleaves and the Marchand family was reasonable and not clearly wrong.

The record contains no proof of how much, if any, of the $500,000.00 payment consisted of lost wages and medical expenses, as opposed to compensation for other damages like pain, suffering, trouble and inconvenience, damages that are recoverable by the Van Cleaves only from General Insurance and its UM/UIM coverage.

The Court of Appeal concluded, therefore, that Advantage Personnel and Timbermen failed to prove to what extent, if any, General Insurance paid the parties’ solidary obligation for medical expenses and lost wages and affirmed the WCJ’s judgment.

ZALMA OPINION

The employer and its insurer was faced with a major workers’ compensation claim that would require it to pay benefits for many years and probably for Van Cleve’s lifetime. They sought to eliminate those benefits by claiming they were not consulted about the UIM settlement. Since, by the terms of the UIM policy, the employer and insurer had no right to the UIM payments their claim was not supportable.

Insurers should be careful and certain of their position before bringing such an action since, even if not subject to bad faith tort claims, the poor publicity this type of case brings can be exceedingly expensive.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This is post 1001. Thank you for following Zalma on Insurance.

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

Posted in Zalma on Insurance | Leave a comment

Family Exclusion Rules

Son Seeks Coverage For Injuries Caused to His Father

Because of a fear of collusion and fraud almost every third party liability policy contains an exclusion refusing to defend or indemnify an insured against liability owed to a family member, employee or insured. In Darrell Lee Hodges, Jr. v. SAFECO Lloyds Insurance Company, Texas Court of Appeal, No. 01-13-00691-CV (May 1, 2014) the Texas Court of Appeal was asked to consider whether the trial court property granted summary judgment in favor of an insurance company that denied coverage to a son who negligently injured his father, with whom he resided.

BACKGROUND

On August 17, 2009, Darrell Lee Hodges, Sr. was assaulted in his home. His son, Darrell Lee Hodges, Jr. ["DJ"], lived at the home with his father. DJ knew the assailants, knew they were looking for his father and that they posed a risk to his safety, but nonetheless failed to warn his father of the men’s presence outside the home and failed to call the police to have the men removed from the premises.

SAFECO had a homeowner’s condominium policy in place at the time of the offense. Mr. Hodges is the named policy holder and DJ is also covered because he lived at the condominium with his father. Mr. Hodges made a claim under the policy for insurance benefits to cover his injuries. SAFECO denied coverage, citing the “homeowner’s exclusion” in the policy, which precludes coverage for “bodily injury to [the named insured] or an insured.”

Mr. Hodges sued DJ in district court alleging that DJ’s negligence in failing to warn him about the presence of the assailants and their intentions was the proximate cause of his bodily injuries. SAFECO initially provided a defense for DJ under a reservation of rights, but subsequently had its attorney withdraw from DJ’s representation. Mr. Hodges obtained a judgment against DJ in the amount of $99,599.96. Evidence showed that Mr. Hodges needed stitches and staples to close a cut on his head caused when he was hit in the head with a beer mug by the assailants, and that he would require plastic surgery to conceal the remaining scars.

THE SUIT

DJ then sued SAFECO, alleging that it had breached the insurance contract by refusing to indemnify him for the judgment Mr. Hodges obtained against him, and that SAFECO acted in bad faith denying coverage and failing to pay his claim promptly. DJ and SAFECO filed cross-motions for summary judgment asserting their respective positions regarding the coverage provided by the policy. The trial court granted SAFECO’s motion and denied DJ’s.

PROPRIETY OF SUMMARY JUDGMENT

To decide whether issues of material fact preclude summary judgment, evidence favorable to the non-moving party must be taken as true, every reasonable inference must be indulged in its favor, and any doubts resolved in its favor. A matter is conclusively established if reasonable people could not differ as to the conclusion to be drawn from the evidence.

Insurance policies are controlled by rules of interpretation and construction applicable to contracts generally. The primary concern of a court in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument.  Terms in contracts are given their plain, ordinary, and generally accepted meaning unless the contract itself shows that particular definitions are used to replace that meaning. If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. If an insurance policy is ambiguous, however, it will be interpreted in favor of the insured.

Relevant Contractual Provisions

The definition of “You”

The policy lists Darrell Hodges [Senior] as the named insured and states that the terms “‘you’ and ‘your’ refer to the ‘named insured’ shown on the declarations and the spouse if a resident of the same household.”

The definition of “Insured”

Under section 4a of the policy’s definitions, the term “‘Insured’ means you and residents of your household who are your relatives.”

