Bad Faith “Set Up” Fails

No Duty to Defend Breach of Contract

Insurance covers many risks of loss but not all. Essentially, a liability insurance policy, insures the insured against risks of loss due to the negligence of the insured that causes property damage or bodily injury to a third person. It does not guarantee the work of the insured or that it will fulfill the terms of contracts it entered into.

In Altom Transport, Inc. v. Westchester Fire Ins. Co., United States Court of Appeals, Seventh Circuit — F.3d —- , 2016 WL 2956834 (May 20, 2016.) the Eighth Circuit was faced with a suit seeking defense and indemnity to a claim and lawsuit that alleged the insured, Altom Transport, Inc. (Altom) breached its contract with a truck driver to pay for his services as an independent contractor.

FACTS

Altom is an interstate motor carrier that focuses on the hauling of liquid products throughout North America. It typically hires independent-contractor drivers to handle its business. Stampley was one of those drivers. He owned and operated his own truck and leased his services to Altom.

Insured interstate motor carrier brought action in state court against its insurer and truck driver, seeking declaration that insurer had duty to defend it under management liability policy in underlying action by driver, that insurer had wrongfully failed to do so, and that insurer’s handling of the matter had been unreasonable and vexatious. Following removal, the United States District Court for the Northern District of Illinois dismissed for failure to state a claim, and insured appealed.

Michael Stampley, a truck driver, sued Altom alleging that Altom had failed to pay him enough for driving his truck for it. Altom turned to its insurer, Westchester Fire Insurance Co., for coverage in the suit. Westchester denied coverage; Altom handled its own defense; and the parties tried to settle the case. At that point, counsel for both Stampley and Altom tried to pull Westchester back into the case, by making settlement offers within the limits of the Westchester policy trying to set up Westchester for a bad faith claim, and seeking Westchester’s approval. Westchester refused to be set up so Altom sued in state court for a declaratory judgment establishing that Westchester had a duty to defend, that it wrongfully had failed to do so, and that its handling of the matter had been unreasonable and vexatious.

Stampley sued Altom, alleging that Altom had wrongfully withheld payment from him and other similarly situated owner-operator drivers who leased their services to Altom. Stampley offered three theories in support of this claim: (1) that the contract violated the Department of Transportation’s regulations, 49 C.F.R. § 376.12, because it failed to include aspects of how Stampley’s compensation would be calculated; (2) that Altom breached the contract by failing to pay the required compensation; and (3) that Altom unjustly enriched itself by failing to pay Stampley and other drivers 70% of the gross revenue per shipment, as contractually required.

Altom had purchased an ACE Express Private Company Management Insurance Policy from Westchester, effective August 3, 2013 through August 3, 2014.  Westchester denied coverage.

Altom sued Westchester in state court for a declaratory judgment. Altom alleged that Westchester had wrongfully refused to defend it, in violation of § 155 of the Illinois Insurance Code, 215 ILCS 5/155, and that Westchester was estopped from asserting noncoverage.

Westchester removed the suit to federal court and moved to dismiss Altom’s complaint for failure to state a claim. Westchester argued that the policy’s plain language excluded coverage for Stampley’s suit because the suit was covered by two policy exceptions: one for claims about unpaid wages, and the other for claims based on a contract.

THE EXCLUSION

The contract claim exception states: “Insurer shall not be liable for Loss on account of any Claim: ¶ (a) alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the actual or alleged breach of any contract or agreement; except and to the extent the Company would have been liable in the absence of such contract or agreement….”

ANALYSIS

Both at the time Altom filed its coverage suit in state court and at the time Westchester removed it to federal court, Altom was an Illinois corporation with its principal place of business in Illinois. Westchester is a Pennsylvania corporation with its principal place of business in Pennsylvania. Stampley, however, who was a party to the action on Westchester’s side at the time of removal, is also an Illinois citizen. That poses a problem under the old “complete diversity” rule.

The Supreme Court, however, has endorsed a more flexible rule, under which even a court of appeals may dismiss dispensable, nondiverse parties to preserve subject-matter jurisdiction. Stampley is just such a party. Under Illinois law, an injured third party is indispensable when an insurer sues an insured for a declaratory judgment defining coverage. Stampley has no legal interest in this suit: he has no claims against Altom or Westchester; nor do they have any claims against him. Stampley may therefore stay or go, as far as the joinder rules are concerned.

An insurer’s duty to defend arises when facts alleged in the underlying complaint fall even potentially within the policy’s coverage. The duty to defend is broader than the duty to indemnify. Nevertheless, the language of the policy controls and the policy here unambiguously excludes coverage for lawsuits stemming from the insured’s contracts with third parties.

Stampley’s claim against Altom, no matter what the legal theory may be, rests fundamentally on the lease agreement under which he was performing his carriage services. Since it is a contract Westchester has no duty to defend or indemnify Altom from claims arising out of it.

Stampley’s breach of contract and unjust enrichment claims are likewise excluded under the policy. Altom’s enrichment is “unjust” only if it failed to pay Stampley everything to which the contract entitled him (and hence retained too much of the profit from Stampley’s hauls). But that is just another way of describing a possible breach of contract. Stampley’s requested damages underscore this point: he seeks the difference between the amount he says he was owed under the contract and the amount Altom actually paid him. This describes expectation damages, the classic measure of contract damages, to a “T”. All three of Stampley’s claims in his underlying suit arise directly from his lease agreement with Altom, and therefore fall within the policy’s contract claim exception.

Altom’s last argument is that Westchester is estopped from claiming noncoverage. Under Illinois law, if an insurer neither defends nor seeks a declaratory judgment defining its coverage obligation, it will be estopped from raising the defense of noncoverage in a subsequent action. But estoppel applies only when the insurer breaches its duty to defend in the later action. Westchester did not breach its duty, and so Altom cannot assert estoppel.

Because all of Stampley’s claims fall within the policy’s contract claim exception, we do not reach the question whether his claims are within the unpaid wages exception. Michael Stampley is dismissed as a party in this case, and the judgment of the district court is otherwise affirmed.

ZALMA OPINION

Liability insurance does not cover every dispute between its insured and a third party. The only claim against Altom was for breach of a lease agreement – a contract – and nothing else.  There were no torts alleged. The plaintiff only wanted the benefits of his contract with Altom and the insurer unambiguously excluded the claims. If an insurer wrongfully denies a claim it can be held for extra-contractual damages. However, if a bad faith set up fails because there is no coverage, the plaintiff has wasted the fees paid to its counsel.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

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A House is Also a Home

Where You Reside Is A Question of Fact

Resident relatives are usually covered by insurance policies in the name of a parent or other relative. What is a residence, however, is a question fraught with danger and an insurer denies coverage to a person claiming to be a resident relative faces immediate and difficult litigation.

In Progressive Northern Ins. Co. v. Pedone, — N.Y.S.3d —- , 2016 N.Y. Slip Op. 0388, 2016 WL 2890048, Supreme Court, Appellate Division, Second Department, New York the insurer refused to insure under a supplemental underinsured motorist (SUM) coverage because the person making the claim was not a “permanent” resident of his parents household. The trial court disagreed and allowed the UIM arbitration to proceed.

FACTS

In September 2012, Jarrod Pedone, a pedestrian, was seriously injured when he was struck by a motor vehicle owned and operated by Timothy Kane in Philadelphia, Pennsylvania. Jarrod sought coverage under the SUM endorsement contained in his parents’ policy with the petitioner Progressive Northern Insurance Company (hereinafter Progressive). The SUM endorsement defined insured, in relevant part, as follows: “you, as the named insured and, while residents of the same household, your spouse and the relatives of either you or your spouse.”

Progressive denied coverage on the ground that Jarrod was not a resident of his parents’ household in Staten Island at the time of the accident and, therefore, was not an insured under the policy.

Jarrod served a demand for arbitration of his claim for SUM benefits, and Progressive commenced this proceeding to permanently stay arbitration. Following a framed-issue hearing, the trial court – Supreme Court – concluded that Jarrod was a resident of his parents’ household in Staten Island, and, in effect, denied the petition.

While a person can have more than one residence for purposes of insurance coverage a person’s status as a resident of an insured’s household requires something more than temporary or physical presence and requires at least some degree of permanence and intention to remain. The issue of residency is a question of fact to be determined at a hearing.

ANALYSIS

Here, the evidence supports the Supreme Court’s determination that Jarrod, an itinerant musician, resided in his parents’ household in Staten Island at the time of the accident.

Under the circumstances of this case, the proof in the record, including the presence of Jarrod’s personal belongings and professional equipment at his parents’ house, the numerous official documents listing his parents’ address as his residence, and the testimony adduced at the framed-issue hearing, sufficed to establish Jarrod’s residency in his parents’ household within the meaning of the subject insurance policy.

Accordingly, the Supreme Court properly denied the petition to permanently stay arbitration of the SUM claim.

ZALMA OPINION

The New York appellate court, applying its amazing ability to get to the issue quickly and briefly, established that Progressive failed to do a thorough investigation before deciding to deny Jarrod’s claim. Had it done a thorough investigation and learned the indicia of residence that the court relied upon it would not have brought the motion and would have adjusted his claim.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

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Written Notice to State Required to Sue State

Strict Compliance With Statute Required to Sue State

Since states and state agencies are protected by sovereign immunity most states have enacted statutes to allow certain people injured by the state to sue the state if the injured person complies with the statutory requirements. Unlike insurance, and claims against insurance companies, the injured person must comply strictly with the statutory requirements. Failure to comply leaves the injured person out of luck and unable to collect damages regardless of how perfect his or her claim.

In Callaham v. Georgia Ports Authority, Court of Appeals of Georgia,  — S.E.2d —-, 2016 WL 2862661 (May 17, 2016) the Court of Appeals of Georgia was asked to hold that substantial compliance with the statutory authority was sufficient while the Georgia Ports Authority asked that it sustain the trial court’s decision that dismissed Callaham’s suit.

ARGUMENT

Kelvin Callaham appealed the dismissal of his personal injury action against the Georgia Ports Authority. On appeal, he argues that when taken together, two documents, a letter to the Ports Authority’s insurance adjuster and a notice of claim to the Risk Management Division of the Department of Administrative Services, satisfied the ante litem notice requirement of the Georgia Tort Claims Act, OCGA § 50–21–20 et seq.  OCGA § 50–21–26(a)(2) of the Act provides that when a person has a tort claim against the state, “a copy [of the person’s notice of claim] shall be delivered personally to or mailed by first-class mail to the state government entity, the act or omissions of which are asserted as the basis of the claim.”

Since Callaham did not mail or personally deliver to the Ports Authority a copy of the notice of claim he sent to the Risk Management Division, he did not strictly comply with the requirements of that section. Because the duty to strictly comply with those requirements cannot be excused on the basis of actual notice, the letter to the adjuster does not replace the requirement.

FACTS

On October 3, 2012, Callaham was injured in an auto accident at a Georgia Ports Authority terminal in Savannah. Later that month, his attorney sent the first of the two documents in question, a letter to a claims adjuster for the Georgia Ports Authority. That letter advised her of his representation of Callaham and notified her that Callaham had sustained injuries and was receiving medical treatment. The letter included a copy of the police report and requested that the claims adjuster provide the declaration page showing the policy limits of the insured’s automobile insurance coverage. And it notified her that once Callaham had completed his medical treatment, the attorney would forward to the claims adjuster his evaluation of the case and demand. In June 2013, the attorney sent by certified mail the second of the documents in question: Callaham’s notice of claim to the Risk Management Division of the Department of Administrative Services.

In May 2014, he filed this action. The Georgia Ports Authority moved to dismiss the complaint because Callaham failed to personally deliver or mail a copy of the notice of claim to it as OCGA § 50–21–26(a)(2) requires. The trial court granted the motion, and Callaham filed this appeal.

ANALYSIS

On appeal, Callaham argued that his October 2012 letter to the Georgia Ports Authority, combined with the June 2013 notice of claim sent to the Department of Administrative Services constitute sufficient ante litem (pre-litigation) notice.  The statute requires a person with a tort claim against the state to give written notice of the claim. The statute requires the claimant to mail the notice by certified mail or statutory overnight delivery, return receipt requested, or delivered personally to and a receipt obtained from the Risk Management Division of the Department of Administrative Services. And it requires the claimant to deliver personally or by first-class mail a copy of the notice of claim to the state government entity whose acts the claimant asserts to be the basis of the claim.

To determine whether a claimant has complied with the ante litem notice provision of the Act, the court must look to the plain meaning of the statutory language. In this case, although Callaham properly sent his notice of claim to the Risk Management Division of the Department of Administrative Services, he did not personally deliver or mail a copy of his notice of claim to the Georgia Ports Authority. Callaham never sent to the Georgia Ports Authority the notice required by the statute.

In Dempsey v. Bd. of Regents of the Univ. System of Georgia, 256 Ga.App. 291, 293–294, 568 S.E.2d 154 (2002), the Georgia Court of Appeal stated that the plain language of the statute provides that the notice “must be mailed by certified mail, return receipt requested, or delivered personally to the Risk Management Division of the Department of Administrative Services; and a copy must be mailed or delivered to the state government entity whose acts or omissions serve as the basis for the claim.” In this case, it is undisputed that Callaham did not mail or personally deliver a copy of the ante litem notice to the Ports Authority within 12 months as the plain language of the statute requires.

The Georgia Supreme Court has held that while hyper-technical compliance is not required, substantial compliance is not sufficient: what is required is strict compliance.

[T]he rule of strict compliance does not demand a hyper-technical construction that would not measurably advance the purposes of the [Act’s] notice provisions, even in cases that arguably reflect some degree of leniency, the plaintiffs complied with the plain language of the ante-litem-notice provisions…. Suffice it to say, substantial compliance is not strict compliance. Strict compliance is exactly what it sounds like: strict. Thus, as we have previously warned, the explicit ante litem notice provision is ignored only at peril to a plaintiff’s cause of action and serves as a condition precedent for bringing suit under the Act. [DeFloria v. Walker, 317 Ga.App. 578, 582, 732 S.E.2d 121 (2012)]

Callaham’s argument that the two documents, when taken together, satisfied the notice requirement is unavailing. The statute requires the claimant to mail to the agency whose acts form the basis of the claim notice that contains certain items of information. He does not dispute that he never sent to the Georgia Ports Authority those items of information. Even when the state agency has actual notice, a claimant is not excused from strictly complying with the notice requirements.

ZALMA OPINION

Since a suit against a state agency is only allowed when the state gives permission to sue as long as the plaintiff strictly complies with the statutory requirement. Counsel for Callaham failed to comply with the statute and Callaham gets nothing from the Port Authority. Callaham, however, is not without a remedy – he can sue his lawyer.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

An Insurer Who Pays a Claim Negligently May Obtain Restitution

Don’t Look a Gift Horse in the Mouth

The failure of life insurance companies to check the Social Security Administration death records to determine if anyone is owed benefits on a life insurance policy has caused serious and expensive administrative fines served on various insurers and reported in Zalma’s Insurance Fraud Letter. Because of the administrative actions many insurers have paid claims after a search of the SSA records only to find, after payment, that they did not owe the claim.

In DeCoursey v. American General Life Ins. Co., — F.3d —-, United States Court of Appeals, Eighth Circuit, 2016 WL 2865394 (May 17, 2016) an insurer paid a beneficiary long after denying a claim only to find, after the beneficiary sued, that it paid in error.

FACTS

When Susan DeCoursey sued American General Life Insurance Company (the company) for interest she claimed it owed her on a payout it made on a policy, the company counterclaimed, asking for its money back because it had paid DeCoursey by mistake and so DeCoursey was not entitled to the payout in the first place, let alone interest. After the district court granted the company summary judgment on DeCoursey’s claims and granted her summary judgment on the company’s counterclaim, both parties appealed.

In 1985, DeCoursey’s husband purchased a $250,000 life insurance policy from the company’s predecessor in interest. In August 1986, DeCoursey’s husband and son died in a car accident. She submitted a claim on the policy, but her claim was denied because the policy had lapsed. DeCoursey took no further action. In June 2011, the company began an effort to determine if any life insurance beneficiaries had failed to notify it of an insured’s death and were thus owed life insurance benefits. The company did so by reviewing Social Security Administration death records.

As a result of the review, the company notified DeCoursey that she was entitled to benefits under the policy because the policy did not lapse until three months after her husband died, and so it paid her the policy’s face value, $250,000, in January 2013. Unsatisfied, DeCoursey demanded that the company pay her 9% interest from the time it denied her claim in 1986.  Much of the information relating to the policy had been discarded, but the company discovered, after an exhaustive search of its records, that the policy had indeed lapsed nine days before DeCoursey’s husband died.

The company then notified DeCoursey that it had erroneously paid her $250,000 because the policy had lapsed before her husband died, but it nonetheless generously offered to settle her claim by allowing her to keep the $250,000 along with an additional $25,000. The company was sued in state court and removed the case to federal court and counterclaimed for unjust enrichment.

The company then moved for summary judgment on DeCoursey’s claims, asserting that DeCoursey had failed to bring suit within the limitations period. The district court agreed, holding that DeCoursey did not bring suit until after the ten-year limitations period had expired. The district court granted DeCoursey’s motion for summary judgment on the company’s counterclaim, holding that the company had voluntarily paid DeCoursey $250,000 because it “put forth no evidence to suggest that it did not have the opportunity to diligently investigate the Policy before it was paid out.”

ANALYSIS

Claims accrue when the evidence was such to place a reasonably prudent person on notice of a potentially actionable injury, and at this point the plaintiff is obliged to discover potential damages and to seek redress. Missouri courts have routinely held that insurance-dispute claims accrue when the plaintiff receives notice that a claim was denied.

Since DeCoursey’s claims accrued in 1986, the ten-year limitations period bars the claims she brought in 2013.

DeCoursey also maintains that, even if her claims accrued in 1986, the limitations period was tolled when the company paid her the policy’s face value. Partial payment of a debt will generally toll a limitations period because it acknowledges the debt and carries an implied promise to pay the remaining balance. Where nothing appears to show a contrary intention, the payment alone prevents the statute from barring the claim. Tolling also prevents a debtor from lulling a creditor into a limitations bar.

Even if partial payment could restart, rather than merely toll, a limitations period, a proposition by no means obvious, the company’s repeated refusal to pay interest is completely inconsistent with an implied promise to pay the remainder of the alleged debt.

For fraudulent concealment to toll a limitations period, there must be something of an affirmative nature designed to prevent, and which does prevent, discovery of the cause of action. DeCoursey does not identify any affirmative fraudulent acts on the company’s part or tell us why it had a duty to speak. The record contains nothing tending to show that the company concealed a fact that prevented DeCoursey from asserting her claims after learning of coverage denial in 1986.

On cross-appeal, the company maintains that the district court erred in concluding that its voluntary payment of the policy amount defeats its counterclaim for unjust enrichment. Such a claim is appropriate “when one party has been unjustly enriched through the mistaken payment of money by the other party. This restitutionary claim arises when a defendant possesses money that in equity and good conscience belongs to the plaintiff.

The company contends that, at the time it paid DeCoursey the face value of the policy, it mistakenly believed that she had never submitted a claim on her husband’s policy and that the policy was in effect at his death. The district court apparently assumed for summary judgment purposes that the company’s claimed mistakes were genuine, but it concluded that the company put forth no evidence to suggest that it did not have the opportunity to diligently investigate the Policy before it was paid out and so paid it voluntarily.

The Missouri Court of Appeals has held that a payor’s lack of care will not diminish his right to recover, or somehow justify retention of the windfall by an unintended beneficiary.  If a consumer, despite having adequate financial records, carelessly overpaid his insurance premium, he would certainly be entitled to reclaim the money despite the fact that he had been negligent in sending it.

The Eighth Circuit concluded that a payor’s lack of care will not diminish his right to recover, or somehow justify retention of the windfall by an unintended beneficiary. This result comports with the relevant Restatement, which explains that the so-called voluntary-payment rule does not impute knowledge of relevant circumstances of which the payor is not in fact aware, describing as “voluntary” a payment that was actually the consequence of negligence or inadvertence.

A “voluntary” payment that will defeat a restitutionary claim normally occurs in the context of a payment made to settle a claim. Where the terms of settlement involve an explicit compromise of an uncertain liability, the contractual mechanism by which a risk of uncertainty is allocated to the payor is transparent. Here, on the other hand, the company’s payment of the face value of the policy did not involve an explicit compromise allocating the risk to the company that DeCoursey might not in fact be entitled to the face value of the policy.

A claim for restitution lies when one party has been unjustly enriched through the mistaken payment of money by the other party. A payor’s negligence should not estop it from asserting that its mistakes of fact resulted in a payment of money that was not due. There is no connection between the payor’s negligence and the voluntary-payment rule. Mistakes are often the result of negligence, and if a restitution claim were barred because the plaintiff was negligent, the voluntary-payment exception would swallow a large part of the general restitutionary rule.

The Eighth Circuit found there was no question that since the obverse was true, that a negligent insured would be entitled to restitution for mistaken premium payments an insurer is entitled to restitution for a mistaken claim payment.

ZALMA OPINION

The plaintiff’s greed when she demanded interest on the $250,000 payment resulted in a judgment that she was not entitled to interest and must pay the insurer the $250,000 it paid her in error. The less: when you receive a gift accept it with good grace and don’t complain or sue for more. Had she not demanded interest the insurer would have peacefully gone away and the plaintiff could have kept the $250,000 plus an extra $25,000 for her trouble.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Requirements for Bad Faith in Alabama

Tort of Bad Faith Different from Wanton and Negligent Conduct

When a claim is not paid as the insured desires a suit will be invariably filed against the insurer seeking both contract and tort damages. When an insurer is sued by its insured, since the invention of the trot of bad faith in the 1950’s, the suit is never limited to contract damages but always includes tort damages to make it possible to profit from the suit.

In Camp Winnataska, Inc., a/k/a Camp Winnataska v. National Casualty Company, United States District Court, N.D. Alabama, 2016 WL 2894093, Case No.: 4:15-CV-01024-KOB (05/18/2016) the USDC, Northern District of Alabama was asked by  National Casualty Company to dismiss Plaintiff Camp Winnataska’s claims against it for wanton and negligent bad faith as alleged in parts of its Amended Complaint.

FACTS

Plaintiff Camp Winnataska owns and operates a camp in St. Clair County, Alabama. The camp facilities include a gymnasium for which National Casualty Company provided commercial property insurance coverage. On May 14, 2014 – within the policy’s coverage period – the roof of the gymnasium collapsed. Camp Winnataska filed a claim with National Casualty Company, asking it to pay for the damage to the collapsed roof and to pay for the demolition and reconstruction of the remainder of the gymnasium. National Casualty Company paid Camp Winnataska for the damage to the roof, but denied coverage as to the remainder of the gym. Camp Winnataska alleges that this denial was a breach of contract and was done in bad faith..

DISCUSSION

National Casualty Company argues that the court should dismiss Counts IV and V of Camp Winnataska’s Amended Complaint because Alabama does not recognize causes of action for negligent or wanton handling of insurance claims. [Kervin v. Southern Guar. Ins. Co., 667 So. 2d 704, 706.]

If Camp Winnataska had merely alleged that National Casualty Company negligently, wantonly, or incompetently handled its insurance claims, then Camp Winnataska would not have stated viable causes of action. However, Camp Winnataska has alleged more than mere negligence or wantonness; Camp Winnataska has stated viable claims for bad faith.

Under Alabama law, an actionable tort arises for an insurer’s intentional refusal to settle a direct claim where there is either (1) no lawful basis for the refusal coupled with actual knowledge of the fact or (2) intentional failure to determine whether or not there was any lawful basis for such refusal.  Within this singular tort of bad faith, two methods of proof exist: “normal” bad faith, also known as bad faith refusal to pay, and “abnormal” bad faith, known as bad faith refusal to investigate.

To state a claim for “normal” bad faith, a party must allege: (1) a breach of the insurance contract; (2) an intentional refusal to pay the insured’s claim; (3) the absence of any reasonably legitimate or arguable reason for that refusal; and (4) the insurer’s actual knowledge of the absence of any legitimate or arguable reason.

Camp Winnataska has sufficiently pled a claim for “normal” bad faith denial of its insurance claim in Count IV of its Amended Complaint by alleging that National Casualty Company acted in bad faith when it denied Camp Winnataska’s claim for the costs and expenses necessary to demolish and reconstruct the gymnasium. Specifically, Camp Winnataska alleges (1) that National Casualty Company breached the insurance contract by refusing to pay its claim; (2) that National Casualty Company intentionally refused to pay Camp Winnataska’s claim; (3) that National Casualty had no legitimate basis for refusing to pay; and (4) that National Casualty Company had actual knowledge of the absence of a legitimate reason.

To state a claim for “abnormal” bad faith, a party must allege, in addition to the first four elements, that the insurer intentionally failed to determine whether there was a legitimate or arguable reason to refuse to pay the claim. If the intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer’s intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.

Camp Winnataska has also sufficiently pled a claim for “abnormal” bad faith in Count V of its Amended Complaint. In Count V, Camp Winnataska alleges that National Casualty Company intentionally failed to determine whether any lawful basis existed for its refusal to honor Plaintiff’s claim. Further, Camp Winnataska alleges that National Casualty Company was incompetent in the way that the claim was investigated and that National Casualty Company failed to conduct any analysis of Camp Winnataska’s claim.

Because Camp Winnataska has stated cognizable claims for bad faith refusal to pay and bad faith refusal to investigate in Counts IV-V of its Amended Complaint, the court will denied National Casualty Company’s Motion to Dismiss as to these Counts.

The court, therefore, found that Camp Winnataska has stated viable claims for bad faith refusal to pay and bad faith refusal to investigate in Counts VI and V of its Amended Complaint. Accordingly, the court denied National Casualty Company’s Motion as to these Counts.

