How Do You Set Aside an Appraisal Award?

Umpire Must Be Unbiased

Appraisal awards are almost impossible to set aside. However, if it is shown that the umpire is biased or even has a potential for bias, the award can be set aside. In Zurich American Ins. Co. v. Omni Health Solutions, LLC, — S.E.2d —-, 2015 WL 4034465 (Ga.App., 7/2/2015) the question of potential bias resulted in litigation and an appeal to the Georgia Court of Appeal.

FACTS

Omni Health Solutions, LLC (“Omni”) filed an insurance coverage claim with its insurer Zurich American Insurance Company (“Zurich”) for hail damage to Omni’s commercial property. When a dispute arose over the amount of the covered loss under Omni’s policy (hereinafter the “Policy”), Omni invoked the Policy’s appraisal provision which provided for the appointment of two appraisers and an umpire. The original umpire resigned, however, after the discussions on the loss had begun, so the parties filed a joint petition in Superior Court for appointment of a new umpire. The Superior Court granted the parties’ joint petition, and subsequently ruled that the appraisal awards made by the original umpire were not binding because there was a question regarding the original umpire’s impartiality. Zurich appealed, contending that the Superior Court erred in ruling that the original umpire’s appraisal awards were non-binding.

The record shows that the Policy provided $2.7 million in commercial property coverage for Omni’s building in Macon, Georgia (the “Insured Property”). The Insured Property consisted of a 17,200 sq. ft. building containing several doctors’ offices. On February 14, 2011, while the Policy was in effect, the roof of the Insured Property was extensively damaged by hail, resulting in damage to the building’s contents and equipment, as well as subsequent water and mold damage to the building’s ceilings, walls and floors. The damage to the building also resulted in business interruption losses for the doctors and their offices. As a result of those losses, Omni filed an insurance claim with Zurich.
Zurich and Omni disputed the amount of the covered loss to the Insured Property. In order to resolve the dispute, an appraisal of the damage to the Insured Property was undertaken pursuant to the terms of the Policy. ,

The two appraisers and the original umpire agreed to an award of more than $800,000 for the structural damage to the Insured Property (the “Structural Damage Award”). Thereafter, Zurich’s appraiser and the original umpire also agreed to an award of $322,445.61 for Omni’s business interruption claim (hereinafter the “Business Interruption Award”).

When the original umpire was initially appointed, he was an independent adjuster. At some point during the appraisal process, the original umpire joined a firm that performed work for Zurich. At Omni’s request, the original umpire stepped down from the appraisal process.

ANALYSIS

An appraisement award is the result of a contractual method of ascertaining the amount of loss, and it is binding on the parties as to the amount of loss unless the award is set aside. There exists a presumption in favor of the regularity and fairness of appraisement awards, and it is difficult to set them aside. While an award may be attacked for any reason that would void a contract, where there is no evidence of fraud, oppression, irregularity, or unfairness, other than on the disputed issue of value, and no other circumstances tending to raise the issue, a verdict in the amount of the award is demanded.

The award for structural damages, joined in by both appraisers and the umpire, was affirmed because the issue of bias did not exist at the time it was entered and all that was required to affirm the award was agreement by two of the three.

However, the record shows that the Business Interruption Award was based on an estimate prepared by Zurich’s appraiser, and, unlike the Structural Award, only Zurich’s appraiser and the original umpire agreed to the Business Interruption Award. The record also shows that Omni could only recover business interruption damages for a maximum of twelve consecutive months, and Zurich determined the 12–month time-period for calculation of Omni’s business interruption damages. Moreover, the Business Interruption Award was issued after the original umpire began working for a company that performed work for Zurich.

The Superior Court found that the original umpire’s possible impartiality was sufficient to set aside the Business Interruption Award. Since the Business Interruption Award was based on Zurich’s estimate, was issued after the umpire joined a company that performed work for Zurich and was not agreed to by Omni’s appraiser. The Court of Appeal, therefore, could not say that the Superior Court abused its discretion in setting aside the Business Interruption Award.  The business interruption portion of the claim must be resolved by the two appraisers and a new umpire.

ZALMA OPINION

Appraisal was designed to resolve disputes over the amount of a loss quickly and fairly. Sometimes, however, it becomes a burden. Here, because the umpire changed employment to a firm that did business with the insurer, a conflict arose and he should have withdrawn. Since the award of an amount for business interruption was made by the appraiser for the insurer and the umpire, after the umpire, took a new job and created a conflict, had to be set aside. Insurers and insureds should take care to avoid appointment of umpires with conflicts and umpires should consider concluding an award before taking new employment that creates a conflict.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What Is Needed to Refuse a Defense?

Duty to Defend Is Difficult to Disclaim on Summary Judgment

It is axiomatic that the duty to defend is broader than the duty to indemnify. Whenever there is a potential for coverage an insurer must defend. If the insurer believes there is no coverage it is usually wiser to agree to defend under a reservation of rights and once the evidence is in and it becomes certain that there is no coverage for defense or indemnity to withdraw the defense and demand return of the money expended in defense under reservation.

In Stein v. Northern Assur. Co. of America, — Fed.Appx. —-, 2015 WL 4032613 (C.A.2 (N.Y.) 7/2/2015) the insurer refused to defend based upon a conclusion by the insurer that the insured knew about the loss before acquiring the policy from Northern.

ISSUES

In this insurance coverage dispute, Plaintiffs–Appellees Judith Stein, Gwendolyn Zegel, and David Neufeld (collectively, “plaintiffs” or “insured”) contend that Defendants–Appellants Northern Assurance Company of America, OneBeacon America Insurance Company d/b/a International Marine Underwriters, and OneBeacon Insurance Group, LTD. (collectively, “insurers”) breached their duty to defend plaintiffs in an underlying action pending in New York Supreme Court: Bernardis v. Town of Islip, No. 08–9250 (the “Bernardis Action”). The district court granted plaintiffs’ motion for partial summary judgment, concluding that insurers had improperly declined coverage based on a policy provision that excludes coverage for property damage that the insured was aware of prior to the policy period.

In reviewing a summary judgment decision, the Second Circuit Court of Appeal utilizes the same standard as the district court: summary judgment is appropriate where there exists no genuine issue of material fact and, based on the undisputed facts, the moving party is entitled to judgment as a matter of law.

Under New York law, “[a]n insurer’s duty to defend its insured arises whenever the allegations in a complaint state a cause of action that gives rise to the reasonable possibility of recovery under the policy.” Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 779 N.E.2d 167, 170 (N.Y.2002) (internal quotation marks omitted).
To be relieved of its duty to defend on the basis of a policy exclusion, the insurer bears the heavy burden of demonstrating that the allegations of the complaint cast the pleadings wholly within that exclusion.

ANALYSIS

An insurer can be relieved of its duty to defend if it establishes as a matter of law that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured under any policy provision.

An insurer’s duty to defend claims made against its policyholder is ordinarily ascertained by comparing the allegations of a complaint with the wording of the insurance contract.  IBM Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 144 (2d Cir.2004). Accordingly, “[i]t is well established that a liability insurer has a duty to defend its insured in a pending lawsuit if the pleadings allege a covered occurrence, even though facts outside the four corners of those pleadings indicate that the claim may be meritless or not covered.” Fitzpatrick v. Am. Honda Motor Co., 575 N.E.2d 90, 90 (N.Y.1991).

The insurer’s duty to defend is not an interminable one. It will end if and when it is shown unequivocally that the damages alleged would not be covered by the policy. When an insurer’s duty to defend turns on an unresolved factual dispute, the duty to defend lasts only until the factual ambiguity is resolved in favor of the insurer. The duty to defend continues until judicial determination, either in the underlying action or in the coverage action, of the issue relevant to coverage.

DECISION

The Second Circuit concluded that the trial court did not err in concluding that insurers have failed to meet their burden of establishing that they were entitled, as a matter of law, to disclaim coverage under the applicable insurance policies.  In particular, the factual allegations in the complaint and bill of particulars filed in the Bernardis Action are insufficient to establish as a matter of law that the insured had prior knowledge of the property damage at issue in that action, such that the insured violated the notice provisions in the applicable insurance policies.

An insurer’s duty to defend is only extinguished under New York law when it is unequivocally established that there is no possible factual or legal basis on which it might eventually be obligated to indemnify its insured. To effectively disclaim coverage, an insurer must show unequivocally that the damages alleged would not be covered by the policy.

Here, there Second Circuit found that there was ample ambiguity on the face of the bill of particulars regarding the nature and quality of the notice that Anthony Bernardis, a plaintiff in the Bernardis Action, gave to Kenneth Stein, a defendant in the Bernardis Action and an officer in Defendant–Appellee Sayville Ferry Service, Inc. (“Sayville”), regarding the property damage allegedly caused by Sayville on Bernardis’s property. Specifically, the bill of particulars alleges that Bernardis informed Stein of flooding from property that Sayville does not own or have any other possessory interest in.

Moreover, consideration of extrinsic evidence, to the extent it is appropriate to do so under New York law, did not alter the Second Circuit’s conclusion that the insurers have failed to meet their burden for disclaiming coverage. An insurer may only disclaim its duty to defend on the basis of extrinsic evidence “where the evidence offered … allow[s] a court to eliminate the possibility that the insured’s conduct falls within coverage of the policy.” IBM, 363 F.3d at 148 (internal quotation marks omitted)

Stein submitted a sworn affidavit in the Bernardis Action in which he states that “prior to the commencement of the Bernardis lawsuit, I had no communication with anyone concerning damage to their home that was allegedly caused by [the insured].” Accordingly, the extrinsic evidence available in the Bernardis Action cannot “eliminate the possibility” that Stein was in compliance with the notice provisions of the applicable insurance policies.

Of course, the insurers can still dispute their duty to defend in the appropriate context and in the appropriate forum, should the factual record on the issue of Stein’s prior notice of the property damage on Bernardis’s property become more fully developed.

ZALMA OPINION

Although extrinsic evidence is useful to establish a coverage position – either for coverage or that none exists – it is necessary that that evidence eliminates the possibility that the insured was in compliance with the notice provision of the policy. In this case the Second Circuit found that the insurers failed to prove that the insured failed to comply with the condition but it still has the right to do so after discovery is completed. The insurers should have defended under a reservation to protect their interest and that of their insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why Insured Should Never Sign a Release Without Advice of Counsel

Release Means What It Says and Says What it Means

When an insured and insurer cannot agree on the amount of a loss sometimes an insurer will pay more than it believes it owes in exchange for a general release that releases all claims, known and unknown, to obtain peace and eliminate future claims from the insured. Such a release is a binding contract on both parties and any additional claims are barred even if they would have been covered by the policy if a release had not been signed.

In Giaccone v. Canopius US Ins. Co., Slip Copy, 2015 WL 3954143 (D.N.J., 6/29/2015) insureds and their public insurance adjuster learned the hazard of signing a release without carefully reading it with the advice of counsel. Defendant Canopius U.S. Insurance Company’s (hereinafter, “Defendant”) refused to pay insurance benefits to Plaintiffs Antonio Giaccone and Rita Giaccone (hereinafter, “Plaintiffs”) for their claim that a January 31, 2013 storm severely damaged their commercial and rental property in Pleasantville, New Jersey.

Defendant specifically asserts that the parties entered into a Release and Settlement Agreement (hereinafter, the “Settlement Agreement” or “Agreement”) on November 27, 2013, concerning Plaintiffs’ claim for property damage that occurred during Hurricane Sandy on October 29, 2012.

The provisions of the executed Agreement, however, release Defendant from “any and all claims” arising out of damages “that occurred on or about October 29, 2012 (the ‘Subject Loss’),” and from “any and all” other claims that Plaintiffs could have asserted against the Policy, including unknown claims and those not expressly mentioned in the Settlement Agreement. Indeed, the Agreement contains a specific covenant that Plaintiffs had, at the time of the Agreement’s execution, “no remaining claims of any kind” under the Policy.
As a result, Defendant asserts that Plaintiffs’ supplemental claim for property damage that occurred on January 31, 2013, approximately ten months prior to execution of the Settlement Agreement, constitutes an impermissible attempt to recover “in contravention of the clear and unambiguous terms” of the Agreement.

BACKGROUND

Plaintiffs own a commercial and rental property in Pleasantville, New Jersey. On May 31, 2012, Defendant issued Plaintiffs a “Commercial Lines” insurance policy for the period of May 2, 2012 to May 3, 2013.

On October 29, 2012, however, Hurricane Sandy “ripped the roof completely off of the building,” allowing water to flood the property. As a result, Plaintiffs, through their licensed Public Adjuster, Michael DeRita, submitted an insurance claim to Defendant for the losses associated with Hurricane Sandy. In investigating the claim, Defendant’s claims agent represented that 80% of the damages to Plaintiffs’ property resulted from a subsequent storm, rather than Hurricane Sandy. Defendant’s agent, in making the final offer, indicated that the offer was more than it would have been for just Sandy related damage alone.

Nevertheless, Defendant offered to settle Plaintiffs’ claim in its entirety and, on October 31, 2013, forwarded a four page proposed settlement and release through Raphael & Associates, Defendant’s claims administrators, in order to resolve the claim. The Agreement, which Plaintiffs executed on November 27, 2013, provided that Plaintiff would receive a total payment of $458,446.11 in full satisfaction of their outstanding insurance claim.

In executing the Settlement Agreement, Plaintiffs acknowledged, before a Notary Public, that they read and reviewed the Agreement in its entirety and fully understood its provision. Nevertheless, on January 16, 2014, ten months after executing the Settlement Agreement, Plaintiffs submitted a second claim under the Policy for damages allegedly sustained to their property during a subsequent storm on January 31, 2013.

DISCUSSION

For the reasons that follow, however, the Court finds the limited terms of the Settlement Agreement to be remarkably clear on their face. A settlement agreement constitutes a simple legal contract subject to enforcement through the application of basic principles of state contract law. Clear and unambiguous contracts leave no room for interpretation or construction and must be enforced as written.  Sheet Metal Workers Int’l Ass’n Local Union No. 27, AFL–CIO v. E.P. Donnelly, Inc., 737 F.3d 879, 900 (3d Cir.2013)

Moreover, it is well settled that a party who enters into a contract in writing, without any fraud or imposition being practiced upon him, is conclusively presumed to understand and assert to its terms and legal effect. Rudbart v. N. Jersey Dist. Water Supply Comm’n, 605 A.2d 681, 685 (N.J.1992). Indeed, signing a contract creates a conclusive presumption that the signer read, understood, and assented to its terms. Nevertheless, a narrow exception arises in the face of evidence that the contract resulted from fraud, duress, and/or misrepresentation. Indeed, under such circumstances, even the clearest of contracts may prove voidable and rescindable.

The Settlement Agreement Broadly Waives Any and All Claims under the Policy

Here, Plaintiffs do not point to any ambiguity in the Agreement, nor do they suggest that the Agreement otherwise lacks sufficient clarity as to its effect. Rather, based upon a single provision of the Settlement Agreement, Plaintiffs insist that it “solely” concerns “damage stemming from” Hurricane Sandy.

The Settlement Agreement defines, at the outset, the damage caused on October 29, 2012 as the “Subject Loss,” and specifically provides that Plaintiffs forever release Defendant from “any and all claims” associated with this Loss. Nevertheless, the Agreement goes on to provide that Plaintiffs also agreed to release Defendant from “any and all claims and rights which [they] may have against [Defendant],” including those of which Plaintiffs were “not aware and those not mentioned in” the Settlement Agreement. The Settlement Agreement then reinforces the broad scope of this release by reiterating that Plaintiffs “specifically release[ ] the following claims: Any and all claims that were made or could have been made under or against [the] insurance policy issued by” Defendant. Indeed, Plaintiffs “specifically agreed” that, as of the date of execution, they had “no remaining claims of any kind” under the Policy.

In arguing that the Settlement Agreement possesses a limited scope, Plaintiffs assert that the Agreement’s identification of the October 29, 2012 Hurricane Sandy damage as the “‘Subject Loss’” necessarily dictates that the Settlement Agreement covers only Plaintiffs’ claims related to this Loss. Plaintiffs’ narrow interpretation would impermissibly render multiple provisions of the Agreement meaningless.

These all-inclusive provisions therefore provide a clear and express indication that the Agreement required, by its very terms, the release of all potential claims against Defendant, regardless of whether they arose from Hurricane Sandy or any subsequent storm. In other words, these provisions make plain that the Settlement Agreement subsumed and covered all of the damages to Plaintiffs’ property up to the November 27, 2013 Settlement date since both parties were aware, at the time the Settlement was signed, of both the Sandy related damages and the January 2013 storm damage.

Here, based upon the circumstances leading up to their receipt and execution of the Settlement Agreement, Plaintiffs assert that they understood the Agreement to concern only damages arising from Hurricane Sandy on October 29, 2012. Indeed, Mr. Giaccone specifically testified during his deposition that he believed the Settlement Agreement only covered “certain damages that occurred during the Sandy storm,” and not any damage caused by storms following Hurricane Sandy.   Mr. DeRita, Plaintiffs’ Public Adjuster, similarly certified that he received the Settlement Agreement from Defendant on October 31, 2013, and forwarded the Agreement to Plaintiffs “with the understanding that [it] released only claims arising from damages sustained as a result of the storm on October 29, 2012 (referred to as the “subject loss”) in the Release.” Despite these assertions, Plaintiffs nevertheless executed an Agreement that included a release with a much greater breadth.

Plaintiffs’ challenge to the Agreement’s enforcement therefore amounts, in essence, to a request that they be excused from the preclusive effect of the Settlement Agreement as a result of their own failure to review its limited and clear provisions.

Having prevailed in its motion, the Court will permit Defendant to file its affidavit of costs and attorney’s fees in the format required by Local Civil Rules, in accordance with the terms of the Release contract. A judgment for attorney’s fees and costs will be entered if these submissions are timely made and approved by the Court.

ZALMA OPINION

This is an example of buyers remorse. The Plaintiffs had two claims pending with the Defendant insurer. One for hurricane Sandy and one for a later storm for which coverage was not available. The insured, through its public adjuster, negotiated a settlement for amounts greater than the loss caused by hurricane Sandy and signed a complete release knowing, at the time, that there were two claims pending. Then, after receiving payment in accordance with the Settlement they attempted to go around the Release. They failed and will now be required to pay Defendant’s attorneys fees and costs. All of which could have been resolved if they had a lawyer review the contract. They are not without a remedy – they can sue their public adjuster for advising them to sign the release.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

You Can’t Con an Honest Person

Insured Must Read Application For Insurance

As I have repeated until I am blue in the face the covenant of good faith and fair dealing incorporated in every policy of insurance applies equally to each party to the policy of insurance. There is no excuse for making false representations on an application for insurance even if the insurer’s agent suggests the misrepresentation. Dishonesty is no less dishonest if it is suggested by someone else when the person applying for the insurance knows that the application for insurance is dishonest.

In Alfa Life Ins. Corp. v. Reese, — So.3d —-, 2015 WL 3964215 (Ala., 6/30/2015) the Alabama Supreme Court was asked to determine if rescission is appropriate when the misrepresentations were suggested by the insurer’s agents.

FACTS

On April 14, 2010, Mrs. Reese applied to purchase life insurance on her husband, Lee V. Reese (hereinafter ‘Lee Reese’).

Mrs. Reese advised the Defendants that she sought to obtain life insurance on Lee Reese so that she would have funds available to bury him in the event of his death. Griffith, as the agent of Alfa, suggested that Mrs. Reese apply for no more than $15,000.00 in life insurance since this was the maximum amount of insurance that could be sold without Lee Reese undergoing a physical examination.

Griffith, as the agent, servant or employee of Alfa acting within the line and scope of his employment, asked a series of questions of Mrs. Reese in completing [on a laptop computer] an application for the policy of life insurance on Lee Reese, including questions about Lee Reese’s past medical history. Mrs. Reese provided answers to the questions asked of her by Griffith who completed the application for insurance.

Griffith read to Reese a question on the application regarding whether or not Lee Reese had diabetes, kidney failure or amputation. Reese answered these questions truthfully and advised the defendants that Lee Reese suffered from chronic kidney disease, diabetes, and an amputation of his leg below the knee. After being advised of Lee Reese’s medical condition, Griffith stated to Reese that he needed to ask a superior, Russell. for advice in completing the application. In the presence of Reese, Griffith advised Russell of the medical issues of Lee Reese. Russell advised Griffith, in the presence of Reese, to not put that information in the application.

After the application was completed, Griffith and Reese stepped out of the office building into the parking lot where Lee Reese was sitting in a pickup truck. Lee Reese had removed his artificial leg prosthesis on his left leg, which had been amputated, and the prosthesis was in plain view of Griffith in the vehicle when Griffith asked Lee Reese to electronically sign the application. Lee Reese was unable to sign the application and Griffith had Reese sign both her name and Lee Reese’s name to the application.

A policy issued. Lee Reese passed away unexpectedly shortly thereafter. Mrs. Reese’s claim was denied by Alfa. She sued.

Mrs. Reese countered the insurer’s motion for summary judgment by contending that Alfa cannot void or rescind the policy based upon any misrepresentation in the application of insurance if the responsibility for the false information was that of the agent who was fully apprised of the insured’s medical problems yet opted to omit that from the policy in order to procure a policy of insurance.

Mrs. Reese admittedly did not read the application, was not asked to read the application, did not “look at” the application, and was not “refused an opportunity by the agent” to read the application.

The trial court entered an order granting the defendants’ summary-judgment motion in part and denying the motion in part. Specifically, the trial court granted the summary-judgment motion as to Reese’s bad-faith claim but denied the motion as to Reese’s breach-of-contract and fraud claims and also denied the motion as to Alfa’s counterclaim seeking rescission of the life-insurance policy.

The trial court granted the motion and certified the following controlling questions of law:

“1. Can a misrepresentation regarding the contents of a document be sufficient in and of itself for a reasonable jury to find an exception to the duty to read?

“2. Where there is no evidence of a special relationship between the parties and no evidence that the plaintiff suffers from a disability rendering her unable to discern the contents of the document, can a plaintiff nevertheless be relieved of the duty to read?

“3. Can information that an agent allegedly obtained in the application process be imputed to the insurance company where the application agreement states, ‘No information or knowledge obtained by any agent … in connection with this Application shall be construed as having been made known to or binding upon the Company’?”

ANALYSIS

The issue is whether misrepresentations to Reese by Alfa’s agents—that the life—insurance policy would be effective despite the false statements in the application regarding Lee Reese’s health and despite the contractual language stating (a) that Alfa’s agents have no authority to unilaterally modify a life-insurance policy and (b) that misrepresentations in the application could result in cancellation and/or lack of coverage—excepted Reese from her legal duty to read the documents received in connection with a particular transaction. The answer to this question is clearly “no.”

The right of reliance comes with a concomitant duty on the part of the applicant for insurance to exercise some measure of precaution to safeguard their interests. The insureds here took no precautions to safeguard their interests. If nothing else, the language in the policies, should have provoked inquiry or a simple investigation of the facts by the insured. The Supreme Court concluded that no reasonable person could read the policies and not be put on inquiry as to the existence of inconsistencies, thereby making reliance on the agent’s representations unreasonable as a matter of law.  Any adult of sound mind capable of executing a contract necessarily has a conscious appreciation of the risk associated with ignoring documents containing essential terms and conditions related to the transaction that is the subject of the contract.