The “household” exclusion

The exclusions section of the policy provides that “Coverage C (Personal Liability) does not apply to bodily injury to you or an insured within the meaning of part a, or part b, of insured as defined.”

The “severability” clause

The severability of insurance clause provides that “[t]his insurance applies separately to each insured. This condition will not increase our limit of liability for any one occurrence.”

ANALYSIS

DJ argued that because the claims are for his father’s bodily injuries and not his own, he should be covered by the policy.

SAFECO admits that DJ is an insured under the policy, and that, pursuant to the severability clause, the contract’s coverage must be evaluated through his eyes. SAFECO contended that no matter whose standpoint the court considers in interpreting the policy, it unambiguously excludes coverage for bodily injuries suffered by “you,” which is contractually defined as Mr. Hodges.

If the exclusion clause uses the term “any insured” or “an insured” as does the SAFECO policy, then application of the separation of insureds clause has no effect on the exclusion clause; a claim made against any insured is excluded. To hold that the term “any insured” or “an insured” in an exclusion clause means “the insured making the claim” would collapse the distinction between the terms “the insured” and “any insured” or “an insured” in an insurance policy exclusion clause, making the distinction meaningless. It would also alter the plain language of the clause, frustrating the reasonable expectations of the parties when contracting for insurance. An appellate court should never adopt an unreasonable construction of an insurance contract.

The effect of the separation of insureds clause on a particular exclusion in an insurance contract depends on the terms of that exclusion. The majority of cases addressing the issue have held that severability clauses affect interpretation of policy exclusions using the term “the insured” (by modifying that term to mean “the insured claiming coverage”), but have no effect on the interpretation of exclusions using the term “an insured” or “any insured.”

The language of the policy does not limit the exclusion of personal injury coverage to simply the person making the claim, but also excludes bodily injury coverage to the named insured and all his relatives residing in his home with him.

In addition the court of appeal found that DJ’s argument completely overlooked the fact that the policy excludes coverage for bodily injury to “you,” and that “you” is contractually defined as Mr. Hodges.

The policy excludes coverage for “you,” contractually defined as Mr. Hodges. Nothing in the policy indicates that “you” is to be interpreted in any other way. The severability clause cannot alter this clearly defined provision in the exclusion, even when viewed from DJ’s standpoint.

ZALMA OPINION

This case teaches the wisdom of a “household exclusion.”  DJ did not beat his father. DJ negligently failed to warn his father of the existence of assailants he knew wanted to injure his father. He admitted his negligence and his father obtained a judgment against his son who, living with his father, probably had no assets to pay the judgment except the possibility that the homeowners policy would pay to defend or indemnify him.

The exclusion was clear and unambiguous. The named insured was injured and injury to the named insured was clearly excluded because the father was the “you” who incurred bodily injury.

I don’t know, and I have no way of knowing, whether DJ and his father colluded to obtain a judgment against DJ so that they could recover from an insurer. I know that I, as a father, even if my son caused me injury by his negligence there is no way I would sue him and expect to recover from him. When DJ grows and leaves his father’s home to earn a living I doubt, although I can’t be sure, that his father will do nothing to collect the judgment from him.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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The Importance of Proof of Mailing

If Premium Not Paid Policy Cancelled

Insurance is, by definition, a contract whereby the insurer, for consideration, agrees to defend or indemnify another against a contingent or unknown risk. For an insurance policy to exist, therefore, the person insured must pay the premium (the consideration) charged by the insurer. States, like Florida, to protect the consumer have enacted laws that require insurers to give adequate notice to the insured before cancelling or non-renewing a policy of insurance.

In Luis Alfredo Rodriguez, etc. vs. Security National Insurance Co., Inc., 2014 WL 1696186 (April 30, 2014) the Florida Court of Appeal dealt with a claim denied because a policy lapsed before the accident. The trial court granted summary judgment to the insurer.

FACTS

Luis Alfredo Rodriguez, individually and as personal representative of the Estate of Alfred Rodriguez, and as assignee of Eduardo Olivera, appeals a final summary judgment entered in favor of Security National Insurance Company (“SNIC”).

On January 31, 2009, Alfred Rodriguez (“Alfred”) was killed while riding his motorcycle when he was struck by a vehicle owned by Eduardo Olivera.  Alfred’s father, Luis Rodriguez (“Rodriguez”) was appointed personal representative of his son’s estate, and sued Olivera for wrongful death. Olivera entered into a Coblentz v. Am. Surety Co. of New York, 416 F. 2d 1059 (5th Cir. 1969)  agreement with Rodriguez and agreed to a consent judgment of $2.5 million, in exchange for assigning his rights to a claim against his insurance company, SNIC. SNIC refused coverage for the accident because Olivera’s policy expired on December 6, 2008, almost two months before the accident.