ZALMA  OPINION

This is a pleading decision rather than one based on evidence. The court found that the allegations of the complaint were sufficient to all the plaintiff to attempt to prove that National Casualty’s claim handling was either normal or abnormal bad faith when it paid part of the claim made by the plaintiff but refused to pay their entire claim. Evidence at trial will show whether coverage existed for the loss and if the decision to partially deny the claim was fairly debatable or the result of a genuine dispute.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Negligent Entrustment of Auto Requires Ownership

Sell a Car & Eliminate Responsibility for its Operation

When a person is injured or killed in an automobile accident where the owner and operator of the vehicle causing the accident is uninsured the injured parties try everything possible to find a person with assets to pay the damages incurred. Sometimes the injured must grasp at arguments that verge on the frivolous.

In Burchett v. Burchett, — S.W.3d —-, Court of Appeals of Kentucky, 2016 WL 2855384 (MAY 13, 2016) the Court of Appeals of Kentucky was asked to find that a person who sold a car to an unlicensed driver who later drove drunk and killed one person and injured others, was responsible for negligently entrusting the vehicle to the buyers and was, therefore, responsible for the injuries suffered by the buyers victims.

BACKGROUND

On May 14, 2012, Amanda Burchett (Amanda) and Erick Blair (Blair) bought an automobile from David Perry, d/b/a Louisa Auto Mart (Perry). Blair crashed the automobile six days later while driving intoxicated. Amanda Burchett and Benjamin Burchett II (Benjamin) were riding with Blair at the time. Benjamin was killed in the crash.

Sandra Burchett (Burchett), as the representative of Benjamin’s estate, later filed a wrongful death action against Blair and Perry. In the complaint, she alleged (1) that Perry violated KRS  186A.220 because he sold the automobile to Blair and Amanda and neither one had insurance; (2) that Perry violated KRS 186.620 by authorizing and permitting a person without a driver’s license to drive an automobile; (3) that Perry negligently entrusted the automobile to Blair and Amanda; and (4) that Perry remained the owner of the automobile because he sold it to individuals who did not have insurance in violation of KRS 186A.220.

Perry eventually moved for summary judgment with respect to these claims. On June 9, 2014, the trial court granted Perry’s motion as to the violations of KRS 186A.220 and denied the remaining motions. A jury trial was later held to decide two issues: whether Perry delivered title documents to Blair and Amanda on the day of the sale, and whether Amanda had a driver’s license.

After considering and weighing the evidence, the jury determined that Perry delivered the automobile’s original title and an Application for a Kentucky Certificate of Title to Blair and Amanda on May 14, 2012. The jury also determined that Amanda did not have a drivers’ license. Based on the jury’s determination, the trial court ruled that title to the automobile transferred on the day of the sale and eliminated any issues relating to Perry’s alleged liability.

DISCUSSION

In Kentucky, the owner of a vehicle is the one who holds its legal title, KRS 186.010(7), and he has a duty to prevent those without a legal right to drive from driving his vehicle. An owner may transfer ownership of his vehicle in two ways. First, he can complete and sign the assignment of title section on the certificate of title and deliver it to the buyer directly.

Second, when the owner is also licensed motor vehicle dealer, he can obtain the purchaser’s consent to file the certificate of title and other necessary paperwork directly with the county clerk on the purchaser’s behalf. If the vehicle’s ownership is transferred under the first method, the responsibility for insurance coverage on the part of the dealer ceases. However, if ownership is transferred under the second method, the dealer must verify that the purchaser has obtained insurance on the vehicle before relinquishing possession.

Here, because the jury determined that Perry delivered the necessary title documents to Blair and Amanda on May 14, 2012, Blair and Amanda became the owners of the automobile on that day. Moreover, since Perry was no longer the owner, he was under no duty to prevent either Blair or Amanda from driving the automobile on the day of the accident. Finally, because Perry transferred the title documents to Blair and Amanda directly, and did not retain the certificate of title with the consent of the new owners to file it with the county clerk, he did not have to verify whether Blair or Amanda were insured.

The common law theory of negligent entrustment is that one who entrusts his vehicle to another whom he knows to be inexperienced, careless, or reckless, or given to excessive use of intoxicating liquor while driving, is liable for the natural and probable consequences of the entrustment. Logically, one cannot maintain a negligent entrustment suit against the former owner of a vehicle who properly transferred ownership of the subject vehicle.

Here, Blair crashed the automobile he jointly owned with Amanda on May 20, 2012. Perry did not own the automobile following May 14, 2012. Accordingly, Burchett’s negligent entrustment claim must fail as a matter of law.

ZALMA OPINION

Kentucky statutes are clear: when title transfers on a vehicle the seller no longer owns it and the buyer is the sole owner responsible for insurance and entrusting the vehicle to responsible drivers. Blair was the owner and operator and, therefore solely responsible for the accident. The car dealer has no responsibility once title transferred. The plaintiffs are not without a remedy, they can obtain a judgment against Blair and attempt to execute on the judgment.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Health Insurance & the U.S. Supreme Court

Why Government Should Not Require Insurance

Insurance is a contract a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The Patient Protection and Affordable Care Act (ACA) changes the historical basis of insurance and requires insurers and insurance buyers to buy certain coverages whether they want it or not.

In Zubik v. Burwell, — S.Ct. —-, Supreme Court of the United States, 2016 WL 2842449 (May 16, 2016) the United States Supreme Court was asked to apply the Constitution’s first amendment prohibition upon the government to not impinge upon a persons free exercise of its religion by making religious organizations do something contrary to the free exercise of their religion.

FACTS

Nonprofit religious employers brought actions against Secretary of Health and Human Services (HHS) and other government officials, challenging under Religious Freedom Restoration Act (RFRA) regulations offering accommodation for religious objections to compliance with regulatory mandate to provide employees with health insurance coverage for contraceptives, which regulatory mandate was imposed in furtherance of requirement in the ACA that employers provide insurance coverage for preventive care for women.

Petitioners are primarily nonprofit organizations that provide health insurance to their employees. Federal regulations require petitioners to cover certain contraceptives as part of their health plans, unless petitioners submit a form either to their insurer or to the Federal Government, stating that they object on religious grounds to providing contraceptive coverage. Petitioners allege that submitting this notice substantially burdens the exercise of their religion, in violation of the Religious Freedom Restoration Act of 1993, 107 Stat. 1488, 42 U.S.C. § 2000bb et seq.

Following oral argument, the Court requested supplemental briefing from the parties addressing “whether contraceptive coverage could be provided to petitioners’ employees, through petitioners’ insurance companies, without any such notice from petitioners.”

Both petitioners and the Government confirmed in their supplemental briefing that such an option is feasible. Petitioners have clarified that their religious exercise is not infringed where they “need to do nothing more than contract for a plan that does not include coverage for some or all forms of contraception,” even if their employees receive cost-free contraceptive coverage from the same insurance company. The Government has confirmed that the challenged procedures “for employers with insured plans could be modified to operate in the manner posited in the Court’s order while still ensuring that the affected women receive contraceptive coverage seamlessly, together with the rest of their health coverage.”

In light of the positions asserted by the parties in their supplemental briefs, the Court vacated the judgments below and remanded to the respective United States Courts of Appeals for the Third, Fifth, Tenth, and D.C. Circuits. Given the gravity of the dispute and the substantial clarification and refinement in the positions of the parties, the parties on remand should be afforded an opportunity to arrive at an approach going forward that accommodates petitioners’ religious exercise while at the same time ensuring that women covered by petitioners’ health plans “receive full and equal health coverage, including contraceptive coverage.”

The Court finds the foregoing approach more suitable than addressing the significantly clarified views of the parties in the first instance. Although there may still be areas of disagreement between the parties on issues of implementation, the importance of those areas of potential concern is uncertain, as is the necessity of this Court’s involvement at this point to resolve them.

The Court expresses no view on the merits of the cases. In particular, the Court does not decide whether petitioners’ religious exercise has been substantially burdened, whether the Government has a compelling interest, or whether the current regulations are the least restrictive means of serving that interest.

The unanimous decision of the Supreme Court does only what it says it does: “afford[s] an opportunity” for the parties and Courts of Appeals to reconsider the parties’ arguments in light of petitioners’ new articulation of their religious objection and the Government’s clarification about what the existing regulations accomplish, how they might be amended, and what such an amendment would sacrifice. As enlightened by the parties’ new submissions, the Courts of Appeals remain free to reach the same conclusion or a different one on each of the questions presented by these cases.

ZALMA  OPINION

When a government gets involved in a private contract between intelligent adults and imposes its will on what must be in the contract litigation will invariably ensue and run all the way up to the U.S. Supreme Court. The parties, by indicating in their supplemental briefs an ability to resolve the disputes by compromise, they gave a court with only eight justices, an opportunity to avoid the issue and allowed the parties plaintiff to continue to protect their right to freely exercise their religion and enter into an agreement with the government that will avoid the issue and gut the coercive portions of the ACA. It would have saved a great deal of money and court time if the act allowed people to insure as they desired realizing that octogenarian nuns have no need for contraceptive coverage.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – May 15, 2016

N.Y. Speaker Guilty

Zalma’s Insurance Fraud Letter

May 15, 2016, Volume 20, No. 10  bz-9

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

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

The current issue of ZIFL reports on:

  • Speaker of N.Y. Assembly Will Serve 12 Years in Prison For Fraudulently Sharing Attorneys Fees With Lawyers
  • Barry Zalma
  • The Claims Commandments – 1-3
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
  • MetLife Securities Agrees to $20 Million Fine
  • Books from Barry Zalma
  • Insurance Fraud by Insurers
  • Wisdom
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Zalma on Insurance

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

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

Read the last two issues of ZIFL at http://zalma.com/ZIFL-CURRENT.htm 

Posted in Zalma on Insurance | Leave a comment

Affordable Care Act Not Affordable

Constitution Requires Congress to Appropriate Funds Before It Can Be Spent

Insurance should be based on a contract between the insurer and the person seeking insurance. The so-called Affordable Care Act (ACA) requires insurers to write government mandated insurance and tries to cover the extra costs created by the statute by using tax credits and payments to insurers. The current Congress, not a fan of the ACA, using the power of the purse granted to it by the Constitution, did not fund everything desired by the authors of the ACA. The executive branch, contrary to the will of Congress tried to spend money not appropriated.

In United States House of Representatives v. Sylvia Matthews Burwell in her official capacity as Secretary of the United States Department of Health and Human Services, United States District Court,  — F.Supp.3d —- District of Columbia, 2016 WL 2750934, Civil Action No. 14-1967 (RMC May 12, 2016) the House of Representatives sued and asked District Judge Rosemary M. Collyer to compel the executive branch to follow the law and only spend money Congress appropriated.

FACTS

This case involves two sections of the Affordable Care Act: 1401 and 1402. Section 1401 provides tax credits to make insurance premiums more affordable, while Section 1402 reduces deductibles, co-pays, and other means of “cost sharing” by insurers. Section 1401 was funded by adding it to a preexisting list of permanently-appropriated tax credits and refunds. Section 1402 was not added to that list. The question is whether Section 1402 can nonetheless be funded through the same, permanent appropriation.

Congress passes all federal laws in this country. [U.S. Const. art. I, § 1]  Those “Powers” includes sole authority to adopt laws that authorize the expenditure of public monies and laws that appropriate those monies. Authorization and appropriation by Congress are nonnegotiable prerequisites to government spending. Appropriation legislation provides legal authority for federal agencies to incur obligations and to make payments out of the Treasury for specified purposes. An appropriation must be expressly stated; it cannot be inferred or implied.

Section 1401 (“Refundable Tax Credit Providing Premium Assistance for Coverage under a Qualified Health Plan”)

The thrust of Section 1401 was to add a new section to the Internal Revenue Code: 26 U.S.C. § 36B. See ACA § 1401(a). Section 36B provides in principal part that “there shall be allowed as a credit against the [income] tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.” 26 U.S.C. § 36B(a). Those taxpayers “whose household income for the taxable year equals or exceeds 100 percent but does not exceed 400 percent of an amount equal to the poverty line for a family of the size involved” are entitled to tax credits to cover their health insurance premiums. 26 U.S.C. § 36B(c). Section 1401 is codified in the Internal Revenue Code, not in Title 42.

Section 1402 (“Reduced Cost–Sharing for Individuals Enrolling in Qualified Health Plans”)

The insurers are supposed to get their money back. An issuer of a qualified health plan making reductions under this subsection shall notify the Secretary of HHS of such reductions and the Secretary shall make periodic and timely payments to the issuer equal to the value of the reductions. Nothing in Section 1402 prescribes a “periodic and timely payment.

Section 1412 (“Advance Determination and Payment of Premium Tax Credits and Cost–Sharing Reductions”)

Section 1412 of the ACA requires the Secretaries to consult and establish a program under which eligibility determinations are made in advance. After the Secretary of HHS tells the Secretary of the Treasury and the pertinent Exchange who is eligible for either benefit, Treasury makes advance payments of such credit or reductions to the issuers of the qualified health plans on such Exchange in order to reduce the premiums payable by individuals eligible for such credit.

Since January 2014, Treasury has been making advance payments of premium tax credits and cost-sharing reimbursements to issuers of qualified health plans to eligible individuals. These payments have been based on the Secretaries’ determination that “the permanent appropriation in 31 U.S.C. § 1324, as amended by the Affordable Care Act, is available to fund all components of the Act’s integrated system of subsidies for the purchase of health insurance, including both the premium tax credit and cost-sharing portions of the advance payments required by the Act.”

ANALYSIS

The question is whether Congress appropriated the billions of dollars that the Secretaries have spent since January 2014 on Section 1402 reimbursements.  Section 1402 reimbursements must be funded annually. Far from absurd, that is a perfectly valid means of appropriation. The results predicted by the Secretaries flow not from the ACA, but from Congress’ subsequent refusal to appropriate money. Such an appropriation cannot be inferred, no matter how programmatically aligned the Secretaries may view Sections 1401 and 1402. Paying out Section 1402 reimbursements without an appropriation violates the Constitution. Congress authorized reduced cost sharing but did not appropriate monies for it, in the FY 2014 budget or since. Congress is the only source for such an appropriation, and no public money can be spent without one.

The Secretaries’ Textual Arguments

The Secretaries argue that the text of 31 U.S.C. § 1324 and other “relevant statutory provisions” of the ACA (and other statutes) authorize their expenditures for cost-sharing reimbursements. It is a most curious and convoluted argument whose mother was undoubtedly necessity.

“Conspicuously absent” text

The Secretaries also rely on the absence of certain text. As it often does, Congress said in certain parts of the ACA that there “are authorized to be appropriated such sums as are necessary.”  But that language is not in Section 1402. The Secretaries do not argue—nor could they—that these words are necessary to appropriate monies in the future. Instead, they deduce that the absence of this language means that Congress felt it unneeded, ostensibly because Section 1402 was already funded permanently.

Congress authorized Section 1402 but did not appropriate for it. That is perfectly consonant with principles of appropriations law. So long as programs are authorized, Congress may appropriate funds for them, or not, as it chooses.

Post–ACA legislation

The problem the Secretaries have tried to solve here is very different: it is a failure to appropriate, not a failure in drafting. Congress’s subsequent inaction, not the text of the ACA, is what prompts the Secretaries to force the elephant into the mousehole.

Unintended consequences

Would it have been “nonsensical” or “absurd” for Congress to authorize a program permanently in 2010 but not appropriate for it permanently at the same time? The answer is “no.” To recapitulate, the consequence at issue here is that a permanently authorized benefit program was made dependent on non-permanent appropriations. That approach is perfectly consonant with principles of appropriations law; most federal entities operate in the same fashion. The Secretaries’ argument, taken to its logical conclusion, is that every permanent authorization must also constitute a permanent appropriation or else an “absurd result” would obtain. That is assuredly not the law.

The best evidence of the contemporary understanding of the ACA comes from the parties’ preparation for the effective date of the law. The Secretaries ignore their own actions and focus instead on congressional inaction. No one disputes that 31 U.S.C. § 1324 is an appropriation; the question is whether that statute, as amended by ACA § 1401(d)(1), permanently appropriates money for Section 1402 reimbursements. The Court concludes that it does not.

CONCLUSION

The Court granted summary judgment to the House of Representatives and enter judgment in its favor. The Court will also enjoin any further reimbursements under Section 1402 until a valid appropriation is in place

ZALMA OPINION

When a government gets involved in the business of insurance it changes the contract of insurance from a contract between two people to a governmental mandated mess whose premiums are not based on actuarial calculations but promises of reimbursements from the government. The statute was so badly written that it failed to appropriate funds to do what the statute wanted to do. An elephant does not fit in a mouse hole. Authorization and appropriation by Congress are nonnegotiable prerequisites to government spending. Congress should never screw up a contract of insurance by statute.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

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Subrogation Right Sacrosanct

Anti-Subrogation Rule Misapplied

The equitable right of subrogation is a profit center available to, and often ignored by, many insurers. When a right of subrogation is available to allow an insurer to obtain its payments for defense and indemnity of its insureds, the insurer should seek the funds from the tortfeasor or person(s) who agreed to indemnify the insured, contracutally, with vigor.

In Millennium Holdings LLC, et al v. The Glidden Company, & c., et al, Court of Appeals of New York, — N.E.3d —- 2016 WL 2350158 (May 5, 2016) a group of insurers who paid claims against insureds as a result of claims of injury from the manufacture and use of lead paint. In this action, appellants insurance companies seek to be subrogated to the right of their insured, plaintiff Millennium Holdings LLC (Millennium), to indemnification against respondents, the Glidden Company, now known as Akzo Nobel Paints LLC, following the insurance companies’ satisfaction of Millennium’s obligations pursuant to monetary settlements reached in certain lead paint related cases. The courts below, applying the antisubrogation rule, held that the insurance companies could not subrogate.

FACTS

The Glidden company, incorporated in Ohio in 1917, made, marketed and sold lead paint, including, until 1958, lead pigment.  A number of the policies issued between 1963 and 1968 provide the Insurers with a right to subrogation, whereby, after paying a claim on behalf of its insured, an insurer may seek to enforce the insured’s rights against another entity to recover its loss.

As relevant to this appeal, the critical moment in the corporate history of the parties occurred in 1986, various purchase and sale agreements were entered into with successors to Glidden.

Under section 9.3 of the 1986 Purchase Agreement, ICI American Holdings agreed to indemnify HSCM–20 after 1994. Through a series of corporate transactions, HSCM–20 became plaintiff Millennium, and ICI American Holdings assigned HSCM–6 to an entity that became Akzo Nobel Paints (ANP). Accordingly, based on the 1986 Purchase Agreement, Millennium and its predecessors were required to indemnify ANP and its predecessors from 1986 to 1994. In turn, ANP and its predecessors were required to indemnify Millennium and its predecessors from 1994 onward.

Commencing in 1987, a number of lawsuits were filed across the nation against the predecessors of Millennium and ANP, alleging either personal injury or property damage from the lead paint they produced, or that the lead paint was a public nuisance requiring abatement (hereinafter the Lead Cases).

During pendency of the 1994 litigation, the London Insurers agreed to pay the defense costs of both Millennium and ANP under an Interim Defense Agreement. However, the London Insurers terminated that funding agreement in 2000, and sought a declaration in Ohio state court that they were not required to provide ANP with a defense and indemnification in the Lead Cases, based on the subject policies. In 2006, the Ohio Supreme Court (trial court) held that ANP was not covered under the relevant policies “by operation of law or by contract,” as it was not a named insured on any of the relevant policies and, additionally, its subsequent purchase of HSCM–6 included an assumption of liabilities.

The London Insurers sought a declaration that they were entitled to subrogate (both equitably and contractually) to Millennium’s indemnification rights in the 1986 Purchase Agreement and, as a result, recover from ANP amounts that were paid by the London Insurers on behalf of Millennium in connection with the Lead Cases.

Specifically, as relevant here, ANP argued, and the courts below agreed, that the Insurers’ subrogation claim was barred by the exception to subrogation—the antisubrogation rule. Although the trial court determined that under the 1986 Purchase Agreement ANP was not an insured, it concluded that because the Insurers sought to recover for the very risk they insured, the antisubrogation rule would prohibit the Insurers’ right of subrogation.

ANALYSIS

Subrogation, generally, may arise either contractually or under the doctrine of equitable subrogation. However, the antisubrogation rule is an exception to the right of subrogation. Under that rule, “an ‘insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered … even where the insured has expressly agreed to indemnify the party from whom the insurer’s rights are derived.’”  In effect, “an insurer may not step into the shoes of its insured to sue a third-party tortfeasor … for damages arising from the same risk covered by the policy”

Insurers are barred under the antisubrogation rule from seeking subrogation from a named insured or additional insureds.

Conversely, subrogation is typically permissible where the third party is not a named or additional insured. The antisubrogation rule, therefore, requires a showing that the party the insurer is seeking to enforce its right of subrogation against is its insured, an additional insured, or a party who is intended to be covered by the insurance policy in some other way.

Here, as recognized by the courts below, ANP and its predecessor were not insured under the relevant insurance policies. When SCM transferred the assets and liabilities of its paints business to HSCM–6 (ANP’s predecessor), the insurance policies that had applied to SCM were specifically excluded from that distribution. The insurance policies were placed in HSCM–20, a predecessor of Millennium.

ANP was never insured by the Insurers. Thus, the principal element for application of the antisubrogation rule—that the insurer seeks to enforce its right of subrogation against its own insured, additional insured, or a party intended to be covered by the insurance policy—is absent.

The essential element of the antisubrogation rule is that the party to which the insurer seeks to subrogate is covered by the relevant insurance policy. The rule also requires that the insurer seek to enforce its right of subrogation against that covered party on a risk insured by the policy.

Here, however, the policy concerns underpinning the antisubrogation rule are not implicated as no conflict of interest arises. Since ANP is not an insured, there is no risk that the Insurers will shirk their obligation to one insured in favor of the other. There is no reason to apply the antisubrogation rule under these facts, and the courts below erred in granting ANP’s motion for summary judgment on that basis.

Accordingly, the order of the Appellate Division should be reversed, with costs, ANP’s motion for summary judgment on its antisubrogation defense is denied, and the case remitted to the Appellate Division for consideration of issues raised but not determined on the appeal to that court.

ZALMA OPINION

If courts extend application of the antisubrogation rule to all non-covered third parties, an insurer who fulfills its obligation to pay on the risks insured by the relevant policy would essentially be foreclosed from the ability to subrogate. It is improper for a court to rewrite a policy of insurance to remove from it the contractual right of subrogation.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

London Market Tradition Must Change

London Market System of Communication Waives Attorney Client Privilege

Insurance brokers, by definition, are people who transact insurance with but not on behalf of the insurer. As such the broker’s duty is to the person insured and not to the insurer with whom the broker places insurance.

When I still practiced law I represented many Underwriters at Lloyd’s and insurers doing business in the London insurance market. Because of how insurance was placed with multiple different underwriters and insurance companies by London brokers the insurers wanted me, as their lawyer, to communicate via the brokers who would convey the communications to the various insurers who made up the totality of insurers insuring the risk. I balked because the broker was the agent of the insured with whom my clients, the insurers, disputed coverage. Therefore, I eventually convinced the insurers I represented to let me communicate directly to the leading underwriter (the one in charge of the claim because it had the largest interest in the risk) who would then make certain that the following insurers what they needed to know.

In Certain Underwriters at Lloyd’s, et al v. National Railroad Passenger Corporation — F.Supp.3d —- United States District Court, E.D. New York,2016 WL 739061 (February 19, 2016) the District Court was faced with a motion to compel production of documents and communications from counsel to the London Market insurers because the privilege was waived by using London Brokers who placed the insurance to convey reports from counsel.

Currently pending before the Court are cross-motions to compel discovery. One of the many discovery disputes at issue is whether attorney-client communications listed on certain insurers’ privilege logs are protected from disclosure even though, due to the unique structure of the London insurance market, those communications were shared with third parties.

BACKGROUND

Plaintiffs in this action are insurers who “did business in the London Insurance Market and who issued or participated in—that is, subscribed to an agreed percentage share of the risk of—” one or more liability insurance policies issued to Amtrak during the period beginning on or about June 1, 1972 and ending in 1986 (the “Policies”).

The London Insurance Market

Before addressing the privilege dispute before the Court, it is helpful to provide background on how the London insurance market operated during the relevant time period. The insurers submitted the declaration of Martin Watson, who claims to have knowledge on the customs and practices of the London insurance market from the 1980s through the present day, based on his experience in that market. According to Watson, a policy for a major corporation like Amtrak would involve “insurance placed in layers, each policy attaching at the exhaustion point of the underlying policy.” Thus, “[a]n insurer might participate in multiple layers at different percentage shares, or might participate on only on [sic] one.” “A single policy might have anywhere from one or two insurers or dozens of insurers.” As such, each policy typically had “one or two ‘lead’ insurers, whose underwriters negotiated policy terms and conditions[.]”

To place its insurance in the London market, Amtrak, through its North American-based insurance broker, engaged two London brokers—Sedgwick and C.E. Heath (“Heath”). The London broker would take Amtrak’s insurance order and walk around to the various syndicates and companies in the London insurance market to “fill up” the policy.

The London brokers did not, however, take action only on behalf of Amtrak. As Watson explains: “With so many insurers, each with its own claims personnel, a system of communication grew up in the pre-computer age that enabled the market to handle claims promptly and efficiently. This system utilized the London broker, which had negotiated with each insurer and maintained the records of each insurer’s participation on each policy, to serve as a conduit for information among the insurers.”

Important to the instant dispute, this “London broker” message delivery system also applied to communications between the insurers and their attorneys.

Amtrak’s Motion to Compel

In its motion, Amtrak challenges the privilege log in two respects: First Amtrak claims that, because the London brokers were neither attorneys nor clients, the distribution of communications from the attorneys (including the Attorney Reports) through the London brokers waived any privilege. Second, Amtrak alleges that by referring to “Underwriters at Interest,” “Interested Insurers,” or “Subscribing Insurers,” the LMI Log inadequately identifies recipients of attorney communications.

The insurers argued that using brokers to distribute privileged communications was “standard” in the London market and not understood to waive the privilege. With respect to the sufficiency of the LMI Log’s identification of the recipients, LMI contends that the participating insurers shared a “common interest in resolving issues correctly and as efficiently as possible and for that reason were represented by the same counsel with respect to Amtrak’s claim.”

