Don’t Sue Your Agent Until Action Accrues

Contingent & Premature Claims Not Viable

There seems to be an unwritten rule that when filing suit in an insurance related issue to sue everyone in sight. It often happens to destroy diversity and keep the case in state courts. Just such a situation was before the District Court for the Southern District of Florida, in Pebb Cleveland, LLC v. Fireman’s Fund Ins. Co., Slip Copy, 2015 WL 328247 (S.D.Fla., 1/23/15) who was asked to remove insurance agents and brokers from the suit since they were fraudulently joined in the suit.

FACTUAL BACKGROUND

Plaintiff Pebb Cleveland LLC (“Pebb”), a Delaware corporation, originally filed this suit against defendants Fireman’s Fund, Halycon and CBIZ in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County, Florida. Count 1 asserted a claim of breach of contract against Fireman’s Fund, a California corporation. Counts 2 and 3 asserted negligence claims against CBIZ and Halycon, Pebb’s Florida-based insurance agent and broker, respectively.
Fireman’s Fund removed the case to the Southern District of Florida on December 1, 2014.

The following facts, drawn from the plaintiff’s complaint, were accepted as true by the court for the purpose of resolving the instant motion.

At a time prior to January 9, 2014, Pebb applied for and obtained an “all risk” business insurance policy from Fireman’s Fund which covered certain commercial property owned by it in Aurora, Ohio. Defendants CBIZ Insurance and Halycon Underwriters represented Pebb in the purchase of the policy, which was delivered to Pebb at its principal place of business in Boca Raton, Palm Beach County, Florida.

On January 9, 2014, a deep freeze caused a sprinkler pipe to burst at Pebb’s Ohio property, causing extensive water damage to the building. Pebb promptly submitted a property damage claim to Fireman’s Fund, which denied the claim on ground the building was allegedly vacant for more than sixty days and the building’s sprinkler system had not been protected from freezing.

DISCUSSION

Motion to Dismiss–Failure to State a Claim

Under Florida law, negligence claims against an insurance agent do not accrue until the existence of insurance has been completely resolved, that is, when the coverage proceedings against the insurer are final. The theory is that an insured claiming that he is entitled to insurance coverage is judicially estopped from simultaneously claiming a lack of coverage against the agent that procured the policy on his behalf.

Under Florida law Pebb’s failure to obtain appropriate insurance coverage claims against Halycon and CBIZ are contingent and premature, as the defendants’ liability for failure to procure, if any, becomes an issue for resolution only upon a final determination that no insurance coverage exists under the policy issued by Fireman’s Fund. If the Court determines that Fireman’s Fund is liable to Pebb under the policy, then Halycon and CBIZ caused no damage to Pebb because insurance was properly procured. On the other hand, if the court determines that Fireman’s Fund is not liable under the policy because it does not cover damage to unoccupied premises, then Halycon and CIBZ are potentially liable for failure to recommend and obtain adequate insurance coverage to meet the known needs of the insured.

There is no possibility that Pebb can state negligent failure to procure claims against Halcyon or CBIZ because the issue is still open and will remain open until the District Court rules on the obligation of Fireman’s Fund to pay or not pay the claim. Therefore, the District Court concluded that the insurance brokerage defendants have been fraudulently joined.

Pebb argues that a stay or abatement of its claims against Halycon and CBIZ is the appropriate remedy if the Court determines that the claims are premature. However, considering the circumstances of this case, and that fact that Pebb’s claims against Halycon and CBIZ may never mature if the court determines that Fireman’s Fund is liable to Pebb under the policy, the court dismissed Pebb’s claims against Halycon and CBIZ, without prejudice.

Pebb cannot properly state a claim against defendant Halcyon or CBIZ, as any negligence action against them is contingent and premature pending the result of the breach of contract claim against Fireman’s Fund. Without an actionable claim against Halcyon and CBIZ, the plaintiff is left with its breach of contract claim against Fireman’s Fund. As such, the two remaining parties to this action are completely diverse in citizenship and have been properly removed to this court.

Pebb has stated a cognizable breach of contract claim against Fireman’s Fund. However, any action against defendants Halycon or CBIZ is premature pending resolution of Pebb’s action against Fireman’s Fund. Because no cause of action has yet accrued against these defendants as a matter of law, they shall be dismissed. The court shall retain jurisdiction over the remaining claim against Fireman’s Fund under its diversity jurisdiction.

ZALMA OPINION

Insurance is a contract, nothing more. The plaintiff sued its insurance company seeking indemnity from its insurer. The issue of coverage, as a result of the suit, was up in the air. The court could rule that Fireman’s Fund owed the claim. If it did, there would be no claim against the agents and brokers. If they lose and the court rules there is no coverage at that point a cause of action would accrue against the agents and brokers and they could then file a separate case. To put the two different allegations together in one suit would be counterproductive and completely confusing to a trier of fact.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

No Good Deed Goes Unpunished

Policy Limits Not Enough

Sometimes a person is not satisfied even when the insurer pays the insured everything that the policy promised to pay. Thomas v. Fire Insurance Exchange, Not Reported in Cal.Rptr.3d, 2015 WL 274068 (Cal.App. 6 Dist., 1/21/15) was just such a case that was filed even after the insurer paid its full policy limits.

FACTS

Plaintiffs Anthony G. Thomas and Wendi Thomas (the Thomases) sued their homeowner’s insurer, defendant Fire Insurance Exchange (FIE), and their insurance broker/agent, defendant Edwin Higashi, for negligence, negligent misrepresentation, and conversion after their home and its contents were destroyed by fire. FIE had paid the Thomases the full policy limits under their homeowner’s insurance policy (the policy) for the dwelling and the full policy limits under the policy for the contents of the dwelling.

The Thomases claimed that Higashi had assured them that their policy would cover more than $20 million in loose emeralds and other collectibles stored in their home even though the policy’s contents limit was $207,750. The Thomases also claimed that FIE had negligently failed to secure the property after the fire and had taken some of the Thomases’ property from the debris.

The action was tried to a jury, and the jury returned a defense verdict.
On appeal, the Thomases make two claims of prejudicial error. They challenge the trial court’s exclusion of evidence that the Thomases’ dwelling had been undervalued by FIE for insurance purposes and the trial court’s response to a jury question during deliberations about FIE’s liability for actions taken by the salvage company that FIE hired to sift through some of the debris from the fire

THE POLICY

The Thomases obtained a homeowner’s insurance policy from FIE through Higashi for their Morgan Hill residence. The policy limit for the dwelling was $277,000, and the limit for personal property was $207,750. A “personal article floater endorsement,” for which the Thomases paid an additional annual premium of about $650, provided $45,935 in coverage for several specific items of jewelry. The jewelry endorsement was the result of the Thomases obtaining supplemental coverage each time they acquired another item of jewelry. An appraisal was required for each jewelry item, and the premium increased for each item. Another of the policy’s endorsements provided coverage of $200 per card and $1,000 “in the aggregate” for “sports cards.”

THE PROPERTY CLAIMS

The Thomases had a large collection of sports “memorabilia” that they stored in their garage. This collection included hockey cards, baseball cards, and football cards that Anthony Thomas (Anthony) valued at $50,000 or $60,000. Anthony testified that he also had a collection of around 8,000 “cut and polished” emeralds weighing nearly 13 pounds, most of which he stored under a piece of plywood in his attic. Although he testified that he had acquired these emeralds for just under $300,000 (most of it in cash), he claimed that the emeralds were worth $25 million. Anthony stored about 100 of his emeralds in a gun safe and a few in his bedroom. He testified that he stored most of his emeralds in his attic because he wanted to ensure that even if someone stole his gun safe the thief would not get most of his emeralds. Anthony also had two emerald statutes.

The Thomases’ home was destroyed by fire on August 13, 2006 while they were on vacation. The Thomases immediately made a claim under their policy. By the day after the fire, the remains of the Thomases’ dwelling had been bulldozed at the direction of firefighters due to safety concerns. A neighbor retrieved the Thomases’ gun safe from the debris, and it was returned to Anthony. The day after the fire, a fire investigator visited the scene and saw nothing “salvageable.” Kristena Wilk, FIE’s claims adjuster, was assigned to the claim the day after the fire. When she inspected the site on August 16, she found piles of debris scattered around portions of the two-acre lot where the Thomases’ dwelling had been. She saw nothing salvageable or of value in the debris.

FIE hired ServiceMaster, a restoration company, to do some sifting of the debris on the property to see if any items could be recovered. The sifting occurred on August 29, 2006. A few items were found, and ServiceMaster took custody of some of these items to store for the Thomases to later retrieve. FIE ultimately paid the Thomases the $207,750 contents policy limits and $37,435 for the two of the three items of jewelry covered by the floater endorsement that had been lost in the fire.

DISCUSSION

Exclusion of “Undervalued Homes” Evidence

Both Higashi and FIE moved in limine to exclude evidence concerning the adequacy of the policy’s dwelling limits. The Thomases’ claims concerning the policy’s coverage for the dwelling had been settled. The settlement agreement included a release under which the Thomases released FIE and Higashi “from any legal theory that argues that the limits for anything other than the Coverage C—Personal Property portion of the claim are or should be different than on the declarations page … except the Coverage C Personal Property portion of the claim and all causes of action pertaining to the Coverage C Personal property claim….”

FIE sought exclusion of any evidence regarding the policy’s coverage limit for the dwelling including “allegations of under-insurance of the dwelling.” FIE’s motion identified as its targets an “ ‘undervalued homes report’ “ and certain potential testimony by Anthony’s brother. The “Undervalued Homes Report” was single-page list of about 50 FIE “insureds [including the Thomases] who had purchased their policies from defendant Higashi [and] who were possibly underinsured.” Higashi had been questioned at his deposition about this report. In a recorded statement, Higashi had stated that he believed that he had accurately valued the Thomases’ property using FIE’s computerized system based on the information available to him at that time.

An insurance expert testified at trial that the FIE contents coverage limit “is automatically 75 percent of” the dwelling coverage limit. Another insurance expert testified that the premium for a policy covering $25 million in jewelry would be about $300,000 per year. He explained that an insurance agent will generally be motivated to sell more coverage because the agent gets a portion of the premium. The only reason an agent would have for “underinsuring property” would be “to present a more attractive price to the insurance buyer.”

ANALYSIS

The evidence that the trial court excluded had very little, if any, probative value on the issues alleged by the Thomases in their operative complaint on the causes of action that went to the jury. The Thomases alleged that Higashi and FIE were liable for negligence because they had a duty to provide the Thomases with “full replacement cost insurance coverage,” represented that they had done so, but had failed to do so. They alleged that Higashi and FIE were liable for negligent misrepresentation because Higashi had affirmatively assured the Thomases that their emeralds, worth more than $20 million, “were already covered for their full replacement value under the terms of the Policy” and did not require “additional coverage,” that their other personal property was “insured for full replacement cost under the policy [,] and that their insurance coverage was adequate regardless of the specified limits.”

The determination of whether the Thomases’ dwelling was actually undervalued would have necessitated the presentation of a great deal of evidence on an issue that did not directly address any of the Thomases’ allegations. And, as the defense pointed out, it would confuse the jury because no questions concerning the policy’s dwelling coverage were before it.

While there could have been factual questions about whether ServiceMaster engaged in tortious conduct that caused harm to the Thomases, any such questions were not among the issues before the jury in this trial. Under these circumstances, the trial court did not prejudicially err in providing a response to the jury that properly excluded this unpleaded, untried, unargued issue from the jury’s purview.

ZALMA OPINION

The plaintiffs in this case knew that they needed a special coverage for jewelry with appraisals setting the value if they wished to exceed the policy limits scheduled in the policy. Had they advised FIE at the time they acquired the policy that present in the house was over $25 million in jewelry neither identified, appraised nor described the probability that a single loss would have been a total loss even if the house was only slightly damaged. A $25 million jewelry policy could have been obtained but not from FIE. It would require a surplus line broker, an appraisal, and a great deal of security. The premium could easily have been three percent of the value. The claim is obviously suspicious and since the insureds were paid the policy limits their suit was, in my opinion, frivolous.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

When Are Operations Completed?

Pollution Exclusion Effective & Unambiguous

An insured manufacturer of automotive parts brought a state-court action against an umbrella insurer, seeking coverage for underlying claims by neighboring landowners for bodily injury and property damage caused by leakage of Trichloroethylene from insured’s plant into soil and groundwater. The United States District Court for the Southern District of Indiana entered summary judgment for the insurer and the insured appealed. Having struck out in the district court, Visteon appealed to the Seventh Circuit Court of Appeals in Visteon Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., — F.3d —-, 2015 WL 294384 (C.A.7 (Ind.) 2015) the Seventh Circuit Court of Appeal was asked to reverse the trial court’s decision by Visteon.

FACTS

Visteon, a large manufacturer of automotive parts, with manufacturing facilities scattered around the world but its headquarters in Michigan, brought this diversity suit for breach of contract against the National Union insurance company. Visteon had a liability insurance policy with National Union providing worldwide liability coverage between 2000 and 2002. The policy contains an exclusion for liability resulting from pollution caused by Visteon, but the exclusion is expressly made inapplicable to liability arising from a “Completed Operations Hazard.” National Union has refused to indemnify or defend Visteon from suits arising from pollution caused by one of Visteon’s plants.

The plant in question was in Connersville, Indiana. In 2001, and thus during the insurance coverage period, the powerful toxic solvent TCE that was used to clean machinery in the plant was discovered to have leaked into the soil and groundwater. Neighboring landowners sued Visteon for damages caused by the leakage. Visteon expended millions of dollars to settle the suits and additional millions to clean up the pollution that the leakage had caused. When National Union refused either to defend Visteon or to reimburse it for any of the costs it had incurred, Visteon filed this suit in an Indiana state court; National Union removed the case to federal district court.

THE POLICY

The insurance policy excludes coverage for damages caused by “the actual or threatened discharge, dispersal, seepage, migration, release or escape of pollutants anywhere in the world”—which obviously encompasses the TCE leak. With Michigan enforcing pollution—exclusion clauses, Visteon is left to argue that what happened in Connersville is within an exception (part of the Completed Operations Hazard clause) to the pollution-exclusion clause for damages “occurring away from premises you own or rent and arising out of … Your Work except … work that has not yet been completed or abandoned.”

THE QUESTIONS

Under Michigan law the court needed to determine if Visteon’s liability from the TCE leak was within the scope of the Completed Operations Hazard clause of the insurance policy, an exception as we mentioned to the pollution-exclusion clause. The district court ruled that Visteon was not entitled to coverage under that clause and so dismissed Visteon’s entire suit.

The question is whether the TCE leaked by the Connersville plant was a result of completed “work.” Visteon argues that its “work” was “completed” each time a contract to supply products made at the plant was performed. In response National Union points out that operations continued at the plant until 2007, long after the insurance policy expired, when Visteon ceased manufacturing at the plant.

Visteon’s interpretation can’t be right, because it erases the line between completed and ongoing operations. The first definition could, as a semantic matter, embrace pollution occurring after the completion of each contract to sell parts manufactured at the Connersville plant. The problem is that such an interpretation apparently would erase the pollution exclusion for all the pollution caused by the plant.

For Visteon doesn’t acknowledge that the pollution expenses resulting from the TCE leak have to be apportioned between products that the Connersville plant made under contract and products that it made hoping to sell but not yet having a contract to sell. It thinks the Completed Operations Hazard clause entitles it to reimbursement for the entire costs it incurred as a result of the pollution claims made against it. It thus interprets that clause as swallowing the entire pollution-exclusion clause—the exception becoming the rule.

ANALYSIS

Is it plausible that National Union would have issued an insurance policy that vitiated the pollution-exclusion clause of an insurance policy that covers liabilities incurred by Visteon anywhere in the world? Doubtful since it wrote a clear and unambiguous pollution exclusion that, if Visteon’s argument is upheld, would emasculate the exclusion.

The Seventh Circuit concluded that Visteon’s argument from the Completed Operations Hazard clause is wrong for another reason. Visteon doesn’t explain why it should make a difference to coverage whether a fuel injection component or other part is sold pursuant to a contract, or is shipped to some distribution facility owned by Visteon where it is then offered for sale. The difference has nothing to do with pollution, so why should it affect the scope of an insurance policy that has a pollution-exclusion provision? The contract-completion exception is more plausibly read as referring to the end of a relationship with a buyer.

Most courts have interpreted the “completed operations hazard” narrowly—more narrowly indeed than required to decide this case in favor of the insurance company. All the cases reviewed by the court hold that pollution arising from ongoing operations (including manufacturing, as in several of the cases cited above) isn’t covered by the Completed Operations Hazard clause, even though these are cases in which the insureds were completing their performance of particular sales contracts with customers.

The Seventh Circuit, in conclusion, noted finally that the pollution-exclusion clause is unambiguous, and therefore National Union had no duty to defend Visteon against the suits brought against it by neighboring landowners who experienced losses because of the leak of TCE from Visteon’s Connersville plant.

ZALMA OPINION

Pollution cases are always expensive. In this case Visteon incurred damages and defense costs in multiple millions of dollars. The expense was sufficient to attempt to obtain coverage from a policy where there was – at least – a vague possibility for coverage to apply. It’s argument was original and well stated albeit wrong. An insurer like National Union that wrote a clear and unambiguous exclusion would not then give it away. Visteon’s argument that each event in a manufacturing plant finishing a particular product is a completed operation. It’s argument failed because the argument made no logical sense because there was no evidence that there was a project completed for one particular customer that resulted in the pollution. It was, rather, due to parts cleaning over the period that the plant was in operation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

The Staged Insurance Loss

Creating Insurance Fraud

A staged insurance loss is a fictitious loss created for the sole purpose of defrauding an insurer. Wherever insurance exists in the world there is insurance fraud.  It is an equal opportunity crime performed by every race, religion, language spoken or national origin.

The number of variations on types of staged losses is limited only by the imagination of the insurance criminals. This article describes some of the variations and how an insurer should deal with a fraudulent claim when it is discovered.

Staged auto theft

A staged theft occurs when the owner contracts with an intermediary to dispose of a vehicle. The owner ‘gives up’ the vehicle and then reports it to the insurer as stolen. The person to whom the vehicle is given up will pass it to a salvor, also known as a “chop-shop,” because it breaks the vehicle up into its component parts and sells the parts.

The staged theft is difficult to detect unless the perpetrator is sloppy, aggressive or forgets his prepared script as to the loss facts. A staged theft of an automobile performed to defraud an insurer is a crime in almost every jurisdiction in the world and can be punished in both criminal and civil courts.
Abandonment

The owner abandons a vehicle upon which he or she hopes to make a fraudulent claim unlocked with the key in the ignition, on a city street or in a parking lot. Doing so creates what insurers describe as a morale hazard. The temptation is too great for people with an inclination to crime and the vehicle will be taken.  The person insured reports the vehicle stolen and collects from an insurer before the vehicle is recovered.
Dumping

Some creative insurance fraud perpetrators cannot rely on the dishonesty of their neighbors and dispose of a vehicle by dumping it into a lake or other body of water. Some cars have even been found buried underground while others have changed the level of some ponds and lakes where hundreds of allegedly stolen automobiles were found underwater.
Fires to avoid auto lease penalties

Many people, rather than purchase an automobile will lease the automobile because the monthly payments are lower than a vehicle loan. What the purchasers don’t recognize until near the end of the lease is that the lessor puts a limit on the amount of miles on the odometer. If the vehicle is driven more than the limit set by the lease – usually 10,000 to 15,000 miles a year – the lease will include penalties of $0.10 to $0.15 per mile over a pre-set limit. That amount grows rapidly as the vehicle is driven.  I have seen some very expensive cars with a penalty of $2.00 per mile lease payment over a pre-set limit.

Upon learning that at the end of the lease the owner will have to pay a considerable sum that the owner does not have the owner will consider fraud as his only way to avoid the payment. The insured-lessee will often take the vehicle to a remote location, set it afire so that it is totally destroyed, and then report it stolen to avoid payment of the excess charges. The lessor will get the market value of the vehicle at the time of the fire and the insured/lessee will walk free with no expense if he can convince the insurer that the theft and fire was true.d.

The Staged Auto Accident

A typical scenario for a staged accident involves an insured person, in collusion with others, who will drive his vehicle into the rear of a car occupied by four co-conspirators. The insured reports the “accident” to his insurer as his fault. The occupants of the other car all claim to suffer soft tissue injuries (strains, sprains, sore backs, necks, headaches) and make claims against the insured. Since there is no physical evidence of soft tissue injuries there are no effective tests available to a physician to accurately determine whether a person is being honest when he or she complains of pain. Quick settlement is reached with the “victims” of the “accident” who share the money received with the insured.

A variant of this is the Short-Stop accident, sometimes called the “swoop and squat.” The claimant, driving an old and dented automobile, deliberately stops suddenly in front of an expensive automobile. The driver cannot stop in time and has no choice but to rear-end the old vehicle. A claim is presented for extensive injuries.

In the typical swoop and squat setup, at least two conspirators drive through the streets looking for an expensive vehicle that is obviously insured. Once the victim is observed the car driven by these co-conspirators is a car with little value. The target is usually a lone driver with no passengers. The fraudsters usually concentrate on city roads with two lanes traveling in each direction. When they spot a victim driving alone in an area with no potential eyewitnesses, one “swoops” – pulling in front of the other car and then “squats” – hitting the brakes so that the scam victim rear ends their vehicle. To see how a swoop and squat works check the videos at Bankrate.com.1
Staged water damage or mold claim

Not all staged losses deal with automobiles. Real and personal property can be the victim of a staged loss.

Mold and fungi can be destructive and unhealthy. It can also create a major insurance claim for a person anxious to defraud an insurer. The fraud perpetrator first acquires an old, inexpensive dwelling which is then insured for full replacement cost. They turn the heat up to maximum and then soak the interior with hoses or interior water sources. The high humidity and heat is sufficient to start the growth of mold and fungi. The insured waits a week or two allowing the mold to grow and then report a claim to the insurer saying they returned from a short two-week holiday to find the mess. The house is usually extensive and can result in a total loss. The insurer repairs or replaces the dwelling and the fraud perpetrators sell the house at a profit.

The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002 by federal investigators, working in conjunction with the Texas Department of Insurance. The defendants were charged with presenting insurance claims for water and mold damage to a succession of homes that they purchased, bought policies for and then intentionally flooded the houses with water hoses or by damaging water pipes. At least one house was overheated (cooked) to speed up mold growth.

Other members of the ring, posing as vendors and contractors, filed false claims to repair the damage and sold the homes to each other to repeat the process.  Six of the conspirators were found guilty.

As the 21st Century began public hysteria about mold grew.  As insureds and their representatives became knowledgeable about mold the temptation to create a covered loss scenario where none would otherwise exist became almost irresistible.

It is important, therefore, for an adjuster to confirm the actual existence of the broken pipe, ruptured hot water tank or other covered cause of loss before adjusting a mold damage claim. Furthermore, during this early adjustment period, corroborating information should be obtained from plumbers, repairmen and dry-out companies that the loss occurred as claimed, and that the water intrusion appeared in areas that are now claimed to be ruined by mold.

Conclusion

Fraud perpetrators should face prosecution and jail and, at the least, an inability to recover from the insurers. Insurance adjusters and insurer fraud investigators must conduct a thorough investigation recognizing that most police agencies are not interested in insurance fraud. The thorough investigation, conducted to defeat the fraudulent claim, can then be packaged for the police and prosecutors who will prosecute since their work has been completed other than trial. The insurer should, if convinced that fraud has been perpetrated, should seriously consider presenting their cases to the local prosecutor. Staged accident perpetrators who, in the past, understood that if they were caught they faced no more than an order of restitution and probation must be convinced that, if caught, they will face hard time in prison.

No matter how the loss is staged if it was done to deceive and defraud an insurer it is a crime in almost every jurisdiction in the world where insurance is sold. When the fraud is prosecuted successfully those tempted to commit fraud will be deterred.

Insurance fraud is a serious crime taking billions from the insurance industry every year. Everyone who buys insurance must understand that if fraud is defeated or reduced they could save from 10% to 30% of the premium they pay.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Insured Owes Utmost Good Faith To Insurer

Lie on Application – Lose Everything

Marine Insurance requires that both parties treat each other with utmost good faith or face the problem of a policy void from its inception. That means, simply, that neither party may lie to the other about anything material to the decision to insure or not insure.

In Securian Casualty Co. v. Markel American Ins. Co., Slip Copy, 2015 WL 300432 (E.D.Wis., 1/22/2015) Orestes Fernandez, Jr. (Fernandez) lied when he acquired a policy from Markel that Markel contended were material and that caused the policy to be void. Fernandez settled with Markel for a small amount, failed to pay the lienholder, who then sued Markel for the amount of its debt.

FACTS

In 2005, Fernandez purchased a speedboat, a 2005 Black Hawk USA Sea Hawk, relying in part upon financing from Eastern Financial Florida Credit Union. The boat was insured by Markel American Insurance Company for the year beginning June 12, 2007, and Eastern Financial was identified as the lienholder. Eastern Financial was named a “Loss Payee” on the declarations page of the policy.  The boat was stolen in February 2008 and subsequently recovered stripped of its equipment, leading Fernandez to file a claim with Markel.

Markel filed an action in the United States District Court for the Southern District of Florida seeking a declaration that it was not obligated to pay under the policy as a result of misrepresentations made by Fernandez in his insurance application. After the court denied Markel’s motion for summary judgment on the basis that Markel failed to introduce any evidence that the omission of a prior claim on Fernandez’s application was material to Markel’s decision to insure the vessel Markel and Fernandez settled their dispute for $35,000.00.

Eastern Financial was not notified of the loss of the vessel, the subsequent litigation, or the settlement between Markel and Fernandez. Only after Fernandez stopped making its loan payments in 2011 did Eastern Financial learn that the vessel had been stolen and that Markel had settled the insurance claim with Fernandez. Eastern Financial was left with over $61,000.00 owed on a loan for which there was no longer any collateral and with regard to which the insurance claim had already been settled. As a result, Eastern Financial submitted a claim to its insurer, Securian Casualty Company, who provided collateral protection insurance coverage for Eastern Financial. Securian paid $61,479.48 to Eastern Financial (technically, to its successor) for the loss.

Securian, as subrogee of Eastern Financial, sued Markel to recover the amount paid to Eastern Financial on the theory that Markel breached the insurance contract when it paid the settlement to Fernandez rather than to Eastern Financial as the designated loss payee.

ANALYSIS

It is Markel’s position that, notwithstanding its acknowledged error in failing to name Eastern Financial as a defendant in the Florida declaratory judgment action, Securian cannot recover in the present action because a loss payee has no greater rights than those of the named insured.

Under the doctrine of uberrimae fidei, parties to a maritime insurance contract must accord each other the “utmost good faith.” Certain Underwriters at Lloyd’s, London v. Giroire,  27 F.Supp.2d 1306, 1311 (S.D.Fla.1998. This duty requires that the applicant voluntarily and accurately disclose to the insurance company all facts which might have a bearing on the insurer’s decision to accept or reject the risk. If the applicant misrepresents or fails to disclose information that is material to the insurer’s risk, the contract is void.

On the insurance application, when asked if he had any insurance losses or claims in the past, Fernandez checked the box for “Yes.” The question continued: “If yes, please describe in detail with dates and amounts.”  On the line below is written, “NOV 1995 WATER DAMAGE $35,000.00.” Fernandez also stated that he had not had any automobile driving tickets in the past three years and that he had never had insurance refused or cancelled. All of these statements were untrue. Fernandez’s prior insurance claim was in 2005, not 1995, and was for $130,000.00 but settled for $35,000.00. That prior insurer then refused to renew his insurance. Fernandez also had three speeding citations in the year before the application.

These facts were material to Markel’s decision to issue the policy to Fernandez. According to Markel’s managing director for marine insurance, if Markel had known the truth with respect to any of these false statements, it would not have issued the policy to Fernandez. Securian has presented no evidence that calls into question the veracity of Markel’s managing director’s statements. Contrary to Securian’s assertion otherwise, it is thus undisputed that Fernandez’s misstatements were material to Markel’s decision to issue the policy. Because the policy was premised upon a material misrepresentation by the insured, the policy was void at its inception.

LOSS PAYEE’S RIGHTS ARE DERIVATIVE

As a simple loss payee, the rights of Eastern Financial, and thus its subrogee Securian, are derivative of Fernandez’s rights. Because Fernandez lacked any rights under the void insurance policy, Securian likewise has no rights. That would seem to be the end of the analysis. But Securian argues that Markel’s payment of $35,000 to Fernandez to settle the Florida lawsuit (when it was aware of the misrepresentations) was a breach of a contract that existed between Markel and Eastern Financial (and, thus, Securian) as loss payee under the policy.

Because the insurance policy was void at its inception, there was no contract for Markel to breach—either as it relates to Fernandez or Eastern Financial. Markel’s payment to Fernandez to settle the Florida lawsuit does not change this fact. Settlement payments are made for all sorts of reasons unrelated to merits of any particular party’s claim—not the least of which includes avoiding the time and expense of litigation. But Markel’s payment to Fernandez did not result in the creation of rights that Eastern Financial never had under the void insurance policy.

An alleged breach of contract does not amount to unclean hands. A failure to comply with the material terms of a loan document may be a breach of contract, and it may not be nice, but it does not amount to unclean hands.

With respect to Markel’s counterclaim, declaratory judgment in favor of Markel shall be granted as follows:

• Policy No. YH 5065166–60 is void for misrepresentations and/or for nondisclosures of material fact;
• Securian as the subrogee or successor in interest to a simple loss payee has no greater rights than the named insured under Policy No. YH 5065166–60.

• Policy No. YH 5065166–60 does not afford any coverage in any amount to Securian regarding the incident referenced in the complaint in this action.

ZALMA OPINION

This case teaches that a lender should always insist on a standard or union mortgage clause when lending money to avoid the limited protection provided by a simple loss payable provision. In addition, insurers should never settle a claim when it has sufficient evidence to enforce rescission for misrepresentation or concealment of material fact. Trial courts are loathe to grant motions for summary judgment. That does not mean the case is lost. They should have taken the Fernandez case to trial. Both sides lost. Markel paid a fraud and was sued for cost saving decision. Securian obtained nothing because its insured was satisfied with a simple loss payable clause that gives it no greater interest than the insured while a union mortgage clause is considered a separate contract between the insurer and the insured and even if rescinded as to the named insured the mortgagee can still collect up to its interest.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Insurer Not Obligated to Pay High Bid

Limit is What a Reasonable Contractor in The Marketplace Would Charge

When a church roof was damaged by windstorm the church retained a contractor who presented a seriously – in the mind of the insurer – inflated estimate for repair of the church roof. The insurer had hired a professional adjuster and engineer to determine what a reasonable, experienced and professional contractor would charge to complete the repairs. The contractor hired by the church, on the other hand, presented an estimate as to what he would charge to do the repairs more than three times what the insurer’s experts said was reasonable.

In St. Panteleimon Russian Orthodox Church, Inc. v. Church Mut. Ins. Co., Slip Copy, 2015 WL 283044 (D.Minn. 1/22/15) the District Court for the District of Minnesota was called upon to resolve the dispute and whether the insurer’s refusal to pay what the church demanded was an act of bad faith..

BACKGROUND

Plaintiff St. Panteleimon Russian Orthodox Church, Inc. (the “church”) is a Minnesota nonprofit corporation that owns real property located at 2210 Franklin Avenue South, Minneapolis, Minnesota 55414 (the “Property”). Defendant Church Mutual Insurance Company is a mutual insurance company incorporated in, and with its principal place of business located in, the State of Wisconsin. In January 2011, Defendant issued to Plaintiff an insurance policy with a property coverage limit of $1,046,500, effective February 2, 2011 through February 2, 2014.

The Policy provides coverage for loss “caused by or resulting from any Covered Cause of Loss,” which is defined to mean “risks of direct physical loss unless the loss is: 1. Excluded under Exclusions; or 2. Limited under Limitations.” In the event that a covered loss occurs, the Policy provides Defendant with several options for payment, including paying “the cost of repairing or replacing the lost or damaged property.

The Loss and the Initial Inspections and Estimates

On March 19, 2010, there was a wind storm at the Property. Wind is a covered risk of loss under the Policy. Therefore, when Plaintiff sought coverage for damage caused by the storm, Defendant hired an outside professional insurance adjuster, Bill Berscheid, to investigate the claim and calculate the amount of the loss. As part of his investigation, Mr. Berscheid retained Stephen Mayhew, a Senior Associate Engineer with Wiss, Janney, Elstner Associates, Inc., who has approximately two decades of engineering experience involving wood structures, to render a professional opinion as to the scope of damage caused to the Property by the wind storm.

Meanwhile, Plaintiff hired Michael DuPont, a general contractor and owner of United Exteriors Midwest, Inc., who has approximately thirty-five years of experience in the construction industry, to fix the roof of the church. Plaintiff designated Mr. DuPont as its representative for purposes of its insurance claim and Mr. DuPont sent letters to Mr. Berscheid on April 20 and April 24, 2012, estimating the insurance claim at $66,320.37 and $64,565.00, respectively.

In May 2013, Plaintiff demanded an appraisal of the dollar amount of damages. In response, Defendant notified Plaintiff that Plaintiff was required to “submit a proof of loss identifying all covered damages being claimed, along with all supporting documentation for those amounts,” in order to proceed with the appraisal. Consequently, Plaintiff submitted a sworn proof of loss stating that the “whole loss and damage to the described property as a result of this loss,” and the “actual cash value of repairs or replacement being claimed,” was $1,046,500.00—i.e., the Policy’s limit. Defendant rejected the proof of loss, noting that it was not accompanied by supporting documentation and was “without question not consistent with the damages at issue.”

DISCUSSION

Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy, and inexpensive determination of every action

Plaintiff’s claims are based on both its alleged right to an appraisal and Defendant’s alleged failure to pay the amount owed under the Policy to cover Plaintiff’s property loss.

As discussed above, Plaintiff’s Motion to Compel Appraisal failed because Plaintiff did not identify the documents or information that it provided to Defendant in support of its claim, as required by the Policy. Plaintiff did not object to the Court’s denial of the Motion, and as of April 22, 2014, Plaintiff’s representative still could not identify any documents or information that Plaintiff had submitted to Defendant to support the claimed loss. Because Plaintiff failed to set forth specific facts showing that there is a genuine issue for trial regarding Plaintiff’s initiation of the appraisal process, summary judgment is appropriate on Plaintiff’s claims to the extent that they are based on Defendant’s failure to engage in that process.

There is no dispute in this case that the cause of Plaintiff’s loss (i.e., wind) is a covered cause of loss under the Policy. Nor is there a dispute as to the scope of property damage caused by the wind storm (i.e., damage to the Dome, a portion of the roof, several ceiling tiles, and the fence). Rather, the viability of each of Plaintiff’s claims for monetary relief is dependent upon resolution of one disputed issue: the amount of money that Defendant is required to pay Plaintiff to cover the cost to repair the damage. Plaintiff would bear the burden of proof on this issue at trial.

As discussed above, the Policy requires Defendant to pay “the cost of repairing or replacing the lost or damaged property,” but not more than the amount “necessary” to repair or replace the property. According to the Minnesota Court of Appeals, the term “necessary” is not ambiguous.

Plaintiff argues that summary judgment is inappropriate because there are two competing estimates of the cost to repair the damage at issue, and the jury must determine which contractor is correct. Defendant’s designated expert, Mr. Elert, has opined that $78,826.55 is the cost that a reasonable contractor in the Minneapolis–St. Paul area would charge to complete the work necessary to repair the damages caused by the wind storm, and that many contractors in the Minneapolis–St. Paul area who are qualified to do the work would be willing to do so for that price. On the other hand, Plaintiff’s contractor, Mr. DuPont, has estimated the cost of his own services to complete the repair work to be $219,540.00.

Because estimating the amount and cost of materials and labor needed to complete the repairs requires specialized knowledge, the Court doubts whether Mr. DuPont could provide testimony under Rule 701 even regarding his own estimate. Second, even if Mr. DuPont could testify under Rule 701 about what he would charge for the repair work, he could not testify about what a reasonable contractor in the marketplace would charge.

Accordingly, while Defendant could present a jury with Mr. Elert’s testimony as to what a reasonable contractor in the marketplace would charge for the repair work at issue, Plaintiff could—at most—present Mr. DuPont’s testimony regarding the amount that he would charge. However, Defendant is only obligated under the Policy to pay Plaintiff what a reasonable contractor in the marketplace would charge. That evidence is undisputed, and the fact that Mr. DuPont would charge more simply indicates that Plaintiff should not hire him.

 ZALMA OPINION

Disputes over the amount necessary to repair are usually resolved by appraisal. In this case the insured Church demanded appraisal but produced no documentation to support its claim nor information sufficient for the appraisers to resolve the dispute. The court refused to compel appraisal because of that failure. In addition the church allowed its contractor/adjuster to inflate the claim without the appropriate expertise to support his claim. The court gave the church good advice, don’t pay the high bid, pay what a reasonable and professional contractor would charge. Insurance is not a place to make a profit but to gain indemnity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Careful With Applications

Broker’s Misrepresentation Without Knowledge of Insured Is Sufficient for Rescission

Insurance brokers, who represent the insured to transact insurance with, but not on behalf of, an insurers often will try to make the process easy for the insured by filling out the application before asking the insured to sign it. It is a practice fraught with danger that can cause the insured to have no coverage at all and make the broker a defendant in a major lawsuit.

In Douglas v. Fidelity National Insurance Co., 229 Cal.App.4th 392, 177 Cal.Rptr.3d 271, 14 Cal. Daily Op. Serv. 10,315, 2014 Daily Journal D.A.R. 12,127 (2014) the insureds sued a fire insurer for bad faith. The Superior Court, Alameda County, entered judgment on special jury verdict awarding damages to the insureds, but struck the jury’s $1.9 million punitive damages award following the granting, in part, of insurer’s motion for judgment notwithstanding the verdict (JNOV). The insurer appealed.

FACTUAL BACKGROUND

In December 2010, plaintiffs went to a business called Cost–U–Less Insurance (Cost–U–Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowner’s insurance policy with Fidelity. Three months later a fire damaged plaintiffs’ home.

After an investigation, Fidelity rescinded the homeowner’s policy on the grounds that plaintiffs’ insurance application contained material misrepresentations about various facts concerning plaintiffs’ and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.

 PROCEEDINGS AT TRIAL

In December 2010, plaintiffs went to a Cost–U–Less store in Stockton to purchase an insurance policy for the Locust Street home. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost–U–Less did not ask him any questions about the property. Jerry signed the documents and gave the employee a check.

After the fire and investigation by Fidelity, Jerry received a letter dated May 31, 2011 from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insurance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed showing material misrepresentations had been made in connection with plaintiffs’ insurance application. The alleged misrepresentations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel utilized circuit breakers or fuses, (3) whether there were roommates or boarders in the home and/or if the home was used as a rooming or boarding house, and (4) whether a business was conducted on the property. Charlston also stated it did not appear Jerry had ever personally lived in the home, asserting the property was being used either as a halfway house for parolees or as a rehab facility. Jerry testified that these claims were untrue. Finally, Charlston advised that plaintiffs owed Fidelity in excess of $24,000 for benefits already paid.

THE PURCHASE OF INSURANCE AND SUCCEEDING FIRE

Richard Gasparini, Jr., had visited On the Right Path several times. During one such visit, he was setting up his laptop computer when people came through the front door yelling that they had a search warrant. He was handcuffed and taken out to the street. In connection with that visit he created a report dated December 30, 2009. He also visited plaintiffs’ home on February 10, 2011. Later, Betty came to his office and told him about the fire. She said several times that she wanted to relocate the facility to another house.

Bruce LeBlanc evaluates policies to ensure they meet Fidelity’s underwriting guidelines. He confirmed that insurance brokers use Fidelity’s website to complete online applications. The application program is called Fidelity Rating and Internet Service Technology (F.I.R.S.T.). It automatically quotes and underwrites policies in real-time. Some of the questions on the application are underwriting questions and others are rating questions. The rating questions pertain to the quote for the premium on a specific policy. The underwriting questions are intended to qualify the risk for acceptance. The broker obtains the relevant information from the applicant and inputs it into the F.I.R.S.T. system. Once the application is submitted, the broker can print the signature page off the Internet and have the applicant sign it. The system will not approve applications that have unacceptable underwriting responses.

DISCUSSION

It is well established in California that material misrepresentations or concealment of material facts in an application for insurance entitle an insurer to rescind an insurance policy, even if the misrepresentations are not intentionally made. To prevail, the insurer must prove that the insured made a material “false representation” in an insurance application.

The evidence presented at trial would support a finding that plaintiffs were licensed to operate a residential care facility out of their home and that they received money in exchange for providing room and board to mentally ill clients. For example, the unusual incident/injury report that Betty submitted to the licensing agency after the fire states that two male clients were residing in the home at the time of the fire. Plaintiffs’ counsel essentially stipulated, outside the presence of the jury, that Betty was running a business out of her home.

INSZONE’S STATUS AS BROKER OR AGENT

As a matter of law, if an insurance application was prepared by an insurance broker (the agent of the insured), the application’s contents are the insured’s responsibility. Unlike insurance brokers an “insurance agent” is one who represents an insurer under an employment by the insurer.  Brokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insureds tend to be under some duty to each other during the entire length of the relationship.

Insurance agents and insurance brokers must be licensed by the Department of Insurance (DOI) (California Insurance Code § 1631). But a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.

There was evidence, albeit conflicting, that InsZone and Lockefeer acted as plaintiffs’ insurance brokers, and not as agents of Fidelity. The court’s review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict. The instructional errors were exacerbated by plaintiffs’ counsel’s closing arguments. He repeatedly asserted the “application” was the blank form Jerry had signed, emphasizing that this form did not include the disputed underwriting questions. Of course, Fidelity was not necessarily required to prove that the misrepresentations it relied on in issuing the policy were contained within an application. It only needed to prove that there was a misrepresentation or concealment of a material fact in connection with an application for insurance.

None of the questions or accompanying answers are printed on the page Jerry signed. Thus, Jerry’s testimony that he never saw the Fidelity underwriting questionnaire generated by InsZone is not implausible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in Jerry’s “application” because there were no representations at all on the blank pages that he signed.

Importantly, the jury was not asked to consider whether the F.I.R.S.T. application submitted by InsZone on plaintiffs’ behalf via Fidelity’s website contained any material misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresentations were made deliberately in violation of California law that allows for rescission based on an innocent concealment or misrepresentation of material fact.

Fidelity’s affirmative defense was not properly presented to the jury and the court concluded Fidelity was prejudiced thereby, necessitating a new trial.

ZALMA OPINION

Insurance agents and brokers should always advise their clients of how they will market the insurance requested. If they are acting as a broker, that is a person who transacts insurance with but not on behalf of an insurer, the broker should advise the insured that he only works for the insured. If an agent he should advise the insured that he is acting for the insurance company. Regardless, when an application is prepared the prudent agent or broker will always provide a copy of all representations made to the insurer – whether on an application or on a computerized system like FIRST and explain to the insured that the insurer will rely on each statement of fact provided to the insurer by the application process whether on an ACORD form or by e-mail or some other method of transmitting information.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

 

Posted in Zalma on Insurance | Leave a comment

Workers’ Compensation Is Exclusive Remedy

Tort Judgment Against Employer Is Only Good for Wallpaper

The workers’ compensation system across the United States provides benefits to injured workers without regard to fault. When the injury is serious or results in death the workers’ compensation benefits do not feel sufficient to indemnify the injured worker or his or her estate for the loss incurred. As a result, the injured worker or his estate will attempt a tort action and then try to collect that judgment by means of a suit against the employer’s insurer.

Employers and employes make a bargain: the employer will not require proof of negligence if the employee is injured and the employee agrees that he or his estate will accept the statutory benefits provided by state law and give up the right to sue the employer for tort damages.

In Morales v. Zenith Ins. Co., — F.3d —-, 2015 WL 265445 (C.A.11 (Fla.) 1/22/15) the estate of an injured worker successfully sued an employer and sought to recover by means of a breach of contract claim filed by plaintiff-appellant Leticia Morales, on behalf of herself, the Estate of Santana Morales, Jr., and two minor children  against Zenith Insurance Company (“Zenith”).

FACTS

Santana Morales, Jr. was crushed to death by a palm tree while working as a landscaper for Lawns Nursery and Irrigation Designs, Inc. (“Lawns”). At the time of Morales’s death, his employer Lawns maintained a “Workers’ Compensation and Employers Liability Insurance Policy” with Zenith. The policy contained two types of coverage: (1) workers’ compensation insurance under Part I and (2) employer liability insurance under Part II. After Morales’s death, Zenith began paying workers’ compensation benefits to the Estate in accordance with its obligation under Part I of the policy.

Under Part II, Zenith was obligated: (1) to “pay all sums [Lawns] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance”; and (2) to defend lawsuits for such damages. In relevant part, Part II contained an exclusion barring employer liability insurance coverage for “any obligation imposed by a workers compensation … law” (the “workers’ compensation exclusion”).

On December 3, 1999, the Estate filed a wrongful death action against Lawns in Florida circuit court and obtained a default jury award to the Estate of $9.525 million in damages against Lawns.

While the Estate’s wrongful death lawsuit was still ongoing, Zenith continued to pay workers’ compensation benefits on Lawns’s behalf until August 2003, when Zenith made a final lump sum payment of $20,000 in full settlement of the Estate’s workers’ compensation claim against Lawns. The parties entered a settlement agreement where the Estate waived all rights to any and all benefits under The Florida Workers’ Compensation Act. Further, the settlement and agreement constituted an election of remedies by the Estate with respect to the employer and the carrier as to the coverage provided to the employer.

In all, the Estate received over $100,000 in workers’ compensation benefits from Zenith, pursuant to the Florida Workers’ Compensation Act and Part I of the policy.

After Zenith refused to pay the $9.525 million tort judgment entered against Lawns, the Estate sued Zenith in Florida state court, asserting that Zenith had breached its insurance policy with Lawns. After Zenith removed the case to the Middle District of Florida, Zenith and the Estate cross-moved for summary judgment.

The district court granted Zenith summary judgment on the Estate’s breach of contract claim, ruling that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the employee Estate’s $9.525 million tort judgment against the employer Lawns. Observing that Florida law provides workers’ compensation benefits as the exclusive remedy for an employee injury caused by an employer’s negligence, the district court determined that the Estate’s state court lawsuit alleging Lawns’s negligence triggered an “obligation imposed by” Florida’s Workers’ Compensation Act, and thus the judgment issued in that lawsuit fell within the policy exclusion in Part II.

APPELLATE COURT’S CERTIFIED QUESTIONS TO FLORIDA SUPREME COURT

In the first panel decision in this case, the court certified the following questions to the Florida Supreme Court:

“(1) DOES THE ESTATE HAVE STANDING TO BRING ITS BREACH OF CONTRACT CLAIM AGAINST ZENITH UNDER THE EMPLOYER LIABILITY POLICY?

“(2) IF SO, DOES THE PROVISION IN THE EMPLOYER LIABILITY POLICY WHICH EXCLUDES FROM COVERAGE “ANY OBLIGATION IMPOSED BY WORKERS’ COMPENSATION … LAW” OPERATE TO EXCLUDE COVERAGE OF THE ESTATE’S CLAIM AGAINST ZENITH FOR THE TORT JUDGMENT?

“(3) IF THE ESTATE’S CLAIM IS NOT BARRED BY THE WORKERS’ COMPENSATION EXCLUSION, DOES THE RELEASE IN THE WORKERS’ COMPENSATION SETTLEMENT AGREEMENT OTHERWISE PROHIBIT THE ESTATE’S COLLECTION OF THE TORT JUDGMENT?”

The Florida Supreme Court answered all three certified questions in the affirmative, holding that “under Florida law, the estate has standing, but that the workers’ compensation exclusion and the release prevent it from collecting the tort judgment from Zenith.” Morales v. Zenith Ins. Co., ––– So.3d ––––, 2014 WL 6836320, at *1 (Fla. Dec. 4, 2014).

As to the workers’ compensation exclusion, the Florida Supreme Court stated as follows: “[T]he estate’s tort judgment arises from an injury that plainly falls within the exclusivity of Florida’s Workers’ Compensation Law and therefore within the coverage provided by Lawns’ workers’ compensation policy. Given the mutually exclusive nature of workers’ compensation and employer liability coverages, Zenith has no obligation under the employer liability policy to pay the tort judgment.”  Accordingly, the Florida Supreme Court held that “the workers’ compensation exclusion bars coverage of the estate’s tort judgment under the employer liability policy.”

CONCLUSION

Given the Florida Supreme Court’s resolution of the certified issues, the district court correctly determined that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the $9.525 million tort judgment against Lawns.

ZALMA OPINION

I can have empathy for the plaintiffs who lost a husband and father. I can imagine their joy at receiving a judgment of $9.525 million only to have that joy dashed by a bankrupt employer and the fact that workers’ compensation is an exclusive remedy.  They can frame the judgment and hang it on the wall but they can never collect it.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

The Cost Of Giving Away the Underwriting Pen

Insurer Gave Insured Right to Bind it to Coverage

Underwriting is the process by which an insurer decides which risks it is willing to take and which it is not willing to take. Insurers, attempting to increase business, have given away to others the right to decide who to insurer without even requiring notice to the insurer that the insurance had been effected. Colloquially called “giving away the pen” such an action is rife with danger.

The Supreme Court, Appellate Division, Second Department, New York, in one of its usual succinct opinions, dealt with the question of whether a corporation became an additional insured by reason of a contract between the parties where the insurer gave to the named insured the pen to make anyone it desired to contract with an additional insured. In Pinon v. 99 Lynn Avenue, LLC, -– N.Y.S.2d —-, 2015 WL 249360 (N.Y.A.D. 2 Dept., 1/21/15) it found that all the person claiming to be an additional insured needed to do to gain coverage was to prove a contract existed making such a promise.

FACTS

In 2004, 99 Lynn Avenue, LLC, and 105 Lynn Avenue, LLC (hereinafter together the Lynn LLCs), the respective owners of properties located at 99 Lynn Avenue and 105 Lynn Avenue in Hampton Bays, contracted with George E. Vickers, Jr., Enterprises, Inc. (hereinafter Vickers), a general contractor, for the construction of custom homes on each of their respective properties.

Vickers subcontracted with Paul Michael Contracting Corp. (hereinafter PMC) to perform the masonry work on the projects. On June 25, 2005, the plaintiff Miguel Pinon, an employee of PMC, was injured when, during his lunch break from his work for PMC on the projects, he dove off a bulkhead located on one of the subject properties into shallow waters in Shinnecock Bay.

The plaintiffs commenced this action to recover damages for personal injuries against, among others, the Lynn LLCs, Vickers, and PMC. Vickers commenced a third-party action against Merchants Mutual Insurance Company (hereinafter Merchants) seeking defense, indemnification, and reimbursement of past defense costs in connection with the main action as an additional insured under a commercial liability insurance policy that Merchants issued to PMC. The Lynn LLCs commenced a second third-party action against Merchants and Lexington Insurance Company (hereinafter Lexington) seeking defense, indemnification, and reimbursement of past defense costs as additional insureds under the policy Merchants issued to PMC and as named insureds under separate homeowners’ insurance policies that Lexington issued to them.

Vickers moved for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in connection with the main action. Lexington separately moved for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. Merchants cross-moved for summary judgment declaring that it is not so obligated.

THE POLICY

The policy issued by Merchants to PMC stated that it provided additional insurance coverage for “[a]ny person or organization [PMC was] required by a written contract, agreement or permit to name as an insured” with respect to liability for injuries arising out of PMC’s work for the additional insured “at the location designated in the contract.”

ANALYSIS

Contrary to Merchants’ contention, Vickers and Lexington demonstrated, prima facie, the existence of a written contract expressly requiring PMC to name Vickers and the Lynn LLCs as additional insureds under the commercial liability policy it obtained from Merchants. Vickers and Lexington further demonstrated, prima facie, that the allegations of the complaint in the underlying action suggested a reasonable possibility of coverage in that Pinon’s injuries arose out of PMC’s operations on the Lynn projects, as defined in the policy. Merchants failed to raise a triable issue of fact in opposition to Vickers’ and Lexington’s motions.

Accordingly, the Supreme Court properly granted Vickers’ motion for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in the main action, and Lexington’s motion for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. For the same reasons, the court properly denied that branch of Merchants’ cross motion which was for summary judgment declaring that it is not so obligated.

ZALMA OPINION

Insurance companies get into trouble providing insurance coverage it did not necessarily want to provide by giving its pen away – that is allow someone other than the insurer to bind insurance coverage. In this case the insurer, Merchants, agreed to provide additional insurance coverage for any person or organization required by a written contract, agreement or permit to name as an insured. That provision in the policy gave the decision to insure or not insure a person or entity as an additional insured to the named insured who could cause insurance to be in effect for a person or entity the insurer never would have agreed to insure had it been asked directly.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Investigating Insurance Fraud

The Beginning of an Insurance Fraud Investigation

The following is an excerpt from my book The Insurance Fraud Deskbook, available from the American Bar Association, Tort & Insurance Practice Section at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 .

Insurance Fraud Investigation

After the claims interview with the insured, claimant or witness, indicators of insurance fraud might be discovered. When discovered additional investigation into the potential of an attempted insurance fraud is required.

The purpose of an insurance fraud investigation is to gather evidence to establish whether a suspected fraudulent claim is legitimate or is, in fact, an attempt to defraud the insurer.

If the facts reveal the claim is legitimate, the fraud investigation stops and the claim is paid. If the facts support the suspicion, then further evidence must be gathered to allow the insurer to successfully deny the claim and refuse to pay.
Training the Investigators

The introduction of the tort of bad faith resulted in the insurance industry instructing its claims departments to avoid denying claims for fraud unless evidence of fraud is overwhelming.  Insurers avoided denying claims fearful that they would subsequently be sued for bad faith. Insurers discouraged their adjusters from looking too closely at claims. As a result, knowledgeable personnel either looked for another career or were laid off by companies interested in improving their bottom line by hiring the less experienced personnel.

Insurance fraud investigations are often expensive. The extent of insurance fraud, depending on which of the various estimates are believed, vary from $80 billion to $300 billion dollars every year. The sum is so enormous as to defy understanding. Insurers are finding that they cannot increase premiums to honest insureds fast enough to cover the amounts lost to fraud. They cannot afford to let such an enormous amount of money deplete their assets and destroy their profits without a fight. In addition, state insurance departments, concerned with the amount of fraudulent claims have compelled insurers to create special fraud investigation units (SIU) who exist only to cause insurers to investigate and present evidence to the local prosecutors of factual instances that indicate insurance fraud has been attempted or succeeded.

An insurer that wishes to stop the hemorrhage of billions of dollars to fraud perpetrators will obtain and rely upon the well-trained, knowledgeable and experienced adjusters and investigators.

Although many adjusters will never witness the sorts of frauds described in The Insurance Fraud Deskbook they must be trained to recognize the indicators of fraud. A well trained and experienced claims staff will be equipped with enough knowledge to separate the suspicious from the honest claim and be able to thoroughly investigate the suspicious claim.

The laws and regulations designed to force the victim of the crime, insurers, to investigate and prepare prosecutions for the state, are beginning to show results.

What An Adjuster Must Understand Before Starting a Claims Investigation

To turn a claims person into a fraud trained adjuster, the adjuster must become familiar with all of the following:

1.    all insurance policy contracts used by the insurer;
2.    the rules applied by the courts for the interpretation of insurance contracts;
3.    the Fair Claims Practices Act of the jurisdiction in which they work;
4.    the regulations promulgated by the Department of Insurance in their state to enforce the Fair Claims Practices Act;
5.    The statutes in their state compelling the existence of a Special Investigation Unit (SIU);
6.    The regulations established by their state concerning the training and operation of the SIU and claims personnel;
7.    the law of contracts;
8.    the law of torts;
9.    the law of fraud;
10.    the obligations of an insurer to pursue anti-fraud activities;
11.    interview techniques that facilitate the obtaining of detailed information;
12.    negotiation skills required for obtaining fair, reasonable, and acceptable settlements; and
13.    the red flags of fraudulent claims.

This training does not occur overnight. It is a tall order that requires commitment by the insurer to thoroughly train its adjusters and other claims personnel concerning the indicators of fraud. Fraud training, by computer assisted training programs, is available for minimal costs from private vendors like National Underwriter Company, IRMI, A.D. Banker, and IRMI’s WebCE, The Insurance Fraud Deskbook, and other materials published by the author. In addition various insurer produced programs exist as well as programs by independent adjusting firms and law firms.

Basic class-room type training for insurance personnel is available across the country in local colleges and universities. Local colleges, community colleges, universities and law firms will provide training at little or no cost. The training programs should be supplemented by meetings between supervisors and claims staff on a regular basis to reinforce and supplement the information learned.

The insurer should also institute a regular program of auditing claims files to establish compliance with the subjects studied to see how effective the training was to discover and defeat fraudulent claims. Monthly meetings should be held with claims staff to reinforce what was learned in the training sessions and to discuss current investigations where fraud is suspected.

There is no quick and easy way to create insurance claims professionals who are knowledgeable about insurance fraud. The training takes time. The learning takes longer. Those adjusters and other personnel who take the fraud training seriously and apply it to existing claims should be rewarded and honored for their skill. Without applying the training to actual claims the training is wasted.

Red Flags of Fraud

Every claims person and SIU investigator should be aware that suspicious claims have common attributes. Insurers and their anti-fraud organizations have collated the common attributes into lists of indicators or red flags of fraud. The lists were created as training aids and to be used to determine whether further investigation is required to determine if a claim is legitimate or false and fraudulent. Continually growing, these lists are known as the “red flags” or “indicators” of fraud lists. There are many different categories, ranging from those associated with the claim itself or with insureds to indicators of specific types of fraud, such as bodily injury fraud or arson for profit.

If, when assessing a claim, three or more red flags are found the need for further investigation should be considered and evaluated by the claims person, a supervisor and the insurer’s special investigative unit. The existence of red flags does not mean a fraud has occurred. Red flags are only a signal to the adjuster to investigate further so that the suspicion may be either removed or confirmed. It is not any single indicator that alerts the adjuster to the possibility of a fraudulent claim but a combination of the red flag or red flags discovered coupled with the results of the thorough claims investigation.