Rodriguez amended the complaint to add SNIC as a party, and added claims against SNIC for breach of contract, enforcement of judgment and bad faith in denying coverage to Olivera. Rodriguez alleged SNIC was required to place Olivera on notice that his policy was about to expire, and that SNIC failed to do so. Therefore, Rodriguez alleged, the policy was in full force and effect on the date of the accident, and SNIC breached the insurance contract and acted in bad faith in denying coverage.

In response, SNIC asserted it did mail expiration notices to Olivera twice before his policy expired, and also that it mailed him a notice of expiration after the policy expired. The notices had all been sent to the address listed on Olivera’s insurance application and on the policy declarations sheet-5005 Collins Avenue, Miami Beach, Florida 33140. However, according to Olivera, the address was missing his apartment number, and therefore, Rodriguez asserted, Olivera did not receive any of the notices mailed by SNIC.

On November 2, 2008, more than a month before the last day of the policy period (December 6, 2008), SNIC sent a renewal offer to Olivera at 5005 Collins Avenue, Miami Beach, Florida, 33140-the very address listed on Olivera’s policy. It sent a “renewal reminder” to Olivera on November 24, 2008, to the same address. Ten days after the policy lapsed, SNIC sent Olivera a notice of policy expiration, once again to the same address.

SNIC also filed a counterclaim for declaratory judgment, seeking a determination that no coverage existed under Olivera’s policy on the date of the accident. After a hearing, the trial court granted SNIC’s motion for summary judgment, finding the policy had lapsed prior to the accident, and therefore, there was no coverage and SNIC did not act in bad faith in handling the claim and had no duty to pay the consent judgment, attorney’s fees or costs.

ANALYSIS

Rodriguez claims SNIC was required to provide notice to Olivera, prior to the policy lapse date, that a premium was due. A Florida statute provides: “No insurer shall fail to renew a policy unless it mails or delivers to the first-named insured, at the address shown in the policy, and to the first-named insured’s insurance agent at her or his business address, at least 45 days’ advance notice of its intention not to renew; and the reasons for refusal to renew must accompany such notice.”  The subsection does not apply to cases of nonpayment of premium.

Rodriguez argued that the failure to provide notice of payment due negates the nonpayment of premium exception for the notice requirement.

The Court of Appeal reasoned that even if SNIC was statutorily required to provide reasonable notice of payment due in advance of the due date, the undisputed facts established that SNIC did in fact send notice to Olivera prior to the policy lapse date, advising that a renewal premium was due in order to maintain his policy in force.

Florida Statutes also provide, reasonably, that: “United States proof of mailing or certified or registered mailing of notice of cancellation, of intention not to renew, or of reasons for cancellation, or of the intention of the insurer to issue a policy by an insurer under the same ownership or management, to the first-named insured at the address shown in the policy shall be sufficient proof of service.”

Rodriguez does not dispute that SNIC established proof of mailing of these notices to the address listed in the policy; he claims, however, that the notice was defective because the address did not contain Olivera’s apartment number. However, Olivera did not include any apartment number in his insurance application. No apartment number appears on his policy declarations page. SNIC, therefore had no way to know that Olivera lived in an apartment.

SNIC, therefore, provided sufficient proof of notice by mailing the renewal offers and notice of policy lapse to the address provided by Olivera in his application, which was the very same address contained in the policy and on the declarations page. The law is clear that an insurer’s proof of mailing of a notice of cancellation to the insured prevails as a matter of law over the insured’s denial as to its receipt.

ZALMA OPINION

The plaintiff, apparently convinced that Olivera had no assets to collect a $2.5 million judgment, agreed to take a chance on convincing a court that his insurance company should pay the full judgment for wrongfully refusing to defend and indemnify Olivera. For $2.5 million it was probably worth the attempt as weak as it was.

What this teaches insurance companies is to comply with each state law that requires appropriate notice of cancellation, non-renewal, and lapse of insurance policies; keep proof of mailing of each notice; and be ready to provide that proof to a court. Failure to keep the appropriate records can cause an insurer to pay a claim on a policy for which no premium was paid and that it believed did not exist.