The duty-to-read rule may be avoided when there have been misrepresentations regarding the contents of a document and there are special circumstances or a special relationship between the parties or the plaintiff suffers from a disability rendering him or her unable to discern the contents of the document. However, none of those exceptions apply in this case, and Reese does not even specifically contend that any of those exceptions do apply.  Reese offers no authority in support of this argument. As a result the trial court erred in failing to grant the defendants’ summary-judgment motion on the basis that Reese was not relieved by special circumstances of the duty to read.

The plain terms of the agreement contradict the appellant’s purported belief, because the undisputed evidence indicates that the appellant, while fully capable of reading and understanding the terms of the agreement, nonetheless made a deliberate decision to ignore those written contract terms in favor of previous purported representations by the insurer.

CONCLUSION

There exists no issue for a jury to resolve in this case because the undisputed evidence shows:

(1) that Reese improperly relied on the agents’ oral representations regarding the validity of the application without making any attempt to read the life-insurance policy application,

(2) that Reese made no attempt to inquire into or to investigate any inconsistencies between the agents’ oral representations and the language of the application, and

(3) that no exception to the duty to read applies here. It is clear that the application states that the information obtained by the agents in the application process that is not contained in the application absolutely cannot be imputed to Alfa.

ZALMA OPINION

Mrs. Reese, knowing that her husband was severely ill, and that he was uninsurable if she honestly reported his condition to the insurer, if only because the agent told her not to put the true information on the application, agreed to obtain the insurance by fraudulent representations. She tried to palm the fraud off to the agent. The attempt failed because she admittedly signed the application for herself and her incapacitated husband knowing it contained false information. There was no meeting of the minds between her and the insurer and she was not allowed to profit from her fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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Sometimes Insurance Fraud Doesn’t Pay

Zalma’s Insurance Fraud Letter

July 1, 2015

Compliance With The California SIU Regulations

To sign up for the live webinar by Barry Zalma, Esq., CFE on July 8, 2015 at 8:00 a.m. Pacific Time and 11:00 a.m. Eastern time, go to: http://www.complianceonline.com/compliance-with-the-california-siu-regulations-webinar-training-703989-prdw?channel=M3_NW_JL08_Barry_JN19_BR or call Toll Free: +1-888-717-2436

This webinar will provide the annual training required by the SIU Regulations required of all anti-fraud personnel and will highlight the effort to reduce the multi-billion dollar crime that bleeds the insurance industry of potential profits.

Sometimes Insurance Fraud Doesn’t Pay

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

The current issue of ZIFL reports on:

1.    False Claim Conviction Affirmed in Utah.
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Fraud Fails – Insured Must Pay Insurer.
4.    E-Books from Barry Zalma
5.    Health Insurance Fraud Scheme Conviction Affirmed
6.    The Zalma Insurance Claims Library
7.    Minnesota Adds New Anti-Fraud Laws
8.    Renzi Stays in Jail.
9.    Webinar – Compliance With the California SIU Regulations
10.    Good News

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    When Does an Endorsement Supersede the Base Coverage Wording? – June 30, 2015
•    When is a “Known Loss” Not Known? – June 29, 2015
•    Can Insured Get Back Premium if No Loss? – June 26, 2015
•    SIU Regulations Webinar – June 25, 2015
•    Can an Insured Receive Coverage for Breach of Fiduciary Duty – June 25, 2015
•    What is a “Residence Premises” & Who Are Resident Relatives? – June 24, 2015
•    Condition Precedent Enforced – June 24, 2015
•    Does the Notice-Prejudice Rule Unfairly Disadvantage an Insurer of Its Contractual Rights? – June 23, 2015
•    When Must An Appraisal Award Be Reversed? – June 22, 2015
•    What is The Covenant of Good Faith and Fair Dealing? – June 22, 2015
•    What is Insurance? – June 19, 2015
•    Millions for Defense and Never Accept Fraud – June 19, 2015
•    Is an Arson Fire Vandalism in Tennessee? – June 18, 2015
•    May Insurers Insure Against Punitive Damages? – June 17, 2015
•    Innocent Misrepresentation Supports Rescission – June 16, 2015
•    The “Chutzpah” of Fraud Perpetrators – June 15, 2015
•    Appraisal Can Stay Litigation – June 12, 2015
•    Conflict of Interest Required To Remove Counsel – June 12, 2015
•    Appraisal Award Binding – June 11, 2015
•    Vicarious Liability & Additional Insured Endorsement – June 11, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

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Heads I Win, Tails You Lose

How Not to Commit Arson – A Fictionalized Story About Insurance Fraud by Barry Zalma, Available at http://www.zalma.com/zalmabooks.htm

Posted in Zalma on Insurance | Leave a comment

When Does an Endorsement Supersede the Base Coverage Wording?

Coverage Determined by What Is not What Might Be

Insurance companies and the people they insure have the right to limit the coverage available under the policy. For each coverage that is eliminated by endorsement the premium cost is reduced. People who buy insurance based on price often express buyer’s remorse and try to compel insurers to provide the coverage the insured agreed, when it took the lower premium, would not be covered.

Century Surety Company (Century), asked the Illinois Court of  Appeal to affirm a trial court declaration that it did not have a duty to defend or indemnify the defendant, Winchester Industrial Controls LLC (Winchester), in connection with a lawsuit filed against Winchester by Fidelitone, in Century Surety Co. v. Winchester Indus. Controls LLC, Not Reported in N.E.3d, 2015 IL App (2d) 140969-U, 2015 WL 3935950 (Ill.App. 2 Dist., 6/25/2015) because the coverage was limited and did not provide coverage for the events alleged.

BACKGROUND

Winchester purchased two policies from Century that provided it insurance coverage in the event it was sued for damages arising from bodily injury or property damage. The policies Winchester purchased specifically provided that coverage would not be provided for alleged damages arising out of “impaired property” or an inability to access certain electronic data. Impaired property was defined as property that has not been physically injured but rather was property that cannot be used as intended due to a defect, deficiency, or inadequacy of the insured’s work.

Fidelitone filed a complaint against Winchester and others. The complaint alleged that Fidelitone contracted with the Beacon Group, LLC (Beacon) “to design and implement a ‘Solution’ for its logistical and supply chain processes and to provide productivity and efficiency improvements” in Fidelitone’s Wauconda facility. Winchester was one of Beacon’s subcontractors. Fidelitone claimed that, although it spent over $2 million on the “Solution,” it never worked. Fidelitone therefore sought to recover its economic losses from Winchester and the others due to the failure of the “Solution.”

After Winchester was sued by Fidelitone, Winchester requested Century to defend it against Fidelitone’s complaint. Century refused and instead filed a motion for a declaratory judgment, seeking a declaration that it owed Winchester neither a duty to defend it nor to indemnify it. The trial court found that based on the plain language of the policies, Century did not owe a duty to defend or indemnify Winchester. The trial court therefore granted Century judgment on the pleadings as to both its complaint and Winchester’s counterclaim.

ANALYSIS

Winchester argues that the trial court erred in ruling in Century’s favor because (1) there is a question as to whether the two policies at issue should be treated as separate policies or one continuous policy; (2) the limitations of coverage endorsement provided Winchester additional coverage than provided by the terms of the general policies; and (3) the trial court’s interpretation of Century’s legal duty to defend was too narrow. All of Winchester’s arguments fail.

Winchester purchased two insurance policies from Century that were effective from rom 2011 to 2013. Winchester’s first argument—that the two policies should be treated as one continuous policy—is contradicted by over 100 years of precedent in this state.

Accordingly, we will consider the two policies at issue as separate policies. The second policy clearly does not provide any coverage to Winchester because it indicates that it does not provide coverage for incidents arising prior to June 23, 2012. The allegations in Fidelitone’s complaint allege that Winchester’s misconduct occurred prior to that date.

As to the first policy, Winchester contends that there is a conflict between the general language of the policy and the “limitations of coverage” endorsement. Although Winchester acknowledges that the policy precludes coverage for damages arising from impaired property, it maintains that the limitations of coverage endorsement actually provides it additional coverage. Winchester insists that because the endorsement specifically referred to the type of work that it was doing on behalf of Fidelitone, the endorsement necessarily meant that Century would be obligated to defend it if Winchester was sued by Fidelitone. Winchester’s argument contradicts the plain language of the insurance contract.

The endorsement at issue provided that it “changes the policy” and provides “limitation of coverage to specified classifications, operations, premises, or projects.” The endorsement described the operations as the “[s]ervicing, maintenance, & repair for conveyor systems in commercial buildings [,] including develop and design of computer software that drives the conveyor system.” The endorsement further provided that insurance coverage was for “bodily injury” and “property damage” that arises from the “operations shown above.”

The “limitation of coverage” endorsement provided that it would only provide coverage if Winchester was performing specified business operations. Thus, the “limitation of coverage” endorsement provided less coverage than the policy without the endorsement would have. Winchester’s argument that the endorsement provided additional coverage is without merit.

In its final argument, Winchester insists that Century should have provided it a defense because Fidelitone “might” have eventually plead something that potentially fell within the insurance coverage that it had purchased from Century. This argument is contrary to clear precedent.

It is well-settled that an insurer’s duty to defend is determined by comparing the allegations in the underlying complaint to the relevant provisions of the insurance policy. An insurer’s duty to defend arises if the complaint alleges facts that fall within, or potentially within, the policy’s coverage. Thus, this court considers the allegations that were actually filed in the underlying complaint, not ones that “might” have been. Based on this standard, the trial court did not err in determining that Century owed no duty to defend Winchester.

ZALMA OPINION

The Illinois Court of Appeal determined, as I have posited here until my fingers were bloody on the keyboard, insurance is a contract whose terms govern the rights and duties of the parties to the contract. When the contract specifically limits the applicability of the policy – whether in the body of the contract or by an endorsement added – the limitation applies. Here, the policy limited coverage to operations happening at a specific location for specific tasks. Neither existed and, therefore, no coverage. No court should rule based on what “might have been” but must be limited to what is.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When is a “Known Loss” Not Known?

Know Loss Exclusion Requires Knowledge of the Damage Claimed

Insurance requires, before a loss can be covered, that the loss was contingent or unknown before the policy was issued. Insurers, using a belt and suspender methodology, not only rely on the definition of insurance but also include within the policy issued a “Known Loss Exclusion”

FACTS

Kaady, who is a mason by profession, was awarded a subcontract for the installation of manufactured stone at the Collins Lake Resort, a multi-unit residential project. Kaady affixed manufactured stone to the wall sheathing of certain buildings, wrapped deck posts with manufactured stone and installed masonry caps on the top of the stone that was wrapped around the deck posts. After the work was completed Kaady was called back to Collins Lake to inspect cracks in the manufactured stone and masonry caps he installed. He told the general contractor that the cracks “had something to do with settling, being struck, or the substrate contracting or expanding.” Almost three months after he had inspected the cracks, Kaady bought a one-year commercial general liability insurance policy from Mid–Continent.

Eventually Collins Lake Homeowners’ Association sued the developer of the project, who sued the general contractor, who in turn sued all the relevant subcontractors including Kaady. The Homeowners’ Association alleged that portions of the structures were damaged as a result of defective workmanship. Kaady settled the claim against him and tendered it to Mid–Continent for indemnification. Mid–Continent denied the claim and Kaady brought this lawsuit.

The district court granted summary judgment to Mid–Continent on the ground that Kaady’s claim was barred by the policy’s known-loss provision. According to the district court, “there was relevant property damage prior to [Kaady’s] obtaining the policy,” which was “known to Mr. Kaady prior to obtaining the policy.” Kaady appealed to the Ninth Circuit in Kaady v. Mid-Continent Cas. Co., — F.3d —-, 2015 WL 3894394 (C.A.9 (Or.) 6/25/2015) asking the Ninth Circuit to compel Mid-Continent to provide coverage.

DISCUSSION

Kaady claims that the damage to the deck posts and wall sheathing under the manufactured stone he installed is “property damage” covered by the policy. Mid–Continent does not dispute that “property damage” occurred or that it was caused by Kaady.

The known-loss provision states that the policy “applies to … ‘property damage’ only if … no insured … knew that the … ‘property damage’ had occurred, in whole or in part.”

Kaady admits that he was aware of cracks in the manufactured stone and masonry caps he installed before he purchased the policy, but states under oath that he didn’t know about any of the damage for which he seeks indemnity: the damage to the deck posts and wall sheathing behind the masonry. Mid–Continent has proffered no evidence contradicting Kaady’s declaration.

Mid–Continent first argues that, so long as the insured knew about any damage to a structure, the known-loss provision bars coverage of any other damage to the same structure. According to Mid–Continent, Kaady’s manufactured stone and the underlying structural components are the same “property.” Thus, once Kaady noticed that the manufactured stone was cracked, he knew that the property was damaged and so could not recover for any damage to that property.

Once the insured’s work is complete, the policy covers damage to property provided by others, including property that the insured’s work was “performed on,” but it doesn’t cover damage to the insured’s own product or work. Mid–Continent doesn’t argue on appeal that the claimed damage was to property that Kaady provided (nor could it). Mid–Continent has offered no reason to treat the insured’s work and the work of others as different property in every provision of the policy except the known-loss provision.

The insured’s knowledge of damage to his own work doesn’t automatically constitute knowledge of damage to the components of the structure furnished by others.
Mid–Continent’s position faces a second difficulty: Even if the masonry and underlying structural components were considered the same “property,” the claimed damage (deterioration of the deck posts and wall sheathing) is a different type of damage than the known damage (cracks in the masonry).

The known-loss provision bars coverage of “property damage” if the insured “knew that the … ‘property damage’ had occurred, in whole or in part.” (Emphasis added.) Use of the definite article particularizes the subject which it precedes and indicates that the claimed damage must be the same as the known damage.

Mid–Continent’s proffered interpretation would eviscerate the known-loss provision’s “continuing property damage” language. The provision states that if the insured “knew, prior to the policy period, that the … ‘property damage’ occurred, then any continuation, change or resumption of such … ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.” (Emphasis added.) But if the insured’s knowledge of any damage to any part of the structure automatically barred coverage of all damage to that structure, it wouldn’t matter whether the claimed damage was a “continuation, change or resumption” of the known damage. The problem is avoided if the known-loss provision is interpreted as barring coverage only if the claimed damage is a “continuation, change or resumption” of the known damage. This interpretation permits coverage of damage unrelated to the damage known before acquisition of the policy, but prevents insurance of a loss in progress.

Kaady’s knowledge of the cracks in the masonry before he bought the policy doesn’t constitute knowledge of the claimed “property damage” to the structural components. Not only are the wooden deck posts and wall sheathing different “property” than the manufactured stone and masonry caps, the claimed damage is of a different type. The ordinary purchaser of the policy would interpret the known-loss provision as broadly as Mid–Continent advocates. Rather, the correct inquiry is whether the claimed damage to the structural components was a “continuation, change or resumption” of the cracks. If it was, Kaady’s knowledge of the cracks would bar coverage of the claimed damage; if not, his knowledge of the cracks wouldn’t bar coverage.

Mid– Continent also argues that the damage for which Kaady seeks coverage was in fact a “continuation, change or resumption” of the earlier cracks. According to Mid–Continent, it’s “undisputed that the cracks in the masonry permitted water intrusion” and, therefore, that the damage to the wooden deck posts and wall sheathing “flowed from” the cracks. But Kaady did dispute this contention in the district court. In his opposition to summary judgment, Kaady argued that Mid– Continent had not “submitted any evidence [that] the cracks in the top caps were the source, cause or basis of the damage to the deck posts.”

Kaady’s admission that the damage to the deck posts and wall sheathing arose from his defective workmanship is not an admission that the damage was caused by the cracks.
In any event, it was not Kaady’s burden to present evidence disputing the connection between the cracks in the manufactured stone and the damage to the underlying structure.

It may well be that the cracks in the masonry allowed water to seep in and damage the wood beneath. If so, then the claimed damage might well be considered a “continuation, change or resumption” of the cracks. But without any record evidence connecting the cracks in the masonry that Kaady observed before he bought the policy to the damage to the wooden components for which Kaady claims coverage, summary judgment was inappropriate.

ZALMA OPINION

This case is evidence that a win on summary judgment is often Pyrrhic. Kaady now has the opportunity to prove he is entitled to defense and  indemnity and Mid-Continent has the opportunity to prove he knew about the loss to property other than Kaady’s work at trial. The litigants may also argue that settlement before notice of loss is late and barred and, depending on the wording of the application, the policy may be rescinded because Kaady knew of a potential loss before he applied for the insurance. Discovery and further motions may resolve the case.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Can Insured Get Back Premium if No Loss?

Risk of Loss Is Transferred to Insurer on Inception of Policy

No one enjoys paying insurance premium. Everyone would like to pay no premiums until the day before a loss rather than wait for years before obtaining the benefits of an insurance policy.  Florida Residents tried a class action to obtain return of premium for coverages they purchased and never used because they claimed the insurers failed to get the insured’s permission to provide more than statutorily required coverage for building and ordinance coverage.

In Allen v. USAA Cas. Ins. Co., — F.3d —-, 2015 WL 3894722 (C.A.11 (Fla.) 6/25/2015), the Eleventh Circuit was called upon to resolve the dispute.

FACTS

After James R. Allen and Diane Z. Allen (collectively, the Allens) purchased building ordinance and law (BOL) insurance from United Services Automobile Association (USAA) covering 50% of their home’s value, they suffered no losses triggering payment. Now the Allens seek to recover a portion of their premium payments because they assert they would have elected to pay for BOL insurance covering only 25% of their home’s value.

Nonetheless, their position is that had they actually suffered a loss, they would have been entitled to 50% of their home’s value, not 25%. The Allens appeal the district court’s dismissal of their complaint, arguing Florida Statutes § 627.7011(2) entitles them to a refund of the difference in premiums USAA would have charged for 25% rather than 50% BOL coverage.

The Allens are a married couple who have resided in Pensacola, Florida since 2000. Since 2002, the Allens obtained homeowner’s insurance coverage from USAA. These policies have included BOL coverage.

Building ordinances can significantly raise the cost of repairing or replacing a damaged structure. These costs are not covered by standard property insurance, which typically covers only the cost of restoring the building to its original condition. BOL coverage fills this gap by paying for the cost of complying with building codes or other legal requirements when repairing or replacing a structure after a covered loss. An insurance policy for a $100,000 home with 25% BOL coverage provides $25,000 to pay for upgrades required by law.

From March 3, 2002 to March 3, 2006, the Allens’ policies included 25% BOL coverage. Since March 3, 2006, the Allens’ policies have included 50% BOL coverage. The policies effective from 2006 to 2013 contain a page titled “Building Ordinance or Law Coverage—Florida,” which specifies each policy includes 50% BOL coverage.

The Allens never specifically consented to 50% BOL coverage on Form OIR–1148, although they accepted the policy and paid the premium. It is undisputed the Allens never gave written consent to 50% BOL coverage on an approved Regulation Office form.

The Allens filed a proposed class action complaint in the Northern District of Florida alleging USAA violated § 627.7011(2) by providing 50% BOL coverage without the Allens’ written consent on a form approved by the Regulation Office.

DISCUSSION

The Allens signed USAA’s contract for 50% BOL coverage. They did not, however, give written consent to this coverage on an approved Regulation Office form. The question before the appellate court is whether USAA violated Florida Statutes § 627.7011(2) by providing 50% BOL coverage without the Allens’ written consent on a form approved by the Regulation Office.

Both parties agree an insurer must obtain a policyholder’s written consent on a form approved by the Regulation Office before issuing less than 25% BOL coverage.

If the policy already provides for replacement cost insurance including 25% BOL coverage, the insurer need not separately offer the first two coverage options listed above. However, the insurer must still offer the third coverage option for replacement cost insurance including 50% BOL coverage.

The Allens’ entire argument hinges on a single sentence in subsection (2): “The rejection or selection of alternative coverage shall be made on a form approved by the [Regulation] [O]ffice.” Fla. Stat. § 627.7011(2). Since this sentence follows the phrase “25 percent of the dwelling limit,” the Allens argue the term “alternative coverage” refers to any departure—up or down—from 25%.

Considered in isolation, the Allens’ interpretation of this sentence is persuasive. The ordinary meaning of the word “alternative” is “a proposition or situation offering a choice between two things wherein if one thing is chosen the other is rejected.” WEBSTER’S NEW INTERNATIONAL DICTIONARY 63 (3d ed.1976). The word “alternative” is therefore not limited to a downward departure. If a policyholder selects 50% BOL coverage, she has chosen that amount and rejected the 25% BOL coverage.

The Allens buttress this argument by noting the sentence refers to the selection, not just the rejection, of alternative coverage. If the approved form requirement applied only when a policyholder sought to reject at least 25% BOL coverage, there would be no reason to include the word “selection,” which necessarily refers to BOL coverage exceeding 25%.

The Allens’ argument is severely undermined, however, when this single sentence in subsection (2) is considered within the entire context of § 627.7011.  Analysis of the whole statute establishes the approved form requirement applies only when a policyholder seeks to choose less than 25% BOL coverage.

The plain language of the statute does not support the Allens’ interpretation for two reasons. First, the statute’s words do not distinguish between premium recovery and property loss.

The Allens’ interpretation would yield bizarre, inconsistent results. According to the Allens, a noncompliant insurance policy must be construed as if “in full compliance with this code,” yet at the same time also be construed “for the full amount stated in the policy.”

A court cannot simultaneously construe an insurance policy as fully in compliance with governing law while also giving effect to terms not fully in compliance. The appellate court resisted attributing to the Legislature an intention that would render the statute internally inconsistent.

CONCLUSION

The Allens claim they received no value from their BOL insurance because their home never suffered a covered loss, and they now wish to recoup their premiums. Florida law does not countenance that result.

The Allens freely contracted to buy 50% coverage, and that is precisely what they received. They cannot now, with the benefit of hindsight, undo their decision to protect their home from unrealized risk. The value of insurance lies in the the transfer of risk from insured to insurer and that transfer is complete at the time that the contract is entered.

ZALMA OPINION

As the court recognized insurance is a risk transfer device. Once the risk is transferred the contract is complete. If there is no loss the insured got what he paid for and has no right to a refund of the premium because he suffered no loss. To do so would change insurance from a contract of indemnity to a benefit provided by the state and only those who incur a loss need pay for insurance. If the Allens were correct insurance as a contract of indemnity would be destroyed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

SIU Regulations Webinar

Webinar – Compliance With The California SIU Regulations

To sign up for the live webinar by Barry Zalma, Esq., CFE on July 8, 2015 at 8:00 a.m. Pacific Time and 11:00 a.m. Eastern time, go to: http://www.complianceonline.com/compliance-with-the-california-siu-regulations-webinar-training-703989-prdw?channel=M3_NW_JL08_Barry_JN19_BR or call Toll Free: +1-888-717-2436
The SIU Regulations attempt to micro-manage the work of insurance company efforts against insurance fraud. The CDOI has audited hundreds of insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can result in a fine from $500,000 to $1 million. By attending this webinar, insurers and their claims and SIU personnel, can inoculate themselves against the potential of paying enormous fines to the CDOI.

According to the regulations, all “integral anti-fraud personnel” must be trained. Integral anti-fraud personnel are almost every employee of an insurer who may have some contact with a claim or with the agreement to ensure it fits the definition of “integral anti-fraud personnel.” Since the definition is so broad, underwriters and insurance agents are included. Therefore, people who in the past were never trained on insurance fraud are now considered part of the anti-fraud team. By training those who work to sell or accept insurance, the insurer may be able to avoid insurance fraud before a policy is issued by refusing to insure a person who might commit fraud.

This webinar will list the training required by the SIU Regulations required of all anti-fraud personnel and will highlight the effort to reduce the multi-billion dollar crime that bleeds the insurance industry of potential profits.