DISCUSSION

Attorney–Client Communications Distributed through London Brokers

As stated above, under certain circumstances, a third party may be privy to attorney-client communications without destroying the protection afforded by the attorney-client privilege. In particular, courts have held that the presence of third parties who are agents of the lawyer or client and whose participation “improve[s] the comprehension of the communications between attorney and client” does not negate the privilege.  Thus, communications from a client to a third-party accountant or foreign-language translator hired to assist a lawyer in providing legal advice to that client are protected under the privilege.

Nothing in the record suggests that the London brokers served any analogous role. The thrust of LMI’s arguments with respect to attorney-client communications sent through the London brokers is that such a practice was “standard” and “necessary” given the London market’s structure. LMI’s position is unavailing for several reasons. First, the fact that a particular method of distributing and/or retaining documents is standard in an industry does not determine whether that method of distribution comports with the law governing attorney-client privilege.

The record is similarly deficient with respect to the extent of the brokers’ agency relationship with the various insurers. The lack of evidence as to the necessity for the role played by the London brokers, as well as to the exact nature of their relationship with the attorneys and/or insurers, is particularly troubling given the dual agency of the London brokers, who represented Amtrak during the negotiation over and purchase of the Policies.

For these reasons, the Court concluded that the insurers failed to establish that attorney-client communications like the Attorney Reports that were distributed through and/or retained by the London brokers were intended to be, and were in fact, kept confidential. Therefore, the documents must be produced.

Essentially, LMI asks this Court to simply trust, in a vacuum, that only the appropriate parties were privy to these communications.  The Court concludes that the insurers have not met their burden of establishing the factual predicate for withholding documents with unspecified Recipient Descriptions on the basis of attorney-client and common interest privilege.

ZALMA OPINION

The system used in the London Insurance Market worked well for centuries even though the people maintaining the insurer’s files and distributing them to the various underwriters and insurers were the agent of the insured with whom the insurers were involved in a dispute. As a result, the “gentlemen,” who were the insurers and the brokers kept confidential from their principal communications to the insurers. In essence the insurers put the fox in charge of protecting their hen house. Modern computers and e-mail now allow lawyers to communicate directly with each insurer and this problem will not arise again.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Conduct Criminal in Nature Excluded

Alford Plead Is Guilty Plea

Insurance companies write policies to explain to the insured the risks they are willing to take and those they are not willing to take. When the policy excludes coverage for a serious loss court are invariably called upon to interpret the wording of the policy to provide coverages for risks that the insurer never intended to take.

In Eberle v. Nationwide Mutual Insurance Co., Court of Appeals of Kentucky, — S.W.3d —-, 2016 WL 2609311 (MAY 6, 2016) the Court of Appeals was called upon to determine whether coverage was available to Michael Bishop the under a homeowner’s insurance policy issued by Nationwide Insurance Company (“Nationwide”).

BACKGROUND

In 2011 Jacob Eberle, who was twelve years old at the time, was playing in Bishop’s neighborhood with a group of friends. Bishop, who was in his fifties, was at his home. The boys had been playing a game where they would ring the doorbells on houses and then run away before the occupants answered their doors.

Eberle was struck with shotgun pellets in his back, neck and right arm while he was on the sidewalk in front of Bishop’s home. It is undisputed that the shotgun pellets were fired by Bishop while he was standing on his porch. It is unclear, however, whether Bishop actually intended to fire his gun at Eberle.

Bishop was indicted on charges of assault in the first degree, wanton endangerment, and tampering with physical evidence. On July 26, 2012, Bishop pleaded guilty to class D felonies pursuant. Bishop’s plea agreement states: “Pursuant to North Carolina v. Alford, 400 U.S. 25 (1970), I wish to plead “GUILTY” in reliance on the attached ‘Commonwealth’s Offer on a Plea of Guilty.’ In so pleading, I do not admit guilt, but I believe the evidence against me strongly indicates guilt and my interests are best served by a guilty plea.”

The circuit court ultimately accepted Bishop’s plea and sentenced him to ten years’ imprisonment on the Alford plea.

At the time of the incident, Bishop held a homeowner’s insurance policy through Nationwide. Bishop subsequently sought coverage for the June 2011 incident, under that homeowner’s insurance. Specifically the policy excluded coverage for “bodily injury” when: “(a) caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured’s conduct. (b) caused by or resulting from an act or omission which is criminal in nature and committed by the insured.”

ANALYSIS

An insurance policy is a contract. Generally speaking, two parties of equal bargaining power are free to contract to any terms and conditions they negotiate with one another; with few exceptions, courts will not endeavor to rewrite such contracts for the benefit of one party or the other. Kentucky has adopted “four basic principles of insurance policy.” They are as follows: 1) all exclusions are to be narrowly interpreted and all questions resolved in favor of the insured; 2) exceptions and exclusions are to be strictly construed so as to render the insurance effective; 3) any doubt as to the terms of the policy should be resolved in favor of the insured; and, 4) because the policy is drafted in all details by the insurance company, it must be held strictly accountable for the language employed.

Criminal Acts Exclusion

The exclusion provides bodily injury is excluded from coverage if it is “caused by or resulting from an act or omission which is criminal in nature and committed by the insured.” Eberle argues that the term “criminal in nature” is ambiguous because it excludes unintentional and criminal conduct reasonable persons expect to be covered under homeowner’s insurance policies.  Kentucky’s Penal Code provided the most logical, reasonable, and consistent definition of the term “crime.” Kentucky Revised Statutes (“KRS”) 500.080(2), defines a crime as “a misdemeanor or a felony.”

For the purposes of this appeal, Nationwide’s exclusion would apply to an “act or omission which is criminal in nature” such that it constitutes a felony or misdemeanor under Kentucky’s Penal Code.

Eberle argues that allowing the criminal act exclusion to apply to all misdemeanors would unjustly deny insureds, like Bishop, coverage because it would exempt conduct most people do not necessarily consider to be criminally reprehensible.

Bishop was accused of and pled guilty to wanton endangerment in the first degree, a Class D felony. While Bishop has denied that he intended to harm Eberle, he admits that he intentionally brandished his shotgun while in striking distance of Eberle and his companion.

While standing on his porch, Bishop brandished a shotgun he knew or should have known to be loaded and pointed it in the direction of two young, unarmed boys located on the sidewalk. Such conduct is unquestionably unlawful and felonious. Intentionally pointing a gun at an unarmed child is the type of conduct every citizen should know is wanton and criminal. Bishop could not reasonably expect such core criminal conduct to fall outside of Nationwide’s criminal acts exclusion.

Alford Plea

Next, we must determine whether the circuit court erroneously relied on Bishop’s Alford plea in granting summary judgment. On appeal, Eberle argues that the circuit court erred in elevating his Alford plea to the position of a regular criminal plea for the purposes of collateral estoppel.

Nationwide chose to make an actual conviction, or lack thereof, of no consequence by the wording of the exclusion. The policy explicitly states that the criminal acts exclusion applies “regardless of whether the insured is actually charged with, or convicted of a crime.” Nationwide, by its own terms, has rendered the actual fact of a prior conviction a nullity. Under the policy, the focus is on whether the conduct causing the injury for which recovery is being sought under the policy, is criminal in nature.

An Alford plea is merely a type of guilty plea in which an individual accused of a crime may voluntarily, knowingly, and understandingly consent to the imposition of a prison sentence even if he is unwilling or unable to admit his participation in the acts constituting the crime.  Most important to the court’s analysis, Alford cautions “that pleas coupled with claims of innocence should not be accepted unless there is a factual basis for the plea.”

Although Bishop’s plea is labeled as an Alford plea, the fact remains that it resulted in his conviction. The entry of a guilty plea under the Alford doctrine carries the same consequences as a standard plea of guilty.

In pleading guilty, Bishop acknowledged that the evidence against him was sufficient to support the charges to which he pled guilty. The trial court reviewed that evidence and agreed that it was sufficient to establish Bishop’s guilt.  Bishop’s Alford plea was admissible in the civil proceeding brought by Nationwide to prove that Bishop committed the crimes he pleaded guilty to in the criminal case. The reasons for Bishop’s guilty plea cannot undermine or erase the fact of his conviction.

ZALMA OPINION

Nationwide’s exclusion was brilliantly broad by eliminating the need for conviction and simply excluding any conduct that was “criminal in nature”. There was no need to prove that Bishop was convicted for the exclusion to apply. In this case it did not matter since Bishop was convicted regardless of his use of the Alford plea. Jail was proper and he had no right to be protected by insurance for his criminal conduct.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Lie to Life Insurer Deprive Beneficiaries of Benefits

Fraud Claim Requires Intent to Deceive

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all  the facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]).

When a person fails to tell the truth to its insurer when applying for insurance the insurance company has the right to void coverage. In Melissa Gammel and Brad Gammel vs. UNUM, United States District Court, W.D. Oklahoma 2016 WL 2587281 (05/04/2016) plaintiffs Melissa and Brad Gammel (the “Gammels”) filed suit against defendant UNUM Life Insurance Company of America (“UNUM”), asserting claims for bad faith and fraud. The dispute is centered on a life insurance policy issued by UNUM to Earlene Forsythe (Melissa Gammel’s mother and Brad Gammel’s grandmother). Plaintiffs allege that UNUM wrongfully denied benefits under that policy.

FACTUAL BACKGROUND

Earlene Forsythe (“Forsythe”) worked for Comanche County Memorial Hospital (the “Hospital”) as a registered nurse until she retired on November 30, 2011. While employed at the Hospital, Forsythe was insured under a group policy for life and accidental death and dismemberment insurance. When she retired, her group coverage expired and she had two options to pursue continued coverage: conversion coverage or portability coverage.

Under UNUM’s policy, all insureds whose group coverage terminated due to a qualifying event (including retirement) had the option to “convert” their life insurance coverage to an individual policy, which could provide limits up to the amount that was provided under the group policy but would cost premium at rates substantially higher than the group premium rates. Some group policies, however, including the Hospital’s group policy, allowed insureds to “port” their life insurance coverage to a policy that would include coverage limits at a percentage of the group policy limits, and would continue to be billed at the group premium rate. To qualify for the portability coverage under the Hospital’s policy, an insured was required to certify on a coverage application to the absence of any medical condition that had a material effect on life expectancy. If a claim was filed within two years of the effective date on a ported policy and if UNUM learned that the insured had such a medical condition at the time of the application, the beneficiaries could only recover a reduced amount of insurance (a “commuted benefit”) which was based on what the policy premium would have purchased at an individual rate.

Forsythe applied for portability coverage in the amount of $30,000 for life insurance benefits. On November 13, 2012, less than two years after the policy effective date, Forsythe passed away. Plaintiffs submitted a claim under the life insurance policy. In the course of investigating the claim UNUM learned that despite Forsythe’s certification on her application that she had no medical condition that had a material effect on her life expectancy, by that time she had been diagnosed with various medical conditions including coronary artery disease, atrial fibrillation, hypertension, diabetes mellitus (Type 2), and morbid obesity. UNUM therefore paid plaintiffs a “commuted benefit” totaling $1,826 and plaintiffs filed this suit.

DISCUSSION

Plaintiffs assert UNUM breached its duty of good faith and fair dealing in two ways. First, they argue that UNUM failed to investigate whether Forsythe submitted her answers on the insurance application with an intent to deceive, and as a result UNUM unreasonably denied the full benefits of her portability coverage. Second, they argue UNUM improperly calculated Forsythe’s commuted benefit by including an annual “conversion fee” which further reduced the benefit amount.

Under Oklahoma law, insurers can decline coverage on the basis of the insured’s misrepresentations only in limited circumstances—when the misrepresentation is fraudulent, material to acceptance of the risk, or such that if the insurer had known the truth it would not have issued coverage to the extent it did. The Oklahoma Supreme Court has interpreted its statutes to include a requirement of knowledge of the representation’s falsity or some intent to deceive. (Hays v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 584, 587 (10th Cir. 1997).) As a result, failure to investigate the facts related to an insured’s knowledge or motivation in making a false or incorrect representation may, in a proper case, expose an insurer to liability for bad faith.

Nonetheless, a plaintiff asserting bad faith based on inadequate investigation must make a showing that material facts were overlooked or that a more thorough investigation would have produced relevant information. When a plaintiff identifies no information that would change the underlying facts on which an insurer can reasonably rely, summary judgment is appropriate.

Here, there is no dispute that Forsythe had all of the medical conditions that UNUM uncovered in its investigation. And there is no dispute that Forsythe, a registered nurse, knew of her conditions at the time she made her application. Prior to her application date, she had visited a cardiologist five times.

With respect to their fraud claims, plaintiffs assert defendant made fraudulent representations by informing Forsythe she “may” continue her life insurance coverage when she actually had a right to converted insurance coverage. Proof of fraud must show a material false representation, made with knowledge of its falsity or recklessly without knowledge as to its truth or falsity, as a positive assertion, with the intention that it be acted upon by another, who does act in reliance thereon, to his injury.

Plaintiffs also assert defendant made fraudulent representations that Forsythe’s coverage was approved at requested policy limits without evidence of insurability, when in fact UNUM reduced her policy coverage after investigating Forsythe’s “insurability” at the time the claim was submitted.

However, both the group life policy under which the portability option was available and the application for portability coverage made clear that eligibility for coverage depended on the absence of any medical condition that had a material effect on life expectancy. They also indicated that if such a medical condition was discovered to have existed, the policy benefit would be reduced to that which a conversion policy would provide.

No showing has been made that Forsythe’s policy or the Gammels’ claim were handled contrary to the terms expressed in the group insurance policy. Further, no evidence has been submitted which would support an inference that UNUM intended to breach the policy terms at the time it made the representations. Therefore, summary judgment was granted.

ZALMA OPINION

People suing insurance companies for breach of the covenant of good faith and fair dealing forget that the covenant applies equally to the insurer and the insured. Here, a registered nurse, knowing she suffered from several life threatening diseases did not disclose the fact when she applied for the life insurance. Her actions were a breach of the covenant and rather than causing the policy to be void merely reduced the benefits her beneficiaries could collect. In effect, she defrauded UNUM and still obtained some benefits.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

VERTICAL EXHAUSTION AND ALL SUMS ALLOCATION

Who’s on First?

When an insured carries multiple layers of insurance started with a primary policy and then several layers of excess insurance designed to pay only after the layers of insurance below have been exhausted.

Insurers have the unquestioned right to select those whom it will insure and is allowed to make a wise discrimination in selecting its risks and may limit the risks it is willing to take by clear and unambiguous language in the policy issued. This right is not limited by whether the policy is primary or excess insurance. New York’s highest court was asked to deal with the meaning of primary and excess policies in In re Viking Pump, Inc., Court of Appeals of New York, — N.E.3d —-, 2016 N.Y. Slip Op. 03413, 2016 WL 1735790 (May 3, 2016).

QUESTIONS

The Questions presented to the highest court in New York:

(1) whether “all sums” or “pro rata” allocation applies where the excess insurance policies at issue either follow form to a non-cumulation provision or contain a non-cumulation and prior insurance provision, and

(2) whether, in light of our answer to the allocation question, horizontal or vertical exhaustion is required before certain upper level excess policies attach.

FACTS

Viking Pumps, Inc., and Warren Pumps, LLC, acquired pump manufacturing businesses from Houdaille Industries in the 1980s. Those acquisitions later subjected Viking and Warren to significant potential liability in connection with asbestos exposure claims.

Houdaille had extensive multi-layer insurance coverage spanning from 1972 to 1985 that included coverage for such claims. More specifically, Liberty Mutual Insurance Company provided Houdaille with primary insurance (totaling approximately $17.5 million) and umbrella excess coverage (totaling approximately $42 million) through successive annual policies. Beyond that, Houdaille obtained additional layers of excess insurance through annual policies issued by various excess insurers (totaling over $400 million in coverage), including a number of policies issued by defendants, designated herein as “the Excess Insurers.”

Viking and Warren sought coverage under the Liberty Mutual policies, and the Delaware Court of Chancery determined that both companies were entitled to exercise rights as insureds under those policies. As the Liberty Mutual coverage neared exhaustion, litigation arose regarding whether Viking and Warren were entitled to coverage under the additional excess policies issued to Houdaille by the Excess Insurers and, if so, how indemnity should be allocated across the triggered policy periods.

Central to the underlying litigation, the Liberty Mutual umbrella policies provide that the insurer “will pay on behalf of the insured all sums in excess of the retained limit which the insured shall become legally obligated to pay, or with the consent of [the Insurer], agrees to pay, as damages, direct or consequential, because of: (a) personal injury … with respect to which this policy applies and caused by an occurrence”.

The majority of the excess policies at issue also follow form to a “non-cumulation” of liability or “anti-stacking” provision in the Liberty Mutual umbrella policies. Those excess policies that do not follow form to the Liberty Mutual non-cumulation provision, contain a similar provision.

ANALYSIS

Insurance contracts, like other agreements, should be enforced as written, and parties to an insurance arrangement may generally contract as they wish and the courts will enforce their agreements without passing on the substance of them.

When construing insurance policies, the language of the contracts must be interpreted according to common speech and consistent with the reasonable expectation of the average insured. Furthermore, the court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.

Generally, non-cumulation clauses prevent stacking, the situation in which “an insured who has suffered a long term or continuous loss which has triggered coverage across more than one policy period wishes to add together the maximum limits of all consecutive policies that have been in place during the period of the loss. Such clauses originated during the shift from “accident-based” to “occurrence-based” liability policies in the 1960s and 1970s, and were purportedly designed to prevent any attempt by policyholders to recover under a subsequent policy—based on the broader definition of occurrence—for a loss that had already been covered by the prior “accident-based” policy.

In policies containing non-cumulation clauses or non-cumulation and prior insurance provisions, such as the excess policies before the court, all sums is the appropriate allocation method. It would be inconsistent with the language of the non-cumulation clauses to use pro rata allocation. Such policy provisions plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence by acknowledging that a covered loss or occurrence may also be covered in whole or in part under any other excess policy issued to the Insured prior to the inception date of the policy.

By contrast, the very essence of pro rata allocation is that the insurance policy language limits indemnification to losses and occurrences during the policy period—meaning that no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence. Pro rata allocation is a legal fiction designed to treat continuous and indivisible injuries as distinct in each policy period as a result of the “during the policy period” limitation, despite the fact that the injuries may not actually be capable of being confined to specific time periods.

The non-cumulation clause presupposes that two policies may be called upon to indemnify the insured for the same loss or occurrence. In a pro rata allocation, the non-cumulation clauses would, therefore, be rendered surplusage—a construction that cannot be countenanced under New York’s principles of contract interpretation and a result that would conflict with previous recognition by New York courts that such clauses are enforceable.

Based on the policy language and the persuasive authority holding that pro rata allocation is inconsistent with non-cumulation and non-cumulation/prior insurance provisions, the court concluded that all sums allocation is appropriate in policies containing such provisions, like the ones at issue here.

EXHAUSTION

All of the excess policies at issue primarily hinge their attachment on the exhaustion of underlying policies that cover the same policy period as the overlying excess policy. Vertical exhaustion is, therefore, more consistent than horizontal exhaustion with this language tying attachment of the excess policies specifically to identified policies that span the same policy period. Further, vertical exhaustion is conceptually consistent with an all sums allocation, permitting the Insured to seek coverage through the layers of insurance available for a specific year.

Here, the Insureds are not seeking multiple recoveries from different insurers under concurrent policies for the same loss, and the other insurance clause does not apply to successive insurance policies. Thus, in light of the language in the excess policies tying their attachment only to specific underlying policies in effect during the same policy period as the applicable excess policy, and the absence of any policy language suggesting a contrary intent, the court concluded that the excess policies are triggered by vertical exhaustion of the underlying available coverage within the same policy period.

The court concluded that, under New York law, the contract language of the applicable insurance policies controls each of these questions, and answered the certified questions  concluding that all sums allocation and vertical exhaustion apply based on the language in the policies before the court.

ZALMA OPINION

Insurers, and those they insure, may contract as they wish and the courts will enforce their agreements. In this case the clear and unambiguous intent of the parties were that each lawyer of insurance for a single policy period must be exhausted before the next insurer in line is required to defend or indemnify. The highest court in New York, therefore, applied the policy language and refused to rewrite the contract of insurance.

 

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Proof of Mailing Required

When Insured Fails to Appear for EUO

THE NEED TO PROVE THE EUO WAS PROPERLY DEMANDED

The appearance at an examination under oath (EUO) is a condition precedent to obtaining the benefits of an insurance policy. When the insured claims, as a defense to the attempt to deny a claim, that the demand for EUO was not received, the insurer must prove that the demand was mailed.

In Progressive Cas. Ins. Co. v. Metro Psychological Services, P.C., Supreme Court of the State of New York Appellate Division, — N.Y.S.3d —-, 2016 N.Y. Slip Op. 03485, 2016 WL 2337939 (May 4, 2016) the plaintiffs insurance companies sued for a judgment declaring that they are not obligated to provide insurance coverage for any of the no-fault claims submitted to them by the defendant on the ground that the defendant failed to comply with conditions precedent to reimbursement under the no-fault laws and regulations and insurance laws of New York.

The plaintiffs argued that the defendant failed to comply with the provision of the insurance policy which required that the defendant submit to an EUO, and therefore the plaintiffs were not obligated to provide insurance coverage for the no-fault claims submitted by the defendant. The Supreme Court (trial court) granted the plaintiffs’ motion and denied the defendant’s cross motion.

ANALYSIS

On appeal, the defendant contends that the plaintiffs’ motion for summary judgment should have been denied because the plaintiffs failed to establish, prima facie, that the letters scheduling the EUOs at issue were timely and properly mailed. Generally, proof that an item was properly mailed gives rise to a rebuttable presumption that the item was received by the addressee.

However, for the presumption to arise, the office practice must be geared so as to ensure the likelihood that the item is always properly addressed and mailed. Denial of receipt by the insured, standing alone, is insufficient to rebut the presumption.

The plaintiffs failed to establish, prima facie, that they timely and properly mailed the EUO letters to the defendant. The affirmation of the plaintiffs’ counsel contained conclusory allegations regarding his office practice and procedure, and failed to establish that the practice and procedure was designed to ensure that the EUO letters were addressed to the proper party and properly mailed.

Since the plaintiffs failed to establish their prima facie entitlement to judgment as a matter of law on the issue of the timely and proper mailing of the EUO letters, their motion for summary judgment on the complaint should have been denied, regardless of the sufficiency of the defendant’s opposition papers.

ZALMA OPINION

Come on New York if a lawyer swears that he or she prepared a demand for EUO and placed it in the procedures of his office, that proper postage was put on it and it was mailed, the demand was sent. What this now requires is that EUO demands in New York be mailed certified, return receipt requested, so that proof exists that the document was received, a waste of time and money.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Workers’ Compensation is an Exclusive Remedy

Temporary Staffing Employee is Employee of Two Entities

The reason for workers’ compensation insurance is to allow no-fault coverage to employees injured on the job. By eliminating the need to prove fault the employee loses the right to sue the employer for negligence and makes the benefits provided by workers’ compensation the exclusive remedy available to the employee.

Employers that use temporary staffing employees who are not officially on the payroll of the employer should be subject to the exclusive remedy of the statutes that created workers’ compensation in lieu of tort damages against the employer. In Tractor Supply Co. of Texas, L.P. v. McGowan, Not Reported in S.W.3d, Court of Appeals of Texas, 2016 WL 1722873 (April 28, 2016) the Texas Court of Appeal was faced with an effort to avoid a multi-million dollar judgment against Tractor Supply when the temporary employee was severely injured claiming he was not an employee of Tractor Supply but was only an employee of the temporary agency.

BACKGROUND FACTS

Kenneth Edd McGowan brought a personal injury suit against Tractor Supply Company, Tractor Supply Company of Texas, L.P., and Dwight Bledsoe.  After a trial, the jury found Tractor Supply 100 percent negligent, and Bledsoe not negligent.

The trial court entered judgment ordering Tractor Supply Company of Texas, L.P. to pay McGowan $8,767,375.81 in damages.

Job Link Personnel Services, Inc., is a temporary staffing company in Waco, Texas. Tractor Supply Company of Texas, L.P. operates a distribution center in Waco, and is a client of Job Link. Job Link assigned McGowan to work in the Tractor Supply distribution center. Tractor Supply employees trained, supervised, and instructed McGowan in his job duties at Tractor Supply.

On May 21, 2012, McGowan was working as a “picker” at the Tractor Supply distribution center. Dwight Bledsoe, an employee of Tractor Supply, was loading a pallet onto a high, gravity-flow rack, and he pushed another pallet loaded with a thousand pounds of dog food off of the rack. The pallet landed on McGowan causing severe injuries.

EXCLUSIVE REMEDY DEFENSE

In the first issue, Tractor Supply argues that the trial court erred when it deprived Tractor Supply of the exclusive remedy defense of the Texas Workers’ Compensation Act that bars McGowan’s recovery as a matter of law. The Texas Workers’ Compensation Act provides that, “Recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage or a legal beneficiary against the employer or an agent or employee of the employer for the death of or a work-related injury sustained by the employee.” TEX. LAB.CODE ANN. § 408.001(a) (West 2015). (Emphasis added)

Recovery of workers’ compensation benefits would be McGowan’s exclusive remedy if Tractor Supply can show that it is McGowan’s employer and that it is covered by workers’ compensation insurance. Tractor Supply argues that at the time of the injury McGowan was a Tractor Supply temporary employee and that Tractor Supply had workers’ compensation coverage with respect to temporary employees assigned by Job Link.

EMPLOYEE CAN HAVE MORE THAN ONE EMPLOYER

An employee may have more than one employer within the meaning of the Texas Workers’ Compensation Act, and each employer who subscribes to workers’ compensation insurance may raise the exclusive-remedy provision as a bar to claims about the injury. An employee of a temporary employment agency who is “injured while working under the direct supervision of a client company is conducting the business of both the general employer [the temporary employment agency] and that employer’s client.” Garza v. Exel Logistics, Inc., 161 S.W.3d at 475 (quoting Wingfoot Enterprises v. Alvarado, 111 S.W.3d 134, 143 (Tex.2003).