Although the existence of multiple red flags should trigger an investigation, failure to investigate has been held to be reasonable as long as there are no patent inaccuracies or actual knowledge of false representations. In one case, the following common “red flags” were found to be a reason for an insurer to suspect arson for profit:

•    more than one mortgage,
•    late payments,
•    divorce,
•    prior claims,
•    multiple claims,
•    problems affecting title to the property,
•    over-insurance,
•    an increase in insurance coverage right before the claim,
•    recent cancellations of insurance held with prior insurers,
•    liens,
•    threats of foreclosure on the property,
•    lawsuits, and
•    recent job transfers.

Some other red flags of fraud include:

Red Flags Common to a Claim

A claim occurs:

•    shortly after the issuance of the policy;
•    shortly after the limits of the policy are increased;
•    in an insured’s first insurance;
•    shortly before the expiration of a policy;
•    within days of a notice of cancellation being served; or
•    on a policy acquired from an agent far from the insured’s home or business.

Red Flags Connected with the Insured or Claimant

When the insured or claimant:

1.    retains or is represented by counsel on the day of the loss;
2.    does not want to retain counsel;
3.    is represented by a public adjuster on the day of the loss;

4.    wants a settlement approved quickly;
5.    does not want the claim to go to a supervisor, regional office, or claims committee for authority;
6.    is exceedingly cooperative and undemanding;
7.    is exceedingly demanding and threatens a bad faith suit from the date of first contact;
8.    demands a proof of loss form at the initial meeting;
9.    is familiar with insurance claims terminology;
10.    asks for the claims manager by name;
11.    is familiar with the adjuster’s authority limits, and wants to settle for a sum within those limits;
12.    handles all business in person (thus avoiding mail and potential prosecution for violation of federal mail fraud statutes);
13.    provides an address that is a post office box, mail drop, or hotel; or
14.    reduces the demand for settlement when it is suggested by the adjuster that he or she file suit.

There are many more you can find in The Insurance Fraud Deskbook.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

No Policy Covers Everything

Must Enforce Clear & Unambiguous Exclusion

Insurance companies have the unquestioned right to determine who, and for what risks, they are willing to insure. There is no such thing as an insurance policy that covers everything and excludes nothing. Every automobile liability policy contains insuring agreements and exclusions that limit the insuring agreement. In Meyer v. Hunt, Not Reported in N.W.2d, 2015 WL 213222 (Mich.App., 1/15/15)

FACTS

Defendant Heather Jo Hunt worked as a child care provider for defendant Jennifer Marie Pierce. She stayed at Pierce’s home during weekdays and watched over Pierce’s three children. Hunt returned to her parents’ home on weekends. Pierce paid Hunt approximately $600 per month for her services and had no other source of income.

In June 2009, Hunt was at Pierce’s home when Pierce’s children found a kitten. Pierce did not want the kitten inside and Hunt offered to take the kitten to her parents’ home. Later that afternoon, Hunt drove Pierce to work in Pierce’s car. Hunt brought the children and the kitten along and, after dropping Pierce off, drove toward her parents’ home. On the way there, Hunt was involved in an incident that led to an accident.

Pierce insured her car with State Farm Mutual Automobile Insurance Company. It is undisputed that Hunt was covered under the State Farm policy because she was operating Pierce’s car with Pierce’s knowledge and consent.

In September 2011, Meyer sued Hunt and Pierce and State Farm provided a defense for them. During the course of discovery it was suggested that Hunt was also covered under a policy issued by Farm Bureau to Hunt’s father. In July 2012, Farm Bureau informed Hunt by letter that she was not covered under her father’s policy at the time of the accident because she was driving her employer’s vehicle during the course of her employment.

Meyer later settled with Hunt and Pierce. Meyer agreed to accept $80,000 from State Farm under its policy covering Pierce’s car and, in exchange, Meyer released Pierce from all claims arising out of the accident. In addition, as part of the settlement, Hunt stipulated to the entry of a judgment of $300,000 against her, but Meyer agreed that he would not seek to collect from any source other than the policy issued by Farm Bureau to Hunt’s father. The trial court then dismissed Pierce from the suit and entered the consent judgment against Hunt.

In January 2013, Meyer obtained a writ of garnishment against Farm Bureau for the judgment against Hunt. Farm Bureau objected to the garnishment and later moved to dismiss it on the ground that its insurance policy did not cover Hunt at the time of the accident. The trial court granted the motion.

ANALYSIS

Even assuming that Hunt was domiciled with her father and—for that reason—covered under the no-fault policy issued by Farm Bureau to him, Hunt would nevertheless not be entitled to coverage if, under the undisputed facts, an exclusion applied. The policy issued by Farm Bureau to Hunt’s father specifically excluded coverage if, at the time of the accident, an insured was “using any non-owned auto while employed or otherwise engaged in any business not described in” another exclusion. If a term is not clearly defined in an insurance policy, the term is given its commonly used meaning.

The verb “employ” means to “hire” or “engage the labor or services of (a person or persons).” Random House Webster’s College Dictionary (1997).

The undisputed evidence presented on the motion for summary disposition established that, whether characterized as a formal or informal babysitting arrangement, Hunt was working as a child care provider at the time of the accident. Hunt testified that, at the time of the accident, she was “caring for the children of Jennifer Pierce, and was being compensated for providing that care,” which was her usual or principal work.

Moreover, the evidence showed that she drove her employer to work and was transporting her employer’s children, who were under her immediate care, and that she was doing so to resolve an issue involving the children namely, to find a home for the kitten that they found earlier that day. Because there was no evidence from which a reasonable jury could find that Hunt was not working at the time of the accident, the work exclusion applied and precluded coverage.

ZALMA OPINION

Another case where a plaintiffs lawyer thought, by getting a stipulated judgment from the defendant, he could bludgeon an insurer into paying a claim it does not owe to avoid the cost of defense. It didn’t happen because the decision to deny coverage was based upon a clear and unambiguous exclusion that fit the facts of the accident.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 2 Comments

Self-Insured Retention Is Not Insurance

Insurance Requires a Promise to Indemnify Another

Insurance is defined as a contract whereby one agrees to indemnify another against a contingent or unknown event for consideration.

In State Farm Fire & Cas. Co. v. Corporation of President of Church of Jesus Christ of Latter-Day Saints, Not Reported in F.Supp.3d, 2015 WL 222323 (D.Utah, 1/14/15) the Defendant Corporation of the President of the Church of Jesus Christ of Latter-day Saints’ (“the Church”) Motion for Summary Judgment and Plaintiff State Farm Fire & Casualty Company’s Motion for Partial Summary Judgment. The Church claimed it had accepted its own risk for the first $15 million and then had an umbrella policy coverings risks over $15 million.

BACKGROUND

In 2008, Kyrt Nay, a bishop of a young single adult ward in the Church, held a ward event at his home. Nay and his son set up a zip line as an activity, and a member of his ward, Martha Miller, was injured. In 2010, Miller sued Nay for alleged negligence related to a zip line accident that occurred at his home and also sued the Corporation of the President of the Church of Jesus Christ of Latter-day Saints (“COP”) for alleged negligence. The parties to that action stipulated to the fact that Nay was acting in the course and scope of his calling as a bishop at the time of Miller’s accident.

At the time of the accident, Nay was insured by State Farm under a homeowner’s policy for $100,000, and a personal liability umbrella policy for $1,000,000. COP retained its own risk for claims up to $15 million and had an umbrella policy for claims in excess of $15 million. The umbrella policy covered COP’s agents or volunteers for acts within the scope of his or her acts while performing duties and services related to COP’s church. Miller sought $6 million in damages, which was well below the threshold for COP’s umbrella policy.

The Church Handbook of Instructions tells leaders that such insurance may be available through homeowners or other policies. When Church leaders fail to obtain insurance or when their insurance is exhausted, it is COP’s policy to voluntarily protect them from personal liability if they were acting in good faith at the time of the incident.

When Miller filed her lawsuit, Nay notified State Farm and State Farm retained defense counsel for Nay. During the litigation of Miller’s claims, counsel for both Nay and COP worked together and coordinated discovery and costs for experts. COP, however, made it clear to State Farm that COP had no intention of defending, indemnifying, or settling Ms. Miller’s claims against Nay until and unless Nay’s insurance with State Farm was exhausted.

Two years into the Miller Lawsuit, State Farm disclosed the existence of Nay’s umbrella policy. Miller moved to strike Nay’s Answer and State Farm responded that it was justified in not disclosing the umbrella policy because it believed that COP should be primarily responsible for Nay’s personal liability and that State Farm should not have to provide any insurance coverage under either of the policies Nay held with it.

When the coverage dispute arose in the Miller Lawsuit and there appeared to be a conflict between State Farm and Nay, COP helped Nay retain individual counsel to represent his own interests. Nay’s individual counsel contacted State Farm. Shortly thereafter, State Farm agreed to settle with Miller for the full amount of Nay’s policies, $1.1 million. COP also settled with Miller on her claims against it for a confidential amount.

State Farm brought the present lawsuit, arguing that it was not responsible for paying Nay’s settlement in the Miller lawsuit.

DISCUSSION

COP moves for summary judgment on State Farm’s policy-related claims for declaratory relief, equitable subrogation, and equitable indemnity, arguing that State Farm cannot prove that Nay was an insured under COP’s self-insured retention for purposes of his own personal negligence or that COP’s self-insured retention constitutes “other insurance” or “self insurance” as those terms are used in State Farm’s policies.

The language of an insurance policy should be construed pursuant to the same rules as are applied to other ordinary contracts. In general, an “other insurance” clause is an insurance contract provision designed to avoid liability for an insurer by declaring either that another insurer provides primary coverage or that the insurance contract containing the clause provides no coverage when another insurance coverage applies to the loss.

In order for State Farm to prove that what it paid to settle Miller’s claims against Nay should have been covered by COP, State Farm has to show that COP insured Nay with respect to the risks at issue in the Miller lawsuit. COP contends that its $15 million self-retained risk does not constitute insurance and asserts that it is a lack of insurance.

Several courts have recognized that a portion of self-retained risk, such as COP’s, is not insurance. In the context of “other insurance” disputes, court have recognized that “[b]ecause ‘self-insurance’ does not involve a transfer of the risk of loss, but a retention of that risk, it is not insurance.” State v. Cont’l Cas. Co., 879 P.2d 111,1116 (Idaho 1994). “It is axiomatic that self-insurance is not insurance. An allegation of self-insurance, which is equivalent to no insurance, is repugnant to the concept of insurance which fundamentally involves the shifting to a thrid party, by contract, for a consideration, the risk of loss as a result of an incident or event.” Chambi v. Regents of Univ. of Cal., 95 Cal.App. 4th 822, 826 (2002).

In this case, there is no contract between COP and Nay that obligates COP to protect Nay from personal liability. There is no evidence that COP insured Nay. There is no contract or agreement between the parties stating that Nay was covered under COP’s self-insured retention for personal liability up to $15 million. Even though Nay was covered under the umbrella policy for amounts over $15 million, it does not follow that he was covered for amounts under $15 million as well.

COP’s self-insured retention is not insurance at all. COP has chosen not to obtain insurance for less than $15 million. Rather, it retains its own risks for that amount. A retained limit simply establishes the point at which the umbrella insurer, not the insured, agrees it will provide coverage.

State Farm further argues that the term “self insurance” in Nay’s personal umbrella policy would refer to COP’s self-retained risk. But the term “self insurance” in Nay’s policy could only refer to Nay’s own self-retained amount—not the self-retained risk of another “self,” such as COP.

The contract between State Farm and Nay cannot create a relationship between COP and Nay. This is particularly true where, as here, COP (as Nay’s principal) would be entitled to be indemnified by Nay had COP had to pay for Nay’s negligent acts in the course and scope of his actions as an agent for COP.
For these reasons, the court concludes that State Farm’s contractual insurance with Nay was Nay’s primary insurance for the Miller lawsuit and State Farm properly paid the limits of both policies to settle the Miller lawsuit. COP’s self-insured retention does not constitute “other insurance” or “self insurance” as those terms are used in Nay’s State Farm insurance policies.

ZALMA OPINION

State Farm, as a major and well respected insurer, should have recognized the difference between insurance and a self-insured retention, a common insurance device where a major entity, like the Church, decides it is more economical to accept risks of loss without insurance up to a limit decided to be within the financial ability of the church. It then insures the risks in excess of the self-insured retention. Since insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event a refusal to acquire insurance can never be “insurance.”

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Statute of Limitation Tolled by Partial Payment

A Defendant’s Voluntary Assumption of the Cost of Providing Treatment Is the Advance Payment of Damages

The State of California enacted a statute many years ago to require potential litigants to avoid lulling a potential plaintiff into a sense of security by making a partial payment. The purpose of the partial payment in such situations was designed to keep the injured person from filing suit until after the statute of limitations ran. What was the moral and right thing to do before the statute became the only thing to do or the statute of limitations never began to run.

California Insurance Code section 11583 provides that the applicable statute of limitations is tolled when advance or partial payment is made to an injured and unrepresented person without notifying him of the applicable limitations period.

Coastal Surgical Institute appeals from the judgment entered in Blevin v. Coastal Surgical Institute, — Cal.Rptr.3d —-, 2015 WL 138218 (Cal.App. 2 Dist., 1/12/15) after a jury returned a verdict in favor of respondent. It contended that the trial court erroneously determined that section 11583 tolled the one-year statute of limitations for medical malpractice actions.

FACTUAL BACKGROUND

On September 1, 2010, a doctor performed surgery on respondent’s knee at appellant’s surgical facility. After the surgery, respondent’s knee became infected. The infection was caused by pseudomonas aeruginosa bacteria. This bacteria was subsequently found on a sponge manufactured by Ruhof Corporation (Ruhof) that had been used to clean surgical equipment prior to respondent’s surgery. The bacteria that infected respondent’s knee had apparently “survived the sterilization process” performed by appellant’s employees.

On October 12, 2010, appellant paid respondent $4,118.23 for the medical expenses he had incurred in treating the knee infection. Respondent did not sign an agreement releasing appellant from liability. Appellant concedes that, at the time of payment, respondent was not represented by counsel and it did not give him written notice of the applicable statute of limitations for a medical malpractice action.

On January 24, 2012, more than 15 months after respondent’s receipt of appellant’s payment, respondent filed suit against appellant.

The trial court, relying on section 11583, ruled that the one-year limitations period of Code of Civil Procedure section 340.5 was tolled by appellant’s payment of respondent’s medical expenses. It denied appellant’s motion to conduct a bifurcated jury trial on the statute of limitations issue.

In a special verdict, the jury found that appellant was negligent and that its negligence was a substantial factor in causing harm to respondent. It awarded damages of $543,034. The trial court reduced the damages to $285,114.

SECTION 11583 APPLIES TO MEDICAL MALPRACTICE ACTIONS

Section 11583 provides in relevant part: “No advance payment or partial payment of damages made by any person, … Failure to provide such written notice shall operate to toll any such applicable statute of limitations or time limitations from the time of such advance or partial payment until such written notice is actually given….”

The legislative purpose of the written notice requirement is to prevent an injury victim from being lulled into a false sense of complacency about the need to sue because an advance or partial payment by the defendant or his insurer shows their apparent cooperativeness.

Appellant asserts that, if section 11583 applies to medical malpractice actions, it was required “to advise [respondent] when the statute [of limitations would] expire[ ].” Such a requirement, appellant argues, “would open up ‘a can of worms.’ ” But section 11583 requires no more than that the payor notify the payee in writing of the applicable statute of limitations, not the actual expiration date. Thus, it would have been sufficient if appellant had informed respondent in writing of the three-year and one-year periods as provided in section 340.5.

APPELLANT WAS NOT ENTITLED TO A JURY TRIAL ON ITS STATUTE OF LIMITATIONS AFFIRMATIVE DEFENSE

The surgical institute claimed that it did not consider the payment of the medical bills to be an advance payment against future litigation because they were never aware of any additional claims or that respondent intended on pursuing additional claims. Rather, the Surgical institute believed that the payment was a complete reimbursement for his then out-of-pocket costs and that this would be the end of it.”

Section 11583 does not contain a scienter requirement. As a matter of law, a defendant’s voluntary assumption of the cost of providing treatment is the advance payment of damages under Insurance Code section 11583. The Surgical institute’s construction of Section 11583 is at variance with the time-honored rule that remedial legislation must be liberally construed to effectuate its object and purpose, and to suppress the mischief at which it is directed.

Based on the undisputed facts, the trial court correctly decided that, pursuant to section 11583, the one-year statute was tolled and therefore did not bar respondent’s action.

ZALMA OPINION

The statute of limitations is designed to prevent stale claims. However, it is a protection not a weapon. Immoral or devious tortfeasors or their less than reputable insurers in the past would make small payments to injured parties to keep them away from lawyers prevent the filing of suit only to reject the remaining damages because the statute of limitations had run. The statute, 11583, did not do away with the statute, it only tolled it until the injured person was advised in writing that it would run. Honest and honorable tortfeasors and their hones and honorable insurers always told the claimant about the statute and even entered into written tolling agreements to avoid suit. The statute merely codified what most insurers believing in the covenant of good faith and fair dealing had always done when making partial payments to injured people.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Martin Luther King, Jr. Day & Insurance

No Damage Is There Coverage for  Loss of Business Due to Riot?

Today the United States commemorate the life and untimely death of Dr. Martin Luther King. Dr. King did many things for the nation and had little or no contact with insurance. However, events following his untimely death brought to the fore issues relating to insurance.

I found an interesting  dissent by the Michigan Court of Appeal, presiding justice, that provides a look at insurance coverage for loss of business due to an order of government forcing the plaintiffs in Allen Park Theatre Co., Inc. v. Michigan Millers Mut. Ins. Co., 48 Mich.App. 199, 210 N.W.2d 402 (1973) to close their theaters after the assassination of Dr. Martin Luther King, Jr. The trial court and court of appeals awarded benefits to the theatres but the dissent, although in the minority, gives useful insight into the interpretation of an insurance policy after a riot.

THE DISSENT

Defendant insurance companies appealed a decision permitting plaintiff theatre owners to recover damages for business losses. Plaintiffs were forced to cease operation pursuant to an executive order closing all places of amusement within Wayne County due to the civil disturbance which occurred subsequent to the death of Martin Luther King, Jr.

There is no dispute regarding the facts of the case. Defendants issued their standard fire insurance policy to plaintiffs, including extended coverage and business interruption endorsements.  The plaintiffs were engaged in business as the owners and operators of the theaters described in the original complaint. On that date, following the death of Martin Luther King, Jr., civil disturbance occurred in various areas of metropolitan Detroit, accompanied by vandalism to real and personal property, although there was no damage in, upon or adjacent to the theatres operated by the plaintiffs. The Governor of the State of Michigan declared that a state of public emergency existed in Wayne County. By Executive Order No. 1968-1, effective Friday, April 5, 1968, at 7:30 p.m., all places of amusement within Wayne County were closed until further notice.

The theatres operated by the plaintiffs were customarily open daily from 5:30 p.m. to midnight in addition to weekend matinee performances. During the period of April 5 through April 10, 1968, in compliance with the Governor’s proclamations and executive orders, the theatres were closed for a six-day period.

The extended coverage endorsement, attached to each of the policies involved, states: “In consideration of the premium for this coverage and subject to the provisions herein and in the policy to which this endorsement is attached, including endorsements thereon, the policy is extended to insure against direct loss by * * * riot * * *.”

In addition the policies contained “Provisions Applicable Only To Riot, Riot Attending A Strike And Civil Commotion: Loss by riot * * * shall include * * * direct loss from pillage and looting occurring during and at the immediate place of a riot * * *.” ¶ “Provisions Applicable Only When This Endorsement Is Attached To A Policy Covering Business Interruption, Tuition Fees, Extra Expense, Rent or Rental Value, Leasehold Interest Or Other Consequential Loss: The term ‘direct’, as applied to loss, means loss, as limited and conditioned in such policy, resulting from direct loss to described property from the peril(s) insured against; and, while the business of the owner or tenant(s) of the described building(s) is interrupted by a strike at the described location, this Company shall not be liable for any loss due to interference by any person(s) with rebuilding, repairing or replacing the property damaged or destroyed or with the resumption or continuation of business.’” (Emphasis added.)

An additional rider, Business Interruption Form No. 3, provides as follows: “‘7. Interruption By Civil Authority: This policy is extended to include the actual loss As covered hereunder, during the period of time, not exceeding 2 consecutive weeks, When as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.”

ISSUE

The central issue presented in construing the above-mentioned provisions is whether actual damage to or destruction of the insured premises as a direct result of riot is required under the interruption by civil authority clause in order for owners to be reimbursed for losses suffered.

ANALYSIS

Addressing first the matter of interpreting the insurance agreement on its face, it appears it was not within the contemplation of the contract to provide business interruption insurance coverage to policy holders without damage to or destruction of the premises. The extended coverage endorsement of the standard policy delineated perils which could result in Direct loss to the insured. Direct loss was defined in the endorsement as a ‘loss limited and conditioned in such policy, resulting from Direct loss to described property from the peril(s) insured against’.

The majority of the court ruled that the requirement of physical damage to or destruction of the insured property was too technical a theory upon which to fulfill the purposes of the parties. Further, it was thought incongruous to deny recovery for business losses where adjacent property was destroyed, yet reimburse the owners of premises who suffered minor dollar damage to property.

The word “direct” is not susceptible to ambiguous interpretation. Loss limited and conditioned in such policy, resulting from direct loss to property from the perils insured against can mean only that direct loss to property must occur as a condition precedent for recovery under the policy.

The fact of the matter is that denial of access to premises without property damage was not one of the risks insured against. This insurance coverage is in no way related to damages, however severe, that may occur to the premises of adjacent property owners.

Access to the premises was prohibited by order of civil authorities as a direct result of riot or civil commotion.  There was no direct damage to the property of the theatres. The dissent would prevent coverage.

ZALMA OPINION

I think Dr. King, if he had been asked, would agree that insurance is not a device to provide social justice. Insurance is merely an indemnity contract where the insurer agrees to provide indemnity to the insured if a risk the insurer agreed to take occurs. It is not designed to protect against risks where the insurer did not agree to provide indemnity. The riots that followed the death of Dr. King were terrible and states, like Michigan, issued orders to limit the effect of the riots, including forcing the closure of the theatres. But, as the dissent clearly points out, if there is no damage to the theatres then there is no coverage for loss of use.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

Sexual Abuse of Minor Not an Occurrence

Abuse of a Minor Is Always Intentional

Insurance, by definition, only insures against contingent or unknown events. Insurers, faced with an occasional odd decision of a state or federal court, decided to not rely on the definition of insurance and added to their policies exclusions and policy language to protect against the rare odd decision of a trial court or an appellate court.

In Allstate Indem. Co. v. Pacheco, Slip Copy, 2015 WL 164091 (W.D.Wash., 1/12/15) the District Court for the Western District of Washington, was asked to rule on a motion for summary judgment by plaintiff Allstate Indemnity Company (“Allstate”) who claimed that there was no occurrence that required it to defend and indemnify its insured’s homeowners policy.

FACTUAL HISTORY

On November 1, 2013, an amended complaint for personal injuries, negligence, abuse, exploitation, and sexual assault was filed by defendant Karyssa Marie Pacheco (“Pacheco”) in Kitsap County Superior Court. In that complaint, Pacheco alleged that on or between January 2005 through January 2007, Davalos “did have repeated intentional unwanted sexual contact with” her “while she was in her home and while in the [Kitsap County] Sheriffs’ [sic] vehicle provided to … Davalos,” and that such contact constituted sexual assaults. Pacheco also alleged that she “was sexually assaulted by … Davalos, as least once while he was taking her home from school,” and that defendant Kitsap School District # 402—for which Davalos “was the school resource officer”—“allowed [him] to take [Pacheco] home, even after [her] mother and … Davalos started a dissolution action.”

During the period at issue in Pacheco’s complaint, January 2005 through January 2007, three homeowners insurance policies Allstate issued to Davalos were in effect.

Allstate filed its motion for summary judgment, arguing the Court should declare “that there is no coverage or duty to defend for the claims made by … Pacheco,” because Davalos’s alleged acts of sexual assault “do not constitute an ‘occurrence’ as required by” the insurance policies, and because those acts “are intentional or criminal acts for which no coverage is provided.”

DISCUSSION

Under Washington law, as in every other state, insurance policies are to be construed as contracts, and interpretation is a matter of law. The entire contract must be construed together in order to give force and effect to each clause, and be enforced as written if the language is clear and unambiguous. If insurance contract language is clear and unambiguous, the court may not modify the contract or create ambiguity where none exists. If, on the other hand, a policy provision on its face is fairly susceptible to two different but reasonable interpretations, the policy is ambiguous and the court must attempt to discern and enforce the contract as the parties intended.

An insurer has a duty to defend when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy’s coverage.

Allstate argues there has been no “occurrence” under the insurance policies. As  defined in those policies, “occurrence” means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions during the policy period, resulting in bodily injury.” Because the insurance policies do not define the term “accident”, however, it must be given its popular and ordinary meaning.

Where the insured acts intentionally but claims that the result was unintended the incident is not an accident if the insured knew or should have known facts from which a prudent person would have concluded that the harm was reasonably foreseeable.

In Washington, deliberate acts of sexual abuse and/or intercourse are not accidents so long as the abuser intended the act. The intent to injure, while normally a subjective determination should be inferred to the insured in sex abuse cases. This is particularly so in child sexual abuse cases, because children inevitably sustain injury from sexual abuse. Washington courts infer an intent to cause emotional distress as well a physical injury from acts of sexual abuse.

Pacheco’s amended complaint alleges that at the time the insurance policies were in effect, Davolos had repeated intentional unwanted sexual contact with her, and that she was sexually assaulted by him at least once while being taking home from school. The acts Davalos allegedly committed, therefore, were intentional, and even if he did not subjectively intend to injure Pacheco, under Washington law that intent is inferred. Accordingly, none of the alleged acts of sexual assault can be said to be an “accident” under the common sense definition of that term used by Washington courts.

As such, there has been no “occurrence” as that term is defined in the insurance policies that Allstate would be required to cover or defend. For the same reasons, Allstate has no duty to cover or defend pursuant to the insurance policies’ exclusionary clause, because, as also noted above, that clause clearly states that bodily injury “intended by, or which may reasonably be expected to result from the intentional or criminal acts” of any insured person is excluded.

ZALMA OPINION

The District Court had no choice but to conclude that the acts Allstate’s insured were intentional abuse of a minor and not accidental. A person cannot force sexual intercourse on a minor accidentally and not cause damage to the minor even if the abuser had no subjective intent to harm the child. No insurer should be obligated to defend a child abuser anywhere.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 4 Comments

Fraud Continues Apace

Zalma’s Insurance Fraud Letter

January 15, 2015

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

The current issue of ZIFL reports on:

1.    New California Insurance Law
2.    New from Barry Zalma – The Zalma Insurance Library
3.    Arson Doesn’t Pay – Defendant Must Make Restitution
4.    New Insurance Regulations – Is it a Free Lunch?
5.    Allianz to Pay $4.7 Million Re Death Master File
6.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com
7.    Insurance Companies Charged With Fraud

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Failure of Condition Precedent – January 14, 2015
2.    $225 Trip & Fall Verdict Affirmed – January 13, 2015
3.    Additional Insured Breached Policy Condition – January 12, 2015
4.    Construction Defect – January 9, 2015
5.    No Loss – No Duty To Indemnify – January 8, 2015
6.    Litigation Requires Grown-Ups In Charge – January 8, 2015
7.    Can There be Coverage by Estoppel? – January 7, 2015
8.    Workers’ Compensation is a Social Contract – January 6, 2015
9.    Investigating Mold Claims – January 6, 2015
10.    Don’t Try to Create Ambiguity When One Doesn’t Exist – January 5, 2015
11.    When Poop Is a Contaminant – January 2, 2015
12.    Zalma’s Insurance Fraud Letter – 1/1/2015 January 1, 2015
13.    Cooperate in Defense or Lose Everything – December 31, 2014
14.    Report Promptly, Sue Quickly or Else – December 30, 2014
15.    Insurer May Litigate Coverage Dispute – December 29, 2014
16.    Brothers Shouldn’t Fight – December 29, 2014
17.    Notice of Claim is When the Insurer Receives It – December 26, 2014
18.    ERISA Bars Jury Trial Against Health Insurer – December 24, 2014
19.    Arson-for-Profit Doesn’t Pay – December 23, 2014
20.    Biased Judge Disqualified – December 22, 2014

 New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Failure of Condition Precedent

It’s Not Nice To Lie To Your Insurance Company

When a life insurer issues a policy based upon false information and learns of the misrepresentation before the expiration of the two-year incontestability period, the insurer will deny coverage, claim the policy never came into effect and that it is entitled to rescind the policy from its inception. In just such a case, American General Life Insurance Company (“American General”) moved for Summary Judgment in the Eastern District of Tennessee to rescind a policy issued in favor of Brenda Underwood (“Underwood”). In American General Life Ins. Co. v. Underwood, Slip Copy, 2015 WL 137529 (E.D.Tenn., 1/9/15) the District Court  was called upon to resolve the dispute and determine if there existed a valid and enforceable policy.

American General filed suit to rescind a life insurance policy or in the alternative for a declaratory judgment that insurance coverage under the policy never became effective. Underwood has filed a counterclaim for breach of contract or in the alternative for a declaratory judgment finding that insurance coverage was in existence at the time of the death of Underwood’s husband, David Underwood (“Decedent”).

BACKGROUND

On September 8, 2008, Decedent executed Part A of an application for a term life insurance policy with American General. Decedent executed Part B of the application on September 24, 2008. Parts A and B are considered the “Application.” The policy is a twenty-year term policy with a death benefit of $300,000, with Underwood as the primary beneficiary.

At delivery of the policy on January 24, 2009, Underwood executed a document titled Health Statement Policy Acceptance Acknowledgement American General Life Insurance Company by signing Decedent’s name.

On January 26, 2009, Decedent again saw Dr. Morton who found on examination bilateral axillary lymphadenopathy masses and noted, “Findings are suspicious for development of lymphoma.” He requested a referral to surgery for a biopsy.  A biopsy of Decedent’s neck lymph nodes revealed he had a lymphoproliferative disorder. On October 4, 2009, Decedent died from angioimmunoblastic lymphoma and hemolytic anemia.

On November 9, 2009, Underwood submitted a claim for benefits under the policy. Because Decedent had died within the two-year contestability period, American General conducted a contestability investigation. During the course of the investigation, American General received the records from Dr. Morton showing that Decedent had seen him on January 19, 2009, and January 26, 2009.

In a letter dated February 17, 2010, American General denied benefits under the policy. The denial was based on misrepresentation of pertinent information on the Health Statement. The letter also stated that American General was rescinding the policy, “making coverage null and void from the inception date.” American General represented that it would make a full refund of the premiums paid plus interest.

ANALYSIS

American General contends that no insurance ever took effect because the conditions precedent for the creation of coverage were not met. The Application provides that insurance does not exist unless there have been no changes in the proposed insured’s health that would change the answers to any questions in the Application before delivery and acceptance of the policy and payment of the first premium.

Underwood contends that the change in Decedent’s health was not a material change because he thought he was suffering from a cold or flu, not a serious condition. The Health Statement directly asks whether since the date of the Application the proposed insured has “[c]onsulted a doctor or other practitioner or received medical or surgical advice or treatment.” It does not qualify the inquiry by asking whether the consultation was for a minor illness. The request is a blanket inquiry. It obviously sought information about any doctor visit or treatment, regardless of the severity.

The application made clear that even if a premium has been paid, no coverage will begin until all three enumerated conditions are met: (1) the policy has been delivered and accepted; and (2) the full first modal premium for the issued policy has been paid; and (3) there has been no change in the health of the Proposed Insured(s) that would change the answers to any questions in the application before items (1) and (2) in this paragraph have occurred.

The health of the Decedent changed before delivery of the policy and payment of the premium that changed the answers to three questions in the application. Decedent was experiencing symptoms that warranted seeing his physician who placed him on three medications.   If the conditions precedent were not met as identified in the Application, no insurance would come into effect, which is what transpired in this case, and no agent had the authority to waive any policy requirements or American General’s rights under the policy. Thus, the court concluded that insurance coverage did not come into effect.

IF COVERAGE EXISTED IS AMERICAN NATIONAL IS ENTITLED TO RESCISSION?

Not wishing to leave a stone unturned the court, after concluding that no policy came into effect, it found it necessary to deal with the rescission issue raised by American General.  Misrepresentations on the Health Statement, American General argued, increased its risk of loss so it is entitled to rescission of the policy.

In Tennessee, it is well settled that “[t]he law presumes that persons who sign documents, having been given the opportunity to read them, are bound by their signatures.” [Baker v. Johnson, No. M2007–01992–COA–R3–CV, 2009 WL 167204, at *5 (Tenn.Ct.App. Jan. 23, 2009); Solomon v. First American Nat’l Bank of Nashville, 774 S.W.2d 935, 943 (Tenn.Ct.App.1989)]  Ordinarily, one having the ability and opportunity to inform himself of the contents of a writing before he executes it will not be allowed to avoid it by showing that he was ignorant of its contents or that he failed to read it.

Whether Underwood read the Health Statement or not, she is charged with knowledge of its contents. In signing the Health Statement on her husband’s behalf, Underwood represented that since the date of the application there had been no change in the health or condition of her husband and that her husband had not “[c]onsulted a doctor or other practitioner or received medical or surgical advice or treatment.” She also represented that since the date of the application no knowledge or belief had been acquired such that “any statements made in the application are now inaccurate or incomplete.”

Underwood admitted in her deposition that she knew her husband had seen a doctor recently and that he was taking medication as a result.

The language in the Health Statement is clear, direct and straightforward. It is more than just a receipt; it is also a verification regarding information given in the application and whether circumstances have changed since the date of the application, like whether the proposed insured had consulted a doctor and was receiving medical treatment.  The court concluded that the misrepresentations in the Health Statement that were directly related and integral to the application were such that they were likely to influence the judgment of the insurer in forming the contract.

The Health Statement was delivered with the Policy. The Health Statement plainly seeks to update the information provided in the application; thus it is supplementing the application. Also, the Health Statement provides that the proposed insured “agree[s] that this Acknowledgement will be made a part of the policy,” and the policy provides that the insurance contract includes the application.

American General’s motion for summary judgment was granted on all grounds, including the dismissal of Underwood’s counterclaim. American General’s only obligation to Underwood is the return of the premiums paid, the amount of which has been on deposit with the Clerk. Underwood shall be paid the amount on deposit plus interest to the date of entry of the court’s opinion and order.

ZALMA OPINION

Ms. Underwood signed the health statement for her husband with full knowledge that the statement was false. She intended that the insurer rely on the facts she represented. American General relied on the statements and issued a policy only to find that the Decedent died shortly thereafter from an aggressive form of Lymphoma. Had she told the truth, that the Decedent had visited his doctor for flu-like symptoms there is a good possibility the policy would have been issued after the insurer did some additional review of his medical records or would have refused the coverage because an early death of the Decedent was no longer a contingency but a certainty.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

$225 Trip & Fall Verdict Affirmed

Lack of Health Insurance Not Appropriate In Tort Action

Evidence of the existence or lack of insurance usually has no place in a tort action. It can easily prejudice a jury to give more or less damages than a plaintiff is entitled to receive based solely on the evidence presented.

Sometimes it becomes appropriate to mention insurance or the lack of it to prove parts of a tort action and damages resulting from the tort. In Williams v. Sidhu, Not Reported in Cal.Rptr.3d, 2015 WL 109887 (Cal.App. 1 Dist., 1/7/15) Kendall Williams sued a gas station and its owner for negligence and premises liability. A jury awarded Williams $225 and the court denied his new trial motion. Williams appealed. He contends the court erred by: (1) excluding evidence of subsequent remedial measures taken by defendants; (2) limiting testimony about his lack of insurance coverage; and (3) denying his new trial motion. We will limit the discussion to the insurance issues.

FACTS

In July 2011, Williams was a 35–year–old big rig truck driver. He often stopped at Gill Sidhu Chevron (gas station). On July 11, 2011, Williams parked his truck at the gas station. He purchased coffee at the gas station’s convenience store and was returning to his truck when he claimed he fell into a “two-foot deep cement hole” (hole or storm drain) “obscured” by a “Plexiglas sign” and suffered “injuries including bruises, contusions, shock, leg and back injuries.” He sued defendants for negligence and premises liability, seeking over $25,000 in damages.

Before trial, defendants moved to “prohibit any evidence or reference to insurance coverage[ ]” pursuant to Evidence Code section 1155. Williams’s counsel said “I’m not going to bring up insurance” and the court granted the motion. Defendants also moved to “prohibit any evidence or reference to the parties’ wealth or financial status” and the court granted the motion.

TRIAL

Williams testified he parked his truck at defendants’ gas station and purchased a cup of coffee in the gas station’s convenience store. As he walked from the convenience store to his truck, he noticed an oil truck had pulled into the gas station and blocked his path to his truck. Williams thought the oil truck was preparing to leave the gas station, so he stepped up onto a curb to get out of the way. Williams was focused more on the oil truck than on where he was walking.

After signaling to the driver he was out of the way, Williams turned back toward his truck, took a few steps “at full stride” on the curb, and stepped onto a Plexiglas sign on the ground. Williams did not see the sign until he stepped on it, nor an orange construction cone near the Plexiglas sign. Beneath the sign was a two-foot-deep storm drain. Williams’s foot went through the sign, to the bottom of the storm drain. He felt a “shock” when he “hit” the bottom; then Williams “couldn’t feel [his] legs” and “started to panic.” He hoisted himself out of the hole but could not get up because he “couldn’t move [his] legs.”

The oil truck driver approached Williams and told him to stay on the ground. The driver called 911. Using a disposable camera, the driver took a picture of Williams. He gave the camera to Williams and said, “ ‘you better take a few photos of this.’ ” Williams took pictures of himself while he waited for help. As paramedics arrived, the feeling in Williams’s legs returned. He had “intense pain” in his left thigh and told the paramedics his left leg was “ ‘hurting pretty bad.’ ”

Paramedics took Williams to the hospital, where he was told he was “banged up” and “was going to be sore” but “all right.” Hospital staff gave Williams pain medication and antibiotics, and discharged him. He did not complain about back pain at the hospital. Williams’s wife took Williams back to the gas station so he could “get [his] truck” and “finish [his] route.” Williams finished his three-hour shift; he felt the injury “wasn’t really that serious” and he was “kind of more interested in getting back there on the road” even though he was “banged up[.]”

Dr. David C. Bradshaw testified as an expert for Williams. Dr. Bradshaw did not treat Williams after the incident and did not examine him until shortly before trial. He opined Williams herniated a disk in his back and pinched a nerve in his leg when he fell. Dr. Bradshaw conceded, however, “[t]ruck driving is actually hazardous to your back. Truck drivers have a lot of back pain[.] … Truck driving is hard on your back[.]” He also admitted Williams had previously sought disability status, claiming he could not perform a sedentary job because of knee pain.

Defendants conceded the storm drain was a dangerous condition but argued it was unreasonable for Williams to walk on the curb, ignore an orange cone, and step on an unfamiliar Plexiglas object. They also argued the only injury Williams suffered was a leg bruise and emphasized the length of time Williams waited to see a doctor.

A jury determined defendants’ negligence was a substantial factor in causing Williams’s injuries and awarded him $1,500 in past noneconomic loss. The jury also determined, however, Williams was 85 percent at fault, reducing his damages award to $225. The court entered and served the judgment.

Williams moved for a new trial on the grounds of jury misconduct, inadequate damages, and insufficiency of the evidence to justify the verdict (Code Civ. Proc., § 657).

DISCUSSION

The Court Did Not Err by Limiting Testimony About Williams’s Lack of Medical Insurance and Any Assumed Error Was Harmless

Williams argues the court erred by excluding evidence of his “gap in insurance coverage[.]” He claims the court precluded him from “explaining lack of medical coverage and his attempts to obtain coverage as the reason for a delay in his treatment.” This argument fails for several reasons. First, the court allowed Williams to testify about his lack of medical insurance and the reason for his delay in seeking treatment. Details about what Williams did after the incident to obtain medical insurance were not relevant, nor was Williams’s “medical coverage situation” over the years. What was relevant was why Williams did not seek treatment before August 1, 2011 and the court allowed him to testify about how his financial condition and lack of medical insurance precluded him from seeking treatment before that date. However, the appellate court concluded that excluding additional testimony regarding Williams’s efforts to obtain medical insurance after the incident was not an abuse of discretion.

Williams’s argument fails because he could not establish any assumed error was prejudicial. Williams testified he did not seek medical treatment before August 1, 2011 because he did not have medical insurance or the “money to pay to go to a doctor[.]”

ZALMA OPINION

Williams wanted the jury to care about his problems by showing that he was unable to buy health insurance after his accident. The court refused to allow him to do so because that testimony was neither probative about the cause of the injury or the reasons why he stopped treatment after the court allowed him to testify that he delayed treatment because of a lack of insurance. The appellate court concluded the trial court allowed the necessary amount of evidence of insurance but properly refused to allow Williams to present too much information just to pull at the jury’s heartstrings.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Additional Insured Breached Policy Condition

Additional Insured Has Duty to Provide Policy to Insurer

When more than one insurer provides liability insurance protection to an insured they often dispute which is obligated to provide defense and indemnity to the insured. Prudent insurers faced with such a dispute will agree to split the cost of defense and indemnity subject to a reservation of rights and then resolve their differences in a separate declaratory relief action that does not involve the insured. In Pennsylvania Nat. Mut. Cas. Ins. Co. v. J.F. Morgan General Contractors, Inc., Slip Copy, 2015 WL 82891 (N.D.Ala., 1/7/15) the District Court for the Northern District of Alabama was called upon to resolve the dispute between two insurers.

FACTS

This declaratory judgment case arises from a dispute over insurance coverage for the underlying case of Miranda McFry v. J.F. Morgan Contractors, Inc., Civil Action No. CV–2009900346, in the Circuit Court of Calhoun County, Alabama. To resolve that case against their purported insured, J.F. Morgan General Contractors, Penn National and Nationwide agreed to each pay half of a settlement and ask this court to resolve ultimate responsibility in this case. So here we are.

On September 1, 2007, Anniston Concrete Company entered into a commercial general liability policy with Penn National. Anniston Concrete purchased its Penn National policy through Jim Garmon’s insurance agency, Insurance Planning Services (“IPS”).

On March 28, 2008, Jacksonville City Schools awarded J.F. Morgan a contract to remodel Jacksonville High School who, in turn, sub-contracted with Anniston Concrete to perform site and grading work at Jacksonville High School. The sub-contract required Anniston Concrete to have a commercial general liability policy and to name J.F. Morgan as an “additional insured” under the policy.

Upon entering into the sub-contract, J.F. Morgan became an “additional insured” to Anniston Concrete’s Penn National policy by operation of the policy’s “Automatic Additional Insureds—Owners, Contractors and Subcontractors (Ongoing Operations)” endorsement.

Harleysville Mutual Insurance Company (Nationwide’s predecessor) also directly insured J.F. Morgan through a commercial general liability policy.
On June 2, 2008, Ricky Smith, an employee of Anniston Concrete, died while performing soil compaction work at Jacksonville High School.

J.F. Morgan immediately learned about the accident, which occurred on its job site, and informed Harleysville. Additionally, J.F. Morgan told Anniston Concrete that it needed to notify its insurance carrier of the accident.
One day after the accident, on June 3, 2008, Anniston Concrete informed IPS about Smith’s accident. IPS notified Anniston Concrete’s workers compensation insurance carrier of the accident, but not Penn National.

About 15 months after the accident, on October 29, 2009, Miranda McFry, Smith’s daughter, filed a lawsuit against J.F. Morgan. J.F. Morgan notified Harleysville of McFry’s lawsuit on the same day, but did not notify Penn National. J.F. Morgan also told Anniston Concrete about McFry’s lawsuit.

On November 12, 2009, Anniston Concrete informed IPS about McFry’s lawsuit. Anniston Concrete had a copy of the complaint, but did not give the complaint to IPS and IPS did not ask for the complaint. IPS reviewed copies of the certificates of insurance it provided to J.F. Morgan and incorrectly determined that Anniston Concrete’s Penn National policy did not include J.F. Morgan as an additional insured. Neither IPS nor Anniston Concrete contacted Penn National about McFry’s lawsuit or forwarded the complaint to Penn National.

On December 15, 2010, J.F. Morgan asked IPS, by letter, to provide a defense and indemnity for McFry’s lawsuit. IPS forwarded the letter to Penn National on December 20, 2010, 13 months after McFry filed her lawsuit and two-and-a-half years after Smith’s accident.

McFry’s lawsuit settled on August 6, 2012 and Penn National and Nationwide each paid one half of the settlement under a reservation of rights. Penn National subsequently amended its complaint to reflect settlement of McFry’s underlying lawsuit.

The only issue for the court is which insurance company has to pay for the settlement of McFry’s lawsuit.

ANALYSIS

Penn National argues that it is not required to pay for the settlement of McFry’s lawsuit because J.F. Morgan failed to timely notify Penn National of Smith’s accident or McFry’s lawsuit and failed to timely forward suit papers from McFry’s lawsuit as required by the Penn National policy.

Failure to comply with the Penn National policy’s notice provisions is a defense to coverage. To determine whether J.F. Morgan failed to notify Penn National, the court must determine who at Penn National J.F. Morgan could have notified, what J.F. Morgan had to tell Penn National, and whether J.F. Morgan’s delay in notifying Penn National was reasonable.

IPS is Penn National’s agent able to receive notice of Smith’s accident and McFry’s lawsuit. Notice to IPS is imputed to Penn National.

NOTICE OF WHAT

The court agreed that the policy did not require J.F. Morgan to notify Penn National of Smith’s accident or McFry’s lawsuit because Anniston Concrete did so. However, the Penn National policy did require J.F. Morgan to “immediately” forward suit papers from McFry’s lawsuit to Penn National. J.F. Morgan failed to do so.

Alabama law controls interpretation of the policy’s notice provisions because Penn National issued the policy in Alabama. When an insured fails to timely notify its insurer about an accident or a lawsuit or fails to forward suit papers as required by the policy, the insurer may deny coverage. The insurer need not show prejudice. [Am. Fire & Cas. Co. v. Tankersley, 116 So.2d 579, 582 (Ala.1959); Am. Liberty Ins. Co. v. Soules, 258 So.2d 872, 878 (Ala.1972); S. Guar. Ins. Co. v. Thomas, 334 So.2d 879, 882 (Ala.1976).

The Penn National policy required J.F. Morgan as “any other involved insured” to send the suit papers from McFry’s lawsuit to Penn National. J.F. Morgan failed to send the suit papers. Under the Penn National policy, “You [Anniston Concrete] and any other involved insured [J.F. Morgan] must … [i]mmediately send us copies of any demands, notices, summonses, or legal papers received in connection with the claim or ‘suit.’” (emphasis added)).

An additional insured with knowledge of insurance coverage does indeed have a duty to notify the insurer of a potentially covered event in accordance with the terms of the notice clause in the named insured’s policy. Under the unambiguous language of the Penn National policy, J.F. Morgan had to “immediately” send suit papers to Penn National. J.F. Morgan’s failure to comply with the Penn National policy’s terms abrogates J.F. Morgan’s coverage.

J.F. Morgan had constructive knowledge of the Penn National policy and its notice requirements. J.F. Morgan requested coverage in the sub-contract with Anniston Concrete, which J.F. Morgan drafted. Further, J.F. Morgan had an employee who oversaw its insurance coverages. At the very least, J.F. Morgan had constructive knowledge of the Penn National policy’s notice requirements because it requested to be covered by the Penn National policy as an additional insured.

The Penn National policy did not require J.F. Morgan to notify Penn National of Smith’s accident or McFry’s lawsuit, but did require J.F. Morgan to “immediately” forward suit papers from McFry’s lawsuit. J.F. Morgan failed to forward the suit papers for 13 months.

When no legitimate reason is offered for the delay courts can find delays unreasonable as a matter of law. J.F. Morgan had constructive knowledge of the policy. Further, J.F. Morgan employed someone to oversee its insurance coverages.

J.F. Morgan failed to “immediately” send suit papers from McFry’s lawsuit to Penn National. J.F. Morgan could have sent the suit papers to either Penn National or its agent IPS.  J.F. Morgan failed to forward the suit papers to anyone for 13 months. J .F. Morgan provided no legitimate excuse for its delay and, thus, the delay is unreasonable as a matter of law.

Because J.F. Morgan violated the Penn National policy’s terms, Penn National is not required to indemnify J.F. Morgan or Nationwide for the cost to settle McFry’s lawsuit; instead Nationwide is required to indemnify Penn National for the cost to settle McFry’s lawsuit.

ZALMA OPINION

This case teaches lessons to contractors who insist on being made an additional insured of policies issued to subcontractors that they must comply with the material conditions of the policy that made them an additional insured. In this case the general contractor failed to comply with a simple, clear and unambiguous condition of the policy making it an additional insured. The person in charge of J. F. Morgan’s insurance program failed to protect it and as a result cost its primary insurer who will either severely raise its rates for the next year or refuse to renew insurance in its favor.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Construction Defect

The Structure

The following was excepted from my book, “Construction Defect Coverage Guide,” available from the  National Underwriter Company for the new Zalma Insurance Claims Library, available at www.nationalunderwriter.com/ZalmaLibrary.

The existence of a structure is essential to the construction defect claim or suit.

A structure is “that which is built or constructed, an edifice or building of any kind, or any piece of work artificially built up or composed of parts joined together in some definite manner.” [Uniform Building Code (UBC), 1985, Part II, Chapter 4, Section 417 – 420.]

Structures range from a dog house for a Chihuahua to skyscrapers more than a mile high. A structure should be safe for occupancy and pose no danger to the property of others. Structures in North America are built using various materials and designs; from wood frame to steel, concrete block to adobe to brick. Some have been built of straw while others are constructed of pressed earth, old tires, used bottles and concrete. Almost every known substance is used to create structures. Building codes allow such creative choices for building materials, but control construction for the safety of the public.

If a structure is constructed in such a manner that damage is caused to the occupants, the structure itself, or other property, it is defective and can be the subject of litigation. Structural failures can impose a danger to life, limb, health, property, or public welfare.

When a defective structure causes harm to its occupant or property, litigation will likely occur. Structural failures can impose a danger to life, health, or property. The Texas Residential Construction Commission Act defines “construction defect” as:

  1. the failure of the design, construction, or repair of a home, an alteration of or a repair, addition, orimprovement to an existing home, or an appurtenance to a home to meet the applicable warranty and building and performance standards during the applicable warranty period; and
  2. any physical damage to the home, an appurtenance to the home, or real property on which the home or appurtenance is affixed that is proximately caused by that failure. [Primary Plumbing Services, Inc. v. Certain Underwriters at Lloyd’s London, No. 01-05-00135-CV (Tex. App. Dist.1 01/26/2006); Tex. Prop. Code Ann. § 27.001(4) and § 401.004(a).]

It is important to note that construction defects are not always caused by the structure. They can include failures of the underlying land or foundation on which the structure is built.

Building Codes

To prevent defects in structures and the injuries that result from them, every jurisdiction has enacted building codes. The purpose of a building code is to set the parameters within which structures must be built, in order to protect the life, health, and welfare of the public.

Concern over the deterioration of the environment has prompted an increasing number of people to use natural materials not normally used in frame and stucco construction. “Natural building” is a term than connotes any sort of building that is accomplished by primarily using natural materials, as opposed to man-made or industrial materials. The objective is to build with simple techniques that do not pollute the environment, consume more fossil fuel, or require major manufacturing efforts. “Natural buildings” are rare, since the expense of construction usually exceeds the cost using standard frame or steel construction.

The requirements of the Uniform Building Code (UBC) can cause a builder to incur expenses not expected at the time the structure was designed. A great deal of money can be added because many simple, effective means of construction, such as rubble trench foundations, and the use of used or ungraded lumber are not permitted.

History

The first known building codes were found in the laws of Hammurabi, ruler of Mesopotamia (2285-2242 B.C.) Hammurabi’s code was a simple performance law that provided:

If a builder has built a house for a man and has not made strong his work, and the house he built has fallen and he has caused the death of the owner of the house, that builder shall be put to death.  [The Oldest Code of Laws, Translated by C.H.W. Johns, M.A. and T & T Clark, Edinburgh, 1903.]

More modern codes describe their purpose as:

The purpose of this code is to provide minimum standards to safeguard life or limb, health, property and public welfare by regulating and controlling the design, construction, quality of materials, use and occupancy, location and maintenance of all buildings and structures within this jurisdiction and certain equipment specifically regulated herein.

* * *

[T]he purpose of this code is to protect the health, safety and welfare of the public and employees by establishing minimum standards for the design, construction, maintenance and inspection of public buildings, including multifamily dwellings, and places of employment. [ UBC, 1985, Part I, Section 102.]

Modern building codes do not provide for penalties as severe as those required by Hammurabi. Now, rather than facing death, the builder is faced with fines and suits for construction defects that will deplete the builder’s bank account and all of his or her available insurance but will allow the builder to keep his life.

The purpose of a building code as described by the California Court of Appeal in Oakland Heritage Alliance v. City of Oakland, 195 Cal.App.4th 884, 2011.CA.0003875,  (Cal.App. Dist.1 05/19/2011) is to protect the public safety.

Basic Construction

To understand the construction defect claim and the litigation surrounding construction defects, it is necessary to first have a basic understanding of construction, what is proper and prudent and what can go wrong. Building codes prescribe basic standards. When these standards are not followed, or not followed carefully enough, a building can fail. It may leak or lean or even fall down. The following discussion offers a brief overview of the component parts of a standard dwelling built of wood framing using common construction methods used over the last century, and the problems that can arise when any part of the building fails.

The Construction Consultant

There are few schools that teach construction except those that assist individuals to become licensed general contractors. Consequently, a construction consultant develops his or her expertise by a combination of education, training, and experience as a general contractor in the state where the property is located. He or she also usually has experience in evaluating the work of people in the construction trades. The construction consultant can also establish his or her credentials by earning a license to construct buildings (and in fact doing so), and by being well-read in the field of construction, publishing peer-reviewed articles and books in his or her fields of expertise, and testifying in court on the subject. A construction expert is a person with practical experience, rather than one whose knowledge comes from schooling alone. Such experts are considered to be the most effective in providing advice, and in convincing a jury of the correctness of their advice and stated conclusions.

The construction consultant acts as an authority in the evaluation of damages to improvements to real property. He or she should be able to effectively:

  • evaluate damages resulting from delay, claims, change orders, and other actions during construction;
  • determine who did damage;
  • determine what was done to cause damage;
  • determine when the damage was done;
  • determine how the damage occurred; and
  • produce an honest and verifiable evidence chain.

The consultant should be prepared to provide the following information about the project:

  • analysis of the original plans and specifications as compared to the structure as built;
  • analysis of the project record in detail, including a relational database of all relevant documents;
  • identification of changes to the scope of work;
  • identification of individual contractor conformance to the schedule, plans, and specifications; and
  • documentary evidence of the effect of failure to comply with plans and specifications on the project and structure.

A consultant should be prepared to provide the following information about defects:

  • analysis of all of the defects claimed or established;
  • identification of party or parties responsible for defects in the as-built structure; and
  • identification of compensable and non-compensable components of the defects in construction or deviation from plans and specifications.

The consultant should also be prepared to provide the following information on scheduling:

  • analysis of the original as-planned schedule for contract conformance;
  • analysis of the construction schedule to determine if it had any impact on the claimed or actual defects;
  • identification of out-of-sequence work;
  • identification of adverse weather impacts to the schedule;
  • identification of party or parties responsible for a delay or impact to the schedule;
  • documentation of the effect of schedule changes on the project; and
  • graphic representation of impacts to the schedule.

The construction consultant must be ready and able to provide the following financial information to allow the property owner to prove damage:

  • a narrative report outlining the actual damages sustained, actual impact to the work, and changes in contract time as a result;
  • a narrative report identifying the difference in overhead costs as a result of the damage or defect;
  • documents that are evidence of loss of productivity as a result of the defect or damage;
  • evidence of actual damages incurred by:
  • the owner;
  • the structure; and
  • the occupants;
  • evidence of the cost to bring the structure into line with the design plans and specifications;
  • identification of compensable and non-compensable parts of delay; and
  • accurate and provable reports of damage for presentation to the court or defendant to prove the amount of the claim.

The consultant must be available to provide sworn testimony at trial or arbitration sufficient to convince the trier of fact in language understandable to lay jury members who have no experience in construction. When a trial must be held the construction consultant and expert is essential to proving the case and convincing the jury that the consultant’s client is correct.

A construction consultant typically works for a consulting firm or construction organization, assisting commercial or residential construction projects by offering expertise and best practices to ensure projects are completed safely and efficiently. Some, when construction business is slow, are working construction professionals who serve as consultants and experts as a sideline. They are often considered more credible than persons whose only work is consulting.

The construction consultants must be capable of designing construction strategies that allow for successful construction planning, while providing consultation and overseeing construction project teams. They also oversee and assist with construction budget planning.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

No Loss – No Duty To Indemnify

There Must Be The Happening of a Particular Event or Contingency To Recover on an Insurance Policy

Frank and Sheri Monteleone, upset that they did not receive the $100,000 they claimed under their homeowner’s policy for water damage in their finished basement, filed suit for themselves and every person similarly situated.

Jurisdiction, in Monteleone v. Auto Club Group, Slip Copy, 2015 WL 71915 (E.D.Mich., 1/6/15), was based on the Class Action Fairness Act (“CAFA”), pursuant to 28 U.S.C. § 1332(d), because the amount in controversy allegedly exceeds $5 million and at least one member is a citizen of a different state than defendant. Defendants are insurance companies collectively referred to as defendants. Plaintiffs seek to proceed as a class action under the theory that defendants categorically denied valid claims based on an erroneous application of the policy terms, and that all individuals who merely purchased insurance, even those who never filed claims, are entitled to a partial refund of premiums, or like measure of damages, because certain coverage was allegedly illusory.

Plaintiffs filed a three count complaint. Before the court is defendants’ joint motion to dismiss Count II, breach of contract, of the Amended Complaint and to deny class certification.

BACKGROUND

On January, 17, 2013, plaintiffs suffered water damage in their finished basement of their Clinton Township home which caused significant harm, including loss of personal property, and structural damage to their home.

Plaintiffs claim they paid for coverage of water damage claims where water originating from within the home is prevented from leaving the premises.  Defendants denied coverage under the policies’ exclusion ¶ 3.b which provides no coverage exists for: “water or water-borne material which backs up through sewers or drains or water which enters into and overflows from within a sump pump, sump pump well or other type system designed to remove subsurface water which is drained from the foundation area.”