Areas Covered in the Webinar:
•    The Special Investigation Unit Regulations
•    Commentary on the Special Investigative Unit Regulations
•    Identifying Insurance Fraud
•    Can the CDOI Enforce the Regulations?
•    The California Insurance Frauds Prevention Act

Who Will Benefit:
•    Insurer Claims Executives
•    Insurer Claims Representatives
•    Independent Insurance Adjusters
•    Insurer SIU Investigators
•    Insurance Agents and Brokers
•    Certified Fraud Examiners
•    Operational Risk Managers
•    Insurance Coverage Lawyers
•    Insurance Claims Lawyers

Posted in Zalma on Insurance | Leave a comment

Can an Insured Receive Coverage for Breach of Fiduciary Duty

Trustees Should Not Cheat Beneficiaries

Directors and officers (“D&O”) insurance is limited to the actions of the officers in their capacity as an officer of a corporation. It, like every other policy issued, contains exclusions. It’s exclusions are different than in other insurance policies and are directed to the risks of loss faced by corporate officers and directors.

In Langdale Co. v. National Union Fire Ins. Co. of Pittsburgh, Penn., — Fed.Appx. —-, 2015 WL 3823709 (C.A.11 (Ga.) 6/22/2015) the Eleventh Circuit was asked to decide whether the district court erred in finding no coverage under a D & O insurance policy for claims asserted by beneficiaries of a family trust against their family-owned corporation and against two individual family members who served simultaneously as directors or officers of the corporation and as trustees of the trust. The beneficiaries alleged violations of duties owed to and by the corporation, and violations of duties owed to the trust.

The D & O policy excluded coverage for alleged misconduct committed in a capacity other than as a corporate officer or director. The issue is whether the underlying lawsuits alleged misconduct that was covered or that was excluded from coverage.

The Langdale Company (“TLC”) sued its D & O insurer, the National Union Fire Insurance Company (“National Union”), for denying coverage and refusing to advance defense costs incurred in litigation filed in the Georgia state court. The district court granted National Union’s summary judgment motion, and TLC appealed.

BACKGROUND

The pleadings filed in the underlying litigation recount the family history. In 1947 The Langdale Company was incorporated and is known as TLC. It functions as a holding company. In 1959, the founder created the Virginia Miller Langdale Family Trust for the benefit of the founder’s daughter and her children. The founder transferred his 25–percent interest in TLC to the Trust, and the Trust beneficiaries received the TLC stock dividends. the founder’s sons, Harley and John, were the trustees.

In May 2009, the Trust beneficiaries sued Johnny and Harley Langdale in Georgia state court. They asserted several claims: (1) breach of trust; (2) breach of fiduciary duty to the Trust beneficiaries; (3) breach of fiduciary duty as directors of TLC to the company’s minority shareholders, the Trust beneficiaries (“Count III”); (4) fraud; (5) constructive trust; (6) conspiracy; (7) attorneys’ fees; and (8) equitable relief.

The beneficiaries’ state-court complaint alleged that beginning in 1994, Johnny and Harley Langdale “embarked on a scheme” to consolidate “their control over TLC” by “hav[ing] TLC redeem the Trust’s stock” in TLC “at an absurdly low price.” The complaint alleged that Johnny and Harley Langdale “used their systemic refusal to pay income to the beneficiaries, their knowledge of estate planning problems caused by the belated revelation that the Trust would terminate in 1999, and their ability to persuade the beneficiaries that the ‘Shareholders’ Agreement’ applied to TLC’s redemption or purchase of the Trust’s stock to induce Virginia Langdale Miller and her children to sign documents ‘consenting’ to the transfer of the Trust’s stock to TLC” at this unfair price.

TLC held an insurance policy with D & O coverage from National Union. The policy required the insurer to advance defense costs for, and indemnify TLC against, lawsuits seeking damages for the wrongful acts of its directors and officers committed in that capacity. The policy provided four types of D & O coverage.

The policy required National Union to “advance … Defense Costs prior to the final disposition of a Claim,” on the Insured’s written request. National Union could “withhold consent to any … Defense Costs … to the extent such Loss is not covered under” either Coverage A or B.

TLC sought defense costs under the policy based on the director-misconduct allegations in Count III of the beneficiaries’ state-court complaint. Count III alleged that Johnny Langdale breached the fiduciary duties he owed TLC as a director. Johnny Langdale sought and received indemnification from TLC, which paid all the fees incurred in the underlying suit.

Johnny Langdale and TLC sued National Union in federal district court based on diversity jurisdiction. They sought (1) damages for breach of the insurance contract, (2) a declaratory judgment that National Union had a duty to advance defense costs, and (3) damages for National Union’s bad faith. Georgia law applied.

The district court granted National Union’s motion for summary judgment and denied TLC’s cross-motion. The court agreed with TLC that National Union’s obligation to advance defense costs was the same obligation as a duty to provide a defense, and that TLC had met its initial burden to show coverage. The court, however, agreed with National Union that it could rely on all three policy exclusions and had met its burden to show that all three precluded coverage. Because the insurance policy specifically excludes any claim “arising out of” an act of an Insured serving in any capacity other than as an Executive/Employee, National Union had no duty to advance defense costs to Johnny Langdale or to TLC.

DISCUSSION

The allegations that TLC’s acts or omissions contributed to allowing Johnny and Harley Langdale to obtain control of TLC without personal cost, breaching their duties as trustees, does not negate the application of the exclusion.

Johnny and Harley Langdale’s alleged breaches of their duties as trustees started before, and continued throughout, the period when they allegedly breached their duties as TLC officers and directors. The breaches of the duties they owed as trustees of the Trust allegedly caused or created the harm to the beneficiaries—the sale of their stock at a below-market price.

The claims in the underlying litigation against TLC for corporate wrongdoing necessarily included claims that Johnny and Harley Langdale breached the duties they owed as trustees to the Virginia Miller Trust beneficiaries, who were also the company’s minority shareholders. The allegedly wrongful acts committed by TLC and by TLC directors would not have occurred but for Johnny and Harley Langdale’s alleged wrongful acts as trustees.

To the extent that Johnny and Harley Langdale were allegedly acting as directors and officers, that misconduct was so inextricably entwined with their alleged misconduct as trustees that the duty to advance defense costs was not triggered.

The gravamen of the state-court complaint and the counterclaim is that Johnny and Harley Langdale conspired to breach their duties as trustees well before the Redemption Agreement was signed, to deprive the beneficiaries of the proper value of their TLC shares and consolidate their own control over TLC.

The claims against TLC for Johnny and Harley Langdale’s alleged misconduct as directors and officers could not have existed independent from their alleged misconduct as trustees of the Virginia Miller Trust. The claims against Johnny and Harley Langdale as TLC directors and officers could not have existed independent from their alleged misconduct as trustees. The allegations of wrongdoing in Counts III and V of the state-court complaint and the counterclaim “arose out of” Johnny and Harley Langdale’s wrongful acts in their capacities as trustees, and are subject to Exclusion 4(g).

ZALMA OPINION

Insurance, even D&O insurance, is not designed to protect its insureds against wrongful conduct performed intentionally to defraud or otherwise harm someone while performing acts outside the duties of the insured as a corporate officer. Here, Johnny and Harley, as trustees of a trust acted to defeat the rights of the beneficiaries of the trust they had a fiduciary duty to protect. Their breach of the fiduciary obligations owed to the beneficiaries was conduct that was not insurable.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What is a “Residence Premises” & Who Are Resident Relatives?

Homeowners Policy Requires Insured to Reside at Dwelling

By definition a homeowners insurance policy insures the owner against the risk of loss of the dwelling where the insured resides. It should not insure the named insured who does not live in the dwelling.  When the insured does not reside at the residence premises the insuring agreement of a homeowners policy appears to be incapable of being met.

The Michigan Court of Appeal in Banks v. Auto Club Group Ins. Co., Not Reported in N.W.2d, 2015 WL 3797729 (Mich.App., 6/18/2015) was called upon to resolve a claim of coverage after a fire by the named insured who did not reside in the dwelling and spent 95% of his time in another dwelling in Detroit. The trial court granted the insurer’s motion for summary judgment and the insured appealed.

FACTS

In 2004, plaintiff Gilbert Banks purchased a residential home located at 16234 Timberview in Clinton Township. Gilbert purchased a homeowner’s insurance policy for the home from defendant, issued by defendant’s affiliate MemberSelect Insurance Company. The home was destroyed by a fire in 2006. It appears from the record that defendant provided coverage for the damages and Gilbert rebuilt the home.

Following the 2006 fire, Gilbert and Vernetta Banks’ son Myron Banks and Myron’s wife Tamika Banks lived at the Clinton Township residence with their children while Gilbert and Vernetta lived in Detroit with Gilbert’s elderly mother.

On January 28, 2009, another fire caused damage to the Clinton Township home. The Clinton Township Fire Department and defendant’s investigator determined that arson was the cause of the fire. Myron later pleaded no-contest to arson of a dwelling. After defendant denied coverage, plaintiffs commenced this lawsuit alleging breach of contract.

Defendant moved for summary arguing that there was no coverage under the policy because Gilbert did not reside at the Clinton Township residence at the time of the fire and therefore the residence was not his “residence premises” as required by the contract.

Defendant also argued that Myron and Tamika’s personal effects were not covered under the policy because they were not members of Gilbert’s household as Gilbert was residing in Detroit at the time of the fire. Finally, defendant argued that summary disposition was proper because plaintiffs failed to submit proof of loss in a timely manner.

The trial court granted summary disposition in favor of defendant. The court concluded that reasonable minds could not differ as to whether Gilbert was residing at his mother’s home at the time of the fire. Because Gilbert was not residing at the premises, there was no coverage under the policy and Myron and Tamika were not “resident relatives” of Gilbert. The court also found that plaintiffs failed to timely submit proof of loss.

ANALYSIS

Where the language in an insurance policy is clear, courts are bound by the specific language set forth in the agreement. The policy provided coverage for “your Dwelling … at the residence premises … The Dwelling must be used principally as a private residence. “Residence premises” was defined as the “premises, described on the Declaration Certificate, used as a private residence by you that is [either] a one-, two-, three-, or four-family Dwelling building … or that portion of any other building you occupy as a residence.” As defined in the policy, “you” or “your” refers to Gilbert and his spouse Vernetta.

Coverage for the insured’s dwelling required proof that the dwelling be at the “residence premises,” which, in turn, required showing that the dwelling be at the premises (1) described on the Declaration Certificate, (2) that the premises be used as a private residence by Gilbert or Vernetta, and (3) the premises be a one, two, three, or four-family dwelling building or other building occupied by Gilbert and Vernetta as a residence.

The first and third elements are not in dispute. The issue in this case is whether there was a question of fact as to whether the Clinton Township home was used as a private residence by Gilbert or Vernetta. The policy does not define the term “private residence.”
In McGrath v. Allstate Ins Co, 290 Mich.App 434, 440; 802 NW2d 619 (2010) the issue was whether the phrase “where you reside” required the insured to physically live at the single-family home listed on the Policy Declarations. The phrase is not merely descriptive of the insured premises, but rather constituted a statement of coverage that required the insured to reside at the home and use the home as a private residence at the time of loss.

In the context of the insurance policy, the definition of the term “reside” is not synonymous with the legal definition of the term “domicile,” which may have a legal or technical meaning beyond mere physical presence, including ‘the intent to live at that location at sometime in the future. Rather the term “reside” requires “that the insured actually live at the property.” (emphasis added).

In this case the phrase “used as a private residence” required that the insured actually live at the property at the time of loss. Combining these definitions, “private residence” in the context of the insurance policy means a private house or place of shelter where the named insured actually lives and occupies that is not merely a place of temporary sojourn. It is not akin to one’s domicile.

In short, there was no genuine issue of fact as to whether Gilbert or Vernetta used the Clinton Township home as their private residence where the evidence showed that they lived in Detroit at the time of the fire. Accordingly, the trial court did not err in granting summary disposition on this issue.

Similarly, the trial court did not err in granting summary disposition as to Myron and Tamika’s personal property claims. Although Myron and Tamika were related to Gilbert by blood and marriage, they were not “residents” of Gilbert’s “household.” Myron and Tamika lived at the Clinton Township home, and, as discussed above, Gilbert did not live there, but rather lived in Detroit. Therefore, Myron and Tamika were not “resident relatives” under the terms of the policy and the trial court did not err in granting summary disposition on this issue.

ZALMA OPINION

The insurer avoided the need to prove that the fire was an arson-for-profit by establishing that the admitted arsonist was not an “insured” and that the insured, who did not reside at the premises, was not entitled to indemnity from the insurer. The Banks’ could have avoided this problem by, before the fire, advising the insurer that the house was rented and they did not reside there. They would have been insured under a dwelling policy form rather than a homeowners policy and Myron and Tamika could have acquired a tenants homeowners form, which would have not paid them because of the arson but the owners could have recovered for the damage to the dwelling.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Condition Precedent Enforced

Can an Insurer Refuse Coverage Because Insured Entered Into Settlement Without Insurer’s Consent

Insurers may limit the terms and conditions of the contract of insurance to protect their interest. No insurance company covers every possible contingency. All have exclusions and conditions. In Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., — F.3d —-, 2015 WL 3853022 (C.A.11 (Ga.) 6/23/2015) the policy contained a condition that required – before it was obligated to pay a settlement – that the insured first obtain the insurer’s consent to settle.

ISSUES

This case involves a Georgia insurance policy. Having concluded that the appeal raises a question of Georgia law that is both determinative of the case and about which this Court had substantial doubt, the Eleventh Circuit Court of Appeal certified three questions to the Supreme Court of Georgia:

(1) Under the facts of this case, and in the light of the Final Judgment and Order—in the Underlying Suit—approving of and authorizing and directing the implementation of the terms of the settlement agreement, is Piedmont “legally obligated to pay” the $4.9 million settlement amount, for purposes of qualifying for insurance coverage under the Excess Policy

(2) In a case like this one, when an insurance contract contains a “consent-to-settle” clause that provides expressly that the insurer’s consent “shall not be unreasonably withheld,” can a court determine, as a matter of law, that an insured who seeks (but fails) to obtain the insurer’s consent before settling is flatly barred—whether consent was withheld reasonably or not—from bringing suit for breach of contract or for bad-faith failure to settle? Or must the issue of whether the insurer withheld unreasonably its consent be resolved first?

(3) In this case, under Georgia law, was Piedmont’s complaint dismissed properly?

Relying on its decision in Trinity Outdoor, LLC v. Cent. Mut. Ins. Co., 285 Ga. 583, 679 S.E.2d 10 (Ga.2009), and on the “unambiguous” terms of the insurance policy at issue in this case, the Supreme Court of Georgia instructed the Eleventh Circuit that, under Georgia’s law, “Piedmont is precluded from pursuing this action against XL because XL did not consent to the settlement and Piedmont failed to fulfill the contractually agreed upon condition precedent.” Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., No. S15Q0418, slip op. at 6–7 (Ga. Apr. 20, 2015). As a result, the Supreme Court of Georgia determined per Georgia law that “the district court did not err in dismissing Piedmont’s complaint.”

We are grateful for the help. Based on this definite response to our certified questions, we affirm the district court’s dismissal of Piedmont’s complaint.

ZALMA OPINION

At times it is a pleasure reading an appellate decision that is brief, concise and to the point. This is one of those cases. The federal court accepted the decision of the Georgia Supreme Court that an insured may not sue its insurer for indemnity for a settlement reached between the insured and the plaintiff suing the insured without first obtaining the insurer’s consent to the settlement which consent was an agreed upon condition precedent to 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 Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Does the Notice-Prejudice Rule Unfairly Disadvantage an Insurer of Its Contractual Rights?

Montana Adopts Notice Prejudice Rule

A Commercial General Liability (CGL) insurer sued its insured contractor and real-property owners for declaratory judgment that insurer had no duty to indemnify, defend, or cover counterclaims asserted by owners in the insured’s state-court action to foreclose a construction lien. Following the insured’s default, the insurer moved for summary judgment.

The United States District Court for the district of Montana, entered summary judgment in favor of the insurer. The owners appealed. The United States Court of Appeals for the Ninth Circuit, certified a question to the Supreme Court of Montana. In Atlantic Casualty v. Greytak, 2015 WL 3444507, 2015 MT 149 No. OP 14–0412 (Decided May 29, 2015) the Supreme Court of Montana responded to the certified question.

The question posed by the Ninth Circuit: “Whether, in a case involving a claim of damages by a third party, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.”

FACTS

According to facts supplied by the Court of Appeals, this case originally arose from a civil action filed in the Montana Third Judicial District Court. In March 2010 GTL filed suit against Greytak and Tanglewood (hereafter, Greytak) for non-payment of an obligation arising from a construction project. GTL was insured by Atlantic Casualty under a commercial general liability policy. In March 2010 Greytak sent a letter to GTL asserting that it had grounds for various counterclaims involving construction defects, and in November 2010 Greytak filed counterclaims against GTL in the state court action.
In April 2011 GTL and Greytak entered a settlement agreement that required GTL to notify Atlantic of Greytak’s counterclaims. GTL and Greytak also agreed that if Atlantic did not appear to defend the case and did not file a declaratory action on the coverage issue, GTL would allow judgment to be entered against it and in favor of Greytak for $624,685.14 plus costs.

On January 23, 2012, Atlantic sued GTL and Greytak in the United States District Court for the District of Montana, seeking a declaration that it was not required to defend GTL from Greytak’s counterclaims or to pay any judgment. GTL defaulted and is not participating in the case. Atlantic’s policy issued to GTL stated that the insured “must see to it that we are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim … if a claim is made or ‘suit’ is brought against any insured, you must notify us as soon as practicable. You must see to it that we receive written notice of the claim or ‘suit’ as soon as practicable.” Atlantic sought a declaration that it was not required to provide coverage of Greytak’s counterclaims because GTL had not provided timely notice as required by the policy language.

The United States District Court granted Atlantic’s motion for summary judgment. The District Court found that Atlantic did not have timely notice of Greytak’s claims against GTL and therefore was excused from providing coverage under the policy. The District Court also found that Montana law did not require Atlantic to demonstrate that it was prejudiced by GTL’s failure to provide timely notice of Greytak’s counterclaims.

DISCUSSION

The District Court found that Atlantic’s Commercial General Liability policy was clear in its requirement that GTL provide timely (“as soon as practicable”) notice of the Greytak counterclaims. The issue presented by the certified question is whether Montana law applies the “notice-prejudice” rule to the insurance policy that Atlantic issued to GTL; specifically, whether the policy provision requiring GTL to notify the insurer of a covered event “as soon as practicable” can be invoked to bar coverage without a consideration of whether a delay in notification caused prejudice to Atlantic.

A majority of the states have adopted the notice-prejudice rule in insurance coverage disputes, requiring that the insurer demonstrate that it was materially prejudiced by not having received prompt notice or notice as soon as practicable of an event that could trigger coverage. The Supreme Court noted Prince George’s County v. Local Govt. Ins. Trust, 388 Md. 162, 879 A.2d 81, 94, n. 9 (Ct.App.Md., that listed the thirty eight states and two territories that have adopted the rule as a matter of common law. Also as noted, the Montana Supreme Court has adopted the notice-prejudice rule in several insurance dispute contexts, most recently in Estate of Gleason v. Central United Life Ins. Co., 2015 MT 140, ¶¶ 37–38, in the context of first-party (insured v. the insurer) insurance coverage disputes.

The purpose of the notice-prejudice rule is to protect the insured or those claiming through the insured from a loss of insurance coverage over a technical violation of the policy when that violation is of no prejudicial consequence to the insurer.

The Supreme Court’s answer, therefore, to the certified question was: Yes, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.

A concurring opinion concluded that the facts set forth in the Certification Order also clearly establish that Atlantic has been prejudiced as a matter of law and that, under application of the principle the notice-prejudice rule, Greytak is entitled to no relief under the policy. Of course, that issue was not before the Montana court but is before the Ninth Circuit who asked the question.

The rule does not abrogate the insured’s duty to notify. It merely excuses failure of that duty when a “technical” violation does not prejudice the insurer. Here, GTL’s violation was not “technical.” It was contrived in order to prejudice Atlantic, which it clearly did.
There are a substantial number of cases from courts around the country that hold prejudice exists as a matter of law where an insurer has not been notified prior to settlement of a claim including those holding as a matter of law that insurers were prejudiced when the insured notified the insurers of the suit after settlement because the insurers were presented with a fait accompli and were denied an opportunity to gain early control of the proceedings and to investigate among other reasons.

The notice-prejudice rule is an equitable remedy that allows an insured to escape the harsh outcome of a complete forfeiture of coverage, for which consideration has been paid, where there has been no prejudice to the insurer. The notice-prejudice rule does not rewrite the insurance contract. Where, as here, GTL and Greytak have secretly negotiated a settlement and attempted to have judgment entered in order to avail themselves of favorable UTPA jurisprudence from the Montana Court, the equitable purposes of the notice-prejudice rule do not exist.

ZALMA OPINION

The concurring opinions – although well reasoned – strayed from the issue presented to the Supreme Court by the Ninth Circuit, whether the notice-prejudice rule applies in Montana. The Supreme Court answered with a clear affirmative. The concurring opinions, stating that the rule did not apply to the facts of the case, albeit correct, was not the issue. It is up to the 9th Circuit and the District Court to apply the rule. When they do I suspect they will find the insurer was prejudiced and will rule in favor of the district court’s factual findings that will require a find that there was no prejudice.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

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When Must An Appraisal Award Be Reversed?

Appraisal Panel Must Appraise Loss Not Claim

Appraisal is, in California, a form or arbitration where the appraisers (arbitrators) are required to find the actual cash value of a loss. When the insured and the insurer disagreed on the scope of the loss it is the duty of the appraisers to determine the appropriate amount of loss regardless of the claims presented by the parties based upon evidence presented to the appraisers and the appraisers inspection and actual determination of loss.

In Lee v. California Capital Insurance Company, — Cal.Rptr.3d —-, 2015 WL 3797827 (Cal.App. 1 Dist., 6/18/15) California Capital appealed from a judgment confirming an insurance appraisal award. California Capital contended the trial court erred in compelling an appraisal that required the appraisal panel to assign loss values to items the insured claimed were damaged in a fire even if the items were not damaged or did not exist. It also claims the court erred in confirming the appraisal award, arguing that the appraisal panel exceeded its authority by issuing two competing and vastly different values for the loss.

FACTUAL BACKGROUND

In November 2010, a fire damaged an apartment building in Oakland owned by Li–Lin Sung Lee (the “property”). The property consists of a four-story building containing a total of twelve apartments, with four units on each of three levels and a fourth garage level underneath. The fire started in a ground floor unit—unit number 3. According to California Capital, the flames did not extend beyond unit 3. Lee claims the fire damaged six of the twelve apartments with fire or smoke.

The property was insured at the time of the fire under a California Capital policy issued to Lee.  Lee retained licensed public adjuster Kevin Dawson to assist her in the presentation of her claim. In February 2011, Dawson submitted a claim to California Capital on behalf of Lee. The total claim exceeded $800,000. The statement of loss provided breakdowns of the claimed costs for cleaning, asbestos abatement, reconstruction of the affected apartments, and loss of rent. As set forth in Dawson’s claim on behalf of Lee, the fire loss consisted of burn damage to unit 3 and smoke damage to the “common” walls located between apartments on the two floors above unit 3. According to the claim submitted by Dawson, all the interior rooms of five apartments other than unit 3 would need to be completely dismantled and then replaced. The claim also included removal of a portion of the stucco exterior around the building, as well as removal of iron balcony railings, followed by a repainting of the entire building.