In determining if a general employee of a temporary employment agency is also an employee of a client company for purposes of the Workers’ Compensation Act, we consider traditional indicators of employment, such as the exercise of actual control over the details of the work that gave rise to the injury. The Workers’ Compensation Act states that “an ‘employee’ means each person in the service of another under a contract of hire, whether express or implied, or oral or written.” TEX. LAB.CODE ANN. § 401.012(a) (West 2015).

The record shows that at the time of his injury, McGowan was working on Tractor Supply’s premises, in furtherance of Tractor Supply’s day-to-day business, and the details of his work that caused his injury were specifically directed by Tractor Supply. The record shows that McGowan worked at all times under the supervision of Tractor Supply employees. McGowan was trained by Tractor Supply employees and given his daily assignments by Tractor Supply employees. For worker’s compensation purposes, McGowan was an employee of Tractor Supply within the meaning of the statutes.

WORKERS’ COMPENSATION INSURANCE

Tractor Supply is a “non-subscriber” to Texas workers’ compensation insurance for its permanent, full-time employees.  Tractor Supply argues that it is covered by the workers’ compensation policy obtained by Job Link for its temporary employees.

The agreement between Tractor Supply and Job Link provided that Tractor Supply would pay a “markup” of 29.50 percent to include payroll taxes, general liability, workers’ compensation insurance, drug screens, employment eligibility, and criminal background checks. The agreement indicated a workers’ compensation code of “8107” for Tractor Supply.

Job Link maintained a workers’ compensation policy issued by Texas Mutual. The policy included an Alternate Employer Endorsement. The Alternate Employer Endorsement provides: “This endorsement applies only with respect to injury to your employees while in the course of special or temporary employment by the alternate employer in the state named in the Schedule. Part One (Workers Compensation insurance) and Part Two (Employers Liability Insurance) will apply as though the alternate employer is insured.”

The record shows that Job Link submitted a “Temp Employee Data Worksheet for Temp Services” to the Texas Mutual Underwriting Department. The document listed the client companies of temporary service for Job Link and the zip codes for those companies. That list of client companies provided to Texas Mutual states that there would be 40 employees at Tractor Supply and gives the description of operations as “warehouse order pickers”.

The “8107” classification code for workers’ compensation insurance referenced in the agreement between Tractor Supply and Job Link is included in the workers’ compensation policy issued by Texas Mutual. The “8107” classification code refers to “forklift sales, service and repair & drivers”.

The Court in Garza held that there must be explicit coverage for the client company. The Alternate Employer Endorsement specifically provides coverage for bodily injury in the course of special or temporary employment by the alternate employer. Although Tractor Supply is not named in the policy as an alternate employer, the policy refers to the alternate employer as “blanket” and Job Link provided Texas Mutual with a list of client companies and their respective job descriptions.

The Court of Appeal concluded that Tractor Supply established that it is covered by workers’ compensation insurance coverage for the injury sustained by McGowan.
Tractor Supply was entitled to the exclusive remedy defense.

Having sustained Tractor Supply’s first issue on appeal, the trial court’s judgment was reversed and judgment was rendered that Kenneth Edd McGowan take nothing by this suit.

ZALMA OPINION

The exclusive remedy is just that. Workers’ compensation is a social contract between the state and employers and employees. When a person is injured at work, even if due to the employees negligence, he or she is immediately able to recover benefits for his or her injuries without a need to sue. In exchange for this benefit the employer is protected from tort suits by making workers’ compensation an exclusive remedy. McGowan tried to get the workers’ compensation benefits and tort damages. He got it from a jury and appropriately lost in the court of appeal.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Estoppel is a Rare and Limited Tool

No Right to Create Coverage by Estoppel

When a Bentley (a $500,000 automobile)  is damaged in an accident while being operated by a stranger to the policy the material damage coverage may not apply. When a dispute arose about the extent of material damage coverage available for the repair of the Bentley litigation ensued.

In E.L.S.R. Corp. v. GEICO General Insurance Company, United States District Court, S.D. Florida, Slip Copy, 2016 WL 1722426 ( 04/29/2016) the USDC, Southern District of Florida was faced with GEICO General Insurance Company’s (“Geico”) Motion for Summary Judgment seeking a finding it owed nothing for the repair of the Bentley.

BACKGROUND

Plaintiff ELSR is an assignee of GEICO’s insured, non-party Cara Ceo (“Cara Ceo” or the “Insured”), and filed the present action against GEICO for breach of contract. On March 13, 2014 Cara Ceo signed a rental agreement with ELSR for a 2013 Bentley GTC (the “Rental Car”). At the time, Cara Ceo was an insured driver under a GEICO policy  (the “Policy”), issued to Cara Ceo’s parents.

On March 15, 2014, the Rental Car was involved in an accident in Miami-Dade County, and was damaged as a result.  Cara Ceo did not occupy the Rental Car during the accident.

The accident was reported to GEICO (the “Ceo Claim”). Brian Broussard, a liability adjuster for GEICO discovered that an individual named Aaron Preston was driving the car at the time of the accident. GEICO sent a reservation of rights letter to the Insured, advising that the Rental Car might not meet the definition of an “owned auto,” a “non-owned auto,” or a “temporary substitute auto” under Section I of the Policy.

Eventually GEICO denied the claim and stated: “The Denial is made due to [sic] Aaron Preston does not meet the definition of a person who is insured under our auto policy for Liability and Physical Damages Coverage while driving a 2013 Bentley GTC which is not owned by our insured. Furthermore, because our insured’s [sic] were not driving or occupying the rental car at the time of the incident, we do not have any coverage for any damage to the rental car itself and any other damage that were sustained in this accident.”

A short time later Tina Swindell, Broussard’s supervisor, reopened the Ceo Claim. Swindell overturned the coverage determination denying the physical damages portion of the Ceo Claim under Section III of the Policy. Swindell called counsel for ELSR and advised that the denial was in error.

The Rental Car was sent to Prestige Imports, a body shop, for repairs. After Prestige Imports completed the body repairs, the Rental Car was towed to the dealer for remaining repairs. On August 20, 2014, GEICO issued a payment to Braman Motors in the amount of $14,855.35, with reference to the Ceo Claim, in payment of “Collision Coverage.” On August 29, 2014, GEICO produced a supplemental estimate in the amount of $60,395.78 based on the repair cost.

On October 6, 2014, GEICO contacted counsel for ELSR and advised that coverage on the Ceo Claim was still pending. Finally, on October 28, 2014, GEICO sent denial letters to the Insured and counsel for ELSR denying coverage.

On March 19, 2015 the Insured assigned the rights and benefits of the collision portion of the Policy to ELSR in exchange for a release of all claims. On August 14, 2015 ELSR sued GEICO. The one-count Complaint alleges breach of contract based on GEICO’s failure to pay the full loss.

DISCUSSION

ELSR abandoned its claim for breach of contract based on coverage under the Policy. This case therefore rises and falls on whether Florida’s limited promissory estoppel exception prevents GEICO from denying coverage.

Under Florida law “[t]he general rule in applying equitable estoppel to insurance contracts provides that estoppel may be used defensively to prevent a forfeiture of insurance coverage, but not affirmatively to create or extend coverage.” Crown Life Ins. Co. v. McBride, 517 So. 2d 660, 661 (Fla. 1987) Equitable estoppel is not designed to aid a litigant in gaining something, but only in preventing a loss. In other words, it will not avail in offense, but only in defense. While Florida recognizes the “very narrow” exception of promissory estoppel, the exception may only be used to create insurance coverage where not to do so would be virtually to sanction the perpetration of fraud or would result in other injustice. As the careful limitation on the exception suggests promissory estoppel is strictly intended to be a rare and limited remedy.

Where fraud is not alleged, the party seeking to invoke the doctrine must show by clear and convincing evidence that the promisor reasonably should have expected that its affirmative representations would induce the promisee into action or forbearance substantial in nature, and that such reliance thereon was to the promisee’s detriment.

The court recognized that the creation of coverage could be possible under a theory of promissory estoppel but only if the plaintiff met the clear and convincing evidentiary burden required to establish such estoppel. ELSR submits only its own, unnotarized declaration to show detrimental reliance. Therein, ELSR states that it would not have agreed to the repairs proposed or the costs calculated had Swindell not reopened the Ceo Claim.

In short, ELSR has not shown that the Court’s failure to extend coverage would sanction fraud or injustice. Although the Court must view the evidence in the light most favorable to ELSR, it is also mindful of its obligation to view the evidence presented through the prism of the substantive evidentiary burden. The trial judge must bear in mind the actual quantum and quality of proof necessary to support the claim.

The Court could not say that the evidence presented – ELSR’s own unnotarized declaration – is such that a reasonable jury might find that detrimental reliance has been shown with convincing clarity. There is no genuine issue if the evidence presented in the opposing affidavits is of insufficient caliber or quantity to allow a rational finder of fact to find an element by clear and convincing evidence.

Summary judgment in GEICO’s favor is therefore appropriate.

ZALMA OPINION

Insurance coverage is based on the wording of the insurance contract. It can only be changed by the contracting parties. When there is no evidence of breach of contract and that the insurer’s denial was properly based on the contract wording the only opportunity for coverage was to claim that GEICO’s claim handling defrauded the insured and prohibited it from applying the denial. To do so the person seeking coverage must prove the ground for estoppel by clear and convincing evidence.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Blaming Agent for Insured’s Mistake Fails

Report Your Loss Promptly – Or Else

Every liability insurance policy has a reporting provision that requires the insured to promptly report any known loss to its insurer. Failure to report a loss promptly, depending on the jurisdiction, can be fatal to a claim for defense and indemnity. When an insured lost – because of a late report – its case against its insurer sought to get coverage from its agent claiming it delayed the report and was responsible for the insured losing its coverage.

In Rockland Exposition, Inc. v. Marshall & Sterling Enterprises, Inc., — N.Y.S.3d —-, 2016 N.Y. Slip Op. 03157, 2016 WL 1652119 (April 27, 2016) Supreme Court of the State of New York, Appellate Division: Second Judicial Department was asked to reverse the order of the trial court on behalf of the agent in its claim for damages for breach of contract, negligence, and breach of fiduciary duty.

FACTS

The plaintiff, Rockland Exposition, Inc. (hereinafter REI), is in the business of managing trade shows, primarily for the automotive industry. Nonparty Great American Assurance Company (hereinafter Great American) issued a primary commercial general liability policy to REI, which was procured by the defendants, REI’s insurance brokers.

The policy provided coverage for “personal and advertising injury” up to $1,000,000 per occurrence. It also provided that Great American had a duty to defend REI in an action to recover damages covered by the policy. As relevant here, the policy obligated REI to notify Great American “as soon as practicable of an occurrence or offense which may result in a claim.” Further, in the event a claim or suit was commenced against REI, the policy obligated REI to notify Great American in writing “as soon as practicable,” and “[i]mmediately send [Great American] copies of any demands, notices, summonses or legal papers received in connection with the claim or ‘suit.’ ”

It is undisputed that during the policy period, on June 27, 2008, REI received a letter from an attorney representing the Association of Automotive Service Providers of New Jersey (hereinafter AASP), stating that AASP had commenced an action against REI on June 25, 2008, in federal court (hereinafter the AASP action). The complaint in the AASP action alleged that REI, which had in the past contracted with AASP to run an annual trade show, had begun running advertisements for its own competing trade show, and had, inter alia, infringed on AASP’s trademark in its advertisement. REI was served with the summons and complaint in the AASP action on July 11, 2008.

It is further undisputed that REI did not notify the defendants of the AASP action until August 18 or 19, 2008. In September 2008, REI provided the defendants with a copy of the summons and complaint in the AASP action. On October 1, 2008, the defendants submitted REI’s claim to Great American. By letter dated October 29, 2008, Great American denied coverage based upon, inter alia, REI’s breach of the policy’s notice provisions.

REI commenced an action against Great American in the United States District Court for the Southern District of New York, seeking a declaration that Great American was obligated to pay REI’s legal fees and costs in the AASP action. The United States Court of Appeals for the Second Circuit affirmed the trial court’s decision that coverage did not apply. (see Rockland Exposition, Inc. v Great Am. Assur. Co., 445 Fed Appx 387 [2d Cir] ).

While REI’s appeal before the Second Circuit was pending, REI commenced this action against the defendants seeking damages for breach of contract, negligence, and breach of fiduciary duty. REI alleged that the defendants failed to properly process REI’s claim and/or provide Great American with timely notice of its claim, thereby depriving REI of the benefit of insurance coverage for which it had paid substantial premiums.

The defendants moved for summary judgment dismissing the complaint on the ground that REI had already breached the notice provisions of the policy, thereby vitiating coverage by the time it notified the defendants of the AASP action on August 18 or 19, 2008. The defendants argued that, as such, any actions they took in processing the claim could not have been the proximate cause of REI’s alleged damages. The trial court granted the defendants’ motion, and REI appealed.

ANALYSIS

Where an insurance policy requires an insured to provide notice “as soon as practicable,” such notice must be accorded the carrier within a reasonable period of time. The insured’s failure to satisfy the notice requirement constitutes a failure to comply with a condition precedent which, as a matter of law, vitiates the contract.

Ordinarily, the question of whether the insured had a good-faith belief in nonliability, and whether that belief was reasonable, presents an issue of fact and not one of law. Nevertheless, the issue of whether an insured’s excuse for the delay is reasonable may be determined as a matter of law where the evidence, construing all inferences in favor of the insured, establishes that the belief was unreasonable or in bad faith.

Here, the defendants established their prima facie entitlement to judgment as a matter of law by establishing that REI did not notify them of AASP’s action until 52 days after it was first notified that AASP had commenced the action, and by establishing that REI’s 52–day delay, if unexcused, was unreasonable as a matter of law. REI proffered two excuses for the delay: (1) that it was unable to understand the complicated language of the policy so as to ascertain whether coverage was available, and (2) that it had a good faith belief in nonliability which was premised upon the advice of its attorneys.

As to the first excuse, it is true that a justifiable lack of knowledge of insurance coverage may excuse a delay in reporting an occurrence. However, to prevail on this theory, the insured must prove not only that it was ignorant of the available coverage, but also that it made reasonably diligent efforts to ascertain whether coverage existed. Here, while REI alleged that it consulted with attorneys about its potential liability in the AASP action, it did not allege that it made any effort to inquire as to the possibility of coverage in connection with the AASP action during the 52–day period.

The court found that, as a matter of law, the excuse of no liability is not reasonable under the circumstances of this case. The policy provided that in the event a claim or suit was brought against REI, REI must notify Great American in writing “as soon as practicable” and “[i]mmediately send [Great American] copies of any demands, notices, summonses or legal papers received in connection with the claim or ‘suit.’ ”

While REI may have had a good faith belief that it would not be liable to AASP, what is “[a]t issue is not whether the insured believes he [or she] will ultimately be found liable for the injury, but whether he [or she] has a reasonable basis for a belief that no claim will be asserted against him [or her]”. By June 27, 2008, REI had no basis upon which to believe that a claim would not be asserted against it because it was aware that AASP had already filed an action against it in federal court. Yet, REI waited at least 52 days to notify the defendants of that action.

While REI may have believed that it would not be held liable, this belief would not, under the circumstances of this case, excuse a 52–day delay in notifying Great American that the action had been filed against it. Since REI failed to raise a triable issue of fact as to whether any further delay caused by the defendants in notifying Great American of the action/claim was a proximate cause of REI’s injuries, the trial court properly granted the defendants’ motion for summary judgment dismissing the complaint.

ZALMA OPINION

New York state, although it will accept excuses for failure to promptly report a claim, it is one of the few that strictly enforces the reporting provision. REI failed in its argument that the insurer denied its claim improperly and, grasping at straws, sued its agent for causing the insurer to deny the claim. Since the report to the agent was already slothful the agent’s actions did not cause the denial and REI is out of luck and must pay from its own funds to defend the action and pay any judgments.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – May 1, 2016

 

CONFABULATION!

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

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

The current issue of ZIFL reports on:

  • Confabulation!
  • Barry Zalma
  • Fraud Fails in the UK
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
  • Books from Barry Zalma
  • Wisdom
  • New Tool to Fight Fraud in Illlinois
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • $77 Million Fraud or Legitimate Claim
  • Zalma’s Insurance 101
  • New California Jury Instruction re Diminution
  • Zalma’s Insurance Fraud Letter

================================================

USEFUL INFORMATION SOURCES

VISIT ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

The Zalma Insurance Claims Library

Learn More

Zalma on Insurance – A Blog

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

Zalma on Insurance

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

 

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

 The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library
Regards,
Barry Zalma
Posted in Zalma on Insurance | Leave a comment

Cooperation Clause Breach Defeats Coverage

Insured With No Risk of Personal Loss May Not Enter Into Assignment of Case Against Insurer

Minnesota allows an insurer to protect its insured – when coverage is in dispute – from a judgment excess of its policy limits. It also allows an insured – when coverage is in dispute – to make a deal with the plaintiff if not protected by the insurer to assign the insured’s right to sue the plaintiff for bad faith. The two types of agreement are contradictory and an insured may only be protected by one.

In American Family Mut. Ins. Co. v. Donaldson, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2016 WL 1639159 the insured, protected by the first agreement also entered into a second agreement allowing the plaintiff to sue the insurer for an excess verdict obtained from an arbitrator.

FACTS

American Family Mutual Insurance Company (American Family) brought this declaratory judgment action to determine whether an umbrella insurance policy it issued to Todd Patton provided any coverage for an automobile accident in which a passenger in a vehicle driven by Todd’s son, Jacob Patton, was seriously injured.

In April 2011, Jacob Patton obtained his driver’s license. He was eighteen years old at the time. About one week later, Jacob decided to drive his father’s Chevrolet minivan after he had been drinking. Jacob’s friend, John Donaldson, was a passenger in the vehicle. A pedestrian observed Jacob driving erratically and called 911. When a police officer responded to the 911 call, saw the vehicle and turned on his siren, Jacob panicked and tried to flee. Shortly thereafter, but not before reaching speeds exceeding at least sixty miles per hour, Jacob lost control of the minivan and collided into a tree. Donaldson suffered serious injuries in the accident and was hospitalized for almost a month following multiple surgeries. Jacob was also taken to the hospital and had his blood drawn for analysis, which revealed a blood alcohol concentration of .20.

At the time of the accident, American Family insured the Pattons’ vehicle under an automobile policy providing $100,000 in coverage. Jacob’s father, Todd, had also purchased an umbrella policy from American Family with policy limits of $1,000,000.

THE SETTLEMENT AGREEMENTS

Within just months of the accident, American Family negotiated the terms of a Drake–Ryan settlement with Donaldson in which American Family agreed the automobile policy provided primary coverage to Donaldson for the injuries arising out of the accident and further agreed to pay the full policy limits of the automobile policy. American Family did not, however, agree that its umbrella policy provided coverage but left Donaldson free to pursue a claim against the excess policy. Significantly, a Drake–Ryan settlement protects an insured defendant from any further personal liability, except to the extent a plaintiff may successfully pursue a claim against the policy limits of an excess carrier. The settlement in this case specifically provided that, by accepting the full policy limits of the automobile policy and preserving the right to pursue coverage under the umbrella policy, Donaldson would “refrain from collecting or attempting to collect any unsatisfied portion of such judgments from the personal assets of Todd Patton and Jacob Patton.”

In response to the declaratory judgment action, the Pattons obtained a new attorney in the state district court action. The new attorney then entered into a Miller–Shugart settlement with Donaldson which admitted liability and provided for a binding arbitration to set the amount of damages. The arbitrator ultimately set the amount of damages at $1,250,000. The arbitration award was filed with the state district court, and a final judgment was entered pursuant to the award.

In this separate declaratory judgment action, American Family filed a motion for summary judgment primarily contending that Jacob Patton’s conduct at the time of the accident fell within the umbrella policy’s intentional act exclusion. Jacob Patton was convicted of felony criminal vehicular operation of a motor vehicle as a result of his conduct in the accident which injured Donaldson.

Donaldson asserted the umbrella policy’s severability clause triggered separate coverage for Todd Patton even assuming one or both of the contested exclusions for intentional acts and violations of law might bar coverage for Jacob Patton. Thus, severability demands that policy exclusions be construed only with reference to the particular insured seeking coverage.

The district court rejected the Pattons’ argument regarding the severability clause and again granted summary judgment to American Family, concluding the violation-of-law exclusion also barred coverage as to both Jacob and his father, Todd.

ANALYSIS

Although the parties and the district court devote most of their attention to the umbrella policy’s exclusions, with Donaldson also emphasizing the policy’s severability clause. The Eighth Circuit believed it was prudent to first address the more fundamental question whether the Pattons violated the policy’s cooperation clause since, if they did, the other issues would become moot.

American Family argues the Pattons violated the policy’s cooperation clause by entering into a Miller–Shugart settlement after American Family had already protected them from any personal liability in the Drake–Ryan settlement. No Minnesota court appears to have addressed the propriety of an insured entering into a Miller–Shugart settlement after already enjoying full protection from personal liability under a Drake–Ryan settlement because of the transparent incongruity of doing so.

Under Minnesota law, the only reason for permitting an insured to compromise an insurer’s ability to contest liability by entering into a Miller–Shugart agreement is to avoid the potential of the insured’s personal exposure where the insurance company has denied the existence of coverage for an underlying claim. Stated differently, the only time an insured is permitted to disregard the obligation to cooperate with the insurer is when there is a risk of personal exposure for the entire amount of any damage award due to the insurer’s denial of the existence of coverage.

Minnesota cases have explained the balancing of an insured’s duty to cooperate with an insurer’s duty to defend and indemnify, focusing on the insured’s potential personal exposure as a primary reason he may ignore his reciprocal duty to cooperate by entering into a Miller–Shugart agreement during periods when coverage is in doubt.

In this case, American Family admitted the existence of coverage as the primary carrier on the automobile policy, but denied coverage as the excess carrier under the umbrella policy. There is no need to resolve that complication. The Pattons did not risk liability for the entire amount of any damage award when they entered the Miller–Shugart settlement because American Family had already provided them full protection from personal liability under the earlier Drake–Ryan settlement.

The Eighth Circuit agreed with American Family that the breach of the cooperation clause was material and prejudicial under the circumstances of this case. First, the breach here was material since the Miller–Shugart settlement foreclosed the possibility of a later settlement in which the insurer could participate. Second, the breach was prejudicial because it compromised the rights American Family enjoyed prior to the settlement to contest liability and the amount of damages.

The Pattons agreed to an entry of judgment against Todd and Jacob jointly and severally, making no allowance for the possibility that Todd may not be negligent or that Donaldson’s comparative fault may reduce part of the judgment, robbing American Family of an attempt to raise legitimate defenses to liability claims.

The Eighth Circuit Court of Appeals concluded that the Pattons breached the umbrella policy’s cooperation clause by entering into a Miller–Shugart agreement after already being protected from personal liability in the Drake–Ryan settlement, and that such breach was material and prejudicial.

It was therefore unnecessary to address the other coverage issues raised by the parties in this appeal.

ZALMA OPINION

This case is a perfect example of how an insured can breach the covenant of good faith and fair dealing by working with a plaintiff to gain damages, including bad faith tort damages, when the insurer had fully protected its insureds. Fortunately, for the insureds, the insurer may not sue them for bad faith tort damages although they clearly forced their insurer, improperly into litigation that was unnecessary and also attempted to eliminate the rights to defend the action.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Insurance Companies are Not Treated Equally to Those Who Sue Them

Claim of Bad Faith Enough to See Ostensibly Privileged Documents

What a lawyer says to his or her client; what a lawyer thinks in preparation of the lawyers advice; what a lawyer does in preparation for litigation is usually privileged or protected from disclosure to their client’s opponents. Although all litigants are equal in the face of the law, some are more equal than others.

In Mayer v. Allstate Vehicle and Property Insurance Company, Slip Copy, United States District Court, S.D. Ohio, Slip Copy,  2016 WL 1632415 (04/22/2016) Allstate attempted to protect from discovery communications from their lawyers or work that they claimed was performed in anticipation of litigation. Those suing Allstate asked the court to force the production because they claimed Allstate’s claimed bad faith activities allowed for the disclosure of normally protected documents.

FACTS

On May 14, 2013, a fire occurred to a home owned by Plaintiffs, Jeffrey Mayer and Vicki Sturgeon Mayer, and insured by Defendant, Allstate Vehicle and Property Insurance Company (“Allstate”). KeyBank National Association (“KeyBank”) had issued a line of credit to Plaintiffs that was secured by the property. Plaintiffs made a claim for coverage. Allstate denied Plaintiffs’ claim, stating in a letter dated December 16, 2013, that the fire had been classified as incendiary.

On April 22, 2014, Plaintiffs commenced a civil action against Allstate in the Franklin County Court of Common Pleas and also named KeyBank as a defendant (“Original State-Court Action”). During the pendency of the Original State-Court Action, Plaintiffs, as part of their discovery requests, sought a copy of the insurance claims file relating to their fire loss claim. Allstate produced the file, but withheld or redacted approximately ten percent of the file on the grounds that the documents contain irrelevant trade secret information or are protected by the attorney-client privilege or as attorney work product. Allstate produced a privilege log detailing its bases for redacting or withholding particular documents. Plaintiffs filed a motion to compel Allstate’s production of the withheld and redacted documents, and Allstate contemporaneously moved for a protective order.

In their Complaint, Plaintiffs assert claims for breach of contract and bad faith against Allstate and also seek a declaratory judgment that Allstate is obligated to KeyBank for the outstanding balance on the line of credit it issued to Plaintiffs.

Plaintiffs seek an order compelling Allstate to produce a complete, unredacted copy of the insurance claims file, including all correspondence with Allstate’s legal counsel. According to Plaintiffs, all of the documents Allstate has withheld and/or redacted were created prior to its denial of their claim.

ANALYSIS

Federal Rule of Civil Procedure 37 permits a party to file a motion for an order compelling discovery if another party fails to respond to discovery requests, provided that the motion to compel includes a certification that the movant has, in good faith, conferred or attempted to confer with the party failing to respond to the requests.