Optional endorsements are available to surplant this exclusion which provide limits usually between $5,000 to $25,000. Named plaintiffs had purchased such an endorsement in this case, and under this option, defendants disclaimed liability and coverage above the $5,000 provided on the endorsement.

There is no dispute that under the policies, claims for “backups” were not covered. “Backups” occur when water originates from an external source, like a municipal sewer system.

Plaintiffs claim that beginning in 2009, defendants began conflating all “overflow” losses as “backups” and wrongfully denied claims for “overflow” losses.

In a written order dated April 23, 2014, the District Court denied class certification as to the above described “property damage” plaintiffs, because issues of liability and damages as to each individual policyholder would predominate over any common questions. The “premium” subclass was described as all individuals who merely purchased homeowners’ insurance from the defendants since March, 2009, regardless of whether these individuals filed any loss claims.

ANALYSIS

Defendants seek to dismiss Count II that alleges breach of contract arising out of defendants’ alleged policy of denying certain legitimate “overflow” claims. Count II is brought on behalf of the “premium class”— that is, on behalf of all policyholders, regardless of whether they sought coverage for water damage.

Plaintiffs claim they paid for “phantom coverage,” and seek damages for “the value of basement and floor drain overflow coverage and protection that policyholders were never going to receive.”

Under Michigan law, the elements of breach of contract claim are: (1) the existence of a contract between the parties, (2) the terms of the contract require performance of certain actions, (3) a party breached the contract, and (4) the breach caused the other party injury. Once the plaintiff establishes the elements of a contract, it must then establish that the contract was breached and damages resulting from the breach. Non-performance is not a breach unless performance is due.

The District Court noted that even taking all of the allegations of the Amended Complaint as true, plaintiffs have failed to state a claim for breach of contract arising out of the theory that all homeowners paid for certain coverage for which they did not receive. Unless plaintiffs filed a claim with their insurer, performance was not due and plaintiffs cannot establish a breach under the policy.

Unless the insured can demonstrate that it suffered a covered loss under the policy, the insurer has no duty to indemnify whatsoever.

Insurance is a contract to pay a sum of money upon the happening of a particular event or contingency. Put another way, the essence of an insurance policy is a promise by the insurer to compensate the insured for the loss of something of value that is covered under the policy, thereby shifting the risk of loss from the insured to the insurer. If defendants’ method of reviewing water damage claims relied on an improper interpretation of policy provisions, this alleged error does not give rise to a cognizable claim.

For those plaintiffs who never suffered water damage, no covered loss occurred and defendants owed no duty to them. Defendants’ duty to perform under the insurance contracts does not arise unless a homeowner submits a valid claim. Moreover, as to the plaintiffs who never filed property loss claims, they can show no actual injury.

The transfer of risk from insured to insurer is effected by means of the contract between the parties-the insurance policy-and that transfer is complete at the time that the contract is entered. Petitioner’s argument contains the unspoken premise that the transfer of risk from an insured to his insurer actually takes place not when the contract between those parties is completed, but rather only when the insured’s claim is settled. This premise is contrary to the fundamental principle of insurance that the insurance policy defines the scope of risk assumed by the insurer from the insured.

Once the insurance contract is executed, the insurer is on the hook for all of the risks delineated in the policy. An insurance company cannot avoid its duty to pay legitimate claims by an internal scheme to violate the terms of the policy. The policyholder retains the right to have the policy enforced according to its written terms and to pursue the denial of a legitimate claim in court. An insurance contract must be enforced in accordance with its terms. Only once a claim is wrongfully denied, does an insured have a breach of contract claim.

Defendants Assumed the Risk; Thus, Policyholders May Not Recover Premiums

In addition, defendants are entitled to dismissal of Count II because they assumed the risks stated in the insurance policies, thus making plaintiffs’ premiums non-refundable. Whether the insurers had an internal policy of denying claims in contravention of the policy language is irrelevant, as in any coverage dispute, it is the court that will ultimately construe the policy language and determine its meaning.  It is a general rule of insurance law that an insured may not have any part of his or her premium returned once the risk attaches, even if it eventually turns out that the premium was in part unearned.

Because defendant-insurers were at risk for any legitimate claims once the insurance contract was executed, there is no basis for the return of any premiums.  Once an insurer’s legal risk has attached the insured is not entitled to a return of any part of the premiums paid. For the reasons stated above, defendants’ motion to dismiss Count II of the Amended Complaint shall be granted.

Denial of Class Certification

Having dismissed Count II of the Amended Complaint, defendants’ motion to deny certification of the “premium” class is now moot as stated in their written reply brief. For the reasons stated in this court’s April 23, 2014 opinion denying class certification of the “property damage subclass,” defendants’ motion to deny class certification of the “property damage and appraisal subclass” shall be granted.

ZALMA OPINION

The plaintiffs were attempting to reduce their premium because they thought they were sold an illusory policy because of the manner in which the defendant insurers handled claims. Since the lead plaintiffs’ claim was paid and the class of plaintiffs had no claim at all, there was no way for the court to assess damages for the class. Some had no claims and some, who had claims, were each different. The attempt to obtain major class action damages based upon a false premise, failed because they sought coverage for claims not made and premium returned for risks actually taken.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Litigation Requires Grown-Ups In Charge

Not Worth The Expense to Fight on Every Issue

Philadelphia Indemnity Insurance Company (“Philadelphia”) sought certiorari review of a non-final order which denied its motion for a protective order and required an individual who resides and works in Pennsylvania to be deposed in Broward County, Florida.

In 2008, Donald Carlton applied for insurance on a collectible vehicle with Grundy Worldwide Collector Vehicle Program (“Grundy Worldwide”), a division of Philadelphia Insurance Companies. Philadelphia issued the policy. The vehicle allegedly was stolen in 2013, while a policy between Carlton and Philadelphia continued to be in effect. Carlton filed a claim for the loss, but Philadelphia rescinded the policy ab initio and filed a petition for a declaratory judgment in the circuit court in Broward County that it had no duty to provide coverage. Within the petition, it described Grundy Worldwide as its subsidiary.

The Florida Court of Appeal, in Philadelphia Indem. Ins. Co. v. Carlton, — So.3d —-, 2015 WL 71669 (Fla.App. 4 Dist., 1/7/15), reviewed the facts and Florida law to determine whether the trial court was correct or erred.

FACTS

In the course of discovery, Carlton noticed the deposition of an individual, Doug Hostvedt, to be taken in Broward County, Florida. Philadelphia moved for a protective order based on Florida Rule of Civil Procedure 1.410(e)(2), which provides, “A person may be required to attend an examination only in the county wherein the person resides or is employed or transacts business in person or at such other convenient place as may be fixed by an order of court.” It explained that Hostvedt was not Philadelphia’s employee, but was Vice President of “Grundy Insurance,” and that he resides and is employed in Pennsylvania.

Carlton responded that in 2009, Hostvedt attended a show in Boca Raton, Florida, in which Carlton’s vehicle was displayed. At the show, Hostvedt identified himself as a vice president of Grundy Worldwide, gave Carlton a business card to that effect (a copy of which Carlton attached), solicited Carlton to continue his insurance coverage with Grundy Worldwide, and discussed with Carlton and his son how they might obtain an increase in the coverage limit. They followed his instructions, and Grundy Worldwide increased the coverage.

ANALYSIS

Carlton explained he sought to depose Philadelphia’s corporate officer in the forum in which Philadelphia chose to litigate, citing Ormond Beach First National Bank v. J.M. Montgomery Roofing Co., 189 So.2d 239, 243 (Fla. 1st DCA 1966). In that case, the court held that, pursuant to the general rule that plaintiffs are required to give their depositions in the forum where the action is pending, a corporate plaintiff’s officers or managing agents generally may be deposed in the county where the corporation instituted its action, though they reside and transact business in another.  For purposes of the instant action, he argued, Philadelphia and Grundy Worldwide were the same.

At the hearing on the motion, Philadelphia represented that Hostvedt was not its employee; instead, he was the employee of a closely related but wholly separate corporation, James A. Grundy Agency, which does not deal with specialty automobiles. The trial court denied Philadelphia’s motion for protective order.

The Court of Appeal granted the petition because neither Hostvedt, James A. Grundy Agency, nor Grundy Worldwide is a party to the underlying lawsuit, which was filed against Carlton by Philadelphia. The party seeking to take the deposition bears the burden of establishing the capacity of the employee sought to be examined. Here, Carlton failed to demonstrate that Hostvedt was an officer, director, or managing agent of the petitioning corporation-Philadelphia-so as to fall within Ormond Beach First National Bank. Accordingly, Rule 1.410(e)(2) applies and Hostvedt cannot be required to attend a deposition in Broward County, Florida, but is entitled to be subpoenaed for deposition where he resides, is employed, or transacts business.

The trial court departed from the essential requirements of law when it denied Philadelphia’s motion for protective order.

ZALMA OPINION

Insurance litigation is never easy. Rather than working together to allow the deposition of Hostvedt to be taken the defendant moved to compel the deposition; the insurer sought a protective order, and they both went to the court of appeal because the insurer was not happy with the trial court order. The Court of Appeal concluded that the insurer was correct and allowed for the deposition to be taken where Hostvedt lives or works by subpoena. It would have been easier and much less expensive if the two parties got together, met and conferred, and arranged for the the deposition to be taken by either paying to bring him to Florida or agreeing to depose him in Pennsylvania. Litigation requires grown-ups rather than a fight to the death on every issue.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Can There be Coverage by Estoppel?

Providing a Defense When Facts Exist to Deny Coverage Can Create Coverage That is not There

In an amazingly succinct opinion, a Florida appellate court made a decision that could raise serious concerns to the insurance industry. The appellate court concluded that undertaking communication, conduct, and steps in defense of an underlying action, heavily dependent upon the circumstances, may rise a coverage by estoppel claim. That is, the conduct of the insurer would prevent it from asserting coverage defenses that it would otherwise have had.

The appeal in Bishop v. Progressive Exp. Ins. Co.— So.3d —-, 2015 WL 63648 (Fla.App. 1 Dist. 1/6/15) involved an allegation that an insurer made statements and undertook actions which led a business owner to believe she had insurance coverage for the underlying action despite the insurer’s knowledge of facts which would have permitted it to deny coverage.

When an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage. This “coverage by estoppel” claim requires a representation of material fact, reasonable reliance, and a detrimental change in position (i.e., prejudice) as a result of the reliance.

The trial court entered summary judgment for the insurer. The appellate court, returned the case to the trial court and ruled only that a cause of action existed that could possibly be proved. The appellate court concluded that it was up to the trier of fact to determine whether the facts were sufficient to support the claim of coverage by estoppel.

ZALMA OPINION

Insurers, at least those operating in Florida, must be careful when they take on the defense of an insured when coverage issues exist. First, the insurer must provide a thorough reservation of rights letter to the insured pointing out each and every possible defense to defense and/or indemnity the facts raise when applied to the policy language. Second, all communications with the insured must comport with the reservations. Third, the insurer must do nothing to give the insured the impression that the facts, policy language and analysis in the reservation of rights letter, were not the true position of the insurer. Finally, the insurer should do nothing that would allow an insured to claim a misrepresentation of material fact by the insurer to the insured, reasonable reliance by the insured on the misrepresentation, and claim a detrimental change in position (i.e., prejudice) as a result of the reliance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

Workers’ Compensation is a Social Contract

Wrap Up Policy Limits Workers’ Compensation Immunity to Injuries to Employees Only

Defendant Messer Construction Co.’s motion for summary judgment, Defendants D.A.G. Construction Co., Inc.’s and Triversity Construction Co., LLC’s motion for summary judgment, Defendant J & B Steel Erectors, Inc.’s motion for summary judgment, and the parties’ responsive memoranda were before the District Court for the Southern District of Ohio in Stolz v. J & B Steel Erectors, Inc., Slip Copy, 2014 WL 7409917 (S.D.Ohio, 12/31/14).

BACKGROUND

Plaintiff was injured while working as a concrete finisher for Jostin Construction, Inc. (“Jostin”) at the Horseshoe Casino construction project in Cincinnati. Plaintiff brings this civil action against Defendants Messer Construction Co. (“Messer”), D.A.G. Construction Co., Inc. (“D.A.G.”), Triversity Construction Co., LLC (“Triversity”), J & B Steel Erectors, Inc. (“J & B Steel”), Terracon Consultants, Inc., and Pendleton Construction Group, LLC, each of whom allegedly had responsibilities related to the construction project.

Defendant Messer moves for summary judgment on the grounds that (1) it is entitled to immunity under Ohio’s workers’ compensation laws as a self-insuring employer and (2) the election of remedies doctrine bars Plaintiff from pursuing his claim against Defendant Messer. Defendants D.A.G., Triversity, and J & B Steel argue that they are entitled to immunity under Ohio’s workers’ compensation laws as enrolled subcontractors under Defendant Messer’s workers’ compensation program.

UNDISPUTED FACTS

1.    At the time of his alleged injuries, Plaintiff Daniel Stolz was working for Jostin as a concrete finisher at the construction project for the Horseshoe Casino in Cincinnati, Ohio (“Casino Project”).

2.    Defendant Messer was the general contractor for the Casino Project and Jostin was one of its subcontractors.

3.    Prior to Plaintiff’s accident, Messer had obtained authority from the Ohio Bureau of Workers’ Compensation (“BWC”) to self-administer the workers’ compensation program for all of the enrolled subcontractors on the Casino Project.

4.    Plaintiff’s employer, Jostin, was an enrolled subcontractor participating in Messer’s workers’ compensation program under the certificate of authority issued by the BWC to Messer.

5.   J & B Steel was an enrolled subcontractor participating in Messer’s workers’ compensation program for the Casino Project under the certificate of authority issued by the BWC to Messer.

ANALYSIS

Workers’ compensation represents a social bargain in which employers and employees exchange their respective common-law rights and duties for a more certain and uniform set of statutory benefits and obligations. In the event an employee is injured in a work-related incident, he is entitled to workers’ compensation benefits, even if the employer is not to blame for the employee’s injury. In exchange, the employer receives tort immunity for work-related injuries.

The “exclusivity rule” dictates that an employee who is injured in the course of his employment must accept workers’ compensation benefits as his exclusive remedy vis-à-vis his employer. On most projects, contractors and subcontractors provide their own liability and workers’ compensation coverage. However, under certain circumstances, contractors on large-scale construction projects may self-insure the project, whereby the employees of subcontractors enrolled in the self-insurer’s plan for that project are treated as employees of the self-insuring contractor for purposes of workers’ compensation.

The Ohio Bureau of Workers’ Compensation (“BWC”) issued a “Certificate of Employer’s Right to Pay Compensation Directly” for “Subs 2000 4170–2 Horseshoe Casino–Cincinnati Wrap Up” (“certificate of authority”) to Defendant Messer, effective March 1, 2011 to March 1, 2012. The list of “subs” identified under this “Wrap Up” included Plaintiff’s employer, Jostin.  It is undisputed that Plaintiff was Jostin’s employee and that Jostin was an enrolled subcontractor under Defendant Messer’s workers’ compensation plan. Accordingly statutes impart workers’ compensation immunity upon Defendant Messer for any injuries sustained by Plaintiff while working on the Casino Project, since he was an employee of enrolled subcontractor Jostin.

Defendant Messer became liable for providing workers’ compensation for injured employees of enrolled subcontractors at the Casino Project upon approval of the application, regardless of whether the rules and statutes had been strictly followed. Defendant Messer’s risk manager testified that Defendant Messer would not have paid Plaintiff’s claims if the certificate of self-insurance being challenged by Plaintiff had not been issued. Plaintiff seeks to retain the benefits he received under the workers’ compensation system, the assurance of recovery, while simultaneously seeking to avoid his own obligations by denying Defendant Messer immunity.

Defendant Messer is entitled to immunity from Plaintiff’s negligence claim pursuant to O.R.C. §§ 4123.35 and 4123.74.

Dual Capacity Doctrine

Plaintiff also argues that Defendant Messer is liable pursuant to the dual capacity doctrine.The dual capacity doctrine is a narrow exception to the general rule of employer statutory immunity in negligence suits brought by employees. In order for the dual-capacity doctrine to apply, there must be an allegation and showing that the employer occupied two independent and unrelated relationships with the employee, that at the time of these roles of the employer there were occasioned two different obligations to this employee, and that the employer had during such time assumed a role other than that of employer.

Here, Defendant Messer is not Plaintiff’s actual employer. Although the statute provides that Defendant Messer is treated as if it were Plaintiff’s employer for the purposes of determining immunity, it does not create an actual employment relationship. In fact, the statute specifically states that employees of covered subcontractors are not considered employees of the self-insuring employer for any purpose other than immunity and self-insuring employers have no authority under the statute to control the means, manner, or method of the subcontractor employee’s work.

Plaintiff has failed to raise a genuine issue of material fact related to the applicability of the dual capacity doctrine, and the Court finds that the dual capacity doctrine does not apply.

WORKERS’ COMPENSATION IMMUNITY

The Court’s paramount concern in construing a statute is legislative intent. To discern legislative intent, the Court first considers the statutory language, reading words and phrases in context and in accordance with rules of grammar and common usage. If the meaning of the statute is unambiguous and definite, it must be applied as written and no further interpretation is necessary.

To read section 4123.35(O) in a manner which grants tort immunity to Subcontractor Defendants for injuries sustained by another subcontractor’s employee is contrary to the plain language of the statute. Section 4123.35(O) states, “the contractors and subcontractors included under a certificate … are entitled to the protections provided under this chapter and Chapter 4121 of the Revised Code with respect to the contractor’s or subcontractor’s employees ….“ (emphasis added).

As the statute is written, each subcontractor is only protected from liability for injuries to one of the subcontractor’s employees-its own. Even though the subcontractor is not providing the workers’ compensation coverage on the job to their own employees, the Ohio General Assembly pronounced that the subcontractors are still entitled to tort immunity from their own employees. If the General Assembly intended for immunity to extend to all subcontractors for injuries sustained by the employees of all the subcontractors, it would have written the statute in a manner that indicated such.

To grant blanket immunity to Subcontractor Defendants, the Court would have to read protections into the statute that are not there.   It contravenes the workers’ compensation scheme to provide Subcontractor Defendants immunity when they have not earned it. To do so would not uphold the social bargain, rather, it would constitute a “free pass” on their alleged liability for their role in the injuries sustained by Plaintiff.

The fact that Ohio’s workers’ compensation statutes do not expressly state that one who receives workers’ compensation is entitled to bring a claim against a third party tortfeasor, does not mean that they do not have the right to do so. The relevant fact is not that the Ohio workers’ compensation act does not grant this right to plaintiffs; the relevant fact is that section 4123.35(O) does not take this right away from plaintiffs.  In light of the fact that the plain language of the statute does not grant the broad immunity the Subcontractor Defendants seek. Plaintiff maintains the right to bring suit against them.

ZALMA OPINION

Wrap-up schemes that allow a general contractor to provide insurance, including workers’ compensation insurance for all of the contractors and subcontractors who are employed on a particular construction project. It does not, however, make each contractor and subcontractor to be an employer of all of the people working on the project. It only provides workers’ compensation benefits to the employee of the particular subcontractor. The statute allows the actual employer and the general contractor who obtained the wrap up privilege to be protected by the exclusivity provision of the workers’ compensation law.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Investigating Mold Claims

Dealing With a Claim Where Mold is Suspected

The following was excerpted from my book the Mold Claims Coverage Guide available from the National Underwriter Company as part of the Zalma Insurance Claims Library.

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

The initiation of an investigation of a claim is the notice of loss. This is a document from the insured or the insured’s agent or broker advising the insurer that a loss has occurred that the insured believes is covered by the policy. The notice of loss will tell the adjuster:

  • the name of the insured;
  • the location of the loss;
  • the date the loss occurred;
  • what the insured believes was the cause of the loss;
  • the policy number, the policy’s effective period, the policy limits, and the standard forms used in the policy; and
  • how to contact the insured.

Once the notice of loss is received from the insured, the adjuster reads the policy wording as it applies to the claim reported and then makes immediate (within 24 hours) contact with the insured to arrange for an inspection of the property.

After making first contact and establishing rapport with the insured, the adjuster should request a recorded statement from the insured. A recorded statement is a conversation between the insured and the adjuster recorded on an audiotape or a digital recorder. The statement is in question-and-answer format and is usually transcribed so that the insured can read, correct, and sign the transcript. The insured should agree to the statement and provide the adjuster with all of the information requested.

When the recorded statement is completed, but before the tape is turned off, the adjuster should advise the insured that a copy of the tape or the transcript of the statement will be provided to the insured for his or her files if requested. The insured should be asked to sign and date the tape’s label. The adjuster should request documents from the insured about the dwelling or structure, such as:

  • the deed;
  • purchase documents;
  • title insurance policies;
  • homeowners insurance policies;
  • permits for additions or modifications;
  • reports of building inspectors;
  • reports or estimates from contractors or workmen already hired by the insured;
  • contracts for recent repair work on the premises;
  • invoices from the plumber or roofer who repaired the leak, or any vendor who may have worked at the house in or near the location of the mold;
  • any notes secured by deeds of trust and the property;
  • reports of police, fire, or other governmental agency; and
  • reports prepared by architects or engineers who have inspected the property.

The adjuster should also request that the insured sign an authorization to obtain confidential documents such as water bills, bank records, and tax records. The authorization should be read with caution by the insured and signed after consultation with a professional public insurance adjuster or lawyer. The insured is obligated to cooperate with the insurer’s investigation but not to the point of sacrificing important rights. Some believe tax returns are privileged personal documents that an insurer cannot compel an insured to produce. California Insurance Code Section 2071 states: “The insurer shall inform the insured that tax returns are privileged against disclosure under applicable law but may be necessary to process or determine the claim.” If an insured resists the production of tax returns, the prudent adjuster should accept the claim of privilege and advise the insured that the tax returns may be necessary to process the claim. At the end of the first meeting the adjuster will advise the insured of the following:

  • his or her next course of action;
  • what the insured can expect until the claims investigation is completed;
  • the type of investigation that will be conducted; and
  • the experts or tradesmen the adjuster will call in to help determine the extent of loss and the amounts needed to repair.

If the adjuster does not provide this information to the insured, the insured must demand such information from the adjuster orally and, after the meeting, in writing. The adjuster will keep a log of all phone calls and correspondence, and make or keep copies of all correspondence the adjuster sends to, or receives from, the insured.

The investigation of a claim where mold is suspected requires a thorough review of the facts of the loss, the actions of the insured, and causation. The investigation must be conducted with the knowledge that “under normal conditions, fungal mold spores exist at safe levels on the exterior and the interior of virtually all homes and businesses.” [“What Coverage Attorneys Need to Know About Mold,” Tort and Insurance Practice Law Journal, Fall 2002 (38:1): page 30.]

Since mold is ubiquitous, almost any property that provides an environment for its growth (water and warmth) will result in mold growth and will usually result in a claim to remediate mold. Before mold claims became a subject of litigation, homeowners and property owners simply removed the source of the problem by spraying mold with chlorine bleach.

Some homeowners and property owners now see mold infestation, mold growth, and the resulting damage to property as a means to remodel their homes with an insurer’s money. Insureds, if turned down, often file bad faith suits that will allow them the opportunity to take advantage of the insurer’s funds by claiming tort and punitive damages because of a bad faith denial of a covered claim. It is prudent for an adjuster and the insurer he or she represents to have a complete record of all communications between the insured and the insured’s representatives to be able to prove later the reasonableness of its decision to reject a mold claim and to prove that there was a genuine dispute between the insurer and insured and that the issue of coverage was fairly debatable.

To avoid multiple bad faith suits and claims for punitive damages, each claims file with a potential mold claim should include the following:

  • confirmation that the insured had insurance against the risk of loss of the property that is the subject of the claim;
  • evidence that establishes that the insured has an insurable interest in the property that is the subject of the claim;
  • documents or other evidence that show that the loss occurred, or was first discovered, during the policy period;
  • documents or statements of the insured that reflect the date when the insured first became aware that a loss of any kind had damaged his or her property, whether mold was suspected or not;
  • documents or statements of the insured or independent witnesses that reflect the date when the insured first became aware that mold was present and growing on the property that is the subject of the claim;
  • documents or statements of the insured that establish where the mold was first observed;
  • documents or statements of the insured, independent witnesses, current and former occupants, property management personnel, maintenance personnel, contractors, designers, architects, or experts that can explain how the loss was caused;
  • documents or statements of the insured that establish the steps the insured took, or intends to take, to prevent further loss;
  • information and copies of reports prepared by experts that can establish the cause of loss;
  • information on whether any experts were retained to establish the proper remediation of the mold situation and the reports of those experts;
  • documents and statements of the insured or of independent witnesses that explain who or what was responsible for the presence of water that facilitated the growth of mold;
  • photographs taken to record the presence and extent of the spread of mold at the time of the first inspection;
  • a detailed inspection of the structure. The inspection should concentrate on those areas with known or suspected water impact or other mold-related problems indicated during the interviews of the insured and independent witnesses;
  • inspection by the investigator of hidden areas behind walls and above ceilings. Often, mold growth can be seen by naked eye. Samples should also be collected for closer inspection in an appropriate laboratory;
  • inspection of the air-conditioning or heating systems for the presence of visible mold and conditions likely to lead to mold growth;
  • measurement of moisture levels using appropriate moisture meters;
  • measurement of temperature and humidity in the occupied space;
  • a complete scope of loss;
  • a recorded statement of the insured detailing all aspects of the claimed loss—the who, what, when, where, why, and how of it; and
  • a recorded statement of any witnesses who can explain the existence of the mold or its cause.

The investigation should be designed to first determine the cause of the mold infestation. Second, the investigation should determine the extent of the damage. Third, it should develop a method to correct the problem. Finally, the investigation should determine methods to prevent further occurrences of the mold infestation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

 

Posted in Zalma on Insurance | Leave a comment

Don’t Try to Create Ambiguity When One Doesn’t Exist

Multiple Insurers Fight Over Who Owes What to Whom

When more than one insurer could arguably provide coverage for an automobile accident, the insurers work to protect their insured and then litigate with each other over who should pay and in what proportion of the total loss. In American Nat. Prop. and Cas. Co. v. United Specialty Ins. Co. — Fed.Appx. —-, 2014 WL 7399053 (C.A.10 (N.M.) 12/31/14) the Tenth Circuit, applying New Mexico law, was faced with such a case.

FACTS

At the time of the underlying events, Endeavor Services, Inc. (“Endeavor”) was in the business of transporting water to oil fields. Jimmy Cooper financed the company at its inception and served as its director while his children jointly owned 51% of its shares and Virgil Woods owned the other 49%. To assist the company, Mr. Cooper provided it the use of his Lincoln Navigator (“the Navigator”). The Coopers used the Navigator as a family vehicle from 2004 until 2010. At that time, Mr. Woods informed Mr. Cooper that Edward De La Paz, an Endeavor salesman, needed a vehicle to perform his duties, and Mr. Cooper offered the Navigator. There was no discussion of Endeavor purchasing the vehicle when Mr. Cooper first provided it, but approximately a month later Messrs. Woods and Cooper agreed that Endeavor would buy the Navigator at fair market value as soon as the company had the funds to do so.

While it had possession of the Navigator, Endeavor paid for all gas and maintenance. Mr. Cooper continued to pay the premiums on the car’s insurance and retained title to the vehicle, but he and his wife never used it.

On June 11, 2010, Mr. De La Paz was driving the Navigator to pick up a check that would have allowed Endeavor to pay Mr. Cooper for the vehicle. Mr. De La Paz crashed into a truck, killing both himself and Roland Judson, the truck driver. The accident occurred approximately fifty miles from Mr. De La Paz’s house—where he began his drive—during daylight, with clear conditions, on a dry, straight, level road. A police report characterized “[d]river inattention” as “a contributing factor in the crash.” An autopsy of Mr. De La Paz found methamphetamine in his system in an amount sufficient to cause death by overdose. In the opinion of Dr. Richard Morrisett, a neuropharmacologist retained by American, drugs “rendered [Mr. De La Paz] incapable of safe operation of a motor vehicle [and] substantially contributed to the motor vehicle accident.”

Mr. Judson’s estate sued Mr. De La Paz’s for wrongful death. A settlement was reached between the insurance companies, Mr. Judson’s estate, and Mr. De La Paz’s estate, whereby Mr. Judson’s estate would be paid $1,650,000 to resolve its wrongful-death claim. Of this amount, American paid $650,000, Great West paid $1,000,000, and United—which issued an excess-liability policy to Endeavor—paid nothing. The insurance companies each reserved their right to contest the claims amongst themselves.

THE POLICIES

There are three different insurance policies relevant to the appeal: (1) a family auto policy issued by American to Mr. Cooper; (2) a commercial umbrella policy issued by American to Mr. Cooper; and (3) a commercial auto policy issued by Great West Casualty Company (“Great West”) to Endeavor.  Mr. Cooper’s family policy with American excluded coverage for damages incurred “while any insured vehicle is rented, leased, or subleased or under any purchase agreement or conditional sale to others.”

As for the commercial umbrella policy American issued to Mr. Cooper, its pertinent provision excluded coverage for damages “[a]rising out of the use … or possession by any person of a controlled substance.” Finally, the commercial auto policy Great West issued to Endeavor indicated, notably, that it applied only to “covered autos,” which included “hired autos” and “nonowned autos.”

THE DECLARATORY JUDGMENT ACTION

American exercised the right to seek a declaratory judgment and equitable subrogation on the ground that United owed it $650,000 (“the loss”) for the money it paid to settle the wrongful-death lawsuit based on the excess-liability policy it issued to Endeavor. Both parties filed motions for summary judgment.

Ruling on the dueling motions for summary judgment, the district court granted United’s, denied American’s, and dismissed the complaint with prejudice. In so doing, it declared that American’s auto and umbrella policies covered the loss and that Great West’s and United’s policies did not. The district court reasoned that the conditional-sale exclusion ambiguous and thus properly construed against American, the insurer. The district court explained that “[a]t most,” the arrangement “amounted to an expression of a plan for Endeavor to purchase the vehicle at some undefined time and for an unstated sales price, rather than a contractual agreement.”  As such, the terms were insufficiently definite to constitute a contract, and the conditional-sale exclusion was not implicated.

As for the Great West policy, the district court found that Great West was not obligated to cover the loss because the Navigator was borrowed, and was therefore not a “hired auto” or a “nonowned auto” within the meaning of the policy. In view of those findings, the district court granted United’s motion for summary judgment, denied American’s motion for summary judgment, and dismissed the complaint with prejudice.

ANALYSIS

In New Mexico, like almost every state, insurance contracts are construed by the same principles which govern the interpretation of all contracts. Where a policy term is unambiguous, the court’s duty is simply to apply it to the facts of the case.  The question of whether an ambiguity in an insurance policy exists is a question of law to be decided by the court.

In short, the conditional sale is a well-established concept, both within and outside the law, and both within and outside New Mexico. It is a simple, straightforward idea with clear, comprehensible terms. We see nothing facially ambiguous about it.

The context of the policy as a whole strengthens the conclusion that the provision is unambiguous. Analysis of the insurance policy proceeds with the primary goal of ascertaining the intentions of the contracting parties with respect to the challenged terms at the time they executed the contract. In sum, the exclusion is unambiguous, both facially and as applied.

A conditional sale is one in which (1) the buyer gets immediate possession, and (2) the seller keeps title, until (3) the buyer pays in full. Applying the more specific language of the policy, i.e., the word “under,” the question is whether the agreement to enter such an arrangement had been reached.The answer is yes. There is no dispute that Endeavor acquired immediate possession of the Navigator while Mr. Cooper retained title until Endeavor paid him the full purchase price. Under the plain language of the insurance policy, the Navigator was subject to a conditional sale on the day of the accident.

To be sure, a court might not have a surefire means to know exactly how much funds were enough to hold that Endeavor had a duty to pay for the Navigator. Nevertheless, such a determination is not so dissimilar to the sort of reasonableness calculations courts make on a daily basis.

For summary-judgment purposes, it cannot be said that the conditional-sale agreement was void for indefiniteness simply because its time for performance was tied to Endeavor’s ability to pay for the vehicle. Therefore, the district court erred in granting summary judgment to United on its claim that the exclusion did not apply.

The district court ruled that the umbrella policy covered the accident and that its exclusion for damages arising from the use of controlled substances was inapplicable.

American’s umbrella policy excluded coverage for damages “[a]rising out of the use … or possession by any person of a controlled substance.” Applying the unambiguous definition of the phrase, the court concluded that United was not entitled to a summary-judgment resolution of the issue in its favor.
The vehicle was unquestionably being used in connection with the business of the insured, Endeavor: it was being driven by an Endeavor salesman to pick up an Endeavor check.

Endeavor exclusively used the car during the relevant period and paid for all of the gas and maintenance for it, even though Mr. Cooper retained the title. Moreover, while Endeavor had not yet paid for the vehicle, the conditional-sales agreement clearly evinced the parties’ intention that it ultimately would do so. The Tenth Circuit concluded that the district court erred in granting summary judgment to United on the ground that Great West’s policy did not—as a matter of law—provide coverage to Endeavor.

ZALMA OPINION

Summary judgment closes down a case totally. Appellate courts will set aside a summary judgment if it believes the trial court erred in application of the law or facts. Here, there was no ambiguity and, as a result, the case will go back to the trial court and will have to allow the parties to present evidence at trial to give it sufficient information to rule now that it has direction from the Tenth Circuit as to the lack of ambiguity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

When Poop Is a Contaminant

Septage, When It Enters a Water Supply, is an Excluded Pollutant

Courts of Appeal are required to deal with cases presented to them, even when they deal with factors as unusual as human excrement and urine. Such cases are seldom the subject of insurance disputes. However, in Preisler v. General Cas. Ins. Co., — N.W.2d —-, 2014 WL 7373070 (Wis.), 2014 WI 135 (12/30/2014), the Wisconsin Supreme Court reviewed a decision of the court of appeals that granted summary judgment to insurers applying their pollution exclusions.

ISSUE

The issue to be decided was whether a reasonable insured would understand that decomposing septage (primarily composed of human urine and fecal material, as well as other materials disposed of in septic tanks, grease interceptors and portable restrooms) is a “contaminant” and therefore, a “pollutant” as defined in the liability insurance policies issued by the insurers and whether it is a pollutant when it has decomposed and seeps into a water supply.

BACKGROUND

Fred and Tina Preisler operate a dairy farm and raise cattle. A well drilled in 1972 supplied water for the Preislers’ household and farm uses until 2008.
Duke, Doug, Dale, and Cheryl Kuettel live on a farm across the road from the Preislers’ farm. From that property, the Kuettels run a farming operation, 4–DK Farm, and a septic pumping service, Kuettel’s Septic Service, LLC. Kuettel’s Septic hauls, stores, and disposes of the waste it pumps from customers’ septic tanks. Kuettel’s Septic also collects waste from grease traps, floor pits, and car washes, which it combines with the human waste from septic tanks.

Septage contains nitrogen, and when septage is introduced into soil, it decomposes. During that biological process nitrates are formed. The presence of nitrates in water supplies is a concern for human health as it may cause health problems in infants and may be implicated as a risk factor associated with chronic health and reproductive problems.

Fred Preisler and Duke Kuettel discussed applying septage on the Preislers’ farm as fertilizer. Kuettel’s Septic received permission from the Wisconsin Department of Natural Resources (DNR) to apply it. Kuettel’s Septic applied septage to the Preislers’ farm fields for several years.

In 2008, the Preislers experienced problems with their well water. The Preislers’ cattle that drank the water began to die at an uncharacteristic rate. The Preislers further noted a decrease in milk production. August 2008 testing showed the Preislers’ well water contained elevated levels of nitrates, which are produced as septage decomposes. The cattle deaths subsided later in 2008 after the Preislers drilled a new well.

The Preislers sued alleging negligence in storing and in applying septage resulting in nuisance and trespass.

The Preislers added the parties’ insurers to the suit.

The Rural and Regent policies include similarly worded pollution exclusion clauses. They exclude harm “arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’….” The Rural and Regent policies also define “pollutants” similarly as: “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed .”

The circuit court concluded that the pollution exclusion clause applies to preclude coverage for alleged losses arising out of storage of septage and application of septage to farm fields that is alleged to have caused contamination of the water supply resulting in harm to the Preislers.

DISCUSSION

Policy Interpretation

The Supreme Court was asked to interpret the pollution exclusion clause as it applies to decomposing septage that entered a water supply.  Policy language is not ambiguous merely because more than one dictionary definition exists or the parties disagree about its meaning. Policy language also is not ambiguous because different courts have come to differing interpretations.

First a court must examine the facts of the insured’s claim to decide whether the policy makes an initial grant of coverage for the claim set out in the complaint. The analysis ends there if the policy clearly does not cover the claim.

The parties did not argue the Preislers’ claims fall outside the policies’ grant of coverage. Due to the fact that most policies define an “occurrence” to mean an “accident,” the pollution coverage issue often turns upon the intent of the insured.  Most courts have focused on the damage caused by the pollution and have concluded that there is an occurrence when the insured did not expect or intend the resultant damage.

The facts of this case, if proved, present an “occurrence” triggering an initial grant of coverage. Here, the “accident” was the seepage of decomposing septage into the Preislers’ water supply. Seepage into the water supply was not “intended, anticipated, or expected. Seepage of decomposing septage into the water supply is an occurrence. Here, the resulting harm is water with elevated nitrate levels.

Pollution Exclusion

Typically, to resolve whether a pollution exclusion applies, the court must first determine whether the substance in question falls unambiguously within the policy’s definition of pollutants. Then, if the substance fits within the policy’s definition of pollutants, it must determine whether the alleged loss resulted from the “discharge, dispersal, seepage, migration, release or escape” of the substance under the plain terms of the policy’s pollution exclusion clause.

However, the parties do not appeal the circuit court’s ruling that the Preislers’ alleged damage resulted from the “discharge, dispersal, seepage, migration, release or escape of” decomposing septage within the meaning of the terms in the pollution exclusion clause. Therefore, in this case, the sole inquiry before the Supreme Court was whether, at the time of the occurrence that triggered coverage, the decomposing septage is a pollutant within the policies’ definition.

It is a rare substance that is always a pollutant. The most noxious of materials have their appropriate and non-polluting uses.  The Supreme Court used the following definition of contaminant: “to make impure or unclean by contact or mixture.”  quoting from the American Heritage Dictionary of the English Language 406 (3d ed.1992).

Determining whether a substance is a contaminant and therefore a pollutant, the focus is on the event causing harm because that is the occurrence triggering coverage. Here, the event causing harm is decomposing septage seeping into the water supply. A reasonable insured would understand decomposing septage to be a contaminant when it seeps into a water supply.

Individual components of septage are common. Septage is a waste product with use as a farm fertilizer. Application of septage comes with risks to water supplies because decomposing septage can release high levels of nitrates, which can be dangerous to humans and cattle if they reach water supplies. A second limiting principle is that if the harm results from “everyday activities gone slightly, but not surprisingly, awry,” a reasonable insured would not necessarily understand the substance to be a pollutant. Exposure of decomposing septage to the Preislers’ water supply is not an everyday activity gone slightly, but not surprisingly, awry.

Septage fits the ordinary meaning of waste, which the policies expressly list as a pollutant, and supports the conclusion that septage is a pollutant when it seeps into a water supply. Septage is primarily composed of human urine and feces.  Therefore, decomposing septage is a pollutant when it seeps into a water supply.

The policies’ use of “contaminant” in defining “pollutant” should have been clear notice to the Kuettels that their policies would not cover claims involving decomposing septage’s seepage into water supplies.  The key terms of the policies are unambiguous.

The Supreme Court concluded that a reasonable insured would understand that decomposing septage is a “contaminant” and therefore, a “pollutant” as defined in the policies when it has decomposed and seeps into a water supply.

ZALMA OPINION

To the Wisconsin Supreme Court, and to insurers across the country, human feces and urine fit clearly within the definition of contaminant and pollutant sufficient to allow an insurer to refuse defense and indemnity under the pollution exclusion. Although not a pollutant when properly handled and treated septage, when applied to the soil and allowed to decompose and cause nitrates to enter a water supply, it becomes a pollutant. When dealing with a pollution exclusion it is important that the insurer, and courts interpreting the decision of an insurer to refuse defense and indemnity, it is important to go through the analysis by determining whether the material is a contaminant and that the contaminant that pollutes a water supply or otherwise causes damage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – 1/1/2015

Happy New Year

In the First issue of its 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on January 1, 2015, continues the effort to reduce the effect of insurance fraud around the world while wishing all its readers a very happy and prosperous new year.

The issue continues to establish that, regardless of some success, the efforts to defeat fraud must be increased. The current issue of ZIFL reports on:

1.   Failure to Appear for EUO May Not Be Enough to Deny Claim.

2. New From Barry Zalma a. National Underwriter Publishes:

i. “Insurance Claims: A Comprehensive Guide;

ii. “Construction Defects Coverage Guide; and

iii. “Mold Claims Coverage Guide” b. Part of the Zalma Insurance Claims Library.

c.     The ABA Tort & Insurance Practice Section publishes:

i. “The Insurance Fraud Deskbook”

3.     The Loss in Progress Rule

4.     Arson-for-Profit Doesn’t Pay

5.     Barry Zalma is on http://WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER 

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

THE “ZALMA ON INSURANCE” BLOG

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

  1. Cooperate in Defense or Lose Everything – December 31, 2014
  2. Report Promptly, Sue Quickly or Else – December 30, 2014
  3. Insurer May Litigate Coverage Dispute – December 29, 2014
  4. Brothers Shouldn’t Fight – December 29, 2014
  5. Notice of Claim is When the Insurer Receives It – December 26, 2014
  6. ERISA Bars Jury Trial Against Health Insurer – December 24, 2014
  7. Arson-for-Profit Doesn’t Pay – December 23, 2014
  8. Biased Judge Disqualified – December 22, 2014
  9. Insurance Lawyer Expert Striken – December 19, 2014
  10. A Christmas Story of Fraud – December 18, 2014
  11. Failure of Contract to Provide Indemnity – December 17, 2014
  12. You Only Get What You Pay For – December 16, 2014
  13. Zalma’s Insurance Fraud Letter — December 15, 2014
  14. Infrared Detection of Mold – December 12, 2014
  15. The Eight Corners Rule Defeats Right to Defense – December 12, 2014
  16. Insurance Fraud – December 11, 2014
  17. A Dam Case – December 10, 2014
  18. Doubt About Exclusion Requires Coverage – December 9, 2014
  19. What is Liability Insurance? – December 8, 2014
  20. Business Risks Never Insurable – December 8, 2014

New From the ABA:

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case. Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624 ; or orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing. This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL: http://www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation. If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL: http://www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different. Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL: www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant. He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith. Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase e-books written and published by Mr. Zalma and ClaimSchool, Inc.

Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog . You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Leave a comment

Cooperate in Defense or Lose Everything

Insured Hurts Itself and Its Victims

A third party liability insurance policy promises the insured to defend and indemnify it if the loss is due to a risk of loss insured against. The insured of a third party liability insurance policy promises to cooperate with the insurer and assist in the presentation of the defense. If either fails to fulfill the promises made litigation usually ensues. In Auto-Owners Ins. Co. v. Premiere Restoration & Remodeling, Inc., Slip Copy, 2014 WL 7369391 (N.D.Ala., 12/29/2014) the District Court for the Northern District of Alabama was faced with an unusual suit where an insurer sought relief because its insured failed to keep any of its promises and deprived the insurer of the right to mount a defense in favor of its insured.

Auto–Owners alleged Premiere violated the terms and conditions of the policy when Premiere failed to cooperate with Auto–Owners and the attorney Auto–Owners provided to represent Premiere in the state court action that the Sheridan family filed.  Auto–Owners seeks judgment against Premiere for Premiere’s failure to answer or otherwise defend this action and judgment as a matter of law against the Sheridans.

DEFAULT JUDGMENT

Auto–Owners filed a motion for entry of default against the defendants accompanied by proof of service and an affidavit. The Clerk entered default against Premiere on September 25, 2014.

The entry of default does not by itself warrant an entry of default judgment. Rather, there must be a sufficient basis in the pleadings for the judgment.  Although a defaulted defendant is deemed to admit the plaintiff’s well-pleaded allegations the Court has an obligation to assure that there is a legitimate basis for the judgment

UNDERLYING STATE COURT ACTION

On March 2, 2011, the Sheridans sued Premiere, Jerry Sulzby, Rodney Bates, and Gary Thompson in the Circuit Court of Jefferson County, Alabama. The Sheridans alleged that in July 2010, they entered into a contract with Premiere. In the contract, Premiere agreed to construct a new home for the Sheridans after a fire destroyed their previous residence. The contract obligated Premiere to construct the new home for the amount the Sheridan’s insurance company had agreed to pay for reconstruction. Despite being paid half the contract price, Premiere did not complete construction of the home in compliance with the contract specifications.  The Sheridans contend it would cost more than $185,000.00 to finish construction of the house to meet the contract specifications and to repair the faulty construction that Premiere had performed to date.

The Sheridan’s state court complaint asserted claims for: (1) breach of contract; (2) negligent construction; (3) wantonness; (4) fraudulent misrepresentation; (5) fraudulent suppression; (6) breach of warranty; and (7) bad faith.  The Sheridans sought compensatory and punitive damages.

Auto–Owners sent Premiere multiple letters requesting Premiere’s assistance in responding to the Sheridans’ discovery requests after accepting its defense under a reservation of rights. Premiere ignored Auto-Owners requests.

On April 30, 2013, the Sheridans filed a motion to compel discovery responses from Premiere. The state court granted the Sheridans’ motion to compel on May 1, 2013, and ordered Premiere to answer the discovery within 21 days. When Premiere failed to respond to the discovery requests, the Sheirdans filed a motion for sanctions. The state court granted the motion and entered default judgment against Premiere.After a hearing on damages, the state court awarded the Sheridans a $125,051.00 judgment.

THE DECLARATORY RELIEF ACTION

Auto–Owners alleges that Premiere has breached the insurance policy contract and is no longer entitled to any indemnity or defense from Auto–Owners. Auto–Owners served the Sheridans with a copy of the summons and complaint on Otcober 28, 2013. The Sheridans answered the complaint and filed a counterclaim against Auto–Owners.  To date, Premiere has not answered the complaint. On August 13, 2014, Auto–Owners moved for Clerk’s entry of default against Premiere, and the Clerk entered default against Premiere on September 19, 2014.

Auto–Owners also filed a motion for summary judgment.  The Sheridans do not respond substantively to Auto–Owners’s motion for summary judgment.

THE ISSUE

The question for the Court is whether or not during the original case was there sufficient non assistance to render the insurance policy null and void thus preventing the Sheridans from recovering.

ANALYSIS

Because Premiere failed to cooperate with Auto–Owners in the underlying state court action, the Court decided to enter default judgment against Premiere and judgment as a matter of law in favor of Auto–Owners on its coverage claim against the Sheridans.

The insurance policy Auto–Owners provided to Premiere places certain duties upon Premiere in the event of an occurrence, offense, claim, or suit for which the policy might provide coverage. The policy requires that Premiere “[c]ooperate with [Auto–Owners] in the investigation or settlement of the claim or defense against the ‘suit.’”

Auto–Owners sent Premiere an initial reservation of rights letter on December 28, 2011.  Premiere’s participation in the defense was a requirement set forth in the policy conditions. Premiere’s failure to adhere to conditions of the policy compromised coverage being provided for defense as a breach of the conditions set forth in the policy.

As the insurer, Auto–Owners has the burden of proof to establish noncooperation In order for Premiere’s noncooperation to constitute a breach of insurance coverage, the lack of cooperation must be both material and substantial. The test for determining what is material and substantial amounts to a requirement of prejudice to the insurer. Alberson v. Nationwide Assurance Co., 2003 WL 23335453, (M.D.Ala. Oct. 24, 2003) quoting Williams v. Alabama Farm Bureau Mut. Cas. Ins. Co., 416 So.2d 744, 746 (Ala.1982));

What constitutes a failure of cooperation by the insured is usually a question of fact. Non-cooperation is deemed prejudicial if the failure to cooperate negates the only evidence the insurer could offer in defense. The insurer is deprived of the opportunity to conduct an investigation and mount a defense. Premiere’s failure to respond to multiple requests from Auto–Owners and the attorney Auto–Owners hired to represent Premiere in the underlying state court action amounts to material and substantial non-cooperation that prejudiced Auto–Owners.

The Court, outside the requirement placed upon it by the declaratory judgment action,  felt it necessary to express its sympathy to the Sheridans’ position. Due to no fault of their own, the Sherdans likely have no recourse against Premiere or any way to enforce the state court default judgment.

Premiere’s failure to answer or respond to the declaratory judgment complaint before this Court impacts only the Court’s determination of whether Auto–Owners is entitled to default judgment against Premiere; Premiere’s failure to answer or respond to the declaratory judgment action does not impact the Court’s analysis of the merits of Auto–Owners’s motion for summary judgment regarding its coverage claims against the Sheridans.

Premiere’s noncooperation relieves Auto–Owners of its duty to further defend or indemnify Premiere against the state court default judgment. Accordingly, Auto–Owners is entitled to default judgment against Premiere, and Auto–Owners is entitled to judgment as matter of law against the Sheridans on its duty to defend and indemnify claims.

ZALMA OPINION

Although I, like the court, feel for the Sheridans’ who were dealt a serious and financially expensive blow by Premiere, their chosen contractor, the court was correct finding that the insurer owed nothing to Premiere or the Sheridans. The policy issued by Auto-Owners was a contract that was clearly breached by Premiere. The only avenue of recovery available to the Sheridans is if they can convince a local prosecutor to prosecute Premiere and its principals for fraud and if convicted to obtain orders of restitution.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Report Promptly, Sue Quickly or Else

Private Limitations of Action Provision Enforceable

First-party property insurance policies always include a prompt reporting requirement and a private limitations of action provision. Even if the claim is reported promptly once it is denied the insured should never sit on his/her/its rights before filing suit ignoring the private limitation of action provision in the policy.

In Northpointe Commerce Park, LLC v. Cincinnati Ins. Co., Slip Copy, 2014 WL 7365931 (W.D.N.Y., 12/24/2014) Cincinnati asked that the court dismiss the Northpointe complaint dismissed for one or more of several layered reasons:

1)     The policy in question requires legal actions to be filed within two years of direct physical loss, and Northpointe did not file its complaint within two years of its loss on May 1, 2011;

2)     Even if a second loss occurred on May 3, 2012, as Northpointe claims, the damage duplicated the damage from the first loss and thus falls under the deadline for the first loss; and

3)     Northpointe never filed a formal loss notice for the alleged second loss of May 3, 2012, as required by the policy.

BACKGROUND

This case concerns two windstorms that damaged one of Northpointe’s commercial buildings and Northpointe’s attempt to claim insurance coverage for the damage. Northpointe is a New York corporation that manages a commercial property (the “Property”) at 60 Northpointe Parkway in Amherst, New York. The Property features exterior walls fitted, at least in part, with a skin of Thermolite™ aluminum composite wall panels.

On May 1, 2011, a windstorm blew through the area where the Property sits. . On March 3, 2012, a second windstorm blew through the area with wind gusts as high as 63 mph. These two windstorms prompted Northpointe to invoke an insurance policy that it bought from Cincinnati, an Ohio corporation, on June 8, 2009.

The policy in question contains several provisions that potentially affect the pending motion and the case in general.  The policy does not appear to require any particular method of notice or deadline to so. Northpointe must cooperate with Cincinnati during the ensuing investigation, which includes furnishing information to Cincinnati as requested.  Finally, the policy contains a limitations provision concerning litigation: “No one may bring a legal action against us under this Coverage Part unless: ¶ 1. There has been full compliance with all of the terms of this Coverage Part; and ¶ 2. The action is brought within 2 years after the date on which the direct physical ‘loss’ occurred.”

The parties do not dispute the basic chronology of events concerning the first windstorm. As noted above, the first windstorm occurred on May 1, 2011. The record contains no information about any action that Northpointe took, including providing notice, for approximately the next nine months. On February 8, 2012, a commercial roofing contractor named CentiMark gave Northpointe a proposal for assessing and repairing the Property. Among other information, the proposal includes photographs of the damaged portions of the Property along with a conclusion that the Property has suffered high wind damage on all 4 sides of building.

Based on the CentiMark proposal, Northpointe gave its insurance agent a formal loss notice on February 22, 2012. The loss notice listed May 1, 2011 as the date of loss. The insurance agent forwarded the loss notice to Cincinnati, and Cincinnati acknowledged receipt of the loss notice through a letter dated February 29, 2012. On May 25, 2012, Cincinnati sent Northpointe a letter denying coverage for the loss date of May 1, 2011. Cincinnati invoked the exclusion for defects, claiming that “the reported damages were not caused by an isolated wind event but, rather, the system-wide failure of perimeter sealant joints which has caused extensive delamination. This failure was caused by numerous design defects and improper installation of sealant joints.”

While events concerning the first windstorm were running their course, a second windstorm hit the Property on March 3, 2012. Northpointe never filed a formal loss notice as it did with the first windstorm. In contrast to the first windstorm, however, Northpointe appears to have provided informal notice to Cincinnati almost immediately.

On March 5, 2012, Northpointe retained National Fire Adjustment Co., Inc. (“NFA”), a Licensed Public Adjuster, to facilitate communications with Cincinnati and to estimate damage from the second windstorm. On March 6, 2012, representatives from Northpointe, Cincinnati, and NFA met at the Property to inspect the extent of damages. The denial letter concerning the first windstorm contains no information suggesting that the denial covered the second windstorm.

Northpointe filed a complaint on February 28, 2014, in New York State Supreme Court, Erie County. The complaint mentions the second windstorm of March 3, 2012 and then the denial of coverage on May 25, 2012, implying that the denial of coverage pertained to the second windstorm.

DISCUSSION

The First Windstorm

The parties do not dispute that, meteorologically, a windstorm occurred both on May 1, 2011 and March 3, 2012. For policy purposes, though, does this case present one “loss” or “occurrence,” or two?

Under these circumstances, “the parties here must have intended to provide coverage for property damage each time it occurred unexpectedly and without design, unless the damage occurring at one point in time was merely part of a single, continuous event that already had caused other damage. Another case that gives the Court some guidance is World Trade Ctr. Properties, L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154 (2d Cir.2003). In World Trade, the Second Circuit grappled with an unfortunately necessary and practical question stemming from the September 11, 2001 terrorist attacks: Was there a question of fact regarding whether those attacks constituted one insurance occurrence or two? The Court understood that the number of insurance events or “occurrences” will be ambiguous when either 1) one generating event spawns multiple, potentially independent damage events; or 2) the generating event is “multi-layered,” that is, it can be assessed at multiple levels of planning, coordination, and execution (the World Trade case).

No such ambiguity presents itself here. Here, two windstorms hit the Property about 10 months apart. The time between the two windstorms renders any causal relationship between them meteorologically impossible.  These circumstances warrant treating the two windstorms as independent causes of direct physical loss and applying Cincinnati’s motion to each windstorm separately.

Having resolved the independence of each windstorm, the Court addressed Cincinnati’s core argument against the first windstorm—that the complaint is untimely relative to that storm. “The parties to a contract of insurance may provide for a shorter limitation of actions than that provided in the general Statute of Limitations.” Brandyce v. Globe & Rutgers Fire Ins. Co., 168 N .E. 832, 833 (N.Y.1929). Additionally, when parties use the phrase “direct physical loss,” the shorter limitations period will run from the date of the physical event that causes property damage. Under New York law, the loss date is the date of the occurrence of the casualty or event insured against.

Here, the language in the policy setting a two-year limit for litigation is identical to the language that courts have affirmed as sufficiently specific. As noted above, Cincinnati’s policy requires that any litigation related to coverage, or denial of coverage, occur “within 2 years after the date on which the direct physical ‘loss’ occurred.” The specificity of that language avoids the ambiguities that courts have found from the use of the term “loss” or “date of loss” by itself.

Under these circumstances, the parties contractually agreed to cut off any litigation about coverage of the first windstorm two years after the date of the windstorm. The first windstorm occurred May 1, 2011, and Northpointe did not file its complaint until February 28, 2014. Any causes of action concerning the first windstorm are untimely.

The Second Windstorm

Compared to the relatively straightforward situation concerning the first windstorm, the situation concerning the second windstorm raises many factual questions that should await further discovery. The parties do not dispute that the second windstorm occurred on March 3, 2012. The parties also do not dispute that they inspected the Property on March 6, 2012 and that Northpointe, through its public adjuster, submitted some kind of loss estimate on May 24, 2012.

Further, although it is not disputed that the windstorm was the direct cause of the initial damage to the plaintiff’s property, since the plaintiff allowed the roof to remain in disrepair for several months, there exists a question of fact as to the extent of the damages which were directly caused by the windstorm.

ZALMA OPINION

Northpointe and its advisors sat on their rights and, at least partially, lost the right to sue for the first storm and serious questions arose concerning the viability of the claim for the second loss because of the failure to protect the property from further loss after the first windstorm damaged the property. New York applies the clear and unambiguous language as written and since suit was filed more than two years after the first windstorm the suit was to be dismissed as untimely.  Had the loss been in California, the limitation period would have been tolled between the report of loss and the denial in accordance with the California Supreme Court decision, PrudentialLMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674, 274 Cal.Rptr. 387, 798 P.2d 1230 Northpoint’s suit would have been timely. Neither rule is perfect.  It is essential that claims professionals know which rule applies in their jurisdiction.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

Insurer May Litigate Coverage Dispute

No Coverage – No Suit Against Insurer

In Quihuis v. State Farm Mut. Auto. Ins. Co., — Fed.Appx. —-, 2014 WL 7331247 (C.A.9 (Ariz.) 12/24/14) the Ninth Circuit Court of Appeal, tracking Arizona law, was asked to allow an insured to sue its insurer for improper claims handling and bad faith, after the court found there was no coverage. Unsure of Arizona law the Ninth Circuit referred the question to the Arizaona Supreme Court since the answer was so obvious it had not been litigated before.