The trial court granted Lee’s petition to compel an insurance appraisal. The order, as later modified directed the appraisal panel to “value three categories of items: (a) items of loss agreed by the parties to have been damaged by the fire; (b) items of loss asserted by Lee to have been damaged by the fire but where [California Capital] disputes coverage; and (c) items of loss asserted by [California Capital] to have been damaged by the fire but where Lee does not assert a claim.”

The appraisal panel declined a request by California Capital to inspect the property. According to California Capital, Lee’s appointed appraiser took the position that the panel was obligated to appraise the scope of loss presented by the insured, even if it was apparent to the panel that the scope was incorrect in matters such as square footage and the number of stories that a building contained.

On February 8, 2012, the appraisal panel issued a unanimous appraisal award setting forth, in exhibits A and B to the award, the replacement cost loss and actual cash value for each claimed item.  The award listed the following amounts:

Exhibit A replacement cost loss (insurer’s scope): $190,505.21

Exhibit A actual cash value loss (insurer’s scope): $186,041.74

Exhibit B replacement cost loss (insured’s scope): $813,884.89

Exhibit B actual cash value loss (insured’s scope): $788,057.02

The panel has made no determination whether the items claimed existed. California Capital filed a petition to vacate or, in the alternative, to correct the appraisal award.

The trial court denied California Capital’s petition to correct and/or vacate the award and separately granted in part Lee’s petition to confirm the award.

DISCUSSION

Appraisal hearings are a form of arbitration and are generally subject to the rules governing arbitration. Judicial review of an arbitration, or appraisal award, is circumscribed. Appraisal awards are immune from judicial review in proceedings to confirm or challenge the award unless:

(1)     The award was procured by corruption, fraud or other undue means.

(2)     There was corruption in any of the arbitrators.

(3)     The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator.

(4)     The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.

(5)     The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.

(6)     An arbitrator making the award either:

(A)     failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or

(B)     was subject to disqualification upon grounds specified in Code of Civil Procedure Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision. (Code Civ. Proc., § 1286.2, subd. (a)., bolding omitted.)

Law Governing Insurance Appraisals

All fire policies issued in California must be on a standard form that includes an appraisal provision as set forth in Insurance Code section 2071. The appraisal process is limited in scope. The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy. (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 403.)

Compelling Appraisal of Disputed Items

A trial court does not necessarily err in compelling appraisal of disputed items when the disputes turn on issues such as coverage, causation, or policy interpretation. Those legal issues can be resolved in subsequent litigation, although it may be appropriate in certain cases to stay an appraisal pending resolution of the disputed issues. However, when the disputes turn on the condition or quality of damaged or destroyed items—and it is possible for the panel to assess an item’s condition or quality without simply having to rely on the insured’s representation—it is error to compel the appraisal panel to assign values to items that inspection reveals were not damaged or did not ever exist. In this case, the court erred because it directed the appraisal panel to assign loss values to items without regard to whether they were actually damaged.

An assessment of whether an item is damaged or existed is fundamental to a valuation of the amount of the loss. If an item is undamaged, there is no repair cost and no need to replace the item. Clearly, a determination that a component part of a building is undamaged is an assessment regarding its condition. Similarly, a determination that a claimed item of loss did not exist in the manner claimed by the insured bears upon the valuation of the loss. For example, if an insured claims that damaged counters are made of granite but a simple visual examination reveals they consist of a much less expensive material, the panel is not compelled to assign a value for repairing or replacing granite countertops simply because the insured lists them on the items of loss submitted for the panel’s consideration. Similarly, if an insured claims that a three-story apartment building damaged in a fire actually contains four floors, the panel is not required to place a value on a non-existent fourth floor.

There may be cases in which the identity of property damaged in a fire or other calamity is at issue, such as when an item is totally destroyed or damaged beyond recognition. An appraisal panel does not necessarily exceed its authority by assigning a value of zero to items of loss submitted to it for consideration. If inspection reveals an item is undamaged or never existed, it is appropriate for the panel to award nothing for loss or damage to that item. The existence of damage to an item as well as the nature of the claimed item are factors that directly bear upon the valuation of the loss, including the cost to repair or replace the item. An appraisal may encompass disputed items when the disputes turn on issues of coverage, causation, or policy interpretation. Here, however, the court went further and compelled the appraisal panel to assign loss values to items that may not have been damaged or never existed, simply because the insured claimed the items were damaged. In so doing, the court effectively prevented the appraisal panel from complying with the dictate of Insurance Code section 2071 to appraise the actual loss suffered by the insured. Instead, the panel was required to appraise a hypothetical loss, without regard to whether the items ever existed or actually required repair or replacement.

For these reasons, the court’s order  compelling an appraisal of three categories of items, including items claimed by Lee to have been damaged in the fire, was reversed. On remand, the trial court shall issue a revised order compelling an appraisal pursuant to Insurance Code section 2071.

The appraisal award issued is fundamentally deficient because it does not provide a single valuation of the loss suffered by the insured.  The competing appraisal amounts appear to be the result of the view that an appraisal panel is required to apply a value to every item that is presented to it by a party, without regard to whether the item was damaged or ever existed.  If inspection reveals that an item is undamaged or never existed, the panel should not apply a loss value to the item.

In addition, the panel should apply a single set of measurements to a physical space and determine what is required to effect a repair, instead of offering two dueling versions of required repairs. If one side claims a room has one window and the other side claims the room has two windows, it is the appraisal panel’s obligation to resolve the dispute to arrive at a single value for the loss.

ZALMA OPINION

Appraisals are tools to resolve disputes over the amount of loss without consideration for coverage issues. Appraisers must evaluate the loss incurred by the insured. The evaluation must be based on facts not claims and it cannot issue an award with two different findings since, to do so, avoids the reason for appraisal. The appraisers, by refusing to inspect the property, failed to fulfill the duty imposed upon them and the court order compelling two findings violated the requirement of the policy and statute. Of course, since the findings are $600,000 apart and there was evidence that the claims included things that did not exist and repair of things that were not there. As a result the court should h ave referred the case to the appropriate prosecutor.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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What is The Covenant of Good Faith and Fair Dealing?

The Covenant of Good Faith Is Mutual

In this, my second video blog I describe the definition of the tort of bad faith.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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What is Insurance

A video blog.

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Millions for Defense and Never Accept Fraud

Fraud Fails – Insured Must Pay Insurer

Insurers act in good faith and pay fire claims and additional living expense promptly as required by the policy and the law. They expect that the persons insured will treat the insurer with the same good faith and fair dealing.

Proving that no good deed goes unpunished, when an insurer tried to limit its payments to what it owed it was sued by the homeowners only to learn, in discovery, that it had been defrauded. In many cases, when the insurer learns that it is a victim of fraud, they often deny the claim and allow the insured to keep what they paid in advance of learning of the fraud to avoid bad publicity. Auto-Owners Mutual Insurance Company (“Auto-Owners”) refused to lose and insisted on getting its money back in Akers v. Auto-Owners (Mut.) Ins. Co., Slip Copy, 2015 WL 3714595 (W.D.Mo., 6/15/2015). A case where, at least in Missouri, fraud doesn’t pay and can be expensive.

FACTS

A fire which occurred at Leslie and Mary Akers’ (collectively “the Akers”) home. The Akers initiated this lawsuit, alleging that Defendant Auto–Owners (Mutual) Insurance Company (“Auto–Owners”) vexatiously failed to pay all amounts due under their homeowner’s policy. Auto–Owners denied the allegations, noting that it had paid more than $3.5 million under the Policy.

During discovery, Auto–Owners discovered evidence that the Akers prepared fraudulent invoices to inflate their losses. Auto–Owners filed a one-count counterclaim alleging that the Akers’ conduct violated the policy’s anti-fraud provision. Auto–Owners seeks a declaration that the Policy is void and that Auto–Owners is entitled to reimbursement of all amounts paid out under the Policy, as well as its attorneys’ fees and costs incurred in defending this lawsuit. The Akers, caught in the act, dismissed their claim with prejudice hoping to be able to keep almost $4 million Auto-Owners had already paid. Auto–Owners did not fall for the ploy and insisted on pursuing its counterclaim through trial.

On May 13, 2015, the District Court for the Western District of Missouri, held a bench trial. After carefully considering all of the evidence, the Court found that the Akers violated the Policy’s “Concealment or Fraud” provision by misrepresenting material facts, engaging in fraudulent conduct, and making false statements. As a result, the entire Policy is void and Auto–Owners is entitled to reimbursement of all sums—$3,929,887.40—paid under the Policy. The Court also ordered the Akers to reimburse Auto–Owners $146,919.21 for its reasonable costs, expenses, and attorneys’ fees incurred in defending against the Akers’ claims in this case.

The Court entered judgment in favor of Auto Owners Insurance Company and against Leslie and Mary Akers, jointly and severally, in the amount of $4,076,806.61.

FINDINGS OF FACT

Four witnesses testified in person: Auto–Owners’ field claim representative Candice Sartin, forensic accountant Peter J. Karutz, C.P.A., Leslie Akers, and Mary Akers. Nine witnesses appeared via videotaped depositions: Akers’ family members Amy Whiting, Laura Whiting, and Randy Akers, and present and former Akers’ employees Brian Tripp, Edward Kalleck, Ron German, Bruce Parker, Levi Sherman, and Michael Stone.

In determining how much weight to give each witnesses’ testimony, the Court made the following credibility determinations. The Court found Peter Karutz, Candice Sartin, Peter Karutz, Brian Tripp, Edward Kalleck, Ron German, Bruce Parker, Levi Sherman, and Michael Stone to be very credible and believes all, or nearly all, of their testimony. The Court gave greater weight to their testimony because it was consistent with the testimony of the other credible witnesses and the exhibits, and these witnesses had little or no motivation to testify falsely. Indeed, portions of Tripp, Kalleck, German, Parker, Sherman, and Stone’s testimony were candid admissions against interest.

The Court found Amy Whiting, Laura Whiting, and Randy Akers to be somewhat credible. The Court found much of Randy Akers’ testimony not credible. The Court found Leslie Akers and Mary Akers’ testimony not credible at all. The Akers’ testimony also contradicted sworn testimony they had given in their depositions on multiple salient points. Finally the Court noted that when questioned by Auto–Owners’ counsel on several crucial topics in this case-such as whether they knowingly submitted false invoices to Auto–Owners–the Akers declined to answer, invoking their Fifth Amendment right not to testify. The Court found that if the Akers had answered these questions truthfully, their answers would have confirmed that they conspired to submit false invoices to Auto–Owners and defraud it of millions of dollars.

The court concluded that the Akers built a very large (approximately 20,000 square foot) residence located at 1999 Southwest 2 Highway in Garden City, Missouri. Shortly after they completed construction a fire of undetermined origin occurred on August 8, 2010, severely damaging the house.

THE EXCLUSION

The Policy also contained a “Concealment or Fraud” provision that stated: “This entire policy is void if, whether before, during or after a loss, any insured has: a. intentionally concealed or misrepresented any material fact or circumstance;  b. engaged in fraudulent conduct; or c. made false statements; relating to this insurance.”

PAYMENTS MADE IN GOOD FAITH

Auto–Owners subsequently made several large payments under the Policy. Under the “dwelling” endorsement, it paid up to the policy limit: $1,712,134.52 to CitiMortgage, the first mortgagee on the property; and $690,365.48 to CBK Properties III, LLC, the second mortgagee on the property. It also paid the Akers $32,000 for debris removal. Under the “other structures” endorsement Auto–Owners paid $4,585 for damage to the pool house. Under the “personal property” endorsement it paid $250,000 to CBK Properties III, LLC and four payments to the Akers totaling $1,150,837.88. Finally, under the “additional living expenses” endorsement, it made numerous payments to the Akers totaling $89,963.87. Auto–Owners’ total payments under the Policy were $3,929,887 .40.

Auto–Owners hired Peter Karutz (“Karutz”), a forensic accountant with thirty-two years of experience, to conduct an analysis. He found that as part of their claim to recover benefits under the Policy, the Akers wrote checks and produced documents for various companies that purportedly rebuilt his home. In fact, the great majority of those checks did nothing more than circulate monies though various accounts until the money came to rest in the Akers’ bank account. Specifically, he found that: (1) the Akers’ claim that they paid $4,318,000 to repair fire-related damage to their home was fictitious; (2) Akers Construction Co. was never paid the 20% “general contractor” fee; (3) the Akers deposited approximately $3,900,000 into their bank accounts that was drawn on the AL & H bank account; (4) the proposals/invoices alleging that Eddie Kalleck d/b/a Kalleck Construction, Ron German d/b/a German Landscaping, and Brian Tripp d/b/a Tripp Electrical, performed certain work does not represent actual services performed by these individuals; (5) numerous other checks drawn on AL & H’s account and purportedly issued to other workers were ultimately deposited into the Akers’ bank account; (6) based on all bank accounts, the most the Akers may have spent rebuilding the house was $1,706,393. The Court found his testimony to be very credible and adopts all of the above listed conclusions.

THE AKERS VIOLATED THE POLICY’S “FRAUD AND CONCEALMENT” PROVISION

The Court found that the Akers violated the Policy’s “Fraud and Concealment” provision. Missouri law governs this dispute, and under Missouri law where an insurance policy clearly states that a misrepresentation voids coverage under the policy, that provision is enforceable. The Akers violated the Policy’s “Fraud and Concealment” provision in every way possible. They intentionally concealed, misrepresented material facts, and made false statements concerning the scope of the damage to their house, who was performing the repair work, who the general contractor was, the amount it actually cost to repair the damage, and who was actually receiving the payments for the repairs. Furthermore, they engaged in fraudulent conduct by creating fraudulent invoices designed to hide who was actually receiving the payments for the repair work.

THE AKERS COMMITTED FRAUD AND ACTED IN BAD-FAITH IN FILING SUIT AGAINST DEFENDANT, JUSTIFYING AWARD DEFENDANT ITS REASONABLE ATTORNEYS’ FEES AND COSTS.

“Under Missouri law, a court may award attorneys’ fees in a declaratory judgment action where special circumstances exist.” Allstate Ins. Co. v. Estes, 118 F.Supp.2d 968, 974 (E.D.Mo.2000). Special circumstances exist where an insured commits fraud.

In the present case, the Akers’ blatant fraud and bad-faith prosecution of Auto–Owners for vexatious refusal to pay is a special circumstance that justifies awarding Auto–Owners its reasonable attorneys’ fees and costs incurred in defending against the Akers’ claim and prosecuting its counterclaim. The Court finds Auto–Owners billing submissions to be reasonable.

ZALMA OPINION

If there is a reason for the tort of bad faith which caused the Akers’ to sue Auto-Owners in the first place there should be, in the case where an insured acts in bad faith and commits fraud, there should be an ability for the insurer to recover punitive damages from the insured. This is a blatant case of insurance fraud and in addition to the judgment to pay the insurer its losses as a result of the fraud the Missouri Attorney General should consider prosecution.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Is an Arson Fire Vandalism in Tennessee?

Lack of Definition Makes Exclusion Unclear

An arson fire is an intentional act causing damage to property. Vandalism is an intentional act causing damage to a structure. A person can be convicted of the crime of vandalism if he or she sets an  intentional fire at a property.  Therefore insurers, as did the insurer in Southern Trust Insurance Company v. Phillips, Slip Copy, 2015 WL 3612989 (Tenn.Ct.App., 6/10/15), will logically attempt to exclude coverage for an arson fire in a vacant structure by means of the vandalism after vacant for 60 days exclusion.

The insurer and the insured filed cross-motions for partial summary judgment on the issue of whether there is coverage for an arson fire not set by the insured to a structure vacant for more than 60 days. The trial court found the policy ambiguous and construed it in favor of coverage, holding that arson was covered under the policy. Accordingly, the trial court granted the motion for partial summary judgment filed by the insured and denied the motion for partial summary judgment filed by the insurer.

FACTS & PROCEDURAL HISTORY

Matthew Phillips is the owner of residential real property located in Lake City, Tennessee. The property was insured under a dwelling policy issued by Southern Trust Insurance Company. On or about February 27, 2013, a fire substantially damaged the residential structure located on the insured premises. Phillips promptly reported the loss to Southern Trust and fulfilled all duties imposed on him under the policy. Nevertheless, Southern Trust denied that the fire was covered under the insurance policy.

Southern Trust filed a complaint for declaratory judgment seeking a declaration that the policy did not provide coverage for the dwelling because, according to Southern Trust, the home “was damaged by vandalism and malicious mischief.” Phillips alleged that the home was damaged by fire, not vandalism and malicious mischief.

The policy did not define vandalism or malicious mischief. However, the policy listed “vandalism and malicious mischief” separate and apart from “fire” under Coverage C, which addressed coverage for personal property.

Following a hearing, the trial court entered an order granting the motion for partial summary judgment filed by Phillips and denying the motion filed by Southern Trust. The court concluded that it was required to construe the insurance policy as a whole.

In considering the meaning of the relevant terms, the trial court noted that arson and vandalism are treated as separate and distinct offenses under Tennessee’s criminal code. The court found that the policy itself also distinguished between the perils of fire and vandalism and/or malicious mischief, differentiating between the two in two different sections of the policy. The court noted that Southern Trust could have easily defined vandalism and malicious mischief or expressed a clear intent to include arson within the exclusion, but it failed to do so.

ISSUES PRESENTED

Southern Trust presents the following issues, as we perceive them, for review on appeal:

1. Whether the trial court erred in finding the insurance policy ambiguous;
2. Whether the trial court erred in considering the section of the policy providing coverage for personal property when determining whether coverage existed under the portion of the policy providing coverage for the dwelling.

DISCUSSION

The courts in Tennessee have long recognized that a vacancy clause in a fire policy is reasonable, valid and binding. The parties do not question the enforceability of the vacancy clause, and the facts relevant to the issue on appeal are undisputed. The crux of this appeal is whether, as a matter of insurance and contract law, arson constitutes “vandalism and malicious mischief” under the policy.

Insurance policies are, at their core, contracts.  As such, courts interpret insurance policies using the same tenets that guide the construction of any other contract. The terms of an insurance policy should be given their plain and ordinary meaning, for the primary rule of contract interpretation is to ascertain and give effect to the intent of the parties. The policy should be construed as a whole in a reasonable and logical manner and the language in dispute should be examined in the context of the entire agreement.

In addition, contracts of insurance are strictly construed in favor of the insured, and if the disputed provision is susceptible to more than one plausible meaning, the meaning favorable to the insured controls.

Whether arson falls within an exclusion for vandalism or malicious mischief is an issue of first impression in Tennessee, there has been no shortage of litigation in other jurisdictions with respect to this very issue. Many courts have held that an exclusion for vandalism and/or malicious mischief clearly does not encompass arson, particularly where the policy at issue distinguishes between fire and vandalism and/or malicious mischief. Where a homeowner’s insurance policy treats “fire” and “vandalism and malicious mischief” as two distinct causes of loss and the terms are not defined, the Court of Appeal concluded that an average person would conclude that arson falls under the category of fire rather than vandalism and malicious mischief.

In Tennessee, it is well settled that exceptions, exclusions and limitations in insurance policies must be construed against the insurance company and in favor of the insured. Applying these principles to the policy as a whole, it becomes clear that the vacancy exclusion for “vandalism and malicious mischief, theft or attempted theft” does not encompass arson. In the section of the policy entitled “Perils Insured Against,” the policy clearly makes a distinction between “fire” and “vandalism or malicious mischief,” listing these as separate perils.

The court noted that if it read the dictionary definitions of the terms vandalism, malicious mischief, and arson independently and in isolation, it could read them to mean that arson is one type of vandalism and malicious mischief. However, it was not able to read portions of a contract in isolation—they must be read together to give meaning to the document as a whole.

The structure and language of the insurance policy requires the conclusion that the parties did not have such a broad understanding with respect to the meaning of vandalism and malicious mischief. As the trial court noted, Tennessee’s criminal statutes also distinguish between vandalism and arson, defining each as a separate and distinct offense.

More importantly, however, the insurance policy itself consistently makes a distinction between fire, on the one hand, and vandalism and malicious mischief, on the other. Therefore, the average policy holder would conclude that fire (and arson) is covered, while vandalism of a vacant dwelling is not.

The vacancy exclusion provided that Southern Trust did not cover loss caused by “vandalism and malicious mischief, theft or attempted theft.” If vandalism and malicious mischief were intended to be read broadly to encompass all property damage resulting from a deliberate act, the additional exclusion for damage caused by “theft or attempted theft” would be superfluous.

The Court of Appeal concluded that policy issued to Phillips unambiguously provides coverage for fire and/or arson but does not cover vandalism or malicious mischief at a vacant dwelling.

ZALMA OPINION

Affirming the trial court, the Tennessee Court of Appeal made clear that if Southern Trust desired the result to be otherwise, as the drafter of the policy, it could have clearly distinguished between damage from accidental fires and damage from intentionally set fires. Alternatively, it could have included a specific definition of vandalism and malicious mischief or expressly added fire or arson to the vacancy exclusion alongside vandalism, malicious mischief, theft, or attempted theft. I would recommend that the exclusion be amended to read that, in the event the property is vacant for more than 60 consecutive days there is no coverage for loss to the property at all or no coverage to the property caused by fire, vandalism, malicious mischief or theft.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

May Insurers Insure Against Punitive Damages?

Insurance For Punitive Damages Against Public Policy

In most states insurance against awards of punitive damages are against the public policy of the state because it will allow the insured to defer his wrongful conduct onto an insurer. The deterrent effect of punitive damages would be eliminated. Rather, the evil conduct that would allow for punitive damages, would be encouraged.

In Wolfe v. Allstate Property & Cas. Ins. Co., — F.3d —-, 2015 WL 3634779 (C.A.3 (Pa.) 6/12/15) the Third Circuit dealt with the dispute between Allstate Property & Casualty Insurance Co. (“Allstate”) and appellee Jared Wolfe to affirm a judgment against an insurer who refused to pay punitive damages assessed against its insured.

The Third Circuit noted that it is Pennsylvania’s public policy that insurers cannot insure against punitive damages, and we therefore predict that the Pennsylvania Supreme Court will answer that question in the negative.

BACKGROUND

Karl Zierle finished his fifteenth or sixteenth beer for the night and drove off until he rear-ended Wolfe. Zierle’s blood alcohol level tested at 0.25%. Zierle also had three prior DUIs. Wolfe was injured in this accident, and he required treatment at the emergency room.

Zierle was insured by Allstate. Zierle’s policy provided liability coverage up to $50,000, and the policy required Allstate to defend Zierle in suits by third parties arising out of automobile accidents. The policy stated that Allstate would “not defend an insured person sued for damages which are not covered by this policy .”  Zierle’s policy expressly excluded coverage for punitive damages.

Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate valued Wolfe’s claim at $1200 to $1400, and Allstate responded with a counteroffer of $1200. Wolfe rejected this offer, and neither party moved from those numbers.

Wolfe then filed suit against Zierle. Allstate informed Zierle that, because Wolfe’s complaint did not indicate the extent of the damages he was claiming, the possibility remained that Zierle could face damages in excess of the $50,000 protection afforded by his policy. If the verdict did exceed the policy limit, Zierle was warned that he would be personally liable for the excess. Zierle was advised that he could hire an attorney at his own expense to cooperate with Allstate’s counsel. Zierle did hire his own counsel, but that attorney was not actively involved in the case.

During discovery, Wolfe learned of the extent of Zierle’s intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.