Insureds who live in apartments, and their agents and brokers, should be careful to give the insurer a complete address, including apartment numbers to make sure they receive all of the notices and communications from the insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Insurance Fraud Scheme Charged as Conspiracy

Cop Guilty Of Extortion In Auto Fraud 

Insurance fraud is not a charge prosecutors like. Although it is an easy crime to prove since all it requires is a single document used with an intent to defraud an insurer, prosecutors prefer to deal with more complex issues and criminal charges. An example of how simple insurance fraud charges were made complicated started in actions of polices officers working in Baltimore, Maryland.

In 2012, a jury found defendant Samuel Ocasio, a former officer of the Baltimore Police Department (the “BPD”), guilty of four offenses relating to his involvement in a kickback scheme to funnel wrecked automobiles to a Baltimore auto repair shop in exchange for monetary payments. Ocasio was convicted on three Hobbs Act extortion counts plus a charge of conspiracy to commit such extortion. On appeal, Ocasio maintained that his conspiracy conviction is fatally flawed and must be vacated. He also challenged a portion of the sentencing court’s award of restitution.

Ocasio and ten codefendants were indicted in the District of Maryland in connection with the kickback scheme involving payments to BPD officers in exchange for referrals to a Baltimore business called Majestic Auto Repair Shop LLC (the “Majestic Repair Shop,” or simply “Majestic”). Nine of the defendants were BPD.  The grand jury returned a seven-count superseding indictment charging only two defendants, Ocasio and another BPD officer, Kelvin Quade Manrich, who had not been named in the initial indictment. Thereafter, the conspiracy offense in the first indictment was dismissed as to each of the other defendants, in exchange for guilty pleas.

In United States of America v. Samuel Ocasio, 2014 WL 1678417, (United States Court of Appeals for the Fourth Circuit, April 29, 2014) the Fourth Circuit resolved the appeal and the question of the right to restitution.

FACTS

From in or about the Spring of 2008, and continuing through at least February 2011, [Ocasio and Manrich], and others did knowingly and unlawfully combine, conspire, confederate, and agree together, with other [BPD officers], and with Moreno and Mejia to obstruct, delay, and affect commerce and the movement of any article and commodity in commerce by extortion, that is, to unlawfully obtain under color of official right, money and other property from Moreno, Mejia, and [the Majestic Repair Shop], with their consent, not due the defendants or their official position, in violation of the Hobbs Act.

The purpose of the conspiracy was for “Moreno and Mejia to enrich over 50 BPD Officers . . . by issuing payments to the BPD Officers in exchange for the BPD Officers’ exercise of their official positions and influence to cause vehicles to be towed or otherwise delivered to Majestic for automobile services and repair.”

The prosecutions underlying this appeal were the result of an extensive investigation conducted by the BPD and the FBI. The BPD began its investigation in the summer of 2009. When federal authorities joined the investigation in late 2010, the BPD had identified approximately fifty of its officers as possibly involved in wrongdoing with the Majestic Repair Shop. In the winter of 2010, the FBI placed a wiretap on Moreno’s telephone and began surveillance at both Majestic and at Moreno’s residence. During the period from November 2010 to February 2011, the FBI recorded thousands of phone calls between Moreno and various BPD officers, including Ocasio and Manrich.

The trial evidence established a wide-ranging kickback scheme involving the Majestic Repair Shop and BPD officers. The scheme was fairly straightforward: BPD officers would refer accident victims to Majestic for body work and, in exchange for such referrals, the officers would receive monetary payments. The payments made to BPD officers by the Majestic Repair Shop for their referrals of wrecked vehicles were made by both cash and check, and ranged from $150 to $300 per vehicle. After the kickback and extortion scheme began, knowledge of it spread by word-of-mouth throughout the BPD.

Ocasio, at trial, raised the primary argument that he pursues on appeal: that he could not be convicted of conspiring with Moreno and Mejia, because they were the victims of the alleged Hobbs Act extortion conspiracy. The following day, Manrich pleaded guilty to the charges lodged against him in the superseding indictment. Ocasio, however, proceeded with the trial and called five witnesses in his defense, three of whom were character witnesses. Ocasio himself did not testify. At the conclusion of the evidentiary presentations, Ocasio renewed his judgment of acquittal motion, which was again denied.

The prosecution sought further restitution with respect to Erie Insurance, predicated on the proposition that Ocasio had defrauded GEICO, which in turn had been reimbursed by Erie (as insurer for the at-fault driver involved in the accident with Ocasio’s wife). The court entered an amended judgment, directing Ocasio to make restitution to Erie in the sum of $1,870.58. That amount represented the difference between the total reimbursement made by Erie and the amount actually attributable to the Erie-insured motorist.