The full facts and procedural history of this case can be found in Quihuis v. State Farm Mut. Auto. Ins. Co., 748 F.3d 911 (9th Cir.2014). This appeal stems from an insurance-coverage dispute. In the Ninth Circuits previous order, it agreed with the district court that the undisputed facts establish that the Coxes were not the owners of the Jeep, and therefore were not covered under State Farm’s policy, at the time of the accident. Plaintiffs argued State Farm was precluded from litigating coverage under the circumstances of this case. These circumstances include:

(1) [State Farm’s] refusal to defend its insured against a third-party tort claim after [it] determined its policy did not cover the accident; a stipulated default judgment against the insured under a Damron agreement; and (3) a question of ownership, which is both an element of liability for the underlying negligent entrustment tort claim against the insured and a requirement of coverage under the insurance policy. [Quihuis v. State Farm Mut. Auto. Ins. Co., 334 P.3d 719, 723 (Ariz.2014).]

Existing Arizona cases were unclear as to whether State Farm is precluded from litigating coverage under these circumstances, so the Ninth Circuit certified a question to the Arizona Supreme Court.

The Arizona Supreme Court accepted review of our question, and answered by holding that State Farm is not precluded from litigating its coverage dispute. Quihuis, 334 P.3d at 730. In that case the Arizona Supreme Court statedL=: “State Farm refused to defend the Coxes in the Quihuises‘ tort action, even under a reservation of rights. The Quihuises contend that “State Farm’s choice not to defend its insured precludes it from collaterally attacking a default judgment against its insured.  In sum, consistent with prior cases decided by the Arizona Supreme Court, it hold that when an injured party obtains a default judgment against an insured pursuant to a Damron or Morris agreement, that judgment will bind the insurer in a coverage case as to the existence and extent of the insured’s liability. The judgment will not preclude the insurer from litigating its identified basis for contesting coverage, irrespective of any fault or damages assessed against the insured. More specifically, it concluded that on the facts presented having determined that coverage on the Jeep ceased to exist before the accident (and thus there was no coverage regardless of any fault or liability of the insureds), State Farm is not bound by the stipulation between the Coxes and the Quihuises as to a fact essential to establishing coverage, despite State Farm’s refusal to defend and the entry of a default judgment pursuant to the Damron agreement.

State Farm may litigate coverage, and because we have determined no coverage existed at the time of the plaintiffs’ injuries, we affirm the District Court’s decision granting summary judgment in favor of State Farm.

ZALMA OPINION

The Ninth Circuit is not noted for brief opinions. This is the exception to the rule. Since the plaintiffs were not the owner of the vehicle – a jeep – there was no coverage available. Since the Arizona Supreme Court concluded that the insurer could litigate coverage because it neither owed defense no indemnity, that decision confirmed the correctness of the Ninth Circuit’s conclusion that there was no coverage under the policy and State Farm was entitled to Summary Judgment.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Brothers Shouldn’t Fight

Intentional Acts Not Covered

Disputes between relatives are never happy if they come to court and litigation. Families who should love each other turn love to hate over jointly owned property. The disputes between relatives ofter appear more like war than a family dispute. In Guillot v. Guillot, — So.3d —-, 2014 WL 7264510 (La.App. 3 Cir.), 2014-364 (La.App. 3 Cir. 12/23/14) suits by brother against brother kept Louisiana Courts busy and resulted in two trips to the Court of Appeal.

FACTS

After farming for over thirty years, Plaintiff, Wayne Guillot, left the family farming partnership in February 2006. Wayne and his brother, defendant Reece Guillot, had jointly farmed rice and crawfish, first with their father, and, when he retired, with their own sons. The brothers had grown up and worked together all of their lives, had served as best man at each other’s weddings, and had raised their sons together. When Wayne’s son left the farming partnership, tension in the family began to escalate. Wayne eventually also left the farming partnership to pursue a career as a crop duster and, at the time of the incident in question, Wayne owned a crop dusting service.

With tensions rising between the brothers and their sons, a partition of the real estate owned by the partnership was finalized only months before the incident in question. However, the ownership of all moveables and farm equipment was still highly contested, and would not be settled until after the incident prompting this lawsuit.

While the partition of the farm equipment was still in litigation, on March 16, 2008, Wayne went onto the farm property and, using his own trailer, loaded a crawfish boat used in Reece’s crawfish farming operation onto his trailer and then proceeded to leave the property. March 16, 2008 was Palm Sunday, the start of the busiest week of crawfish season, a fact Wayne acknowledged. At the time the crawfish boat was taken from the farm property, Wayne did not yet have his own crawfish pond and would not have been able to use the crawfish boat in crawfish farming operations until the following season. Wayne acknowledged that crawfish farming was one of the main sources of income for Reece’s farm at that time.

A neighbor alerted Reece that Wayne was removing the crawfish boat from the farm property. Reece tried to stop Wayne from taking the boat but Wayne drove around Reece’s truck. At some point in the sequence of events, Wayne called his wife, who was at their house, and told her to call the police because he was on his way home with the crawfish boat and Reece was following him. Wayne told her that “[t]here’s going to be trouble.”

While in pursuit of Wayne, Reece alerted his son, Benjamin, his partner in the farming operations and codefendant herein, and told him that Wayne was taking a boat they needed for crawfishing. Benjamin left his house and went in the direction that Wayne and Reece were travelling. Benjamin then blocked the road with his truck to try to stop Wayne from going to his house with the crawfish boat. Wayne went off of the road to get around Benjamin’s truck and Benjamin’s and Wayne’s trucks collided in the process. Wayne was able to get around Benjamin’s truck and continue travelling to his home with the boat. Reece and Benjamin followed in close pursuit.

When Wayne arrived home, he parked his truck on his driveway with the crawfish boat in tow. Reece was right behind him and parked on Wayne’s driveway in the vicinity of the rear of Wayne’s truck and the boat. A fight then ensued near the back of Wayne’s truck and the front of Reece’s truck. The evidence is in dispute as to the exact location of the men in relation to their trucks and who threw the first punch. Wayne claimed that Reece charged him and hit him first. Reece claimed that Wayne aggressively charged him and hit him first. There is no dispute that Reece struck Wayne in the eye, and Wayne went down. The fight ended with Reece on top of Wayne, and Reece pummeling Wayne until he tired of swinging.

Wayne was hit in the eye and the surrounding area immediately became swollen and discolored. Reece had a bit of blood around his ear. Benjamin arrived as the two brothers were on the ground, with Reece on top, hitting Wayne. Benjamin was not involved in the fight, except as to allegedly egg his father on. Benjamin was sued only for damages to Wayne’s truck.

The police arrived and questioned witnesses. Reece left to get a trailer, returned to Wayne’s house, put the boat on his trailer, and returned to the farm property with the crawfish boat in tow.

It was later confirmed by Dr. Casanova, Wayne’s treating physician, that Wayne suffered from a fracture to the orbital bones around his left eye, requiring surgery. Wayne claims he now has permanent double vision and can no longer perform the duties of a pilot in his crop dusting business. In his brief to this court, Wayne is claiming that he has $7,363.60 in medical bills, $680,000.00 in past lost income at the time of trial, and an annual loss of future earning capacity equal to $130,000.00 in pilot fees because he can no longer fly and has been forced to pay substitute pilots. Wayne claimed that pursuing a flying career was one of the main reasons he left the family farming operation in the first place and also claims past and future mental anguish, pain and suffering.

Wayne filed suit against Reece for his personal injuries, Benjamin for his property damage, and Farm Bureau Insurance Company, as insurer of Reece and Benjamin. Farm Bureau filed a motion for summary judgment stating that the conduct committed by Reece and Benjamin was excluded under their policy because their actions were intentional. The trial court granted Farm Bureau’s motion, dismissing the insurance company from the suit. The district court’s grant of summary judgment was later upheld by a panel of this court In Guillot v. Guillot, 12–109, P. 9(La.App. 3 Cir. 6/6/12), 92 So.3d 1212, 1217 this court held “The Farm Bureau homeowner’s and farm liability policies unambiguously excluded coverage for Wayne’s injuries resulting from the intentional actions of Reece and Benjamin.”.

Wayne’s case against Reece and Benjamin proceeded to trial by jury. Using special interrogatories, the jury found that Wayne had “consented” to the intentional battery by Reece, and that Reece was not liable for the injuries to Wayne. Additionally, the jury found Benjamin liable for all damages to Wayne’s vehicle due to Benjamin blocking the roadway. Judgment was signed dismissing Wayne’s suit against Reece and this timely appeal followed. There was no appeal from the judgment for property damages to Wayne’s truck in favor of Wayne against Benjamin, and that issue is not before us.

DISCUSSION

Louisiana is a comparative fault state that allows an injured party to recover that proportion of his injuries not due to his own fault. However, comparative fault does not apply when one “consents” to a battery. The law of consent is well-established in Louisiana. The Louisiana supreme court stated, “Consent may be expressed or implied; if implied, it must be determined on the basis of reasonable appearances.” Cole v. State Dep’t of Pub. Safety & Corr., 01–2123, p. 11 (La.9/4/02), 825 So.2d 1134, 1142. Further, “When a person voluntarily participates in an altercation, he may not recover for the injuries which he incurs, unless force in excess of that necessary is used and its use is not reasonably anticipated.”

Because the jury found, based on the evidence presented, that both parties either expressly or impliedly agreed to fight, the consent of one is not vitiated merely because the other strikes the first blow. The two brothers were intent on fighting and neither deserved to collect damages for the results of the fight.

ZALMA OPINION

It appears clear that these brothers will not join together for Thanksgiving for many years, if at all. They clearly intended their actions, had multiple opportunities to avoid the physical altercation, and refused to avoid fisticuffs. Families should not fight. No one should pummel a person sufficiently to break his occipital bone. This type of intentional conduct should never be covered by an insurance policy and was properly found to be not covered in this situation.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | 1 Comment

Notice of Claim is When the Insurer Receives It

Claims Made and Reported After Premium Finance Cancellation

Claims made and reported policies provide limited coverage by requiring that the claim against the insured must be made and reported to the insurance company before the expiration of the policy. Arguments often follow as to the date when the claim was made. When the notice is late insureds will argue notice was made when the notice is mailed. Insurers, and the Eleventh Circuit conclude notice is made when it is received by the insurer.

In Lake Buena Vista Vacation Resort, L.C. v. Gotham Ins. Co.— Fed.Appx. —-, 2014 WL 7234825 (C.A.11 (Fla.) 12/19/2014) the Eleventh Circuit Court of Appeal was called upon to decide whether an attempt to recover under a professional services liability insurance policy issued by Gotham Insurance Company (“Insurance Company” or “Company”) to Coastal Title Services, Inc. was made before the policy was effectively cancelled.

Coastal worked with Lake Buena Vista Resort, L.C. (“LBV”) in developing a planned luxury resort (San Marco) in Orange County, Florida. Coastal performed a title search, closing, escrow and other professional services for the project. As part of the arrangements among the parties, prospective purchasers of condominium units made escrow deposits which were held by Coastal. Some of the deposits were stolen from the Coastal escrow account, and the San Marco project failed.

THE UNDERLYING SUIT

The Matthews, purchasers of condominium units, filed suit against Coastal, Hatch, and LBV (the underlying suit). LBV filed cross-claims against Coastal and Hatch. With respect to Coastal, LBV alleged in its cross-claim that Coastal (along with Hatch) “intentionally and fraudulently defalcated, converted and/or misappropriated … deposits from [Coastal’s] escrow trust account.” Coastal defaulted in the underlying suit and LBV obtained a large default damage judgment as well as all of Coastal’s property, including any rights Coastal might have to recover under the liability insurance policy issued by Insurance Company (the “Policy”). LBV sued the Insurance Company to recover on the basis of the tortious acts of Coastal (acting through Hatch).

THE POLICY

The Policy provided a type of coverage known as “claims made and reported.” It covered acts, errors and omissions that occurred “[d]uring the Policy Period, and then only if [a] claim is first made against [Coastal] during the Policy Period and is reported to [Insurance Company] in writing during the Policy Period.” The Policy Period was originally scheduled to run from March 1, 2007, to March 1, 2008. Coastal financed the Policy through Premium Assignment Corporation (“PAC”), which paid Insurance Company the entire annual premium in exchange for monthly payments from Coastal. PAC was given a power of attorney to cancel the Policy if it did not receive the monthly payments from Coastal.

Because Coastal did not pay the monthly premiums to PAC, PAC, after due notice to Coastal, sent a “Notice of Cancellation” to the Insurance Company on October 3, 2007. The Notice of Cancellation stated in conspicuous print at the top “Cancellation Date 10/03/2007.” The Notice of Cancellation also stated in its text: “This cancellation is effective one day after the above captioned date, at the hour indicated in the policy as the effective time.” The relevant provision in the Policy indicates that 12:01 a.m. is the effective time.

ISSUE: WHEN WAS POLICY CANCELLED?

The crucial issue for our resolution of this appeal is a determination of the effective date of the foregoing Notice of Cancellation, and whether a claim was made against the insured—Coastal—and also reported to the Insurance Company during the Policy Period and before the effective date of PAC’s Notice of Cancellation.

The only relevant communication to the Insurance Company that might arguably constitute a claim upon which LBV could rely in seeking coverage was a note from Ira Hatch on behalf of Coastal dated October 4, 2007, and received by the Insurance Company on October 10, 2007.

The cancellation provision of the policy provided “A. This Policy may be cancelled by the NAMED INSURED by surrender thereof to the Company or any of its authorized representatives, or by mailing to the Company written notice stating when thereafter cancellation shall be effective. ¶  … ¶ C. The time of the surrender or the effective date and hour of cancellation stated in the notice shall terminate the Policy Period. The mailing of such notice as aforesaid, whether by ordinary mail or by certified mail, shall be sufficient proof of such notice.”

Moreover, the relevant Florida statute § 627.848 expressly provides for cancellation on behalf of the insured by a premium finance company possessing a power of attorney.

Thus, both the Policy itself and the statute expressly provide that Notice of Cancellation can fix the effective date and hour of cancellation, whether the cancellation be by the insured or by a premium finance company with appropriate power of attorney.

LBV argues in the alternative that the effective date of the instant Notice of Cancellation was October 5, 2007, at 12:01 a.m. Then, LBV argues, because Hatch’s note was dated October 4, 2007, the claim was made and reported to the Insurance Company during the Policy Period.

WHEN WAS THE NOTICE GIVEN?

Although the Eleventh Circuit believed that the most plausible construction of the Notice of Cancellation is that it intended October 3, 2007, to be the last day of coverage (and it was so construed by the endorsement issued by the Company pursuant to the Cancellation Notice), the court had no need to so decide. Even if the effective cancellation date were October 5, 2007, at 12:01 a.m., the Eleventh Circuit concluded that the claim (Hatch’s note) was not reported to the Insurance Company until October 10, 2007, when the Company received it.

WAS THERE A WAIVER?

Finally, LBV argues that the Insurance Company has waived the right to assert the defense that Coastal cancelled the Policy before Hatch’s claim was made and reported. LBV points out that the Company’s October 18, 2007, response to Hatch’s note denied coverage on the basis of exclusions for intentional, fraudulent actions, and did not mention a defense that the Policy had been cancelled. LBV argues that the cancellation defense is precluded by common law estoppel and by the Florida Claims Administration Statute (“FCAS”), Fla. Stat. § 627.426.

However, the Florida Supreme Court has held that estoppel may not be used to create or extend coverage, and has held that the FCAS is in the nature of an estoppel and that expiration of a policy or express exclusion of coverage under a policy are not “coverage defenses” to which the statute applies. AIU Ins. Co. v. Block Marina Inv., Inc., 544 So.2d 998 (Fla.1989).

There, the Supreme Court of Florida held that the statute, by its express terms, applies only to a denial of coverage, “based on a particular coverage defense,” and in effect works an estoppel. Term “coverage defense,” as used in § 627.426(2), means a defense to coverage that otherwise exists. The Florida Supreme Court refused to construe the term “coverage defense” to include a disclaimer of liability based on a complete lack of coverage for the loss sustained.

As a result of the cancellation of the Policy in this case, before Hatch’s note was received by the Insurance Company, there was simply a lack of coverage in this case. In light of our decision that there was a complete lack of coverage, we need not address the other issues about which the parties debate.

ZALMA OPINION

Anyone with a professional liability policy that requires a claim be made and reported to the insurer within the policy period should report any claim made against them immediately to the insurer. Had the notice been sent to the insurer by messenger, fax, or e-mail this case might have had a different result and the issue would have been hours rather than several days.  The insurer might have saved some of this litigation and argument had it disclaimed coverage for failure to make claim within the policy period and not just the coverage defenses used. Regardless, the policy expired before the claim was received and the insurer owes nothing.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

ERISA Bars Jury Trial Against Health Insurer

Must Prove Private Limitations of Action Provision

The Employee Retirement Income Security Act (ERISA) was designed to, among other things, limit the remedies available to people enrolled in an ERISA plan to those remedies allowed by the statute. By so doing Congress expected that the insurers would provide insurance benefits for less money.

In  Ibson v. United Healthcare Services, Inc., — F.3d —-, 2014 WL 7181226 (C.A.8 (Iowa) 12/18/14) the Eighth Circuit Court of Appeal was called upon to resolve disputes over an ERISA health plan for a law firm.

FACTS

CeCelia Catherine Ibson and her family were insured by United Healthcare Services, Inc. (UHS) through a policy available to her to as a member of her law firm. Due to an error, UHS began informing Ibson’s medical providers that Ibson and her family no longer had insurance coverage. Although UHS eventually paid the claims it should have paid all along, Ibson initiated suit against UHS raising state law claims of breach of contract, negligence, and bad faith, and seeking punitive damages. UHS responded that Ibson’s claims were preempted by the Employee Retirement Income Security Act (ERISA) and barred by the policy’s three-year contractual limitations period. The district court agreed with UHS and entered summary judgment against Ibson. Ibson appeals, asserting the same arguments presented below.

In 2003, Ibson became a shareholder in the firm. On March 6, 2004, Ibson applied to UHS for health insurance coverage for herself and her family under the law firm’s group health coverage. Each shareholder of the law firm was responsible for his or her own premium payments, however the firm paid 90% of its covered employees’ premiums for single coverage. The law firm remitted payment to the insurance company and distributed information from UHS to the members and employees of the law firm, but performed no other administration relating to the insurance.

From 2006 through 2008, Ibson and her family received extensive medical care for numerous aliments including cancer and a seizure disorder. In January 2008, the doctor treating Ibson’s children notified her that UHS was rejecting the claims the doctor submitted on Ibson’s behalf, saying to the providers that Ibson had “no coverage.”

On April 4, 2008, UHS sent Ibson an e-mail stating: (1) it would change the incorrect social security number UHS had on file for Ibson back to her correct social security number, (2) it would notify the department in charge of recouping monies of the correction and direct them to stop recoupment proceedings, (3) it would run a report for all prior claims that had been subjected to recoupment and reprocess those claims, and (4) it would contact all of Ibson’s medical providers to explain UHS’s error and to promise that Ibson’s claims would be correctly processed. UHS failed to follow through on all of these promises. Even as late as January 2010, Ibson continued to receive notice that her claims were not being processed and UHS continued recoupment actions. The district court noted that UHS’s behavior, “if true, is shocking.”

On September 27, 2012, Ibson brought suit against UHS, alleging state law claims of breach of contract, negligence, and bad faith, and seeking punitive damages. UHS moved to strike Ibson’s jury demand, arguing that her state law claims were preempted under the complete preemption clause of ERISA and, as such, a jury trial was unavailable. While that motion was pending, UHS also moved for summary judgment, arguing Ibson’s claims were barred by a three-year limitations period in the contract. The district court granted the motion to strike and later summary judgment to UHS. In granting summary judgment, the district court held the claims were time-barred under the policy’s three-year contractual limitations period for bringing suit.

ANALYSIS

For coverage under ERISA, a plan must be an “employee benefit plan,” defined as either an “employee pension benefit plan” or an “employee welfare benefit plan.” An “employee welfare benefit plan” is defined as any plan, fund, or program, established or maintained by an employer or an employee organization for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise.  The plan at issue was an “employee benefit plan.”

Certain group or group-type insurance programs offered by an insurer to employees are explicitly exempted from ERISA governance under the safe harbor provision.  Because of the first element—that no contributions be made by the employer—the plan fails to qualify for the safe harbor exemption. It is uncontested that the law firm paid part of the premium costs for the employees of the firm. Thus the plan does not meet all of the elements for exemption under the ERISA safe harbor provision.

Ibson argues that her state-law claims concern UHS’s improper cancellation of her insurance policy and are not related to ERISA or the terms of the policy. This argument ignores the essence of her claim—that UHS should have paid medical benefits under the ERISA-regulated plan and failed to do so—a claim that could be brought under ERISA.

Ibson’s claims are completely preempted by ERISA.

THE SUMMARY JUDGMENT

Under Section 9 of the Policy, which is entitled “General Legal Provisions,” the policy gives two limitations periods for bringing legal actions against UHS. The first limitations period states:

You cannot bring any legal action against us to recover reimbursement until 60 days after you have properly submitted a request for reimbursement as described in (Section 5: How to File a Claim). If you want to bring a legal action against us you must do so within three years from the expiration of the time period in which a request for reimbursement must be submitted or you lose any rights to bring such an action against us.

The second limitations serves as a catch-all provision and provides:
You cannot bring any legal action against us for any other reason unless you first complete all the steps in the complaint process described in (Section 6: Questions, Complaints, Appeals). After completing that process, if you want to bring a legal action against us you must do so within three years of the date we notified you of our final decision on your complaint or you lose any rights to bring such an action against us.

Ibson and UHS were permitted to impose contractual limitations periods, like those found in the However, at oral argument, UHS dropped the majority of its limitations argument. UHS argues that its April 4, 2008 email constituted a “final decision” under the second paragraph, and therefore Ibson had until April 4, 2011, to file her complaint.

UHS now asks this court to find that its April 4, 2008 email to Ibson constituted a final decision for purposes of the second limitations paragraph. The Eighth Circuit found that the record had not been fully developed as to the issue, and declined UHS’s invitation. Further, it noted that the district court found that “Ibson attempted to resolve coverage issues with UHS up until 2010,” suggesting that the district court would not have found UHS’s April 4, 2008 email to be a final decision. In any event, construing the facts in the light most favorable to Ibson, the Eighth Circuit could not say that, as a matter of law, UHS is entitled to summary judgment based on the plain language of the policy limitations period in the insurance contract.

ZALMA OPINION

The April 4, 2008 letter relied upon by the insurer was a final decision to pay all claims and solve all of the problems it had created by poorly handling Ibon’s claims. At no time did the insurer tell Ibson that her claims would not be paid and they were, eventually paid. As the trial court, even ruling in favor of the insurer, said that UHS’s behavior, “if true, is shocking.” This ruling will give the District Court the direction to find that Ms. Ibson is entitled to the damages allowed by ERISA.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Arson-for-Profit Doesn’t Pay

Go Directly to Jail, Do Not Pass Go

Arson is probably the dumbest form of insurance fraud. With modern municipal fire departments arson fires seldom totally destroy the premises, evidence is always left for arson investigators to review, and firefighters and the public are exposed to danger of injury and death and, as a result, judges have little mercy for an arsonist. Arsonists hoping to make a  profit from a fire seldom sit back and accept their punishment when they are convicted.

In State v. Jones, Slip Copy, 2014 WL 6977259 (Iowa App., 12/10/14), the Iowa Court of Appeal was faced with a convicted arsonist who claimed there was insufficient evidence to convict her and that the punishment handed down was too severe.

FACTS

Donna Jones appealed from the judgment and sentence entered following her convictions for second-degree arson and two counts of insurance fraud.

On May 6, 2012, a fire began in a bedroom of Jones’s Davenport home. The fire was contained to the bedroom, though smoke and heat damaged the rest of the house. At the time of the fire, Jones owed approximately $53,338.15 on the home and there was a $17,095.60 judgment lien against it. Although Jones was nine months behind on her house payments and owed the IRS approximately $4000, she was current on her homeowner’s insurance policy payments to Allied Nationwide Insurance (Allied).

On the day of the fire, Jones attempted to drop off her step-grandson, who lived with her, at a bowling alley. After learning the bowling alley was closed, Jones dropped him off at her daughter’s house. She claimed to have soiled her clothes on her way home and changed them when she returned. She told investigators she put the clothes in the laundry and lit a candle in the bedroom to cover the odor. Jones then left the house without extinguishing the candle taking her dog with her.

While at a retail establishment Jones received multiple calls from her neighbor, who was attempting to inform her of the fire. Jones did not answer her phone initially. Surveillance video shows she left the store two minutes after receiving the call her house was on fire. Jones appeared to be wearing the same clothes during a visit to the store earlier that day, even though she claimed to have changed between visits.

During his investigation, Davenport Fire Department Lieutenant Robb Macdougall observed a partially-melted candle on the floor on the right side of the bed. Items near the candle were not burned. However, the top of the bed was extensively damaged, and the posts above the bed were also damaged. Based on his observations, Lieutenant Macdougall determined the fire began in the northwest corner of the bedroom. He was unable to determine a cause but ruled out the possibility of an electrical fire or an accelerant fire.

Chief Fire Marshall Mike Hayman also investigated the fire. Based on the burn patterns, mattress damage, and charring, he determined the fire began on top of the mattress on the northwest corner of the bed. Chief Hayman ruled out the candle as the source of the fire because it was found almost fully intact and the dresser near it had limited damage. Chief Hayman determined the fire was intentionally set.

Allied hired Terry Brown, a fire investigator, to determine the cause of the fire. Brown also determined the fire originated on the northwest corner of the bed given the charring patterns on the bedposts. He also found charring underneath the candle found on the opposite side of the bed, which indicated the candle was not on the floor when the fire began. Because the melting temperature of carpet is well above the melting temperature of the candle, Brown concluded it would have been “scientifically impossible” for the candle to have burned the floor underneath it.Had the fire originated with the candle, Brown would not have expected to find any of the candle remaining.

Brown also determined two smoke detectors in the home had working batteries that were disconnected at the time of the fire. He concluded the fire was set intentionally when “an open flame ignition device” was used to ignite the bed. A butane lighter was found on the nightstand next to the bed.

In the days following the fire, Jones rented a house and submitted paperwork to Allied to be reimbursed for the rent and security deposit on the house. However, she never lived in the house. Instead, Jones lived in an RV.

Following a jury trial, Jones was found guilty on all three counts. She was sentenced to an indeterminate term for no more than ten years in prison and fined $1000 on the arson charge. She was sentenced to indeterminate terms for no more than five years in prison and fined $750 on each of the insurance fraud charges. The sentences were ordered to run concurrently.

SUFFICIENCY OF THE EVIDENCE

Jones first contends there is insufficient evidence to establish she committed arson. Because she argues she did not commit arson, Jones also contends the evidence is insufficient to show she committed fraud by submitting to Allied a sworn statement that swears she did not cause the loss by an act, design, or procurement.

Substantial evidence revealed that the fire was intentionally set. Both Chief Hayman and Brown reached the same conclusion: the fire was intentionally set and began in the northwest corner of the bedroom, rather than on the floor on the opposite side of the bed where the candle was found.

There is also substantial evidence to indicate Jones caused the fire. Jones made sure the house was empty on the day of the fire, taking her step-grandson to her daughter’s house earlier in the day and bringing her dog to the grocery store with her. Jones was the last person in the home before the fire began and left shortly before the fire was discovered. Her financial difficulties provide a motive for the fire.

In sentencing Jones, the court noted the pre-sentence investigation report recommended probation. It then stated, “The problem the Court has is, these were deliberate bad acts that put other people at risk.” The court went on to generally discuss the dangers involved in setting fires and defrauding insurance companies. It then addressed Jones’s specific situation, noting her financial situation, and opined that she committed the arson as “an easy way out to solve it” even though it put lives in danger. The court found “that prison is the most appropriate sentence here because of the dangerousness of what your deliberate bad act was.”

The Court of Appeal agreed these statements indicate the court placed considerable emphasis on the serious nature of the crimes.

However, other statements show the court considered other factors in sentencing Jones. After sentencing, the court added, “I don’t see you as a good person that’s likely to change,” opining that Jones blamed others for her problems and “that isn’t the best frame of mind to rehabilitate.” It added that in addition to sending the community a message that serious consequences will be given to those who set houses on fire, the prison sentence was also intended to put Jones in a frame of mind to rehabilitate.

Because all of the court’s statements indicate it considered multiple factors in determining the appropriate sentence, we find no abuse of discretion.

ZALMA OPINION

Insurance fraud is a serious crime and a felony in most states. Arson is more serious and akin to attempted murder. The sentence Jones received was appropriate and could have been longer. Jones left behind every red flag indicator of an arson-for-profit: (1) Financial difficulties and far behind on mortgage payments, but insurance premiums paid in full; (2) she removed child and dog from the home; (3) she defrauded insurer by claiming she rented a replacement dwelling but, instead, lived in an RV.  Although the insurer did not have to pay Jones her conviction would have no effect on the claim of her mortgagee.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Biased Judge Disqualified

Judges Ought to be More Learned Than Witty

It has long been said in the courts of this state that “every litigant is entitled to nothing less than the cold neutrality of an impartial judge.”   State ex rel. Davis v. Parks, 194 So. 613, 615 (Fla.1939). Insurance defense lawyers often believe that judges and juries are biased against them Usually the assumption of bias is wrong. However, on occasion,  a judge is truly biased and needs to be disqualified.

In Great American Ins. Co. of New York v. 2000 Island Blvd. Condominium Ass’n, Inc., — So.3d —-, 2014 WL 7156894 (Fla.App. 3 Dist., 12/17/14) the Florida Court of Appeal was faced with a trial judge  who abandoned his post as a neutral overseer of the dispute between the parties and was called upon to deal with Great American Insurance Company’s Petition for a Writ of Prohibition.

FACTS

This case arises out of an insurance coverage dispute between 2000 Island Boulevard Condominium Association, Inc. and Great American Insurance Company of New York over whether a policy issued by Great American affords the Association coverage for falling concrete and slab deflection, alleged to have occurred in the condominium parking garage. The Association sued and the case was assigned to Miami–Dade Circuit Court Judge David C. Miller. Great American filed its Answer and Affirmative Defenses. The affirmative defenses raised various exclusions and conditions contained in the insurance policy, including that Great American was unable to finalize its coverage position because the Association had failed to provide documents and refused to appear for an examination under oath.

Operating on an “expedited” case management schedule, the trial court struck Great American’s legal defenses three weeks later as “legally invalid.” The remarks upon which Great American relies in support of disqualification of the trial judge were made at the hearing, and at a hearing held one week earlier on Great American’s motion for a protective order to limit discovery of its pre-litigation, engineering consultant.

At the time of these hearings no discovery of any kind had been performed.

THE COURT’S COMMENTS

THE COURT: Well, it doesn’t feel like we’re in an abandonment situation. We’ve got a lawsuit filed. We’ve got an insurance company that’s not paying a claim. We’ve got them basing that decision, in part, upon this expert that went out there, and I imagine he was maybe perhaps even involved in putting together the list of things they still needed. You said you would give them a report when they got all of that information to you. It strains all credulity for me to believe that your carrier has not denied coverage based on the information they know now.
        
[DEFENSE COUNSEL]: But they have not.        

THE COURT: Then fork over the money. (Emphasis added.)

The court of appeal opined that this startling remark, in and of itself, is sufficient to compel disqualification. Whether Great American is required to “fork over the money” is the entirety of what is at issue in this case. While a trial judge may form mental impressions and opinions during the course of the case, the judge is not permitted to pre-judge the case.

Anexchange took place after Great American’s counsel stated that Great American did not have an opportunity to complete its investigation before the Association filed suit. Regardless of whether the court believed or disbelieved this statement, it had an obligation to remain impartial. Yet, bias was again displayed in the following exchange:

THE COURT: You can’t read the June 26, 2012 letter without saying this is a denial letter. “We’re not sure,” you can “we’re not sure” until the cows come home. And, in fact, you won’t be sure until the jury speaks, and then you won’t be sure until the Appellate Court rules, and then you won’t be sure until the Supreme Court rules after that. Then even if they rule against you, you won’t be sure that they’re right. You’ll claim that they’re wrong. That’s just the nature of litigation. That’s how it works.

Listen, if it were—if I were being asked, I would sanction you for making a specious argument that this person shouldn’t be deposed and opinions fully addressed. You’ve taken a position, you’re involved in litigation, you’ve denied coverage, you’ve stated and specified things. It’s doggone concrete spalling, up or down. This is not rocket science. This is something that construction’s been dealing with for many, many, many years. Ever since they put a piece of steel inside concrete they’ve been having these issues. It’s not a big deal….

In addition to the trial judge’s palpable distrust of Great American’s willingness to render a coverage determination, the court here goes a step further by expressing a contemptuous view of Great American (or its counsel’s) willingness to accept judicial pronouncements.

The Court casually states, “That’s just the nature of litigation. That’s how it works.” A court of law should not be in the business of casting aspersions on the ability of a party or its counsel to accept the wisdom of this state’s appellate courts and make unsubstantiated predictions of how that party will process those decisions.

The court then went further still in offering legal advice to the plaintiff by stating “If it were me, I would still ask questions of an opinion nature and get the statements regarding privilege on the record.” Such legal advice, standing alone, is sufficient to compel disqualification. disqualification.”).

At the October 22 hearing, the court continued improperly to make unsupported factual findings based upon a barren record. For example, the court made statement that “we all know that the spalling is caused by moisture getting into the rebar and the rebar rusting and expanding and cracking the concrete off.”

Regrettably, these statements, which sound more like they are coming from a party who is arguing the case rather than from a judge who has not taken a single piece of evidence, lend further credence to Great American’s belief that this court has pre-judged the facts of this case, is injecting his personal opinions on causation into the case, and has a bias in favor of the plaintiff.

Finally, at the October 22 hearing, the court again took up the issue of whether a June 26, 2012, letter sent by Great American was (as Great American contends) a reservation of rights letter or (as plaintiff contends) a denial letter.

On this issue, the court stated, “I think it’s a denial. I mean, the absence of anything else—well, it’s an unkept promise of a denial after explaining why it’s not giving coverage. How is that for fancy talk for we’re not paying you. To me, it’s the same thing, we’re not giving you money.” The “fancy talk” comment is yet another display of the court’s animosity towards Great American or its counsel. But this comment reasonably also may be interpreted as something even more problematic—a suggestion that Great American was somehow being deceptive by using “fancy talk” to disguise a “denial letter” as a “reservation of rights letter.”

ANALYSIS

The question of disqualification focuses not on what the judge intended, even if a poor attempt at wit, but rather how the message is received and the basis of the feeling. In the words of the sixteenth century statesman and jurist, Sir Francis Bacon (1561–1626):

Judges ought to be more learned than witty; more reverend (sic) than plausible; and more advised than confident. * * * Patience and gravity of hearing is an essential part of justice; and an overspeaking judge is no well tuned cymbal. “Of Judicature,” Francis Bacon Essays, pub. by J.M. Dent & Sons, 1958, Essay LVI, pp. 162, 163.

A judge who is not fair and impartial, who rules without evidence based solely upon plaintiff’s pleadings and his own prejudice violates exactly what what he was appointed to do. Great American should be commended for bringing this abuse of judicial discretion to the appellate court and the appellate court should be commended for disqualifying a judge who was obviously prejudiced and prejudged the case without evidence.

ZALMA OPINION

Although a biased judge is rare insurers must recognize that, like George Orwell’s Animal Farm although all litigants are equal in the courts of the United States some, when faced with a biased judge, are more equal than others. Insurers, when faced with such a difficulty should emulate Great American and file a writ to remove the biased judge.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Insurance Lawyer Expert Striken

Legal Issues Not Proper Expert Testimony

A plaintiff seeking to use an insurance coverage lawyer as an expert to convince a jury that an insurer was responsible for breaching the tort of bad faith, must be careful in the choice of lawyer and the testimony the lawyer will be asked to provide the jury. A lawyer with no claims handling experience will be disfavored as will be a lawyer who insists on testifying about matters of law. In Corinth Investor Holdings, LLC v. Evanston Insurance Company, Not Reported in F.Supp.3d, 2014 WL 7146040 (E.D.Tex., 12/15/14) the District Court for the Eastern District of Texas was faced with a motion to strike the report and proposed testimony of a lawyer/expert.

FACTS

A motion to strike arose out of an underlying medical malpractice lawsuit filed under the terms of an insurance policy issued to Plaintiff Atrium Medical Center (“Atrium”) by Homeland Insurance Company (“HIC”). A lawsuit was filed against Atrium which asserted professional liability claims against Atrium (the “Garrison litigation” or the “underlying litigation”). The Garrisons assert that Mr. Garrison suffered injuries and now faces terminal illness due to the failure of his primary physician to advise him of the results of a CT scan performed at Atrium that revealed a stage I mediastinal mass located in his thymic gland. Atrium was served with notice of this lawsuit. Atrium notified HIC of the lawsuit, and requested that HIC defend it pursuant to the Policy.

HIC denied coverage asserting that the claim was not “first made” against Atrium during the HIC policy period and was excluded by the Policy’s prior knowledge exclusion. Plaintiff alleged Defendant has a duty to defend and indemnify Plaintiff under the policy, and Defendant’s denial of coverage constitutes common law bad faith and violates provisions in the Texas Insurance Code.

Defendant designated Michael W. Huddleston (“Huddleston”), an attorney with experience in insurance law, as an expert witness.

LEGAL STANDARD

Federal Rule of Evidence 702 provides for the admission of expert testimony that assists the trier of fact to understand the evidence or to determine a fact in the issue. In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 590–93 (1993) the Supreme Court instructed courts to function as gatekeepers and determine whether expert testimony should be presented to the jury. Courts act as gatekeepers of expert testimony “to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999).

The party offering the expert’s testimony has the burden to prove by a preponderance of the evidence that: (1) the expert is qualified; (2) the testimony is relevant to an issue in the case; and (3) the testimony is reliable. A proffered expert witness is qualified to testify by virtue of his or her knowledge, skill, experience, training, or education. Moreover, in order to be admissible, expert testimony must be not only relevant, but reliable.
In deciding whether to admit or exclude expert testimony, the Court should consider numerous factors. The decision to allow or exclude experts from testifying under Daubert is committed to the sound discretion of the district court.

ANALYSIS

Plaintiff moves to strike the testimony and report of Huddleston under Rules 702 and 403 of the Federal Rules of Evidence. Plaintiff asserts that Huddleston’s opinions are inadmissible conclusions of law that invade the province of both the Court and the jury.

The Federal Rules of Evidence allow an expert to assert opinions that embrace an ultimate issue to be decided by the trier of fact. Of course, an expert witness may not offer opinions that amount to legal conclusions. The Fifth Circuit has held that while experts may give their opinions on ultimate issues, our legal system reserves to the trial judge the role of deciding the law for the benefit of the jury. Allowing attorneys to testify to matters of law would be harmful to the jury. The jury would be very susceptible to adopting the expert’s conclusion rather making its own decision. There is a certain mystique about the word “expert” and once the jury hears of the attorney’s experience and expertise, it might think the witness even more reliable than the judge.

Plaintiff does not contest Huddleston’s expert qualifications, but argues that his testimony must be excluded at trial because “he intends to give several legal opinions regarding how this case ultimately should be determined. These opinions are impermissible because Mr. Huddleston is simply purporting to usurp the roles of the trial judge and jury” Plaintiff points to numerous examples within Huddleston’s report that supports its argument that Huddleston’s opinions are impermissible legal opinions.

Atrium asserts common law and statutory bad faith claims against HIC. Lawyers may testify as to legal matters when those matters involve questions of fact. After considering the expert report of Huddleston, the Court found that his report invades on the province of both the Court, in instructing the jury on the applicable law, and the jury in determining the facts to be applied to the law. To the extent Huddleston purports to offer expert testimony regarding customs and practices in the insurance industry, the Court finds that his expert report does not do that.

Huddleston is an experience insurance coverage attorney and advocate, and is not a claims adjuster or former claims adjuster. His report is clearly legally-based, and his opinions are not formed from his experiences in the insurance industry, but are formed from a legal analysis of his opinion of the applicable law. Section V, subsection B of Huddleston’s report contains an entire analysis of Texas law, the eight corners rule, and a legal assessment of the arguments of the parties (even discussing the merits of the objections made to the report and recommendation). This section improperly invades the province of the Court. Section V, subsection C of Huddleston’s report goes on to address the issue of reasonableness, first discussing the conflict in the law that pertains to the legal issues in this case, then discussing the reasonableness of the actions taken by HIC with numerous citations to case law. Huddleston goes on to discuss extrinsic evidence, determining that it is permissible to use extrinsic evidence in this case. Huddleston then applies the facts to the law and concludes that HIC’s actions were reasonable. This improperly invades the province of both the Court and the jury. Section V, subsection D is a pure legal conclusion, as Huddleston admits that it is for the Court to determine whether the duty of good faith applies in this setting. Section V, subsection E reads like a legal brief which analyzes the elements of the statutory claims and provides a legal definition of “knowingly.” Simply put, Huddleston’s report contains the legal arguments and analysis that the Court would expect the attorneys for HIC to make regarding the applicable law and the relevant facts that should apply in this case.

The Court agreed that whether an insurer acted reasonably is to be judged by the standards of the insurance industry, not by an attorney offering a legal opinion based on his interpretation of case law.

Plaintiff’s motion to strike the expert report of Huddleston was granted. The Court foud that Section V, subsection A, footnotes one and two should be stricken, along with subsections B, C, D, and E, in their entirety. After those portions are stricken, there is nothing remaining in Huddleston’s report that would assist the finder of fact in understanding the evidence or determining an issue of fact. Therefore, the Court found that Huddleston’s report should be stricken in its entirety.

ZALMA OPINION

In California Shoppers v. Royal, 175 Cal.App.3d 1, 221 Cal. Rptr. 171(1985) the California Court of Appeal, much like the Texas District Court, found that an attorney expert, in no sense was qualified as an expert to testify about the subject on which he purported to testify. There is no question both on the record and as a matter of repute at the bar, but that he is a highly qualified trial attorney, and a particularly aggressive advocate of plaintiffs’ cases against insurance companies. However, no foundation whatsoever was laid to demonstrate that the expert had any special knowledge, skill, experience, training or education such as would qualify him as an expert on insurance company practices. In Texas and California, at least, before an expert can testify about insurance matters the expert must have special knowledge, skill, experience, training or education that qualifies the witness as an expert on insurance company practices. It is why, when I testify, I testify about the custom and practice of the industry, not legal conclusions or application of law.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

A Christmas Story of Fraud

The Sleaze

This year I inadvertently failed to place this story in Zalma’s Insurance Fraud Letter. It is one of more than 80 stories in my e-book, “Heads I Win, Tails You Lose” and is an expression of how insurance fraud perpetrators will even use the Christmas season to profit from fraud. I hope you enjoy it since it is fiction based upon a true story. The entire e-book is available at http://www.zalma.com/zalmabooks.htm.

The Sleaze learned the safe way to steal in prison. A Superior Court Judge sentenced him to two years in state prison for forging his mother’s will. His cell mate, an armed robber bragged about his successful brother. The brother had found a new career claiming the theft of small pieces of jewelry on homeowners’ policies. Insurance companies always paid, whether he owned the jewelry or not, rather than fight. His cell mate explained how prosecutors had no interest in this type of crime. Insurance companies, fearing punitive damages verdicts would pay even when they were sure the claim was fraudulent.

The Sleaze vowed that when he got out of prison he would pursue this safe form of crime.

The Sleaze was a man of his word. Immediately after leaving prison he bought a tenant’s homeowners policy. He asked for, and received without question, a $10,000 jewelry extension from the company. His limit of liability, instead of the standard $1,000, was $10,000.

Within a month of buying the policy, he reported the probable theft of a $10,000 ring. He told the adjuster that he was at the Beverly Wilshire Hotel meeting with a business associate. He removed his ring to wash his hands in the men’s room. He forgot to replace his ring, returned to his lunch and realized the ring was missing about the time he finished lunch. He immediately went back to the restroom, but found the ring missing. He reported the possible theft to the men’s room attendant and to the hotel security office. He told the adjuster that the ring was a family heirloom given to him by his father a week before he died. He had no appraisals or receipts. He had nothing in writing that proved he owned the ring. He had no photographs showing him wearing the ring. He was willing, however, to swear that he owned the ring and that it was probably stolen from the restroom at the Beverly Wilshire Hotel.

The insured, having read up on jewelry, described the ring to the adjuster in detail. He told the adjuster that it was a rather heavy ring. It was  made of eighteen carat gold set with a four-carat center diamond. On each side were two baguette diamonds totaling .5 carats. He did not know the gemological grade of the diamond nor its color. He admitted the center diamond was not a perfect stone. It had a slight yellowish tinge to it. He could see no flaws in the diamond with his naked eye.

The adjuster verified the Sleaze’s story by interviewing the hotel men’s room attendant and the security officer. Both agreed that the insured reported the loss of a ring to them. Neither recall seeing the Sleaze wearing the ring before he reported the loss. He was not a regular guest of the hotel and they had never seen him before or since he reported the loss.

The jeweler evaluated the description of the Sleaze. He told the adjuster that it was probably a Gemological Institute of America J or I color. He could not replace it for less than $3,500 per carat. Adding to the cost of the diamond the cost of the four baguettes and the eighteen carat gold, the jeweler did not believe he could replace the Sleaze’s ring for less than the policy limits.
The adjuster, faced with a sworn proof of loss and no evidence that the Sleaze was lying, paid the policy limits and closed his file.

The Sleaze was pleased. The work was easy. The efforts required were minimal. On a $300 investment in premium he had made, in less than two months, $10,000. More money than any annual salary he received before he went to prison.

He invested a small portion of his profits into a new policy with a different insurer and in less than a year collected $75,000 in claim payments.
The Sleaze did not know there was an organization known as the ISO All Claims Data Base that included the records of the Property Insurance Loss Registry (PILR) and the National Insurance Crime Bureau (NICB). Although all property insurers are not members, many are members. Each member records in the registry all property losses presented to them.

After a year of successful insurance fraud the Sleaze tried his trick on a company that was a member of the Property Insurance Loss Registry (PILR). When they entered the Sleaze into their system, they found recorded in PILR five of his last nine insurance claims. They contacted each insurer and found that two of them had paid claims on property that appeared the same as that claimed by the Sleaze. One, which did not have similar property, had the same loss situation. The Sleaze had told his present insurer that his scheduled diamond earrings had been accidentally thrown out with the Christmas trash. He had told his prior insurer that a scheduled diamond necklace had been accidentally entangled in wrapping paper and thrown out with the wrapping paper for his wife’s birthday. The coincidences were too great to ignore. The insurance company retained counsel to examine the Sleaze under oath.

He appeared for the examination under oath confident in his skill and power. He testified clearly and held nothing back. He admitted the previous losses. He admitted his criminal record. He denied that the claim was fraudulent. He challenged the insurance company to deny his claim. He informed them that he had heard of the tort of bad faith and he was looking forward to pursuing them if they refused to pay his claim. The insurance company, undaunted, denied the claim. It informed the Sleaze the reason for the denial was the claim was made with knowledge that it was false and fraudulent. The insurer also rescinded the policy of insurance because the insured had failed to reveal on his application the prior losses and several prior cancellations.

The Sleaze filed suit in propria persona (acting as his own lawyer) for the value of the earrings and for punitive damages because of the bad faith of the insurer in not paying his claim.

The Sleaze pursued his lawsuit vigorously. The Board of Directors of the insurer had laid down a specific policy to never pay a fraudulent claim. The company had committed its assets to spend as much as necessary to defeat fraudulent claims. It would do so even if the cost of defense exceeded the value of the property that was the subject of the claim. They also committed to aggressively, and legally, attack the insureds who presented fraudulent claims through the courts.

Therefore, after the complaint was served, the insurance company not only answered the allegations made by the plaintiff, but cross-complained for fraud and breach of the covenant of good faith and fair dealing. The insurer demanded damages, including punitive damages, from the Sleaze. Based upon the evidence already gained at the examination under oath, the insurer filed a motion for summary judgment seeking judgment by the court that they owed nothing to the Sleaze on his complaint. The motion also sought judgment for $20,000 in attorneys’ fees and investigation costs incurred as a result of the fraudulent claim. Finally, the insurer asked for punitive and exemplary damages to deter future fraud.

The court granted the motion for summary judgment and awarded the insurance company $20,000 in compensatory damages and $50,000 in  punitive damages. The Sleaze was incensed. He filed a notice of appeal. He also went to the courthouse and ordered a copy of the original file from the clerk. The clerk, as is their practice with such public records, handed the entire court file to the Sleaze. The Sleaze removed the judgment from the file and, using a public typewriter in the courthouse building, typed the words at the bottom of the judgment “Judgment stayed pending appeal.” He then returned the judgment, as he had amended it, to the court file and purchased a certified copy of the now amended judgment. He served this copy on counsel for the insurance company to stop them from executing on the judgment.
Counsel for the insurance company, shocked at the stay without a bond being required, contacted the clerk. The clerk informed him that before any document being filed in the court’s file, it was first microfilmed. At counsel’s request, the microfilm was pulled and a print of the microfilm copy of the judgment was made. The microfilm copy, of course, did not have the stay language on it.

Three weeks later, in open court, a motion was heard to correct the court’s record. The motion was granted and the court referred the Sleaze to the District Attorney for prosecution for tampering with the court file. He was never prosecuted. However, while the Sleaze and counsel for the insurance company argued the motion before the court, the Los Angeles County Marshal served a writ of execution on the Sleaze’s brand new car to satisfy the judgment. The Marshal notified the Sleaze that the car was taken in open court.

The Sleaze was furious. He threatened physical harm to the attorney for the insurance company. Counsel was concerned by the threat. She knew the Sleaze’s first criminal conviction was for the violent act of raping a girl scout cookie salesperson who made the mistake of attempting to sell her cookies at his door.

At all future court appearances counsel was accompanied by a bodyguard.
The Sleaze would not let the matter rest. He filed suit in Superior Court naming counsel and the insurance company for fraud in the taking of his automobile. The insurance company had to retain new counsel to defend its attorney and itself to this new lawsuit. When that was unsuccessful, the Sleaze filed small claims court actions alleging fraud and hoping that the insurer or its attorney would fail to appear. When counsel appeared at the small claims court action, the Sleaze, who was present, faked an illness and begged for a continuance. When this was unsuccessful, judgment was entered on the small claims court action for the insurance company.

On the surface, the Sleaze was unsuccessful in his fraudulent claims against the insurance company. He was successful in committing fraud. He was successful in raising the reasonable costs of defending fraudulent insurance claims beyond logic. His only mistake was getting angry and filing suit acting as his own lawyer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Failure of Contract to Provide Indemnity

Rights of Third Party Beneficiary Limited to Terms of Contract

Whenever a party to a contract wants indemnity from the other party(ies) to the contract it usually will demand such indemnity in writing from each of the other parties to the contract and not rely on others to protect it. It can still receive indemnity as a third party beneficiary but only to the rights given. When a person relies on rights as a third party beneficiary to a contract where he is not a party, he leaves himself at the mercy of the parties making the contract.

This appeal is taken from the trial court’s granting of a motion for summary judgment in favor of Universal Maritime Service Corporation (UMS), and dismissing the third party claims of the Board of Commissioners for the Port of New Orleans (Board). The Louisiana Court of Appeal was asked to overturn the trial court’s decision in Charles v. Gervais, — So.3d —-, 2014 WL 6982471 (La.App. 4 Cir.), 2014-0447 (La.App. 4 Cir. 12/10/14).

The appeal relates to the Board’s claims against UMS for defense, indemnity and insurance coverage pursuant to a clause in the license agreement between UMS and Ceres. UMS sought and was granted summary judgment on the claims asserted by the Board and an appeal followed.

On appeal, the Board argues that the trial court erred in granting summary judgment and by failing to find that the Ceres/UMS license agreement created a stipulation pour autrui (a stipulation in a contract of a benefit for a third person, called a third party beneficiary) requiring UMS to defend and indemnify the Board.

FACTS

The Board owns the Nashville Avenue terminal and leases it to Ceres Gulf, Inc. (Ceres). UMS is allowed access to the terminal pursuant to a license agreement with Ceres. This lawsuit arises from an accident which occurred at the Nashville Avenue terminal. Louis Charles alleges that he was injured during a vehicular accident while working for UMS, and operating a vehicle owned by Ceres. The vehicle he was operating was struck by a vehicle operated by Jason Gervais. At the time of the accident, Mr. Gervais was acting in the course and scope of his employment with the Board.

Mr. Charles filed suit naming Mr. Gervais, the Board, and their insurer as defendants. Later, the Board filed several third-party demands against various parties.

ANALYSIS

Louisiana law is clear, third parties can benefit from contracts for which they were not in privity.  This is considered a stipulation pour autrui.  However, there is no presumption in favor of a stipulation pour autrui. The intent of the party to create the stipulation in favor of a third party must be manifestly clear.  Further, establishing the existence of a stipulation pour artrui rests with the party demanding performance.

In Joseph v. Hosp. Serv. Dist. No. 2 of Parish of St. Mary, 05–2364, pp. 8–9 (La.10/15/06), 939 So.2d 1206, 1212, the Louisiana Supreme Court concisely set forth the requirements of a valid stipulation pour autrui:

(1)   the stipulation for a third party is manifestly clear;

(2)   there is certainty as to the benefit provided the third party; and

(3)   the benefit is not a mere incident of the contract between the promisor and the promisee.

Joseph also stated that “[e]ach contract must be evaluated on its own terms and conditions in order to determine if the contract stipulates a benefit for a third person.”

The Board contends that it is owed a defense and indemnification due to the stipulation pour autrui created by the following language within the license agreement: “UMS shall at all times relieve, indemnify, protect, defend and hold harmless Ceres and the Board … from and against any and all claims … caused, directly or indirectly, by (a) the use and operations of the Equipment by UMS, (b) the use or occupation of the Terminal by UMS, (c) the conduct of stevedore operations by UMS on or about the Terminal, (d) any act, omission or negligence of UMS or any UMS Related Person and/or (e) any failure by UMS or any UMS Related Person to comply with any application federal, state, regional, or municipal law, ordinance, rule or regulation, or any operating rules and restrictions …”

The Court of Appeal agreed with the Board that the language creates a contractual indemnity clause that stipulates a benefit to the Board, or a stipulation pour autrui. The clause clearly meets the criteria. First, the stipulation is clearly in favor of the Board in a contract for the Board is not in privity since it neither made nor signed the contract. Secondly, the benefit provided is clear, the Board will be defended, indemnified, and held harmless for actions by UMS that result in damages. Lastly, the benefit is not incidental to the contract, but expressly created within the license agreement to protect the Board from actions by UMS in its performance under the contract.

The Board maintains that the obligation extends to acts of the Board’s own negligence. As the party demanding performance of this obligation, the Board bears the burden of proving the existence of this obligation.

Here, the language of the agreement is clear and unambiguous. In such a situation a Court should not seek to interpret that language in a broader manner than was intended.  Furthermore, the Louisiana Supreme Court in Polozola v. Garlock, 343 So.2d 1000, 1003 (La.1977), specifically addressed this issue. In Polozola, the language in the indemnity clause was unequivocal and provided that National Union would indemnify Dow whether cause by Dow’s negligence or otherwise.

As the Polozola Court stated: “A contract of indemnity whereby the indemnitee is indemnified against the consequences of his own negligence is strictly construed, and such a contract will not be construed to indemnify an indemnitee against losses resulting to him through his own negligent act, unless such an intention was expressed in unequivocal terms.”

In this case, the indemnity clause simply does not provide, in unequivocal terms, indemnity for damages caused by the Board’s own negligence.

ZALMA OPINION

A person seeking indemnity must have a contract that clearly and without any ambiguity provides for such indemnity. In this case the contract, although apparently made for the benefit of the putative indemnitee – the Board – failed to provide, in unequivocal terms, indemnity for damages caused by the putative indemnitee’s own negligence. As a result the putative indemnitee also lost the right to the insurance coverage it sought.

This could have been cured by causing simple language to be added to the contract agreeing to indemnify the Board against its own negligence except when its negligence is it’s the sole negligence involved in the accident. It could also have required that it be made an additional insured on its policy. Since the Board was not a party to the contract its reliance on others to protect it was not well founded.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

You Only Get What You Pay For

Special Assault & Battery Exclusion Applies

Insurance, as I have said often, is nothing more than a contract where a liability insurer – for example – promises to defend and indemnify the insured against certain identified risks of loss in exchange for the insured’s promise to pay premium and comply with the conditions of the policy. In Century Sur. Co. v. Spurgetis, — Fed.Appx. —-, 2014 WL 6985627 (C.A.9 (Wash.) 12/11/14) the insurer promised to defend and indemnity James Spurgetis (Spurgetis) against certain risks of loss and excluded assault and battery. The insurer, Century Surety (Century) allowed Spurgetis to buy back the exclusion but only for a limit of $250,000, not the full $1 million limit.

FACTS

James Spurgetis, as Guardian for the estate of Gary Dvojack (Dvojack), appealed the district court’s summary judgment grant in favor of Century in this insurance coverage dispute.
The district court concluded that Century’s assault and battery $250,000 policy limit applied rather than the general $1 million bodily injury coverage.

Dvojack’s state court complaint alleges an assault and battery by Abbott, and the plain language of the general liability policy excludes coverage for any injury arising out of or resulting from any “actual, threatened or alleged assault or battery” anywhere in the chain of events, including any negligent employment, supervision or training of any person in connection with such actual, threatened or alleged assault and battery.

ANALYSIS

This is a coverage case, not a duty to defend case. Century properly agreed to defend the lawsuit under a reservation of rights, made a settlement offer based on what it reasonably believed to be the applicable policy limit, and then sought a declaratory judgment to determine the actual policy limit.

ZALMA OPINION

Much to the chagrin of plaintiffs’ lawyers insurance is a contract that, if clear and unambiguous, must be enforced. The policy had a special limit of liability for actions related to an assault or battery. That special limit was agreed to by the insured who paid extra premium to eliminate the assault and battery exclusion. The insured bought back the exclusion but only for one quarter of the available limit. It might have been able to buy back more but did not do so. An insured who agrees to a coverage should not be able to challenge that which it agreed to when the policy was acquired. The Ninth Circuit, in a brief opinion, got this decision right.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter — December 15, 2014

Merry Christmas & Happy Chanukah

In the 24th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on December 15, 2014, continues the effort to reduce the effect of insurance fraud around the world while wishing all its readers a Merry Christmas and a Happy Chanukah. The issue establishes that, regardless of some success, the efforts to defeat fraud must be increased.