“[T]he proponent of a motion to compel discovery bears the initial burden of proving that the information sought is relevant.” Guinn v. Mount Carmel Health Sys., No. 2:09-cv-226, 2010 WL 2927254.

As set forth above, Allstate has withheld or redacted documents in the insurance claim files on the grounds that they are protected by the attorney-client privilege and the work-product doctrine or because they lack relevance and contain trade secret information.

The Attorney-Client Privilege

Ohio’s attorney-client privilege is governed by both common law and statute. The Ohio Supreme Court created an exception to Ohio’s attorney-client privilege for claims file materials in actions alleging bad faith denial of insurance coverage finding that in an action alleging bad faith denial of insurance coverage, the insured is entitled to discover claims file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of coverage. At that stage of the claims handling, the claims file materials will not contain work product, i.e., things prepared in anticipation of litigation, because at that point it has not yet been determined whether coverage exists. Ohio authorities conclude that courts evaluating the discoverability of otherwise privileged claims file materials must consider whether the documents at issue “may cast light” on whether the insurer acted in bad faith.

Ohio’s  testimonial  privilege  statute  does  not  apply to documents.  Thus,  attorney-client communications in the insurance claims file that were created prior to the denial of coverage are discoverable so long as they “may cast light” on whether Allstate acted in bad faith. The Court advised that in assessing whether a particular document “may cast light” on the issue of bad faith, it declines to assess the merits of the case at this stage of the litigation. As this Court explained in earlier cases the Court is not passing judgment as to whether the documents discussed herein ultimately support or undermine the parties’ claims or defenses.

Rather, if a document is relevant to the issue of coverage, claim processing, or other bases set forth in the party’s bad faith claim, then it is discoverable.”

Keeping the foregoing guidance in mind, Allstate was ordered to produce any documents created prior to the denial of coverage that it previously redacted or withheld from production on the grounds of attorney-client privilege that “may cast light” on the issue of whether it acted in bad faith. To the extent Allstate continues to maintain that any of the documents it has redacted or withheld on the grounds of attorney-client privilege remain non-discoverable, it was ordered to submit the documents for in camera review.
.
The Work-Product Doctrine

The work-product doctrine is a procedural rule of federal law.  Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative. In the instant case, whether the documents Allstate redacted or withheld are protected from disclosure under the federal work-product doctrine turns on whether they were prepared in anticipation of litigation.

The privilege log Allstate provided to Plaintiffs and attached to its Memorandum in Opposition fails to describe the documents with enough detail to allow the Court to evaluate whether it has satisfied its burden of demonstrating that the documents in question were prepared in anticipation of litigation. Accordingly, to the extent Allstate continues to maintain that any of the documents it has redacted or withheld as protected under the federal work-product doctrine remain non-discoverable, it was ordered to submit, together with a privilege log that complies with the court’s rules, the Court will determine which, if any, of the documents must be produced.

Relevancy and Trade Secret

Finally, Allstate asserts that some of the documents it redacted or withheld contain “proprietary matters and/or trade secrets which are not relevant to the case at bar.”  The problem here, however, is that the descriptions of the documents Allstate provided in the privilege log fail to convey enough information to enable Plaintiffs or this Court to evaluate whether the at-issue documents are relevant to a claim or defense in this action.

Accordingly, the Court directed Allstate to provide more detailed descriptions of the documents it redacted or withheld on the basis of relevancy. To the extent that the parties agree that a particular document is relevant but contains trade secret information, the parties should collaborate to agree upon a protective order to facilitate production. If the parties are unable to agree upon the relevancy of a particular document, Allstate must submit the disputed documents for in camera review.

ZALMA OPINION

Ohio binds the district court to allow discovery of matters that would usually be protected from discovery because they were communications between counsel and the client; because they were the work product of the lawyer or because they were trade secrets. However, since insurers are not as equal as other litigants when someone, a potential arsonist, simply alleges bad faith, their rights change and the court will review the documents to see if the document “may cast light” on allegation of bad faith. Hopefully the judge will be fair when he reviews the documents in camera.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

No Need to Prove Prejudice When Insured Makes Voluntary Payment

Insured’s Settlement With Claimant Destroyed Right to Insurance Benefits

Insurers have the right to choose the promises it makes in a liability insurance policy. One universal contract term states there would be no coverage for a voluntary payment by the insured.

In Travelers Property Casualty Company of America v. Stresscon…, Supreme Court of Colorado,  — P.3d —-,  2016 WL 1639565 (April 25, 2016) Travelers petitioned for review of the court of appeals’ judgment affirming the district court’s denial of its motion for directed verdict in a lawsuit brought by its insured, Stresscon.

Much as the district court had done, the appellate court rejected Travelers’ contention that the no-voluntary-payments clause of their insurance contract relieved it of any obligation to indemnify Stresscon for payments Stresscon had made without its consent. Instead, the court of appeals found that this court’s opinion in Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo.2005), permitting the insured in that case an opportunity to demonstrate a lack of prejudice from its failure to comply with a notice requirement of its insurance contract, had effectively overruled our prior “no voluntary payments” jurisprudence to the contrary and given Stresscon a similar opportunity.

FACTS

Stresscon Corporation, a subcontracting concrete company, filed suit against Travelers Property Casualty Company of America, alleging, among other things, that Travelers acted in bad faith, unreasonably delaying or denying its claim for covered insurance benefits; and Stresscon sought awards of two times the covered benefits along with fees and costs, as prescribed by statute.

Stresscon’s claims for relief arose from a serious construction accident in July 2007, which was caused by a crane operator employed by a company that was itself a subcontractor of Stresscon. Stresscon’s general contractor, Mortenson, sought damages from Stresscon, asserting Stresson’s contractual liability for the resulting construction delays, and Stresscon in turn sought indemnification from Travelers.

There was no dispute that by December 31, 2008, Travelers had not paid the damages asserted by Mortenson. There was also no dispute that on December 31, 2008, despite Mortenson’s failure to bring a lawsuit or seek arbitration against Stresscon, Mortenson and Stresscon entered into a settlement agreement without consulting Travelers.

The agreement settled, without differentiation as to amount, this accident-related claim, along with other unrelated and concededly uncovered Mortenson claims against Stresscon. In March 2009, also without prior notice of the settlement agreement, Stresscon filed suit against several entities, including Travelers, the subcontracting crane company, and various other insurers; and with regard to Travelers, it ultimately prevailed, winning a verdict for bad faith breach of the insurance contract and an award of the statutory amount, costs, and attorney fees.

With regard to the issue upon which review was granted in this court, Travelers moved for summary judgment in the trial court on the grounds that it owed Stresscon no duty of indemnification for the amount of Stresscon’s settlement, according to the terms of the no-voluntary-payments provision of the policy, which stated, “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

The district court denied Travelers’ motion, finding by analogy to the so-called “notice-prejudice” rule with regard to an insured’s failure to give timely notice of a claim concerning an occurrence-based liability policy, that the policy’s no-voluntary-payments provision could relieve Travelers of indemnification only if Travelers suffered prejudice from Stresscon’s settlement, and that the question of prejudice involved disputed matters of fact, which could not be resolved by summary judgment.

The court of appeals affirmed these rulings of the district court.

ANALYSIS

The Supreme Court explained that it did not implicitly extend its newly minted notice-prejudice rule to no-voluntary-payments or consent-to-settle provisions, as the court of appeals believed. Quite the contrary, the Supreme Court took pains to note that in the insurer’s motion for summary judgment in Friedland, it had expressly raised the no-voluntary-payments provision of the insurance policy at issue in that case as a bar to recovery, and expressly declined to address that issue, for the reason that the trial court had not yet done so. In the absence of any ruling concerning the meaning of that provision and possible factual disputes or defenses by Friedland, rather than opining on the effect of payments voluntarily made or settlements voluntarily entered into by an insured in the face of a contract provision barring such payments or obligations or expressly excluding them from coverage, the Supreme Court limited its decision to extending the notice-prejudice rule only to the situation in which notice of a claim was given only after settlement.

Also unlike the court of appeals the Supreme Court found justification for adopting a notice-prejudice rule in a notice of loss situation does not expand the notice prejudice rule to the no voluntary settlement provision. Unlike the timely notice requirements of the occurrence policies the violation of which were technicalities from which insurers “reap a windfall,” the Supreme Court, in a different case, found a requirement that the insured provide notice of a claim within the policy period of a claims-made policy to be a fundamental term of the contract, actually defining the scope of coverage. Similarly, the no voluntary settlement provision, is a fundamental term of the contract.

As with the notice requirement of the claims-made policy in Craft, depriving an insurer of its choice to defend or settle in the first instance has important practical implications for the risks that insurers undertake and the premiums that insureds pay. Nowhere in the policy is a promise to include reimbursement for obligations assumed or payments made by an insured that are expressly excluded from coverage by the terms of its policy. Insuring against the risk of a specified class of injuries does not include insuring against the risk of damaged business relationships or the loss of future business contracts that may result from the insurer’s defense against third-party claims.

The broad public policy suggested by Stresscon would treat no-voluntary-payments clauses of insurance contracts, including the one in this case, as nothing more than a technicality, unenforceable in the absence of prejudice, whether or not any actions of the insurer had exposed its insured to an excess judgment. The result of such a rule would be to ignore the competing interests and risks of collusion or fraud and would effectively deny insurers the ability to contract for the right to defend against third-party claims or negotiate settlements in the first instance.

The Supreme Court concluded that public policy demands no such restriction on the right to contract.

Because the Supreme Court declined to extend the notice-prejudice rule to the no-voluntary-payments clause at issue in this case, the judgment of the court of appeals affirming the district court was reversed. Because application of the notice-prejudice rule was the sole basis for the district court’s denial of Travelers’ motion for directed verdict and because it was undisputed that Stresscon voluntarily settled and paid the third-party claim for which it sought reimbursement, the case is remanded with directions that the jury verdict be vacated and that a verdict instead be directed in favor of Travelers.

ZALMA OPINION

The notice-prejudice rule serves a useful purpose of protecting the slothful insured who fails to report a claim  promptly as long its sloth does not prejudice the rights of the insurer. However, like in a claims made policy, there is no need for prejudice when the failure deprives the insurer of a the rights the insured gave the insurer when it acquired the policy. Stresscon knew it did not have the right to settle with Travelers’ money. It did so anyway and, although it took an appeal to the Supreme Court, its failure was appropriate.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Diminished Value in California

New California Jury Instruction

The California Judicial Council changed a pattern jury instruction concerning the diminution of value of a repaired automobile, as follows:

2-3900 CACI 3903J

Judicial Council of California Civil Jury Instructions (CACI) > Series 3900 DAMAGES
3903J Damage to Personal Property (Economic Damage) [Insert number, e.g., “10.”] The harm to [name of plaintiff]’s [item of personal property, e.g., automobile]. To recover damages for harm to personal property, [name of plaintiff] must prove the reduction in the [e.g., automobile]’s value or the reasonable cost of repairing it, whichever is less. [If there is evidence of both, [name of plaintiff] is entitled to the lesser of the two amounts.]
[However, if you find that the [e.g., automobile] can be repaired, but after repairs it will be worth less than it was before the harm, the damages are (1) the difference between its value before the harm and its lesser value after the repairs have been made; plus (2) the reasonable cost of making the repairs. The total amount awarded may not exceed the [e.g., automobile]’s value before the harm occurred.]

To determine the reduction in value if repairs cannot be made, you must determine the fair market value of the [e.g., automobile] before the harm occurred and then subtract the fair market value immediately after the harm occurred.

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

  1. That there is no pressure on either one to buy or sell; and
  2. That the buyer and seller are fully informed of the condition and quality of the [e.g., automobile].

New September 2003; Revised December 2011, June 2013, December 2015

This changes the recommended jury instruction for a tort case dealing with the value of an automobile. Contrary to what some may believe, this does not change the wording of an insurance policy and since California case law is clear that an automobile material damage policy does not change — it only agrees to pay for the cost of repair or the fair market value of the vehicle if it is a total loss — diminished value is not available from an insurer. However, both the insurer and the insured, can sue a tortfeasor for the repair plus diminished value by applying this instruction.

In 2012, the California Court of Appeal decided that an automobile insurance policy provision which gave an insurer the option of repairing a vehicle rather than paying pre-accident market value of the vehicle was not contrary to public policy, even if repair did not take into account vehicle’s depreciation in value. If the vehicle could be restored to safe condition under manufacturer’s repair standards such that insurer’s election to repair vehicle was not injurious to the public or carried out in bad faith, and, while policy excluded payments for diminution in value, insured owner did not pay premiums for such added coverage. [Carson v. Mercury Ins. Co., 210 Cal.App.4th 409, 148 Cal.Rptr.3d 518, Cal.App. 4 Dist., (September 24, 20120]

In California diminution in value is not “property damage” as defined in CGL or other third-party-liability policies. California courts conclude that an insurance policy does not insure against diminution in market value as a result of the property’s environmental condition because such diminution in value does not constitute “damages” within the meaning of those policies.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Confabulation!

Some Testimony Cannot & Should Not be Believed

Sworn testimony, most believe, is either true or intentionally false. However, some people, although not actually cunning, intentional liars, are simply unable tell the truth. The condition known as confabulation is a memory disturbance characterized by verbal statements inaccurately representing memory, background, or present situations. Confabulation is considered “honest lying,” and is distinct from deliberate lying because there is typically no intent to deceive—the individual is unaware that their information is false. Individuals who confabulate are generally very confident about their recollections, despite evidence contradicting its truthfulness.

The best-known causes of confabulation are traumatic and acquired brain damage (e.g., aneurysm, edema), and psychiatric or psychological disorders (e.g., schizophrenia, bipolar disorder, or dementia). The claims investigator, adjuster, or lawyer, as professional interviewers, must hone his or her ability to recognize a confabulator—a person who, clinically speaking, cannot tell the truth—because the confabulator, judging by tests and all other indications, appears to be a truthful person.

Usually, confabulation does not benefit the subject. He or she is motivated by nothing other than the desire to relate his or her thoughts and experiences. Confabulations, although not true, are not lies. They are the product of a psychological problem that must be understood by the interviewer before drawing any conclusions about the degree of truthfulness in the subject’s responses.

Problems of confabulation and suggestion are magnified by certain investigative techniques that the professional should avoid. Often the person interviewed will develop a rapport with the interviewer and subconsciously wish to please him or her by giving answers which the subject believes the professional desires. This risk is particularly high when the subject has a substantial interest in the outcome of the investigation. These answers then become a part of the subject’s memory. The more a witness repeats his or her story the more fixed it becomes in his or her mind. In addition, by asking questions in a certain manner, the interviewer may unintentionally supply information that gets incorporated into the subject’s memory.

Confabulation is what happens when the brain tries to fill in missing pieces of data. It is part of a natural reflex that is similar to what happens when there are gaps in our physical vision. There is an actual hole in your visual field, the “blind spot,” where the nerve sensors receive no light. But even if you close one eye and look, you are not aware of it. The brain fills in missing information. That is what also happens when there is a memory lacuna: the brain literally tries to bring in extraneous information to fill in this big empty space.

Due to problems with this hyper compliance in the confabulator, a subject will refuse to admit that his or her memory is imperfect or has gaps in it. He or she will instead attempt to fill in those gaps. This could produce a recall of an event comprised of all the following elements:

  • relevant actual facts;
  • irrelevant actual facts taken from an unrelated prior experience of the subject;
  • fantasized materials (confabulations) unconsciously invented to fill gaps in the story; and
  • conscious lies—all formulated in the most realistic fashion possible.

The risk of confabulation is especially great during posthypnotic suggestion when the hypnotist suggests that the subject will remember clearly the forgotten event when the subject has no actual memory of the event. The subject may feel pressured to respond to the hypnotic suggestion as a result of desire to please the hypnotist. In addition, the subject tends to respond literally to hypnotic suggestion. These factors enhance the potential for the hypnotized person to “remember” events that actually did not occur.

An excerpt from an interview with a person whose statements qualify as confabulations follows:

  1. Can you tell me a little bit about yourself? How old are you?
  2. I’m 40 . . . 42. Pardon me: 62.
  3. Are you married or single?
  4. Married.
  5. How long have you been married?
  6. About four months.
  7. What’s your wife’s name?
  8. Martha.
  9. How many children do you have?
  10. Four. [He laughs.] Not bad for four months!
  11. How old are your children?
  12. The eldest is 32, his name is Bob, and the youngest is 22, his name is Joe.

[These answers are close to the actual age of the boys.]

  1. [He laughs again.] How did you get these children in four months?
  2. They’re adopted.
  3. Who adopted them?
  4. Martha and I.
  5. Immediately after you got married you wanted to adopt these older children?
  6. Before we were married we adopted one of them, two of them. The eldest girl Brenda and Bob . . . and Joe and Dina since we were married.
  7. Does it sound a little strange to you, what you are saying?
  8. I think it is a little strange.

* * *

  1. Do you really believe that you have been married for four months?
  2. Yes. ….

[Excerpted from Stephen J. Ceci, “False Beliefs: Some Developmental and Clinical Considerations” in Daniel L. Schacter, Editor, Memory Distortion: How Minds, Brains, and Societies Reconstruct the Past, Harvard University Press, 1995.]

Psychological research supports the conclusion—one so important to professional interviewers—that remembering is a constantly reconstructive process, and that distortions occur and accumulate at every retelling.

Memory Distortion

Memory traces of events we experienced are stored randomly. Human memory is like a fragmented computer hard drive, with bits and pieces of a file in various places. Except with a computer’s hard drive, you can run defragmenting software to correctly rearrange the bits and pieces. There is no defragmentation software for the human brain.

In a system that does not honor time or order, the possibility of one memory-event influencing another is very great, especially if they bear some similarity to each other. Similarly, if the assignment of remembered events to their proper context and sequence depends on strategic retrieval, then post event suggestions, which themselves become randomly stored memory traces, can later be mistaken for (and in effect take the place of) the “true” or original memories.

The professional knows from experience that even normal, healthy people confabulate all the time. We all add certain nuanced elaborations or distortions each time we relate a story (usually to make it reflect better on us), but these ego-based creative re-rememberings are sufficiently small that they have no real effect on the general truth of the complete story. They can be cleared up with further detailed questioning and investigation.

Although the interviewer wishes human beings’ ability to remember were perfect, on most occasions it is sufficiently reliable. When precision of content and sequence is demanded, however, as it is in eyewitness testimony, human memory is notoriously poor and frequently distorted. The professional recognizes the irony that eyewitness testimony that is not corroborated is the least reliable of all forms of evidence.

Human beings are not computers. Memory is not hard-wired. It is almost never recovered in exactly the same way as it was recorded. Memory is a process that can be distorted and manipulated by events, by new information . . . or by a talented but unscrupulous interviewer.

Freud: The Crypt of Memory

Even Sigmund Freud, the famous psychiatrist, was subject to false beliefs. Freud learned that he had inadvertently taken credit for an idea of a colleague’s that the latter had shared with him several years earlier. He wrote to a colleague excitedly to tell him about his new theory of original bisexuality, and was crestfallen to be reminded that the colleague himself had actually first articulated the theory during an evening walk they had taken together in Breslau years earlier.

This phenomenon of suppressing memories that do not serve our purposes or reflect well on ourselves is now discreetly referred to as “cryptomnesia.” It occurs when a forgotten memory returns without it being recognized as a memory. The person believes it is something new and original. It is a memory bias whereby a person may falsely recall generating a thought, an idea, a song, or a joke. The person is not lying and not deliberately engaging in plagiarism, but rather experiencing a memory as if it were a new inspiration.

Thus, that most professional of professional interviewers, the father of modern psychoanalysis, found he had created a false memory. He learned, and taught, that the interviewer must assume any person can create a false memory without the least intention of lying.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Unambiguous Exclusion Defeats Claim for Defense

Business Policy Not an Auto Liability Policy

People buy insurance for various reasons. Insurance policies limit the promises made depending on the coverage sought by the insured. Automobile liability insurance insures against risks of loss from the use or operation of an automobile. A business owners policy insures against the risks of loss from the operation of the business. They are as different from each other as an apple is different from a pomegranate. People who are injured in an accident where there is insufficient funds or insurance to indemnify the victims they attempt to add insurance coverage by stretching the meaning of the coverage.

In Atain Specialty Insurance Company v. Greer, Slip Copy, 2016 WL 1569892, United States District Court, S.D. Illinois (04/19/2016) Atain Specialty Insurance Company’s (“Atain”) moved the USDC, Southern District of Illlinois, for judgment on the pleadings.

A motion for judgment on the pleadings seeks a finding that the pleadings contain facts that allow the reasonable inference that the non-moving party could prevail in the action. In ruling on a motion for judgment on the pleadings, the Court considers the complaint, answer and any written instruments attached to those pleadings, accepts all well-pleaded allegations in the non-moving party’s pleading as true and draws all inferences in favor of the non-movant.

FACTS

Viewed in the light most favorable to the defendants, the pleadings establish that Defendant Jeffrey Rynders was employed to work in a tire dealership by some or all of defendants Julian Greer, Jay Greer and Cheapies #1, LLC (the “Cheapie Tire defendants”). On September 15, 2013, while driving a vehicle for his employer, Rynders had a collision with a motorcycle ridden by Gary and Lora Wright, both of whom died from the accident.

Benner, the administrator of the Wrights’ estates, sued Rynders and the Cheapie Tire defendants in the Circuit Court for the Third Judicial Circuit, Madison County, Illinois. That lawsuit seeks to hold Rynders liable based on his driving conduct and to hold the Cheapie Tire defendants liable for negligent hiring, retention and supervision of Rynders and under a vicarious liability theory. Rynders and the Cheapie Tire defendants tendered their defense to Atain under a commercial general liability (“CGL”) policy (the “Policy”).

Atain rejected the tender. Atain sued seeking a declaration that it owes neither a duty to defend nor a duty to indemnify under the Policy because Cheapies #1, LLC is not an insured and because the Auto Exclusion excludes Benner’s claims from coverage.

Setting aside disputes over who exactly is insured by the Policy, no party argues that the Policy’s coverage does not extend to bodily injury from the accident. They disagree, however, about whether the Auto Exclusion excludes from that coverage claims for bodily injury as alleged in the underlying lawsuit. Further, no party disputes that the Auto Exclusion is part of the Policy, but they disagree as to its interpretation.

The Auto Exclusion provides, in pertinent part: “This insurance does not apply to: “‘Bodily injury’ or ‘property damage’… arising out of or in connection with any ‘auto’ unless as outlined below; or the “loading or unloading” of any ‘auto’ … by any insured. This exclusion applies to ‘bodily injury’ or ‘property damage’ arising out of any … ‘auto’ … whether or not owned, maintained, used, rented, leased, hired, loaned, borrowed or entrusted to others or provided to another by any insured. ¶ This exclusion applies even if the claims allege negligence or other wrongdoing in the supervision, hiring, employment, entrustment, permitting, training or monitoring of others by an insured.¶ This exclusion applies even if the claims against any insured allege direct or vicarious liability.”

ANALYSIS

No party contests that Illinois substantive law applies to this case. Under Illinois law, an insurer has an obligation to defend its insured in an underlying lawsuit if the complaint in the underlying lawsuit alleges facts potentially within the coverage of the insurance policy, even if the allegations end up being groundless, false or fraudulent. If the policy is unambiguous, the Court must construe it according to the plain and ordinary meaning of its terms.

On the other hand, if the policy is ambiguous, the Court must construe all ambiguities in favor of the insured and against the insurer, who drafted the policy. The Court must give the policy and the complaint a liberal construction in favor of the insured.

Atain argued that the Policy’s Auto Exclusion unambiguously excludes claims for “’bodily injury’…arising out of or in connection with any ‘auto,”’ with inapplicable exceptions. It further argued that the Wrights’ bodily injury from the September 15, 2013, traffic accident clearly arose out of or was in connection with the auto Rynders was driving at the time of the collision with the motorcycle the Wrights were riding.

Benner contended that the Wrights’ bodily injuries arose not out of or in connection with an “auto” but with Rynders’ negligent use of an “auto.” Benner argued that for a claim to arise out of or be in connection with an “auto,” there must be a causal relation or nexus between the inherent nature of the auto and the injuries suffered, which he argues does not exist in this case.

At a minimum, Benner argues, the Auto Exclusion is ambiguous and should be construed in his favor to cover the claims in the underlying lawsuit.

The Court found that the Auto Exclusion unambiguously excludes claims for bodily injuries based on traffic accidents like the September 15, 2013, accident between Rynders and the Wrights. As a preliminary matter, the phrase “arising out of or in connection with” is extremely broad, although the Court should give it the most limited interpretation possible in favor of the insured when it appears in an exclusion.

Even giving the Auto Exclusion the most narrow reading possible, there is no way the claims in the underlying lawsuit are not excluded from coverage. The causal relationship alleged in that case clearly falls within the exclusion’s “arising out of” provision: Benner alleges that the Wrights’ injuries and subsequent deaths were caused by their being struck by the vehicle Rynders was driving. Thus, it is alleged that their injuries “originated from,” “grew out of,” “flowed from” an “auto,” and that their injuries “came into being,” and “took place” because of an “auto.” The involvement of the “auto” was not fortuitous or incidental to their injuries but was the very instrument of those injuries while the “auto” was being driven, the customary manner in which an “auto,” by its very nature, is meant to be used.  The alleged accident “arose out of or in connection with” the auto Rynders was driving. To hold otherwise would read the Policy to extend beyond what the parties’ to the Policy intended as expressed by the Auto Exclusion’s broad language.

Indeed, it is clear from the Policy as a whole in this case that the parties intended it to cover the “hazards incident to operation of a business” other than driving its own vehicles. The fact that the Cheapie Tire defendants are in the tire business presumably means there will be vehicles on its premises involved in the operation of its business but not owned, rented or leased for business use, and the Policy makes special provisions for those vehicles. It appropriately carves out exceptions to the Auto Exclusion for “autos” parked on or near the premises but not used to operate the business and for “autos” being serviced by the business.

Because Benner has not alleged claims in the underlying action that are potentially covered by the Policy, the Court finds Atain is entitled to judgment on the pleadings as to Count III.