ANALYSIS

The appellate court, reviewing the conviction, must sustain a guilty verdict if, viewing the evidence in the light most favorable to the prosecution, it is supported by substantial evidence. Ocasio was convicted of conspiring with BPD officers, as well as Moreno, Mejia, and others known and unknown to contravene the Hobbs Act by extorting three victims – Moreno, Mejia, and the Majestic Repair Shop. Consistent with the statutory language, the trial court instructed that, in order to convict Ocasio of the Count One conspiracy, the jury was obliged to find that the prosecution satisfied the following elements:

1.    That two or more persons entered the unlawful agreement that is charged in the indictment, starting in or about the spring of 2008, and this is the agreement to commit extortion under color of official right;

2.    That the defendant, Mr. Ocasio, knowingly and willfully became a member of that conspiracy;

3.    That one of the members of the conspiracy knowingly committed at least one of the overt acts charged in the indictment; and

4.     That the overt act, which you find to have been committed, was done to further some objective of the conspiracy.

The statutory object of the conspiracy count was to violate the Hobbs Act, which provides, in pertinent part, that “[w]hoever in any way or degree obstructs, delays, or affects commerce . . . by . . . extortion . . . in furtherance of a plan or purpose to do anything in violation of this section shall be [guilty of an offense against the United States].”

One who knowingly participates in a conspiracy to violate federal law can be held accountable for not only his actions, but also the actions of his coconspirators. Contrary to Ocasio’s argument, nothing in the Hobbs Act forecloses the possibility that the “another” can also be a coconspirator of the public official. A bribe-payor’s mere acquiescence to the scheme suffices to render a bribe-taker guilty of extortion.

Although the Fourth Circuit affirmed Ocasio’s convictions it vacated the sentencing court’s award of restitution to Erie Insurance. Ocasio maintains that Erie was not a victim of any of his offenses of conviction. At best, he contends, Erie was the victim of an uncharged insurance fraud scheme.  The controlling statute defines a “victim” as “a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered including, in the case of an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity, any person directly harmed by the defendant’s criminal conduct in the course of the scheme, conspiracy, or pattern.”

The statute authorizes restitution only for losses traceable to the offense of conviction.  Indeed, nothing in the superseding indictment or in the trial evidence suggests that an object of that conspiracy was to commit insurance fraud. Nor does the record suggest that an insurance fraud scheme was part of a pattern of criminal activity included as an element of the Count One conspiracy. Perhaps Ocasio could also have been convicted of defrauding Erie Insurance or conspiring to do so, but that did not occur. The United States Attorney and the grand jury did not see fit to charge Ocasio with an insurance fraud scheme, and it would thus be inappropriate to penalize him as though he was also convicted of that offense.

ZALMA OPINION

Clearly the conspiracy that led to officer Ocasio’s conviction was an insurance fraud scheme by Majestic, who funded the bribery of Ocasio and other police officers, so that they could overcharge accident victims and their insurers for repairs of vehicles. It was a major insurance fraud scheme that hurt GEICO, Erie and other insurers.

Exercising prosecutorial discretion the US Attorney and the Grand Jury decided to only charge violation of the Hobbs Act. If they wished to punish the officers and gain restitution for the insurers the state of Maryland could prosecute the officers for violation of their insurance fraud statute. For reasons known only to the state they did not.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Who’s on First?

“In the Business Of” Trucking

Acceptance Casualty Insurance Company (Acceptance) seeks review of a published decision of the court of appeals affirming the circuit court’s grant of summary judgment in favor of Great West Casualty Company (Great West). Both Acceptance and Great West issued liability insurance policies for a semi-tractor that was owned by John Zeverino and leased to Taylor Truck Line. Acceptance provided a non-trucking use policy and Great West provided a commercial truckers’ policy.

In Casey v. Smith, Supreme Court of Wisconsin, —  N.W.2d — 2014 WI 20 (April 18,2014)  Acceptance asserted that its policy provided no coverage because it contains two exclusions which preclude coverage. It primarily focuses on 14(b) that excludes coverage when a semi-tractor is being used “in the business of” a lessee. Acceptance contends that because the accident occurred while the semi-tractor’s driver, John Zeverino, was on his way to a maintenance facility for repairs to the grille and oil filler tube, the semi-tractor was being used in the business of Taylor Truck Line at the time of the accident.

Alternatively, it advances that 14(a) excludes coverage when a semi-tractor is “en route to” a “business purpose” and that obtaining maintenance is a business purpose. Acceptance argues that because obtaining repairs constitutes a business purpose, there is no coverage under its non-trucking use policy.