The current issue of ZIFL reports on:

1.        The Three Major Types of Insurance Fraud
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.        Fraud Decision
4.        Allstate Sues Fraudster
5.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.      The Eight Corners Rule Defeats Right to Defense – December 12, 2014
2.      Insurance Fraud – December 11, 2014
3.      A Dam Case – December 10, 2014
4.      Doubt About Exclusion Requires Coverage  – December 9, 2014
5.      What is Liability Insurance? – December 8, 2014
6.      Business Risks Never Insurable – December 8, 2014
7.      The Claims Interview  – December 5, 2014
8.      Resident Relative Must Abide in House – December 4, 2014
9.      Fishing Expedition Prohibited in Texas – December 4, 2014
10.    Indemnity & Insurance – Who Goes First – December 3, 2014
11.     Inadequate Adjusting Expensive – December 2, 2014
12.     Fraud Struggle Continues – December 1, 2014
13.     Failure to Promptly Rescind – November 28, 2014
14.     Thanksgiving – November 26, 2014
15.     Lie To Your Insurer – Lose All Coverage – November 25, 2014
16.     Mold Damage Requires Proof – November 25, 2014
17.     Illusory Policy Disfavored – November 23, 2014
18.     Equitable Fraud Supports Rescission – November 21, 2014
19.    Agent’s Obligations Limited – November 20, 2014
20.    Insurer’s Language Used Against It – November 19, 2014

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Infrared Detection of Mold

An Excerpt from the

Mold Coverage Guide

Experts can bring infrared technology to the examination of the property to allow the inspector to see where water leaks not visible to the naked eye exist.

Infrared Thermography (IT) is a technique that detects infrared energy, converts it to temperature and produces an image showing temperature distribution.

The most typical type of thermography camera resembles a typical camcorder and produces a live TV picture of heat radiation. More sophisticated cameras can actually measure the temperatures of any object or surface in the image and produce false color images that make interpretation of thermal patterns easier. An image produced by an infrared camera is called a thermogram or a thermograph.

To understand IT as a tool it is necessary to understand how it works. Thermal or infrared energy is light that is not visible to humans because its wavelength is too long to be detected by the human eye. Infrared energy (IR) is the part of the electromagnetic spectrum that we perceive as heat. Unlike visible light, in the infrared world, everything with a temperature above absolute zero emits heat. Even very cold objects, like ice cubes, emit infrared. The higher the object’s temperature, the greater the IR radiation emitted.

IT cameras produce images of invisible infrared or “heat” radiation. The IT camera can provide precise non-contact temperature measurement capabilities. The existence of moisture—a substance cooler than normal construction materials—can be used to detect conditions that promote mold growth. Mold-related problems can be identified before the mold is visible to the eye or detectable by the nose. IT cameras are extremely cost-effective, valuable diagnostic tools in construction-related problems of water intrusion and mold growth.

Infrared cameras that incorporate temperature measurement allow professionals to make well-informed judgments about the operating condition of a structure. Temperature measurements can be compared with historical operating temperatures, or with infrared readings of similar structures at the same time, to determine whether a significant temperature rise will compromise the structural integrity or encourage mold growth.

Digital image storage, available on most FLIR Systems infrared cameras, produces calibrated thermal images that contain over 78,000 independent temperature measurements that can be measured at any time with FLIR Systems infrared software products on standard PC platforms.

When used properly, a thermal imaging camera can provide valuable information during moisture assessments, remediation oversight, energy audits, roof and electrical system inspections, and water damage investigations. Temperature difference caused by evaporation, radiation, thermal bridging, infiltration/exfiltration and other sources must all be carefully evaluated. The inspector trained to properly use the IR camera can read the information to spot suspect areas. The findings can later be verified using electronic, data-logging moisture detection equipment and in some cases core samples from the roofs or walls.

An inspector can use the thermal imaging and data logging moisture detection equipment to establish that all areas of concern have been assessed. The extra verification gives additional assurance that the findings from the IR camera are defensible. All property owners and their insurers faced with a claim alleging mold infestation can find these tools essential to the decision process and proper maintenance of the structure.

When suspect areas are found they can be visually documented using the IR camera. Images from an IR camera are easier for a lay person or non-technical person to understand. Findings from the IR camera can be explained to the property owner or the insurer’s personnel combined with the verification obtained by using data-logging moisture detection equipment with a time stamp and/or destructive testing.

Using an IR camera for larger areas, can save time and money by providing a faster, more efficient, and more reliable survey. An IR camera can detect moisture located behind interior walls under the right conditions, so the temperature difference created by the presence of moisture on the inside surface of a wall will appear differently than the surrounding area.

IR and IT experts recommend that property owners or their insurers should use IR cameras and IT for moisture detection under the following circumstances:

  • after any water damage event like a flood, broken water lines, equipment failure, roof leaks, etc;
  • before warranty expiration on new construction;
  • before acquiring real estate suspected of having hidden moisture damage;
  • when basement walls are covered by finish materials and the inspector cannot give a definitive answer on moisture issues;
  • when suspected plumbing leaks have occurred from in-slab water supply and/or waste lines;
  • when doors, windows, or other openings in the structure are suspected of leaking;
  • when performing an energy audit of the building to determine areas of infiltration and exfiltration;
  • to determine adequacy of insulation—wet insulation is a poor insulator but is a great heat conductor;
  • infrared inspection of the roof can determine potential for ice dams, plugged drains, and water retention that may cause roof damage and/or leakage;
  • locating hidden leakage and/or dampness under resilient flooring; or
  • locating wet areas in non-accessible crawl spaces.

Infrared technology is especially useful for inspecting flat roofing systems and synthetic stucco systems, which rarely give any visual clues as to their condition or the location of leaks and moisture retention. Litigation involving synthetic stucco or exterior insulating finish systems (EIFS) is rampant nationwide. Many property owners blame EIFS exterior cladding for retaining moisture behind the EIFS artificial stucco and encouraging mold growth and deterioration of the structure. The property owners claim that EIFS, because it retains water, promotes mold growth and rotting within exterior wall cavities.

IR technology is being supplemented with a living tool: dogs trained to sniff out the existence of mold. Mold-sniffing dogs can detect certain categories of mold. The dogs cannot, however, differentiate one genus of mold from another. Typically these mold-sniffing dogs are trained to give an “alert” when they have found one of approximately 18 – 19 genera of mold. These mold-sniffing dogs are not expected to determine how toxic the mold is, or even the genus of mold, but just to confirm the existence of mold in an area. While a mold-detection canine can quickly find mold inside a home or commercial building, infrared thermal imaging has the edge on the exterior and in detailing—with imagery, location, and extent of mold infestation.

High definition (or high resolution) thermal imaging refers to the fine detail and clarity of a thermal image. This means it contains a large number of pixels per unit of area. In this case, a thermal imaging camera taking a high definition photo means you will find smaller problems at greater distances. More pixels mean greater temperature measurement accuracy, particularly for small objects. A high definition thermal imager means a strong competitive advantage.

A high definition thermal imager is ideal for a work environment that demands the best thermal imaging camera and technology. This type of thermal imager can result in time and money saved.

Other typical inspection methods involve guesswork and random cutting of core samples or pieces of walls—both inside and out—to analyze for mold and moisture. A combined mold detection dog and infrared thermal imaging inspection can protect a potential buyer from acquiring a run-down or mold-infested property or from incurring repair and remediation costs far beyond a building’s value.

A mold problem is always a moisture problem since mold cannot grow without moisture. When IR is used to find moisture, it becomes possible to prevent mold and rot from taking hold or to remove the mold that actually grows.

Online resources list examples of IR cameras that can be used for IT inspections.

Various firms are trying to revolutionize air pollutant detection technologies by using new, extremely small micro-electro mechanical sensors (MEMS). Future air quality studies could benefit from cheaper sensors that could be deployed in networks of hundreds of devices. Next-generation particle detectors employing super-compact MEMS devices are being developed. One development is a miniature device to measure the concentration of nanometer-sized particles by detecting the electrical charge they carry.

Cost-effective, networkable methods for sizing airborne particles using electric fields to separate them by size alert occupants to the presence of the smallest, most dangerous nanoparticles.[5] The technology continues to improve and these miniaturized sensors can be placed throughout a structure in a network that communicates with each sensor and a monitor that can be read by the structure’s security staff.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This was an excerpt from my book Mold Claims Coverage Guide. It is available from the National Underwriter Company,  for the new Zalma Insurance Claims Library.

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

The Eight Corners Rule Defeats Right to Defense

No Accident If You Shoot a Person In the Head at Close Range

Terry Graham, Jr., shot and killed would-be burglar, Hiram Joshua Chambers, at Graham’s ranch house in Smith County, Texas by shooting him in the face at close range with a shotgun. Graham successfully defended the resulting wrongful death lawsuit by Chambers’ family members. Since his insurer refused to defend him, Graham incurred $130,841.43 in defense costs. He sued Texas Farm Bureau Underwriters (Underwriters), the issuer of Graham’s Texas Farm and Ranch Owner’s Insurance Policy, to recover his defense costs.

Both parties filed motions for summary judgment and the trial court granted Graham’s motion. Underwriters appealed in Texas Farm Bureau Underwriters v. Graham, — S.W.3d —-, 2014 WL 6911570 (Tex.App.-Texarkana, 12/5/14).

FACTS

It is uncontested (1) that Graham was an insured under the policy, (2) that he had paid all premiums required under the policy, (3) that he had personal liability coverage for bodily injury occurring on the resident premises as of the date of the incident, (4) that the incident occurred on the resident premises, and (5) that Underwriters received timely notice of Graham’s request for defense. Seeking reimbursement of the money he paid to his defense attorneys, Graham sued Underwriters for breach of contract, breach of the duty of good faith and fair dealing under Chapter 542 of the Texas Insurance Code (the Prompt Payment of Claims Act), and attorney fees in bringing this lawsuit.

Underwriters filed a legal denial based on the governing “eight corners rule,” which provides that an insurer is entitled to rely solely on the factual allegations contained in the four corners of the complaint in conjunction with the four corners of the liability policy to determine whether it has a duty to defend.

ANALYSIS

Underwriters is correct in its assertion that this case is governed by the eight corners rule that allows an insurer to rely solely on the factual allegations contained in the petition in conjunction with the terms of the policy to determine whether it has a duty to defend. If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured.

When applying the eight corners rule, a Texas court will construe the allegations in the pleadings liberally.   The factual allegations are considered without regard to their truth or falsity, and all doubts regarding the duty to defend are resolved in the insured’s favor

An insurer is obligated to defend the insured if the facts alleged in the petition present a matter that could potentially be covered by the insurance policy.
The insured has the initial burden to establish coverage under the policy.  Interpretation of insurance contracts in Texas is governed by the same rules as interpretation of other contracts. When construing a contract, the court’s primary concern is to give effect to the written expression of the parties’ intent.

The policy defines the term “occurrence” as “an accident, including exposure to conditions which results in bodily injury or property damage during the policy period.” It also contains the following exclusion: “Coverage C (Personal Liability) … do[es] not apply to: … bodily injury or property damage which is caused intentionally by or at the direction of an insured.”

The Chambers family alleged both that Graham committed “a violent assault and battery” on Chambers and, in the alternative, that Graham was “negligent and grossly negligent” in causing Chambers’ death. The petition contained the following allegations: “Plaintiff alleges that just before Terry Graham, Jr.’s vicious assault on [Chambers], he had directed [Osborn] to bring to him a loaded 410 shotgun. Before the death of [Chambers], [Graham] had instructed [Osborn] to shoot [Chambers], but [Osborn] refused to do so. Instead, [Osborn] carelessly, negligently, and very foolishly handed the shotgun to [Graham], who then used it to carry out his intent and purpose of bringing about the death of [Chambers].”

Even though the eight corners rule prohibits the court from looking beyond the Chambers family petition and the terms of the insurance policy, Graham asks this Court to consider extrinsic evidence in our analysis. To demonstrate that Underwriters had a duty to defend, Graham relies on a fact that was not included in the underlying petition—that Chambers was burglarizing the property when he was shot, on the jury’s verdict absolving Graham of liability for Chambers’ death, and on the deposition of Underwriters’ corporate representative who testified that had the Petition been amended to take away intent he would have reconsidered the decision to deny defense.

Reliance on this kind of extrinsic evidence violates the eight corners rule. Consequently, Graham asks this Court to recognize a rule exception referenced in a Texas Supreme Court opinion. In Pine Oak Builders, Inc., 279 S.W.3d at 654 the Texas Supreme Court noted that some courts have recognized an exception “permitting the use of extrinsic evidence only when relevant to an independent and discrete coverage issue, not touching on the merits of the underlying third-party claim.”  Without expressly recognizing or approving the exception, Pine Oak Builders, Inc. warned that “any such exception would not extend to evidence that was relevant to both insurance coverage and the factual merits of the case as alleged by the third-party plaintiff.”

To date, neither the Texas Supreme Court nor the Tyler Court of Appeals has officially embraced any exception to the eight corners rule, and our sister courts have declined to apply the exception referenced in Pine Oak Builders, Inc.

The court was required to determine whether the Chambers family’s petition alleged that Graham committed a negligent act in addition to an intentional one. Graham claims that the Chambers family pled two distinct positions with regard to state of mind. In support of his argument that the petition alleged a negligent state of mind.

An accident is generally understood to be a fortuitous, unexpected, and unintended event. Reviewing the Chambers family’s pleadings in light of the policy provisions, the court must focus on the facts alleged instead of the legal theories. The underlying petition’s causes of action for negligence and gross negligence, on their own, were insufficient to require Underwriters to defend Graham in the Chambers lawsuit.

Nothing suggests that Graham’s act in shooting Chambers was anything other than intentional because (1) there is no suggestion that Graham slipped, fell, or otherwise mistakenly pulled the trigger, and (2) other language used in the petition described the shooting as intentional.

Although the court found that the act causing the damage was intentional, we recognize that an intentional act can still be considered an accident because whether an event is accidental is determined by its effect. A deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.

A claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured’s actions, that is, was highly probable whether the insured was negligent or not.

In this case the four corners of the petition demonstrate that Graham’s use of a “loaded 410 shotgun … to carry out his intent and purpose of bringing about Chambers’ death was intentional. Because Chambers’ death was the type of injury that ordinarily follows from pointing a shotgun at a person’s head and shooting him or her “at very close range,” the court concluded that the injury was a natural and probable result of Graham’s act. Where acts are voluntary and intentional and the injury is the natural result of the act, the result was not caused by accident.

Under the terms of the policy, coverage applied only to accidents causing bodily injury and was expressly excluded for acts “caused intentionally by … an insured.” Because the incident was not an accident, Underwriters had no duty to defend. Therefore, the trial court erred in granting Graham’s cross-motion for summary judgment and in denying Underwriters’ summary judgment.

ZALMA OPINION

The four corners/eight corners rule sometimes results in odd decisions that can be cured by extrinsic evidence. Texas refuses to deal with extrinsic evidence when an insurer makes a decision to defend or not defend the insured. In this case extrinsic evidence would not have helped. In fact the ruling in the wrongful death case proved that the death was intentional and proper because the decedent was in the process of burglarizing the insured’s home at the time he was shot. The shooting and resulting death were the intent of the insured and coverage did not, nor would it have applied even if the extrinsic evidence was considered.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud

Insurers are faced with three major types of insurance fraud:

  • fraud in the inception The insured misrepresents or conceals facts material to the decision of the insurer to insure or not insure the prospective insured. If the insured lies in the application about a matter that would have, had the truth been known, affected the decision of the insurer, the insurer may have the right to rescind the policy, determine it never existed, return the premium, and deny the claim presented by the insured;
  • fraud (by the insured) in the presentation of the claim. The insured lies about a fact material to the decision of the insurer to pay or not pay a claim. The insurer faced with a fraudulently presented claim can deny the claim in accordance with the policy provisions or declare the policy void and deny the claim; and
  • fraud in the presentation of a claim by a claimant against the insured. In these cases, the third party claimant makes a false and fraudulent claim against the insured.

In all three cases, the insurer is faced with the same challenges: how to investigate fraud and how to prove that the fraud is a valid ground for denying a claim.

Denying a Claim

When fraud is discovered, the natural response of an insurer is to deny coverage. However, various factors must be considered before such a decision is made. Perhaps the most important is determining the grounds for denial and the level of proof that would be required by a judge or jury if the case were taken to court.

To constitute fraud, an insured must have concealed or misrepresented a material fact with the intention of inducing an insurer to pay a claim. The facts that are deemed to be “material” for purposes of denying a claim or voiding a policy are not clearly defined and therefore each case must be evaluated separately.

Generally, a fact is material to the application for insurance if it might have influenced a reasonable insurer in deciding whether to accept or reject the risk. Material facts intentionally concealed or misrepresented with intent to mislead the insurer are fraud, which, at the option of the insurer, void the policy. A misrepresentation after a loss as to a single material fact will forfeit the entire insurance contract.

An insured cannot commit a “small” fraud any more than he can be just a little dead. Once caught in a small fraud, the insured cannot demand that he or she be paid the legitimate part of the claim.

As the following case demonstrates, however, determining “misrepresentation” is not always straightforward. In Suggs v. State Farm Fire and Casualty. Co., 833 F.2d 883 (10th Cir.1987), an initial investigation by an insurer and the state fire marshal concluded that a residential fire was the result of arson. The fire marshal further concluded that it was the insured who set the fire. The insured was arrested and charged with arson. With criminal charges pending, the insured hired experts who concluded that the fire was probably caused by an electrical malfunction. Criminal proceedings were then dismissed. Another expert retained by the insurer later concluded that the fire was not of electrical origin, and the insurer denied the insured’s fire damage claim on the ground that the insured had intentionally set the fire. The insured responded by suing for benefits under the policy, as well as for bad faith. A jury found in favor of the insured on both causes of action.

On appeal, the Tenth Circuit reversed the bad faith judgment. The termination of the arson prosecution was found to be immaterial because the disposition of criminal cases involves different criteria than civil cases. In any event, substantially conflicting evidence existed regarding the nature of the fire. Based on this conflict, the Suggs court held that the only reasonable conclusion the jury could have reached was that the insurer had not acted in bad faith. The insurer had good reason to believe that the insured, Suggs, misrepresented facts material to the claim by denying he set the fire. The insurer was unable to convince the jury that the insured lied but was able to convince the Tenth Circuit Court of Appeal that the denial was made in good faith.

Although this case resulted in a beneficial or partially beneficial verdict on behalf of the insurer, it reveals the need to deal fairly and in good faith with all insureds and even more so with insureds suspected of fraud. If the insurer treats the suspected fraud with the utmost of good faith, it will avoid unnecessary litigation, will have sufficient facts to deny a claim, and will explain to the insured all of the reasons for the denial.

In some states, like California and New York, when misrepresentations as to material facts are made in an application for insurance, existence of a fraudulent intent to deceive is not essential to the avoidance of the policy. In these states, a policy can be rescinded (that is, declared void from its inception) for an innocent misrepresentation or concealment of a material fact.

In the presentation of a claim, however, the insured’s act must have been intended to defraud the insurer. Even a gross overvaluation of a claim will not permit an insurer to deny the entire claim or declare the policy void unless the insurer can prove that the overvaluation was not an honest mistake.

In a Massachusetts case, the court found that an insured furnished insurers with a schedule wherein he “knowingly exaggerated the sound value of the property in order to be in a more advantageous position to be paid for the real loss suffered, but not with the intent to defraud the insurers.” As a result it held:

When it is established … that the insured has not only made false statements, even in such a matter as value, for the purpose of influencing the adjustment of the loss, public policy demands that the contract be so construed as to discourage such conduct and to give full protection to the insurer. Gechijian v. Richmond Insurance Co., 11 N.E. 2d 478 (Mass. 1937); and Bennie Bockser v. Dorchester Mutual Fire, 1951.M.A.144, 99 N.E. 2d 640, 327 Mass. 473 (1951).

Materiality of false statements is not determined by whether or not the statements deal with a subject later determined to be unimportant. If, for example, false statements are made about factors other than those that caused a loss, the false statements are nevertheless material. False sworn statements are material if they might have affected the attitude and action of the insurer. They are equally material if they were calculated to discourage, mislead, or deflect the company’s investigation in any area. A fact is material to a claim if it concerns a subject relevant and germane to the insurer’s investigation of the claim.

Another key element needed to prove the defense of fraud is reliance. The general rule is that an insurer need not suffer detriment or rely on an insured’s fraud before being allowed to declare a policy void. If the insurer is deceived and could incur detriment if the deceit is successful, this is sufficient to establish the fraud defense. There is no need for the insurance company to wait to be damaged when the deceit itself is the proscribed activity, and the stated penalty is forfeiture of all benefits. The principle that attempted fraud defeats coverage is necessary as a deterrent to would-be fraudsters. Without this protection in place, even more insureds would try fraud, just in case it might be successful and undetected. After all, they would have nothing to lose by trying.

False Swearing

False swearing is a special category of misrepresentation or concealment because it is made under oath. In criminal law, false swearing is called perjury.

In Mutual of Enumclaw v. Cox, 757 P. 2d 499 (1988), the Washington Supreme Court was asked to interpret a homeowners policy that stated the entire policy would be void if “There has been fraud or false swearing.” Even though the insured’s fraud involved only his unscheduled personal property, the court held that the entire policy was void and the insured was not entitled to any recovery. This appears to be the majority position.

An insured’s ulterior motive in misrepresenting material facts to the insurer is irrelevant in determining whether a fraud and concealment provision provides a defense to the insured’s claim. The California Court of Appeal stated:

First, plaintiff admits that she knew she was lying to the defendant and did so with the intent that defendant not find out the actual facts. Second, under Claflin, the intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity. Thus, plaintiff’s intent to deceive was established as a matter of law Cummings v. Farmers Ins. Exchange, 202 Cal. App. 3d 1407, 249 Cal. Rptr. 568 (Cal. App. 2 Dist. 1988). (Emphasis added.)

This conclusion is in no way avoided by the plaintiff’s contention that the motivation for the false statements was her very reasonable fear of her son. As expressed by the US Supreme Court in Claflin, an insured’s ulterior motive in misrepresenting material facts to the insurer is simply irrelevant. In the context of the Cummings case, the plaintiff’s motive of fear of her son’s violence was irrelevant to the question of whether she intended to deceive the insurer. Cummings, supra.

The Californian Court of Appeal, in Watts v. Farmers Insurance Exchange,
98 Cal. App.4th 1246, 120 Cal. Rptr.2d 694 (2002) broke new ground in the defense of fraudulent insurance claims. The Court of Appeal resolved, to the benefit of insurers, the issue of whether a fraud or false swearing defense to an insurance claim can be established without proof that the insurer relied on the misrepresentation to its prejudice. However, by applying “public policy” it also decided that an innocent co-insured who holds property jointly with an insured that has committed fraud is not automatically excluded from coverage, even if the language of the policy preventing such recovery is clear and unambiguous.

The court held that the false swearing defense can be raised in the absence of reliance and that under the wording of the policy in question applying the public policy of the state as evidenced by the California standard form fire insurance policy, an innocent co-insured may recover for his or her percentage share of the losses despite the transgressions of the other insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book   Insurance Claims: A Comprehensive Guide available from the National Underwriter Company at the Zalma Insurance Claims Library, available at www.nationalunderwriter.com/ZalmaLibrary.

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

A Dam Case

When ACV is RCV Less Depreciation

The definition of the insurance term “actual cash value” (ACV) has resulted in multiple definitions depending on jurisdiction. Some define it as fair market value, some define it as replacement cost value (RCV) less physical depreciation and others apply the broad evidence rule combining the various definitions to reach the promised full indemnity. Since a first-party-property policy agrees to pay ACV first and then, after the property is replaced the difference between RCV and ACV, it is in the best financial interest of the insured to obtain the highest possible ACV, especially if the insured does not want to rebuild.

In Sierra Pacific Power Co. v. Hartford Steam Boiler Inspection and Ins. Co., Slip Copy, 2014 WL 6883056 (D.Nev., 12/05/14) the United States District Court for the District of Nevada was called upon to resolve a dispute over the value of a dam and the amount required to be paid to the owner of the dam by its insurers after the dam was destroyed by a flood. The owner claimed the ACV was RCV because the value of the dam, when rebuilt, would be the same as it was before the loss. The insurers claimed ACV must be determined by RCV less physical depreciation. The case was tried, appealed to the 9th Circuit, reversed, and retried.

FACTUAL BACKGROUND

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

Following a three-day bench trial the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. The Court determined that the actual cash value (“ACV”), with proper deduction for depreciation, of the Dam was $1,261,000.  The Court further determined that the replacement cost of the Dam was $19,800,000.

The parties appealed and the Ninth Circuit Court of Appeals issued a Memorandum vacating the Court’s finding that the ACV of the Dam was $1,261,200, and remanding for a determination of the ACV based on reducing the replacement cost of $19,800,000 by the “appropriate” depreciation, and to fashion an appropriate order tolling the three-year period for replacing the Dam until the conclusion of the litigation in this matter.

The Ninth Circuit rejected the proposed ACV of $1,261,200 because it was not related to the figure found as the replacement cost ($19,800,000).

On retrial the trial court then held that based on the evidence presented at trial, it was appropriate to apply a 50% rate of depreciation for the in-river Dam and a 5% rate of depreciation for the wing wall, and that subtracting this depreciation from the full replacement cost yielded an ACV of $12,216,600.

DISCUSSION

Depreciation

Sierra Pacific argues that the Court’s calculation of depreciation and ACV is incorrect because the Court (1) based its determination of the appropriate depreciation factor on a mistake as to the age of the Dam, (2) failed to apply the legally-mandated methodology for determining depreciation in the casualty insurance context, (3) relied on invalid, factually unsupported assumptions regarding the relationship between the age of the Dam and its value, (4) relied on evidence for establishing the 50% depreciation factor that the Ninth Circuit rejected as a basis for making any valuation determinations, and (5) incorrectly interpreted the order of the Ninth Circuit as mandating that the replacement cost of the Dam be reduced by a depreciation factor greater than zero.

As an initial matter, the Court acknowledges that it inadvertently stated that the Dam was 100 years old at the time of the flood; it is undisputed that the Dam was thirty-four years old. By itself, however, the Court’s inadvertent use of that date does not require amendment of the rate of depreciation, which was based on evidence presented at trial.

Despite multiple opportunities—at trial and after the Ninth Circuit’s July 27, 2012 Memorandum—to present evidence regarding the proper depreciation rate to apply to the Dam, Sierra Pacific has maintained that the Court should determine that the ACV is equivalent to replacement cost because the value of a newly constructed Dam would be equivalent to the destroyed Dam.

The Hartford and Zurich policies each state that valuation is “actual cash value (with proper deduction for depreciation) of the property destroyed.” The Ninth Circuit has held that “[s]ince the Policy uses these precise words, the ACV should be determined as replacement cost less depreciation of the dam.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 665 F.3d 1166, 1171 n. 2 (9th Cir.2012) because the term was clearly defined in the policy.

The Ninth Circuit also noted that “where the property to be replaced has no sales market, such as the Farad Dam, California Courts have sanctioned the use of replacement cost less depreciation as an acceptable method for determining ACV.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 490 Fed. Appx. 871, 875 (9th Cir.2012).

The Hartford and Zurich polices also include the standard California language on appraisal for disagreements that arise as to amount of loss. There is no evidence that Sierra Pacific ever demanded an appraisal to determine ACV of the Dam when it was destroyed. Additionally, although no document indicates that Sierra Pacific agreed to the 50% depreciation rate, Defendants testified at trial that Risley, a Sierra Pacific employee at the time, agreed to the 50% depreciation rate. Such an agreement would void Sierra Pacific’s argument that it was not bound by the 50% depreciation rate.

The Ninth Circuit has rejected Sierra Pacific’s argument that it is entitled to replacement cost without a reduction for depreciation. Additionally, Sierra Pacific failed to produce any evidence—either at trial or after the Ninth Circuit’s Memorandum—that the Court should apply a lower depreciation rate than the trial court applied in its order. Accordingly, the Court denied Sierra Pacific’s Motion to Amend on this ground and affirms that the ACV of the Dam when it was destroyed was $12,216,600.

If Sierra Pacific decides to rebuild the Dam, it shall recover prejudgment interest on the full replacement cost of $19,800,000, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. If, on the other hand, Sierra Pacific does not rebuild the Dam, it shall recover prejudgment interest on the $12,216,600 ACV, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. Interest shall accrue at ten percent per annum pursuant to California Civil Code § 3289(b).

Good cause appearing, the Court concludes that the ACV of the Dam is $12,216,600. If Sierra Pacific rebuilds the Dam, it shall be entitled to the full replacement cost of $19,800,000 less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the replacement cost less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.

If Sierra Pacific does not rebuild the Dam, it shall be entitled to the $12,216,600 ACV less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the ACV, less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.

The Court also reaffirms its prior Order that the three-year period granted for rebuilding the Dam shall be tolled until the conclusion of this litigation. Due to the interest in maintaining reasonable prejudgment interest, Sierra Pacific shall decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.

ZALMA OPINION

Because this case involves a great deal of money to replace the dam litigation ensued over the determination of ACV. Had the parties been interested in avoiding unnecessary litigation either the insurers or the insured could have demanded appraisal and allowed a panel of appraisers (arbitrators) to determine ACV and RCV. They chose to litigate instead and forced the court to determine the amount of loss. It did so and now Sierra has three months to decide if it will rebuild the dam to recover the difference between the ACV and RCV. That they fought so hard to have ACV and RCV determined to be the same amount one could speculate that the plaintiff has no intent to rebuild.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Doubt About Exclusion Requires Coverage

If any Part of Suit Requires a Defense The Entire Suit Must Be Defended

An insurer’s duty to defend, although not unlimited, is extremely broad and requires an insurer to provide a defense for insured and uninsured events if there is a potential for coverage of any of the allegations made against an insured. Refusing to defend an insured is often a difficult task and was once explained as seeking coverage on an automobile comprehensive policy for a fire at a commercial building. Insurers keep trying to refuse to provide a defense only to be slapped by a trial or appellate court.

In Khatib v. Old Dominion Ins. Co., — So.3d —-, 2014 WL 6851418 (Fla.App. 1 Dist., 12/05/2014) the Florida Court of Appeal was faced with the refusal to defend an insured because of the claimed applicability of an exclusion.

Old Dominion Insurance Company was faced with a multi-faceted action for fraud, conversion, civil conspiracy, breach of contract, and other causes of action, being prosecuted by certain physicians against the president and founder of a medical practice they all once worked at together. It is not seriously questioned that the doctors are insureds under the policy and that the insuring clause of the insurance policy would afford coverage to the doctors. The dispositive question is whether coverage is precluded by a policy exclusion.

BACKGROUND

This case stems from a dispute between Dr. Majdi Ashchi and the appellants, Drs. Yazan Khatib, Vaqar Ali, Youssef Al–Saghir, and Sumant Lamba. Dr. Ashchi was the president and founder of First Coast Cardiovascular Institute (“FCCI”), a professional service organization that treats heart and cardiovascular disease. Appellants are FCCI’s other officers and directors.

After wresting control of FCCI from Dr. Ashchi, appellants, acting through FCCI, sued Dr. Ashchi and others for fraud, negligently supplying false information, breach of contract, reformation, unjust enrichment, breach of fiduciary duty, and conspiracy. Dr. Ashchi denied all allegations and believing that a good offense is the best defense joined his former colleagues in the action individually, through a third-party defamation complaint.

The third-party complaint alleged that appellants launched a systematic plan to take control of FCCI and oust Dr. Ashchi from power. The complaint further alleges that as part of the plan the doctors made baseless allegations against Dr. Ashchi at an FCCI shareholders meeting and that each published defamatory statements about Dr. Ashchi to third parties.

The insurance policy in this case is a commercial general liability insurance policy. FCCI is the named insured on the policy. The policy also insures FCCI’s “‘executive officers’ and directors … but only with respect to their duties as officers and directors.” The third-party doctor defendants are executive officers or directors of FCCI, and in some cases both. It is alleged that at a shareholders meeting Dr. Ashchi was accused of stealing money from FCCI to pay for improvements to his home, intentionally overcharging FCCI millions of dollars in rent through his real estate affiliates, and engaging in acts of embezzlement.

ANALYSIS

We have little difficulty in concluding that at least some of these alleged wrongs were performed by the third-party defendant doctors “with respect to their duties as officers and directors.” Some, if not all, of the wrongs alleged occurred while the third-party doctor defendants were either discharging their obligation at a shareholders meeting or executing other official duties.

Old Dominion argues that the employment-related practices exclusion found in one of the endorsements to the insurance policy excuses it from any coverage obligation in this case. This exclusion reads in pertinent part:

This insurance does not apply to:

“Personal injury” to:

(1) A person arising out of any

(a) Refusal to employ that person;

(b) Termination of that person’s employment; or

(c) Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person….

The exclusion goes on to specify that it applies: “(1) Whether the insured may be liable as an employer or in any other capacity…”

The third-party defendant doctors argue that the emphasized language found in subsection (1)(c) of the employment-related practices exclusion is ambiguous as a matter of law because it negates the coverage afforded under Coverage B, subsection 1.b, which affords coverage for “personal injury” caused by an offense “arising out of [the insured’s] business.”

The third-party defendant doctors are correct on the law but wrong on the interpretive facts. It is true that an insurance policy cannot, with impunity, grant a right in one paragraph, then retract the very same right in an exclusion.

Unfortunately for the third-party doctor defendants, however, a cursory consideration of the two clauses on which they place their reliance for this argument reveals the provisions do not conflict. Contrary to the argument of the third-party doctor defendants, a defamatory utterance might easily “arise out of [a company’s] business” while being not at all “employment related.”

One of Florida’s canons of construction provides that when a drafter uses two different phrases in the same context when he might have used one, it is presumed the drafter meant two different things. A contract is not to be read so as to make one section superfluous, and so all the various provisions of a contract must be so construed as to give effect to each.

However, it is further axiomatic in the law of insurance coverage in Florida that if a complaint alleges some facts within and some facts outside of coverage under an insurance policy, the insurer must nevertheless defend the entire suit.

The third-party complaint contains the following “examples” of defamatory statements allegedly made about Dr. Ashchi by the third-party doctor defendants to their staff members, referring physicians, and patients:

a. Dr. Khatib told Dr. Imran Sheikh that Dr. Ashchi had embezzled from FCCI;

b. Dr. Khatib told Dr. Jessica Barbare that Dr. Ashchi was guilty of financial improprieties;

c. Dr. Khatib told Victoria Kozel that Dr. Ashchi was due to be prosecuted for his conduct at FCCI;

d. Dr. Khatib told Dr. Juzar Lokhandwala that Dr. Ashchi orders unnecessary procedures; and

e. Dr. Al–Saghir told Dr. David Grech that Dr. Ashchi was a thief.

There is no indication in the third-party complaint that these allegedly defamatory statements were “employment related” at all. It is quite possible, for example, that these utterances were made at a business-related conference or business-related social event, therefore “arising out of [the insureds’] business” for insuring agreement purposes, while at the same time not being “employment related” in any of the narrow senses discussed above.

Moreover, “[i]f the allegations of the complaint leave any doubt regarding the duty to defend, the question must be resolved in favor of the insured requiring the insurer to defend.” Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So.2d 810, 814 (Fla. 1st DCA 1985).  Our study of the third-party complaint in this case leaves us with sufficient doubt.

CONCLUSION

For the reasons stated, we find that Old Dominion Insurance Company owes the third-party defendant doctors a duty of defense on the allegations of the third-party complaint. At the same time, we hold that the decision of the trial court exonerating Old Dominion Insurance Company from a duty to indemnify the third-party defendant doctors is premature.

ZALMA OPINION

When faced with the question of a duty to defend an insurer should do the type of analysis that was made by the Florida Court of Appeal. When reviewing a lawsuit to determine if coverage applies the claims handler and the lawyers for the insurers must look at the complaint and extrinsic facts to see if there is any doubt about the applicability of an exclusion. If the doubt exists coverage should be extended and a defense provided. Failure to do so can expose the insurer to suits for breach of contract, breach of the covenant of good faith and fair dealing, and claims of exemplary and punitive damages.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

What is Liability Insurance?

How Do I Buy It?

Insurance, by definition, is a contract where the insurer, for consideration (premium) agrees to indemnify another against a contingent or unknown risk of loss. It is used as a method to spread losses among many people who are insured with the same company. The insurer, by its policy, promises, in exchange for a premium, to pay to defend and indemnify the insured, in the event that a certain type of loss occurs within a specified period of time called the “policy period.” By spreading the risk of loss among many, each individual only pays a minuscule portion of the risk of loss insured against.

Liability insurance is limited to insurance against the risk of losses that can be incurred by a person for damages done to the person or property of another by an accidental or fortuitous cause.

The California Insurance Code defines liability insurance as follows:

Liability insurance includes:

(a) Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

(b)(1) With respect to operations or property covered by a policy of liability insurance as defined in subdivision (a), insurance of medical, hospital, surgical and funeral loss or expense of the insured or other persons injured, and in the case of an automobile liability policy disability benefits to the insured or other persons injured and in the event of their death, funeral and accidental death benefits to their dependents, beneficiaries or personal representatives irrespective of legal liability of the insured, when issued with or supplemental to the insurance defined in sub-division (a);

(2) When issued with or supplemental to the insurance defined in subdivision (a), the disability insurance covering the insured and members of his household, or other persons who customarily operate any automobile covered by such a policy and who are named in such policy; and such disability insurance may cover against accidental injury, death or dismemberment caused by any or all hazards as defined in such coverage;

(c) Insurance covering injuries sustained by an insured resulting from a tort committed by a third party against which such third party is not himself covered by liability insurance;

(d) Insurance coverage against the legal liability of the insured, and against loss, damage, or expense incident to a claim arising out of the death or injury of any person as the result of negligence or malpractice in rendering professional services by any person who holds a certificate or license. [California Insurance Code § 108.]

In exchange for the promise to pay the premium charged, the insurance company agrees to provide the insured protection from various risks faced by an owner, developer, or builder of real property. The risks of loss taken by the insurer are listed on the policy. For each promise made by the insurer it charges a premium.

The Commercial General Liability policy (CGL), issued by most insurers, promises to protect the insured against the risk of loss, as follows:

We will 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. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit that may result.” [Insurance Services Office (ISO) form CG 00 01 10 01]

The policy will provide coverage for the following:

  • bodily injury and property damage to persons injured by the insured;
  • medical payments regardless of fault;
  • personal and advertising injury; and
  • contractual liability.

These are the principal coverages available in CGL policies. There are other coverages available to cover special needs of individual people, corporations, partnerships or joint ventures. If special needs exist for a particular construction project that faces risks not contemplated by a CGL, it is prudent to consult with a professional and major insurance brokerage that specializes in the industry involved in the case. You can find such brokers by conferring with others who specialize in similar projects, your state Department of Insurance, professional risk managers, or Chartered Property and Casualty Underwriters (CPCU), who act as insurance consultants.

Purchasing CGL Insurance For People in the Construction Industry

When purchasing insurance as a named insured, it is imperative to purchase only the insurance coverages needed. Seek the advice and assistance of the insurance brokers and agents with whom insurance is sought, at least three months before the inception date of the policy needed. Regardless of whether the policy sought is a new policy or a renewal, the agents and brokers will need sufficient time to shop the available insurance market. The person seeking insurance should not rely on the broker to simply renew the previous policy for the same price with the same insurer. Coverages available and prices vary considerably every year. Insurers will enter and leave the market for the construction industry every year. The prudent insured will shop wisely and diligently every year.

The prudent person seeking insurance will provide the broker with a list of coverages needed, the status of the insurer with whom the broker is to shop
(e.g., a Best’s Rated A or better and admitted to do business in your state or an approved surplus line insurer). The prudent person will have the agent or broker avoid, if possible, unapproved and not admitted insurers and recognize that the surplus lines market is the market of last resort. The person seeking insurance should ascertain that the broker knows and advises the prospective insurers of the following:

  • each person and entity that must be named as an insured;
  • the location and a description of all properties under construction or to be under construction while the policy is in effect;
  • the gross earnings of the insured(s) for the year before the inception of the policy;
  • the gross earnings anticipated by the insured(s) for the year following;
  • the type of work done by the insured(s):

–    general contractor who supervises subcontractors but has no employees work on project;

–    general contractor who supervises subcontractors and uses his own carpenters;

–    carpentry only;

–    plumbing only; or

–    framing and dry wall installation;

  • the loss history of the person(s) to be insured(s);
  • whether the insured(s) require(s) every subcontractor to indemnify the insured(s);
  • whether the insured(s) require(s) all subcontractors to name him or her as an additional insured on their CGL;
  • whether the insured(s) require(s) only a certificate of insurance from the subcontractors;
  • the identity of the owners of the insured(s);
  • the financial condition of the insured(s) (different from gross earnings, which is needed for calculation of premium);
  • the number and identity of individuals or entities the named insured is required to name as additional insured;
  • the number of indemnity contracts signed by the insured;
  • whether the contracts entered into by the insured require waivers of subrogation;
  • the value of the projects that will be worked on by the insured(s) during the year the policy will be in effect;
  • the amount the insured is willing to pay as a deductible or a self-insured retention; and
  • the territory where the insured(s) operate(s).

When an additional insured endorsement is issued, the named insured is paying for the protection of the owner, general contractor, or some other person or entity that the construction contracts require to be named as an additional insured. The named insured still has control over the insurance and the insurer owes the named insured a duty of care to properly defend and indemnify the named insured. By accepting a person as an additional insured, the insurer is promising to defend and indemnify the additional insured subject to the terms and conditions of the additional insured endorsement as if the additional insured is the named insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book  Construction Defects Coverage Guide.

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Business Risks Never Insurable

Insurance of a Business Risk Creates a Perverse Incentive to Sue Corporate Officers and Shareholders

Being in business is always a risk. When a person or entity builds something – a yacht, for example – it always runs the risk of displeasing the client. Commercial General Liability Insurance (CGL) policies are designed to protect the person insured against the potential loss or damage to property of others for damage due to contingent or unknown events that caused the damage. However, no insurance policy covers every potential risk of loss and every CGL policy I have read excludes damage to the insured’s product or work since that is a business risk rather than a risk of harm to others.

FACTS

Lyman Morse Boatbuilding, Inc. (LMB) of Maine contracted to build a luxury yacht for Russ Irwin. Unhappy with the completed yacht, in 2011 Irwin brought an arbitration proceeding against LMB and Cabot Lyman, the controlling owner of LMB, alleging that the vessel had numerous defects. LMB and Cabot Lyman tendered defense of the arbitration complaint to their insurer, Northern Assurance Company of America, but Northern Assurance refused to defend the insureds. Unhappy with the insurer’s decision, the insureds filed suit in 2012 seeking to recover the costs and attorneys’ fees that they incurred in the arbitration proceeding.

The district court held that Northern Assurance had a duty to defend Cabot Lyman, the individual, but not LMB, the corporation; it then awarded to Cabot Lyman 50 percent of the attorneys’ fees incurred during the arbitration by the two insureds together. Each side was unhappy and we are faced with appeals and cross-appeals.

In Lyman Morse Boatbuilding, Inc. v. Northern Assur. Co. of America, — F.3d —-, 2014 WL 6765781 (C.A.1 (Me.) 12/2/14) the First Circuit Court of Appeal was asked to resolve the dispute.

THE ARBITRATION DEMAND

On July 22, 2011, Irwin filed an arbitration complaint against LMB and Cabot Lyman, claiming damages related to the allegedly defective construction of a 52–foot custom sailing vessel. Irwin alleged that LMB and Cabot Lyman had agreed to build the vessel “with the ‘best practices for quality yacht construction’ using the ‘highest quality materials’ “ for a price of $2,155,000. However, there were cost overruns, and Irwin eventually ended up paying over $3,400,000 for the completed vessel.  As of the date of filing of the arbitration complaint, the quality of the vessel was still unsatisfactory to Irwin.

That complaint alleged eight causes of action: fraud, negligent misrepresentation, constructive fraud, breach of contract, rejection and revocation of acceptance under the Uniform Commercial Code, breach of the implied warranty of fitness for a particular purpose, breach of the implied warranty of merchantability, and violations of Maine’s unfair trade practices laws. Irwin requested rescission of the agreement and a refund and damages for the time he spent and the expenses he incurred during the period when he repeatedly rejected the yacht because of its defects.

The arbitration complaint contained two paragraphs naming Cabot Lyman. First, Irwin alleged that Cabot Lyman, the controlling owner of LMB, was the alter ego of the corporation, and alleged that “[a] unity of interest exists between [Cabot] Lyman and [LMB] and injustice and fraud can only be avoided by piercing the corporate veil” and holding Cabot Lyman jointly and severally liable for the wrongs alleged.

THE CGL INSURANCE POLICY

Northern Assurance had issued a package insurance policy to LMB and Cabot Lyman. The named insureds listed in the Declarations of the policy are “Lyman Morse Boatbuilding Co., Inc.” and “Cabot & Heidi Lyman ATIMA.” “ATIMA” stands for “as their interests may appear.”

In addition to providing the general bodily injury and property damage coverages common to a CGL policy, importantly, the policy excludes from coverage “‘[p]roperty damage’ to ‘your product’ arising out of it or any part of it.” This exclusion, common to CGL policies, is generally called the “your product” exclusion.

THE PROCEEDINGS IN THE DISTRICT COURT

On cross-motions for summary judgment, the district court held that Northern Assurance had no duty to defend LMB, but that it did have an obligation to defend Cabot Lyman in the arbitration proceeding. Lyman Morse Boatbuilding, Inc. v. N. Assurance Co. of Am., Inc., No. 2:12–cv–313–DBH, 2013 WL 5435204, at *1 (D.Me. Sept.27, 2013) [hereinafter Lyman I ]. It applied the exclusion to the corporate defendant but the court determined that Northern Assurance did have a duty to defend Cabot Lyman, the individual, notwithstanding the “your product” exclusion, because “[t]he yacht was the boatyard’s product, not Cabot Lyman’s product.”

In a separate order on the issue of damages, the district court held that Cabot Lyman was entitled to recover 50 percent of the attorneys’ fees that LMB and Cabot Lyman jointly incurred in defending the arbitration proceeding

THIS APPEAL

Northern Assurance has appealed, arguing that it did not owe a duty to defend Cabot Lyman in the arbitration proceeding, and LMB and Cabot Lyman have cross-appealed, arguing that Northern Assurance did owe a duty to defend LMB. Both parties contend that the district court’s ruling on the duty to defend and the damages issue was error.

Irwin’s Arbitration Demand is strident, but simple. It complains about the failure to build the yacht as promised, as well as overbilling. There is no suggestion that somehow the yacht’s defects damaged other property. There is no suggestion, for example, that the buyer put cushions and equipment on the yacht that were damaged on account of defects. Thus the complaint did not allege any facts that even suggest the potential for a covered claim.

In Baywood Corp. v. Maine Bonding & Casualty Co., 628 A.2d 1029 (Me.1993), the Maine Law Court found that a complaint alleging that the insured inadequately designed a sewer system for a condominium complex did not fall within the coverage of a CGL policy because it sought only “the cost to replace or upgrade the [sewer] system.” Although “the complaint refer [red] generally to property damage,” the Law Court explained, it “allege[d] no physical damage to the [condominium] units.”  Thus, the insurer had no duty to defend.

So it is here. While referring generally to a “risk” to personal property, Irwin’s arbitration complaint did not allege any damage to such property or request any relief for personal property damage. Instead, the complaint requested several specific items of relief related to the damage sustained by the defective vessel itself and the expense that Irwin went to in discovering and attempting to rectify its defects.

Interpreting this insurance contract the court’s task is to “‘effect the parties’ intentions … construed with regard for the subject matter, motive, and purpose of the agreement, as well as the object to be accomplished.’” State v. Murphy, 861 A.2d 657, 661 (Me.2004).

Irwin’s complaint alleged damages to the yacht; the policy excludes damages to “your product”; “you” is defined as, inter alia, LMB; the yacht is LMB’s product; thus, the policy unambiguously excludes the allegations of the complaint. Accordingly, on these facts, the First Circuit found that Northern Assurance had no duty to defend Cabot Lyman in the arbitration proceeding. To hold otherwise would undercut the well-recognized purpose of CGL insurance policies, as articulated by the Maine Law Court. CGL policies are designed to cover “occurrence of harm risks” but not “business risks.”   A “business risk” is a risk that the insured will not do his job competently, and thus will be obligated to replace or repair his faulty work. A CGL policy covers an occurrence but specifically excludes a business risk.

A contrary holding would create perverse incentives when plaintiffs sue a corporation for defective workmanship.

If these plaintiffs could trigger a duty to defend on the part of the corporation’s CGL insurer not otherwise obligated to provide a defense by simply adding a corporate officer or employee as a defendant, they would often have the incentive to do so in order to add another pocket to the other side of the negotiating table. As a consequence, the “your product” exclusion, long a staple of CGL policies, would be rendered a dead letter.

The First Circuit declined to read the policy to allow such a result, absent any evidence, of which there is none, that this was the parties’ intent.

ZALMA OPINION

CGL policies are designed to cover “occurrence of harm risks” but not “business risks”; an “occurrence of harm risk” is a risk that a person or property other than the product itself will be damaged through the fault of the insured, whereas a “business risk” is a risk that the insured will not do his job competently, and thus will be obligated to replace or repair his faulty work. Since the entire claim against the insureds was a “business risk” there was no duty to defend nor indemnify.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

The Claims Interview

The Interview is a Structured Conversation

The beginning of every claim investigation is the interview of the insured and/or the claimant. Every person involved in claims needs to know the basics of the interview.

The Interview is a structured conversation. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps.

Interviews are everywhere. Interviewing is an art. Use of methods similar to those used by scientists conducting experiments is a more accurate description of interviewing than police interrogations.

Everyone has been interviewed. Everyone has, at some point in his or her life, interviewed someone.

When Edward Lloyd opened his coffee shop in the shipping center of the city of London, England he knew information was the essence of insurance. An Underwriter who was not fully informed lost his investment. Because his customers needed to be fully informed, Mr. Lloyd kept a chalk board in his coffee shop on which the latest intelligence concerning shipping at the port of London was written. Insurance underwriters, customers of Mr. Lloyd, could gather much of the information they needed to properly evaluate the risks their customers asked them to take. As insurance, and the people who bought insurance, became more sophisticated, underwriters found a need to gather and evaluate information more efficiently.

The Underwriters borrowed techniques from detectives at Scotland Yard. They developed techniques that were unique to insurance. Insurers found that they needed trained investigators before they could properly evaluate a risk or a claim. They learned that minimal investigation before they took a risk could save enormously expensive investigation after a loss.

Other businesses, faced with fraud, embezzlement, employee dishonesty, and competition found that accurate information was necessary to operate a competitive business. In every business the gathering of intelligence about the business and its competitors is essential. News organizations like Reuters, UP, AP, the radio and television networks, CNN, Fox News, and the Internet were all designed to provide credible and useful information to those who needed it.

Whenever two or more people meet, information passes between them. Effective conversationalists are skilled interviewers. A good interviewer uses an ability to listen and ask open ended questions  to use the basic human need to share expertise to gain information.

Interviewing in a social setting bears no resemblance to a police interrogation or cross-examination in a court. Interviewing in a social setting is conversational and pleasant. To be effective the interviewer must:

·    Ask questions that call for a narrative response,

·    Listen to the response to each question,

·    Look directly at the person to whom the question is posed. Eye contact convinces the person to whom you are speaking that you are interested and encourages a detailed response, and

·    Avoid questions that seek “yes” or “no” answers.

The claims person investigating a first or third party claim must be prepared to conduct a low-key interview that determines details about the insured, the claimant, what caused the loss and where, when, how and why the loss occurred. With this information the claims person can establish the existence of coverage for the loss, the amount of the loss and how much is owed by the insurer.  This article is designed to provide a working knowledge of the interview process for the claims professional.

1.    General Principles

The essence of the scientific experiment is that no matter how often an experiment is repeated, as long as the conditions are consistent, the results will be the same.  However, this is not true of an interview.  The information gained in an interview, coupled with the physical evidence collected as part of an investigation creates a complete story.  In every interview there are three variables: the witness, the interviewer, and the subject in question, and these variables prevent the establishment of definite rules.  An experienced interviewer may formulate general principles that are useful on most occasions.
i.    The Witness

No two witnesses are exactly alike.  Because of this, a technique used successfully in one interview will not automatically ensure success in other cases of a similar nature.

During the course of an interview, a witness may change dramatically, exemplified either by their responses or attitude.  For example, a witness who appears very worried prior to the interview may relax considerably during the interview itself.  This may be because the witness now feels in control of the situation.  On the other hand, a witness who does not appear particularly worried before the interview, can become extremely worried if the adjuster appears to have complete control of the interview.  This is more often the case with those submitting a fraudulent claim as they fear that the adjuster may discover the falsified application or some other form of misrepresentation.  The adjuster must take these aspects into consideration and be extremely flexible.  He or she must be able to change approach seamlessly to whichever is the most effective for the witness at any particular moment.

Some worldly and sophisticated people are calm and forthcoming in an interviewer’s office, while others who are unaccustomed to formal proceedings find the process intimidating and somewhat frightening. Conversely, it sometimes happens that the experienced, sophisticated person will cautiously refuse to communicate in an interviewer’s office, while the “average” person will feel perhaps uncharacteristically at ease in the presence of an impressive professional interviewer. And then there is the doctor who will talk freely about medicine, but not at all about her real property holdings, or the mechanic who will talk constantly about cars, but not say a word about his recreational activities or family life outside work. In short, no situation—and certainly no person—is ever the same as another.

The varieties are endless: while one subject will listen and respond cooperatively to reason and logic, another will be more susceptible to an emotion-based appeal. It is up to the interviewer to constantly amend and update the tactics of the interview to fit the personality of the person interviewed.

There is a key to each person interviewed that, when found, will unlock even the most guarded information. By careful and patient questioning, it is the task of the interviewer to find the key, and then to exploit it to extract the truth. Once the key is discovered, even the subject may be surprised at how much previously concealed information he or she is ready to reveal.

ii.    The Interviewer

Just like anybody else, the moods, outlook, and personality of the interviewer can change.  Some are more alert and flexible in the morning while others function better later in the day.  At the end of a hard day, an interviewer may show the effects of physical fatigue and mental exhaustion by conducting an ineffective interview, rushing through the questions without listening to the answers.

Interviewers may react differently to particular sorts of claims.  A good-looking witness making a $1,500 burglary claim may be treated gently, whereas an arson for profit suspect may be treated aggressively due to the adjuster’s emotions concerning the potential for injury or death of innocent children.  However, the good looks of one witness should cause no more effect on the adjuster than the possible offensive actions of another.  The sophisticated language of a witness should have no more effect than the uneducated, crude language of another.  The adjuster conducting the interview must adapt his or her technique to establish a rapport with each witness.  If emotion, rather than reason, is allowed to control the interview, it will fail.  The witness will return the emotion.  The experienced interviewer knows that information will not flow unless the interviewer can use the emotions of the witness to his or her advantage.

In order to conduct a successful interview, the interviewer must control everything about the interview.  An interviewer who is emotionally unprepared for the interview will be unsuccessful, even if he or she is prepared factually.

iii.    The Subject of the Interview

The subject matter in question will have an effect on every interview.  A fire to a residence will raise different questions than a fire to a commercial structure.  A theft claim raises questions about security devises while a water damage claim may raise questions about plumbing fixtures and repairs performed in the past.

However, all claims require questions to be asked about the insured, the claimant, and any previous experience they have with insurance and insurance claims.

iv. Types of Interview

The varieties are endless: while one subject will listen and respond cooperatively to reason and logic, another will be more susceptible to an emotion-based appeal. It is up to the interviewer to constantly amend and update the tactics of the interview to fit the personality of the person interviewed.

There is a key to each person interviewed that, when found, will unlock even the most guarded information. By careful and patient questioning, it is the task of the interviewer to find the key, and then to exploit it to extract the truth. Once the key is discovered, even the subject may be surprised at how much previously concealed information he or she is ready to reveal.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book  Insurance Claims: A Comprehensive Guide.

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

Resident Relative Must Abide in House

Mother’s House Not Son’s Residence

Susan and Peter White (White), appealed an order of the Superior Court denying their petition for a declaratory judgment that respondent Charles Matthews (Matthews) was covered under a homeowner’s insurance policy issued to his mother by respondent Vermont Mutual Insurance Company (Vermont Mutual).  The issue devolved to the New Hampshire Supreme Court to resolve in White v. Vermont Mutual Insurance Company, — A.3d —-, 2014 WL 6533298 (N.H., 11/21/14).

FACTS

When a dog owned by Matthews caused an accident that injured Susan White on July 3, 2011 she sued Matthews. He had no insurance of his own. Because the incident occurred while Matthews was staying with friends at a home owned by his mother in Moultonborough, New Hampshire. The Moultonborough home was covered by an insurance policy issued to Matthews’s mother by Vermont Mutual.

The policy defined an “insured” to include “residents of your household who are … your relatives.” Matthews’s mother also owns a home in Naples, Florida, where she lives for approximately half of the year, and where Matthews usually visits only at Christmas. The Florida residence is Matthews’s mother’s primary residence. There was no evidence, and no one claimed, that Matthews is a resident of the Florida home.

Matthews was born in Boston and lived in Massachusetts until he moved to Moultonborough when he was thirteen years old. As a teenager, he lived at the Moultonborough residence and attended Moultonborough Academy. In 2000, after graduating from Boston University, he began working and living in Massachusetts full–time. In 2005, he bought a building in Somerville, Massachusetts, which he converted into condominium units. He sold several units and retained three: one for his own use, and two for rentals. Since 2005, Matthews has served as the head of the condominium association for that building.

Matthews has been unemployed since 2009 and receives financial assistance from his mother. He uses his Somerville address on his resume. Matthews testified that since graduating from college, if asked, he tells people that he lives in Massachusetts. The last time Matthews filed tax returns prior to the 2011 incident leading to this case, he used his Somerville address. His only telephone has a Massachusetts area code.

Matthews testified that he resides in Massachusetts for 80% or more of the year. He voted in Moultonborough in the 2012 election, a month before the hearing in this case. Matthews also has a New Hampshire driver’s license and his vehicle is registered in New Hampshire. However, his decision to register his car in New Hampshire was motivated by his desire to avoid buying automobile insurance, which is required in Massachusetts.

Matthews refers to the Moultonborough house as his mother’s home, not his home. He goes to Moultonborough occasionally for vacations, long weekends, and to visit his family. He typically notifies his mother in advance to obtain her permission to stay at the house, especially if he is bringing friends.