All claims in the underlying action are excluded from coverage under the Auto Exception. Accordingly, Atain has no duty to defend or indemnify Rynders or the Cheapie Tire defendants in connection with the underlying action.

ZALMA OPINION

It seems more than odd to me that any person with a greater than third grade education would claim that when an automobile crashes into a motorcycle killing the riders on the motorcycle did not arise out of the use or operation of an automobile must be hoping that a trial judge is under the influence of a hallucinogenic substance. Fortunately, for justice, the judge saw through the argument. The exclusion was clear and unambiguous.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Fairness Controls Interpretation of “Other Insurance” Language

Escape Clause Fails

Liability insurers write policies with multiple variations on the “other insurance” clause trying to deal with the problem raised when more than one insurer insures the same risk. The reason for the clause is to prevent one insurer taking advantage of another and leaving the insured without protection.

In Certain Underwriters at Lloyds, London v. Arch Specialty…, — Cal.Rptr.3d —- 16 Cal. Daily Op. Serv. 3833, 2016 WL 1436362 Court of Appeal, California (4/11/2016) a dispute arose when one insurer had a pro rata other insurance clause while another had an escape clause that attempted to totally eliminated coverage for defense if there is other insurance.

There is no question that an insurer and insured can agree to any terms or conditions of a policy they desire to write. The question raised by conflicting other insurance clauses is whether they are enforceable.

Two insurers shared indemnification costs to settle claims made against mutual insureds in underlying construction defect litigation brought by third parties. But one insurer—defendant Arch Specialty Insurance Company (Arch)—refused to share the costs to defend the insureds in the underlying litigation. The other insurer—plaintiff Certain Underwriters at Lloyds, London (Underwriters)—paid all defense costs and now seeks equitable contribution from Arch. The trial court concluded Arch had no duty to defend the insureds in the underlying litigation, because Arch’s insurance policy expressly stated it had a duty to defend provided no “other insurance” afforded a defense, and Underwriters’ policy did afford a defense.

FACTS

Underwriters and Arch were both primary insurers of Framecon, Inc. (Framecon) but at different times.

Underwriters issued a commercial general liability (CGL) policy to Framecon effective October 28, 2000 to October 28, 2001, and another CGL policy effective October 28, 2001 to October 28, 2002. These were the only CGL policies issued to Framecon for that two-year period, and Underwriters were the primary insurers for that period. The policies provided coverage for property damage only if caused by an occurrence in the coverage territory and the damage occurs during the policy period.

Arch issued a CGL policy to Framecon effective October 28, 2002, to October 28, 2003. That was Framecon’s only CGL policy for that time period, and Arch was the primary insurer for that year. The Arch policy applied to property damage if caused by an occurrence during the policy period, whether or not such occurrence was known to the insured, and damage resulting from such occurrence first took place during the policy period.

Framecon tendered the cross-complaint from its general contractor to both Underwriters and Arch. KB Home, the general, tendered the complaint to both Underwriters and Arch, asserting it was an “additional insured” under Framecon’s insurance policies. No one disputes that KB Home qualified as an additional insured.

Underwriters agreed to defend Framecon with a reservation of rights. Underwriters also agreed to defend KB Home as an additional insured, with a reservation of rights.

Based on the coverage terms of Arch’s “insuring agreement,” “in the event Framecon, Inc. is already being afforded a defense in this matter by another insurer, even if coverage were found to apply, [Arch’s] policy would be excess with regard to defense of … Framecon.” The policy, in part, provided: “a. Excess Insurance ¶ “This insurance is excess over any other insurance, and over deductibles or self-insured amounts applicable to the loss, damage, or injury, whether such other insurance is primary, excess, contingent or contributing and whether an insured is a named insured or additional insured under said policy. ¶ “When this insurance is excess, we will have no duty under Coverage A or B to defend any claim or suit that any other insurer has a duty to defend.”

As indicated, Arch stipulates it was the primary insurer and the only CGL policy issued to Framecon for the period from October 2002 to October 2003.

Underwriters and Arch both agreed to indemnify Framecon for damages covered under their respective policies on a “time on the risk” basis for homes completed during each carrier’s policy period.

DISCUSSION

Underwriters argued Arch’s policy terms—excusing it from a duty to defend when another insurer has a duty to defend—are unenforceable “escape clauses” against public policy, regardless of their location in the insurance policy. Arch does not dispute that its insurance policy required it to indemnify the insureds for the damages at issue in the construction defect litigation. And Arch did pay its share of the indemnification costs. Although Arch’s insurance policy afforded “coverage” for this risk, Arch maintains its policy did not afford “coverage” for defense costs related to this risk, because Arch included the “other insurance” language in the “coverage” section of its policy.

The original purpose of “other insurance” clauses was to prevent multiple recovery by insureds in cases of overlapping policies providing coverage for the same loss. (Dart Industries, Inc. v. Commercial Union Ins. Co. (2002) 28 Cal.4th 1059, 1079–1080, 124 Cal.Rptr.2d 142, 52 P.3d 79  (Dart ).) On the other hand, ‘other insurance’ clauses that attempt to shift the burden away from one primary insurer wholly or largely to other insurers have been the objects of judicial distrust.

Public policy disfavors “escape” clauses, whereby coverage purports to evaporate in the presence of other insurance. This disfavor should also apply, to a lesser extent, to excess-only clauses, by which carriers seek exculpation whenever the loss falls within another carrier’s policy limit. The modern trend is to require equitable contributions on a pro rata basis from all primary insurers regardless of the type of “other insurance” clause in their policies.

Arch does not dispute that its policy was primary, not excess. “ ‘Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability. [Citation.] Primary insurers generally have the primary duty of defense. [¶] “Excess” or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.’ [Citation.]” (Century Surety Co. v. United Pacific Ins. Co. (2003) 109 Cal.App.4th 1246, 1255, 135 Cal.Rptr.2d 879 (Century ), italics omitted.)

Arch persuaded the trial court—and argues on appeal—that the California cases invalidating “other insurance” clauses are distinguishable because the clauses in those cases were located only in the conditions section of the insurance policies, not in the coverage section. Arch invokes general principles that an insurer’s duty to defend is not absolute but is measured by the nature and kinds of risks covered by the policy.

Because giving effect to its “other insurance” provision, in the nature of an escape clause, would result in imposing on the Underwriters the burden of shouldering that portion of defense costs attributable to claims the escape clause must be disregarded. Where there are “successive primary insurers and the claim by the third party involved a continuing-loss liability coverage over the span covered by multiple insurers,” the court  declined to allow one of those insurers to employ an “other insurance” escape clause to avoid equitable contribution.

Arch’s policy made Arch liable for defense costs, but then purported to extinguish that obligation when other insurance afforded a defense. The risk of leaving an insured stranded without coverage is not the only public policy consideration. Imposing the entire liability for a loss on the insurer with a policy providing for pro rata coverage would annul that policy’s language, and create the anomaly that courts will only predictably enforce proration between policies when they all have conflicting “excess other insurance” language barring proration.

Giving ‘excess other insurance’ clauses priority over policies providing for pro rata apportionment of liability among policies is completely unrelated to the original historical purpose of such “other insurance” clauses, which was to prevent multiple recoveries by insureds in cases of overlapping insurance policies providing coverage for the same loss.

The court of appeal concluded Underwriters are entitled to receive equitable contribution from Arch because to do otherwise would be an unfair breach of California Public Policy.

ZALMA OPINION

Escape clauses are properly disfavored because they change the meaning and purpose of a liability insurance policy: to provide defense and indemnity to an insured that incurs a covered loss. The insureds incurred losses that were covered by both Arch and the Underwriters and they shared indemnity costs. If Arch really wanted to avoid defense costs it could easily have worded its policy to say it only covered indemnity and would never pay for defense costs. Rather, it tried to shift, by policy wording its obligation to the Underwriters.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fairness Controls Interpretation of “Other Insurance” Language

Failure of Promise to Pay Defeats Claim on Contract

Total Failure of Consideration Defeats Claim

An insurance contract is made when promises are made between an insurer and an insured are kept. To effect a contract of insurance it is necessary that the insurer offers to insure a person, that person accepts the offer, and the premium is paid. If any of the three elements of a contract fail, there is no insurance policy.

When an insured fails to keep the one promise necessary to effect the contract of insurance – payment of the premium – the contract never came into effect.

After an automobile accident the operators sought protection from an insurance policy claimed to be in effect protecting those operating a particular vehicle. In Progressive Premier Insurance Company of Illinois v. Gibbs, United States District Court, N.D. Georgia, 2016 WL 1557413 (04/18/2016) the USDC for the Northern District of Georgia was asked by the insurer to declare that it owed nothing because the insured failed to keep the promise to pay the premium.

BACKGROUND

On May 29, 2015, Cory Gibbs was driving a 2008 Nissan Maxima on Gardenwalk Boulevard near its intersection with Upper Riverdale Road in Clayton County, Georgia.  Dara Gibbs owned the Nissan Maxima. While driving the vehicle, Mr. Gibbs was involved in an accident with Defendants Lemon, Buford, Smith, Washington, and Valeriano-Campos, who all claim to have suffered bodily injuries.

On May 5, 2015, Dara Gibbs submitted an online application for insurance to the Plaintiff, Progressive Premier Insurance Company of Illinois. The application package included an Electronic Funds Transfer Authorization that allowed the Plaintiff to deduct policy premium payments directly from the listed bank account. When the insurer submitted the initial premium amount to the listed financial institution for payment the transaction was declined. Ms. Gibbs admits that she has no proof that payment was ever made to the Progressive  and that she was not the account holder for the listed bank account. Progressive never received any premium payments whatsoever.

DISCUSSION

The Plaintiff argues that no contract for insurance ever existed and therefore requests a declaration that no coverage must be provided. Every contract has three elements: Offer, Acceptance and payment of consideration. Failure of consideration, if proved, is sufficient to defeat an action on contract since one element cannot be proved to establish the existence of a contract.

The Georgia Court of Appeals has held that unless the record establishes that the parties intended for mere tender of a check to constitute payment, there is a total failure of consideration when a check is dishonored, which renders a contract null and void.

Specifically, the application for insurance read “[i]f I make my initial payment by electronic funds transfer, check, draft, or other remittance, the coverage afforded under this policy is conditioned on payment to the Company by the financial institution.” Ms. Gibbs does not dispute that her electronic funds transfer was returned. She additionally admits that she did not pay Progressive via any other means.

When Progressive submitted the electronic funds transfer, it was declined, and Progressive never received any other form of payment. Because no payment was ever received, there was a total failure of consideration for the policy. As a result, no contract ever existed, so Ms. Gibbs was never insured by the Plaintiff.

The Defendants make several arguments as to why this Court should enforce the insurance contract despite its lack of consideration. Because the contract here is void for failure of consideration, the cancellation requirements set by a Georgia statute does not apply.

The Defendants also argued that public policy concerns of universal insurance coverage should trump the lack of consideration and require the contract to be enforced. The Court found no policy concerns that would require it to enforce a contract that is void for lack of consideration. To do so would violate basic contract law.

ZALMA OPINION

The people seeking insurance coverage mistake insurance for an entitlement where the insurer must keep all promises made in the policy and the person seeking insurance has no obligation to keep any of the promises made to the insurer. The defendants attempted to obtain a free insurance policy by providing Progressive with an account to pay the premium in which she had no account and no funds. The court did not go far enough in just granting the motion for summary judgment, it should have punished the defendants for attempting to defraud Progressive.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Failure of Promise to Pay Defeats Claim on Contract

Lead Paint is a Pollutant In Georgia

Georgia Concludes Lead a Pollutant and Excluded

Modern life exposes Americans to hundreds of different pollutants that are toxic to humans. Liability insurers are loathe to insure against the risk of injury caused by a toxic pollutant. Modern liability policies contain what the insurers refer to as a “total pollution exclusion.” Because of the limited space available and the number of pollutants that exist, it is impossible for an insurer to list every possible pollutant it wishes to exclude. Rather, modern insurers use the generic description of the term “pollutant” without limiting the exclusion by a list of pollutants.

Georgia law permits an insurance company to fix the terms of its policies as it sees fit, so long as they are not contrary to law, thus companies are free to insure against certain risks while excluding others.

In Georgia Farm Bureau Mut. Ins. Co. v. Smith, — S.E.2d —- , 2016 WL 1085397, Supreme Court of Georgia (March 21, 2016) the Georgia Supreme Court was faced with the question whether ingestion of lead paid is a pollutant and excluded even though the policy did not mention lead or lead paint. The Supreme Court, as a matter of first impression in Georgia, needed to determine whether personal injury claims arising from lead poisoning due to lead-based paint ingestion were excluded or not from coverage pursuant to an absolute pollution exclusion in a commercial general liability (“CGL”) insurance policy covering residential rental property.

FACTS

Amy Smith (“Smith”), individually and as next friend of her daughter Tyasia Brown (“Brown”) sued her landlord, Bobby Chupp (“Chupp”) for injuries Brown allegedly sustained as the result of ingesting lead from deteriorating lead-based paint at the house Smith rented from Chupp. The house was insured by Chupp under a CGL policy issued by Georgia Farm Bureau Mutual Insurance Company (“GFB”). After Chupp tendered Smith’s claims to GFB under the provisions of the policy, GFB filed a declaratory judgment action against Smith and Chupp seeking a determination that Brown’s injuries were not covered under the policy and that it had no duty to defend Chupp against Smith’s claims.

GFB argued that even if the policy’s coverage terms did apply, Brown’s injuries from lead poisoning were excepted from coverage by the policy’s pollution exclusion clause, thus relieving GFB of its duty to defend and indemnify Chupp in Smith’s suit.

THE POLICY

The terms of Chupp’s CGL policy require GFB “to pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies,” and “to defend the insured against any ‘suit’ seeking those damages.” The policy provides in its “Exclusions” section that the insurance does not apply to “‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’: (a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured. ¶ A ‘pollutant’ is defined in the policy as ‘any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.’”

Both defendants appealed and, in a combined opinion, the Court of Appeals reversed the trial court’s grant of summary judgment to GFB. Recognizing that Georgia law requires the narrow construction of exclusions from coverage in insurance policies, the Court of Appeals sided with those foreign courts holding that a pollution exclusion like the one in this case did not bar coverage for injuries arising out of the ingestion or inhalation of lead-based paint.

ANALYSIS

Construing the terms of an insurance policy, an appellate court must look first to the text of the policy itself. Words used in the policy are given their “usual and common” meaning and the policy should be read as a layman would read it and not as it might be analyzed by an insurance expert or an attorney. Georgia law permits an insurance company to fix the terms of its policies as it sees fit, so long as they are not contrary to law, thus companies are free to insure against certain risks while excluding others.

In this case, Chupp’s CGL policy contains an absolute pollution exclusion clause which precludes recovery for bodily injury or property damage resulting from exposure to any pollutant. The “absolute” pollution exclusions, among other things, extended the application of pollution exclusions beyond the natural environment to premises owned, rented or occupied by the insured, and removed the adjective “toxic” before the word “chemicals,” thus expanding the number of chemicals regarded as pollutants.

Following the insurance industry’s introduction of absolute pollution exclusions in CGL policies, a split developed among jurisdictions over whether to apply these exclusions to all injuries caused by pollutants or, given the historical purpose behind such clauses, to apply these exclusions only to injuries or damages caused by what is traditionally considered environmental pollution.

Georgia courts have enforced absolute pollution exclusion clauses without requiring that the pollutant at issue be explicitly named in the policy. Thus, while the specific question of whether lead-based paint unambiguously qualifies as an excluded pollutant under an absolute pollution exclusion may be one of first impression in Georgia, the method by which Georgia courts are to interpret absolute pollution exclusion clauses was clearly established by the Supreme Court in earlier decisions that control the manner in which pollution exclusions in CGL policies are to be construed by the courts of this State.

Exercising its duty to construe the absolute pollution exclusion the Georgia Supreme Court found that the contractual language of Chupp’s CGL policy unambiguously governs the factual scenario in this case. Accordingly, the Court of Appeals was required to simply apply the terms of the contract as written.  In interpreting the insurance policy’s provisions, the Court of Appeals had “no more right by strained construction to make the policy more beneficial by extending the coverage contracted for than they would have [had] to increase the amount of the insurance.”

Smith alleged that her daughter suffered lead poisoning and permanent injury from the ingestion of lead-based paint found on the premises of the house she rented from Chupp. Under the broad definition contained in Chupp’s policy, the Supreme Court concluded that lead present in paint unambiguously qualified as a pollutant and that the plain language of the policy’s pollution exclusion clause thus excluded Smith’s claims against Chupp from coverage.The fact that “lead” was not mentioned in the policy was irrelevant since it fit within the definition of “pollutant” in the policy.

ZALMA OPINION

The Georgia Supreme Court, rather than doing what would help the poor injured plaintiff, deprived her of the right to collect from Chupp’s insurance policy because lead was, without doubt, a pollutant. The Supreme Court did not deprive the plaintiff of the right to sue if Chupp is liable for her injuries they can collect directly from his assets. Just because collecting a judgment from an insurer is easier, insurance does not cover every possible exposure faced by its insured and the insurer properly refused to defend or indemnify Chupp.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Lead Paint is a Pollutant In Georgia

Insurer Must Be Allowed to Exercise Meaningful Contractual Rights

First Report After Verdict Sufficient to Avoid Coverage

In a case where an insured bank that was obligated to retain counsel to defend suits against it and seek reimbursement from its insurer, was faced with a gigantic default judgment, failed to report the suit and judgment until eight months after the company was served.

In St. Paul Mercury Ins. Co. v. American Bank Holdings, Inc., United States Court of Appeals, Fourth Circuit, 2016 WL 1459517 (April 14, 2016) the Fourth Circuit was faced with a need to determine if an insurer that refused to defend its insured because of late reporting and breach of a material condition.

BACKGROUND FACTS

On June 11, 2008, Amiel Cueto, a disbarred lawyer and convicted felon who was acting pro se, filed an action in the St. Clair County Circuit Court in Belleville, Illinois, against American Bank and 10 other defendants, alleging that they fraudulently failed to fund his $8 million sale of real property to Lester J. Petty and Associates, Inc., causing the deal to collapse. The complaint sought both compensatory and punitive damages.

On June 18, 2008, American Bank Holdings, Inc., was served with the Cueto complaint and summons that issued from state court in Belleville, Illinois. Because of an internal oversight, however, American Bank did not respond to the summons, and the court, on July 23, 2008, entered a $98.5 million default judgment against it. Some eight months after receipt of the summons, on February 25, 2009, American Bank notified its insurance company—St. Paul Mercury Insurance Company—of the lawsuit, and St. Paul Insurance denied coverage due to the late notice.

The insured bank contended that it learned that the plaintiff in the underlying action was a former trial lawyer who was a convicted felon and that the felon’s brother was the chief judge of the court, that the associate judge, who was the judge that signed this order, somehow needed the approval of the brother to become a tenured judge, and that from all accounts claimed that St. Clair County, Illinois, was known as a judicial cesspool and that questionable judgments and verdicts happened there on a regular basis.

American Bank was thereafter able to have the default judgment vacated and the lawsuit dismissed, but at an expense of some $1.8 million paid to two of the largest law firms in the country.

On the parties’ cross motions for summary judgment, the district court entered judgment for St. Paul Insurance. Among other things, the court concluded that because American Bank did not provide St. Paul Insurance with notice “as soon as practicable,” as required by the terms of its insurance policy, and because the late notice caused St. Paul Insurance prejudice, St. Paul Insurance was within its right to deny coverage.

More than six months later, Cueto began efforts to collect on the default judgment in Maryland and elsewhere, sending the relevant court papers to American Bank. American Bank received them around February 13, 2009, and thereafter notified its insurance broker, providing the broker with copies of the papers. The broker in turn notified St. Paul Insurance by email on February 25, 2009.

St. Paul Insurance commenced this action for a declaratory judgment that it had no duty to provide coverage to American Bank because American Bank failed to provide it with timely notice of the Cueto suit, as required by the policy. By an amended complaint, it also contended that American Bank breached its duty under the policy to defend the Cueto suit upon being served with it.

ANALYSIS

American Bank argues, its “obligation to notify St. Paul was not triggered until it had  actual knowledge of the Cueto action, shortly after February 12, 2009.  The policy provision reads: “The Insureds shall, as a condition precedent to their rights under this Policy, give to the Insurer written notice of any Claim made against the Insureds as soon as practicable, but in no event later than: (a) sixty (60) days after expiration of the Policy Year in which the Claim was first made….” (Emphasis added).

Here, there is no dispute that the Cueto complaint was served on CT Corp. on June 18, 2008, and that CT Corp. was American Bank’s designated resident agent for receiving service of process. While the insurance policy does not use the term “actual knowledge” to trigger the notice requirement, American Bank was nonetheless also imputed, as a matter of law, with actual knowledge as of June 18, 2008, under established principles of Maryland agency law.  Therefore, as a matter of law, American Bank received actual knowledge of the suit on June 18, 2008, when its authorized agent, CT Corp., was served with process.

The most that American Bank’s argument accomplishes is to reveal the fact that the suit papers were not routed internally so as to get promptly into the hands of its counsel. As the district court found, “through a variety of corporate screw-ups, significant suit papers that should have gotten immediate attention didn’t.” But internal “corporate screwups” provide no basis to excuse American Bank’s failure to give St. Paul Insurance timely notice of the Cueto suit after being validly served with process.

The defining characteristic of that notice obligation is notice given “as soon as practicable.”
In sum, when American Bank was served with the complaint and summons in the Cueto suit on June 18, 2008, its duty to notify St. Paul Insurance was triggered. Yet, it did not provide St. Paul Insurance with notice until eight months later, on February 25, 2009. No one can credibly argue that that lapse of time was “as soon as practicable.”

American Bank’s notice to St. Paul Insurance, therefore, was not timely.

THE NEED TO PROVE PREJUDICE

American Bank maintains correctly, however, that even if it failed to provide notice as soon as practicable, Maryland law still requires that St. Paul Insurance “establish[ ] by a preponderance of the evidence that the lack of … notice has resulted in  actual prejudice to [it].”  The District Court explained: “Had the insured not breached its obligation [to give timely notice and] to defend, this would have been a relatively trivial matter [based on a lack of personal jurisdiction] and, by any standards—with apologies to Potter Stewart, I know it when I see it—this is prejudice.”

Even though American Bank had the contractual duty to provide its own defense, for which it would, under the policy, be reimbursed by St. Paul Insurance, the policy nonetheless provides that St. Paul Insurance “shall have the right and shall be given the opportunity to effectively associate with, and shall be consulted in advance by, [American Bank] regarding: (a) the selection of appropriate defense counsel; (b) substantive defense strategies, including decisions regarding the filing and content of substantive motions; and (c) settlement negotiations.”

American Bank’s late notice denied St. Paul Insurance the opportunity to participate in the selection of counsel, to speak with counsel, and to discuss credible defense strategies for dismissing Cueto’s suit before the default judgment. St. Paul Insurance was also denied the opportunity to involve itself in considering the possibility of settlement negotiations with Cueto prior to the default judgment and prior to the expenditure of $1.8 million incurred by American Bank to vacate it.

When a late notice precludes an insurer from exercising meaningful contractual rights provided to it by the policy—in this case,  all the contractual rights — the insurer has suffered actual prejudice.

ZALMA OPINION

Liability insurance is a contract that promises to defend and/or indemnify the insured subject to the terms and conditions of the policy. The insured, like the insurer, is obligated to keep all the promises made in the policy and treat the insurer fairly and in good faith. Internal “corporate screwups” – the reason for the failure to give prompt notice – do not excuse an insured’s obligation. By the screwups deprived the insurer of all of its contractual rights and prevented it from protecting its interests.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurer Must Be Allowed to Exercise Meaningful Contractual Rights

Bad Faith Set-Up Fails

Insurer Only Responsible for Stipulated Judgment That is Free From Fraud or Collusion

Insurers apply the terms and conditions of an insurance contract by applying the facts of the reported claim to the wording of a policy. When a policy only provides coverage for a claim made within the policy period it is not unreasonable for an insurer to refuse to defend or indemnify if the claim is made before the inception of a claims made and reported policy.

Bad faith requires more than a refusal to defend. The refusal must be without merit.

In Carlson v. Century Sur. Co., United States District Court, N.D. California Not Reported in F.Supp.2d, 2012 WL 601707 (Feb. 23, 2012) the USDC for the Northern District of California was faced with a claim of bad faith for refusing to defend or indemnify its insured for a claim made for the errors and omissions of a real estate agent.

BACKGROUND

This is an action for failure to defend and failure to indemnify on a real estate errors and omissions (“E & O”) liability insurance policy. Plaintiffs Ron Carlson and Marion Benjamin Carlson (“the Carlsons”) have brought an action for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. The Carlsons are suing under an assignment of rights from Gold Mountain Investments, Inc. dba Prudential California Realty (“Gold Mountain”) and Jane Lyla Oberg (collectively, the “insured”), who were insured by defendant Century Surety Co. (“Century”).

The Underlying Claim

The Carlsons listed their home for sale with Prudential California Realty. On July 18, 2006, plaintiffs entered into a sale agreement for $1,262,000. The sale fell through.
On January 21, 2011, the Superior Court entered default judgment in favor of the Carlsons in the amount of $3,334,834.61. Century has been unable to obtain a copy of the transcript from this “prove up” hearing.

The Insurance Policy

Gold Mountain was the named insured on an E & O policy issued by defendant with a policy period from February 1, 2008 until February 1, 2009. It was a claims made and reported policy providing coverage for damages that result from a claim that is both first made against the “Insured” and reported in writing to the “Company” during the “Policy Period”.

Claim Reported, Defense Denied

Gold Mountain timely tendered the Carlsons’ state court action to Century for defense and indemnity. Gold Mountain also provided Century with the real estate file that Gold Mountain had created for the Carlsons’ transactions. Inside the real estate file was a letter written by the Carlsons, dated August 20, 2007. The letter requested that Prudential California attend a mediation in order to attempt to resolve a conflict, and it indicated that the Carlsons were considering making a $65,000 claim against Prudential California. It was attached to a certificate of service dated August 21, 2007.