Settlement attempts failed. The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 compensatory damages award, but not the $50,000 punitive damages award. Following the trial, in return for Wolfe’s agreement not to enforce the punitive damages judgment against him personally, Zierle assigned his rights against Allstate to Wolfe.

DISCUSSION

Two issues were presented to the Third Circuit on appeal: First, did the District Court err by permitting Wolfe to introduce the punitive damages award from the underlying suit as evidence of damages? Second, did the District Court err by denying Allstate’s motion for summary judgment and holding that Allstate had no duty to consider the potential for punitive damages when valuing the compensatory claim, since the compensatory damages award was within the policy limits, which Allstate paid to Wolfe in full?

It is undisputed that the substantive law of Pennsylvania applies here. In the absence of a controlling decision by the Pennsylvania Supreme Court, the Third Circuit must predict how it would decide the questions of law presented in this case.

Motion in Limine

Wolfe persuaded the District Court to admit evidence of the punitive damages award because, if Allstate had acted in accordance with its contractual duty and negotiated in good faith to settle Wolfe’s claim against Zierle, the case never would have gone to trial, and the jury never would have awarded punitive damages against Zierle. Allstate argues that, by allowing Wolfe to present to the jury evidence of the punitive damages award in the underlying trial as damages in his current suit against Allstate, the District Court circumvented Pennsylvania’s public policy against insuring punitive damages.

The Third Circuit predicted that the Pennsylvania Supreme Court would conclude that, in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit. Therefore, the punitive damages award was not relevant in the later suit and should not have been admitted.

Our prediction is a logical extension of Pennsylvania’s policy regarding the uninsurability of punitive damages. It is Pennsylvania’s longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law. To permit insurance against the sanction of punitive damages would be to permit such offenders to purchase a freedom of misconduct altogether inconsistent with the theory of civil punishment which such damages represent.

Because Pennsylvania law prohibits insurers from providing coverage for punitive damages in order to ensure that tortfeasors are directly punished, the Third Circuit held that Allstate cannot be responsible for punitive damages incurred in the underlying lawsuit. To hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy.

California, Colorado, and New York have similar prohibitions on the indemnification of punitive damages. Wolfe argues that Allstate breached its duty of good faith by unreasonably refusing to negotiate.

In light of Pennsylvania’s public policy against insuring punitive damages, which emphasizes personal responsibility and deterrence, the Third Circuit concluded that the insured cannot shift the punitive damages to its insurer. Because the $50,000 punitive damages award is not a compensable item of damages in this case, the District Court erred in allowing evidence of that award to be presented to the jury.

The District Court’s ruling effectively shifted Zierle’s liability for punitive damages to Allstate, which violated Pennsylvania’s public policy.

It follows that an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. As a result, Allstate is entitled to a new trial, at which Wolfe may not introduce evidence relating to $50,000 in punitive damages, although he may seek compensatory damages based on injury other than the $50,000 punitive damages award

Pennsylvania law recognizes a claim in contract for an insurer’s breach of its fiduciary obligations to its insured, and an insured’s right to recover compensatory damages under that claim for injuries sustained as a result of that breach.  In defining what this duty of good faith entails, the Pennsylvania Supreme Court held that the insurer must “consider in good faith the interest of the insured as a factor” in deciding whether to settle a claim. Evidence showing only “bad judgment” is insufficient for liability and “bad faith, and bad faith alone was the requisite to render the defendant liable.” An insurer’s bad faith must be proven by clear and convincing evidence.  Wolfe’s breach of contract claim sought recovery of the $50,000 punitive damages award; interest on the $50,000 punitive damages award; and attorney’s fees and costs. By removing the $50,000 award from consideration, we remove all compensatory damages that Wolfe seeks, based on the statements in his complaint.

Therefore, Wolfe does not need compensatory damages to succeed on his statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.

The Third Circuit, therefore, affirmed the District Court’s denial of summary judgment on both the breach of contract and statutory bad faith claims and reversed the District Court’s ruling with regard to punitive damages.

ZALMA OPINION

The Third Circuit and Pennsylvania properly make it impossible to insure against wrongful conduct that allows an award of punitive damages against an insured. To do otherwise would encourage wrongful conduct.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Innocent Misrepresentation Supports Rescission

Why Did It Take Adjusting 175 Claims Before the Insurer Learned it Was Deceived?

Staffing agencies and employee leasing organizations have difficulty obtaining workers’ compensation insurance for a reasonable price. The agencies and leasing organizations are sometimes tempted to misrepresent their true profession and organization’s activities to obtain insurance at a more reasonable price. When the insurer learns that it has been deceived it has the option to unilaterally rescind the policy from its inception, return the premium, and refuse to pay claims. When the insurer has paid claims before it learned it was deceived, the case, as in American Home Assurance Company v. 99 Cents Only Stores, Not Reported in Cal.Rptr.3d, 2015 WL 3563133 (Cal.App. 2 Dist.), becomes more complicated.

FACTS

American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA and Illinois National Insurance Company (collectively Insurers) issued workers’ compensation policies to Optima Staffing, Inc. for 2008 and 2009 based in part on Optima’s representation it was a temporary staffing agency that directly hired, trained and supervised employees deployed as temporary workers in various industries and not a professional employer organization. After defending and indemnifying 175 workers’ compensation claims, the Insurers discovered Optima was operating as a professional employer organization for several temporary staffing agencies and their special employer clients. The Insurers rescinded the policies and filed an action for declaratory relief to confirm the rescission and for restitution from the temporary staffing agencies and the special employers.  The Insurers appealed from the judgments entered after the trial court sustained without leave to amend the demurrers of several of the temporary staffing agencies and special employers and subsequently granted motions for judgment on the pleadings in favor of the remaining temporary staffing agencies and special employers.

After receiving an application the Insurers issued a proposal stating that issuance of any workers’ compensation policy was conditioned upon Optima providing temporary staffing services only and not performing as a professional employer organization or employee leasing business. Optima accepted the proposal, and a binder for insurance was issued including the same condition. Policies were subsequently issued for the policy period February 22, 2008 through February 22, 2009.

Because Optima had no supervision or control over the employees, the operative complaint alleged, it greatly expanded the risk of workers’ compensation claims.

Although most of the temporary staffing agencies and special employers answered the amended complaint, on October 14, 2011 two temporary staffing agencies demurred on grounds including there could be no rescission of the insurance policies as to them because they were not parties to the agreements between the Insurers and Optima and a contract cannot be rescinded when the rights of others have intervened and rescission would harm them. The agencies argued they had reasonably relied on the workers’ compensation policies procured by Optima and, in turn, had entered into agreements with special employers to provide temporary workers.

The trial court sustained the demurrers without leave to amend.

DISCUSSION

Law Generally Governing Rescission

An insurer may rescind an insurance contract when the insured has misrepresented or concealed material information, even unintentionally, in obtaining insurance coverage. To effect rescission, the insurer must give notice to the insured and refund all premiums received before commencement of an action on the contract.

When an insurance policy is rescinded, “it is void ab initio, as if it never existed.” (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 184 [“[i]n other words, defendants, in law, never were insureds under a policy of insurance”]; LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1267 [“ ‘rescission effectively renders the policy totally unenforceable from the outset so that there was never any coverage and no benefits are payable’ ”]; see generally Civ.Code, § 1688 [“contract is extinguished by its rescission”].) Consequently, in addition to the refund of premiums by the insurer, the insured must return any advance payments that have been received. In contrast, the cancellation of a policy terminates coverage only prospectively.

Rescission applies to all insureds under the contract, including additional insureds, unless the contract provides otherwise. When an insurer rescinds a policy in conformity with all of the requirements imposed by law, the insurer generally may avoid liability on the policy to any third party injured by the insured.

The Insurers Are Not Required to Seek Reimbursement from the Injured Workers Who Received Benefits to State a Claim for Rescission.

Defendants contend the Insurers’ rescission claim fails because, by declaring they do not intend to seek reimbursement from the injured workers or to terminate previously agreed-upon benefits, the Insurers are not truly seeking rescission. Defendants’ argument that rescission is an all or nothing proposition—either the Insurers must seek to recover from the injured workers what they paid to them or the policies remain available for all third party claimants—is without merit.

Indeed, Civil Code section 1692 itself recognizes a contract may be “rescinded in whole or in part.” (emphasis added) If in an action or proceeding a party seeks relief based upon rescission, the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.

The Insurers, on the other hand, argue, although prejudice to third parties may be an inevitable consequence of rescission, the law clearly provides rescission is binding on innocent additional insureds, third party beneficiaries and injured third parties.

Unjust Enrichment

The elements for a claim of unjust enrichment are receipt of a benefit and unjust retention of the benefit at the expense of another. The theory of unjust enrichment requires one who acquires a benefit which may not justly be retained, to return either the thing or its equivalent to the aggrieved party so as not to be unjustly enriched. It is not, strictly speaking, a theory of recovery, but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so. It is synonymous with restitution. Ordinarily, restitution is required only if the benefits were conferred by mistake, fraud, coercion, or request.

The Operative Complaint Adequately Alleged it Would Be Unjust for Defendants to Retain the Money Expended in Connection with Their Employees’ Workers’ Compensation Claims

Although the operative complaint does not allege defendants colluded with Optima or were aware of its fraud, participation in the fraudulent scheme is not required for a claim for unjust enrichment. Restitution may be warranted in cases in which the parties are innocent of wrongdoing, for example, in the case of a mistake of fact. This case has the added complexity that defendants may be innocent third parties, but the Insurers are also innocent third parties. How equity is best served under these circumstances is a question that can only be resolved after a full development of all the facts. In sum, the operative complaint adequately states a claim for unjust enrichment.

DISPOSITION

The orders sustaining the demurrer and granting judgment on the pleadings to the causes of action for quantum meruit were affirmed. The cause was remanded for further proceedings.

ZALMA OPINION

Insurance, as policyholder lawyers remind me continuously, is a business of the utmost good faith. They forget, just as often, that the covenant of good faith and fair dealing applies equally to both sides of the contract of insurance. Here, the insured misrepresented the risk that it asked the insurers to take and the insurers rightfully rescinded their policies. If the policy never existed the 175 recipients of workers’ compensation benefits may not have had an insurer to pay but must take their benefits directly from the employer. If the insurers succeed the workers will not be without a remedy. I can only wonder why it took 175 claims to determine the insurers were deceived.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

The “Chutzpah” of Fraud Perpetrators

Zalma’s Insurance Fraud Letter

June 15, 2015

The ACE Conference

Barry Zalma will be speaking, June 18, 2015 on “Millions for Defense & Not a Dime For Tribute” at the Annual America’s Claims Event in Austin, Texas. The ACE Conference is one of the ONLY industry events where senior managers, practitioners and experts involved with claims operations can get the insight they need to implement effective and tactical strategies for their claims handling process. More than 400 professionals and decision-makers from mid-size to large Fortune 500 companies attend the event to engage in idea exchange and peer to peer learning.

I will also be at the National Underwriter booth from June 17 to June 19, 2015 and would hope to meet you there and talk about the Zalma’s Insurance Claim Library.

The “Chutzpah” of Fraud Perpetrators

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

The current issue of ZIFL reports on:

1.    The “Chutzpah” of Fraud Perpetrators Put Down by the Third Circuit
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    False Swearing
4.    E-Books from Barry Zalma
5.    The Zalma Insurance Claims Library
6.    State Farm Takes the Profit Out of 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.

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:

•    Appraisal Can Stay Litigation – June 12, 2015
•    Conflict of Interest Required To Remove Counsel – June 12, 2015
•    Appraisal Award Binding – June 11, 2015
•    Vicarious Liability & Additional Insured Endorsement – June 11, 2015
•    Insured vs. Insured Exclusion – June 10, 2015
•    Why Is There An Insurance Adjuster? – June 9, 2015
•    Is There Coverage for Assaulting Your Employee? – June 8, 2015
•    When Does Assault & Battery Exclusion Apply? – June 5, 2015
•    New York’s Difficulty With The Tort of Bad Faith – June 4, 2015
•    Does Breach of Warranty Void Insurance Coverage? – June 3, 2015
•    When Is a Landslide a Fire? – June 2, 2015
•    The Amount of Fraud Influences Sentence – June 1, 2015
•    May a Lender Force Place Insurance? – May 29, 2015
•    Speculative Conflict & The Right to Independent Counsel – May 28, 2015
•    Webinar by Barry Zalma – May 27, 2015
•    Is an Insurer Obligated to Pay For Coverage Not Requested? – May 27, 2015
•    What Are the Insurance Obligations of a Condo Unit Owner? – May 26, 2015
•    An Important Tool – The Examination Under Oath – May 25, 2015
•    Are Intentional Acts Insurable? – May 22, 2015
•    Is The Car an Innocent Bystander to Road Rage? – May 21, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

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Appraisal Can Stay Litigation

Appraisal Compelled to Resolve Dispute Over Quantum of Loss

Insureds and insurers who have no trouble resolving disputes over the applicability of coverage have difficulty in reaching agreement about the amount of loss on either an actual cash value or replacement cost basis. Those who create insurance policies, since before the enactment of the New York Standard Fire Insurance policy more than a century ago, created an arbitration provision – called appraisal – to allow a quick, fair, and outside court proceedings to resolve the amount of loss dispute.

In Laredo Landing Owners Association, Inc. v. Sequoia Insurance Company, Not Reported in F.Supp.3d, 2015 WL 3619205 (D.Colo., 6/10/15) the District Court for the District of Colorado was asked by the plaintiff to allow the amount of loss to be determined by trial and to refuse to allow its insurer to compel appraisal.

FACTS

In its Amended Complaint, Plaintiff asserts claims for breach of insurance contract and statutory and common law bad faith based on Defendant’s alleged failure to provide full insurance coverage for damage to Plaintiff’s insured property resulting from a May 5, 2012 wind and hail storm. Plaintiff alleges that, despite Plaintiff’s independent adjuster’s estimate that the cost to repair the property was $445,545.33, Defendant’s adjuster estimated that the total cost of repairs was between $100,000 and $110,000, and that Plaintiff should be paid only $475.75 over the applicable deductible and depreciation. Although Plaintiff admits that Defendant later agreed to pay an additional $29,666.39 to replace two additional roofs on the property Plaintiff nevertheless asserts that Defendant has acted in bad faith by not paying its claim in full.

Plaintiff concedes that the relevant insurance policy contains an appraisal provision that provides, in pertinent part, as follows: “If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that the selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding….”

Based on this provision, Defendant seeks to compel an appraisal of the amount of the alleged loss caused by the storm.

ANALYSIS

At least two decisions from this District have found that the appraisal process like the one at issue here is properly “classified as an arbitration” under the Colorado Uniform Arbitration Act. The appraisal process itself—which is limited to determining the amount of loss—is binding on both parties.

Colorado possesses a tradition of supporting alternative dispute resolution mechanisms when agreed to by the parties. The right of parties to contract encompasses the correlative power to agree to a specific ADR procedure for resolving disputes. Although an appraisal process is not on all fours with arbitration, both are rooted in similar policies of economy for the parties and judicial efficiency. The court found it must accord the parties a presumption in favor of appraisal and must resolve all doubts about the scope of the appraisal clause in favor of the appraisal  mechanism.

Plaintiff argues that Defendant waived its right to demand an appraisal because (1) it denied all liability and (2) failed to demand an appraisal within a reasonable time. The denial by an insurer of all liability under a policy is a waiver of the right to an appraisement. However, Defendant has not denied all liability. Instead, the Amended Complaint makes clear that Defendant and Plaintiff disagree as to the extent of the damage caused by the storm. This disagreement as to the “amount of loss” is precisely what the appraisal provision is designed to address.

Although Defendant’s Motion to Compel was filed approximately seventh months after this action was initiated, Defendant made its first demand for appraisal on June 27, 2014—less than two months after Plaintiff filed its original Complaint. Although it appears that the parties continued to discuss the propriety of an appraisal for some time, Defendant continued to assert its right to demand an appraisal.

Finally, Plaintiff argues that an appraisal determination would have no effect on its claims for common law and statutory bad faith. While legally correct, this does not foreclose an appraisal. While the appraisal process will likely result in a binding determination as to the amount of loss–including any issues as to causation the court acknowledged that the parties may need to resume this action to resolve issues outside the scope of the appraisal.

As a final matter, the court must consider whether to stay proceedings until the appraisal process is completed. The court considered the following factors in determining whether a stay is appropriate: (1) the plaintiff’s interests in proceeding expeditiously with the civil action and the potential prejudice to plaintiff of a delay; (2) the burden on the defendants; (3) the convenience to the court; (4) the interests of persons not parties to the civil litigation; and (5) the public interest.

As to the first three factors, it is most efficient for the parties and the court to wait for the results of the appraisal before further proceeding with discovery and other matters. The appraisal process should resolve key factual issues that are in dispute. If the storm did not cause any damage beyond the amount found by Defendant’s adjuster, then there will likely be no reason for this case to proceed any further. Alternatively, if Plaintiff is correct that the storm caused damage above and beyond the amount that Defendant has agreed to cover, appraisal will resolve the extent of that damage, which, in turn, may assist the parties in resolving a number of issues outside the scope of the appraisal process. Accordingly, appraisal could limit the need for discovery in this case, resulting in a significant cost savings to both parties.

The court, therefore, ordered that the parties shall promptly and fully participate in the appraisal process, including by identifying their preferred appraisers in accordance with the appraisal provision no later than July 1, 2015. It also ordered that all discovery and other proceedings in the action were stayed until completion of the appraisal process and that, no later than 14 days after the completion of the appraisal process, the parties shall file a Joint Status Report to advise if any issues remain in this case.

ZALMA OPINION

Usually appraisal is an effective, quick, and fair method of determining the amount of loss. Sometimes it is abused and takes longer and is more expensive than a trial. Courts believe in arbitration to effectively ease the burden of the court since the award, if it agrees with the insurer, will emasculate the bad faith law suit and if in favor of the insured may establish the bad faith. I was once a trial lawyer in an appraisal proceeding that took 51 trial days and resulted in an award that was less than the amount paid by the insurer. The insured was so upset they sued their appraiser for appraisal malpractice. Nothing in the law or insurance is perfect. Appraisal, much more often than not, is fair, quick and reasonable.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Conflict of Interest Required To Remove Counsel

Insurer Appointed Lawyer’s Duty is to Client It Was Retained to Defend

Insurance companies have the right and obligation to choose counsel to defend its insureds. Counsel retained by an insurer to defend an insured, contrary to the belief of many, is obligated solely to represent the rights, duties, obligation and defenses of the party insured. When that party is a corporation the counsel is obligated to represent the interest of the corporation even if it is contrary to the rights and obligations of its officers and shareholders.

In Landon v. Austin, — N.Y.S.3d —-, 2015 WL 3617141 (N.Y.A.D. 3 Dept.), 2015 N.Y. Slip Op. 04911 (6/11/15) a New York appellate court was asked to agree with a corporate officer’s attempt to disqualify the lawyers assigned to represent the corporation since counsel’s defense of the corporation could allow for a judgment in excess of the officer’s personal liability insurance.

FACTS

Plaintiff sued to recover for injuries he suffered while performing construction work on a residence owned by defendant Duane Austin. The project also involved equipment owned by, and several employees of, defendant Austin Construction, Inc. (hereinafter ACI). Austin and his wife are the sole shareholders and officers of ACI, and Austin cross-claimed against ACI for contribution and/or indemnification.

ACI has commercial liability insurance coverage, and its carrier selected Smith, Sovik, Kendrick & Sugnet P.C. (hereinafter SSKS) to provide a defense. Austin is also entitled to a defense under the terms of his homeowners insurance policy, and a separate law firm was retained to represent him.

Approximately three weeks before the trial in this matter was to begin, Austin moved to disqualify SSKS as counsel for ACI. Austin argues that he is the “alter ego” of ACI, and that SSKS is impermissibly placing the interests of ACI’s insurance carrier ahead of his stated wishes. Austin fears that the damages awarded at trial will exceed the liability limits of his homeowners insurance policy and that, should ACI not be held liable, he will be personally responsible for some of the award.

He argued that he was acting in his corporate capacity in the lead-up to the injury, which would render ACI liable and bring the liability limits of its commercial liability insurance policy into play. SSKS rejected the demands of Austin that it endorse that strategy, and has instead argued that ACI is not liable because Austin was acting solely in his individual capacity.

ANALYSIS

The court’s analysis begins with the observation that any disqualification motion is founded upon an allegation of a breach of a fiduciary duty owed by the attorney to a current or former client. Although SSKS was retained by the insurer for ACI, the paramount interest SSKS represents is that of ACI and the insurer is precluded from interference with counsel’s independent professional judgments in the conduct of the litigation on behalf of its client. (Feliberty v. Damon, 72 N.Y.2d 112, 120 [1988]; see Elacqua v. Physicians’ Reciprocal Insurers,  52 AD3d 886, 889–890 [2008]; Federal Ins. Co. v. North Am. Specialty Ins. Co., 47 AD3d 52, 59 [2007]). Disqualification is therefore appropriate only where a conflicting interest between the insurer and insured may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship.

A conflicting interest exists, for example, where the defense attorney’s duty to the insured would require that he or she defeat liability on any ground and his or her duty to the insurer would require that he or she defeat liability only upon grounds which would render the insurer liable.

With that backdrop in mind, SKSS has consistently argued that ACI is not liable at all. While this defense could harm the personal financial interests of Austin if it succeeds, SSKS has never represented Austin in his individual capacity. The defense advanced by SSKS clearly furthers the corporate interests of ACI, and the record is devoid of any indication that its actual goal is to recoup funds for the insurer’s benefit from ACI or its principals. Because Austin failed to demonstrate the existence of any conflict of interest between ACI and its insurer, the trial court did not abuse its discretion in denying his disqualification motion.

SKSS has plainly acted in furtherance of ACI’s interests, Austin has attempted to direct SSKS to take a litigation position harmful to a corporation of which he is an owner and officer. SSKS properly viewed those efforts with skepticism, as every one, dealing with an officer of a corporation who assumes to act for it in matters in which the interests of the corporation and officer are adverse, is put upon inquiry as to the authority and good faith of the officer.

The trial court order was affirmed.

ZALMA OPINION

Mr. Austin attempted to move his personal liability to the corporation he controls – which had greater insurance coverage limits than his homeowners policy’s personal liability limits – instead of asking corporate lawyers to protect the corporation’s rights. Counsel, recognizing its duty, refused to act contrary to the rights and defenses available to its client and the insurer paying for its defense. If Austin was able to remove counsel and replace them with a lawyer that would follow his instructions to put all liability on the corporation he would have acted in breach of the covenant of good faith and fair dealing owed to his corporation’s insurer to the benefit of his homeowners insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Appraisal Award Binding

Payment of Appraisal Award Satisfies Policy Promise to Indemnify

In an opinion expressing the brevity required of a decision on an issue of insurance law that is patently obvious, the Missouri Court of Appeal decided in James-Miller v. American Family Mutual Insurance, — S.W.3d —-, 2015 WL 3610497 (Mo.App. E.D., 6/9/2015) that an appraisal award is binding on the parties to a first party property insurance policy.

Appellant Lisa James–Miller (“James–Miller”) appealed from the judgment of the trial court entered in favor of Respondent American Family Mutual Insurance Company (“American Family”) on her petition for insurance coverage.

Following a bench trial, the trial court found that any loss sustained by James–Miller was properly determined by the appraisal process set forth in James-Miller’s American Family homeowner’s insurance policy. The trial court additionally held that even if the appraisal process was not binding, James–Miller failed to prove that American Family failed to pay any amounts due under her policy.