FACTS

Zeverino owned a 2003 Freightliner semi-tractor which he leased to Taylor Truck Line, Inc. Under the terms of the lease Zeverino agreed to provide a driver and use his semi-tractor exclusively for Taylor Truck Line. The lease also provided that Zeverino would “bear all expenses to the operation to the equipment, including … [r]epairs and maintenance” and “[m]aintain[ ] the equipment in a state of repair required by all applicable regulations.”

The lease further required Taylor Truck Line to obtain insurance as required by federal law and Zeverino to obtain “bobtail liability insurance” to cover the semi-tractor “when not used in performance under this agreement .”

Taylor Truck Line obtained a commercial truckers’ insurance policy from Great West. The policy provides coverage for: “[t]he owner or anyone else from whom you lease, for more than 30 consecutive days, a covered ‘auto’ with a driver that is not a ‘trailer’ while the covered ‘auto’: (1) Is being used exclusively in your business as a ‘trucker.’”

In January 2009, Zeverino took the semi-tractor to FABCO, a truck maintenance facility in Eau Claire, to have its engine control module recalibrated. While the semi-tractor was there, FABCO inadvertently damaged its grille. FABCO ordered a new one and called Zeverino when it arrived. Instead of making an appointment to replace the grille, Zeverino was to return to FABCO to have the grille replaced whenever it was convenient for him. In addition, Zeverino had previously ordered a new oil filler tube which he had intended to install himself. FABCO offered to install the new tube at the same time it replaced the grille.

The damaged grille did not put the truck out of service or prevent Zeverino from completing or accepting new loads to haul. Zeverino claimed that he needed to have the repair work done “to have [the] tractor the way [he] needed it to … operate as an owner, operator for Taylor Truck Line.”

On February 27, 2009, approximately a month after the grille was broken, Zeverino left his home in Prescott and headed to Eau Claire to have the grille replaced. Zeverino was off-duty at the time. Taylor Truck Line did not know he was going to Eau Claire that day and he was not under any order or instruction from Taylor Truck Line. Zeverino stated in his deposition that he did not consider himself to be “in the business of Taylor Truck Line at the time.” Zeverino also testified that he could have taken a load that day without service to his grille or oil filler tube.

While en route to Eau Claire, Zeverino’s tractor was involved in a multi-vehicle accident that included vehicles driven by Ronald Smith and Brian Casey. Casey filed a complaint seeking recovery for injuries he sustained in the accident. He included Zeverino, Taylor Truck Line, Acceptance, and Great West as named defendants.

SUMMARY JUDGMENT MOTIONS

Both insurance companies filed cross motions for summary judgment. Acceptance pointed to two relevant exclusions in its non-trucking policy, section 14(a) and section 14(b). It asserted that at the time of the accident the semi-tractor was being used “in the business of” Taylor Truck Line. Additionally, it argued that because the accident occurred while Zeverino was “en route” to have maintenance done on the semi-tractor, it was being used for a “business purpose” of the lessee. Acceptance contended that the exclusions precluded coverage.

The circuit court granted summary judgment in favor of Great West. It found that Zeverino was having non-essential repairs done on his own time. Accordingly, the circuit court determined that Zeverino was not involved in furthering the business of Taylor Truck Line at the time of the accident.

The court of appeals affirmed. Casey v. Smith, 2013 WI App 24, 346 Wis.2d 111, 827 N.W.2d 917.

ANALYSIS

The Supreme Court established a methodology for determining insurance coverage. First, it looks to a policy’s initial grant of coverage. Second, if there is an initial grant of coverage, the court will examine whether any exclusions withdraw coverage from a claim. Third, if an exclusion applies, the court will then consider whether there are any exceptions to the exclusion that reinstate coverage.

It is undisputed that Acceptance’s non-trucking use policy makes an initial grant of coverage for the accident. Looking at the exclusions the Supreme Court noted that “in the business of” an organization to whom an automobile is rented clearly refers to occasions when the truck is being used to further the commercial interests of the lessee. Not all repairs and maintenance to a leased semi-tractor further the commercial interest of the lessee. Repairs are in furtherance of a lessee’s commercial interests when they are necessary to allow the semi-tractor to continue to accept and complete hauls for the lessee. Repairs may also be in furtherance of a lessee’s commercial interest when they are being done to comply with the lessee’s orders or the lessor’s contractual duties.

The undisputed facts in the record establish that the repairs to the grille and oil filler tube were not required to comply with the federal regulations. The record contains the report of the state trooper who inspected the semi-tractor after the accident. Rather than marking the semi-tractor out-of-service, the trooper indicated in his inspection report that there were no violations and permitted Zeverino to continue on to Eau Claire.