The Court agreed with plaintiffs that Century had breached its duty to defend the underlying claim. However, the Court found that plaintiffs had failed to show that there were no genuine issues of material fact regarding breach of the implied covenant.

DISCUSSION

Century moves for judgment on the issue of whether it breached the implied covenant of good faith and fair dealing, and the related issues of punitive damages and attorney’s fees.
In its claim denial, Century had relied on the fact that Prudential California’s real estate file for plaintiffs contained the August 20, 2007 letter, which indicated that the Carlsons were considering making a $65,000 claim against Prudential California. Century believed the existence of this letter placed the claim outside of the scope of the policy.

Century argues that there was a “genuine dispute” as to whether it had a duty to defend its insureds, and therefore, its denial was not unreasonable.  Century’s position was based on an interpretation of the legal standards which was not unreasonable.

Century did not act unreasonably. The court granted Century’s motion for summary judgment on plaintiffs’ allegations of breach of the implied covenant of good faith and fair dealing. Because punitive damages require a greater showing than simply bad faith, a fortiori the Court also denied plaintiff’s motion for punitive damages and granted Century’s motion on the issue.

Whether Plaintiffs’ Damages Are Limited to the Policy Coverage

Plaintiffs seek to recover the $3.3 million default judgment, which substantially exceeds Century Surety’s $500,000 policy limits. Having found no breach of the implied covenant, plaintiffs are limited to contractual damages. The question is whether contractual damages are limited to the policy coverage.

All the detriment proximately caused may include excess settlements or judgments.

Whether the Default Judgment Is Free from Fraud and Collusion

The general rule is that an insured “who is abandoned by its liability insurer is free to make the best settlement possible with the third party claimant, including a stipulated judgment with a covenant not to execute. Provided that such settlement is not unreasonable and is free from fraud or collusion, the insurer will be bound thereby. The Court noted that, “plaintiffs’ claim ballooned from a desire to recover a $1,000 deposit, to a wish for a $5,000 recovery, to a complaint for $65,000, to a judgment for $3,334,834.61, all stemming from a real estate transaction involving a house that was once under contract to sell for $1,262,000.

The Court adds the fact that the August 20, 2007 letter was found within the insured’s file, and that the Court relied on the truth of Ms. Low’s statement that she could not recall reading it when ruling against Century.

Plaintiffs have established the first two foundational facts—that the insurer wrongfully failed to provide a defense, and that the insured thereafter entered into a settlement. Plaintiffs provided prima facie evidence regarding the third foundational fact—that the settlement/judgment was informed and in good faith—via the declarations that were attached to the settlement agreement.

The Settlement Agreement

The Carlsons and Prudential California Realty entered into a settlement agreement, which included (and required) attached declarations from Betty Low and Julie Fox. The court concluded that Century met its burden on summary judgment by proving by a preponderance of the evidence that the agreement was collusive. In the insurance context, “collusion occurs when the insured and the third party claimant work together to manufacture a cause of action for bad faith against the insurer or to inflate the third party’s recovery to artificially increase damages flowing from the insurer’s breach.” Safeco Ins. Co. of Am. v. Parks, 170 Cal. App 992, 1013 (2009).

As for the Carlsons, the uncontroverted facts prove by a preponderance of the evidence that they colluded with the underlying defendants. The settlement agreement was conditioned on sworn declarations by the insured and provided to the Carlsons that stated the insured were unaware of the Carlsons’ claim prior to February 5, 2008. Furthermore, the declarations were only signed after the insured met with plaintiffs’s attorney and discussed “what type of information needed to be included in [the] declaration.” Plaintiffs maintained the right to cancel the settlement agreement if the declarations proved to be unsatisfactory.

Therefore, the court concluded that the settlement agreement and the resulting default judgment were the products of collusion.

An insurer is only bound by a stipulated judgment accompanied by a covenant not to execute if the settlement is reasonable and free from fraud or collusion. Because the Court found that the agreement and judgment are the product of collusion, Century is not bound by it.

The question remains what damages, if any, Century is liable for owing to its breach of the duty to defend. The Court requested guidance from the parties as to the appropriate next step in this litigation.

ZALMA OPINION

Although refusing to defend when a duty to defend exists can cause damage to a party it does not excuse the insured from colluding with the plaintiffs to create a multi-million dollar fraudulent judgment. The attempted fraud should not be honored with damages, even if the plaintiffs incurred attorneys fees to get to the point where an assignment was made. The guidance the court needs is that an attempted fraud that fails deserves no damages. Rather, the plaintiffs who attempted the fraud should be punished.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Bad Faith Set-Up Fails

Because a Disco Is Not a Deli Policy Rescinded

It’s Not Nice to Lie to Your Insurance Company

It does not take a member of Mensa to agree that a disco is not a deli, and that the risks posed by the combination of billiards, booze, and entertainment are materially different from the hazards that could arise out of a corned beef on rye or a pastrami sandwich.

In Nationwide Mutual Fire Insurance Company v. Almco, Limited, 2016 WL 1452327, Civil Action No. 13-1009 (ABJ) United States District Court, District of Columbia, (04/13/2016), Nationwide Mutual Fire Insurance Company (“Nationwide”) sued Almco, Limited (“Almco”), seeking a declaration that the insurance policy it issued to Almco is void because it was “procured as a result of a material misrepresentation.”

Specifically, Nationwide alleges that Almco represented on its insurance application that it operated a delicatessen on the insured premises when in fact it operated a pool hall and nightclub, providing live entertainment and hosting private events where alcoholic beverages were sold.

It was not disputed, even by the defendant, that the insurance application contained false statements and deceived Nationwide about the nature of Almco’s business. Almco argued that the lies on the application should not matter because it did not intend to deceive Nationwide.

BACKGROUND

Almco was formed by Regina Ruckman in the District of Columbia in May of 2011. The plan was to eventually operate as a delicatessen, but the sandwich business was not underway at the start or ever.

Ruckman, acting as Almco’s principal, was responsible for securing insurance coverage for Almco. From September 1, 2011 through September 1, 2012, the business was covered by a businessowner’s insurance policy provided by Travelers Casualty Insurance Company of America (“Travelers”)  (“Travelers Policy”). That policy was brokered by First Insurance Group, and it listed Almco as a “restaurant pac” in the business of “fast food.” Ruckman stated in a sworn declaration that during the period in which Almco was covered by the Travelers Policy, Almco “provided food service, had pool tables, offered live entertainment including DJs, served alcoholic beverages through vendors and caterers licensed to do so and had paid admissions and cover charges.” From the day it opened, it traded under the name “DC Soundstage.”

On August 28, 2012, Ruckman completed a cancellation request form to discontinue Almco’s coverage with Travelers, effective September 1, 2012. (“Cancellation Request”). That document was also signed by Audrey Sample, who was listed as the “producer”.

Ruckman signed a commercial insurance application on behalf of Almco, seeking a “premier businessowners” policy with Nationwide.  The Insurance Application described Almco’s business as a “deli,” and it stated that Almco did not have a website, did not “serve or sell alcohol,” and did not “have bouncers, DJs, live entertainment, pool tables … paid admissions, cover chargers or other similar exposures.” In signing the application, Ruckman certified that the answers were “true, correct and complete to the best of [her] knowledge.”  As of August 31, 2012, when Ruckman signed the application, Almco had yet to ever operate as a deli, and its business continued to involve billiards and alcohol.

In  January  2013,  a  shooting  occurred  on  Almco’s  business  premises  during  a  private  event  where  alcohol  was  being served. Several patrons were injured, and as a result, claims were presented against the  Nationwide  insurance  policy. Almco  then  “demanded  that  Nationwide  afford  it indemnification and a defense for all claims and causes of action arising out of” the January 2013 incident. Since then, Almco has ceased to do business.

On September 22, 2015, Almco moved for summary judgment on the grounds that it did not intend to deceive Nationwide through its responses on the Insurance Application.

ANALYSIS

The parties agree that D.C. Code § 31-4314 is the provision that governs this insurance dispute. The statute provides: “The falsity of a statement in the application for any policy of insurance shall not bar the right to recovery thereunder unless such false statement was made with intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the company.” [D.C. Code § 31-4314.]

There is no dispute that the statements on Almco’s Insurance Application were false.

The Insurance Application, which was signed by Ruckman on August 31, 2012, described Almco’s business as a “deli,” and it represented that the business did not have a website, did not “serve or sell alcohol,” did not have “bouncers, DJs, live entertainment, pool tables … paid admission, cover charges or other similar exposures,” and did not “have any other exposures that have not been identified” elsewhere on the application. Insurance Appl. at 2–3. Ruckman certified that the answers were “true, correct and complete to the best of [her] knowledge.”

Almco does not appear to dispute that it never operated as a delicand its admissions in this case bear that out. Ruckman testified that when Almco first opened in 2011, it was not operating as a deli, and she admitted that as of the date she signed the Insurance Application with Nationwide, Almco had not undergone any transformation into a delicatessen.

Similarly, Ruckman averred that when she filled out the Insurance Application, she knew that Almco intended to “operate as a deli with a dining area for food intake, provide pool tables, have a stage for live music including disc jockeys, rent the facility out from time to time to entities with liquor licenses and that [it was] in the process of applying for [its] own liquor license.” She also testified that she told Sample during the application process that alcoholic beverages would be sold on the premises, and she admitted that as of August 2012, the District of Columbia had denied Almco the license to operate a deli.

In light of those admissions, it is clear that Almco’s representations on the Insurance Application were false as of August 2012, the date Ruckman signed and certified the application.

Because Nationwide put forth evidence sufficient to show that the false statements on the Insurance Application had a material effect on its decision to insure Almco, and because Almco has failed to identify any specific facts demonstrating that there is a genuine dispute on that issue, Nationwide’s motion for summary judgment will be granted.

Sample, the “producer” – or insured’s agent – explained that the information that Almco was using the trade name “DC Soundstage” would have been a “red flag” to her and to Nationwide’s underwriters. And she testified that if Ruckman had informed her that Almco had applied or would be applying for a license to serve alcohol, it would have affected “the eligibility of the policy.”  Finally, she stated that if she had known that Almco rented out the facility for private parties where alcohol was served, she would have written the insurance policy with a carrier other than Nationwide because that fact would have resulted in “a change in exposure.”

Because Nationwide has put forth evidence demonstrating the absence of a genuine dispute of fact on the question of materiality, the burden now shifted to Almco.

An insurer has a right to rely on statements made in the insurance application. An insurer’s reliance on statements made in an insurance application is generally recognized as objectively reasonable. Sample’s sworn deposition testimony, in which she stated that had she known the realities of Almco’s business, she would not have even bothered to send the application to Nationwide because it “do[es] not write businesses” with exposures like “bouncers, DJs, live entertainment, [and] pool tables.”

Proof that an application for insurance contains a false statement which materially affects the acceptance of risk or hazard assumed by the insurer is sufficient to defeat a claim under the policy. Hill v. Prudential Ins. Co. of Am., 315 A.2d 146, 148 (D.C. 1974).

CONCLUSION

Because there is no dispute that Almco made false statements on the Insurance Application and that those misstatements materially  affected  Nationwide’s  acceptance  of  the  risk  or  hazard  it  assumed  by  insuring  Almco,  the  Court  granted Nationwide’s motion and award it judgment as a matter of law.

ZALMA OPINION

Insurance companies have the unquestioned right to rely on he or she who would be insured to provide sufficient information to allow the insurer to wisely discriminate on the risks it is willing to take. In this case, by misrepresenting material facts, Almco deprived Nationwide of the right to make a wise discrimination and by the deception, whether intentional or negligent, caused the policy to be void from its inception.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 49 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Because a Disco Is Not a Deli Policy Rescinded

Panama Papers & Insurance Fraud

Zalma’s Insurance Fraud Letter

April 15, 2016

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

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

The Panama Papers and Insurance Fraud

  • Barry Zalma
  • Health Care Fraud Suit Fails
  • SIU Investigators Get Overtime
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud – Convictions
  • Books from Barry Zalma
  • Wisdom
  • Hard Fraud v. Soft Fraud
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Zalma’s Insurance 101
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provide the Following Services to Its Clients
  • Zalma’s Insurance Fraud Letter

Zalma’s Insurance Fraud Letter – Vol. 20, Number 8

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

 THE “ZALMA ON INSURANCE” BLOG 

The most recent posts of the 1583 posts included in the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Panama Papers & Insurance Fraud

Broker Responsible to Insured for False Application

Insurer May Increase Premium on Audit

New York appellate courts are noted for succinct and clear opinions that seem to resolve most issues presented to them with what seems like little effort. Of course, anyone who writes knows that it is more difficult to be brief than to write succinctly with as few words as possible.

A perfect example of successful brief and succinct writing is Seneca Ins. Co., Inc. v. Certified Moving & Storage Co., LLC, — N.Y.S.3d —-,  2016 N.Y. Slip Op. 02757,  Supreme Court, Appellate Division,  2016 WL 1420951 (APRIL 12, 2016) where the Appellate Division was faced with an appeal from orders denying motions for summary judgment.

The trial court, to the extent appealed from, denied defendants/third-party plaintiffs’ motion for summary judgment dismissing plaintiff’s complaint and partially denied third-party defendant Frenkel & Co.’s cross motion for summary judgment dismissing the third party complaint.

FACTS

Certified Moving and Storage Co. and Certified Installation Services, LLC (collectively, Certified) paid premiums based upon Certified’s payrolls for the trucking and warehouse operations of the business. The initial premiums were deposit premiums. Seneca maintained the right, under the policies, to conduct payroll audits after the conclusion of the policy periods to determine the final premium. During one of these audits, Seneca determined that the installation business and payroll was a far more substantial portion of Certified’s business then the insurer had previously realized. Accordingly, Seneca sought to reclassify the policy and premium amounts to reflect the risks it actually believed it took under the policy.

Seneca filed this action, seeking payment of the premiums and alleging that Certified misrepresented the nature of its business when applying for insurance coverage. Certified filed a third-party claim for indemnification against third-party defendant Frenkel & Co., its broker, claiming that it relied on Frenkel’s representations in completing the application for insurance, specifically, that the installation payroll was not needed.

ANALYSIS

New York Insurance Law § 3426(d)(1) clearly permits the collection of additional premiums in instances where the policy terms call for it through the conduct of an audit. Moreover, as the motion court also correctly determined, even if § 3426(d)(1) did not apply, there would be, at the very least, a question of fact concerning whether the additional premium increase exceptions of § 3426(c)(1)(D) & (E) apply based on Certified’s alleged omissions in filling out the policy applications.

On the issue of the alleged misrepresentations in the policy application, Frenkel’s motion for summary judgment dismissing Certified’s third-party indemnification claims was also properly denied. There are issues of fact concerning the representations made in filling out Certified’s insurance application, an application that was completed by Frenkel.

It is well settled that an insurance broker may be held liable to its principal for common law indemnification where it breached its duty to that principal by negligently or intentionally misrepresenting facts in connection with obtaining insurance coverage.

ZALMA OPINION

Summary judgment is always difficult and it seems odd that the parties appealed the decision rather than taking the case to trial. They can be thanked by the insurance industry in New York because the Appellate Division made clear that an insurer can seek additional premium after an audit and an insured, who allowed a broker to fill out a false application, can hold the broker liable if it can be proved it breached its duty to the principal by intentionally misrepresenting facts on an application

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Broker Responsible to Insured for False Application

To Be or Not to Be an Additional Insured?

Contract Must Require Additional Insured Status

Businesses require indemnity from their vendors in almost every contract. Most also require a certificate of insurance to prove that the vendor is insured and can, therefore, give confidence that claims for indemnification can be paid. Many prudent businesses also require that the vendor make the buyer an additional insured on the vendor’s policy.

In Federal Signal Corporation v. Tammcor Industries, Inc., United States District Court, N.D. Illinois, Eastern Division 2016 WL 1426289 (April 7, 2016) Federal Signal Corporation (“Federal Signal”) sued Defendants Tammcor Industries (“Tammcor”) and Peerless Indemnity Insurance (“Peerless”), seeking indemnification for certain costs it incurred defending against, and later settling, a separate lawsuit. After limited discovery, Peerless filed a Motion for Summary Judgment, claiming that under the relevant contracts, it has no duty to indemnify Federal Signal.

BACKGROUND

Federal Signal designs and manufactures security and communication systems, among other products, for a variety of customers. Among their products was a speaker system installed on the Navy supply ship, USNS Matthew Perry. Tammcor Industries manufactures various machine components and supplied Federal Signal with the metal housing for the speaker system on the ship. The origins of the present lawsuit trace back to an accident involving that speaker system. A speaker allegedly malfunctioned sometime in April 2011 and sent debris into the eyes of a nearby person. The injured party filed a lawsuit in California state court against Federal Signal, and the parties settled for an undisclosed sum.

Federal Signal now seeks indemnification for the losses it sustained in defending and eventually settling the California suit. It brings claims against Tammcor, whom it alleges manufactured the component responsible for the injury. But it also names Tammcor’s insurer, Peerless, as a defendant. The Complaint maintains that Federal Signal enjoys “additional insured” status under Peerless’ insurance policy with Tammcor, making Peerless directly responsible for Federal Signal’s legal liabilities in the California case.

The dispute implicates two contracts. The first is the general liability insurance policy between Peerless and Tammcor. An amendment to the policy provided that: “ADDITIONAL INSURED—VENDORS … A. SECTION II—WHO IS AN INSURED is amended to include as an additional insured any person or organization (referred to below as vendor) when [Tammcor] and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on [Tammcor’s] policy. Such person or organization is an additional insured only with respect to “bodily injury” or “property damage” arising out of “your products” which are distributed or sold in the regular course of the vendor’s business….” (emphasis added)

The policy period for the coverage was from February 2, 2011 to February 2, 2012.
The second relevant contract is one between Tammcor and Federal Signal. The contract was a purchase order for the parts used in the speaker system on the USNS Matthew Perry. The purchase order contained certain terms and conditions, including the following provision: “INDEMNIFICATION: [Tammcor] shall defend, indemnify, and hold harmless [Federal Signal] against all damages, claims or liabilities and expenses (including attorney’s fees) arising out of or resulting in any way from any defect in the goods or services purchases hereunder, or from any act or omissions of [Tammcor], its agents, employees or subcontractors. This indemnification shall be in addition to the warranty obligations of [Tammcor] and [Tammcor] agrees to provide Certificates of Insurance for such Indemnity upon request.”

According to the Complaint, Tammcor supplied all components for the speaker system to Federal Signal between 2003 and 2008. Whether Peerless agreed to indemnify Federal Signal as an “additional insured” is the only issue raised in the present Motion for Summary Judgment.

ANALYSIS

Federal Signal believes that the amendment to the Peerless insurance policy regarding additional insureds “automatically provides Federal Signal coverage pursuant to [the purchase orders] with Tammcor.”

This issue is more straightforward than Federal Signal suggests—the relevant contractual provisions are unambiguous. First, the insurance policy: Peerless agreed to adopt a party as an additional insured only when Tammcor and that party “agreed in writing in a contract or agreement that such [party] be added as an additional insured.”  The required agreement in writing, according to Federal Signal, is satisfied by the purchase orders signed between 2003 and 2008 for the speaker components. But the purchase orders’ terms state that Tammcor, not Peerless, will indemnify Federal Signal for all relevant damages. Tammcor alone responsible for Federal Signal’s legal liability. An insurer (for example, Peerless) may be eventually responsible for Tammcor’s losses, but that insurer would only be considered liable to Federal Signal in a derivative fashion.

In another relevant term of the purchase orders, Tammcor agrees “to provide Certificates of Insurance for such Indemnity upon request.”  The Peerless insurance policy required Tammcor to contract explicitly in order to add an additional insured. The express identification of an additional insured is precisely what is lacking here.

But even if there were ambiguity, Federal Signal had no reasonable expectation that it would be covered by Peerless. It signed the last purchase order in 2008. At that time, it was reasonable to expect that Tammcor would indemnify it for certain of the components—the terms of the purchase order said as much. There is no evidence, however, that Federal Signal believed at that time, or in 2011 when the accident occurred, that it was covered directly under an insurance policy held by Tammcor. There is similarly no evidence that Federal Signal ever inquired about its status as an additional insured prior to the accident; that it ever questioned Tammcor’s ability to pay for potential liabilities; or even that it requested Tammcor’s proof of insurance.

Even if Federal Signal did entertain an expectation of insurance, it would be unreasonable, because a third-party insurer is nowhere mentioned in the purchase orders. Federal Signal is a large, established public company, not an unsophisticated individual. If it wanted additional insured status, it should have contracted for it.

Peerless is not directly liable to Federal Signal, and that is the only question that was before the Court.

ZALMA OPINION

The court used the clear and unambiguous language of the two contracts to put away the creative, albeit useless, argument that a request for a certificate establishing that a vendor is insured make the purchaser an additional insured. As the court made clear, if a party wants additional insured status it should have contracted for it. Failure to do so was fatal to the creative and imaginative arguments of the plaintiff.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on To Be or Not to Be an Additional Insured?

Lawyers Lie to Court About Impartiality of Appraiser Defeats Award

Counsel’s Conduct Impugned the Integrity of The Appraisal Process and the Court

Appraisers in a first party property dispute are supposed to be impartial. Although appointed by a party the appraiser, acting as an arbitrator, must do what is fair not what the party appointing him or her want the award to be.

In Auto-Owners Insurance Company v. Summit Park Townhome Association, United States District Court, Colorado, 14-cv-03417-LTB, 2016 WL 1321507 (04/05/2016) the USDC, Colorado, was faced with new information that the insured’s appointed appraiser was not unbiased or disinterested.

This insurance coverage dispute by Auto-Owners Insurance Company’s (“Auto-Owners”) raised an objection to George Keys acting as appraiser based on recently discovered, undisclosed relationships with defendant and its representatives.

FACTS

Auto-Owners sought declaratory relief to determine the extent of coverage under a property insurance policy it issued to Summit Park for damage to buildings on Summit Park’s premises from a 2013 hailstorm.

The parties had difficulty starting the appraisal so the court imposed several guidelines to govern the process and appointed an umpire, Robert J. Norton. One of the guidelines the court imposed stated: “An individual who has a known, direct, and material interest in the outcome of the appraisal proceeding or a known, existing, and substantial relationship with a party may not serve as an appraiser.” The court also required the appraisers to disclose all of their relationships that might indicate a bias. To put some teeth in his order the court warned that he would sanction any party who failed to comply.

The Parties’ Disclosures

On June 15, 2015, counsel for Summit Park, William Harris of the Merlin Law Group (“Merlin”), disclosed in a letter to counsel for Auto-Owners that Keys “does not have any significant prior business relationship with the Merlin Law Group.” Mr. Harris added that Keys “has acted as a public adjuster and/or appraiser on behalf of policyholders that the Merlin Law Group has represented in the past, however, this obviously does not affect his ability to act as an appraiser in this matter.”

Keys disclosed in an email to Auto-Owners’ counsel as follows: “I do not have any substantial business relationship or financial interest in Merlin Law Group. There have been cases where both Merlin Law Group and Keys Claims Consultants [Keys’ business] acted for the same insured but under separate contracts.”

The Appraisal Award

The appraisal panel issued its award. The award is signed by the umpire, Mr. Norton, and Defendant’s appraiser, George Keys, but not by Auto-Owners’ appraiser. Auto Owners paid the actual cash value part of the award and made clear that Auto-Owners is making this payment under a full and complete reservation of all of its rights under the policy and applicable law.  Auto-Owners’ counsel further stated that “Auto-Owners does not waive…[its] objection to Keys as an appraiser and any other issues currently pending, or that may be asserted, in [this] action, including any grounds for recoupment of any amounts that have been paid to [Summit Park].”  Auto-Owners moved to amend its complaint to assert, inter alia, a claim for recoupment of the appraisal award.

The Objection

First, Auto-Owners identified matters in which Summit Park’s counsel, Merlin, or attorneys presently affiliated with Merlin, represented Keys or his company.

Second, Auto-Owners highlights other joint activities undertaken by Keys and Merlin attorneys. For example, Keys and Merlin founder Chip Merlin founded the Florida Association of Public Insurance Adjusters (“FAPIA”), whose stated “number one goal is to protect policyholders and the public adjusting profession.”

Third, Auto-Owners’ reply brief lists 33 cases in which Keys served as either an appraiser or expert witness for the same client Merlin represented. Mr. Pettinato provided a testimonial for Keys’ marketing brochure stating that “Both Keys and his staff have assisted me as well as my firm in resolving an untold number of large multi-million dollar losses to an amicable resolution and settlement to the policyholders’ benefit and satisfaction.”

Fourth, Auto-Owners cites facts that it believes demonstrates that Keys is “completely devoted to policyholders.”

Fifth, Auto-Owners notes that Summit Park initially retained Keys under a contract that fixed his compensation at “$350 per hour as well as expenses not to exceed 10% of the amounts paid to” Summit Park in this case.

ANALYSIS

The policy does not define the term “impartial.” Neither the parties nor the Court have located any Colorado appellate authority construing the term in the context of an appraisal provision like the one here.

An arbitrator must exercise a high degree of impartiality, without the slightest degree of friendship or favor toward either party. Evident partiality has been found when a reasonable person would have to conclude that an arbitrator would be predisposed to favor one party to the arbitration. Keys, based upon the authorities reviewed, cannot be considered impartial. His relationship with Merlin goes well beyond the mere “retention of an expert on multiple engagements” that the court suggested would be permissible in the disclosure order.

In addition to working on dozens of prior cases in which Keys was retained by the policyholder, Merlin and/or Merlin attorneys have served as Keys’ personal counsel, served as incorporator and registered agent for Keys’ companies, taught with Keys, and donated to a Keys-led group involved in pro-policyholder lobbying. These aspects of the relationship between Keys and Merlin, viewed collectively, make clear that he cannot satisfy any of the standards of impartiality.