On appeal, James–Miller argues that the trial court erred in: (1) finding that the appraisal process was binding; (2) refusing to impose a discovery sanction precluding Chris Powers, American Family’s designated appraiser, from testifying at trial; and (3) finding in favor of American Family because the decision is against the weight of the evidence.

The appellate court concluded that no error of law appears and that an extended opinion reciting the detailed facts and restating the principles of law applicable to this case would serve no jurisprudential purpose.

ZALMA OPINION

Appraisal has been a condition of first party property policies for more than a century. They were created as a device to allow resolution of disputes over the quantum of a loss when an insurer and the insured do not agree. The insured submitted to appraisal, an award was issued and the insured paid the award. As a result the insured had no case.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Vicarious Liability & Additional Insured Endorsement

Duty To Defend Based on Extrinsic Evidence

Capital City Real Estate, LLC (“Capital City”) initiated a declaratory judgment action in the District of Maryland, seeking a declaration that Certain Underwriters at Lloyd’s London (“Underwriters”) were obligated to defend and indemnify Capital City against a negligence lawsuit filed in the Superior Court for the District of Columbia. The district court granted summary judgment in favor of the Underwriters, concluding that it had no duty to defend or indemnify Capital City.

On appeal, the Third Circuit Court of Appeal, in Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, Subscribing to Policy Number: ARTE018240, — F.3d —-, 2015 WL 3606861 (C.A.4 (Md.) 6/10/15), was asked to resolve the dispute. The dispute arose from a common wall shared by the structures located at 55 Bryant Street, NW, Washington, DC (“55 Bryant Street”) and 57 Bryant Street, NW, Washington, DC (“57 Bryant Street”). 55 Bryant Street was owned by Leon Yates (“Yates”) and insured by The Standard Fire Insurance Company (“Standard Fire”). Capital City, a real estate development company with its principal place of business in Washington, DC, was operating as the general contractor for the renovation of 57 Bryant Street in 2008 and 2009.

THE CONTRACTS

Capital City subcontracted the foundation, structural, and underpinning work for the 57 Bryant Street renovations to Marquez Brick Work, Inc. (“Marquez”), a corporation engaged in the business of concrete, bricks, blocks, and foundation work with its principal place of business located in Maryland. The subcontract between Capital City and Marquez Brick required Marquez Brick to indemnify Capital City for damages caused by its [Marquez’s] work and further required Marquez Brick to maintain certain general liability insurance naming Capital City as an additional insured. Accordingly, on November 17, 2008, the Underwriters issued an insurance policy (the “Policy”) to Marquez, effective from November 17, 2008, through November 17, 2009.

The Underwriters also issued an Endorsement (the “Endorsement”) to the Policy listing Capital City as an additional insured party on the Policy. As relevant to this case, the Endorsement amends the Policy to cover Capital City as an additional insured, but only with respect to liability for “property damage” caused in whole or in part by Marquez’s acts or omissions; or the acts or omissions of those acting on Marquez’s behalf in the performance of [Marquez’s] ongoing operations for  Capital City in Washington, D.C.

THE INCIDENT

On June 9, 2009, during the course of Marquez’s work on the underpinning of 57 Bryant Street, the common wall shared by 57 Bryant Street and 55 Bryant Street collapsed.

Standard Fire, as subrogee, filed suit against 57 Bryant Street, NW Limited Partnership, Bryant St., LLC, and Capital City in the Superior Court for the District of Columbia. The underlying complaint does not mention Marquez or explicitly seek any damages for any of its acts or omissions. Rather, the complaint attributes the June 9, 2009 collapse and resulting damage to 55 Bryant Street to negligence on the part of the named defendants.

Standard Fire paid for the repairs per its insurance policy with Yates, and requested $600,000 in damages, plus attorney’s fees, costs, and interest.

Capital City responded in part by filing a third party complaint against both Marquez and its owner, Feliciano Marquez. Capital City alleges that its contract with Marquez requires Marquez “to pay for defending and indemnify [Capital City] against all claims for liability that were a result of or partially resulting from Marquez’s breach of any term of the” contract, and also requires “that if [Capital City] is sued and the subject of the suit is [Marquez’s] work or the direct or indirect result of it, [Marquez] shall indemnify [Capital City] against all liabilities” and reimburse it for any damages or fees.

ANALYSIS

In determining whether an insurer has a duty to defend under an insurance policy, Maryland courts apply the following test:

(1)   what is the coverage and what are the defenses under the terms and requirements of the insurance policy?

(2)   do the allegations in the tort action potentially bring the tort claim within the policy’s coverage?

The first question focuses upon the language and requirements of the policy, and the second question focuses on the allegations of the tort suit. At times these two questions involve separate and distinct matters, and at other times they are intertwined, perhaps involving an identical issue.

Unlike the majority of other states, Maryland does not follow the rule that insurance policies are to be most strongly construed against the insurer. Empire Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md.1997) Rather, Maryland law applies ordinary contract principles to insurance contracts. Nevertheless, under the general principles of contract construction, if an insurance policy is ambiguous, it will be construed liberally in favor of the insured and against the insurer as drafter of the instrument.

If the policy’s language is clear and unambiguous, the Court will assume the parties meant what they said. As with any contractual dispute, the court must start with the relevant policy wording. The Endorsement in this case is the form provided by the Insurance Services Office, Inc. (“ISO”) which is the almost exclusive source of support services in this country for commercial general liability insurance. However, the language is quite clear that coverage is provided for Capital City, as the additional insured, for “property damage … caused in whole or in part by” Marquez.

The Underwriters argued that the scope of coverage is limited to Capital City’s vicarious liability for Marquez’s acts or omissions. However, there is no mention of vicarious or derivative liability in the Endorsement. If the parties had intended coverage to be limited to vicarious liability, language clearly embodying that intention was available but was not included in the ISO form. The words “derivative” and “vicarious” are conspicuously absent from the Endorsement. The language of the Endorsement plainly lacks the vicarious liability limitation that the Underwriters seek to impose.

As the Maryland Court of Appeals has stated, “to give effect to the duty to defend where the allegations, even if groundless, present claims both within and without the policy coverage the rule in Maryland is that ‘the insurer still must defend if there is a potentiality that the claim could be covered by the policy.’” Continental Cas. Co. v. Bd. Of Educ., 489 A.2d 536, 542 (Md.1985). Maryland courts generally look to the pleadings in the underlying lawsuit to determine whether there is a potentiality of coverage. Aetna Cas. & Sur. Co. v. Cochran,  651 A.2d 859, 863 (Md.1995).

Here, the underlying complaint is silent as to the involvement of Marquez. Indeed, Marquez is not named anywhere in the complaint. However, Capital City has filed a third party complaint against Marquez and its owner, and has introduced extrinsic evidence that the collapse of the common wall between 55 Bryant Street and 57 Bryant Street was caused by Marquez.

Because the underlying complaint does not make clear that Marquez conducted the foundation, structural, and underpinning work that led to the collapse of the common wall, Capital City is entitled to rely on its extrinsic evidence to establish those facts and to thereby establish a potentiality of coverage. It was error for the district court to conclude otherwise.

By contrast, there is not such a clean delineation of which actor owes which duty in this case, in part because the underlying complaint fails to even mention Marquez. It is undisputed that Marquez did the foundation work during the course of the renovations. The appellate court, therefore found that there is a potentiality of coverage and, as a result, the Underwriters have a duty to defend Capital City in the underlying tort lawsuit.

For the foregoing reasons, the Third Circuit concluded that the scope of coverage under the Endorsement extends beyond acts or omissions of Marquez for which Capital City was vicariously liable. The plain language of the Endorsement creates a duty to defend Capital City where Capital City is being held liable for the acts or omissions of Marquez.

ZALMA OPINION

Additional insured endorsements cause a great deal of litigation and interpretation of the wording of the additional insured endorsement. In this case the insurer attempted to expand the meaning of the endorsement to limit the coverage to vicarious liability imposed on the additional insured by the actions of the named insured. Since the key words did not appear in the endorsement the court refused to limit the coverage as Underwriters desired. Intent, in insurance, must be in writing and if the limitation to vicarious liability is intended it must be put in writing in the contract of insurance. Underwriters failed to use that language and, instead used the broader ISO wording.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insured vs. Insured Exclusion

One Insured Can’t Get a Defense When Sued by Another Insured

Robert D. Redmond sued ACE American Insurance Company (“ACE”) after it refused to provide insurance coverage in connection with a civil suit Redmond’s former employer brought against him. The District Court dismissed Redmond’s complaint because the language of the insurance policy under which he sought coverage excluded his claim.

FACTS

Industrial Enterprises of America, Inc. (“IEAM”) purchased a “Management Protection” insurance policy (the “Policy”) from ACE. The Policy provided insurance coverage for the “Company,” defined as IEAM, its subsidiaries, “any such organization as a debtor-in-possession,” as well as “Insured Persons,” including IEAM executives. Subject to certain conditions and exclusions, the Policy required ACE to cover losses arising from, among other things, “misleading statement[s]” and other “act[s and] omission[s],” by the insureds and to pay costs “arising out of” civil proceedings related to such acts.  The Policy also included an “insured versus insured” exclusion (the “Exclusion”), under which ACE was not liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.”

During the relevant time, Redmond was an “Insured Person” under the Policy. In November 2007, shareholders sued IEAM for securities violations and accounting fraud. In 2009, IEAM filed for bankruptcy protection, and in 2011, brought an adversary proceeding (the “Adversary Proceeding”) in bankruptcy court against several former executives and employees, including Redmond. Acting as a debtor-in-possession, IEAM sought damages “on behalf of itself and as assignee of its shareholders,” alleging that the defendants, including Redmond, had engaged in a fraudulent scheme to manipulate the company’s stock price. In 2013, a Chapter 11 trustee was appointed to pursue IEAM’s claim.

Redmond asked ACE “to provide his defense in the matter” or otherwise cover his costs.  ACE denied Redmond’s request, and Redmond sued ACE in Delaware state court, alleging that ACE had breached its contractual obligations under the Policy, acted “in bad faith,” and “wrongfully conspired with IEAM … to deny [him] his right to coverage of his defense costs.” The District Court held that the Exclusion relieved ACE of its obligation to assume the cost of Redmond’s defense and dismissed his complaint. Redmond appealed.

ANALYSIS

In Redmond v. ACE American Ins. Co., — Fed.Appx. —-, 2015 WL 3514690 (C.A.3 (Del.) 6/5/2015) the Third Circuit resolved the dispute. It noted that under New York law, an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract. This is a matter of law for the court to decide, and requires the court to determine, in the first instance, whether the terms of the insurance contract are ambiguous.

Policy language is not ambiguous if it has a “definite and precise meaning, unattended by danger of misconception in the purport of the policy itself, and concerning which there is no reasonable basis for a difference of opinion.” Breed v. Ins. Co. of N. Am., 385 N.E .2d 1280, 1282 (N.Y.1978).

Noting that in this case the Exclusion provides that ACE shall not be liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.”  Generally speaking, a claim or proceeding is brought when in law it is commenced, and the same holds true in the policy exclusion context. The phrase “brought … by” as used in the Exclusion means “commence” and is not ambiguous. Having so concluded, the court concluded that it must apply the exclusion as written.

IEAM, the insured “Company,” commenced the Adversary Proceeding against Redmond, another insured. Under the Exclusion, ACE is not liable for suits commenced, or “brought,” by the “Company,” and thus it is not obligated to cover Redmond’s defense costs. The fact that the Chapter 11 trustee has been substituted as the plaintiff in the action under Fed. R. Bankr.P.2012(a) and is now pursuing the action on behalf of IEAM does not mean the trustee initiated the suit or change the fact that IEAM commenced, or “brought,” the action.

While the action now proceeds as if it had been originally commenced by the real party  does not change the fact that IEAM “brought” it. Therefore, the plain language of the Exclusion allows ACE to deny Redmond’s request for defense costs, and the District Court did not err in dismissing Redmond’s complaint.

ZALMA OPINION

Insurance Companies just don’t like insuring inter-family suits whether the family is a domestic one or a commercial family. In this case the insurer refused to insure any actions by one corporate insured against another corporate insured. As a result there was no coverage at all to defend or indemnify one insured for a suit brought by another insured. The plain language of the policy applied.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why Is There An Insurance Adjuster?

The Adjuster

The insurance adjuster is not mentioned in a policy of insurance. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions requiring the insured to, within sixty days of the loss, submit a sworn proof of loss. The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insured could reject the claim. If the insured submits a timely proof of loss the insurer could accept or reject the proof of loss. Insureds were not happy with that system and most were incapable of complying with the strict enforcement of the policy conditions.

“An ‘adjuster’ or ‘insurance adjuster’ is a person, copartnership or corporation who undertakes to ascertain and report the actual loss to the subject-matter of insurance due to the hazard insured against.” As a result of its policy, an insurance company has a contractual obligation to pay its insured’s valid claim and, therefore, often dispatches one with special knowledge – the adjuster – to separate fact from fiction regarding a claim and obtain information to enable the insurance company to distinguish the valid claim from a claim for which the insurance company is not liable under its policy.

Some policies specifically state that the claimant must use his own judgment in estimating the amount of loss and that the assistance of an insurance adjuster is a “courtesy only” — the claimant must still send “a proof of loss within 60 days after the loss even if the adjuster does not furnish the form or help you complete it.” 44 C.F.R. Pt. 61, App. A(1), § VII(J)(7). [Mertz v. American Family Insurer, Slip Copy, 2013 WL 6385268 (D.Or.)]

The first person from the insurer that the insured meets when he or she suffers a first party property loss is the adjuster. Hundreds of years ago the claim adjuster was invented to smooth the claims process and be certain that the insured receives the indemnity promised and complete a thorough investigation to avoid fraudulent claims. As a result every modern claims adjuster should know that it is his or her duty to aid the insurer in its obligation to fulfill the promises made by the policy of insurance and assist the insured in presenting his or her claim to the insurer.

An insurance adjuster is a person engaged in the business of insurance. Statutes define an adjuster as one who investigates losses on behalf of an insurer as an independent contractor or an employee of an independent contractor. [Eagle Oil & Gas Co. v. Travelers Property Cas. Co. of America, Slip Copy, 2013 WL 5969920 (N.D.Tex., 2013)]

Although a special relationship exists between an insurer and insured because they are in privity of contract as an individual, the individual insurance adjuster is not in privity with the insureds based on their insurance policy wording. Thus, the employee adjuster does not owe a special duty to the plaintiffs on which the bad faith tort could be based against the adjuster although actions of the adjuster can support a claim of bad faith against the insurer for whom the adjuster works. [Morris v. Mid–Century Ins. Co., Not Reported in F.Supp.2d, 2012 WL 3683540 (S.D.Ind., 2012)] In the absence of privity of contract, an insurance adjuster is not liable to an insured for a failure to settle a claim against an insured. [Dumas v. ACCC Ins. Co., 349 Fed.Appx. 489, 2009 WL 3358479 (C.A.11 (Ga.), 2009)]

An independent insurance adjuster is not liable to an insured for malfeasance when the insurer delegates to the adjuster the responsibility to handle the insured’s claim because the adjuster is not in contractual privity with the insured. (See Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032 (Gruenberg) that held that an insurance adjuster and law firm hired to adjust claim were not liable for bad faith; Sanchez v. Lindsey Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 253, 84 Cal.Rptr.2d 799 ( Sanchez ) where an independent adjuster hired to adjust claim was found to owe no duty to insured.

Imposed on the adjuster is an obligation to investigate the loss, interpret the policy wording, and apply the policy wording to the facts discovered in the investigation. A first party property adjuster must be educated, trained, experienced and ready to help an insured obtain the benefits promised by the insurance policy. The adjuster does not act as an attorney for the insurer. As a result any effort to expand the work-product doctrine to include the work of the insurance adjuster prior to retention of counsel requires a deliberative and participative process to assure a careful balance between advocacy and truthfulness. The routine taking of statements by an insurance adjuster is work in the ordinary course of business which fails to qualify as work product. [Popina v. Rice–Steward, Not Reported in S.E.2d, 86 Va. Cir. 402, 2013 WL 8118663 (Va.Cir.Ct., 2013)]

To do so it is necessary that the adjuster, after being assigned a first notice of loss caused by fire, lightning, windstorm, hail, or any other peril not excluded by a direct risk of loss policy, to complete a thorough investigation, determine if the loss is one for which the insurer promised to provide indemnity, determine if the conditions of the policy have been complied with by the insured, and reach agreement with the insured as to the amount of loss and the amount of claim compensable by the policy.

Zalma Opinion

The adjuster is the most important employee of an insurance company because he or she is the only person a part of the insurer the insured will meet. If the adjuster does not work to fulfill the promises made by the insurance policy the insurer fails and will lose the opportunity to be in the business of insurance profitably.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Is There Coverage for Assaulting Your Employee?

Business Dispute Not Covered by Homeowners

A Homeowners policy provides worldwide liability insurance coverage to the homeowners subject to various exclusions and limitations. In Perry v. Hartford Underwriters Insurance Company, Not Reported in A.3d, 2015 WL 3508099 (Del.Super., 6/3/2015) a physical confrontation between an employer and the person he fired resulted in both a criminal prosecution of the employer and a civil action for the injuries incurred by the ex-employee as a result of the fight.

A Delaware appellate court was asked to resolve a dispute over insurance coverage between Plaintiff, Clarence Perry, and Defendant, Hartford Underwriters Insurance Company (“Hartford”). Upon consideration of Hartford’s motion for summary judgment and Perry’s opposition thereto, the Court made the following findings:

1.     In March 2007, Perry was insured under a personal homeowners insurance policy issued by Hartford. The policy identified 1017 East 13th Street, Wilmington, Delaware as Perry’s residence.

2.     Perry owned and operated a business, Perry Trucking, LLC, from his residence. Perry did not have a commercial insurance policy with Hartford or any other insurance company to insure the business activities of Perry Trucking or losses associated with the business.

3.     Perry employed Robert White as a truck driver. If assigned a job, White used the Perry Trucking dump truck. Although White had a key for the truck, he did not have permission to use the truck for other purposes.

4.     Around 6 o’clock in the morning on March 17, 2007, Perry noticed the Perry Trucking dump truck was not parked in front of his residence. Perry had not assigned White a job for March 17. When Perry confronted White about the missing truck, White admitted that White was using the Perry Trucking dump truck to complete a job unaffiliated with Perry Trucking. When White returned the Perry Trucking dump truck to Perry’s residence on March 17, Perry fired White and attempted to give White his final paycheck. At this point, Perry and White had a verbal and physical altercation.

5.     Perry faced criminal charges for assaulting White. On May 2, 2007, Perry pled guilty to Assault Third Degree, admitting that he “intentionally or recklessly cause[d] physical injury to another person.”

6.     Anticipating a civil lawsuit, on September 17, 2008, Perry submitted a claim with Hartford under Perry’s homeowner’s policy. Perry recited the facts of the March 17 altercation and provided Hartford with a copy of the criminal complaint against Perry alleging assault and battery against White. On September 25, 2008, Hartford denied Perry’s claim for coverage on several grounds, including an exclusion for business activity. Specifically, Hartford claimed that the personal injury suffered by White arose out of dispute related to Perry’s trucking business and was therefore not covered by Perry’s homeowner’s policy.

7.     On October 29, 2008, White filed a civil action against Perry and Perry Trucking alleging intentional and negligent conduct. After a two-day trial, a jury found in favor of White and entered a verdict against Perry and Perry Trucking for $64,100.00. The jury rejected Perry’s self-defense claim.

8.     On October 18, 2013, Perry filed this insurance coverage dispute, claiming Hartford failed to defend and indemnify Perry in connection with the 2008 civil claim by White. On February 18, 2014, Hartford filed a motion for judgment on the pleadings, which the Court denied on March 12, 2014.

9.     On March 30, 2015, after discovery was completed, Hartford filed the pending motion for summary judgment on the grounds that the policy excludes coverage for White’s claim against Perry. According to Hartford, the policy does not provide coverage for Perry’s conduct in the March 17 altercation for several reasons, including an exclusion that applies because Perry’s liability arose from operating a business.

10.     In opposition, Perry maintains that there are genuine issues of material fact which defeat summary judgment. Perry contends that the trier of fact must consider the nature of the personal relationship between the parties and the circumstances that gave rise to the March 17 altercation. Specifically, Perry contends that he and White had been friends before they were business associates.

11.     The Court may grant summary judgment only where the moving party can “show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” The moving party bears the initial burden of proof and, if satisfied, the burden shifts to the non-moving party to show that material issues of fact exist.  The Court must view the facts “in the light most favorable to the non-moving party.”

12.     The Court’s interpretation of the policy is a question of law. Where the language is clear and unambiguous, “parties will be bound by the plain and common meaning of the policy language.”  Here, the parties agree the language of the policy is clear and unambiguous.

13.     The policy excludes personal liability coverage for loss from “ ‘[b]odily injury’ … arising out of or in connection with a ‘business’ conducted from an ‘insured location.’ ”  The policy defines business as a “trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or [a]ny other activity engaged in for money.”

14.     Delaware decisional law defines a business pursuit as a “continuous or regular activity, done for the purpose of earning profit, including part-time or supplemental income activities.” The record is clear, even viewing the facts in the light most favorable to Perry, that the reason White was at Perry’s residence on March 17 was to return the Perry Trucking dump truck and to collect his paycheck.

15.     The Court is satisfied that there is no genuine issue as to any material fact and Hartford is entitled to summary judgment. Perry owned and operated a trucking business on his residence and employed White to drive his dump truck. The policy at issue excludes coverage for the loss arising out of or in connection with a business – Perry Trucking – conducted from an insured location–Perry’s residence. The increased risk associated with operating a business is exactly what Hartford sought to exclude and, indeed, did exclude from coverage under the homeowner’s policy Hartford issued to Perry.

The court concluded that Hartford was entitled to summary judgment as a matter of law.

ZALMA OPINION

The only question I have is why this case was taken to a court of appeal. The insured, instead of just paying off his fired employee, beat him sufficiently that Perry pleaded guilty to the crime of assault, and a jury awarded the ex-employee $64,000 in damages. The court found the fact that there was a business pursuit was sufficient to rule in favor of Hartford. It could also have found no coverage because a criminal assault is an intentional act also excluded. Regardless, the insured must pay the damages from his own assets.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When Does Assault & Battery Exclusion Apply ?

Assault & Battery Exclusion Easy to Prove When Patrons Shot

Places of public accommodation like bars, restaurants and hotels that serve alcoholic beverages are subject to rambunctious customers who may injure innocent customers. Insurers are loathe to insure risks where damage from assault or battery or the use of firearms and usually exclude such causes from an assault, battery or shooting. In Seneca Specialty Ins. Co. v. 845 North, Inc., Slip Copy, 2015 WL 3400415 (M.D.Fla., 5/26/15) an insurer sought to avoid the obligation to defend and indemnify the insured who were alleged to have failed to warn and prevent patrons from being shot by other patrons.

BACKGROUND

Petitioner, Seneca Specialty Insurance Company (Seneca) Petitioned the District Court for the Middle District of Florida, seeking Declaratory Judgment that the insurance policy it issued to  845 North, Inc. (845 North) does not provide coverage for claims arising from a nightclub shooting, including two state court lawsuits filed by Respondents Kimberly Addison (Addison) and Tyler Gomes (Gomes). Both Addison and Gomes alleged that, on September 27, 2013, while at a nightclub owned and operated by 845 North, they were “assaulted and shot on the Defendant’s premises, suffering serious bodily injury and permanent disfigurement.”  Addison and Gomes each assert a single claim of negligence, alleging that 845 North failed to provide adequate security and failed to warn its invitees and the public of the numerous criminal incidents that had previously occurred on its premises.