Following the 2011 incident involving Matthews’s dog, the petitioners sought a declaratory judgment that Vermont Mutual is responsible for any damages they may recover from Matthews. After a bench trial, the trial court denied the petition, as well as the petitioners’ motion for reconsideration.

ANALYSIS

The interpretation of insurance policy language is a question of law for the court to decide. Vermont Mutual bears the burden of proving that its policy does not provide coverage.

Although Matthews is one of the respondents in this action, his arguments are in line with the petitioners’ because he is seeking coverage under the Vermont Mutual policy at issue. The petitioners and Matthews assert that Matthews is a “resident relative” within the meaning of his mother’s insurance policy.

Because Matthews’s arguments overlap with the petitioners’ arguments, we will consider them together. In contrast, Vermont Mutual asserts that Matthews is a resident of Massachusetts and did not qualify as a resident of his mother’s household, and, consequently, was not entitled to coverage under the policy insuring the Moultonborough home.

The Vermont Mutual policy at issue defines an “insured” to include “residents of your household who are … your relatives,” but does not define the term “resident.” However, courts have considered the meaning of this term in the insurance context on multiple occasions, and have defined “residence” as “the place where an individual physically dwells, while regarding it as his principal place of abode. The definition considers two factors that must occur simultaneously: (1) the person must physically dwell at the claimed residence; and (2) the person must regard the claimed residence as his principal place of abode.

Additionally, in New Hampshire, the term “household” is understood to be a group of people dwelling as a family under one head and under one roof.

When a court interprets policy language, it looks to the plain and ordinary meaning of the policy’s words in context. Matthews independently owns and spends most of his time in his own home in Massachusetts. He considers himself a resident of Massachusetts and refers to the Moultonborough property as his mother’s home rather than his own. Although Matthews lived at the Moultonborough property as a teenager and college student, his statements and actions over the years following his college graduation express his intent to disregard the Moultonborough property as his residence and emphasize his decision to reside in Massachusetts.

Even if Matthews occupied the Moultonborough home at the time of the 2011 incident, he did not regard that residence as his principal place of abode. Therefore, the New Hampshire Court concluded he was not a “resident relative” of the Moultonborough home within the meaning of the policy.

Rather, the objective facts indicate that Matthews is not a resident of that home. Matthews is an educated, independent adult, who for many years has had his own residence in Massachusetts. He spends more than 80% of his time at that residence and visits his mother’s Moultonborough home only on occasion. Matthews notifies his mother before visiting and seeks her permission to bring friends to the home. Moreover, Matthews listed his Massachusetts home as his residence on his resume, he used his Massachusetts address on his tax returns the last time he filed taxes, and his telephone has a Massachusetts area code.

Even if we were to assume that the Moultonborough property is a vacation home and that a person can have more than one residence for insurance purposes when one of the residences is a vacation home, the policy here, requires that the additional insured be a resident relative of “your [the named insured’s] household.” To satisfy this requirement of sharing the same household, Matthews also would have to be a resident of his mother’s primary residence in Florida. As noted previously, the petitioners do not claim that Matthews is a resident of his mother’s Florida home.

ZALMA OPINION

When people are injured and sue the person who is responsible for the injury it is always best for the injured person if the tortfeasor is insured. Even if a judgment is obtained it is often difficult to collect, especially in a situation like this, where the tortfeasor is unemployed. For that reason is was worth the attempt to make Matthews insured because his mother was insured. It didn’t work because there was simply no evidence that established the house as his residence and a part of the named insured’s household.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Fishing Expedition Prohibited in Texas

Scouring Claim Files Not Related to Insured Wrong

The business of insurance requires each party to the insurance contract to treat each other with good faith so as to not prevent the other from receiving the benefits of the insurance contract.  When the insured accepts settlement of her claims and then files suit and seeks evidence about other claims that the insurer handled in the community, is fishing for evidence that would support a bad faith claim. To do so the request must be limited and relevant to the claim of the plaintiff. By making an excessive demand the insured is not treating the insurer in good faith and fair dealing.

In a case involving allegations of underpaid insurance claims, the Supreme Court of Texas was asked to consider whether a trial court abused its discretion in ordering the defendant insurer to produce evidence related to insurance claims other than the plaintiff’s. Plaintiff’s intent was to prove that the insurer treated her differently than others similarly situated.

FACTS

In September 2011 and June 2012 storms swept through the City of Cedar Hill and caused damage to Mary Erving’s home. Erving filed claims with her homeowner’s insurer, National Lloyds Insurance Company. National Lloyds sent adjusters to inspect Erving’s residence in response to each claim.

Following those inspections, National Lloyds paid the claims.

Concerned that National Lloyds had undervalued her claims, Erving brought suit against the company. She alleged breach of contract, breach of duty of good faith and fair dealing, fraud, conspiracy to commit fraud, and violations of the Texas Deceptive Trade Practices Act and chapters 541 and 542 of the Texas Insurance Code. During discovery, Erving requested production of all claim files from the previous six years involving three individual adjusters. She also requested all claim files from the past year for properties in Dallas and Tarrant Counties involving Team One Adjusting, LLC, and Ideal Adjusting, Inc., the two adjusting firms that handled Erving’s claims. Erving sought via interrogatory the names, addresses, phone numbers, policy numbers, and claim numbers associated with the requested claim files.

National Lloyds objected to the requests as overbroad, unduly burdensome, and seeking information that was neither relevant nor calculated to lead to the discovery of admissible evidence. Erving moved to compel production. After reviewing the discovery requests, the trial court ordered production of the files for claims handled by Team One and Ideal Adjusting. The trial court also limited the order to claims related to properties in Cedar Hill and to the storms that caused the damage to Erving’s home. National Lloyds filed a petition for writ of mandamus with the court of appeals, which denied relief. National Lloyds now seeks mandamus relief in this Court. The case finally made its way to the Texas Supreme Court who decided the issues in In re National Lloyds Insurance Company, — S.W.3d —-, 2014 WL 5785871 (Tex.), 58 Tex. Sup. Ct. J. 64 (10/31/14).

ANALYSIS

A discovery order that compels production beyond the rules of procedure is an abuse of discretion for which mandamus is the proper remedy. The Texas Rules of Civil Procedure provide for discovery of any matter that is not privileged and is relevant to the subject matter of the pending action.
Even these liberal bounds have limits, and discovery requests must not be overbroad. A request is not overbroad merely because it may call for some information of doubtful relevance so long as it is reasonably tailored to include only matters relevant to the case. The Supreme Court has, in the past, held that overbroad requests for irrelevant information are improper whether they are burdensome or not.

In this case, the trial court’s order compelled production of information relating to insurance claims filed by Cedar Hill residents in connection with the two storms that damaged Erving’s house. The order was also limited to claims that were assessed by the adjusting firms that assessed the damage to Erving’s home.  Essentially, then, Erving has proposed to compare National Lloyds’ evaluation of the damage to her home with National Lloyds’ evaluation of the damage to other homes to support her contention that her claims were undervalued.

The Supreme Court found it impossible to see how National Lloyds’ overpayment, underpayment, or proper payment of the claims of unrelated third parties is probative of its conduct with respect to Erving’s undervaluation claims at issue in this case. Requests for information about damage to other properties that were not tailored to include the information actually used in adjusting the plaintiffs claim amounts to an improper fishing expedition. This is especially so given the many variables associated with a particular claim, such as when the claim was filed, the condition of the property at the time of filing (including the presence of any preexisting damage), and the type and extent of damage inflicted by the covered event. Scouring claim files in hopes of finding similarly situated claimants whose claims were evaluated differently from Erving’s is, at best, an impermissible fishing expedition

Erving is correct that discovery must be reasonably limited in time and geographic scope. Because the information Erving seeks is not reasonably calculated to lead to the discovery of admissible evidence, the trial court’s order compelling discovery of such information is necessarily overbroad.  Accordingly the Supreme Court granted mandamus relief and directed the trial court to vacate its discovery order.

ZALMA OPINION

Erving’s claims were paid. After accepting payment of her claim she sued because she believed her insurer did not treat her fairly. Apparently having no evidence to establish that her claim was improperly handled she sought the right to scour through every claim file from the same storm in her neighborhood in hopes of finding that some were treated differently than she. Since every claim and every property is different the search she sought was to prove a suspicion without a factual basis based upon claim files that would invariably be different than Erving’s because the property and the damage would be different. In so doing Erving was breaching the implied covenant of good faith and fair dealing by fishing for a way to get damages from her insurer after her claim was paid to her satisfaction.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Indemnity & Insurance – Who Goes First

Additional Insured Must Collect from Insurance Before It Can Seek Contractual Indemnity

Many contracts have dual purposes when it comes to shifting the risk of loss. Usually the owner requires the contractor to name it as an additional insured on its liability insurance policy and to defend and indemnify it to certain tort claims. In Hercules Offshore, Inc. v. Excell Crane & Hydraulics, Inc., — S.W.3d —-, 2014 WL 6601644 (Tex.App.-Hous. (1 Dist., 11/20/14) the Texas Court of Appeal was called upon to determine issues relating to defense, indemnity, and insurance obligations.

FACTS

This dispute between Hercules Offshore, Inc. and The Hercules Offshore Drilling Company, LLC (collectively “Hercules”) and Excell Crane & Hydraulics, Inc. arises from the parties’ conflicting interpretations of indemnity and insurance provisions in their Master Service Agreement (MSA).

Hercules contended that the “additional assured” language in the MSA’s insurance provision means that Excell’s insurance must be exhausted before Hercules’s indemnity obligation is triggered. Excell, on the other hand, argues that Hercules’s indemnity obligation is primary, notwithstanding any other provision of the MSA, including the insurance provision.

The trial court granted summary judgment in favor of Excell and denied Hercules’s motion for summary judgment.There is an additional wrinkle. This case arises out of a personal-injury lawsuit by Hercules employee Dennis  Brunson, who sued Hercules and Excell in Texas state court. Meanwhile, another Hercules employee, Kevin Currey, who was injured in the same incident, sued Hercules and Excell in Louisiana state court. Excell prevailed against Hercules in the Louisiana litigation.

The Louisiana judgment in Excell’s favor became final while the appeal was pending. Excell now argues that the Louisiana judgment precludes further litigation in this case and that Excell is entitled to judgment based on principles of res judicata and collateral estoppel.

THE ACCIDENT

In 2007, Hercules was serving as the drilling operator of a semi-submersible drilling rig off the shore of Louisiana. Three Hercules employees, including Brunson and Currey, were injured when the rig elevator in which they were riding went into a free-fall. Excell had inspected and tested the elevator two months earlier, and it performed this work under the terms of the MSA.

TRIAL COURT ACTIONS

Excell moved for summary judgment on its cross-claim, arguing that the indemnity provision unambiguously required Hercules to defend and indemnify Excell against Brunson’s claims. Hercules counterclaimed for breach of the MSA, arguing that it was not obligated to indemnify Excell under the MSA until the insurance that Excell was obligated to provide Hercules had been exhausted.

Hercules moved for traditional summary judgment on Excell’s claim for indemnity and on its own claim for breach of the MSA.

The trial court granted Excell’s motion for summary judgment. The trial court entered a final judgment, ordering Hercules to defend and indemnify Excell for Brunson’s claims pursuant to the MSA.

DISCUSSION

Hercules contends in a single issue that the trial court erred in granting summary judgment for Excell and denying Hercules’s motion for summary judgment as to the contract interpretation issue, because federal maritime law, which the parties agree applies here, dictates that the “additional assured” language in the MSA’s insurance provision means that Hercules’s indemnity obligation is triggered only after Excell exhausts the insurance it agreed to obtain.

Both parties agree that federal maritime law governs the substantive dispute in this case. Well-settled Fifth Circuit law, beginning with Ogea v. Loffland Brothers Company, 622 F.2d 186 (5th Cir.1980), holds that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

In Ogea, the Fifth Circuit held that contractor Loffland Brothers’ insurance obligation must be exhausted before Phillips Petroleum Company’s indemnity obligation was triggered. The Fifth Circuit noted that the insurance and indemnity obligations in a maritime contract “must be read in conjunction with each other in order to properly interpret the meaning of the contract.”

Since Ogea, the Fifth Circuit has consistently held that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

ANALYSIS

The appellate court conclude that this case is controlled by Ogea. The MSA provided that Hercules would indemnify Excell against claims by Hercules’s employees. The MSA provided that Excell shall maintain at its sole expense the minimum insurance coverage requiring that all insurance policies, except Worker’s Compensation, shall name all such parties as additional assureds. All such policies shall be endorsed to provide that additional assureds shall not be liable for premiums and that such policies shall be primary as to additional assureds, regardless of any “excess” or “other insurance” clauses therein.

The coverage extended an additional assured shall not be less than that provided to the Contractor. All policies will cover investigation and defense of claims. All policies will include contractually assumed liability coverage.

The controlling fact is the existence of the ‘additional assured’ coverage whereby Excell agreed to procure insurance coverage for the benefit of Hercules. The import of the additional assured clause is emphasized here because the MSA also required that insurance procured by Excell must afford primary coverage to Hercules. It also made clear that the policy must include contractually assumed liability coverage, and it did not limit the insurance requirement to liability coverage assumed by Excell.

When there are conflicting indemnity and insurance requirements, the insurance of the indemnitee must first respond up to the dollar limit of coverage. Only then must the indemnitor honor its hold harmless obligation.

Hercules is seeking coverage for Brunson’s injuries, which allegedly arose as a result of a free fall in an elevator that Excell had certified for use only 50 days earlier. The MSA limits the scope of the agreement such that the insurance referenced could apply only to work by Excell, its affiliates, and its subcontractors for Hercules or its affiliated companies.

Accordingly, following well-settled Fifth Circuit maritime law, the court concluded that Hercules is not obligated to indemnify Excell until the limits of insurance coverage that Excell was obligated to purchase by the MSA have been exhausted.

RES JUDICATA

After briefing in this appeal was complete, Excell sought leave to file a supplemental brief in which it argued that the doctrines of res judicata and collateral estoppel preclude further litigation and that Excell is entitled to judgment in its favor. The basis of the argument is that a Louisiana state court adjudicated the same issue presented in this case and entered a final judgment in Excell’s favor. The Louisiana case arose from the same incident. Currey, who was injured in the same elevator accident as Brunson, sued in Louisiana, and Excell and Hercules litigated in Louisiana the very same insurance and indemnity issues presented in this appeal.

Because the final judgment upon which Excell relies was rendered by a Louisiana court, Louisiana law governs its res judicata and collateral estoppel effect.

The appellate court declined to apply res judicata and collateral estoppel. While Louisiana substantive law controls the effect of the Louisiana judgment, Texas procedural rules control how that effect is determined. In Texas, res judicata and collateral estoppel are affirmative defenses that are waived if not raised in the trial court, and cannot be raised for the first time on appeal.

The court recognized that Excell could not raise these defenses in the trial court because the Louisiana judgment did not become final until the Louisiana Supreme Court denied Hercules’s writ application in February 2014, when this case was already on appeal. The appellate court concluded that it may not affirm a summary judgment on a ground not included the motion.

The trial court’s summary judgment was reversed in favor of Excell and judgment was rendered granting Hercules summary judgment with respect to liability on its breach of contract claim.

ZALMA OPINION

This is a “who’s on first” type litigation that is not funny like the Abbott and Costello routine. It is a clear understanding of the type of contract found in almost every construction and personal service contract where the contractor – to obtain the benefit of the contract work – agrees to insure the owner as an additional insured, and, as additional security agrees to indemnify the owner from the contractor’s personal assets. This case makes it clear that if the insurance is adequate to indemnify the owner nothing further is required from the contractor. If it is not sufficient, once the insurance is exhausted then, and only then, is the contractor required to use its on funds to indemnify the owner.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Inadequate Adjusting Expensive

Failure to Establish ACV Promptly

Insurance companies know how to settle property damage claims under a policy with replacement cost value (RCV) coverage. They obtain the agreement with the insured the full cost to repair or replace and the actual cash value (ACV) of the loss, usually applying the deduction of physical depreciation from the replacement cost. The insured can then elect to take the ACV loss with an agreement to pay the difference between ACV and RCV once the repairs are completed unless the actual amount expended is less than the difference between RCV and ACV.

However, when there is a question of coverage or a suspicion of fraud the common practice disappears and litigation ensues. That was the case in Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., — Cal.Rptr.3d —-, 2014 WL 6679263 (Cal.App. 1 Dist., 11/24/14).

FACTS

Fireman’s Fund Insurance Co. issued an insurance policy covering loss from property damage, including rent, on a building owned by plaintiff Stephens & Stephens XII, LLC ( Stephens XII). Three days after the policy became effective, Stephens XII discovered the property had sustained serious damage from burglars who stripped it of all electrical and other conductive materials. Stephens XII sought reimbursement for the damage from Fireman’s Fund, but Fireman’s Fund delayed resolving the claim. Stephens XII, tired of waiting, sued.

The policy provided two different measures for reimbursing covered damages. Stephens XII could recover either the full RCV, so long the repairs were actually made, or the ACV. As of the date of trial, Stephens XII had not repaired the damage. The jury nevertheless awarded Stephens XII the full cost of repairing it.  The trial court granted Fireman’s Fund judgment notwithstanding the verdict (JNOV), finding that neither of the awards was permitted under the policy.

The property was burglarized sometime after June 8, when the property was inspected and found sound. Burglary hardly begins to describe the nature of the crime. Virtually all conductive material was stripped from the building and taken away. An electrician who examined the damage said “[t]he copper theft was the most complete job I’ve ever seen.” There was water damage throughout; walls were damaged; fire-protection equipment was rendered inoperable; and virtually all electrical components had been taken away. The estimated cost of repair exceeded $1 million.

Although Fireman’s Fund eventually paid Stephens XII for emergency repairs, it neither accepted nor denied coverage for the loss. From virtually the beginning of its investigation, Fireman’s Fund was concerned that the damage was too extensive to have occurred in the brief period of the policy’s coverage.

Replacement or Repair Cost

Fireman’s Fund is not required to pay replacement cost “until the lost or damaged property is actually repaired or replaced and unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.”

As an alternative to seeking replacement cost, the insured may claim “Actual Cash Value,” which is defined as the actual, depreciated value of the damaged property. As the policy acknowledges, the actual cash value might be “significantly less” than the replacement value. If an insured makes a claim for actual cash value, it may still repair the damage and claim the additional amount necessary to equal the replacement cost, so long as the insured notifies Fireman’s Fund of its “intent to [make a claim for the additional costs] within 180 days after the loss or damage.”

These provisions are common in property-damage insurance policies. RCV insurance is optional additional coverage that may be purchased to insure against the hazard that the improvements will cost more than the ACV and that the insured cannot afford to pay the difference. Unlike standard indemnity, replacement cost coverage places the insured in a better position than he or she was in before the loss.

Because replacement cost coverage places the insured in a better position than before the loss, there is a moral hazard that the insured will intentionally destroy the insured property in order to gain from the loss. For this reason, most RCV policies require actual repair or replacement of the damaged property as a condition precedent to recovery of RCV.

During the three years between the burglary and the initiation of this lawsuit, the parties engaged in an extended series of ultimately fruitless discussions about reimbursement for the damage. During the course of the discussions, it appears never to have been suggested by either party that Stephens XII seek an actual cash value payment, thereby providing it the seed money to start repairs. At trial, Stephens XII presented no evidence of the ACV of the damaged property and expressly disclaimed any intent to seek recovery under this measure.

The trial court found that Stephens XII was required to complete the repairs before it was entitled to receive replacement cost. It also found that Stephens XII’s claim that it was excused from the repair requirement was unsupported by the language of the policy.

DISCUSSION

Although Stephens XII is not entitled to an immediate award for the costs of repairing the damage, it is entitled to a conditional judgment awarding these costs if the repairs are actually made.

The insurer can be required to pay ACV immediately and to pay RCV conditionally on the insured’s completion of repairs promptly from the date of the judgment. The rationale for this approach excusing the insureds’ performance of the repair/replace condition was only temporary.  Where the insured can still conduct the repairs/replacements and be reimbursed by the insurer, then the good faith denial of liability should not operate to give the insured a benefit it did not contract for.

When an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused. If coverage is ultimately resolved in favor of the insured, the insured should remain eligible to receive replacement cost, but only so long as the insured complies with other applicable policy terms, such as a repair requirement. In other words, a coverage dispute should not give the insured a benefit under the policy it never had in the absence of the dispute—such as the right to receive replacement cost without actually repairing the damage.

Had Stephens XII sought damages based on ACV and proved them at trial, it would have been entitled to an immediate award of such damages. When Stephens expressly disclaimed recovery of ACV damages, it waived an award based on this measure. Stephens XII, nonetheless, remains entitled to a judgment awarding replacement cost consistent with the repair requirement if it actually completes the repairs “as soon as reasonably possible” after the judgment becomes final.

The court of appeal recognized that “[g]enerally, a party’s failure to perform a condition precedent will preclude an action for breach of contract.” ( Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1192.) But here, Stephens XII’s repair of the property is not a condition precedent to Fireman’s Fund’s liability under the policy.

The judgment must accommodate an additional limitation on Stephens XII’s ability to recover RCV. Stephens XII submitted proof of likely replacement cost and received a monetary award of those costs from the jury. The court found no basis for the failure to repair and no basis for awarding Stephens XII a specific amount of RCV before it makes the actual repairs. Stephens XII is only entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs have actually been performed in a timely manner, and in an amount equal to Stephens XII’s actual expenditures for them.

On the other hand, the award bears a striking correlation to Stephens XII’s theory of lost rent. Where, as here, a jury’s verdict precisely matches an expert’s testimony, logic and common sense tells us that the jury accepted the expert’s analysis and calculations.

ZALMA OPINION

It is not obvious whether the greed of Stephens XII or the failure to adjust by the Fireman’s Fund was the reason for this suit and appeal. To me, it is both. If the Fireman’s Fund believed the loss did not occur during its policy period it should have conducted an immediate investigation to determine exactly when the loss occurred. The police caught one of the thieves so he was available to give that information to the Fireman’s Fund. The insured and Fireman’s Fund could have agreed on the ACV and RCV loss, paid the ACV loss and agreed to pay up to the difference once repairs were completed. Stephens XII wanted RCV and did not want to repair. As a result of the greed of the insured and the failure of adjustment by the insurer both lost.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Fraud Struggle Continues

Zalma’s Insurance Fraud Letter

December 1, 2014

In the 23rd  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on December 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue establishes that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.        Blatant BP Deepwater Horizon Fraud Requires Severe Punishment
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide“; and
iii.    “Mold Claims Coverage Guide
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook
3.        The Fight Against Insurance Fraud Moves Forward in Canada
4.    Arson for Profit Fails – Conviction Affirmed
5.    More on Death Master File Abuse – $1.2 Million Settlement
6.    Lawyer Guilty of Insurance Fraud
7.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Failure to Promptly Rescind – November 28, 2014
2.    Thanksgiving – November 26, 2014
3.    Lie To Your Insurer – Lose All Coverage – November 25, 2014
4.    Mold Damage Requires Proof – November 25, 2014
5.    Illusory Policy Disfavored – November 23, 2014
6.    Equitable Fraud Supports Rescission – November 21, 2014
7.    Agent’s Obligations Limited – November 20, 2014
8.    Insurer’s Language Used Against It – November 19, 2014
9.    Not All Relatives Are “Resident Relatives” – November 18, 2014
10.    No Good Deed Goes Unpunished – November 17, 2014
11.    The Fight Against Fraud Continues – November 14, 2014
12.    Bad Faith “Set-Up” Fails – November 14, 2014
13.    Subrogation – November 14, 2014
14.    No Claim, No Settlement, No Coverage – November 13, 2014
15.    Location of Injury & Employment Controls – November 12, 2014
16.    Clear & Unambiguous Language Controls – November 11, 2014
17.    Collapse or Sewer Backup – November 11, 2014
18.    Insured May Reject or Limit UM Coverage – November 10, 2014
19.    Incorrectly Denying Claim Not Bad Faith – November 7, 2014
20.    Erroneous Denial Not Bad Faith – November 6, 2014

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

If for some reason the current issue is not attached it will be available for a month at http://www.zalma.com/ZIFL-CURRENT.htm.

Posted in Zalma on Insurance | Leave a comment

Failure to Promptly Rescind

Breach of Contract Not Enough for Summary Judgment

When an insurance company receives facts that support rescission of an insurance policy it is imperative that the remedy be exercised promptly. When the claim comes it becomes necessary to complete a thorough investigation, including demands for documents and the examinations under oath (EUO) of the insured. In Certain Underwriters at Lloyd’s, London v. Lee Group Shelbyville Holding Co., LLCSlip Copy, 2014 WL 6601975 (Ind.App., 11/20/2014) the Indiana Court of Appeal was faced with what to do when the insured failed to appear for EUO.

Certain Underwriters at Lloyd’s, London (“Underwriters”) appeal the trial court’s denial of their motion for summary judgment against The Lee Group Shelbyville Holding Company, LLC (“Lee Group”). Underwriters raised only one issue on appeal, that the failure to appear for EUO bars the lawsuit and their summary judgment should have been granted.

FACTS

Underwriters insured commercial property of Lee Group through a policy (the “Policy”) for a period between March 28, 2011, and June 28, 2011. On April 29, 2011, Lee Group submitted a property loss notice to Underwriters asserting that it sustained damage to its roof during a windstorm on April 27, 2011. Underwriters commenced an investigation to adjust the loss.

On June 3, 2011, Robert Trombley, a property claims examiner  sent an e-mail message to Murray Edward and attached the adjuster report and the property loss notice and certificate of insurance. Trombley provided some details regarding the claim and stated that Lee Group was not in compliance with the “80% co-insurance.” Trombley wrote that Roxanne Logan “advised the branch underwriter that based on these issues she was mailing out DNOC (direct notice of cancellation) to be effective 6/1/2011 in lieu of letting the policy expire on 6/28/2011. Trombley alleged that “it appears this risk was represented to us incorrectly.” He stated that the “DNOC [was] processed at 10:17 AM on the 29th of April prior to receiving notification of the loss.” He requested Edward to “review and advise how Underwriters wish to proceed with the claim.”

On June 8, 2011, Daniel Mahoney sent an e-mail message to Trombley and Edward stating “Lead Underwriter has noted W.P. With the amount of discrepancies and issues on this Risk” and asked why the underwriter should have better placed in action work to rescind the policy due to material misrepresentation and return the premium.  On June 14, 2011, Trombley sent an e-mail message to Mahoney and stated that “we do feel that there was material misrepresentation but wanted to provide Underwriters with all the facts and strongly feel that this should be referred to counsel” and recommended Walker Wilcox and Matousek. On June 16, 2011, Chris Bristow e-mailed Trombley and stated that Underwriters had agreed to the selection of Walker Wilcox and Matousek and were awaiting their advice.

In a letter dated May 24, 2012, counsel for Lee Group wrote counsel for Underwriters and alleged that Lee Group suffered damage to their structure on April 27, 2011. The letter alleged that the roof was damaged and began to leak due to severe winds, that over the course of the next week or so, the Shelbyville area received over two inches of rain, and that due to the damaged roof, the rain was able to enter the structure and do serious, irreversible damage.

On October 1, 2012, Burns filed a motion to dismiss, which the court later granted. In a letter dated October 3, 2012, Underwriters’ counsel wrote a letter to Lee Group’s counsel which stated: “A deposition in the Lawsuit is no substitution for the EUO, which is a condition precedent to coverage. They are two entirely different things. Your letter also overlooks that the Lee Group breached the Policy when it sued Underwriters before sitting for the EUO and before producing documents to support the loss.”

On September 13, 2013, the court held a hearing on Underwriters’ motion for summary judgment and took the matter under advisement. On September 23, 2013, the court denied Underwriters’ motion for summary judgment.

DISCUSSION

The issue is whether the trial court erred in denying Underwriters’ motion for summary judgment. Summary judgment is appropriate only where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

Underwriters argue that they are entitled to judgment as a matter of law based on Lee Group’s refusal to produce documents and sit for an EUO before suing Underwriters. They assert that they are entitled to judgment on all of Lee Group’s causes of action, “whether sounding in breach of contract, bad faith or for punitive damages, based on Lee Group’s breach of the Underwriters Policy Conditions.”  They contend that Lee Group’s breach prevented Underwriters from determining the basis for the $753,347 claim made in Lee Group’s May 24, 2012 letter, prevented them from concluding their claim investigation, and put them to the expense of this suit and appeal. Underwriters also appear to argue that Lee Group’s claims for bad faith and punitive damages fail as a matter of law because the “undisputed material facts establish that Lee Group breached the Underwriters Policy’s ‘Duties In the Event of Loss or Damage’ Condition and ‘Legal Action Against Us’ Condition by failing to produce requested documents and sit for an EUO….”

A contract for insurance is subject to the same rules of interpretation as other contracts. Thus, if the language in the insurance policy is clear and unambiguous, it should be given its plain and ordinary meaning. However, if the language of the policy is ambiguous, we may apply the rules of construction in interpreting the language. When an insurance policy contains an ambiguity, it should be strictly construed against the insurance company. A policy is ambiguous only if it is “susceptible to more than one interpretation and reasonably intelligent persons would differ as to its meaning.”

Based upon review of the designated evidence, issues of material fact exist as to whether Underwriters acted in bad faith or breached the contract, and the court was unable to say that the trial court abused its discretion in denying Underwriters’ motion for summary judgment.

To the extent that Underwriters argue summary judgment is proper based on Lee Group’s refusal to produce documents and sit for an EUO before suing Underwriters, the court noted that a party first guilty of a material breach of contract may not maintain an action against the other party or seek to enforce the contract against the other party should that party subsequently breach the contract. Accordingly, because the court concluded that issues of material fact exist because Underwriters did not eliminate the claim that they breached the contract or whether Underwriters acted in bad faith. As a result the appellate court concluded that the trial court did not abuse its discretion in denying Underwriters’ motion for summary judgment.

ZALMA OPINION

When a prospective insured misrepresents material facts in the application for insurance, as did the Lee Group in this case about the value of the property, the proper remedy available to an insurer is rescission. The insurer declares the policy void from its inception and offers to return the premium paid or returns the premium paid. That is what the leading underwriter suggested when it determined that Lee Group misrepresented a material fact in the application. Counsel for the Underwriters took what appeared to be an easy course, summary judgment based on a clear breach of the contract, the refusal to appear for EUO. This should have been sufficient, as a matter of law, to deny the claim for breach of contract. Because of the weakness in the motion for summary judgment, and the fact that many judges are loathe to grant motions for summary judgment, it was denied and the appellate court found an issue of fact, that is, whether Underwriters had breached the contract before the breach by the insured. The case teaches that even when there is an excellent ground for summary judgment failure to properly document the motion and failure to assert the material misrepresentations led to a suit that will need to be resolved at trial.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Thanksgiving

What I am Thankful For

My family and I have much to be thankful for this year, not the least of which is you, my friends, clients and readers of my blog “Zalma on Insurance”, “Zalma’s Insurance Fraud Letter,” and my other writings.We Americans have celebrated Thanksgiving when we were just a colony of Great Britain to give thanks for the good things in life at least once a year. It took Abraham Lincoln, our greatest President, to make it an official holiday. The Thanksgiving holiday gives me the opportunity to consider the blessings my family and I have received and to thank all who have made it possible.

Please allow me this opportunity to explain to you all the things I, and my family, can give thanks for:

 

  1. I have loved my wife of 47 years since she was 9 and I was 12 when we first met. I am thankful that she still loves me and lets me make clear every day that I love her more now than I did when I was 12.
  2. My three adult children who are successes in their own right.
  3. That my three children and one grandson live nearby, put up with my wife and me, and are healthy, successful, and mostly happy in what they do.
  4. My clients who, for the more than 42 years have allowed me to earn a living doing what I love.
  5. My parents and grandparents of blessed memory, for having the good sense to leave the Mediterranean at the beginning of the 20th Century so we could avoid the Holocaust.
  6. My country for giving me a place to live and work in peace and complain about it without fear.
  7. Those of you who read what I write and gain something from it.
  8. Seventy two years of mostly good health that gives me the ability to continue to work – albeit at a reduced rate.
  9. The hundreds of friends I have never met but with whom the Internet has allowed me to communicate in parts of the world I have never visited.
  10. My publishers and editors who help me make whatever I write intelligible and in proper English.
  11. The wonder of the Internet that allows me to publish E-books, ZIFL and my blog instantly on line.
  12. That my family can get together tomorrow to express our thanks for each other and our happiness this year again without a need for anything but enjoying each other’s company.
  13. That most of you can gather with your families to express your thanks.

When I started practicing law in 1972 new technology allowed a typewriter to erase errors from the keyboard, legal research was done in a large library and took days to find support for an issue, and I needed three professional legal secretaries to keep up with my dictation. Now, using modern technology, I can do the same legal research in 30 minutes on line, need no secretary, and can operate my law firm and consulting business with no employees.

I hope, on this Thanksgiving weekend, that you can join my family and me remembering that it is more important to think about our blessings and those things that we have to be thankful for than to get in line for “Black Friday” to buy an inexpensive flat screen t.v. or tablet computer.

Thanksgiving is a day to think about the good things we have in this life, eat a great deal of food, and enjoy the company of family and friends. I cannot express how thankful I am for all of you and that I have been able to enjoy the life my forbears could not even dream of achieving.

Posted in Zalma on Insurance | Leave a comment

Lie To Your Insurer – Lose All Coverage

Total Mold Exclusion Effective

When a contractor installed a freezer that was improperly installed, leaked into an adjoining premises, and infested the property with mold the insured presented a claim for defense and indemnity. In Canopius U.S. Ins., Inc. v. Cresco, Inc., Slip Copy, 2014 WL 5107063 (E.D.Va., Oct. 6, 2014) the United States District Court for the Eastern District of Virginia was called upon to resolve the coverage issues raised by the insurer in its declaratory judgment action regarding misrepresentations in the application for insurance and the effectiveness of a Total Mold Exclusion.

THE POLICY

Plaintiff Canopius issued defendant Cresco a commercial general liability insurance policy (“Canopius Policy”). The Canopius Policy includes a declarations page and related supplements that contain pertinent information provided by the insured Cresco as part of its application for insurance.

On its application, Cresco made representations regarding its scope of business and its gross receipts. Specifically, Cresco represented that the company’s scope of business was limited to “trim work” and “painting” services with classifications for carpentry and painting interior.  Cresco also indicated on the application form that the company does not “draw plans, designs, or specifications,” it does not perform “demolition work” or “roofing work” and it does not “install, service, or demonstrate products” or “perform structural work.”  In addition, Cresco made representations that it is an “artisan contractor—100%” and was not a subcontractor or general contractor. Moreover, Cresco represented that its gross receipts were $65,000 for the 2012 application year and $95,000 for the previous year.

The policy contains a “Total Mold Exclusion” clause which excludes coverage for any “bodily injury,” “property damage,” “advertising injury,” and “medical payments” arising out of, resulting from or caused by any “mold.”

FACTUAL BACKGROUND

The underlying incident arises from property damage stemming from the installation of a walk-in freezer performed by one of Cresco’s subcontractors. The damage is alleged to have occurred on or about July 4, 2013 on adjacent properties owned by defendant WTLJ and Pacific located in Centreville, Virginia.

Defendant Pacific asserts that as a result of the freezer installation, condensation from the freezer entered into its unit causing water damage and mold to the drywall. Plaintiff anticipates a claim for indemnity or contribution against Cresco for the work performed. Plaintiff asserts that it is not obligated to defend or indemnify Cresco because the damages alleged and the work performed fall outside the scope of the policy issued to Cresco.

Investigation and discovery in the case established that the representations made by Cresco in the application were material and false.

THE MOLD EXCLUSION CLAUSE BARS THE MOLD CLAIMS

Defendants WTLJ and Pacific have made mold-related claims in connection to the freezer installation. The magistrate judge finds that these mold claims are not covered under the Canopius policy. The policy contains a Total Mold Exclusion provision that specifically excludes any property damage or bodily injury claims related to mold including costs related to mold remediation. Accordingly, the mold-related property damage for which WTLJ and Pacific seek damages is expressly excluded from coverage under the policy.

In addition, the court found, that:

1)     Defendant Cresco, Inc.’s material misrepresentations on its application for insurance result in the Canopius Policy being void ab initio.

2)     Any matters alleged by the defendants Cresco, Inc.; Pacific Realty, Inc.; TK Services, Inc.; and The World of Tous Les Jours, Inc. and any potential cross-claims alleged against Crecso, Inc. that arise from work that falls outside the classifications limitations in the Canopius Policy are excluded from coverage.

3)     The mold allegations of Pacific Realty, Inc. fall within the specific mold exclusion of the policy and are therefore excluded from coverage.

4)     Plaintiff is not obligated to defendant Cresco, Inc. or any other individual or entity with respect to the claims made or any anticipated claims, including the cross-claims.

5)     Plaintiff is not obligated to indemnify Cresco, Inc. or any other individual or entity with respect to the claims, including cross-claims.

6)     As necessary and otherwise proper, all defendants named herein are bound by the Court’s determinations herein, and have no right to make any claim under the Canopius Policy for any losses or damages related to the incident at issue.

ZALMA OPINION

This case is an example of an insurer acting proactively. When the claim was reported to it it conducted a complete and thorough investigation. It found that the claim involved allegations that its insured caused mold damage, a cause and type of damage specifically excluded. It also learned that representations upon which the insurer relied in deciding to insure the insured was false. Because it anticipated problems it immediately filed a suit for declaratory relief. The court agreed that there was no ground for coverage under the policy, because of the total mold exclusion and that, regardless, the entire policy was void from its inception because the insured lied to the insurer when it acquired the policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Mold Damage Requires Proof

First Party Policy Does Not Cover Bodily Injury of Insured

The Phelpses owned a two-story residence in Somerset, Kentucky, that was insured by Kentucky Farm Bureau Mutual Insurance Company (KFB). The residence had been in foreclosure since May 21, 2001. The mortgagee, Greentree Servicing, LLC, purchased its own insurance policy on the residence through American Reliable in order to protect its interests.

On or about December 10, 2008, a windstorm caused shingles to blow off the roof of the residence. The Phelpses also alleged that rain water entered through the damaged roof and caused water damage in multiple rooms. They also alleged that this water damage resulted in mold damage to the residence and personal property. They also claimed that the mold exacerbated Mrs. Phelps’s preexisting asthma condition. KFB sent a claims adjuster and contractor to the residence a couple of days after the storm to inspect the damage. KFB arranged for a repairman to patch the roof shortly after the storm.

The Phelpses later alleged that a second windstorm occurred on February 11, 2009, and caused similar damage. The Phelpses made a claim on their KFB policy and demanded that the residence and personal property be declared a total loss. They requested that they be paid their policy limits of $425,100 for the dwelling and $212,550 for the personal property. They also asked to be compensated for Mrs. Phelps’s personal injury.

KFB made some payments to the Phelpses. These payments totaled $58,110. KFB eventually learned that the Phelpses had made an insurance claim in 2004 for wind and water damage to Safeco Insurance. KFB believed that much of the damage alleged by the Phelpses was preexisting and refused to make any more payments.

The Phelpses filed suit. KFB argued that the Phelpses’ claim exceeded the actual damage and that most of the damage was preexisting. KFB did not seek to recover any money it had already paid to the Phelpses. The jury found that the Phelpses were not entitled to any more than the $58,100 they were already paid.

Around two years after the initial insurance claim, counsel for KFB discovered that additional shingles were missing from the roof of the residence. KFB requested that the court allow its experts to inspect the residence again, which the court permitted. After this inspection, the court allowed KFB to supplement its discovery responses and include new expert opinions.
The American Reliable policy had an escape clause which would preclude the Phelpses from recovering under that policy. The clause stated: “If at the time of the loss there is other valid and collectible insurance on the covered property, this policy will be void.”

In Phelps v. American Reliable Insurance Company, Not Reported in S.W.3d, 2014 WL 6113365 (Ky.App., 11/14/14) the Kentucky Court of Appeal was asked to reverse the trial court.

ANALYSIS

The Phelpses’ first argument on appeal is that the trial court erred in failing to rule as a matter of law on the issue of coverage and failed to properly instruct the jury on this issue. The record is over 2,000 pages long and includes 8 days worth of video recordings.

It is well established that construction and interpretation of a written instrument are questions of law for the court. Although the trial court did not grant a directed verdict on this issue as the plaintiffs requested, it still properly instructed the jury on this issue.

The Phelpses argued on appeal that the trial court improperly excluded Mr. Phelps’s testimony about statements made to him by Richard Madison, an employee of Environmental Safety Technologies, who inspected the residence for mold. During Mr. Phelps’s testimony, he was explaining that he attempted to remove the mold from the residence himself, but stopped the work because of what he had been told by Mr. Madison. Defense counsel objected on the basis of hearsay and the trial court sustained the objection.

We are unable to consider this issue because there was no testimony set forth in the record to inform us (proffered outside the presence of the jury) as to what Mr. Madison told Mr. Phelps. Furthermore, the Phelpses do not state in their brief what Mr. Madison said to Mr. Phelps.

The Phelpses argue that Kentucky has deemed escape clauses such as the one at issue to be against public policy. The Phelpses would have us hold that escape clauses such as the one at issue are always against public policy; however, they cite to no Kentucky case law supporting this position and the court was unable to find such.

Because the Phelpses were able to collect on their KFB insurance, the American Reliable escape clause was invoked and they had no case against American Reliable.

ZALMA OPINION

Mold, under some policies, can result in indemnity for damages caused by or resulting from mold infestation. However, if the insured is either unable or unwilling to prove the existence of mold or the existence of mold caused by an insured against peril, that claim will fail. In this case the insureds had a mold expert who told them about the infestation and need for remediation. Rather than call the expert at trial the plaintiffs unsuccessfully failed to call the expert but attempted to get his opinions in by use of hearsay testimony from Mr. Phelps. To add insult to the injury the plaintiffs did not proffer what the expert would have said outside the hearing of the jury and deprived the court of the ability to deal with the issue.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Illusory Policy Disfavored

Ambiguous Policy Term Construed Against Insurer

Insurance companies must, when dealing with a claim, deal with the policy written not the policy they intended to write. When an insurer writes a policy that contains an ambiguous exclusion that it cannot prove reasonably applies to the facts of the case it will always be construed against the insurer and in favor of coverage.

In Century Sur. Co. v. Gene Pira, Inc., Not Reported in F.Supp.3d, 2014 WL 6474987 (C.D.Cal., 11/19/2014) the US District Court for the Central District of California was presented with motions for summary judgment filed by Plaintiff Century Surety Company (“Century” or “Plaintiff”), Defendant Gene Pira, Inc. (“Pira”), and Defendants Lexington Insurance Company (“Lexington”) and Chartis Property Casualty Company (“Chartis”). The motions dealt with a request that it determine whether insurance applied to damage caused by a water hammer that flooded a hotel while testing a fire sprinkler system.

BACKGROUND

The facts underlying the action are largely undisputed, and arise from state court proceedings in Lexington, et al. v. Gene Pira, Inc., Los Angeles Superior Court Case No. BC507142.Pira is a commercial plumbing contractor. Century issued Pira a commercial general liability policy (“the Policy”) for a one-year period beginning on December 11, 2009.

The Policy

The Policy included several endorsements, each of which excluded certain types of claims from coverage. One such endorsement was a “Testing or Consulting Errors and Omissions” exclusion, which stated that the Policy did not apply to injuries “arising out of [ ] an error, omission, defect, or deficiency in [ ] any test performed ….” A separate, “Professional” exclusion disclaimed coverage for injuries “which would not have occurred … but for the rendering or failure to render any of the following professional services … [, including] [i]nspection, construction management, or engineering services.”

The Policy also contained an integration clause, which stated, “This policy contains all the agreements between [Pira] and [Century] concerning the insurance afforded…. This policy’s terms can be amended or waved only be endorsement issued by [Century] and made a part of this policy.]

Inquiries to Agent

On July 27, 2010, over seven months after Century issued the Policy, Pira’s independent insurance broker, Andrew Breckenridge, contacted Century’s agent, Dan Cullinan, by e-mail, writing “Please have the ‘testing’ exclusion removed from the policy as we stated clearly … that as a plumber they do some ‘backflow testing.’ If this is two different things we are talking about and they are covered let me know either way.” In response, Century’s agent, Cullinan, wrote, “This is just excluding E[rror] & O[mission] coverage,” and attached the testing exclusion once more.  Cullinan did not issue an endorsement removing the testing provision. Pira’s agent replied, “I take your response as E & O isn[‘]t covered but [b]ackflow testing is and its [sic] ok….”

The Loss

As alleged in the underlying state action, approximately two months after the inquiry about the exclusion, on September 21, 2010, Pira conducted a fire pump test on sprinkler lines at a Four Seasons Hotel in Los Angeles. During the test, the formation of a water hammer caused sprinkler heads in the hotel owners’ penthouse residences to activate. The state complaint alleges that the water hammer formed when Pira re-pressurized the sprinkler system too quickly. The fire sprinkler discharge caused over $2 million in damage.

As a result of the water damage, the hotel made a claim to its insurer, Lexington, and the hotel owners, whose residences were damaged, made separate claims to their insurer, Chartis. Chartis and Lexington subrogated to their respective insureds’ rights, and brought the underlying state suit against Pira.

Century defended Pira against the state suit under a reservation of rights, and filed this action for a declaratory judgment that, as a result of either the Policy’s testing or professional exclusions, or both, Century has no duty to defend or indemnify Pira.

DISCUSSION

The question presented is whether the Policy covers Pira’s acts at the hotel, notwithstanding the testing and professional services exclusions.

Interpretation of an insurance policy presents a question of law governed by general rules of contract interpretation. Accordingly, it is an insurer’s burden to demonstrate that an exclusionary clause, which is interpreted narrowly against the insurer, plainly, clearly, and conspicuously disclaims coverage.

Century’s exclusive focus on the word “test,” however, ignores the full context in which the general commercial liability Policy was issued. Century does not dispute that Pira was a commercial plumber, or that the Policy covered claims which could be brought against a plumber. Century concedes, for example, that damages resulting from a faulty bathtub installation, failure to shut off water before attempting a pipe repair, or a welding-related fire would likely be covered.

As Defendants point out, however, examination and evaluation are integral parts of plumbing work, including the type of installation and repair projects Century lists as exemplars of covered activities. Were “test” to be interpreted as Century suggests, Defendants argue, no type of plumbing would be covered, rendering Pira’s commercial liability coverage wholly illusory.

The District court agreed. “Insurance coverage is deemed illusory when the insured receives no benefit under the policy.” Jeff Tracy, Inc. v. U.S. Specialty Ins. Co., 636 F.Supp.2d 995 (C.D.Cal.2009). Insurance policies may not provide illusory coverage. The District Court found it unclear how Pira could undertake any plumbing activity without examining, evaluating, or observing the item upon which he was engaged to work. Similar logic applies to the professional services exception.

The exclusion’s lack of clarity is illustrated by the exchange between Pira’s agent and Century’s agent. Prior to the loss at issue here, Pira’s agent communicated one interpretation to Century. Pira’s agent asked that the testing exclusion be removed, as Pira admittedly conducted “backflow testing.” Pira’s agent also drew attention to the ambiguity of the exclusion, pointing out the possibility that “testing,” as used in the policy, and the “backflow testing” conducted by Pira might be “two different things,” and asking Century’s agent to clarify. Century’s agent did not disabuse Pira’s agent of any misconception regarding the term “testing,” but rather, at best, reinforced the ambiguity by responding that the testing exclusion was “just excluding E[rror] & O[mission] coverage.”  In other words, Pira’s agent asked whether the testing exclusion covered a broader or narrower set of possibilities and Century’s agent responded that the exclusion applied “just” to a certain set. It was, therefore, reasonable for Pira to interpret the Policy as covering the types of testing he conducted.

Pira’s question regarding the extent of the exclusion, Century’s agent’s response, and the tensions between Century’s all-encompassing dictionary definition of testing and its alternative “stand alone testing” construction illustrate that the meaning of the testing exclusion was ambiguous. To the extent Century intended the exclusion to apply to plumbing tests unconnected to some contemporaneous repair, it could have drafted language to that effect with relative ease. Absent any such elucidation or definition of the word “test,” its meaning in the Policy is ambiguous, and must be construed in Pira’s favor.

Century’s Motion was denied. Pira’s motion and Chartis and Lexington’s Motion were both granted.

ZALMA OPINION

This case teaches that insurance companies must carefully draft insurance policies to mean what they intend. It also notes that a simple special definition of the term “test” could have established the intent of the insurer without confusion. Finally, when an inquiry about coverage is presented to an insurer’s representative, the insurer must make sure that the answer is correct and comports with how the claims and legal department will act in the event of a loss. Clearly, in this case, the insurer failed to have its representative before the loss give the same answer its claims department used after the loss.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “Zalma on California Claims

Posted in Zalma on Insurance | Leave a comment

Equitable Fraud Supports Rescission

It Doesn’t Pay to Lie To Your Insurer Even If You Didn’t Mean It

An insurer sought declaratory relief because of several alleged misrepresentations that a recreational boat owner made on an application form when obtaining an insurance policy for his vessel. After the boat caught fire and was damaged, the owner filed a claim with the insurer. The insurer disclaimed coverage and cancelled the policy upon determining that the owner had made several false statements on his application. In moving for that relief, the insurer invoked alternative legal theories of breach of contract, equitable fraud, and the common-law doctrine of “uberrimae fidei.” The insurer also sought damages and other remedies from the owner under the Insurance Fraud Protection Act (“IFPA”). In turn, the owner sued the insurer, alleging, among other things, its bad faith denial of coverage.

After the two lawsuits were consolidated and discovery was completed, the trial court granted summary judgment in the insurer’s favor and dismissed with prejudice the boat owner’s own affirmative claims. The court awarded the insurer a total sum of $119,992.02 under the IFPA, including its costs of investigation and counsel fees.

FACTS

The recreational vessel in question is a 1977 Uniflite cruiser known as “Sanity Chek.” Appellant Gary M. Hochschild purchased the used boat in 1996 from Essex Boat Sales at a marina in Baltimore. After certain repairs were done, Hochschild eventually docked the boat in New Jersey, where he resides.

On or about June 30, 2008, Hochschild completed, signed, and submitted a one-page, two-sided application form for marine insurance with Continental. The standardized form contains a series of typewritten questions asking about the boat owner, the vessel itself, and the boat’s location and intended use. The form also sets forth various special conditions and other information, including details about additional coverages, discounts, and premiums.
At the bottom of the back page of the policy application, the following language appears in italicized print: “While my signature verifies this information to be true, this application does not bind me to accept insurance, nor does it bind Boat U.S. or the Insurance Company to accept me as an applicant for insurance. …  Omitting, misrepresenting or stating information falsely on this application constitutes insurance fraud, voids all coverage, and is subject to criminal and civil penalties. …” Hochschild’s signature and the date appear immediately below this italicized language.
Continental established the falsity of  five separate responses on Hochschild’s application that it contends were false or misleading. The five items concern: (1) boat purchase price; (2) prior claims or losses; (3) prior damage; (4) previous insurance company and prior premium; and (5) prior insurance refusals or cancellations.

MISREPRESENTATIONS

The record shows that Hochschild’s vessel had an extensive prior history of claims or losses, including some that potentially occurred during the three-year pre-application period inquired about on the form.

The court noted that it was readily apparent that Hochschild’s responses on the form —— disclosing only a previous theft and vandalism claim of an unspecified amount “over three years ago,” and “small damage” in the Erie Canal, in or near “Champlain Lock number six”  —— do not accurately reflect his actual claim history.

The record shows that Hochschild did have prior marine insurance for the vessel with at least two successive companies: Travelers and Continental. The Travelers coverage existed prior to 2002. In 2002, Hochschild obtained a Continental policy, but that policy lapsed approximately in the 2005–06 time frame.

ANALYSIS

Uberrimae fidei has its roots in British jurisprudence. The doctrine has historically been applied to certain types of insurance contracts in the United States, dating back to 1828. The doctrine imposes the highest duty on parties to an insurance contract to disclose facts that materially affect the insurer’s risk. Several federal cases have applied the duty of uberrimae fidei in the marine insurance setting. Under uberrimae fidei, any failure to disclose a material fact not known by the underwriter that is, or should be, within the knowledge of the insured party, is grounds for rescission of the policy, even if the omission or misstatement is the result of the insured’s mistake, accident, or forgetfulness.

The second alternative basis for cancellation invoked by Continental is breach of contract.  The insurance policy that was issued to Hochschild contains the following anti-fraud language: “There is no coverage from the beginning of this policy if you or your agent has omitted, concealed, misrepresented, sworn falsely, or attempted fraud in reference to any matter relating to this insurance before or after any loss.”

The contract provisions do not require that the insured misrepresent or omit facts knowingly, or with an intent to deceive the insurer, in order to enable Continental to cancel the policy.

Both the doctrine of uberrimae fidei and the anti-fraud language included in Continental’s standardized policy form and contract allow the cancellation of coverage because of material misrepresentations or omissions, even in instances where an insured has not knowingly or intentionally tried to deceive the insurer. Those legal theories each impose a high degree of care upon an insured to assure the utmost accuracy in the responses that he or she provides on his or her policy application.

Unlike common-law legal fraud, the concept of equitable fraud does not require that a defendant make misstatements with an intent to deceive the plaintiff. Instead, equitable fraud requires proof of only three elements: (1) material misrepresentation, (2) a defendant’s intent that a plaintiff rely on those statements, and (3) plaintiff’s detrimental reliance.

This record, even when considered in a light most favorable to Hochschild, clearly show that his false or misleading responses to several objective questions on the 2008 application satisfy the three classic elements of equitable fraud. There are no genuine issues of material fact that need to be tried to a jury as to those elements.

Several of the misrepresentations Hochschild made on the 2008 application form are unquestionably material. Information provided to an insurer is material if a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.  The questions posed on the application form probed into relevant questions about the value of Hochschild’s vessel, any prior damage to the vessel, its claims history for the preceding three years, the identity of prior insurers, and the insured’s track record in maintaining past policies.

These are all topics that logically would affect the underwriting process, both as to the carrier’s decision to insure the vessel at all and, if so, as to what premium to charge.

It is obvious from the circumstances that Hochschild submitted his answers on the 2008 application with an intent and expectation that Continental would rely on his answers.

The uncontroverted record establishes that Continental relied on Hochschild’s material misrepresentations on the completed application to its detriment. Continental’s reliance was corroborated by the certification of James Holler, a Senior Vice President who heads Continental’s underwriting department. Holler certified that Continental would not have insured this vessel “at all” if Hochschild had supplied accurate answers responding to the five queries at issue.

Given this vessel’s checkered history with multiple prior incidents of damage and claims, it is entirely logical to accept Holler’s unrebutted testimony that Continental would not, in fact, have underwritten the 2008–09 policy for Sanity Chek if Hochschild had truthfully disclosed that material background in his application responses.

Because all three elements of equitable fraud are manifestly established by the record, the trial court appropriately granted summary judgment upholding Continental’s cancellation of coverage and its denial of Hochschild’s fire loss claim.

The court remanded for a trial on Continental’s IFPA claim, in which the sole liability question will center upon Hochschild’s alleged knowledge of the falsity of the material misrepresentations that appeared on his 2008 policy form.

ZALMA OPINION

The idea of equitable fraud supporting rescission is followed in several states. In a situation like this one, it should be obvious. The insured lied on the application and the insurer, relying on the false statements, issued a policy. The court found, rightly, that whether he intended to deceive or not, the insurer was deceived and had the right to rescission. As to fees under the IFPA the court requires a trial to prove the misrepresentations were intentional. If so, Continental will obtain money from its putative insured. If not, it will not. In no event will the insured recover anything.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “Zalma on California Claims

 

Posted in Zalma on Insurance | 1 Comment

Agent’s Obligations Limited

Insured’s Failure of Due Diligence Eliminates Case Against Agent

People who buy insurance are trusting souls. They believe that if they ask an insurance agent to obtain a homeowners policy for them that the agent will do everything necessary to obtain the best, most comprehensive and least expensive insurance available. However, that is not how the law looks at the situation.

In Siegfried v. Pacific Specialty Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 5861339 (Cal.App. 2 Dist., 11/13/14) Elaine Siegfried appeals from the judgment entered following the trial court’s orders granting summary judgment in favor of Pacific Specialty Insurance Company (Pacific Specialty) and Cappuccino Insurance Agency (Cappuccino).

Appellant purchased a homeowner’s insurance policy from Pacific Specialty through Cappuccino. She filed a claim with Pacific Specialty after her home was destroyed in a fire, but she requested an appraisal when Pacific Specialty paid an amount less than the policy limit. After Pacific Specialty paid the policy limit, appellant sought payment under her extended replacement cost coverage. Pacific Specialty denied the claim. Appellant filed a complaint asserting negligence by Cappuccino and breach of contract and breach of the implied covenant of good faith and fair dealing by Pacific Specialty.

FACTUAL BACKGROUND

The Homeowner’s Insurance Policy

Appellant purchased residential property in West Hills, California in 1994 and has maintained homeowner’s insurance on the property since she purchased it. In 2008, appellant purchased a homeowner’s insurance policy for the property from Pacific Specialty through Joey Cappuccino (Joey), whom she knew through his work as a mortgage broker. Appellant had occasionally worked for Joey as a real estate appraiser, and she considered him a work colleague.

Appellant contacted Joey when her policy came up for renewal, and he asked appellant for the address and size of her home “so he could run the numbers.” Other than giving him the address and size of her home, appellant did not speak with Joey about the amount of insurance she needed. She did not ask Joey about the amount of insurance she needed, and she did not recall him asking her how much insurance she wanted. Appellant trusted Joey and assumed he would choose the correct amount of coverage for her.

Appellant’s application for the insurance policy described her home as “Standard,” which resulted in an estimated value of $144,375, based on Pacific Specialty’s cost estimator. Including estimates for a garage and fireplace, the total estimated replacement cost was $171,000. The application included “Extended Replacement Cost Dwelling” coverage of 20 percent at a cost of $34. It was undisputed that Joey did not explain the insurance policy, the replacement cost, or the extended replacement cost coverage to appellant.

The application contained a statutorily-mandated “Replacement Cost Disclosure,” which stated that “Limited Replacement Cost Coverage” applied to appellant’s policy, and explained as follows: “In the event of any covered loss to your home, the insurance company will pay to repair or replace the damaged or destroyed dwelling with like or equivalent construction up to a specified percentage over the policy’s limits. See the declarations page of your policy for the limit that applies to your dwelling. Appellant did not read the disclosure.