When a lease includes a clause requiring the lessor to obtain bobtail coverage, it clearly contemplated a situation where the vehicle, though rented, would not be engaged “in the business” of another. Acceptance contended that since Zeverino had indicated in his Daily Trip Log that he was “driving” prior to the accident and “on duty” at the scene of the accident, meant that he was working on behalf of Taylor Truck Line while he was on his way to obtain the repairs. Federal regulations require drivers to keep daily logs of their driving status. Under federal regulations the notation of “on duty” in a log book is appropriate for “[a]ll time inspecting, servicing, or conditioning any commercial motor vehicle at any time” and “[a]ll time repairing, obtaining assistance, or remaining in attendance upon a disabled commercial motor vehicle.” [49 C.F.R. § 395.2.]

Because the repairs were not required by the lease agreement, were not done pursuant to orders by Taylor Truck Line, and were not necessary for the semi-tractor to continue its service, the Supreme Court concluded that Zeverino was not acting in furtherance of Taylor Truck Line’s commercial interest at the time of the accident.

Section 14(a) does not exclude coverage. Here, Zeverino was on his way to have the grille and oil filler tube on the semi-tractor replaced when the accident occurred. It is undisputed that the semi-tractor could still carry loads without the repairs. Thus, the repairs were not necessary to allow the semi-tractor to carry property and the exclusion in section 14(a) of Acceptance’s policy does not apply.

The Supreme Court concluded, therefore, that Acceptance’s interpretation that any operation towards repair may render its coverage illusory. Instead, the Supreme Court concluded that the exclusion refers to maintenance necessary to allow the semi-tractor to carry property. It is undisputed that the semi-tractor could and did carry loads without the repairs to the grille and oil filler tube.

ZALMA OPINION

Insurance policies must be interpreted to provide the coverage that meet the reasonable expectations of the insured and the clear and unambiguous language of the policy. Here, Acceptance, providing bobtail coverage, wanted the court to interpret its policy that it provided no coverage while the tractor was in operation for any reason. That interpretation would make the policy illusory. The Supreme Court, as did the lower courts, found that Acceptance’s policy applied since the trip was not in the business of Taylor but only in that of Zeverino.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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HAPPY LAW DAY

Crooked Police Officer Tempted to Fraud

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

The current issue of ZIFL reports on:

1.    Police Officer Jailed for Insurance Fraud.
2.    New E-Books From Barry Zalma.
3.    Met Life Pays $60 Million for Unlawful Sales.
4.    Insured Tried to Collect Loss Twice to Profit From Fire.
5.    Man Bites Dog Story – Allstate Awarded $3.8 Million Against Fraud Perpetration Chiropractor.
6.    BP’s Billions & Fraud.
7.    New Webinar, “Compliance with the Examination Under Oath Requirement of a Property Insurance Policy” presented by Instructor: Barry Zalma; Duration: 60 Minutes; Wednesday, May 7, 2014; 10:00 AM PDT | 01:00 PM EDT, Available from Online Compliance Panel at http://www.onlinecompliancepanel.com/ecommerce/webinar/~product_id=500306LIVE/~Barry_Zalma/~Compliance_with_the_Examination_Under_Oath_Requirement_of_a_Property_Insurance_Policy

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2014 as long as its readers continue in their efforts to reduce insurance fraud.

THE “ZALMA ON INSURANCE” BLOG

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

Zalma on Insurance

•    Expert Must Explain Conclusions
•    Extortion to Get Insurance Commissions
•    Leaking Corpse Not Named Peril
•    Don’t Let a Viable Defendant Walk Free
•    Employment Practices & Exclusions
•    Rape Not Insurable Conduct
•    “Corrosion” Exclusion is Unambiguous
•    Don’t Be In a Hurry to Sue
•    Buyers Remorse
•    Arising Out of Use Required
•    Catch-22 & Trucking
•    Coverage Counsel Must Protect Privileges
•    Limitation on ERISA
•    Zalma’s Insurance Fraud Letter
•    Public Interest Outweighs Private Property Interest
•    Breach of Condition – Fatal or Not
•    Suspended License Not a “Disability”
•    Insured Held to Understand Policy
•    Lawyer Destroys Plaintiff’s Case
•    Preemption of State Law Defeats Suit

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

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

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

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

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Expert Must Explain Conclusions

Conclusory Affidavit Not Evidence

An expert witness, providing an affidavit in opposition to a motion for summary judgment, must provide the same type of testimony he or she would provide if called as a witness at trial. Information known to the expert and the basis of the expert’s testimony will be ignored if it is simply conclusory.