THE  POLICY

Prior to the shooting incident, Seneca had issued a policy to 845 North. The policy provides general commercial liability coverage for the policy period of December 5, 2012, to December 5, 2013. Of particular relevance are two specific provisions identifying exclusions from the Policy’s coverage. The first provision which is entitled the “Assault, Battery or Assault and Battery Exclusion” states:

“This insurance does not apply to damages or expenses due to “bodily injury”, “property damage” or “personal and advertising injury” arising out of or resulting from: ¶ (1) “Assault”, “Battery” or “Assault and Battery” committed by any person; ¶  (2) The failure to suppress or prevent “Assault”, “Battery” or “Assault and Battery” by any person; ¶ (3) The failure to provide an environment safe from “Assault”, “Battery” or “Assault and Battery”; ¶ (4) The failure to warn of the dangers of the environment which could contribute to “Assault”, “Battery” or “Assault and Battery”(Emphasis added)

The Policy defines “Assault” as either “an act creating an apprehension in another of immediate harmful or offensive contact” or “an attempt to commit a ‘Battery.’ ”  A “Battery,” in turn, “means an act which brings about harmful or offensive contact to another or anything connected to another.”  An “Assault and Battery” is a combination of an “Assault” and a “Battery” as the Policy defines those terms.

The second provision is a weapons exclusion which states,

“This insurance does not apply to ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ arising out of or resulting from the possession, ownership, maintenance, use of or threatened use of a lethal weapon, including but not limited to firearms by any person.” (Weapons Exclusion).

APPLICABLE LAW

Seneca contends that the Assault and Battery and Weapons Exclusions negate any duty to defend or indemnity 845 North as to these claims. Accordingly, in the Petition and the instant Motion, Seneca seeks a judgment declaring that 845 North has no coverage under the Policy as to Gomes and Addison’s claims.

Pursuant to Florida law, interpretation of an insurance policy is a question of law to be decided by the court. In so doing, the court must construe the contract in its entirety, striving to give every provision meaning and effect.

In determining an insurer’s duty to defend, the Court looks solely to the allegations in the underlying complaint(s). The duty arises when the relevant pleadings allege facts that fairly and potentially bring the suit within policy coverage. The duty to indemnify is narrower than the duty to defend because it turns on the actual facts, not the facts as alleged in the complaint.

From the face of both Complaints, Gomes and Addison allege that they were “assaulted and shot” on 845 North’s premises and suffered damages as a result of 845 North’s negligence. The Weapons Exclusion precludes coverage under the Policy for claims that arise out of or result from the use of a lethal weapon. The claims at issue, which stem directly from the alleged shootings, necessarily involved, arose out of, and/or resulted from the use of a lethal weapon. Moreover, in the state court Complaints Gomes and Addison plainly assert that they were “assaulted” and that someone shot them, which is a harmful or offensive touching constituting a battery under the Policy definition.

In considering an “assault” and “battery” exclusion, the court in Evanston Ins. Co. v. S & Q Prop. Inv., LLC, No. 8:11–CV–2121–T–27MAP, 2012 WL 4855537 (M.D.Fla. Oct.11, 2012) explained that a fatal shooting “plainly constituted a battery” such that it precluded insurance coverage even though the underlying action involved a negligence claim for failing to prevent a trespasser from shooting and killing the decedent.

Similarly, in this case, the Policy explicitly excludes claims arising from an assault and battery and based on a failure to prevent an assault, battery or both, such as the ones Gomes and Addison have asserted in the underlying actions. The Court concluded from the pleadings of the underlying state court lawsuits — the Gomes and Addison Complaints — that the Assault and Battery and Weapons Exclusions apply and, therefore, Seneca has no duty to defend 845 North against these claims.

ZALMA OPINION

The decision was an expression of the obvious. When a patron of the insured property is shot and injured the assault and battery and the weapons exclusions applied without question.  Regardless of the seriousness of the injury and the court’s desire to provide indemnity to the injured, there was no way to change a shooting into an accident that was not excluded by the policy.

© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Does Assault & Battery Exclusion Apply ?

New York’s Difficulty With The Tort of Bad Faith

It Takes More than a Refusal to Pay a Claim to Obtain Tort Damages

Insurance companies seldom deny a claim without a reasonable basis for the denial. Regardless, when a claim is denied, the insured feels a need to sue the insurer for both contract and tort of bad faith damages plus punitive damages. New York is not as friendly to insured’s whose claims are denied as other states who are quick to hold insurers to tort damages just because a claim was denied.

Plaintiff Jo–Ann Ripka (“Ripka” or “plaintiff”) sued her insurer, seeking to recover damages from the alleged breach of a homeowner’s insurance policy issued by Peerless Insurance Company (“Peerless”). In Ripka v. Safeco Ins., Slip Copy, 2015 WL 3397961 (N.D.N.Y., 5/26/15) the appellate court was called upon to determine if Ripka stated a viable cause of action.

BACKGROUND

Ripka, a resident of Pulaski, New York, purchased a homeowner’s insurance policy from Peerless (the “Homeowner’s Policy”).

In April 2012, a plumbing leak caused substantial damage to Ripka’s home and its contents. Although plaintiff duly reported the damage in accordance with the Homeowner’s Policy, Peerless initially failed to dispatch any representatives to inspect the damage. Eventually, at plaintiff’s repeated urging, Peerless sent a contractor to “inspect only limited physical damages to the real property.”
Ripka claims that, in her repeated conversations with Peerless’s representatives, each uniformly “claimed the damages were within the scope of coverage and [assured plaintiff she] would be promptly compensated.” However, Peerless allegedly engaged in a series of delaying tactics—continually asking for the same information, switching adjustors without notice, refusing to communicate with plaintiff for long stretches of time, and refusing to inspect the premises—before ultimately failing to “pay the claim in full or tender interest for the unsubstantiated delays in payment.”

DISCUSSION

Ripka’s complaint is hardly a model of clarity. Peerless, for its part, has moved to dismiss Ripka’s: (1) claims for relief pursuant to New York statute 11 N.Y.C.R.R. § 216, arguing New York does not recognize a private right of action under those regulations; (2) claim pursuant to N.Y. Gen. Bus. Law § 349, arguing plaintiff has failed to state a claim under this statute; and (3) claims for recovery of consequential and punitive damages. In other words, Peerless aims to limit the dispute in this case to a relatively straightforward breach of contract claim.

First, insofar as Ripka’s complaint purports to assert any claims for relief under various provisions of 11 N.Y.C.R.R. § 216, Peerless is correct—these claims must be dismissed because the regulations in question, which implement a provision of New York State’s Insurance Law, do not give rise to any private causes of action. It is well settled that no private cause of action exists for a violation of New York Insurance Law § 2601 or for an alleged violation of part 216 of the Insurance law. Accordingly, Peerless’s motion with respect to these claims was granted.

N.Y. Gen. Bus. Law § 349

The appellate court also concluded that Ripka’s claim seeking relief pursuant to § 349 of New York’s General Business Law must also be dismissed.  “To state a cause of action under § 349, a plaintiff must assert (1) the defendant’s deceptive acts were directed at consumers, (2) the acts are misleading in a material way, and (3) the plaintiff has been injured as a result.” PB Americas Inc., 690 F.Supp.2d at 251 (citations and internal quotation marks omitted). Importantly, however, the focus of § 349 cases is whether the alleged deceptive practice was “consumer oriented.”

A defendant cannot be held liable pursuant to § 349 where the disputed private transaction does not have ramifications for the public at large.

The appellate court found that it is clear that Ripka’s claims are based on Peerless’s actions toward her, not on any actions directed more generally toward the public at large. Plaintiff’s complaint rather conclusorily alleges “members of the public at large have been harmed and [i]njured by Defendant’s practices and policies as described in this complaint in that Defendant has unreasonably delayed the claim adjustment process of Plaintiff’s claims, Defendant has unreasonably denied insurance coverage of the Plaintiff’s claims, [d]emanded duplicative information, and irrelevant information in support of Plaintiff’s [c]laims.”

Finding the allegations insufficient to suggest Peerless advertised, marketed, issued, adjusted, settled, or paid out claims under its homeowner’s insurance policies in a way that might be misleading to the public generally. It only alleges claims arising from Peerless’s failure to pay what the Plaintiff claims was her legitimate and reasonable claims in a timely fashion. Accordingly, Peerless’s motion with respect to this claim was granted.

Bad Faith & Consequential Damages

Peerless also argued that Ripka failed to state a cause of action warranting the imposition of consequential damages. Under New York law, consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages “were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.” Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 856 N.Y.S.2d 513, 886 N.E.2d 135, 137 (N.Y.2008).

Ripka alleged that Peerless’s failure to investigate and pay her claim in a timely and good faith manner resulted in various damages, including: (1) “the loss of the monetary amount due from Defendant from the full Value of the Plaintiff’s property”; (2) “the value of certain personal property damages or destroyed during the loss or occurrence”; (3) “the monetary loss of the value and cost to fully clean and restore property damaged by the loss or occurrence”; (4) “various and consequential damages including distress, aggravation and inconvenience”; and (5) “living expenses for household and other expense as well.”

Ripka’s further claim that she suffered “distress, aggravation and inconvenience” as a result of Peerless’s delays and denial, and is therefore entitled to “emotional damages as well as paid [sic ] and suffering,” is also misplaced. Under New York law, damages for emotional distress are unavailable in a breach of contract action, at least in the absence of demonstrable physical injury.

New York does not recognize an independent tort for the bad faith denial of insurance coverage, and Ripka has not offered any other independent tort basis on which to base liability for this alleged mental distress. Allegations that an insurer had no good faith basis for denying coverage are redundant to a cause of action for breach of contract based on the denial of coverage, and do not give rise to an independent tort cause of action, regardless of the insertion of tort language into the pleading.

Ripka’s complaint, which focuses entirely on Peerless’s alleged failure to timely pay her claim under the Homeowner’s Policy, fails to plausibly allege that Peerless’s conduct is actionable as an independent tort, that its actions were so “morally reprehensible” as to imply “criminal indifference,” or even how, beyond conclusory assertions of public harm, Peerless’s actions were part of a pattern directed at the general public. Rather, plaintiff’s complaint is focused only on a private insurance dispute over the proper payment of a claim under the Homeowner’s Policy.

ZALMA OPINION

New York has refused to enter the stampede to adopt the tort of bad faith. It does not, willy nilly, allow an insured whose claim is denied to seek, in addition to contract damages, tort and punitive damages from the insurer who had the temerity to deny a claim. I have written here often about the fact that insurers are being abused by practitioners of the tort of bad faith and it is time it is rejected as much as possible across the United States.  Limitations like that imposed by New York law are more than sufficient to deter wrongful conduct by insurers. If the tort of bad faith survives litigants will destroy the insurance industry. Only lawyers profit from the tort of bad faith. Doing away with the tort will free up hundreds of courtrooms a day to deal with important civil and criminal matters.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on New York’s Difficulty With The Tort of Bad Faith

Does Breach of Warranty Void Insurance Coverage?

Strict Compliance With Marine Insurance Warranty is Required

Marine insurance contains warranties – promises by the insured for future conduct on which the policy relies – and if breached would cause the policy to be void. Such warranties are usually strictly construed because the policy would not have been issued but for the warranty.

In Guam Indus. Services, Inc. v. Zurich American Ins. Co., — F.3d —-, 2015 WL 3449891 (C.A.9 (Guam) 6/1/2015) the sinking of a dry dock, loaded with barrels of oil, during a typhoon on Guam was underwritten with a warranty requiring a Navy certification, which was tested by an appeal to the Ninth Circuit

Guam Industrial Services, Inc. (“Guam Industrial”) owned the dry dock. At the time of the sinking, one of its insurance policies covered damage to the dock. After the dock sank, Guam Industrial filed a claim under each policy. The insurers denied the claims, and Guam Industrial brought suit. The district court granted summary judgment for the insurers, finding that the first policy was voidable because Guam Industrial had failed to maintain the warranty on the dock.

BACKGROUND

Guam Industrial owned and operated a dry dock called the Machinist, located in Apra Harbor, Guam. The dry dock sank on January 2, 2011. Guam Industrial had insured the dry dock under two policies: a Hull and Machinery Policy, which was underwritten collectively by Zurich American Insurance Company (“Zurich”) and Starr Indemnity and Liability Company (“Starr”), and an Ocean Marine Policy, which was underwritten by Zurich alone.

The Hull and Machinery Policy covered damage to the dry dock resulting from certain specified “perils” that included lightning, earthquake, pirates, assailing thieves, and various types of accidents and malfunctions. As a condition of coverage, the policy required Guam Industrial to obtain and maintain Navy Certification for the dry dock (“the Navy Certification warranty”). Such certification ensures that the dock has satisfied a certain level of structural integrity. It is the highest standard in the industry.

Guam Industrial never obtained Navy Certification. Instead, Guam Industrial obtained “commercial” certification from a company called Heger Dry Dock, Inc. In October 2010, that commercial certification expired. Heger Dry Dock informed Guam Industrial that it would not renew the certification unless Guam Industrial undertook significant repairs. Guam Industrial then took the dry dock out of commission to conduct these repairs. The dock sank while it was undergoing the repairs.

Guam Industrial then filed a claim under the Hull and Machinery Policy with Zurich and Starr. The insurers denied the claim on the basis of the breach of the warranty that required it to obtain Navy Certification.

The district court granted summary judgment in favor of Zurich and Starr. It concluded that the Hull and Machinery Policy did not provide coverage because Guam Industrial had breached the Navy Certification warranty. The court rejected Guam Industrial’s position that Zurich and Starr had to demonstrate that the breach caused the sinking of the dry dock because applicable law required strict compliance with certification requirements.

HULL AND MACHINERY POLICY AND THE LACK OF CERTIFICATION

The Hull and Machinery Policy covering damage to the dry dock was underwritten by both Zurich and Starr, and required, as a condition of coverage, that Guam Industrial obtain and maintain Navy Certification for the dry dock. Guam Industrial breached the warranty because the dry dock was never Navy Certified.

Ultimately, whether derived from federal admiralty law or state law, the Ninth Circuit concluded that the law requires strict compliance with marine insurance policy warranties, even when the breach of the warranty did not cause the loss. Applying that law to these facts, there is no question that Guam Industrial failed to comply with the Navy Certification warranty.

Guam Industrial contends that the insurers waived their right to demand strict compliance with the Navy Certification warranty because they had accepted commercial certification. The Ninth Circuit concluded that summary judgment in favor of the insurers was proper because even if the insurers had waived the insistence on Navy Certification, for which there was no evidence, the dry dock lacked even commercial certification when it sank.

ZALMA OPINION

Warranties in Marine Insurance are the essence of Marine Insurance and are considered the foundation upon which the policy of insurance was built. In this case the insurers required a Navy Certification of the dry dock as a condition of writing the insurance. The insured never had a Navy Certification nor, at the time of the loss, any certification at all. As a result the policy was void at the time of the loss and the insured had no right to indemnity under the policy.  Warranties, in other than marine insurance, are also strictly construed but not as strictly as in marine insurance because some states have enacted statutes limiting the effectiveness of an insurance warranty.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Does Breach of Warranty Void Insurance Coverage?

When Is a Landslide a Fire?

Ninth Circuit Finds Fire To Be Direct Cause of Landslide that Destroyed House

Those of us who live in the western United States see wildfires on a regular basis. Fire is a named peril and is covered by a simple fire policy and by a homeowners or commercial property policy. Landslides and mudslides that follow wildfires because the fire burned off the vegetation that would hold the soil in place after a rain are excluded as surface water, mudflow or landslide.   Most prudent homeowners who live in areas subject to wildfires also purchase flood insurance to cover the risk of loss by mudflow after a fire burns off the local watershed.

In Stankova v. Metropolitan Property and Cas. Ins. Co., — F.3d —-, 2015 WL 3429395 (C.A.9 (Ariz.) 5/29/15) the Stankovas, as insureds, sued their insurer in state court against their homeowner’s insurer who had denied coverage under a homeowners policy exclusion after flooding and mudslides in the area destroyed their home one month after a wildfire destroyed all the vegetation on a nearby hillside. They claimed that the cause of the loss was not the mudflow but the fire that denuded the hillside and was the proximate cause of their loss.

Following removal, the United States District Court for the District of Arizona, granted summary judgment in favor of the insurer seeing that the house was not burned and was destroyed by mud. The insureds appealed.

FACTS

The Stankovas’ home and its garage were insured under a homeowner’s insurance policy issued by Metropolitan Property and Casualty Insurance Company (“Metropolitan”). The policy provided coverage for “sudden and accidental direct physical loss or damage” by “Fire or Lightning” as a covered peril. Plaintiffs’ homeowner’s policy covered damage directly caused by fire, and excluded damages caused by flooding or earth movement.

In 2011, there was a massive wildfire, the “Wallow Fire,” in the area near the Stankovas house.  The fire itself consumed the Stankovas detached garage on June 13, but did not reach the house. Metropolitan paid for the loss of the garage. The wildfire also destroyed all the vegetation on a nearby hillside. On August 6, 2011, a month after the wildfire was put out, there was a mudslide on the hillside. The mudslide and runoff water destroyed the Stankovas house.

The Stankovas sought coverage under the homeowner’s policy first for the destruction of the garage and later for the destruction of the home. Metropolitan agreed to cover the loss of the garage but denied coverage for the loss of the home. Metropolitan informed the Stankovas that it was denying coverage because the damage was due to flood water and earth movement, both of which were explicitly excluded from coverage under the policy. Stankova contested this determination, arguing that fire was the actual and proximate cause of the loss.

The case the parties discuss that is factually closest to this case is Howell v. State Farm Fire & Cas. Co., 218 Cal.App.3d 1446, 267 Cal.Rptr. 708 (1990). There, a wildfire occurred near the insured’s property in summer; when winter and heavy rains came, a landslide occurred and damaged the property. The policy at issue provided coverage for fire damage but not water or earth movement damage. The insurer denied coverage on that basis, and the insured successfully appealed, with the court holding that the landslide likely would not have occurred if there had not been a fire, and that therefore the fire was the “efficient proximate cause” of the loss.

Arizona has not adopted the doctrine of “efficient proximate cause” in deciding issues of causation in insurance disputes. See Millar v. State Farm Fire & Cas. Co., 167 Ariz. 93, 804 P.2d 822, 826 (Ariz.Ct.App.1990). However, the underlying policy coverage issue in Millar was not related to direct loss caused by fire damage. Nevertheless, the fact that Arizona has not adopted the efficient proximate cause doctrine is a principal reason the district court granted summary judgment for Metropolitan, so we must look closely at Arizona law.

Arizona requires, by statute, that all fire insurance policies conform to a standard policy, which is based on New York’s standard fire policy of 1943.  If a policy conflicts with the provisions in the standard policy, the standard policy provisions govern. The standard fire policy states that an insurer will provide coverage against all direct loss by fire, lightning and by removal from premises endangered by the perils insured against in this policy.

The key question under Arizona law is then whether the mudslide that damaged Stankova’s house was “directly” caused by fire. Stankova argues that the mudslide was directly caused by the fire, and that therefore the damage to her home is covered under the policy. Metropolitan argues that Stankova’s insurance policy unambiguously excludes water damage and earth movement and asserts that the fire was not a direct cause of the damage to Stankova’s house.

Fire insurance is intended to cover every loss, damage, or injury proximately caused by fire. The Ninth Circuit also believes that it also covers every loss necessarily following directly and immediately from such peril or from the surrounding circumstances, the operation and influence of which could not be avoided.  Under the definition of direct and proximate cause adopted by Arizona, it is possible that the fire directly caused Stankova’s loss in an unbroken sequence and connection between the wildfire and the destruction of the house.  A reasonable fact finder could conclude that the destruction of the house was caused by the fire, which likely caused the mudslide, the operation and influence of which could not be avoided.

Thus, although an efficient proximate cause analysis is not appropriate under Arizona law, we need not apply that doctrine in order to find that the damage here could have been directly and proximately caused by the wildfire.

There is no doubt that Metropolitan attempted to limit its coverage with its anti-concurrent causation provision. However, this provision is inconsistent with Arizona’s standard fire insurance policy, which insures against all direct loss by fire. We know of no case that would allow Metropolitan to contract out of the standard fire policy’s purpose so as to exclude coverage for this type of direct loss from fire.

There is a triable issue as to whether the fire directly caused the destruction of Stankova’s home. The district court’s grant of summary judgment was reversed and the case remanded for trial or further proceedings.

ZALMA OPINION

I believe a reasonable trier of fact would find the direct cause of loss was landslide and mudflow, two causes specifically excluded, much easier than finding the direct cause of the loss was fire since there is no way to determine that the mud would not have flowed but for the fire. This is not a finding that fire caused the damage. It is only a finding that a reasonable jury might find that it is the cause of loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Is a Landslide a Fire?

The Amount of Fraud Influences Sentence

Zalma’s Insurance Fraud Letter

June 1, 2015

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

The current issue of ZIFL reports on:

1.    How Big Was the Fraud
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Guilty of Arson-For-Profit But Avoids Reverse Bad Faith
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Misrepresentations Concerning Theft Claim Voids Coverage
6.    Webinar: “Set-Up of Insurer Bad Faith, Defense of Bad Faith Suits and “Reverse Bad Faith” Claims: Insurer v. Policyholder Perspectives
7.    Something Different – Bimbo Commits Fraud
8.    The Need to Keep Politicians Out of the Insurance Business.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    May a Lender Force Place Insurance? –  May 29, 2015
2.    Speculative Conflict & The Right to Independent Counsel – May 28, 2015
3.    Webinar by Barry Zalma – May 27, 2015
4.    Is an Insurer Obligated to Pay For Coverage Not Requested? – May 27, 2015
5.    What Are the Insurance Obligations of a Condo Unit Owner? – May 26, 2015
6.    An Important Tool – The Examination Under Oath – May 25, 2015
7.    Are Intentional Acts Insurable? – May 22, 2015
8.    Is The Car an Innocent Bystander to Road Rage? – May 21, 2015
9.    Can a Person Be a Member of a Household Living in a Separate Structure? – May 21, 2015
10.    Arson-For-Profit Must Repay Insurer – May 20, 2015
11.    Does the AIA Construction Contract Avoid Litigation? – May 19, 2015
12.    When a Customer Is Not a Customer – May 18, 2015
13.    What Happens When State Formed Insurer Acts in Bad Faith? – May 18, 2015
14.    Murder For Insurance – May 15, 2015
15.    When Are Intentional Acts Also Accidental? – May 14, 2015
16.    Is It Time to Reconsider the Notice-Prejudice Rule? – May 13, 2015
17.    Free Claims Magazine Subscription – May 12, 2015
18.    California SIU Regulations – May 12, 2015
19.    Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer – May 11, 2015
20.    How to Avoid the Tort of Bad Faith – May 9, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on The Amount of Fraud Influences Sentence

May a Lender Force Place Insurance?

 Profits, Commissions & Force Placed Insurance

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

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on May a Lender Force Place Insurance?