The policy warned that “it is ultimately the insured’s responsibility to obtain adequate insurance coverage. If you feel that the dwelling replacement cost estimated above is insufficient, you should increase the coverage to the appropriate amount.”

Appellant scanned the policy and did not read the details. She did not look at the policy to see the amount of the insurance. Appellant renewed the homeowner’s insurance policy in May 2010. She paid for the renewal without examining the policy, based on the assumptions that the insurance was “working … fine so far,” and that she could trust Joey and Pacific Specialty. The renewed policy increased the estimated replacement cost to $184,000. As pertinent here, the renewal provided a limit of $190,000 under Coverage A, Dwelling, plus 25 percent extended replacement cost coverage.

The Insurance Claim

On December 19, 2010, a fire caused extensive damage to appellant’s home. Appellant submitted a claim for the loss to Pacific Specialty.  Appellant and the insurer could not agree on the amount of loss and submitted their differences to appraisal.  The appraisal panel determined the replacement cost value of the home to be $273,813.04. Based on the appraisal, Pacific Specialty paid an additional $8,742.07 to reach the policy limit of $190,000, but stated that it would not make any further payments.

In December 2011, appellant sought payment under her extended replacement cost coverage. Pacific Specialty denied appellant’s claim for extended replacement cost coverage, stating that it “must respectfully deny coverage under the Extended Replacement Cost endorsement because the home was not insured to its full replacement cost immediately prior to the loss.”

The Lawsuit

Appellant sued seeking damages for broker negligence against Cappuccino. Appellant alleged that Cappuccino was obligated to use reasonable care in procuring insurance coverage and that it breached its duty by failing to obtain adequate coverage and failing to discuss the extended replacement cost coverage with her.

DISCUSSION

Negligence Claim Against Cappuccino

Appellant contends that the trial court erred in granting summary judgment in favor of Cappuccino on her negligence claim.

Ordinarily, an insurance agent assumes only those duties normally found in any agency relationship. This includes the obligation to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. An insurance agent generally has no duty to volunteer that an insured should obtain different or additional insurance coverage. The rule changes when—but only when—one of the following three things happens: (a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided, (b) there is a request or inquiry by the insured for a particular type or extent of coverage, or (c) the agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.

There is no evidence that Cappuccino assumed a greater duty to appellant by express agreement or by holding itself out as having special expertise.
Although appellant presented evidence that she never questioned Joey or asked him any questions because she trusted him and assumed he would provide adequate coverage for her, she presented no evidence that he assumed a special duty to her. Despite her testimony that she assumed he would provide her “full” coverage in case of a loss, she never testified that she communicated to Joey what her expectations were regarding the coverage. Nor did she ask him any questions regarding the coverage.

Appellant has presented no evidence that Joey or Cappuccino ever did or said anything to make her believe that Cappuccino was an expert in homeowner’s insurance or was assuming a special duty of care to her.

Summary judgment in favor of the agent was granted. Separately, the court found that there were issues of fact concerning the claim that Pacific Specialty acted in bad faith and reversed the summary judgment in its favor.

ZALMA OPINION

The California Appellate court, following the rule of law in almost all states that an insurance agent’s liability is limited to obtaining the insurance that the insured asks for unless the agent assumes extra duties. The agent in this case did not and the Appellant failure to use due diligence to obtain the insurance she needed was fatal to her case against the agent. She still has a case against the insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Insurer’s Language Used Against It

Terms Defined for Liability Policy Should Not be Used In First Party Cover

Writing a clear and unambiguous insurance contract is a difficult task. To avoid problems insurers define special terms to prevent confusion. In Strauss v. Chubb Indem. Ins. Co., — F.3d —-, 2014 WL 6435314 (C.A.7 (Wis.) 11/18/14) the insurer’s definition of “occurrence” for the third party portion of a homeowners policy caused it difficulty when it used the same term in the first party portion of the policy.

FACTS

Randal and Diane Strauss constructed a home in Mequon, Wisconsin in 1994. The Strausses insured the home with a number of policies (collectively, “the Policy”) issued by Chubb Indemnity Insurance Company, Vigilant Insurance Company, Federal Insurance Company, and Great Northern Insurance Company (collectively, “the Chubb Defendants”) from October 1994 to October 2005. Water infiltrated and damaged the home through a defect present since the completion of construction; however, the damage went undiscovered until 2010, well after the Policy expired.

When the Strausses submitted a claim to the Chubb Defendants seeking recovery for the damage, they refused coverage, contending that because the damage manifested in 2010 and the “manifestation” trigger applies to first-party property insurance, it could not be responsible for the damage. The Chubb Defendants additionally asserted that the claim was submitted well beyond the applicable statute of limitations. The Strausses sued. The district court concluded that the “continuous” trigger theory applied due to the language of the Policy such that coverage existed for the entire loss. Because the continuous trigger theory applied, the district court found that the claims were not time-barred. The Chubb Defendants now appeal, arguing that (1) the manifestation trigger theory applies to first-party property insurance policies universally and (2) the Strausses’ suit was not timely filed. For the following reasons, we affirm.

The Strausses built their home in Mequon, Wisconsin in 1994. To insure the home, they purchased a “Chubb Masterpiece Deluxe Home Coverage” first-party property insurance policy. The Policy was issued by the Chubb Defendants over the years, from the time of construction in October 1994 through October 2005.  From 2005 onward, the Strausses obtained insurance coverage for the home from other providers.

The Policy states that coverage is limited “only to occurrences that take place while this policy is in effect.” “Occurrence” is defined as “a loss or accident to which this insurance applies occurring within the policy period. Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.” Under the Policy taken out by the Strausses, a “ ‘covered loss’ includes all risk of physical loss to [the] house or other property … unless stated otherwise or an exclusion applies.” In addition, the Policy includes a “Legal Action Against Us” clause, mandating that any action against the Chubb Defendants be brought “within one year after a loss occurs.”

In October 2010, the Strausses discovered that water infiltration had been causing damage within the building envelope of the home. The infiltration was ongoing and progressive in nature, beginning around the time of original construction and continuously occurring with each subsequent rainfall. On December 22, 2010, the Strausses submitted a claim to the Chubb Defendants for the discovered damage. The Strausses filed suit in federal court on October 19, 2011, within one year of their discovery of the damage caused by the water infiltration.

DISCUSSION

The Seventh Circuit construed the Policy as it would be understood by a reasonable person in the Strausses’ position. It refused to interpret the Policy to provide coverage for risks the Chubb Defendants did not contemplate and for which they did not receive premiums. In Wisconsin, insurance policies are interpreted under the same rules that apply to contract construction. The primary objective in interpreting a contract is to ascertain and carry out the intentions of the parties.

COVERAGE

For an insurance policy to potentially provide coverage to an insured, a triggering event must occur during the policy’s period of enforcement. Because a triggering event is necessary to implicate coverage, the core issue in this case is how coverage is triggered under the Policy for the water infiltration damage to the home.

Wisconsin has described four different theories to determine whether a “triggering” event occurred during a relevant policy period: “The ‘exposure’ theory fixes the date of injury as the date on which the injury-producing agent first contacted the body or the date on which pollution began. The ‘manifestation’ theory holds that the compensable injury does not occur until it manifests itself in the form of a diagnosable disease or ascertainable property damage. The ‘continuous trigger’ theory, also known as the ‘triple trigger’ theory, provides that the injury occurs continuously from exposure until manifestation. Finally, the ‘injury-in-fact’ theory allows the finder of fact to place the injury at any point in time that the effects of exposure resulted in actual and compensable injury.”

The Chubb Defendants urged the court to impose the manifestation trigger theory, primarily arguing that the continuous trigger theory should be limited to third-party coverage cases and that the manifestation trigger is the only trigger suitable to analyzing first-party property insurance policies. They cite a variety of cases from jurisdictions across the country utilizing the manifestation trigger in this context; however, noticeably absent from this list is any decision from a Wisconsin court.

The Seventh Circuit noted that it sits as a court, not as a legislature, It is not its province as a federal appellate court to fashion for Wisconsin what the court was certain many would say was a wise and progressive social policy.

The Chubb Defendants’ argument fails not only because Wisconsin courts have never adopted a rule that applies the manifestation trigger independent of the language found in a policy in the first-party context nor exiled the continuous trigger theory to the third-party liability landscape, but also because Wisconsin has unequivocally held that the language of a policy guides the analysis and determines whether coverage exists.

Turning to the language of the Policy as mandated by Wisconsin case law, the Seventh Circuit found that the provisions found in the Policy require the application of the continuous trigger theory.  The Policy covers “all risk of physical loss to [the] house or other property covered under this part of [the Policy], unless stated otherwise or an exclusion applies.” The Policy applies “only to occurrences that take place while this policy is in effect.” (emphasis added)

“Occurrence” is a defined term, meaning “a loss or accident to which this insurance applies occurring within the policy period. Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.”

These provisions are not ambiguous: given the Chubb Defendants’ definition of “occurrence,” which includes “continuous or repeated exposure,” the parties “contemplated a long-lasting occurrence” that could give rise to a loss “over an extended period of time.” According to the Policy’s plain language, coverage is triggered when a “loss” “occurrence” takes place during the Policy’s term.

The only reasonable interpretation of the Policy’s “covered loss” definition is that physical damage to the property triggers coverage; otherwise this provision would be superfluous. While there was only one ongoing occurrence as defined by the Policy, there was continual, recurring damage to the property with each successive rainfall.

Creating a bright-line rule at the Chubb Defendants’ request because, as the Seventh Circuit concluded, “they perhaps regret the language they drafted for the Policy” would be an inappropriate interference with the parties’ rights to contract.  The Chubb Defendants were in the best position to dictate how the Policy would be activated, its coverage, and its exclusions. Letting the Chubb Defendants off the hook now would reward their sloppy drafting.

Here, because the loss was ongoing and occurred with each rainfall and because the Policy itself states that “[c]ontinuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence,” the loss, for purposes of the statute of limitations, occurred all the way up until the damage manifested in October 2010. The parties do not dispute that the Strausses filed suit within one year of manifestation of the water infiltration.

ZALMA OPINION

All that Chubb needed to do to avoid the decision of the Seventh Circuit was to eliminate the defined term “occurrence” from the first party portion of their policy and replace it with a word like “loss” or a phrase like “physical damage to property.” The “occurrence” definition is traditional and a broad definition for third party liability coverages but does not – as this case makes clear – work for a first party property policy and extended coverage well beyond the intent of the drafters of the policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Not All Relatives Are “Resident Relatives”

A Person Cannot Reside Primarily in Two Places

In the 21st Century more grown, emancipated children are living with their parents. Automobile liability insurance policies are written to protect the parents insurer from providing coverage to a resident relative who has his own coverage when operating a motor vehicle owned by the parent or other relative.

In State Farm Mut. Auto. Ins. Co. v. Schaefer, Slip Copy, 2014 WL 5844043 (W.D.Mo., 11/12/14) State Farm sought declaratory judgment from the District Court for the Western District of Missouri under a policy issued to Carl Winters. Defendant Kimberly Schaefer was injured in a motor vehicle accident involving Craig Winters, who was driving a car insured by a State Farm policy that was issued to his father, Carl Winters.

ISSUE

The sole issue before the Court is whether, under the terms of Carl Winters’ insurance policy, his son, Craig Winters, was a “resident relative” at time of the accident. The Parties agree that if Craig Winters was a “resident relative,” then Schaeffer is not entitled to the additional $100,000 under Carl Winters’ policy; if he was not a “resident relative,” then State Farm will pay the additional $100,000.

BACKGROUND

On August 1, 2013, Craig Winters was in a motor vehicle accident with Defendant Kimberly Schaefer in Missouri. At the time of the accident, Craig was driving a vehicle owned by his father, Carl Winters, which was insured in Carl’s name by State Farm. The policy provided liability coverage up to $100,000. Craig was separately insured by State Farm under an automobile policy which provided liability coverage up to $250,000, and under a personal liability umbrella policy which provided coverage up to $1,000,000.

Following the accident, State Farm made a settlement payment on behalf of Craig and Carl Winters to Schaefer in the amount of $1,250,000. As part of the settlement agreement, Schaefer agreed to dismiss the underlying lawsuit against Craig and Carl Winters, but reserved the right to pursue the additional $100,000 of coverage under Carl’s State Farm automobile policy through an action for declaratory judgment.

CARL WINTERS’ POLICY

The provision at issue states, in part:

If Other Liability Coverage Applies
“1. If Liability Coverage provided by this policy and one or more other Car Policies issued to you or any resident relative by one or more of the State Farm Companies apply to the same accident, then:
“a. the Liability Coverage limits of such policies will not be added together to determine the most that may be paid; and
“b. the maximum amount that may be paid from all policies combined is the single highest applicable limit provided by any one of the policies.”

The policy defines “resident relative” as “a person, other than you, who resides primarily with the first person shown as a named insured … and who is … related to that named insured … by blood.”

EVIDENCE RELATED TO CRAIG WINTERS’ PRIMARY RESIDENCE

At the time of the accident, Craig was approximately forty-nine years old. He was raised at his parents’ home in Gardner, Kansas, and left the family home approximately thirty years ago to attend dental school. After graduation, Craig returned to Gardner, Kansas, lived in his own home, and practiced dentistry until he retired approximately four years prior to the accident.

After retiring, Craig leased his home. For the next four years, Craig traveled “all over,” primarily in South and Central America. During that time and leading up to the accident in August 2013, he never had a long-term lease or rental agreement. Instead, he traveled and stayed with his wife’s family or in hostels. For approximately six months prior to the accident, Craig lived in Lima, Peru with his wife in her mother’s home. Craig testified that at the time of the accident, he had been living in South or Central America for four years.

While Craig traveled and lived in South or Central America, his mail, including bills, insurance policies, and tax returns, was delivered to his parents’ home. However, most of his mail was delivered via e-mail, and some mail was delivered to his private post office box. Some of his belongings were also stored in his parents’ home, including files, tax returns, clothes, some furniture, and artwork.

At the time of the accident, Craig had been staying with his parents for two to three days. His return flight to Peru was booked for the upcoming week. The day of the accident, Craig borrowed his father’s car.

A few days after the accident, Craig returned to Peru and stayed there for approximately two months until he returned to Kansas for matters related to the accident. He stayed with his parents for approximately one week, but after learning that he would need to be in Kansas for a prolonged stay, he rented an extended-stay hotel and then a loft in Kansas City, Missouri. He did so because he believed he was “too old to be living with [his] parents on a long-term basis.”

DISCUSSION

When interpreting an insurance policy, a court gives the language its plain meaning. The plain or ordinary meaning is the meaning that the average layperson would understand and is determined by consulting a standard dictionary.

The court gave the phrase “resides primarily” its plain or ordinary meaning.  To have a “primary” residence under this commonly accepted definition means that while a person may reside in two places for purposes of insurance coverage, a person cannot reside “primarily” in two places.

Whether Craig Winters Primarily Resided with Carl Winters

Plaintiff argues that Craig Winters was not a “resident relative” of Carl Winters because although Craig stayed with his parents from time to time, stored some of furniture and belongings at the house, and received his mail there, the home was not where he primarily resided. Craig moved out of his childhood home nearly three decades ago, went to school, and established a dental practice.  At the time of the accident, Craig had been staying with Carl for two to three days as part of a one-week visit. He testified that at the time of the accident, he had lived in Lima, Peru with his wife and her family for approximately six months. Prior to his six month stay in Peru, he traveled throughout South and Central America for approximately four years, sometimes staying in a particular location for two or three months.
State Farm argues that Craig was a “resident relative” of Carl because he had no intention of making other arrangements for a place to keep his belongings or to stay when he was in town.

Craig stored some of his personal items at his father’s home and forwarded most of his mail there, but he also testified that most of his information was set up through electronic billing and that his father’s address was used for “whatever still comes on paper.” There is no evidence in this case that after moving out of his father’s house thirty years earlier, Craig actually ever lived with his parents for longer than his typical one-week visits.

While Craig testified that he did not have a residence elsewhere, it is clear that under the meaning of the terms in Carl’s policy, at the time of the accident, Craig primarily resided in Peru, not in Carl’s home.

The evidence in this case was sufficient to support a finding that Craig was a “relative” under the policy provisions. However, it was insufficient to support a finding that he was a “resident relative” under the actual policy provisions in Carl’s policy. Accordingly, State Farm’s Motion for Summary Judgment is denied and Schaeffer’s Motion for Summary Judgment is granted and Ms. Schaeffer must receive an additional $100,000 from State Farm.

ZALMA OPINION

This was not a difficult case for the court. Craig, although he had slept in his parents home for three days before the accident, his history was clear, for more than thirty years he never spent more than a week at the home of his parents. State Farm had viable arguments that Craig may have maintained a domicile in his parents home, but the policy required he be a “resident relative” to be eliminated from coverage under his father’s policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 1 Comment

No Good Deed Goes Unpunished

Duty of Good Faith Is Mutual

Plaintiffs’ counsel have no problem suing insurers for breach of the covenant of good faith and fair dealing. Their clients see a legitimate insurance claim as an opportunity to profit from the claim by acting in a manner that will lead an insurer to deny the claim so that they could later claim the tort of bad faith.

As a justice of the California Supreme Court once said, “The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.”  [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

In Shifrin v. Liberty Mut. Ins., — Fed.Appx. —-, 2014 WL 5840732 (C.A.7 (Ind.) 11/12/14) Brian and Melanie Shifrin appealed a trial court’s grant of summary judgment for Liberty Mutual Insurance in their diversity action asserting breach of contract and negligence with regard to their homeowners-insurance coverage.

FACTS

After a tornado damaged their barn and the roof of their house, the Shifrins filed an insurance claim. An adjuster from Liberty promptly inspected the damage, and a contractor hired by the insurer installed tarps over the house’s damaged roof. The adjuster determined that the cost to repair the damage to the barn likely exceeded the building’s coverage, so Liberty paid them $14,226 (the policy limit) for the barn’s damage. The adjuster also advised the Shifrins that they needed to replace their house’s roof immediately to protect the house from further damage.

About six weeks later, the adjuster re-inspected the property (at the Shifrins’ request) and saw new water damage. He again told the Shifrins that their policy required them to repair the roof to protect the house from further damage. He estimated the cost to repair the damage to the house at $22,713, though he acknowledged that there were “some open items” including “the remediation of the premises once the roof is replaced.” Liberty issued the Shifrins a check in the estimate’s amount.

The Shifrins disputed the amount of that payment because it did not include damage to their house’s foundation. In response to the Shifrins’ contention, Liberty had the property inspected by an engineer, who determined that the tornado had caused some cracks in the foundation—damage that was covered by the policy. Liberty agreed to pay to repair those cracks once the Shifrins selected a contractor to do the work, but the Shifrins disputed the engineer’s determination that only some of the cracks were caused by the tornado.

Liberty suggested that they hire their own engineer to evaluate the damage and advised them that under the terms of their policy, they were entitled to an appraisal if they disputed the report of Liberty’s engineer. Over the following months, the Shifrins and Liberty continued to disagree about the extent of the house’s tornado-related damage and the necessary repair costs, and the Shifrins learned that Liberty would not renew its policy after its expiration.
Eventually Liberty’s adjuster met with a contractor whom the Shifrins had selected, and both men agreed on the cost of the work to repair the damage to the roof and inside the house. The adjuster revised his estimate to $36,950.94, and Liberty issued the Shifrins a supplemental payment of $14,237.25 (the difference between the earlier estimate and the revision); Liberty reminded the Shifrins that “we will afford coverage for water remediation when the work has been performed” but that the work “can only take place once the roof has been replaced.” The parties continued to wrangle over the amount of loss. After the Shifrins insisted that there was additional damage to the roof, siding of the house, and the chimney, Liberty arranged for another engineering inspection. The Shifrins objected to the new report, and Liberty decided to initiate an appraisal process, as provided in the Shifrins’ policy; the Shifrins refused to participate. The roof still had not been repaired.

The Shifrins brought suit. The district court granted Liberty’s motion for summary judgment. The court agreed with the insurer that the Shifrins had breached the policy by failing to have the roof repaired. The court also concluded that Liberty properly invoked—and did not waive—its right to an appraisal, and that the Shifrins’ refusal to participate in the appraisal process was another instance in which they did not comply with their policy’s conditions.

The Shifrins appealed, essentially challenging the trial court’s conclusion that they breached their insurance contract by refusing to repair the roof. They assert that they were not obligated under the policy to repair the roof because Liberty had agreed to repair it and the repairs would have been too expensive relative to the house’s value.

DECISION

The appellate court concluded that the Shifrins breached their policy by not repairing their roof after the tornado. Under the policy, any loss required them to “protect the property from further damage” and, if repairs were required, to “make reasonable and necessary repairs to protect the property.”

A contract provision requiring the insured to complete certain duties after a loss is not optional, and non-compliance is a breach of the contract.

The Shifrins also challenge the district court’s denial of their motion for summary judgment and maintain that Liberty breached the contract and acted in bad faith by not repairing the roof or the interior water damage.

But as the district court stated, the Shifrins didn’t identify any part of the contract requiring Liberty to repair the roof; Liberty paid them $36,950.94 (the estimate of the cash value of the damage) before any repair or replacement was performed and agreed to pay for moisture remediation after the roof was repaired. Liberty also demanded appraisal and the Shifrins refused to participate, a second breach of the contract of insurance.

ZALMA OPINION

Insurance promises to indemnify an insured. It does not promise to repair it only promises to pay the money required to repair. Under full replacement cost provisions the insured is required to actually do the repair before the difference between actual cash value and replacement value.  In this case the insured attempted to create a bad faith case out of a simple wind loss. They failed because they intentionally refused to comply with material policy conditions even after the insurer bent over backwards to satisfy them, hired engineers and expanded their estimate to comport with the estimate created by the insured’s contractor, only to have the insured do nothing to repair their property and then sue the insurer for bad faith damages.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 2 Comments

The Fight Against Fraud Continues

Zalma’s Insurance Fraud Letter – November 15, 2014

In the 22st  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on November 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.     The Covenant of Good Faith & Fair Dealing & the Fraud Investigator
2.     New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.     Lawyer Loses License For Health Care Fraud
4.    Commit Fraud & Lose Your Assets
5.    Arson-Detection Dogs are Heros in Florida
6.    $3.2 Million Death Master File Settlement
7.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.
8.    Terrorism and Insurance Fraud

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Bad Faith “Set-Up” Fails – November 14, 2014
2.    Subrogation – November 14, 2014
3.    No Claim, No Settlement, No Coverage – November 13, 2014
4.    Location of Injury & Employment Controls – November 12, 2014
5.    Clear & Unambiguous Language Controls – November 11, 2014
6.    Collapse or Sewer Backup – November 11, 2014
7.    Insured May Reject or Limit UM Coverage – November 10, 2014
8.    Incorrectly Denying Claim Not Bad Faith – November 7, 2014
9.    Erroneous Denial Not Bad Faith – November 6, 2014
10.    Construction Defects an “Occurrence” in Texas – November 5, 2014
11.    You Can Beat the IRS – November 4, 2014
12.    Agent’s Duty – November 3, 2014
13.    Chutzpah & Fraud – October 31, 2014
14.    When Reserves Are Not Discoverable – October 30, 2014
15.    What is a Real Estate Manager? – October 29, 2014
16.    Waiver of Stacking – October 28, 2014
17.    Failure to Secure Insurance – October 27, 2014
18.    Intentional or Criminal Act Uninsurable – October 24, 2014
19.    Lawyers Should Keep Their Promises – October 23, 2014
20.    Construction Defects Coverage Guide – October 22, 2014

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Bad Faith “Set-Up” Fails

Refusal of Policy Limit Demand Not Bad Faith

The potential for punitive damages against an insurer who fails to pay policy limits after receiving a reasonable offer of settlement tempts plaintiffs’ lawyers to make policy limits demands quickly, and with a very short time limit, hoping the insurer is unable or unwilling to meet the time limit. It is inappropriate conduct and often acts against the interests of the client plaintiff. Often the ploy works. Sometimes, like in Graciano v. Mercury General Corporation, Not Reported in Cal.Rptr.3d, 2014 WL 5298172 (Cal.App. 4 Dist.. 10/17/2014) it fails because the ploy is obvious and clearly unfair and prejudicial to the rights of the insurer.

FACTS

Plaintiff Sonia Graciano suffered severe injuries when she was struck by a car driven by Saul Ayala (Saul). Saul was insured by a policy issued by defendant California Automobile Insurance Company (CAIC), which had policy limits of $50,000. Less than three weeks after Graciano’s attorney first contacted CAIC alleging Graciano was injured by one of CAIC’s insureds, during which time Graciano misidentified both the name of the driver and the applicable insurance policy, CAIC completed its investigation of the accident, identified the correct insurance policy and driver, and tried to settle Graciano’s claim against Saul by delivering to Graciano’s attorney a “full policy limits offer.”

Graciano did not accept CAIC’s full policy limits offer and, in the present action, asserts CAIC and its parent and affiliated companies (together Defendants) acted in bad faith, based on an alleged “wrongful failure to settle.” Graciano argues CAIC could have and should have earlier discovered the facts, and should have made the full policy limits offer more quickly. The jury found in favor of Graciano and the insurer appealed. \

The Two CAIC Policies

Saul was a named insured on CAIC policy No. 040115180005897, in effect on the date of the accident (Saul’s policy) with a policy limit of $50,000. The Cadillac was a listed vehicle on Saul’s policy.

CAIC had also insured Jose Saul Ayala (Jose) under a separate policy (policy No. AP00401514, Jose’s policy), and the Cadillac was also a listed vehicle on Jose’s policy. Jose’s policy, which had policy limits of $15,000, had been canceled approximately six months before the accident.

The Two Reports of the Accident

Saul reported he fell asleep while driving and had struck a woman and injured her. Based on the preliminary information, CAIC believed the driver was 100 percent at fault. By October 30, 2007, CAIC’s adjuster believed it would likely be an “excess bodily injury claim,” meaning the amount for which Saul was liable would exceed the amount of coverage provided by CAIC’s policy. CAIC apparently did not know at that point the identity of the person injured by Saul.
Graciano’s Report

Three days after Saul’s report, Ms. DeDominicis contacted a CAIC call center in Texas to report her client (Graciano) had been injured by a driver insured by CAIC. DeDominicis reported Graciano was injured on October 21, 2007, gave the call center “AP00297623” as the driver’s policy number with CAIC, and told CAIC the driver’s name was “Saulay Ala.”

Graciano’s Demand Letter

On November 5, 2007, DeDominicis mailed a demand letter to Talley. The letter identified Jose as the “named insured,” the policy as “Policy # AP00401514,” the “Date of Loss [as] October 21, 2007,” and described Graciano’s extensive injuries. The offer to settle for verified policy limits was stated to expire within ten days of the date of the letter. That letter was not received by Talley until November 8.

The previous day, Talley first received the police report of the incident. The police report correctly reflected Saul was the driver but still listed Jose’s old policy (i.e., policy No. AP00297623) as the applicable insurance policy.

CAIC’s Response to the Demand for Jose’s Policy Limits

By Monday, November 12, CAIC’s investigation of Graciano’s report and claim had determined Saul, whom the newly obtained police report listed as the driver who struck Graciano, was a “non-listed driver” on Jose’s policy and, according to the police report, did not reside at Jose’s address.  That day, CAIC again tried, without success, to speak with DeDominicis about Graciano’s claim.

CAIC immediately prepared a letter offering $50,000, which it identified as the full policy limits on Saul’s policy, in full and final settlement of Graciano’s injury claim. Graciano did not accept CAIC’s offer to settle her claims against Saul. Instead, she pursued her action against Saul. Graciano obtained a judgment against Saul for over $2 million and obtained an alleged assignment of Saul’s rights against CAIC.

The court excluded evidence proffered by the defense to support its argument that DeDominicis’s offer to settle for the policy limits was not a genuine offer and that, once CAIC informed her that it appeared there was no coverage under Jose’s policy, its subsequent efforts to settle on behalf of Saul were hampered by DeDominicis’s machinations. For example, although DeDominicis knew (not later than November 7, 2007) that the driver’s name was Saul Ayala, Jr., her November 5 demand letter, as well as her November 7 letter enclosing Graciano’s medical bills and her November 8 letter reiterating the November 15 deadline for CAIC to respond, continued to refer solely to Jose and Jose’s policy number without any mention of Saul. Additionally, the court excluded evidence that CAIC tried to reach DeDominicis telephonically on the afternoon of November 15 to convey the offer to settle, but those calls went unanswered, and excluded evidence that CAIC’s efforts to fax the offer of policy limits during this same time frame were prevented because DeDominicis had (in a departure from ordinary procedures) turned her fax off.

APPLICABLE LEGAL STANDARDS

In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach. The standard of good faith and fairness examines the reasonableness of the insurer’s conduct, and mere errors by an insurer in discharging its obligations to its insured does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer’s conduct must also have been unreasonable.   The law clearly states that erroneous denial of a claim does not alone support tort liability; instead, tort liability requires that the insurer be found to have withheld benefits unreasonably.

An insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits.

A claim for bad faith based on an alleged wrongful refusal to settle also requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance.

ANALYSIS

There Is No Substantial Evidence CAIC Unreasonably Rejected an Offer to Settle Saul’s Liability

Nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear, but instead requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. The court concluded that there was no evidence Graciano ever offered to settle her claims against Saul for an amount within Saul’s policy limits.

The only settlement “offer” CAIC could have accepted was DeDominicis’s November 5, 2007, letter. It identified Jose as the named insured, the relevant policy as Jose’s policy (e.g. “Policy # AP00401514”), and (after describing Graciano’s extensive injuries) stated DeDominicis had been retained to pursue Graciano’s remedies “arising out of an event in which your above-referenced insured and/or their vehicle struck [Graciano]”, and demanded that CAIC “immediately provide a copy of the declaration page and payment of the maximum bodily injury policy limits…. ”

Graciano cites no authority that an offer to release one potentially liable party (here, Jose) in exchange for that party’s policy limits, if rejected by the insurer, can serve as the basis for a “wrongful refusal to settle” claim by a different potentially liable party (here, Saul), and analogous authorities suggest a contrary rule. Graciano argues these cases do not support reversal because claimants are not required to begin settlement overtures with letter-perfect offers to which insurers need only respond “Yes” or “No.” An insurer’s duty of good faith would be trifling if it did not require an insurer to explore the details of a settlement offer that could prove extremely beneficial to its insured.

The only evidence in the record is that Graciano’s misidentification of the applicable policy did cause actual prejudice to CAIC because the insurer showed a substantial likelihood that, with timely notice, it would have attempted to settle the claim.  Once CAIC learned of the applicable policy, it did not decline coverage for the same reason (or for any reason) but instead proffered the full policy limits in an attempt to protect its insured. Because the undisputed evidence shows CAIC was actually prejudiced by the misidentification of the applicable policy, and also shows (notwithstanding the misidentification) CAIC undertook a continuing investigation there was no evidence to support judgment against CAIC.

A claim for “wrongful refusal to settle” requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. When a liability insurer does timely tender its “full policy limits” in an attempt to effectuate a reasonable settlement of its insured’s liability, the insurer has acted in good faith as a matter of law because by offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.

ZALMA OPINION

Counsel for the plaintiff attempted, by making a quick policy limits demand with a short – ten day – limit to respond believed that she had set up CAIC for a bad faith judgment and could collect the full $2 million verdict from the insurer with a $50,000 limit. By demanding settlement from the wrong person with the wrong policy, the attempt failed. Counsel, to protect the client, should have dealt in good faith with the insurer and accepted the $50,000 when it was pointed out to counsel that the delay in offering policy limits was due to the failure to properly report the name of CAIC’s insured and policy number. Since it appears Saul was judgment proof it would have been in plaintiffs’ best interest to accept the offer.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Subrogation

The Equitable Remedy to Reduce Insurer’s Net Loss

The following article is adapted from Insurance Claims: A Comprehensive Guide by Barry Zalma and available at the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary.

The equitable doctrine of subrogation places the subrogee in the precise position of the one whose rights are subrogated. Subrogation is the remedy called into existence for the purpose of enabling a party secondarily liable, but who has paid the debt, to reap the benefit of any securities which the creditor may hold against the principal debtor, and by the use of which the party paying may thus be made whole. Texas law recognizes three sources of subrogation rights: equitable, contractual, and statutory.

Every claim requires a thorough investigation of subrogation possibilities. The insurance claims person who ignores the possibility of subrogation is completing only half of a thorough investigation. The equitable remedy arises from tort, contract or equity.

In 1748, the House of Lords in England decided in Randall v. Cochran, where an insurer for an English ship that was taken by the Spanish, was permitted to bring suit in the name of its insured against the administrators of a public prize fund, compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor, quoted in an article by John J. O’Brien, said:

The plaintiffs had the plainest equity that could be. The person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer … the assured stands as trustee for the insurer, in proportion for what he paid. [John J. O’Brien, J.D., CLU, CPCU, “The Origins of Subrogation,” Property/Casualty Insurance, January/February 2005, see www.subrogation.net/Home.aspx.]

The earliest master of insurance law in England was Lord Mansfield, who addressed subrogation in a case called Mason v. Sainsbury in 1782. Rioters had ransacked Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district. The insurance company pursued a recovery action against the administrator in the name of its insured.

Traditionally, an insurer that pays its insured’s claim is entitled to recover the payment from the third party who caused the insured’s covered loss. This concept

is called subrogation, and can arise by contract, statute, or equitable principle. As early as 1888, the US Supreme Court found that equitable subrogation was a well-recognized doctrine. The Supreme Court stated the historical rule that:

The Equitable assignee of a chose in action has the right to go into a court of equity to have his interest therein established; and when so established he will have the right to complete relief in the same action by decree of specific performance of the contract. [Aetna Life Insurance Company v. Middleport, SCT.40059; 124 U.S. 534, 31 L.Ed. 537, 8 S.Ct. 625 (1888).]

Regardless the Supreme Court found that the insurer acted as a volunteer and ruled against its right of subrogation.

The US Supreme Court stated the basic rule of subrogation as follows:

 

Hence it has often been ruled that an insurer, who has paid a loss, may use the name of the assured in an action to obtain redress from the carrier whose failure of duty caused the loss. Hall & Long v. Railroad Companies,13 Wall. 367, 369 … But it is equally well settled that the right, by way of subrogation, of an insurer, upon paying for a total loss of the goods insured, to recover over against the carrier, is only that right which the assured has, and that accordingly when a bill of lading provides that the carrier, when liable for the loss, shall have the full benefit of any insurance that may have been effected upon the goods, this provision is valid, as between the carrier and the shipper; and that, therefore, such provision limits the right of subrogation of the insurer, upon paying the shipper the loss, to recover over against the carrier. Phoenix Ins. Co. v. Erie & Western Transportation Co.,117 U.S. 312; St. Louis, Iron Mountain; Railway v. Commercial Union Insurance Co., 139 U.S. 223. [Wager v. Providence Insurance Company v. Morse., 1893. SCT. 40365; 150 U.S. 99, 37 L. Ed. 1013, 14 S. Ct. 55 (1993).]

Generally, to protect its subrogation right, an insurer may seek intervention in the insured’s lawsuit against the legally responsible party or may wait to seek the funds from its insured. The purpose of subrogation is to prevent the insured from obtaining a double recovery (and thus being unjustly enriched) and to place the responsibility for paying the loss on the party who caused the loss.

The “made-whole” rule is a common law exception to an insurer’s subrogation right. As applied in California, the rule generally precludes an insurer from recovering any third party funds unless and until the insured has been made whole for the loss. The applicability of the doctrine generally depends on whether the insured has been completely compensated for all the elements of damages, not merely those for which the insurer has indemnified the insured.  In many jurisdictions, including California, courts hold that parties may avoid the made-whole exception by contract. California courts have recognized that the made-whole exception does not apply if the insurer participated in prosecuting the claim against the third party. A separate and independent limitation on the subrogation and reimbursement right provides that an insurer’s reimbursement from its insured is subject to the insurer bearing a pro rata portion of the insured’s attorney fees and costs incurred to obtain the recovery from the third party.

In several jurisdictions adopting the made-whole rule, the courts have stated or assumed that attorney fees and costs should be deducted from the total recovery in determining whether the insured was made whole. Several other jurisdictions have specifically held that attorney fees and costs to obtain the third party recovery should not be deducted from the insured’s total recovery for purposes of the made-whole rule calculation.

Because attorneys’ fees are not recoverable in a tort action, the fees paid by an insured have no effect on determining if he or she was made whole. It is well established in California and in most states that an insurer has the right to enforce a subrogation and reimbursement contractual provision to require an insured to repay the insurer in the event of a recovery for the covered loss from a third party. It is not the purpose of the made-whole exception to eliminate this right merely because it would appear fair to do so. Rather, the applicability of the made-whole rule depends on whether the insured has received an amount that is equivalent to all the damages to which he or she is entitled under California law. Where the insured reports that he or she has received that full recovery, there is no valid basis for precluding an insurer from reimbursement after the insured has twice recovered for the same loss.

ZALMA OPINION

For an insurer to be profitable it is important that it implement an aggressive subrogation effort. By taking on the rights of an insured who is entitled to immediate payment from the insurer the insurer can recover some or all of the monies paid from a tortfeasor or person obligated to pay for the loss by contract. By so doing the net claims payments made over a period of time can be reduced.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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


Posted in Zalma on Insurance | Leave a comment

No Claim, No Settlement, No Coverage

When Is an Insured “Legally Obligated to Pay?”

People without a great deal of knowledge about the danger of being exposed to mold are frightened when it appears in a residential property. When a condominium project with more than 190 units became infested with mold because of the use of impermeable wallpaper the management company instituted a remediation program that cost it more than $11 million. No lawsuit was filed by the property owner. No claims were presented by the property owners. They agreed to the remediation but were never asked to, nor did they, sign a release.

 

In Busch Properties, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Slip Copy, 2014 WL 5564580 (E.D.Mo., 10/31/2014), The District Court for the Eastern District of Missouri was asked to grant defendant’s motion for summary judgment because its insured was never “legally obligated to pay damages to anyone.

BACKGROUND

The coverage dispute between Busch Properties, Inc. (BPI) and National Union Fire Insurance Company of Pittsburgh, Pa. ( National Union) occurred as a result of BPI’s actions as the property manager for condominiums at the Kingsmill Resort (Kingsmill) in Williamsburg, Virginia, a gated residential golf community. National Union was the general liability insurance carrier for BPI from September 1, 1994 to July 1, 2004.

In 2003, BPI personnel became aware of a serious mold problem inside the condominium development at Kingsmill. According to BPI, the primary cause of the mold was determined to be the use of impermeable vinyl wallpaper which prevented moisture in the walls from escaping, thereby providing a fertile climate for mold to develop and spread inside the walls of the units. BPI, as the property manager, had selected and installed the vinyl wallpaper in the units at Kingsmill. As a result, BPI believed that it faced significant exposure from potential claims by unit owners and resort guests alleging property damage or bodily injury.

On December 1, 2003, BPI notified its insurers, including National Union, of the problem. BPI informed its insurers, including National Union, that its proposed strategy was to proactively remediate the problem. BPI alleges it paid remediation costs of approximately $11.3 million to address the damage caused by the mold problem.

BPI filed this lawsuit on December 17, 2012, nine years after giving notice to its insurers, alleging claims of breach of contract and vexatious refusal to pay. National Union admits that BPI provided notice regarding the alleged mold problem and its efforts to remediate the affected units. National Union contends, however, that it did not consent or otherwise agree to BPI’s remediation plan.

INTERPRETATION OF INSURANCE CONTRACTS

Under Missouri law, the interpretation of an insurance contract is generally a question of law, particularly in reference to the question of coverage.  Unless an ambiguity exists, the policy must be enforced as written. The plaintiff has the burden of showing that the loss and damages are covered by the policy; the defendant insurer has the burden of demonstrating the applicability of any exclusions on which it relies.

DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

The Consent agreement between BPI and the property owners provided that the abatement of mold would be done at no cost to the owners. Further, the Consent provided, among other things, that it did not obligate BPI to proceed with the remediation project, that BPI did not admit liability, and that the owners gave irrevocable and blanket consent to BPI to take whatever actions it deemed necessary to remediate the mold. The Consent did not provide for a general release of claims the owners might have against BPI.

BPI did not receive any claims from property owners, nor were any lawsuits filed against it, related to the mold issue.

National Union noted that National Union did not have evidence that BPI was legally obligated to pay damages or incurred liability imposed by law in connection with the Kingsmill mold remediation as would be required for the policies to provide coverage.

ANALYSIS

National Union raises five issues in its motion for summary judgment. National Union contended that BPI is not entitled to coverage for the costs to repair property damaged by mold because it cannot show, as required by the policies at issue, that it was “legally obligated to pay” for such damages. National Union argues that BPI is not entitled to coverage for costs to repair property damage based on its bare assertion that it was liable. Under Missouri law, a legal obligation to pay for insurance purposes requires at least a settled claim against the insured that gives rise to a legally enforceable obligation.

Missouri law recognizes a claim and a settlement agreement as sufficient to establish that an insured is legally obligated to pay damages. In other states, the Court notes divergent judicial views on what is required to establish that an insured is “legally obligated to pay damages.” The term “legally obligated to pay as damages” under a CGL policy requires a final judgment or a settlement as a result of a lawsuit. The court was reluctant to say that a written demand alone, without the coercive force of a lawsuit, can be considered a process that could result in the insured being “legally obligated to pay.”

The insured bears the initial burden to prove a prima facie case by producing evidence of the good faith and reasonableness of its settlement. Additionally, in cases of environmental pollution and its regulation by state and federal entities, the courts have been more willing to find sums paid to remediate damage done to specific property or to pay into a state cleanup fund to be the result of ‘legal obligation.

Requiring a settled claim, except in environmental cleanup cases where the legal obligation is mandated by statute,  serves the purpose of providing the insurer with an opportunity to investigate and weigh in on the claim and protect the insurer’s interest as established by the insurance policy.

In this case, BPI did not settle any potential or formal claims or lawsuits. It is undisputed that none of the property owners made any claims or filed any lawsuits against BPI related to the mold issue at Kingsmill. It is also undisputed that BPI did not enter into any settlement agreements with, or obtain any releases of claims from, the property owners with regard to the mold remediation undertaken by BPI at its own cost.

In essence, BPI proposes that this Court depart from existing case law and hold that “legally obligated to pay as damages” does not require a settled claim or a settlement or judgment arising from a lawsuit, but instead simply requires BPI to show potential legal liability and voluntary payment of alleged damages without a release or settlement agreement. This position is supported neither by existing Missouri law nor by any other states that have considered this issue. Further, it would be unreasonable for an insured to be able to unilaterally obligate an insurer to pay damages where there has been no protection of the insurer’s interest. Without a settled claim or a settlement or judgment arising from a lawsuit, BPI cannot show it was “legally obligated to pay by reason of liability imposed by law.” As a result, there is no coverage under the insurance policies.

ZALMA OPINION

This case poses a warning to people insured by a liability insurance policy to work closely with the insurer when working to remediate problems that expose the insured to damages far in excess of the sums required to remediate the exposure. Had BPI worked closely with National Union and made certain that each of the property owners made a claim or executed a settlement agreement that would have qualified as a legal obligation to pay. Bad wording of the Consent agreement and failure to close the remediation with a release would have saved BPI $11 million.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | 2 Comments

Location of Injury & Employment Controls

Workers’ Compensation Applies in State of Injury

When a party believes a trial court has erred it can petition an appellate court for an order directing the trial court to correct the alleged error. The process is called seeking a writ of mandamus.

In Ex parte Dalton Logistics, — So.3d —-, 2014 WL 5785802 (Ala.Civ.App., 11/7/14), Dalton Logistics (“the employer”) petitioned the Alabama Court of Appeals for a writ of mandamus directing the Choctaw Circuit Court to grant the employer’s motion seeking a summary judgment in a civil action brought against it by Ernest Harold Presley (“the employee”) pursuant to the Alabama Workers’ Compensation Act, Ala.Code 1975, § 25–5–1 et seq. (“the Act”).

The employer asserts in that petition that the Act does not apply to the employee’s claim, which stems from an injury sustained by the employee at a work site in North Dakota, and that the trial court lacks subject-matter jurisdiction.

FACTS

The employee testified at his deposition that he contacted the secretary for the employer’s president, and the secretary sent “paperwork” to the employee’s Alabama residence via facsimile transmission for the employee to complete to finalize the employment arrangement. The employee testified that he completed the paperwork and had thereafter sent that paperwork via facsimile transmission to the secretary (who was in Texas. The secretary arranged for the employee to pick up a prepaid airplane ticket in Meridian, Mississippi, by which he would be able to fly to North Dakota to report to work.

The employee testified that was picked up at an airport in Minot, North Dakota by representatives of the employer and had been billeted in a “man camp” in that state consisting of a number of house trailers and a common dining area. From the “man camp,” the employee traveled to and from job sites between 20 and 150 miles away and performed work for the employer moving oil-drilling equipment among locations, typically working for 20 straight days in North Dakota and spending the following 10 days in Alabama after having flown home at the employer’s expense via commercial airlines.

According to the employee’s deposition testimony, it was in the vicinity of Ray, North Dakota, approximately 40 miles from the “man camp,” that he sustained an injury in August 2012 when his back struck a mud pump. It is that alleged injury that the employee claimed in his March 2013 complaint and that he claimed warranted an award of benefits under the Alabama Workers’ Compensation Act. In March 2014, the employer filed a motion for a summary judgment asserting that the Act did not provide a legal remedy to the employee; the employer relied upon the employee’s complaint and the transcript of his deposition.

The trial court entered an order on June 20, 2014, denying the employer’s summary-judgment motion, and the employer filed its mandamus petition within the presumptively reasonable time for seeking review of the trial court’s order.

DISCUSSION

The principal substantive question raised by the petition and answer is whether the Act applies to the employee’s claimed workplace injury. It is undisputed that the injury alleged by the employee occurred in North Dakota, not Alabama. However, although the employee’s injury occurred outside Alabama, that fact alone does not disqualify him from receiving benefits under the Act. Generally, under the Act, if an employee, while working outside Alabama, suffers an injury as to which that employee would have been entitled to workers’ compensation benefits under Alabama law had that injury occurred in Alabama, that employee will be entitled to benefits under the Act provided that one of several alternative conditions has been fulfilled. Benefits under the Act are payable if, at the time of the injury:

[1]     the employee’s employment was ‘principally localized’ in Alabama or

[2]     the employee was working under an employment contract entered into in Alabama as to three discrete types of employment:

(a)     employment that was not ‘principally localized’ in any state;

(b)     employment that was ‘principally localized’ in another state but was provided by an employer that was not subject to that state’s workers’ compensation law; and

(c)     employment outside the United States. See Ala.Code 1975, § 25–5–35(d)(1)–(4); see also 2 Moore, Alabama Workers’ Compensation, § 30:37; and Associated Gen. Contractors Workers Comp. Self Ins. Fund v. Williams, 982 So.2d 557, 559–60 (Ala.Civ.App.2007).

Given the importance of the issue to the extraterritorial application of the Act it is unsurprising that the parties disagree with respect to the location as to which the employee’s employment was “principally localized.” The employer claimed that the employment was “principally localized” in North Dakota and the employee alternatively claimed that the employment was “principally localized” in Alabama.

The Act itself provides the applicable test: “[E]mployment is ‘principally localized’ in a particular state—whether Alabama or another state—when the employer ‘has a place of business in this or such other state and [the employee] regularly works at or from such place of business’ or ‘if [the employee] is domiciled and spends a substantial part of [the employee’s] working time in the service of [the] employer in this or such other state.”’ (Ala.Code 1975, § 25–5–35(b)).

Viewing the undisputed evidence adduced by the parties through the lens of the applicable legal standard, the court found it agreed with the employer that the employment from which the employee’s alleged workplace injury stems was “principally localized” in North Dakota. In this case, the employee was afforded air transportation to North Dakota, was housed during his working periods in facilities located in North Dakota whose use by the employee had been arranged by the employer, and traveled each working day from those facilities to oil-rig locations in North Dakota where he performed the work for which he had been hired.

In contrast, although the employee was permitted to return to his home in Alabama for several days each month, and although the employer withheld Alabama income taxes from the employee’s wages for the employee’s benefit, it is undisputed that the employee was not expected to perform work for the employer while in Alabama and that he did no work for the employer in any state other than North Dakota.  The court concluded that the employee in this case suffered an alleged injury while engaged in employment that was principally localized in a single state other than Alabama.

As to the first condition, we may assume, because the employer does not seriously contend to the contrary, that the employment contract between the parties was formed in Alabama by the employee’s having accepted an offer of employment through his having completed and dispatched pertinent forms to the secretary for the employer’s president from his home in Alabama.

The parties differ as to the applicability of North Dakota’s workers’ compensation laws, with the employer citing authority to the effect that coverage is afforded under North Dakota law to nearly all employees in that state, while the employee asserts that North Dakota’s workers’ compensation laws do not apply to the parties’ employment relationship.

North Dakota, like every state, has a long-standing and strong public policy interest in making workmen’s compensation the exclusive remedy against an employer in the case of an injured employee.

After reviewing the facts and law of both states the Alabama Court of Appeal concluded that the employee has not demonstrated that North Dakota’s workers’ compensation laws do not apply to the employer in this case so as to support the trial court’s conclusion that it had jurisdiction under the Act to hear the employee’s workers’ compensation claim.

Because none of the alternative requirements for extraterritorial applicability of the Act are present, the trial court acted outside of its discretion in denying the employer’s summary-judgment motion challenging that court’s power to adjudicate the employee’s claim. A writ of mandamus was, therefore, issued and the trial court was ordered to (a) vacate its order denying the employer’s summary-judgment motion and (b) enter a summary judgment in favor of the employer.

ZALMA OPINION

It is understandable why an Alabama resident would prefer to get benefits from his home state rather than the frozen plains of North Dakota. However, it is clear that he was employed in North Dakota, he was injured in North Dakota, and he gained the right to the benefits provided by the North Dakota Workers’ Compensation law.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Clear & Unambiguous Language Controls

Court Refuses to Change Policy Wording

Injured people who failed to purchase insurance to protect themselves will often seek to conflate the wording of an insurance policy issued to a relative to find coverage that did not exist. Sometimes, to avoid the expense of litigation, the tactic works. More often than not insurers determine to spend what ever is necessary to defend against spurious lawsuits rather than pay tribute.

The Massachusetts Court of Appeal was faced with an appeal of just such a case where the plaintiff asked that it reverse a judgment of the trial court that James N. Ellis, Sr. (Ellis Sr.) not an insured under a policy of automobile insurance issued by defendant Commerce Insurance Company.

Ellis Sr. contends that he is entitled to underinsured motorist coverage under the policy because on the coverage date in question he was a member of the same household as his son, James N. Ellis, Jr.

In the application for commercial insurance, coverage was sought for “Ellis & Ellis, Nicholas Ellis, [and] James N. Ellis, Jr. As Partners.” The application form contains a check mark next to the box labeled “Business Auto.” Successive business automobile policies were issued to “Ellis and Ellis[,] Nicholas and James Ellis.”

The underinsured motorist endorsement provides coverage to the household member of a business “[i]f the form of your business under Item One of the Declarations is shown as an individual.” At all relevant times, Item One of the Declarations listed the “form of business” as “Other Direct Billed Commercial.” The applicant also checked the “partnership” box, not the “individual” box, on the application. The application is incorporated into the policy.

The appellate court concluded in a brief and succinct opinion that a policy of automobile insurance which is clear and unambiguous will be enforced in accordance with its terms.  Since the policy language is clear and unambiguous, since the policy was not issued to a business for which coverage is provided to household members, the trial court was correct in issuing judgment in favor of the insurer.

ZALMA OPINION

I continue to be amazed that presumably competent lawyers bring actions where there is no potential for coverage under a clear and unambiguous insurance policy. A business auto policy is limited by its terms to the members of the commercial enterprise and not every member of the family of the individual employees of the business.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Collapse or Sewer Backup

The Court Cannot Create Ambiguity Where the Terms of the Contract Are Clear

Insurance policies, including those that are described as “all risk” or “direct risk of physical loss” policies, do not insure against all possible causes of damages. No insurer insures against all losses. Every first party property insurance policy contains some exclusions and all first party property policies require the loss to occur during the policy period.

Denise Hill (Plaintiff) sued Liberty Insurance Corporation (Defendant) for insurance coverage relating to property damage caused by water in the basement of her home. In Hill v. Liberty Ins. Corp., Slip Copy, 2014 WL 5800089 (E.D.Mich., 11/7/14) the District Court for the Eastern District of Michigan was asked to issue summary judgment in favor of Liberty and Hill opposed the motion.

BACKGROUND

On or about February 24, 2012, Defendant issued a HomeProtector Plus homeowner’s policy covering Plaintiff’s home and personal property. On February 24, 2013, Defendant renewed the policy for the period through February 24, 2014.

On February 28, 2013, Plaintiff submitted an insurance claim to Defendant for water damage sustained to her basement and its contents. Plaintiff admits that she cannot establish with certainty the precise day or time that the water entered the basement. Plaintiff states that there were four inches of standing water backup in her basement resulting from a blocked drain. After discovering the water Plaintiff hired a licensed plumber who snaked a drain. The plumber’s action allowed the water to flow freely out of the basement.

Defendant denied Plaintiff’s claim on the basis that there was no coverage under the policy, citing the Water Damage Exclusion.

THE POLICY

The policy provides, in part: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. * * * c. Water Damage, meaning: (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;
(2) Water which backs up through sewers or drains or which overflows from a sump; or (3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.”

Defendant argues that Plaintiff’s claim should be denied because the Water Damage Exclusion precludes coverage for the damages claimed.

ANALYSIS

Relying on the language of the policy, Defendant argued that Plaintiff’s claim must be denied because there is no question of material fact that the damage in the basement was caused by “water which backs up through sewers or drains,” “regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

Under Michigan law, the rules of insurance policy interpretation are the same as for any other written contract. An insurance policy must be enforced in accordance with its clear and unambiguous terms, and a court should not hold an insurance company liable for a risk it did not assume. Although ambiguities will be construed in favor of the insured, a court should not create ambiguity where the terms of the contract are clear. Furthermore clear and specific exclusions must be given effect.

Plaintiff conceded numerous times that the source of the water that damaged the contents of her basement originated at the basement drain. In a sworn deposition Plaintiff testified that the water came up from the drain and it was dirty because it was filled with household debris.

The public adjuster representing Plaintiff further testified that the standing water in the basement resulted from an accumulation of household debris, dirt, tree roots, and crock among other things-a blockage that prevented the water from exiting and caused it to pool and collect in the basement.

In response, Plaintiff argues that she is covered under other related provisions of the policy. Plaintiff says that the damage was caused by a collapse of the pipe carrying waste water that ran from her home, rather than from its backup. She maintains that the pipe which collapsed is part of the structure of her home, and that the collapse concerned the overflow of water within a plumbing system. She did not explain how a pipe that had “collapsed” could function properly after being snaked.

The District Court noted that Plaintiff’s arguments related to “collapse” fail for a number reasons:

Plaintiff did not introduce this theory of recovery until her response brief. In support of her argument, Plaintiff says that the public adjuster determined her claim to be based on the “Collapse” provisions of the homeowner’s policy.

However, there is no evidence in the record indicating any structural compromise of the drain or the drain pipe; nor does Plaintiff point to any statement by the public adjuster, whose deposition and declarations mention nothing about a collapse. Instead, the public adjuster stated that the backup was caused by an accumulation of “household debris, dirt, tree roots and crock among other things.”

Nor would the public adjuster’s interpretation of the homeowner’s policy be in any way dispositive.

In addition, Defendant points out that Plaintiff’s reading of the “Collapse” provisions is incomplete, because it ignores language which later states, “Loss to … underground pipe … is not included … unless the loss is a direct result of the collapse of a building.” Here, no building has collapsed.

As a last resort, Plaintiff argues that the policy provisions include ambiguous terms, which are “reasonably and fairly susceptible to multiple understandings and meanings,” and should therefore be construed against the Defendant. The District Court concluded that there is no ambiguity in the terms of the policy.

The Court cannot create ambiguity where the terms of the contract are clear.

ZALMA OPINION

The Plaintiff in this case is lucky that the court did not slap her with sanctions for bringing a frivolous suit. Even her own expert public insurance adjuster testified that there was no “collapse” and that the cause of the damage was the water backing up from the drain. Testimony was clear that there was no collapse and that the drain backed up when the plumber snaked the drain and the water flowed away as it should. Simple, clear, unambiguous language in an insurance policy must always be applied or there is no need for a contract of insurance.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

Insured May Reject or Limit UM Coverage

Must Be Insured to Receive UM/UIM Coverage

Insurers have the unquestioned right to select whom it will insure and for what risks it is willing to take. Often, believing they will never really need the insurance, consumers opt for the least expensive insurance coverage rather than the most effective protection. Then, when a loss occurs that is not covered, litigation ensues to attempt to correct the error in the policy acquired to gain coverage they did not want to pay for but after a loss determined they needed to properly obtain indemnity.

In Nielson v. Shelter Mut. Ins. Co., — So.3d —-, 2014 WL 5793843 (La.App. 1 Cir., 11/07/25 the Louisiana Court of Appeal was asked to reverse a summary judgment in favor of an insurance company, holding that the insurance company’s policy did not provide uninsured/underinsured motorist (UM) coverage for an injured guest passenger, who did not fit the insurance policy’s definition of an insured since she was not “using” the vehicle that was involved in the traffic accident.

FACTS

On July 30, 2012, Mona Nielson was riding as a guest passenger in a car driven by Thelma Nolan in Denham Springs, Louisiana. Nielson was injured when Nolan’s car was involved in an accident caused by an underinsured driver. After settling with and recovering the liability policy limits from the other driver’s liability insurer, Nielson filed the instant suit against Nolan’s liability insurer, Shelter Mutual Insurance Company (Shelter), seeking damages under the UM provisions of Shelter’s policy. Shelter filed a motion for summary judgment requesting dismissal of Nielson’s UM claim, because Nielson was not an “insured” as defined by Shelter’s policy for purposes of UM coverage. After a hearing, the trial court granted Shelter’s motion, and signed a judgment dismissing Nielson’s claims against Shelter. Nielson now appeals.