While Keys’ relationship with Merlin is sufficient by itself to render him other than impartial, the totality of the circumstances here make this conclusion unavoidable. As noted above, Keys has made numerous comments suggesting a bias in favor of policyholders. The initial fee agreement under which Keys was initially retained in this case—which capped his fees and expenses at 10% of Summit Park’s recovery—raises further concerns. By making the appraiser’s fee contingent upon the amount awarded it caused the appraiser to conclude that the higher his appraisal, the higher the fee. The fact that Keys was operating under a contingent fee agreement is enough, by itself, to render him other than impartial.

Despite the foregoing, the extent of Summit Park’s disclosure to Auto-Owners regarding Keys was that Keys “has acted as a public adjuster and/or appraiser on behalf of policyholders that the Merlin Law Group has represented in the past”; neither Summit Park nor Merlin made any effort to disclose the number of times Merlin attorneys had worked together or the other aspects of their relationship outlined above. Instead of being aboveboard and demonstrating his neutrality, Keys’ nondisclosure only raises suspicions about his impartiality and creates the appearance that he was trying to hide the damaging information.

In this regard, the court found it troubling that one of the Merlin attorneys who has appeared in this case, David Pettinato, provided more detail about Merlin’s relationship with Keys in a brochure for Keys’ business—a brochure in which he is quoted as saying that “[b]oth Keys and his staff have assisted me as well as my firm in resolving an untold number of large multi-million dollar losses to an amicable resolution and settlement to the policyholders’ benefit and satisfaction,” — than he did in his disclosures to Auto-Owners before this Court.

Similarly, Mr. Harris, another Merlin attorney who has appeared in this case, acknowledged at the hearing that Merlin assisted Keys in making the disclosure in which Keys stated that he did “not have any substantial business relationship…[with] Merlin Law Group.”

The disclosure order required a “reasonable” inquiry regarding conflicts of interest, and these facts suggest that Merlin and, specifically, the Merlin attorneys who have appeared in this case, failed to take this duty seriously.  Unfortunately, counsel’s conduct has impugned the integrity of not only the appraisal process but also the Court.

Undisputed material facts establish that Keys, who is Summit Park’s appraiser, is not “impartial” as required by the insurance policy in this case. Summit Park’s and Keys’ failure to disclose material information regarding, among other things, Keys’ extensive relationship with Summit Park’s counsel, violated the order requiring disclosure of facts that a reasonable person would consider likely to affect an appraiser’s impartiality.

For the reasons set forth herein, the court sustained the objection, disqualified Keys from serving as an appraiser in this matter, vacated the appraisal award lodged with the Court on December 23, 2015 and instructed counsel to file briefs on the appropriate sanctions to be imposed on the Merlin Law Group.

ZALMA OPINION

Lawyers are under an ethical duty to make honest and fair representations to the court. When this court issued an order requiring counsel and appraisers appointed by counsel, to disclose any potential lack of impartiality. The lawyers in this case drafted the appraiser’s statement of impartiality that they knew was false. One of the Merlin attorneys who  appeared in the provided more detail about Merlin’s relationship with Keys in a brochure for Keys’ business than was disclosed to the court. Sanctions will be imposed and the bad conduct now requires the client to pay for a second appraisal with impartial appraisers and return the money paid by Auto Owners.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Criminal Conduct Defeats Insurance Claim

One Reservation of Rights is Sufficient

Insurance companies faced with a claim seeking defense and indemnity that on its face appears to be due to a cause that is specifically excluded usually result in a defense provided under a reservation of rights. The defense is provided and once the case is resolved the insurer can then refuse to indemnify if the facts support such a denial.

In American Guarantee & Liability Insurance Company v. John F. Lamond; Sean F. Murphy; Tremont Realty Investments, Llc; Seamur Enterprises, Llc; and Colucci, Colucci, Marcus & Flavin, P.C.,  United States District Court, D. Massachusetts 2016 WL 1312008 (04/04/2016) the USDC for the District of Massachusetts, was asked to determine whether American Guarantee & Liability Insurance Company (AGLI) is estopped from denying professional liability insurance coverage to defendant John F. Lamond because it did not issue to Lamond a second reservation of rights letter in the underlying state court litigation.

FACTS

AGLI issued Lamond, then a licensed attorney, a professional liability policy covering the period from May 20, 2007, through May 20, 2008. During the policy period, Lamond represented defendant Sean F. Murphy and two defendant companies in which he is the principal – Tremont Realty Investments, LLC, and Seamur Enterprises, LLC (collectively Murphy) – in the purchase of several lots of land for development. Prior to the closing, Lamond learned that the land was the site of an Indian burial ground and was subject to a preservation restriction. He nonetheless certified to Murphy’s mortgagor – Hill Financial Services Company – that titles to the land were free from any encumbrances. After the purchase, the truth was discovered, and Murphy was unable to build on the land as planned and defaulted on the mortgage. Hill foreclosed on the lots, but could not develop or sell them because of the burial ground.

In 2009, Hill brought suit against Murphy and Lamond in the Norfolk Superior Court. Murphy, in turn, brought third-party claims against Lamond for, inter alia, professional negligence and violations of Mass. Gen. Laws Ch. 93A.

In May of 2009, after Hill initiated the state court lawsuit, AGLI sent Lamond a letter informing him that while it had arranged for attorney Joseph Berman of the law firm of Looney & Grossman to defend him, it was “reserv[ing] all rights and defenses available under the Policy and at law to deny coverage on any of the [ ] bases” identified in the letter.  Specifically, the reservation letter quoted that Lamond’s policy does not apply … “[t]o any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest[.]”

The Hill] Complaint alleged the Insured’s failure to advise of the Indian issue was deceitful and claims the Insured’s failure to advise Hill Financial of the Indian issue was done so fraudulently so that Hill Financial would loan money. To the extent that this exclusion applies, American Guarantee advised its insured by the reservation of rights that it may be able to deny coverage and reserves the right to do so.

The reservation letter also noted that the definition of covered damages under the policy excluded “criminal or civil fines, penalties (statutory or otherwise), fees or sanctions; … 5. punitive, exemplary or multiple damages; … legal fees, costs and expenses paid to or incurred or charged by the Insured …”

AGLI did not send Lamond a second reservation letter specifically addressing Murphy’s third-party claims. In 2013, Murphy’s claims against Lamond were tried to a jury, which awarded $20,000 to Murphy for Lamond’s professional negligence, and $397,000 in actual damages for Lamond’s deceptive acts and practices under Chapter 93A, doubled by the jury to $794,000 after it found that Lamond had acted willfully. … Pursuant to Chapter 93A, the court also awarded $111,190.62 in attorneys’ fees to Murphy.

DISCUSSION

To prevail on their negligent misrepresentation claims, the defendants must establish in this context that the plaintiff, in the course of their business, profession or employment, or in any other transaction in which they had a pecuniary interest, supplied false information for the guidance of others in their business transactions without exercising reasonable care or competence in obtaining or communicating the information, that those others justifiably relied on the information, and that they suffered pecuniary loss caused by their justifiable reliance upon the information.

The absence of a second reservation letter is not reasonably understood as a representation that AGLI did not intend to reserve its rights with respect to Murphy’s third party claims against Lamond in light of the first letter.

The policy excluded “any intentional, criminal, fraudulent, and malicious or dishonest act or omission by an Insured.”  The letter identified the allegations that Lamond’s “failure to advise of the Indian issue was deceitful and … [his] failure to advise … was done so fraudulently.” The court noted that as Murphy’s third-party claims were based on the same allegations of misconduct, no new issues were raised.

Assuming, for the sake of argument, that the absence of a second letter implied a conflicting message from the first letter, Lamond’s reliance, without any efforts to rectify the two positions, was not reasonable.

The record is devoid of any evidence that Lamond obtained assurance or clarification from AGLI on his interpretation of the absence of a second letter. As a matter of law, he cannot now “rel[y] on one of a pair of contradictories simply because it facilitates the achievement of [his] goal.”

With respect to the Chapter 93A claim, defendants also allege that AGLI engaged in unfair and deceptive business practices by failing to settle Murphy’s claims against Lamond in good faith.

AGLI’s duty to settle the claims against Lamond does not arise until liability has become reasonably clear. Determining if a claim is covered by the policy is essential to evaluating the reasonableness of the insurer’s response to a demand.

Having identified the specific provisions of the policy that excluded coverage of Lamond’s conduct and damages in its reservation letter (those policy exclusions having also been confirmed by this court), it was never reasonably clear that AGLI’s policy covered the claims against Lamond. Absent such clarity, AGLI had no duty to settle Lamond’s claims.

ZALMA OPINION

A reservation of rights informs the insured that there is a problem with coverage and that there exists a possibility that if certain facts are proved there would be no coverage. In this case a trial court established that the lawyer acted fraudulently to cause damage to the parties suing him. That was sufficient to establish there was no coverage under the policy and his failure to seek clarification is his problem, not that of the insurance company. The loss was clearly excluded.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Criminal Conduct Defeats Insurance Claim

Additional Insured Added to Policy Without Underwriting Involvement

Stupid to Give Away Underwriting  Duty to Insured

Underwriting is the process by which an insurer evaluates the risks presented to it and decides whether it is willing to take a risk that will make insurance a profitable business. Commercial General Liability insurers have adopted a form of additional insured agreement that makes anyone that the named insured – by contract – agrees to make another an additional insured if the action seeking a defense meets certain requirements. By so doing the insurer transfers the obligation to underwrite the exposure to liability to the named insured and away from the insurer. As a result, until there is a loss, the insurer does not even know who it is insuring and whether it is a good risk or a risk no insurer would be willing to take.

In Old Republic General Insurance Corporation v.  Scottsdale Insurance Company, United States District Court, W.D. Pennsylvania, Defendant, Civil Action No. 15-31 (03/30/2016) the USDC for the Western District of Pennsylvania was asked to deal with a dispute over which insurer was required to defend an entity made an additional insured by the named insured without input from the insurer..

The issue was first presented to a magistrate judge who then presented to the District Court judge a Report and Recommendation (“R&R”) that recommended that the court grant Plaintiff Old Republic General Insurance Corporation’s (“Old Republic”) motion for summary judgment and hold that Scottsdale has a duty to defend a third-party — E.E. Austin & Son, Inc. — for whom Old Republic is currently paying defense costs.

BACKGROUND

Erie Water Works — a public utility company — hired E.E. Austin to serve as its general contractor for a construction and renovation project. In order to complete this project, E.E. Austin hired DH Steel to serve as its subcontractor for all metal installation.  While E.E. Austin already had a general insurance policy with Plaintiff Old Republic, the E.E. Austin-DH Steel agreement required DH Steel to obtain insurance coverage that would indemnify E.E. Austin for any harms stemming from DH Steel’s actions during the project.

DH Steel obtained a comprehensive general liability insurance policy from Scottsdale. The policy provides that the following are covered “Additional Insured” parties: “Who is An Insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for ‘bodily injury’…caused in whole or in part, by: ¶ Your acts or omission; or The acts or omissions of those acting on your behalf.”

During the policy period, one of DH Steel’s employees filed a negligence action in state court, naming E.E. Austin as the sole defendant. The employee’s underlying complaint alleged that he was injured while working for DH Steel on the Erie Water Works project. According to the complaint, the employee was injured as a result of E.E. Austin’s failure: to implement an effective daily inspection plan with its subcontractor’s employees; to provide an on-site supervisor; to train and supervise its DH Steel’s employees; and to designate a competent supervisor to review DH Steel’s safety program.

As E.E. Austin’s general insurance company, Old Republic submitted a request for coverage to Scottsdale. Scottsdale denied the claim on the grounds that the employee’s underlying complaint did not expressly state that DH Steel engaged in any acts of negligence and, therefore, did not implicate the Additional Insured Parties provision and was not covered by Scottsdale’s policy. Old Republic then filed the present declaratory action in federal court.

LEGAL STANDARD FOR A DUTY TO DEFEND

Generally, a court examining questions of insurance coverage shall grant summary judgment only if the movant shows that there is no genuine dispute as to any material fact. However, it is well-settled law in Pennsylvania and probably every other state that the duty to defend is broader than the duty to indemnify. In Pennsylvania, the duty to defend arises if there are any facts in the complaint that could “potentially” impose liability upon the insured within the policy’s coverage.

DISCUSSION

The R&R concludes that Scottsdale has a duty to defend E.E. Austin because the employee’s underlying complaint alleges facts that, if true, would potentially impose liability that falls within the scope of the Scottsdale insurance policy.

According to the employee’s complaint, the injuries were caused — at least in part — by the actions of DH Steel’s employees. The complaint seeks to hold E.E. Austin for negligently supervising DH Steel. That is, by implication, it alleges that E.E. Austin should have prevented DH Steel’s employees from engaging in negligent acts which caused the employee’s injury.

The court agreed with Magistrate Judge’s reasoning and entered judgment requiring Scottsdale to defend its additional insured.

ZALMA OPINION

Underwriting is an important part of any insurance business. Proper evaluation of the risk of third party liability takes a professional who can evaluate the persons seeking insurance based upon facts determined by an application and independent investigation by the underwriter. When that obligation is transferred to the named insured it can make an entity with a record of causing damage to be an insured and place its insurer in a situation defending a person or entity it would never have insured directly.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Additional Insured Added to Policy Without Underwriting Involvement

Criminal Activity Should Never Be Insurable

Scofflaws Demand Insurance Protection for Their Crimes

Insurance is designed to protect the persons insured against fortuitous events that are neither intended or expected by the insured. When a person is convicted of a crime it is axiomatic that the conduct resulting in the conviction was not fortuitous but was intentional and expected.

In Darwin National Assurance Company v. Luzerne County Transportation Authority, Stanley J. Strelish and Robb A. Henderson, United States District Court, M.D. Pennsylvania Civil Action No. 3:14-2417 | (03/30/2016) the USDC for the Middle District of Pennsylvania was asked to provide coverage to two criminals who were named as insured in a liability insurance policy.

BACKGROUND

In June 2014, a Pennsylvania statewide investigating grand jury issued a Presentment containing written findings of fact and a recommendation that criminal charges be filed against defendants Strelish and Henderson (collectively, the “Individual Defendants”). The Individual Defendants allegedly conspired to defraud PennDOT by intentionally submitting inflated and false county bus ridership data to PennDOT to obtain excess grant monies. Strelish held the position of Executive Director since 2007 and had overall responsibility for LCTA. Henderson held the position of Operations Manager since 2008 and supervised all LCTA bus drivers.

On September 23, 2014, the government filed Criminal Informations against Strelish and Henderson, respectively, in Pennsylvania state court. The Criminal Informations allege that Strelish and Henderson conspired to create false bus ridership data, which Strelish then submitted to PennDot to obtain excess grant monies, and the monies were then used to pay various operating expenses of LCTA, including the salaries of the Individual Defendants. Strelish and Henderswon were charged with multiple crimes.

The Individual Defendants tendered the Criminal Informations to the plaintiff insurer under the Public Officials Liability and Employment Practices Liability Insurance Policy which the plaintiff issued to LCTA. On September 3, 2015, Strelish executed a document titled, “Guilty Plea Agreement and Colloquy of Defendant Stanley Strelish” (“Plea Agreement”), in his criminal proceeding to several counts of tampering with public records, a felony of the third degree. At a hearing on September 8, 2015, the Court of Common Pleas of Dauphin County accepted Strelish’s plea and sentenced Strelish to five years of probation and ordered him to pay a $5,000 fine.

Plaintiff’s Motion for Summary Judgment

On June 29, 2015, the plaintiff filed a motion for summary judgment along with a supporting brief and a statement of material facts. Henderson and Strelish filed cross-motions.

The Public Officials Liability and Employment Practices Liability Insurance Policy contains, in relevant part, the following provisions regarding coverage for the liability of public officials:

“EXCLUSIONS

The Insurer shall not pay Loss, but shall only pay Defense Expenses, from any Claim brought about or contributed to in fact by:
A. any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured;
B. any willful violation by any Insured of any law, statute, ordinance, rule or regulation; or
C. any Insured gaining any profit, remuneration or advantage to which such Insured is not legally entitled.

The applicability of Exclusions to any specific Insured may be determined by an admission of such Insured, a finding, or final adjudication in the proceeding constituting the Claim or in a proceeding separate from or collateral to the Claim.

DISCUSSION

Prior to defendant Strelish’s guilty plea, the parties agreed that Strelish and Henderson are Insured because they were employees of LCTA. Although the insurer paid some defense expenses, the insurer refused to provide further coverage.

The acts in Strelish’s admission fit within exclusion A(1) of the list, which is “any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured.” Strelish pled guilty to a felony of the third degree and admitted to committing a criminal act. As such, the court found that the plaintiff has fulfilled its burden in proving that the Section III.A(1) exclusion applies to Strelish’s claim. Strelish is not covered under the insurance contract, and he is obligated to reimburse the plaintiff for the $50,000 in Defense Expenses the plaintiff advanced to him.

Interpretation of Insurance Contract

Determining the scope of coverage involves interpretation of the insurance contract, which is a question of law for the court to decide. The initial burden of establishing coverage under an insurance policy rests with the insured, however the insurer bears the burden of establishing the applicability of an exclusion under an insurance policy.

With respect to all charged offenses other than dealing in proceeds of unlawful activities, Loss excludes as “fines” and “penalties” the sentencing alternatives including monetary payments upon conviction of these charges.

Limit of Liability

The court agrees with the plaintiff’s conclusion that the Section III.A exclusion bars Strelish from receiving coverage for his criminal proceeding, thereby rendering his cross-motion for summary judgment moot. The court concluded that, regardless of whether Strelish reimburses the plaintiff all or none of the $50,000 owed, the plaintiff is nevertheless obligated to pay Henderson Defense Expenses up to the Limit of Liability of $100,000 per the insurance contract.

Counterclaims for Bad Faith & Breach of Contract

With respect to Henderson’s counterclaim for bad faith, the plaintiff argues that the counterclaim should be dismissed because the plaintiff’s position is grounded in a reasonable basis.

Where an insurer defends itself on the grounds that a policy exclusion applies, the burden shifts to the insurer to prove the applicability of exclusions or limitations on coverage.

Further, in light of the court’s rulings above, it cannot be said that the plaintiff has breached any duty to LCTA. The plaintiff’s motion for summary judgment will therefore be granted with respect to LCTA’s counterclaim for breach of contract

ZALMA OPINION

The policy provided coverage for defense costs until a defendant is convicted. Both defendants were engaged in a massive criminal conspiracy and lost coverage for everything, other than defense costs, regardless of the broad nature of the policy. To do otherwise would be to allow the defendants to profit from their crime.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Criminal Activity Should Never Be Insurable

No Relief for Insured’s Lack of Diligence

Ph.D Who Failed to Read Policy Loses Suit for Coverage

Most people and their lawyers forget that the covenant of good faith and fair dealing is a two way street. The insured must deal fairly and in good faith to the insurer just as the insurer must deal fairly and in good faith with the insurer. That means the insured must be clear when ordering insurance and read the policy to determine that the policy ordered is the same one that was received.

In Amankwah v. Liberty Mut. Ins. Co., Court of Appeals of Ohio, First District, Slip Copy, 2016 -Ohio- 1321,  2016 WL 1244482 (March 30, 2016) John Amankwah appealed from the decision of the trial court granting summary judgment in favor of Liberty Mutual Insurance Company and insurance agent Robert Walker (the “Liberty Mutual defendants”) on Amankwah’s claims for negligent procurement and contract reformation, arising from an accident in which Amankwah’s vehicle was totaled and Amankwah had no collision coverage.

BACKGROUND FACTS

The relationship between Amankwah and the Liberty Mutual defendants began in 2006, when Amankwah purchased automobile insurance through Walker for a Mercury Sable. Amankwah obtained full, comprehensive coverage for the vehicle, which included collision coverage. At some point, Amankwah purchased a Kia and added this car to the policy as well, which also had full coverage. Amankwah testified that he reviewed the policy in 2006 and again when the Kia was added. Amankwah renewed the policy for the Sable and Kia in March 2011, and approximately one month later, Amankwah purchased a Volkswagen Passat to replace his Sable.

Amankwah called the number for Walker’s office to request an exchange of car insurance. According to Amankwah’s deposition testimony, he spoke with a woman at that office about “roll[ing] over” the policy from the Sable to the Passat. Amankwah recalled that the woman had told him that his total premium for the two vehicles would be increasing because the Passat was a “foreign-made” car, and that the woman would take care of his request. At that time, Amankwah asserts that Liberty Mutual began to automatically deduct his insurance premiums from his bank account on a monthly basis.

Amankwah testified that he “skimmed” through the April 2011 policy after he substituted the Passat, but he did not review the policy declarations page, which explained that Amankwah had no collision coverage on the Passat. The parties do not dispute that Amankwah received two more annual renewal policies, both of which also indicated the absence of collision coverage on the Passat.

In October 2013, Amankwah was involved in a car accident, and his Passat was a total loss, valued at $14,000 and his claim was rejected. Amankwah then filed suit against the Liberty Mutual defendants for negligence and contract reformation based upon mutual or unilateral mistake.

The Liberty Mutual defendants successfully moved for summary judgment on both claims, relying upon Amankwah’s deposition testimony, and an affidavit from a senior branch manager at Liberty Mutual.  Amankwah responded to the Liberty Mutual defendants’ summary-judgment motion with an affidavit addressing the contemporaneous note from his April 2011 call. In his affidavit, Amankwah avers that when he had called Walker’s office to switch vehicle coverage, he had discussed with the agency representative a transfer of the Passat’s warranty from the prior owner, and not the transfer of collision coverage.

NEGLIGENT PROCUREMENT

The appellate court’s review of Ohio case law in actions brought by insureds against insurance agencies for negligence, where the insureds have indisputably breached their duty to review the policies, reveals that courts have reached differing results, not based upon any legal rule, but upon the unique facts of each case.

Several courts have relied on an insured’s failure to review coverage in an insurance policy in barring the insured from recovering from an insurance agency under a negligent-procurement theory.  The loss in this case goes beyond Amankwah’s failure to read the insurance policy according to the Ohio Court of Appeal.

According to Amankwah’s deposition testimony, he is highly educated with a Ph.D. in communications and holds a position as a professor at Mount Saint Joseph University. When he called the number to Walker’s office to “roll over” the insurance from his Sable to his Passat, Amankwah stated that the woman at the office had told him that his total premium would be increasing, because the Passat was a “foreign-made” vehicle. Although Amankwah expected his premiums to increase, he did not notice that his premiums actually decreased. Amankwah attempts to downplay his oversight because, at the time he obtained insurance on the Passat, Liberty Mutual began withdrawing the premiums on a monthly basis from his bank account. Thus, not only did Amankwah fail to read the policy declarations for two years, when a simple glance would have revealed the absence of collision coverage, but he also failed to examine his bank account and take notice that Liberty Mutual had decreased and not increased his premiums.

The change to Amankwah’s insurance policy was brought about by a condition he changed—selling the Sable and buying the Passat—not a periodic renewal of a policy with a condition changed by the insurance company. Amankwah knew his policy would change by virtue of insuring a newer, foreign-made vehicle, causing his premium to increase. Reasonable minds can conclude only that Amankwah’s loss of his vehicle was proximately caused by his negligence, and not the negligence of the insurance agent or Liberty Mutual.

CONTRACT REFORMATION

An insurance policy may be “reformed” to correct a mutual mistake by the insured and the insurer, or to correct a unilateral mistake made by the insurer in failing to issue a policy in accordance with a prior agreement of the parties. Reformation is an equitable remedy that requires the court to treat the parties with fairness, available to a complaining party who has acted with reasonable diligence. Where a complaining party has failed to read a contract, equitable relief in the form of contract reformation is appropriately prohibited.

As a matter of law Amankwah cannot claim relief on the grounds of mistake when the loss occasioned by the alleged mistake was the result of his own negligence.

ZALMA OPINION

Insurance contracts are mutual agreements between the insured and the insurer and are reduced to writing. For a person with a Ph.D in communications to claim he is entitled to relief because he did not read the policy, note that he was charged less for the addition of the Passat rather than the more promised, simply sat on his rights and was neither entitled to a contract interpretation that the policy should be changed to provide collision coverage that was neither ordered nor paid for.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 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.

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

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

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

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

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com on Tumbler at https://www.tumblr.com/search/zalma and Twitter at Follow me on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Relief for Insured’s Lack of Diligence

Zalma’s Insurance Fraud Letter – April 1, 2016

Fraud Schemes

No April Fools Jokes 

Click here to receive the current issue

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

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

The current issue of ZIFL reports on:

  • Fraud Schemes
  • Barry Zalma
  • Litigation Privilege Defeats Claim of Fraud by Lawyer
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
  • New From Barry Zalma
  • Books from Barry Zalma
  • Fraud Conviction Affirmed
  • Wisdom
  • Just for Fun From “Heads I Win, Tails You Lose” – The Tiffany Kid
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Zalma’s Insurance 101
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma’s Insurance Fraud Letter

Special Links

Zalma’s Insurance Fraud Letter – Vol. 20, Number 5

Visit the Website of Zalma Insurance Consultants

ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

The Zalma Insurance Claims Library

Zalma on Insurance – A Blog

 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 

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

Multiple Crashes Still One Accident
Policy Properly Rescinded for Misrepresentation of Material Facts
Litigation Privilege Defeats Claim of the Lawyer Committed Fraud
Claim Made Before Policy Not Covered
Special Relationship Needed to Hold Insurance Agent For Negligence
When Insured Commits Fraud or False Swearing It Should Not be Confused with Appraisal
Insurance Is Going to Pot in Colorado
Jury Selection Comments Not Evidence
Deductible Applies to Each Occurrence
No Coverage No Bad Faith
Actual Conflict Required for Independent Counsel
Zalma’s Insurance Fraud Letter, February 15, 2016
Agents May Compete in California
Claims File Sacrosanct Until Coverage Established
Innocent or Intentional Misrepresentation Requires Rescission
Umbrella Excess over Municipal Risk Pool
No Honor Among Insurance Criminals
Speculative Class Action Fails
Exclusion Clear & Unambiguous Applies


Zalma Insurance 101 

I have also created a video blog called Zalma’s Insurance 101 which currently has over 551 three to four minute videos starting with “What is Insurance” and moving forward to the Release of All Claims explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101

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

ZALMA-INS-CONSULT
Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – April 1, 2016