In Edgar Ortega and Bituminous Insurance Company v.  National Oilwell Varco, L.P., Court of Appeals of Texas, No. 07-13-00140-CV (April 24, 2014) an injured worker,
Edgar Ortega and his insurer, Bituminous Insurance Company (jointly referred to as Ortega) appeal from the granting of a no evidence motion for summary judgment in favor of National Oilwell Varco, L.P. (NOV). Ortega sued NOV alleging claims of negligence and products liability for injuries received while working on an oil rig manufactured by NOV. In response to the summary judgment motion, Ortega offered only an affidavit from an engineer who opined as to NOV’s liability.

Ortega challenges the trial court’s finding that William Munsell (the engineer) lacked the qualifications to render the opinions given and that his testimony was conclusory, speculative, and lacking in factual support. Since the propriety of a finding concerning the trial courts ruling with regard to Munsell is dispositive, the court of appeal limited its decision to that ruling.

Munsell’s affidavit consisted of a statement describing the information he had reviewed which information included his examination or review of:

1)     component parts and research concerning such component parts,

2)     the Model 5C rig manufactured by National Oilwell VARCO . . . and involved in the subject accident, and

3)     seven depositions and exhibits thereto.

He also mentioned interviewing four persons. The entirety of the opinions that followed are these: “My opinion is that the subject workover rig . . . was defective as designed and manufactured, and that said rig was negligently designed and manufactured by the manufacturer, in such respects as are more specifically set forth hereafter. Further, the defects and acts and omissions of negligence were producing and proximate causes of the accident in which Mr. Ortega was injured.”

ANALYSIS

Conclusory statements by an expert witness are insufficient to raise a question of fact to defeat a summary judgment. Conclusory statements are ones that do not provide the underlying facts to support the conclusion.  An expert opinion is conclusory when the opinion has no basis or when the basis provides no support.

Munsell’s opinions and statements are conclusory. The most the court was able to derive from them is that:

1)     some unnamed “component part” failed to perform as intended and acted as “a producing and proximate cause of the accident,”

2)    an unnamed safety system failed in a foreseeable way, safer alternative designs were available, there were unnecessary delays in the braking function, and

3)    the service and emergency brakes failed to function.

Munsell did not, however, explain or reveal what the component part was and whether it was part of the braking system or some other system, how the part was designed or manufactured defectively, and how the failure of the part resulted in the accident, whether the safety system that failed is the braking system or some other system, how the safety system was designed or manufactured defectively, why it was foreseeable that the system would fail, and how that failure resulted in the accident, the identity or description of safer alternative designs that were purportedly feasible, why they were safer and feasible, and whether they would have prevented or reduced the risk of personal injury without impairing the utility of the product, what facts made the delays in the braking function unnecessary and how those delays resulted in the accident, and what facts showed a breach of duty by NOV with respect to the failure of the brakes.

The court of appeal concluded that the absence of this information was fatal Ortega’s claim and suit. No other summary judgment evidence appears of record to explain the conclusions reached by Munsell. Therefore, the trial court did not err in finding his opinions to be conclusory, that is, lacking in factual support.

A witness, even an expert witness, may have personal knowledge of facts; yet, he must still disclose those facts for his testimony to have any value. While the engineer may have had personal knowledge of his opinions and facts underlying them, his opinions were conclusory and lacked probative value because those facts (or the rationale for his opinions) went unmentioned in his affidavit.

Noting that Munsell’s opinions may be quite reliable the court of appeal concluded they had no evidentiary value if unaccompanied by explanations or facts. Indeed, when testimony is challenged as being non-probative or conclusory on its face, there is no need to go beyond the face of the record to determine their reliability. As a result the court of appeal affirmed the trial court.

ZALMA OPINION

Since one of the plaintiffs was an insurance company – a professional litigant – it paid a great deal of money for the work of Mr. Munsell and should have made sure that the affidavit submitted contained more than his conclusions as to the defects in the oil rig. It needed to make sure that the opinions stated the facts and knowledge that supported the conclusion that the defendant produced a defective product.

The suit was lost, not because it had no value, but because counsel for Ortega and Bituminous allowed the expert to prepare a bare, conclusory, affidavit. Experts, like engineers, are usually not lawyers and need the assistance of the experienced litigant and counsel to make sure that the expert’s report provides the court with evidence it can rely on in making its decision.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013″, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at http://www.stpub.com/Getting-the-Whole-Truth_p_254.html.

Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at http://www.stpub.com/insurance-claims-a-comprehensive-guide-online.

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

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Extortion to Get Insurance Commissions