ANALYSIS

Interpretation of an insurance policy usually involves a legal question that can be resolved properly in the framework of a motion for summary judgment. An insurance policy is a contract between the parties and should be construed using the general rules of interpretation of contracts set forth in the Louisiana Civil Code.  If the language in an insurance policy is clear and unambiguous, it must be enforced as written. However, if there is any doubt or ambiguity as to the meaning of a provision in an insurance policy, it must be construed in favor of the insured and against the insurer.

The Shelter policy, in part, provides: “(2) Insured means a person included in one of the following categories, but only to the extent stated for that category.¶ … Individuals who have permission or general consent to use the described auto are insureds for claims resulting from that use. … ¶ (2) Insured means: ¶ (a) You; (b) Relatives; (c) Individuals listed in the Declarations as an “additional listed insured” who do not own a motor vehicle, and whose spouse does not own a motor vehicle; and (d) Any individual using the described auto with permission.”

It is well-settled in Louisiana that a person who does not qualify as a liability insured under a policy of insurance is not entitled to UM coverage under the policy. As such, any determination of whether a person is entitled to UM benefits must follow a determination that the person is an insured for purposes of auto liability insurance coverage.

According to the plain language of the policy, Shelter owes uninsured damages only to individuals who are an “insured” for purposes of UM coverage. The policy clearly defines an insured for UM coverage as: “(1) the named insured; (2) relatives; (3) an additional listed insured, and (4) an individual “using” the described auto with permission.” It is undisputed that Nielson is not a named insured on Shelter’s policy, is not a relative of the named insured (Nolan), and is not an additional listed insured on the policy. Thus, under the plain language of the Shelter policy, the only possibility for Nielson to be considered an insured for UM purposes is if she were “using” Nolan’s vehicle with Nolan’s permission.

Shelter’s policy places the word “using” in bold, indicating that it is a defined term by the policy. The policy definition of “use” means: “physically controlling, or attempting to physically control, the movements of a vehicle. It includes any emergency repairs performed in the course of a trip, if those repairs are necessary to the continued use of the vehicle.” Therefore, if Nielson is to be considered an insured for liability or UM purposes under Shelter’s policy she must have been “using” the vehicle by physically controlling or attempting to physically control the movements of Nolan’s vehicle. It is undisputed, however, that Nielson was simply a passenger in Nolan’s vehicle and was not controlling or attempting to control its movement in any way.

Shelter’s policy further defines “passenger” as an “individual who is occupying one of the seats of a vehicle with permission but does not include the operator of a vehicle.” Additionally, “operator” is defined in Shelter’s policy as “an individual who is using a vehicle.” Thus, the Shelter policy very clearly and unambiguously makes a distinction between one who is a driver or an operator, such as Nolan in this case, and one who is merely a guest passenger who is occupying one of the seats of the vehicle, such as Nielson in this case.

Pursuant to Shelter’s policy language, merely being a guest passenger in the insured vehicle does not entitle the individual to UM coverage. The same analysis excludes Nielson as an insured under the general liability coverage of Shelter’s policy since Nielson was not “using” the vehicle as defined by the policy.

While there is strong public policy in favor of UM insurance coverage in Louisiana, an insured is free to reject or limit UM coverage in order to reduce premiums. The Shelter policy clearly limits who is covered for UM purposes, and the policy should be enforced as written.  The appellate court, therefore, concluded that the trial court correctly granted summary judgment in favor of Shelter and dismissed Nielson’s UM claims.

ZALMA OPINION

Nelson protected herself and others she might injured by purchasing liability and uninsured motorist/underinsured motorist coverage. To save money she accepted a policy from Shelter that did not provide UM/UIM coverage for passengers, thereby limiting the exposure faced by the insurer. Her argument that the exclusion was in violation of public policy did not succeed because the Louisiana statute allowed the insured to limit exposure to only insureds and operators of the vehicle. Nelson got what she ordered and Nielson was out of luck in getting UM/UIM coverage from Nelson’s insurer.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

Incorrectly Denying Claim Not Bad Faith

Fraud Defense Requires Willful Intent

Often an insured is his or her own enemy when it comes to the presentation of a claim. They will attempt to increase the amount of their claim by scheduling items claimed destroyed in a fire that were not there. Sometimes they will innocently claim items stolen or destroyed that were not stolen or destroyed. Often they will delay claim processing and complain, when they did not fulfill the requirements of the policy, that they innocently erred.

In Willis v. Allstate Ins. Co., Slip Copy, 2014 WL 5514160 (S.D.Miss., 10/31/2014) the trial court in the Southern District of Mississippi was faced with multiple problems caused by the denial of a contents claim for misrepresentation of material facts in the claim presentation and failure to properly investigate a second claim.

Plaintiff’s house was destroyed by a fire on June 14, 2012. At the time of the fire, the house was insured under an insurance policy issued by Defendant. Plaintiff filed a claim for benefits. Defendant then conducted an investigation of the loss that lasted approximately eight months. On February 27, 2013, Defendant denied Plaintiff’s claim for the contents of the house, contending that she had misrepresented material facts related to the claim. On March 10, 2013, Defendant issued a check to Plaintiff for $75,100.00, the policy limit of coverage for the dwelling. On March 5, 2013, Plaintiff filed a lawsuit where she asserted claims of breach of contract, bad faith, negligence/gross negligence, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. After discovery, the parties filed cross-motions for summary judgment.

DISCUSSION

Breach of Contract—Contents

A plaintiff asserting a breach of contract must prove 1) the existence of a valid and binding contract, and 2) that the defendant has breached it. The policy provides: “We do not cover any loss or occurrence in which any insured person has concealed or misrepresented any material fact or circumstances.”

Knowing and Willful

In Mississippi, for an insurance company to defeat a policy on the basis of a concealment clause, it must establish that statements by the insured were (1) false and (2) material and (3) knowingly and willfully made. The Court found it only needed to address the third element—that a material misrepresentation was “knowingly” and “willfully” made.

Finding that it is undisputed that Plaintiff provided false information on her contents list; she included items that were not in the house, and she provided incorrect ages for items; admitted during her Examination Under Oath (EUO) and deposition that she had been investigated for and charged with insurance fraud related to the subject loss and claim;  that an inspector for the Hattiesburg Fire Department, told Defendant’s investigator that there were little to no contents inside the home; that an investigator from the State Fire Marshall’s office, told Defendant’s investigator that he was unable to locate any evidence of the items she included on her contents list, and that he intended to arrest Plaintiff for insurance fraud the court saw a reasonable ground for investigation and delay.

However, in her deposition Plaintiff testified that her children had taken some of the contents out of the house without her knowledge. After Plaintiff’s EUO she later corrected testimony from the EUO with an errata sheet, claiming that she had recently learned that her children took contents from the house before the fire.

As a result a genuine dispute of material fact exists as to whether Plaintiff’s misrepresentations were “knowing and willful” or honest mistakes.

Bad Faith Denial—Contents

Both parties seek summary judgment as to Plaintiff’s bad faith claim arising from Defendant’s denial of her contents claim. Defendant argues that it had an arguable basis for denial of the contents claim, and that Plaintiff has no evidence that it committed any acts or omissions that would rise to the level of intentional tort. Plaintiff contends that Defendant had no arguable basis for denial of the contents claim, and committed a variety of actions which rise to the level of intentional torts.

The insured has the burden of establishing a claim for bad faith denial of an insurance claim, and she must show that the insurer denied the claim (1) without an arguable or legitimate basis, either in fact or law, and (2) with malice or gross negligence in disregard of the insured’s rights.

Here, the Court need only address the first element—whether Defendant had an arguable or legitimate basis for denial. An insurer has no arguable basis for delaying or denying payment on a claim if nothing legal or factual would have arguably justified its position. Phrased differently, an arguable reason is one in support of which there is some credible evidence. Therefore, a plaintiff bears a heavy burden in demonstrating to the trial court that there was no reasonably arguable basis for denying the claim.

Defendant denied Plaintiff’s contents claim because it believes that she knowingly and willfully made material misrepresentations of fact regarding the contents of her home. The record contains a variety of evidence supporting this reason for denial.  An arguable reason is one in support of which there is some credible evidence. The evidence above—most of which is contained in Plaintiff’s own exhibits—demonstrates that Defendant had an arguable reason to deny Plaintiff’s contents claim for material misrepresentations.

The existence of a genuine factual dispute as to whether Plaintiff’s misrepresentations were knowing and willful is relevant insofar as the existence of a viable dispute means that both sides had arguable reasons to litigate the issue. The fact that an insurer’s decision to deny benefits may ultimately turn out to be incorrect does not in and of itself warrant an award of punitive damages if the decision was reached in good faith.

For all of these reasons, the Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the denial of her contents claim, and it denied Plaintiff’s motion for summary judgment as to the same.

Considering the facts outlined above—derived largely from Plaintiff’s own exhibits—the Court concluded that at all relevant times prior to payment of Plaintiff’s dwelling claim, Defendant was engaged in active investigation of the claim and did not delay payment in bad faith.

Because Mississippi places a duty on insurers to properly investigate the claims asserted by their insured, conducting a prompt and adequate investigation provides a legitimate basis for a payment delay. Mississippi courts have held that an insurer’s conduct does not amount to gross negligence or an intentional tort as long as the insurer is actively investigating a claim.  As demonstrated above, there was ample reason to investigate Plaintiff’s dwelling loss from the very beginning of the claim process.

Defendant had an arguable and legitimate reason to delay payment of Plaintiff’s dwelling claim to complete its investigation of the dwelling loss. Therefore, the Court granted Defendant’s motion for summary judgment as to Plaintiff’s claim for bad faith delay of payment on her dwelling claim, but it denies Plaintiff’s motion for summary judgment as to the same.

Specifically:

The Court denies the parties’ motions for summary judgment as to Plaintiff’s claim for breach of contract related to Defendant’s denial of her contents claim.

The Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the denial of her contents claim and denied Plaintiff’s motion for summary judgment as to the same.

The Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the delay of payment on her dwelling claim and it denied Plaintiff’s motion for summary judgment as to the same.

The Court denied Defendant’s motion for summary judgment as to Plaintiff’s claim for breach of the implied duty of good faith and fair dealing.

The Court granted in part and denied in part Defendant’s motion for summary judgment as to Plaintiff’s claims of negligence and gross negligence.

The Court denies the parties’ motions for summary judgment as to Plaintiff’s claims for punitive and extra-contractual damages.

ZALMA OPINION

This case teaches that it is difficult, even when there is substantial evidence that a fraud has occurred, to prove a willful and intentional misrepresentation. The case also teaches that it is imprudent to rely on the representations of police investigators whose interest is only to get a conviction not to respond quickly to protect an insurer. Before denying a claim for willful and intentional misrepresentation – fraud – it is necessary to have evidence that establishes the fraud. When an insured corrects the testimony relied upon it will take the efforts of a jury to determine which of the insureds statements were true. The insurer, by its motions, has limited its exposure to the contract benefits. It’s investigation and discovery should be extended to see if it can prove that there was a willful misrepresentation and breach of the policy condition.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Erroneous Denial Not Bad Faith

Destruction of Property by Fired Employee

Criminal acts exclusions result in litigation between insurers and their insureds. In Easy Corner, Inc. v. State Nat. Ins. Co., Inc., — F.Supp.3d —-, 2014 WL 5510319 (E.D.Pa., 11/3/14) the District Court for the Eastern District of Pennsylvania, was called upon to resolve disputes over such an exclusion and claims of bad faith.

Easy Corner, Inc. (“Plaintiff”) filed a Complaint in the Court of Common Pleas for Philadelphia County against State National Insurance Company (“Defendant”). The Complaint contains two counts: breach of contract and bad faith in violation of 42 Pa. Cons.Stat. Ann. § 8371. Defendant removed the case to federal court.

BACKGROUND

For more than ten years, Plaintiff—a corporation owned by Ezra Reuven, who also owns an apartment building and an auto repair shop—operated Easy Corner Bar at 537 North 35th Street in Philadelphia. In the meantime, Reuven decided to get a new manager for the bar (his wife managed it previously) and met Darius Mason, who offered to run the bar for Reuven. On May 10, 2012, Reuven and Mason executed an “Agreement regarding Management of ‘Eazy Corner Inc.’”

After the end of the agreement, Mason just kept running the place against Reuven’s wishes. Reuven retained a lawyer to evict Mason who refused to be fired.

At some point during the beginning of August 2013, Reuven approached Mason again about leaving the bar, and Mason asked to “have the last weekend” before leaving—the “weekend” being Saturday, according to Reuven. Mason then threw a party for his final Saturday night at the bar. The following day Reuven and his wife passed by the bar and saw Mason and four other people “destroy the place” and “[b]reak everything.” Reuven called the police, and Mason and his companions were arrested.

The bar sustained extensive damage as a result of Mason’s actions—Young Adjustment Company estimated that the total loss was $42,950.14. That amount included damage to the apartment above the bar, where Mason was a tenant and which he also wrecked.

The insurer, after investigation, concluded Mason was a manager of the bar. They declined to pay based on Plaintiff’s insurance policy exclusion that reads in relevant part: “2. We will not pay for loss or damage caused by or resulting from any of the following: ¶ ….  h. Dishonest or criminal act (including theft) by you, any of your partners, members, officers, managers, employees (including temporary employees and leased workers), directors, trustees or authorized representatives, whether acting alone or in collusion with each other or with any other party; or theft by any person to whom you entrust the property for any purpose, whether acting alone or in collusion with any other party.”

DISCUSSION

Breach of Contract

Ordinarily in insurance coverage disputes an insured bears the initial burden to make a prima facie showing that a claim falls within the policy’s grant of coverage, but if the insured meets that burden, the insurer then bears the burden of demonstrating that a policy exclusion excuses the insurer from providing coverage if the insurer contends that it does.

The judge concluded that the most reasonable reading of the exclusion provision reveals that it has two portions. The first covers “dishonest or criminal act[s] (including theft),” and applies to the insured and any of the insured’s “partners, members, officers, managers, employees (including temporary employees and leased workers), directors, trustees or authorized representatives.” The second covers theft alone and applies to “any person to whom you entrust the property for any purpose.”

Because the entrustment clause contemplates only theft and not other forms of loss, whether a loss-causing individual was entrusted with the property is the end of the inquiry only if theft is the sole basis for coverage.

If the entrustment clause was meant to apply to the entire provision, such that it covered any “dishonest or criminal act” by “any person to whom you entrust the property for any purpose,” there would be no need to specify that theft is included in “dishonest or criminal act” and then list it again in connection with the entrustment clause.

Clause One: “Dishonest or Criminal Act”

The first clause prohibits coverage for any “[d]ishonest or criminal acts (including theft) by you, … managers, employees …, directors, trustees or authorized representatives, whether acting alone or in collusion with each other or with any other party.” Under the facts as presented for summary judgment, this is the case of a former manager returning for retaliation. Since none of the other categories seem to apply to Mason, at least not as of August 18, the day after his management role terminated, the exclusion’s first clause therefore does not apply and does not form a basis for denying coverage. The parties will have to present evidence at trial to resolve this issue.

Clause Two: Theft by Entrustment

That leaves the question of whether Mason was still entrusted with the property on August 18, such that any theft he committed that day is excluded from coverage. The exclusion provides that “theft by any person to whom you entrust the property for any purpose, whether acting alone or in collusion with any other party” is not covered by the insurance policy. This entrustment clause, which considers theft alone, is far more narrow in its scope than the “dishonest or criminal act” clause.

The purpose of an entrustment exclusion is to exclude from the risk undertaken by the insurer those losses that arise from the ‘misplaced confidence’ of the insured in those to whom it entrusts its property. Here, the insured and the individual causing the losses had come to an agreement about the end of the individual’s right to be on the property, and the losses occurred after his right had terminated.

Nothing in the language of the entrustment exclusion requires that the wrongful act and the entrustment of property be contemporaneous. The district court construed this language to require nothing more than a causal connection between the act of entrustment and the resulting loss, even if the loss occurs after the entrustment has terminated. The entrustment exclusions apply even after the temporal termination of an entrustment, provided that there is a causal connection between the act of entrustment and the resulting loss. Here, the loss is causally connected to the act of entrustment: because of his prior management of the bar, Mason had a key and was able to access the building easily. Therefore, any theft committed by Mason or those in collusion with him is explicitly excluded from coverage by the insurance policy, and under the circumstances the court granted Defendant’s motion for summary judgment as to any claims of theft.

Bad Faith

To recover on a statutory bad faith claim under 42 Pa. Cons.Stat. Ann. § 8371, the insured must prove by clear and convincing evidence that: (1) “the insurer did not have a reasonable basis for denying benefits under the policy”; and (2) “the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim. The insurer’s conduct need not have been fraudulent, but “mere negligence or bad judgment is not bad faith.”

Plaintiff has not met the burden of showing clear and convincing evidence of bad faith here. Plaintiff’s argument is essentially that Defendant was in the wrong in denying coverage, and must have or should have known as much, and therefore Defendant must have acted in bad faith. But Plaintiff has pointed to no facts of record showing that Defendant’s denial of coverage rose above “mere negligence or bad judgment” or that Defendant acted out of self-interest or ill will. Rather, under Plaintiff’s reasoning, virtually every incorrect denial of insurance coverage would constitute bad faith merely by virtue of being incorrect.

CONCLUSION

For the foregoing reasons, the Court granted Defendant’s motion for summary judgment in part and denied it in part.

Because Mason does not fall into one of the enumerated categories of individuals in the “dishonest or criminal act” clause, but was entrusted with the property, the Court denied the motion for summary judgment as to any breach of contract claims for destruction of property. The court granted the motion for summary judgment as to any claims of theft. Because there were no facts under which a reasonable jury could find by clear and convincing evidence that Defendant engaged in bad faith with respect to its refusal to cover Plaintiff’s loss, the Court granted the motion for summary judgment as to Plaintiff’s bad faith claim. An appropriate order follows.

ZALMA OPINION

This case teaches two lessons, one to the insurer and one to the plaintiffs bar:

First, if you want to exclude something from coverage write your policy carefully so that there is no question of the meaning of the exclusion. Had the damage to property exclusion had similar wording to the theft exclusion, the denial would have been affirmed.

Second, a plaintiff cannot hold an insurer for bad faith just because it made a wrong decision concerning coverage. Rather a jury must be able to find by clear and convincing evidence that there was wrongful and bad faith conduct.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Construction Defects an “Occurrence” in Texas

Contractual Liability Exclusion Trumped by Breach of General Duty

Insurers have not been happy paying construction defect claims. They have rewritten their policies in an attempt to avoid paying for damages caused by an insured contractor who constructed a defective building causing damage to the property owners.

Doug and Karen Crownover contracted with Arrow Development, Inc. (“Arrow”) to construct a house for them in Texas. Arrow performed defective work and then failed promptly to correct the work. The Crownovers spent a significant amount of money paying to correct the work themselves. An arbitrator found Arrow liable to the Crownovers for breaching its express warranty to repair non-conforming work and awarded them damages. Because Arrow filed for bankruptcy, however, the Crownovers were limited to recovering what they could from Arrow’s insurance policies. They sued Mid–Continent Casualty Co. (“Mid–Continent”), Arrow’s insurer, in federal court for the damages owed to them by Arrow, and both sides moved for summary judgment. Mid-Continent convinced the trial court that its “contractual liability exclusion” deprived Arrow of coverage and granted it summary judgment against the Crownovers.

In Crownover v. Mid-Continent Cas. Co., — F.3d —-, 2014 WL 5473084 (C.A.5 (Tex.) 10/29/2014) the Fifth Circuit Court of Appeal was presented a principal question to determine whether a contractual provision in the construction contract between the Crownovers and Arrow, which obligated Arrow to repair its work where that work failed to conform to the requirements of the construction contract, was an “assumption of liability” that exceeded Arrow’s liability under general Texas law, thereby triggering a “contractual-liability exclusion” in Arrow’s insurance contract with Mid–Continent. If the contractual-liability exclusion does not apply, the question becomes whether any other exclusion from coverage applies.

BACKGROUND

In October 2001, the Crownovers entered into a construction contract with Arrow to construct a home on their land in Sunnyvale, Texas. The contract also contained a warranty-to-repair clause, which in paragraph 23.1 provided that Arrow would “promptly correct work … failing to conform to the requirements of the Contract Documents.” The Crownovers attempted to have Arrow correct the problems and eventually sought legal relief. Their demand letters were forwarded to Mid–Continent, but to no avail.

The Crownovers initiated an arbitration proceeding against Arrow. The arbitrator found that the HVAC system “was not installed properly, did not perform as required, and exhibited numerous deficiencies as identified by the various consultants and contractors who evaluated the system,” and determined that “Arrow is responsible for the costs associated with replacement of the HVAC system, less betterment.” The arbitrator also found that the foundation failed and that Arrow was responsible for the costs of repairing the foundation. Accordingly, the arbitrator concluded that the Crownovers had a meritorious claim for breach of the express warranty to repair contained in paragraph 23.1 of their contract with Arrow, which was not barred by the statute of limitations.

Because the arbitrator awarded damages to the Crownovers on that ground, she declined to decide whether the Crownovers’ other claims were barred by a statute of limitations.
Arrow later filed for bankruptcy.

The Crownovers then sued Mid–Continent for breach of contract.

POLICY

Several exclusions apply to this general coverage provision. The district court concluded that one of them, the contractual-liability exclusion, applied in the instant case, such that Mid–Continent was not obligated to indemnify Arrow for the damages it owed the Crownovers. This exclusion states that “[t]his insurance does not apply to[ ] ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” There is, however, an exception to this exclusion for “liability … [t]hat the insured would have in the absence of the contract or agreement.” The district court noted that the arbitration award to the Crownovers was based only on Arrow’s breach of the express warranty to repair contained in paragraph 23.1 (the arbitrator explicitly declined to decide whether Arrow was liable to the Crownovers on any other ground). Thus, the district court held that because Arrow “became legally obligated to pay the arbitration damages on the basis of [its] contractually assumed liability,” the contractual-liability exclusion applied with no applicable exception to the exclusion. The district court did not rule on Mid–Continent’s other alleged exclusions from coverage.

DISCUSSION

Under Texas law, the insured has the [initial] burden of establishing coverage under the terms of the policy. If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion.  If the insurer proves that an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage. Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 193 (Tex.Ct.App.2003)).

Independent of its contractual obligations, the contractor owes a duty to comply with law and to conduct its operations with ordinary care so as not to damage the property. Following oral argument in this case, a panel of this court certified two questions to the Texas Supreme Court that are germane to the Crownovers’ dispute with Mid–Continent:

  • Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.
  • If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Texas Supreme Court answered the first question “no” and did not answer the second question.

The arbitrator in this case found in favor of the Crownovers, concluding that Arrow had breached the express warranty to repair.  The Insuring Agreement requires Mid–Continent to “pay those sums that [Arrow] becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies.

Here, the defective installation of the HVAC system caused the system to be deficient and eventually required the stressed mechanical units to be replaced. There can be no doubt that the HVAC units were themselves “tangible property,” and therefore the loss of their use amounted to property damage.   Therefore, Arrow’s defective work was an “occurrence” that caused the HVAC system and the foundation to require repairs, which amounted to “property damage.” The Crownovers thus met their initial burden of establishing coverage under the insurance policy.

The general law creates a duty to perform under the terms of a contract with reasonable care. Implicit in every contract is a common-law duty to perform the terms of the contract with care, skill and reasonable experience. Mid–Continent failed to prove that the express duty to repair non-confirming work expanded Arrow’s obligations, they have proven the converse.

Under the facts as determined by the arbitrator, there can be little doubt that Arrow’s adjudicated liability was no greater than that called for by general law. The arbitrator found that both the foundation and HVAC system began showing signs of problems shortly after the Crownovers moved in; the HVAC system was not installed properly, did not perform as required, exhibited numerous deficiencies and failures, and the units eventually had to be replaced; the foundation failed and Arrow did not repair it; and Arrow was responsible for the associated costs of repairing or replacing both the foundation and the HVAC system. Mid–Continent failed to proffer evidence creating a dispute of fact as to whether the arbitrator’s award was based on liability greater than that dictated by general law. Therefore, the contractual-liability exclusion from coverage does not apply.

ZALMA OPINION

Since the damages found by the arbitrator created an occurrence as defined by the policy coverage applied and Mid-Continent owed indemnity to Arrow. It should have defended Arrow in the arbitration and should have avoided this law suit. Reliance on the exclusion, although sufficient to convince the trial court judge, failed because of the need to interpret the contract as a whole. Arrow was clearly negligent in performing its duties and was driven out of business because of its negligence. This case also teaches that a policy and exclusion must be read as a whole. If Mid-Continent wanted its exclusion to apply to all events it should have eliminated the exception to the exclusion that it does not apply to damages that would have resulted had there been no contract damages.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

You Can Beat the IRS

Taxes and Insurance

The Internal Revenue Service is not filled with insurance professionals. It might be said that no one at the IRS can define the term “insurance.” In Securitas Holdings, Inc. v. C.I.R., T.C. Memo. 2014-225, 2014 WL 5470747 (U.S.Tax Ct., Oct. 29, 2014) the IRS (Respondent) issued a notice of deficiency determining deficiencies of $13,801,906 for 2003 and $16,496,539 for 2004. The deficiencies largely stem from respondent’s partial disallowance of deductions for interest expenses and deductions for insurance expenses related to a captive insurance arrangement. The sole issue presented to the tax court was whether petitioner is entitled to deduct premiums paid through the captive insurance arrangement established by its parent corporation.

FINDINGS OF FACT

Parent–Subsidiary Structure

Securitas AB is a public Swedish company. In 1999 SHI acquired Pinkerton’s, Inc. (Pinkerton’s), a Delaware corporation, and its subsidiaries. According to Securitas AB’s 2003 annual report, Securitas AB and its subsidiaries (Securitas AB Group) accounted for 8% of the total world market for security services. During 2003 and 2004 the Securitas AB Group employed over 200,000 people in 20 countries, mostly in North America and Europe.

Services

In 2003 and 2004 the Securitas AB Group and the SHI Group provided guarding services, alarm systems services, and cash handling services.

Protectors

Protectors Insurance Co. of Vermont (Protectors) was incorporated in Vermont in 1986 as a licensed captive insurance company. As a result of various acquisitions, the SHI Group acquired Protectors in early 2000, and Protectors became a direct, wholly owned subsidiary of SHI in January 2003. Throughout 2003 and 2004 none of the U.S. operating subsidiaries of SHI or the non-U.S. operating subsidiaries of Securitas AB owned any interest in Protectors, and it was managed by a company that was unrelated by ownership to SHI.

During 2003 and 2004 Protectors was subject to regulation as a captive insurance company in the State of Vermont and paid premium taxes to the State of Vermont. In early 2004 the Vermont regulators allowed the SHI Group to avoid contributing additional capital to Protectors as a result of Protectors’ issuing an insurance policy for 2004 to Loomis. The Vermont regulators also waived the premium taxes with respect to the policy.

Securitas Group Reinsurance Limited

In late 2002 Securitas AB informed the Irish Department of Enterprise, Trade, and Employment that it intended to establish a new captive reinsurance company in Ireland called Securitas Group Reinsurance Ltd. (SGRL) and that it intended SGRL to be fully operational before the end of 2002. The Irish authorities responded that they had no objection, and SGRL was incorporated under the laws of Ireland.

Beginning in December 2002 and continuing through 2004, SGRL operated as a wholly owned subsidiary of Securitas AB, and it was subject to regulation as a reinsurance company in Ireland

Implementation of the Captive Insurance Program

After wages, the cost of risk is the second largest cost for the Securitas AB Group. The operating subsidiaries of the SHI Group had exposure to various insurable risks, including: workers’ compensation, automobile, employment practices, general, and fidelity liabilities.

A captive insurance program was attractive to the Securitas AB Group for a variety of reasons, including that the cost of adopting the program was less than the cost of reducing deductibles and purchasing insurance from third parties. The captive program also allowed Securitas AB to centralize risks. Further, it allowed the subsidiaries to know their cost of risk in advance. In the years since its implementation, the captive insurance program has provided more cost-effective insurance coverage than would have otherwise been available.

Insurance Coverages for U.S. Subsidiaries

In December 2002 Protectors issued a loss portfolio transfer policy to SHI to cover the unresolved or unreported losses for the insurable risks of most of the SHI Group’s operating subsidiaries up to the deductibles or self-insured retentions of the third-party policies. Protectors also issued a similar policy to Loomis in December 2003.  For 2003 Protectors issued prospective insurance policies to cover the insurable risks of most of the SHI Group’s operating subsidiaries up to the deductible or self-insured retentions of the third-party policies.

Reinsurance

All of the insurable risks covered under the two loss protection policies and the prospective insurance policies were reinsured with SGRL. Like the policies that Protectors issued, the reinsurance policies identified the insured, contained an effective period, specified the covered risks, identified a premium amount, and were signed by an authorized representative.

During the years in issue outside actuaries reviewed the premiums and determined they were reasonable. Respondent does not challenge the reasonableness of the premiums.
On July 1, 2010, the IRS issued notices that resulted in tax increases of $13,801,906 for 2003 and $16,496,539 for 2004.

OPINION

Insurance Premium Deduction

Section 162(a) permits a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Insurance premiums may be deductible business expenses. Although insurance premiums may be deductible, amounts placed in reserve as self-insurance are not. Such amounts can be deducted only at the time that the loss for which the reserve was established is actually incurred.

Neither the Code nor the regulations define “insurance”. However, the Supreme Court has stated that historically and commonly insurance involves risk-shifting and risk-distributing. Over time, courts have looked primarily to four criteria in deciding whether an arrangement constitutes insurance for Federal income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risks among its policyholders; and (4) the arrangement must be insurance in the commonly accepted sense.

In order for an arrangement to be considered insurance, it must shift risk of loss from the insured to the insurer.

Because Protectors reinsured 100% of its risks through SGRL, Protectors’ net premium-to-surplus ratio was 0 to 1, which falls below the industry standard. SGRL was adequately capitalized. Considering the insurance and reinsurance contracts together, the court found that Protectors was adequately capitalized for its role as a primary insurer that reinsured all of its risks with SGRL and that the arrangement adequately shifted risk. The balance sheet and net worth analysis indicates that the captive insurance arrangement has shifted any economic consequence of a risk from the SHI Group subsidiaries to Protectors and then to SGRL.

Risk Distribution

The insurer achieves risk distribution when it pools a large enough collection of unrelated risks, those that are not generally affected by the same circumstance or event. Distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as a premium because by assuming numerous relatively small, independent risks that occur randomly over time, the insurer smoothes out losses to match more closely its receipt of premiums. Risk distribution incorporates the law of large numbers which has been described as the size of the pool increases, the chance that the loss per policy during any given period will deviate from the expected loss by a given amount or proportion declines.

Insurance in the Commonly Accepted Sense

Protectors and SGRL were both organized, operated, and regulated as insurance companies. Protectors was subject to regulation under the laws of Vermont, kept its own books and records, maintained separate bank accounts, prepared financial statements, and held meetings of its board of directors. Similarly, SGRL was regulated under the laws of Ireland and also kept its own books and records, maintained separate bank accounts, prepared financial statements, and held meetings of its board of directors.

The insurance and reinsurance policies issued by Protectors and SGRL were valid and binding. Each insurance policy identified the insured, contained an effective period for the policy, specified what was covered by the policy, stated the premium amount, and was signed by an authorized representative of the company.

The premiums set by Protectors and SGRL were reasonable. Finally, the premiums were paid, and the losses were satisfied. Considering all the facts and circumstances, the court found that the captive arrangement constituted insurance in the commonly accepted sense.

Conclusion

The Tax Court concluded that the captive arrangement is insurance for Federal tax purposes. The captive arrangement shifted risk from the SHI Group to Protectors and ultimately to SGRL. Further, the captive arrangement distributed risk by insuring a large pool of differing risks. Lastly, the captive arrangement constitutes insurance in the commonly accepted sense. Accordingly, the premiums paid by the SHI Group are deductible under section 162 as insurance expenses.

ZALMA OPINION

Although taxes, like death, are certain in every life and business, taxes must be fair and applied intelligently. The IRS concluded that premiums paid to a captive insurance company were not legitimate and deductible business expenses because the insurer was owned by the parent of its various insureds. The tax court, after a review of extensive facts and the law of insurance, concluded that a captive insurer, as a risk transfer device, was insurance and that the payments made in premium were deductible and required that the IRS return the $13,801,906 disallowed for 2003 and $16,496,539 disallowed for 2004. Yes, Virginia, you can fight the IRS and win.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Agent’s Duty

Low Premium Is Not Always Best

When business is bad, when cash flow is inadequate, the first avenue cutting corners, is by reducing or not paying insurance premiums. The procedure works fine when there is no loss but causes extreme pain, suffering and litigation when there is a loss. In Cox v. Mayerstein-Burnell Co., Inc., — N.E.3d —-, 2014 WL 5493348 (Ind.App.,10/31/14) Eric Cox and Pea Cocks Corp. d/b/a Cox’s Pub (“Cox’s Pub” or “the Pub”) appealed the trial court’s grant of summary judgment in favor of Jeff Clute and Mayerstein–Burnell Co., Inc. d/b/a MBAH Insurance (“MBAH”).

FACTS AND PROCEDURAL HISTORY

Cox became the president of Cox’s Pub in May 2003 when his father, who had purchased the Pub in 1996, died. Julie Burton, a longtime employee of the Pub, managed the routine operations of the business. Among other things, Burton was responsible for the procurement and maintenance of business insurance, an obligation that afforded her the attendant authority to make necessary representations on behalf of the Pub.

Until May 2010, Cox’s Pub maintained a business insurance policy through Society Insurance (“Society”) that had policy limits of $383,000 for losses to the Pub’s building.

Between August 2008 and May 2010, Cox’s Pub settled a wrongful death lawsuit, which resulted in higher premiums under the Society policy. Cox’s Pub could not afford these premiums, and, in May 2010, Burton let the Society policy lapse for failure to pay premiums. Later, in August 2010, Burton contacted Clute, told him about the Society policy’s premiums, and informed him that Cox’s Pub was currently uninsured. She stated that the Pub needed insurance but, due to financial difficulties, desired to keep its premiums as low as possible.

During their meeting, Burton provided Clute with a copy of the Society policy’s declarations page and requested the same coverage under a new policy. Burton also provided Clute with other information necessary for Clute to obtain a quote. Clute later summarized this information, which Clute submitted this information, via the Acord application, to Illinois Casualty Company, which used it to prepare a commercial building valuation report (“Valuation”). The Valuation estimated a replacement cost value for the Pub building at $265,049. Nonetheless, following Burton’s instructions to provide a quote in line with the Society policy, Clute presented Burton with a quote from Illinois Casualty with building coverage limits of $354,000 and a yearly premium of $4,032. The following day, after a conversation with Burton, Clute presented Burton with a second quote, also from Illinois Casualty, based on the Valuation. It had building coverage limits of $265,000 and a yearly premium of $3,880. Throughout the process, Burton made clear to Clute that Cox’s Pub was struggling financially, needed to save money, and wanted to keep the Pub’s premiums as low as possible.

The final decision regarding the Pub’s coverage belonged to Burton, and Clute did not personally offer an opinion about the value of the Pub building. Less than one month later, on September 8, a fire destroyed Cox’s Pub.

Cox’s Pub submitted a claim to Illinois Casualty, and, subsequently, Cox, individually, and the Pub jointly filed a complaint against Clute and MBAH. The complaint included negligence and breach of contract claims, which were based on Cox and the Pub’s allegations that the insurance proceeds were insufficient to cover the replacement cost of the building. Cox and the Pub alleged that the true replacement cost exceeded $500,000, which left them unable to rebuild and continue the business. Clute and MBAH moved for summary judgment, which the trial court granted following a hearing.

DISCUSSION AND DECISION

Cox’s Pub contends that the trial court erred when it entered summary judgment for MBAH and Clute.

Summary judgment is a “high bar” for the moving party to clear in Indiana. Unlike federal practice, which permits the moving party to merely show that the party carrying the burden of proof at trial lacks evidence on a necessary element, Indiana imposes a more onerous burden: to affirmatively negate an opponent’s claim. For the trial court to properly grant summary judgment, the movants must have made a prima facie showing that their designated evidence negated an element of the nonmovants’ claims, and, in response, the nonmovants must have failed to designate evidence to establish a genuine issue of material fact.

Whether a Special Relationship Existed

Cox and Cox’s Pub contend that, by obtaining the Valuation, Clute counseled the Pub regarding specialized insurance coverage and, thereby, held a special relationship with the Pub.  In Indiana an insurance agent who undertakes to procure insurance for another is an agent of the insured and owes the insured a general duty to exercise reasonable care, skill, and good faith diligence in obtaining insurance. However, the agent’s duty may extend to the provision of advice only upon a showing of an intimate long-term relationship between the parties or some other special circumstance. Something more than the standard insured-insurer relationship is required to create a special relationship obligating the insurer to advise the insured about coverage. It is the nature of the relationship, not its length, that invokes the duty to advise. To establish a special relationship there must be evidence that:

  1. the agent exercises broad discretion to service the insured’s needs;
  2. counseling the insured concerning specialized insurance coverage;
  3. holding oneself out as a highly-skilled expert, coupled with the insured’s reliance upon the expertise; and
  4. receiving compensation, above the customary premium paid, for the expert advice provided.

This existence of a duty is a question of law for this court which depends, in part, on the relationship of the parties. Whether an insurance agent owes the insured a duty to advise is likewise a question of law for the court. However, whether the parties’ relationship gives rise to such a duty may involve factual questions. Clute and MBAH’s designated evidence shows that Clute and Cox’s Pub began their insurer-insured relationship approximately one month before the fire but “had never done business … prior to the disputed transaction.

The evidence is unambiguous and affirmatively negates the claim that Clute counseled Cox’s Pub. It shows that Clute and MBAH obtained from Illinois Casualty two different quotes for standard business policies, one with limits of $354,000 and one with limits of $265,000. The policy with the $265,000 limits was based on the Valuation. Clute provided Burton with Illinois Casualty’s quotes and did not personally give an opinion regarding either the value of the Pub’s structure or which policy Cox and the Pub should purchase. Burton ultimately selected the policy with the $265,000 limits and the lower premium.

It is undisputed that, when faced with competing quotes, Cox’s Pub, not Clute, made the final determination about what coverage it needed. It was in the best position to assess its needs for coverage in light of its personal assets and ability to pay. The Pub’s mere expectation of full replacement cost coverage is not enough to impose a duty on Clute to provide advice to an insured regarding the amount of coverage that should be purchased. Therefore, the appellate court concluded that, as a matter of law, Clute did not counsel the Pub regarding specialized insurance needs. Instead, Clute merely offered two quotes for standard property and casualty insurance, which is not specialized insurance. Cox’s Pub then made its own determination of adequate coverage.

Whether Clute Assumed a Duty to Advise

A duty to exercise care and skill may be imposed on one who, by affirmative conduct, assumes to act, even gratuitously, for another. The actor must specifically undertake to perform the task he is charged with having performed negligently, for without actual assumption of the undertaking there can be no correlative legal duty to perform the undertaking carefully.

With respect to the Valuation, the  evidence shows that Clute was not an “actor” in the same sense that the gratuitous assumption of duty cases contemplate because he did not specifically undertake the task that Cox’s Pub now ascribes to him. Indeed, it is not disputed that Clute merely submitted the information that Burton had provided to him to Illinois Casualty via the Acord application. Clute acted only as an intermediary between the Pub and Illinois Casualty.

If we accept Cox and the Pub’s argument, then insureds become free riders, paying lower premiums, perhaps for many years, and then retaining the ability to claim the benefit of higher coverage if a loss is incurred. This would contravene the public policy that places the risk of loss on he who is best able to avoid that loss—the insured,.

The trial court properly granted summary judgment in favor of Clute and MBAH and against Cox and the Pub on all claims. As a matter of law, Clute, as MBAH’s agent, did not have a special relationship with Cox and the Pub such that a duty to advise arose. Moreover, as a matter of law, Clute did not assume a duty to advise.

ZALMA OPINION

The agents motions for summary judgment were successful because they were able to show that all they did was provide two possible standard policies for the insured to buy and the insured bought the cheapest. As a result the insurance was inadequate and the agents did nothing to set up a special relationship. Good record keeping saved the agents.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

 

Posted in Zalma on Insurance | 1 Comment

Chutzpah & Fraud

Zalma’s Insurance Fraud Letter  November 1, 2014

In the 21st  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on November 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.        Chutzpah! A convicted Fraud Perpetrator Sues Lawyers Who proved it.
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.        Non-Layers Sue Lawyers for Referral Fees.
4.    Do Insurers Get Their Money’s Worth Fighting Fraud?
5.    Only in the U.K. – Private Prosecution of Insurance Fraud.
6.    Insurance
5.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.      When Reserves Are Not Discoverable – October 30, 2014
2.      What is a Real Estate Manager – October 29, 2014
3.      Waiver of Stacking – October 28, 2014
4.      Failure to Secure Insurance – October 27, 2014
5.      Intentional or Criminal Act Uninsurable – October 24, 2014
6.      Lawyers Should Keep Their Promises – October 23, 2014
7.      Construction Defects Coverage Guide – October 22, 2014
8.      The Implied Covenant of Good Faith and Fair Dealing – October 21, 2014
9.      Making Insured Whole Not Enough – October 20, 2014
10.    Restitution Limited to Real Damages – October 17, 2014
11.    Agent Owes No Duty to Public At Large – October 16, 2014
12.    Zalma’s Insurance Fraud Letter — October 15, 2014 – October 15, 2014
13.    Failure to Promptly Appeal Denial of Claim Expensive – October 14, 2014
14.    Certificate Must Be Honored – October 13, 2014
15.    Fraud By Insurance Agent Requires Jail – October 10, 2014
16.    Policy Needs Void For Fraud Language – October 9, 2014
17.    Insurers Have The Right To Chose Who and What It Will Insure – October 8, 2014
18.    Three Shots at Head Not an Occurrence – October 7, 2014
19.    Duty to Defend – October 6, 2014
20.    Underinsured Motorist Coverage Is to Assure Insurance Coverage – October 3, 2014

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10

The Insurance Fraud Deskbook is a valuable resource for those who are engaged in the effort to reduce expensive and pervasive occurrences of insurance fraud. It explains the elements of the crime and the tort to claims personnel, and it provides information for lawyers who represent insurers so they can adequately advise their clients. Prosecutors and their investigators can use this book to determine what is required to prove the crime and win their case.

Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

When Reserves Are Not Discoverable

Loss Reserves Are Estimates

Whenever a plaintiff sues an insurer the plaintiff wants to know what the insurer estimated to be the amount of loss hoping to show a difference between the amount reserved and the amount offered to show bad conduct by the insurer. In most cases reserve amounts are not discoverable, especially after suit is filed, and the reserves are based on information gained in litigation and based upon the advice or analysis of defense counsel

The U.S. District Court for the Northern District of Indiana was faced with a discovery dispute over the ability of a party suing an insurance company to compel production of reserves and changes in made in the reserves as discovery in litigation proceeded. In G & S Metal Consultants, Inc. v. Continental Cas. Co., Slip Copy, 2014 WL 5431223 (N.D.Ind., Oct. 24, 2014.)

G & S Metal Consultants, Inc. (G&S) moved to Compel Continental Casualty Company to Disclose Information on Loss Reserves.

An insurance reserve, also known as a “loss reserve,” is the reserve for outstanding losses at least equal to the aggregate estimated amounts due or to become due on account of all losses or claims of which the company has received notice.

G & S asks the Court for an order permitting it to question Continental’s Rule 30(b)(6) representative about loss reserves. Continental opposes the request, arguing that loss reserves are irrelevant at this stage of the litigation when discovery on G & S’s Complaint has long been closed. Continental also argues that information about loss reserves since the onset of litigation is protected as the mental impressions and litigation strategies of Continental’s lawyers.

BACKGROUND

G & S, the insured, filed this first party lawsuit against Continental, its insurer alleging breach of contract and bad faith related to property damage and business interruption losses that allegedly went unreimbursed by Continental after a steam explosion at G & S’s Georgia facility.

The Court granted Continental’s Motion to Compel and G & S disclosed approximately 300,000 documents dating back to 2003 that had not been previously provided to Continental. Based on those documents, Continental sought leave to file an amended answer to assert additional affirmative defenses and a counterclaim based on alleged misconduct by G & S during the claim adjustment process. The Court granted the motion. Continental filed the Amended Answer, pleading four additional affirmative defenses and a Counterclaim. The Court reopened discovery to allow G & S to defend against the Counterclaim.

G & S then served on Continental a Notice of Rule 30(b)(6) Deposition and Subpoena Duces Tecum. Deposition Topic 13 requested testimony as to “[w]hether Continental currently has a reserve or loss reserve with regard to the Claim, the amount of each reserve, when such reserve was established, whether there was a change in the reserve related to the filing of the Counterclaim or other reasons for the change in reserve, and the identity of all persons with knowledge of the facts relating to the establishment of the reserves.”

ANALYSIS

Federal Rule of Civil Procedure 26(b)(1) provides that “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to the party’s claim or defense” and that “relevant information need not be admissible” but only “reasonably calculated to lead to the discovery of admissible evidence.”

The relevance standard allows discovery of information that reasonably could lead to other matters that could bear on, any issue that is or may be in the case. Unlike in most cases, in which the insured wants information on loss reserves to learn how the insurer valued the claim, G & S seeks the information in this case to determine if the discovery that it provided to Continental in 2012 was really new to Continental such that the discovery could have formed the basis of Continental’s subsequently filed Counterclaim for fraud.

Continental’s Counterclaim alleged that G & S fraudulently concealed and misrepresented information that it failed to disclose during the original claim submission process by producing the information for the first time in 2012 during this litigation.  Based on Mr. Barrick’s prior testimony that reserves set for G & S’s claim change as new information is received by Continental, G & S reasons that “what the reserves were and are, when they changed, and by how much” may “establish a time line” of when Continental received information. G & S suggests that if the information was not “new” to Continental in 2012, this would be evidence that Continental’s Counterclaim sounding in fraud is without merit.

Continental responds that Rule 30(b)(6) testimony on how its loss reserves may have changed after this litigation was filed is irrelevant and reflects nothing more than the mental impressions and litigation strategies of Continental’s lawyers, protected by the attorney-client privilege and the work product doctrine.  Since the advice, analysis, and recommendations of the attorneys are discussed by Continental management, who take into account the confidential attorney-client communications in considering whether and how to increase or decrease loss reserves it is protected by both the attorney client privilege and the work product protection.

The Court concluded that any change in the loss reserves since the lawsuit was filed, and, more specifically since G & S produced additional discovery in 2012, would not provide an identifiable correlation between Continental’s knowledge.

Multiple factors affect the adjustment of loss reserves during the course of litigation in addition to information obtained during discovery, such as litigation strategy, the potential for settlement, developments in the litigation, and the possibility of a favorable or unfavorable judgment.

Moreover, G & S already has the information it needs for an analysis of what Continental knew during the claim adjustment process and then later during this litigation and in 2012. Over the course of several discovery motions since the discovery deadline was extended in relation to Continental’s Counterclaim, the Court has granted G & S wide latitude to conduct discovery regarding the information and documents that Continental received during the initial claims process even though discovery on G & S’s Complaint for bad faith had closed. Continental has responded to G & S’s requests for production of documents, producing all nonprivileged documents contained in its claim file.  The topic of “what Continental knew and when” can be further explored in the continuation of Mr. Barrick’s deposition.

Thus, because testimony about the loss reserves since the filing of the lawsuit does not appear reasonably calculated to lead to the discovery of admissible evidence, the loss reserves are not relevant and, as a result, are not discoverable.

Once litigation is anticipated, loss reserves are protected by the work product doctrine when there is evidence that the loss reserves were established or adjusted in consultation with counsel in anticipation of or during litigation. Because the Court found that loss reserves established or adjusted during this litigation are not relevant, there is no basis at this stage in the litigation to compel Continental to disclose pre-litigation loss reserves in the context of discovery related to the Counterclaim.

ZALMA OPINION

Bad faith law suits cause – because the exposure to an adverse judgment can be severe – are hard fought and involve multiple motions and disputes over discovery. In this case discovery gave the insurer defendant a reason to amend its answer and file a counterclaim alleging that the insured attempted fraud. The insured, similarly, seeks to get through discovery, reserve information to show that the claim of fraud was not newly discovered by the insurer and was not appropriate. The court found that the reserves were irrelevant to its defense of the counterclaim and refused to allow that discovery. Once litigation is anticipated, loss reserves are protected by the work product doctrine since they are based upon the litigation analysis of defense counsel.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

 

Posted in Zalma on Insurance | Leave a comment

What is a Real Estate Manager

Tenant Is Just a Tenant

An unwritten rule of law is that an appellate brief or an appellate opinion should never truly be brief. The 11th Circuit Court of Appeal in Georgia broke the rule in dealing with Moon v. Cincinnati Ins. Co., — Fed.Appx. —-, 2014 WL 5410298 (C.A.11 (Ga.) Oct. 24, 2014) and resolved an insurance coverage issue succinctly and in language that any person can understand.

FACTS

Shawn Moon and Tanya Moon brought this action again The Cincinnati Insurance Company (“Cincinnati”) asserting both common law and contractual claims arising out of their insurance coverage dispute. The district court granted summary judgment to Cincinnati on all the Moons’ claims against it. The Moons brought this appeal.

The suit arose after the drowning death of a two-year-old child in a swimming pool at a home occupied by Shawn and Tanya Moon. At the time of the accident, Tanya Moon was babysitting the child.

The property was owned and insured by Shawn Moon’s father, Terry Moon. In addition to Terry Moon, the insurance policy extended coverage to “[a]ny person … while acting as [Terry Moon’s] real estate manager.”

The decedent’s parents and estate brought suit against Shawn and Tanya Moon and obtained a judgment in excess of ten million dollars. After initially defending Shawn and Tanya Moon under a signed reservation of rights, Cincinnati subsequently denied coverage and withdrew its defense of the Moons. The stated reason for the denial of coverage was that the policy did not cover Shawn and Tanya Moon through their relationship with Terry Moon, the homeowner and policyholder.

The Moons brought this action in state court asserting breach of contract and both common law and statutory bad faith failure to settle claims. They also sought punitive damages and attorneys’ fees. Cincinnati removed the action to the district court. The parties filed cross motions for summary judgment. The district court granted Cincinnati’s motion, holding that it had no duty to defend the Moons in the wrongful death action against them as they were neither the insured under the policy nor acting as real estate managers at the time of the accident.

The crux of the Moon’s argument was that, since the term “real estate manager” is undefined in the policy, it is ambiguous and its meaning must be strictly construed and resolved in favor of coverage. They asserted that a “real estate manager” is “one who simply takes care of an owners’ (sic) needs with regard to a piece of real estate.” They argued that, because they took care of the home they leased from Shawn Moon’s father, Terry, they were real estate managers as well as lessees.

The district court held that the term real estate manager has an accepted meaning in the industry and is not ambiguous. The industry term “real estate manager” implicates real estate transactions rather than routine occupancy of a dwelling.

ANALYSIS

The Eleventh Circuit concluded that to extend the definition of real estate manager to include a tenant who performs routine maintenance on the home he is leasing would render meaningless the policy’s lack of coverage for tenants of the property. Indeed, it would transform every tenant, family member or friend living in another’s home, who cuts the yard or paints a wall, into a covered real estate manager. Nothing that the assertion is not a reasonable interpretation of real estate manager the Eleventh Circuit concluded that no reasonable insured would equate his tenants with real estate managers.

Furthermore, to be covered, a real estate manager must be acting as a real estate manager at the time of the event for which coverage is sought. At the time of this accident, Tanya Moon was babysitting and Shawn Moon was not at home. There were no allegations in the complaint that the Moons were acting as real estate managers at the time of the accident.

Finally, the deposition testimony of the actual insured, Terry Moon, clearly revealed that he did not consider his son and daughter-in-law to be real estate managers of his property. He was allowing them to live there to help them out (he purchased the home from them to avoid foreclosure).

Because the Moons were neither the insureds nor real estate managers, all of their other claims—which depended upon their being covered by the policy—were appropriately denied by the trial court.

ZALMA OPINION

The Moons, and the parents of child for whom Tanya Moon was babysitting, would have been protected if the Moons had acquired a tenant’s homeowners policy or a commercial liability policy to cover her babysitting business. They did not but relied on her father, Terry, who bought the house from his daughter and her husband because they were going to lose it it foreclosure.  The real estate manager argument, although creative, had no basis in fact or in the common meaning of the term. I am amazed that this case was not thrown out as frivolous and can understand why the Eleventh Circuit found little need to write an extensive opinion affirming the decision of the trial court.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “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;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Posted in Zalma on Insurance | Leave a comment

Waiver of Stacking

Action Of Named Insured Binds All Insureds

Insureds work diligently to reduce the premium they pay. Since none believe they will ever have a loss and claim, insureds are willing to waive coverages like the right to stack coverages, uninsured motorist or underinsured motorist coverage to limit the premium they pay for their auto insurance. When a loss occurs the insured then claims that the waiver did not apply to them or that it violated state statutes.

SUPREME COURT ASKED TO ANSWER QUESTIONS OF GREAT PUBLIC IMPORTANCE

Insured, who was injured while riding as passenger in vehicle owned by her father and was being driven by permissive user, brought action against insurer, seeking uninsured-motorist (UM) benefits.

The Florida Supreme Court was asked to answer questions certified by an appellate court to be of great public importance:

        1. WHETHER THE FAMILY VEHICLE EXCLUSION FOR UNINSURED MOTORIST BENEFITS CONFLICTS WITH SECTION 627.727(3), FLORIDA STATUTES, WHEN THE EXCLUSION IS APPLIED TO A CLASS I INSURED WHO SEEKS SUCH BENEFITS IN CONNECTION WITH A SINGLE–VEHICLE ACCIDENT WHERE THE VEHICLE WAS BEING DRIVEN BY A CLASS II PERMISSIVE USER, AND WHERE THE DRIVER IS UNDERINSURED AND LIABILITY PAYMENTS FROM THE DRIVER’S INSURER, WHEN COMBINED WITH LIABILITY PAYMENTS UNDER THE CLASS I INSURED’S POLICY, DO NOT FULLY COVER THE CLASS I INSURED’S MEDICAL COSTS.

        2. WHETHER UNINSURED MOTORIST BENEFITS ARE STACKABLE UNDER SECTION 627.727(9), FLORIDA STATUTES, WHERE SUCH BENEFITS ARE CLAIMED BY AN INSURED POLICYHOLDER, AND WHERE A NON–STACKING ELECTION WAS MADE BY THE PURCHASER OF THE POLICY, BUT WHERE THE INSURED CLAIMANT DID NOT ELECT NON–STACKING BENEFITS.

BACKGROUND

On October 29, 2009, Crystal Harrington was injured in a single-car accident, while riding as a passenger in a car owned by her father, but driven with permission by a non-family member, Joey Williams. The vehicle was insured by Travelers Commercial Insurance Company (“Travelers”). Harrington’s mother was the named insured and the purchaser of the policy on the vehicle. The policy insured three vehicles and provided liability and non-stacked uninsured motorist coverage for Harrington, her mother, and her father. Specifically, the Harrington’s policy provided for bodily injury liability coverage of $100,000 per person and $300,000 per accident, and non-stacked UM coverage of $100,000 per person and $300,000 per accident.

After she was injured, Nationwide paid Harrington the $50,000 limit of Williams’ liability policy. This payment did not fully cover Harrington’s medical expenses, and Travelers also tendered its liability limit of $100,000. However, Harrington’s damages still exceeded the combined liability payments, and she subsequently sought UM benefits from Travelers. Travelers denied the claim on the ground that the vehicle was not an “uninsured motor vehicle” as defined in the policy.

Specifically, the policy’s definition of an “uninsured motor vehicle” included an “underinsured” vehicle, that is a vehicle to which a liability policy applies at the time of the accident but the amount paid under the policy is not enough to pay the full amount of the insured’s damages. However, the policy also contained a “family vehicle exclusion” which expressly provided that an uninsured vehicle does not include any vehicle owned by or furnished or available for the regular use of you or a “family member” unless it is a “your covered auto.”

ANALYSIS

Whether the Family Vehicle Exclusion Conflicts With Section 627.727(3), Florida Statutes
Under Florida law, insurers are required to provide UM coverage for all vehicles insured for liability purposes, unless the insured expressly rejects UM coverage. Harrington argues, and the Court of Appeals concluded, that the family vehicle exclusion in the Travelers policy is void because it conflicts with section 627.727(3)(b), which provides that underinsured vehicles shall be considered uninsured for purposes of UM coverage, and that Harrington is entitled to both liability and UM benefits under the Travelers policy.
The terms and conditions of the insurance policy expressly and unambiguously excluded the vehicle in question from the definition of an “uninsured motor vehicle. Thus, the family vehicle exclusion does not conflict with section 627.727(3)(b) because the statute clearly states that the term “uninsured motor vehicle” is subject to the terms and conditions of the policy.

A vehicle cannot be transformed from an insured vehicle into an uninsured vehicle simply because liability coverage was barred due to a valid enforceable household exclusion in the same policy.

Whether the Exclusion Conflicts With Statute

The family vehicle exclusion does not conflict with the statute because the liability policy does not exclude coverage for non-family members. Rather, the Harrington’s liability policy, consistent with the purposes of the statute, covers any person who drives, with permission, any of the vehicles insured under the policy, and also provides that an insured vehicle is considered uninsured for purposes of UM coverage if the liability policy excludes coverage for non-family members whose operation of the vehicle cause injury to the named insured or the named insured’s family.

The Supreme Court concluded that the family vehicle exclusion does not conflict with the and answered the first certified question in the negative.

Stacking of UM Benefits

While stacking of UM coverage is presumptive under Florida law, section 627.727(9) provides that an insurer may offer non-stacking coverage provided that the insurer informs the insured of the limitations of such coverage and the insured executes an approved form expressly electing non-stacking coverage. Harrington’s mother, the named insured, executed a coverage election form expressly electing non-stacking UM coverage and, as a result of this election, paid a corresponding lower insurance premium. The plaintiff argued that she did not agree to non-stacking coverage nor did any of the insureds other than the named insured and that, therefore, the non-stacking provision should not apply to her.

The Supreme Court noted that automobile insurers have never provided individualized UM coverage.  UM coverage premiums are calculated based on the coverage selected for the policy as whole.  The Court of Appeal’s interpretation creates the potential predicament that individuals under the same policy will elect both stacked and non-stacked UM benefits, making the calculation of a single UM premium impractical, as well as virtually impossible.

The Supreme Court, therefore, concluded