Speculative Conflict & The Right to Independent Counsel

Construction Defect Suit Defended Under Reservation of Rights

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

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

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

FACTUAL  BACKGROUND

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

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

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

DISCUSSION

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

The Eighth Cause of Action

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Speculative Conflict & The Right to Independent Counsel

Webinar by Barry Zalma

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

Attend Live Online Training Only

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

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

Why Should You Attend:

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

Areas Covered in the Webinar:

  • The tort of bad faith and why it was created.
  • How the tort of bad faith grew from payment of an excess verdict to multi-million punitive damage judgments.
  • The methods used to set up an insurer for claims of bad faith.
  • The appropriate responses to an attempt to set up the insurer for a claim of the tort of bad faith.
  • The type of evidence available to prove the insurer was set up.
  • How to convince courts that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.
  • The defences available to insurers who are charged with the tort of bad faith.

Who Will Benefit:

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

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

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

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

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

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

Sign up here.

Posted in Zalma on Insurance | Comments Off on Webinar by Barry Zalma

Is an Insurer Obligated to Pay For Coverage Not Requested?

You Only Get What You Pay For

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

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

BACKGROUND

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

ANALYSIS

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

Breach of Fiduciary Duty

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

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

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

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

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

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

Negligent Procurement of Insurance

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

Constructive Fraud/Negligent Misrepresentation

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

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

Negligent Underwriting

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is an Insurer Obligated to Pay For Coverage Not Requested?

What Are the Insurance Obligations of a Condo Unit Owner?

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

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

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

FACTS

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

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

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

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

LAW AND ANALYSIS

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What Are the Insurance Obligations of a Condo Unit Owner?

An Important Tool – The Examination Under Oath

 False Answer at EUO Is Fraud

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on An Important Tool – The Examination Under Oath

Are Intentional Acts Insurable?

Intentional Acts and Insurance

“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22] As a result an intentional or intended action that causes damage to a third party is not available to defend or indemnify an insured since an  intentional and known event is not insurable.

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

FACTUAL BACKGROUND

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

The Insurance Policy

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

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

Mr. Baccouche’s Lawsuit

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

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

Defendant’s Investigation and Denial of Plaintiff’s Claim

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

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

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

DISCUSSION

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Are Intentional Acts Insurable?

Is The Car an Innocent Bystander to Road Rage?

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

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

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

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

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

ANALYSIS

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is The Car an Innocent Bystander to Road Rage?

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

What the Heck Is Curtilage?

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can a Person Be a Member of a Household Living in a Separate Structure?

Arson-For-Profit Must Repay Insurer

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

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

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

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

FACTS

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

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

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

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

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

CAN THE INSURER MAINTAIN A REVERSE BAD FAITH ACTION?

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

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

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

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

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

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

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

ZALMA OPINION

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

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Does the AIA Construction Contract Avoid Litigation?

Insured May Effectively Waive Subrogation

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

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

FACTS

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

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

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

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

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

Discussion and Decision

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

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

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

CONCLUSION

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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When a Customer Is Not a Customer

Bankers’ Bond Requires Loss to Bank’s Customer

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

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

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

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

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

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

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

(3)  the party must consent; and

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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What Happens When State Formed Insurer Acts in Bad Faith?

First Party Bad Faith Creature of Statute in Florida

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

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

BACKGROUND

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

Specifically, Perdido Sun claimed that Citizens

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

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What Happens When State Formed Insurer Acts in Bad Faith?

Murder For Insurance

Zalma’s Insurance Fraud Letter

May 15, 2015

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

The current issue of ZIFL reports on:

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

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITERThe Zalma Insurance Claims Library

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

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When Are Intentional Acts Also Accidental?

When Herbicides Destroy Crops Litigation Follows

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

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

BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

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

CONCLUSION

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Are Intentional Acts Also Accidental?

Is It Time to Reconsider the Notice-Prejudice Rule?

Insured’s Inaction Defeats Coverage

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

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

FACTS

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

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

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

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

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

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

ANALYSIS

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

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

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

ZALMA OPINION

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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Free Claims Magazine Subscription

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

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California SIU Regulations

The Minimum Standards for Dealing With Potential Insurance Fraud in California

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

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

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

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

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

The SIU Regulations

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

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

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

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

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

Fraud Division

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

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

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

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

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

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

Statutory Duty To Report Fraud

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on California SIU Regulations

Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer

Serious Injuries Not Enough To Get UIM

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

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

FACTS

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

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

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

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

THE POLICY

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer

How to Avoid the Tort of Bad Faith

You Need a Professional Claims Staff

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

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

A PROFESSIONAL CLAIMS STAFF

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

A professional claims staff must include people who:

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

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Avoid the Tort of Bad Faith

I Spoke On Avoiding Bad Faith

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

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

Have a great weekend.

Posted in Zalma on Insurance | Comments Off on I Spoke On Avoiding Bad Faith

Policy Definition Controls

The Reason for Non Owned Auto Provisions

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

FACTS

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

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

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

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

THE MOTIONS FOR SUMMARY JUDGMENT

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Policy Definition Controls

What is Needed to Prove You are an Insured

To be Insured Party Must Fit Definitions in Policy

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

The appeal was dismissed.

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What is Needed to Prove You are an Insured

Can Defendant Depose Plaintiff’s Counsel?

Lawyer As Witness

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

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

STANDARD

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

DISCUSSION

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can Defendant Depose Plaintiff’s Counsel?

Conflict Stays Declaratory Relief

Whisky Infringement & Declaratory Relief

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

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Conflict Stays Declaratory Relief

Advertising Injury Coverage Does Not Cover Breach of Contract

There Must Be Alleged or Actual Advertising Injury to Require Defense

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

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

FACTUAL BACKGROUND

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

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

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

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

BLACKSTONE’S INSURANCE POLICY

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

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

DISCUSSION

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

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

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

Advertising Injury In Commercial General Liability Policies

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

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

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

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

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

These three elements have been recognized and applied in Maryland.

THE CAUSAL CONNECTION REQUIREMENT

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

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

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

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

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

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

RMG’S UNJUST ENRICHMENT COUNT

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

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

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

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

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

ZALMA OPINION

When I wrote about the lower court decision I said:

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

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

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Advertising Injury Coverage Does Not Cover Breach of Contract

Why Insurance Fraud Succeeds

Zalma’s Insurance Fraud Letter

May 1, 2015

Happy Law Day – Celebrate the Magna Carta

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Why Insurance Fraud Succeeds

Extrinsic Evidence Eliminates Duty to Defend

Intentional Pollution Not Covered

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

FACTUAL BACKGROUND

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

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

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

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

Coverage Dispute

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

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

DISCUSSION

Duty to Defend

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Extrinsic Evidence Eliminates Duty to Defend

Subrogation

Injured Parties Owe Fiduciary Duty to Health Insurer

Automobile Accident Leads to Settlement, Insurance Payments

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Subrogation

A “Heads I Win, Tails You Lose” Story

Help, My House Is Falling Into The Sea

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

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

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

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

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

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

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

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

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

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

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

After completing its investigation, with the advice of counsel, the insurer did the following:

1.    It advised the insured that the policy was rescinded from its inception because of the concealment of a material fact. The insured had concealed the fact of the landslide. With notice the insurer returned the $9,375.00 premium.

2.    It advised the insured that even if it had not rescinded the policy it would have denied his claim as one that was not fortuitous. Its investigation showed that the landslide had started before the inception of the policy. It further advised the insured that the loss in progress rule barred any recovery.

3.    The insurer recommended that the insured present his claim, if he still wished to pursue it, to the insurer who insured him a against earth movement at the time of the loss.
The insurer, reasonably concluded that although the loss was progressive and continuous it was fairly certain that a loss had occurred on or before the insured learned of the landslide.

Of course, the insured did not have earth movement insurance at the time of the notice and bought the insurance from the surplus line insurer in an attempt to recover for the loss that had already occurred.

The insured, if asked, would testify that he had no intent to defraud his insurer. He would testify that the insurer, if it had asked him, would have been told the truth. All he was doing was taking an economic advantage over a lazy insurer who did not bother to ask. What the lawyer/insured would have said sounds reasonable. It wasn’t true. He knew of a material fact that would affect the decision of his insurer to insure him. He concealed that fact from the insurer. He intended to conceal the fact from the insurer. Had the insurer known the truth it would not have issued a policy for a loss that was in progress. The insured attempted a fraud. His action in fraudulently getting an earth movement policy was reprehensible. His actions in buying the earth movement policy were no less a fraud than if he set the house aflame and made claim on his fire insurance.

Insurance is, as the lawyer should have known at the time: “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

“Concealment” is defined by California Insurance Code Section 330 as “[n]eglect to communicate that which a party knows, and ought to communicate.” In addition, section 332 states: “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.” Therefore, the insured was actively failing to comply with the public policy stated in the California Insurance Code since the facts were within the insureds knowledge and material to the contract.

As a lawyer the intentional concealment of a material fact with the intent to deceive an insurer to its detriment is fraud and grounds for disbarment. For that reason the insured accepted the denial and did nothing further about the claim.

Had the insurer not done the minimum investigation and retained the services of a competent engineer it would have paid the $2,500,000.00 claim.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on A “Heads I Win, Tails You Lose” Story

Diminution

Is There a Right to Diminution In Value After Repairs

This is an excerpt from my e-book Diminution in Value Damages available at http://www.zalma.com/zalmabooks.htm.

 

Since the Georgia Supreme Court decided Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) I have written several articles concerning the right to recover damages for diminution of value of property even after the damaged property is repaired.

The subject caused concern to the insurance industry, every person insured with a policy of insurance that promised to pay only the cost to repair or replace the property with material of like kind and quality, appraisers, adjusters, and lawyers.

Because of the apparent confusion I created an e-book to more thoroughly review how the United States deals with questions of diminution in value. It covers each of the fifty states of the United States, the District of Columbia, the 12 federal Circuit Courts of Appeal and the U.S. Supreme Court and how they dealt with the issue of establishing the amount of loss to property.

It also covers in detail how each of the jurisdictions dealt with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how much tortfeasors, or their insurers, must pay to those whose property is damaged by their actions.

Since insurance was invented in ancient Sumeria when insurance policies were written on clay tablets, insurers and their insureds have struggled with establishing a fair method to properly and fairly compensate the person insured for the property lost or damaged as a result of a peril insured against. Since insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event, the key question to be answered is how much is needed to indemnify the person insured? The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court said: “Indemnity means an obligation to make good a loss…” Although, on its face, calculating indemnity seems to be a simple task, as the cases in this E-Book are reviewed the reader should be in a position to understand why diminution in value is a concept that has given litigants, insurers and courts serious problems and what seems to be a constant deluge of litigation.

That few jurisdictions agree on methodology and proper computation of damages justify this exercise.

The measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury.  The measure is often difficult to determine. The measure seldom fits into a hard rule of thumb. Every possible means of providing complete indemnity is required when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.

The courts of the various states and federal jurisdictions do not use identical rules to calculate the proper measure of damages. To understand the issue and to apply the proper remedy requires an understanding of how each state applies, what it believes to be, the proper measure of damages for tort, for contract breaches and for insurance claims situations. Although each court should reach the result of true indemnity the same way diversity of opinion is the rule rather than the exception.

For example, automobile insurance policies usually promise to pay the insured, when an automobile is damaged by collision or some other insured cause, the costs to repair the vehicle or if unrepairable, the actual cash value of the vehicle. Most policies say nothing about the difference in value of a vehicle that is repaired after an accident. Because the policies were silent and only promised repair or actual cash value, insurers decided it was unnecessary to even mention the difference in value before the accident and the value after repairs. Since no promise was made to pay for more than actual cash value or the cost of repair the issue was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).  Mabry caused serious concern among insurers. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired. Insurers believed this decision was a judicial rewriting of the wording of the policy and generated suits across the country seeking recovery for diminution of value in suits against insurers and third-party-defendants.

Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass repair of diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policies wording that establishes that the insurer does not intend to, nor will it, pay for diminution of value.

When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repair. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired. The resale value most likely will be less than that for a comparable automobile that has not been damaged. In other words, the damage results in a reduction — or “diminution”— in the resale value of the automobile. On the other hand, when real property is repaired replacing old material with new the resale value of the real property is often increased. No one, however, has suggested that the insurer or tortfeasor is entitled to a reduction in its payment for repair because the insured profits from the repair and is not, therefore, truly indemnified.

When the property is insured, the insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s automobile or it may arise from a first-party claim against the insured’s own physical damage coverage. The key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by state insurance departments, and the holding of the various courts.

With regard to first-party claims by a person insured against an insurer, while it is perhaps arguable, the ISO contract language — specifically the Limit of Liability condition — appears to cover only the actual cash value  of the damage or the actual cost to repair the damage, some states require payment of additional sums to indemnify the owner for loss in value. Although there is nothing in the policy wording that even appears to contractually cover any reduction in market value, some courts require that the insurer pay extra. Even if the insured could prove the amount of reduction in value collecting from an insurer should require a change in the policy wording.

The policy usually allows the insurer to deduct for “betterment” or depreciation, although the burden of proof is on the insurer to demonstrate such depreciation or betterment.  In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but will not compensate the insured for a reduction in value due to the same accident.

Third-party claims (claims against an insured person for damages done to the property of some third person) for “diminution of value,” on the other hand, have generally been found by the courts to be covered by auto insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in value of the property before the loss and the value of the property after the loss.

For example, Texas court cases have found that legal liability for third-party damages includes diminution of value. However, no single measure of damages can serve in every case to adequately compensate an injured party. For the award of damages to be fair, recognizing that diminution of value is not always accurate, an award of restoration damages, according to some courts, must be available to compensate a plaintiff fully for damages to property when diminution in value fails to provide an adequate remedy.

The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value, unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.  If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the  amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.

There is a disparity between the various states on the subject. Some apply the rules strictly, some apply the general rule of fairness while others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims. The following is a review of how the various states deal with the issue of the proper measure of damages to achieve complete indemnity.
In this book, by including the full text of the court decisions, the issue of diminution  of value damages, is covered thoroughly for every state of the United States and all federal jurisdictions.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Diminution

Is a Liability Policy a First Party Policy?

Unambiguous Statute Must Be Interpreted as Written

Insurance parlance defines the first party as the person insured, the second party as the insurer and the third party as a person who claims injury as a result of actions of the first party. First party insurance causes the second party to pay indemnity to the person insured. Third party insurance pays to defend and indemnify its insured against claims of negligence causing injury to a third party who receives the payment. The state of Washington instituted a statute called the Insurance Fair Conduct Act (IFCA) which allows insured’s, harmed by the unfair conduct in a first party claim, to obtain punitive damages from their insurers.

In King County v. Travelers Indem. Co., Slip Copy, 2015 WL 1867098 (W.D.Wash., 4/23/15) the U.S. District Court for the Western District of Washington was asked to resolve a claim by King County for defense and indemnity coverage provided by insurer defendants and for violations of the IFCA. The defendants moved to dismiss only the IFCA claim.

BACKGROUND

Plaintiff King County claimed defense and indemnity coverage under third-party liability policies issued by multiple insurer Defendants for costs arising from Plaintiff’s defense associated with the cleanup of two superfund sites in the county. Plaintiff filed its original complaint on December 23, 2014; on February 5, 2015 (before any answers had been filed), Plaintiff amended its complaint to allege violations of the IFCA.

ANALYSIS

Defendants assert that, as a matter of law, Plaintiff cannot state a claim under IFCA arising from demands for insurance coverage under a third-party liability insurance policy. The District Court has twice addressed this issue (Cox v. Continental Casualty Co., C13–2288MJP, 2014 WL 2011238, 2014 WL 2560433; and Central Puget Sound Regional Trans. Authority v. Lexington Ins. Co., C14–778MJP, 2014 WL 5859321) and twice determined that “IFCA … applies only to first-party insurance.”

Plaintiff attempts a third bite at this apple, arguing that preceding proponents of its position have failed to present to the Court the legislative history of IFCA which the County alleges supports its position. Plaintiff asserts that this Court must follow Washington’s principles of statutory construction, and that those principles direct the Court to employ statutory construction to carry out the intent and purpose of the Legislature.

While Plaintiff urges the Court to consider IFCA’s legislative history in accord with Washington principles of statutory construction, it fails to place those principles in context. The Washington Supreme Court counseled that resort to the tools of statutory construction only under certain circumstances.

In determining the meaning of a statute, the court must apply the general principles of statutory construction. These principles begin with the premise that if a statute is plain and unambiguous, its meaning must be derived from the language of the statute itself. Ambiguity exists if the language of a statute is susceptible to more than one reasonable interpretation. If a statute is ambiguous, resort to the tools of statutory construction is appropriate. A finding of ambiguity must precede any inquiry into legislative intent.

A cause of action arises under IFCA when “[a]ny first party claimant to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.” [RCW 48.30.015] The statute defines “first party claimant” as “an individual, corporation, association, partnership or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.” (emphasis added) [RCW 48.30.015(4)]

The Court saw no ambiguity in the language of the statute or the statutory definition of who may assert an IFCA claim. The Washington Supreme Court has defined “first-party insurance” as any policy that pays specified benefits directly to the insured when a determinable contingency occurs, allowing an insured to make her own personal claim for payment against her insurer. The statute defines “first party claimant” narrowly, in a way that applies only to first-party insurance.

The County points to no ambiguity in the language of the statute and the Court found none. In the absence of any ambiguity, the meaning of IFCA must be derived from the language of the statute itself.

Neither will the Court adopt Plaintiff’s argument that public policy should be allowed to dictate the meaning of the statute. Punitive damages such as those levied under IFCA are, as a rule, contrary to public policy. Brown v. MHN Gov’t Serv., Inc., 178 Wn.2d 258, 277 (2013). Further, Washington adheres to the principle of statutory construction [that] statutes in derogation of the common law must be construed narrowly.

As it has previously, the Court declines to adopt the expansive reading of IFCA propounded by Plaintiff.

CONCLUSION

“First party claimant” as used in IFCA does not apply to an insured with a third-party insurance contract, and thus Plaintiff’s IFCA cause of action in its amended complaint must be DISMISSED as to all defendants. Because there is no further amendment possible which could remedy this defect, the dismissal of the IFCA claim will be with prejudice.

ZALMA OPINION

It is interesting that although the punitive damages are contrary to the public policy of the state of Washington it still enacted the IFCA. The court made clear that, as a result, the application of the IFCA must be narrowly construed to limit its application to first party policies and claims of the first party. Plaintiffs, after failing to stretch the statute by court rulings should give up and lobby the state Legislature to change the statute if it believes such a change is worthwhile.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is a Liability Policy a First Party Policy?

Applicant has Duty to Tell The Truth

Lawyer Applying For Insurance Should Never Lie to the Insurer

The covenant of good faith and fair dealing implied in every contract of insurance requires that neither party should misrepresent or conceal material facts from the other to deprive the deceived party from receiving the benefits of the contract of insurance.

Chicago Insurance Company (Chicago), a professional liability insurer sued its insured, the law firm, Paulson & Nace, PLLC (Paulson), and their client, seeking declaratory judgment that it had no duty to defend or indemnify Paulson in an underlying legal malpractice lawsuit. The United States District Court for the District of Columbia entered summary judgment in Chicago’s favor, and defendants appealed to the DC Circuit in Chicago Ins. Co. v. Paulson & Nace, PLLC, — F.3d —-, 2015 WL 1782273 (C.A.D.C., 4/21/2015).

FACTS

Paulson was engaged to bring a medical malpractice action on behalf of a young woman who had become paralyzed after surgery. Roughly a year and a half after the engagement, shortly before the statute of limitations was about to run, the firm filed a complaint in Virginia state court. The original suit was dismissed without prejudice for failure to correctly caption a pleading. A second complaint was filed with the correct caption but was dismissed with prejudice for filing outside the statute of limitations.

THE DISPUTE

The insurance coverage dispute at the heart of this appeal turns on whether, at the time the law firm applied for its new policy, the firm was on notice that it had committed a breach of professional conduct, or otherwise should have foreseen that the dismissals could give rise to a legal malpractice claim.

On July 18, 2007, while the state court appeal was still pending, the firm’s sole member, Barry J. Nace, applied for a new insurance policy with Chicago Insurance Company. Nace was asked whether there were “any circumstances which may result in a claim being made against [his] firm.” Despite the recent dismissal of Gilbert’s claims, Nace responded “no.”
Chicago Insurance subsequently issued a “claims-made” liability insurance policy—that is, coverage for all claims made within the policy period, regardless of when the events giving rise to the claim occurred. But the policy also contained a standard known risk exclusion, meaning pre-policy conduct would not be covered if the firm had a reasonable basis “to believe that the [firm] had breached a professional duty” prior to the policy’s issuance or to otherwise foresee that pre-policy conduct might result in a claim against the firm.

Paulson eventually informed Chicago Insurance of the Gilbert incident, though it represented that the potential malpractice had occurred in 2008, not 2006. Shortly thereafter, Chicago Insurance provided Paulson with an attorney, who submitted relevant case files and other materials to Chicago Insurance throughout 2010 and 2011. In November 2011, the insurance company noticed that Paulson had made the caption error in 2006—prior to the policy period. On January 13, 2012, Chicago Insurance notified Paulson that it reserved its rights to deny coverage under the known risk exclusion if a malpractice suit arose.

Ms. Gilbert eventually filed a legal malpractice action against the law firm in March 2012, and she was awarded $1,750,000 by a Virginia court in 2013. Chicago Insurance brought this declaratory judgment action premised on diversity jurisdiction, contending that Paulson should have known of the potential claim when it applied for the insurance policy and that the known risk exclusion therefore applied. The District Court granted summary judgment in favor of Chicago Insurance. Chicago Ins. Co. v. Paulson & Nace, PLLC, 37 F.Supp.3d 281 (D.D.C.2014). Paulson & Nace appeals.

ANALYSIS

The principal question in this case is whether a reasonable attorney in Paulson’s position would have been on notice by July 2007 of a possible breach of professional duty or a potential malpractice claim, such that there was an obligation to disclose the underlying incident to the insurer.  This question is appropriate for summary judgment only if a reasonable jury can draw but one inference and that inference points unerringly to the conclusion that the insured has not acted reasonably under the circumstances

The DC District agreed with the District Court that no reasonable jury could have found against Chicago Insurance on this question. It is undisputed that Paulson was aware that the first complaint was improperly captioned, as evidenced by its attempt to correct the error in October 2006 and by the dismissal of the complaint on the basis of the captioning error in February 2007. It also is undisputed that Paulson knew that its attempt to correct the error had failed at the trial level, and that Ms. Gilbert’s claims were going to be dismissed with prejudice.

Under such circumstances—that is, where an attorney is aware that he committed a procedural error that resulted in an unfavorable outcome—there is no triable question with respect to a lawyer’s duty to inform his insurer of the potential claim. The dismissal of a lawsuit because of attorney error would clearly put a lawyer on notice of the possibility of a malpractice claim.

Paulson claimed that expert testimony should have been required to determine what a reasonable attorney might have foreseen. It is true that expert testimony is routinely required in legal malpractice actions where lay jurors are ill-equipped to evaluate the merits of an attorney’s strategic decisions. But no expert testimony is required if an attorney’s lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.

The Virginia state court did all the expert legal work needed here in dismissing the cases based on Paulson’s procedural error prior to decision on the merits. Nothing more than this dismissal with prejudice—which can be explained to a jury through lay testimony and court records—was needed to establish that Gilbert’s legal malpractice claim was reasonably foreseeable.

In fact, Paulson initially informed Chicago Insurance that the alleged malpractice occurred within the policy period and it never expressly alerted the insurer to its error. Chicago Insurance was under no duty during the preliminary stages of the claim process to sift and verify the information provided by Paulson.  An insurer generally has the right to rely on statements made in an insurance application; the insurer need not conduct an independent investigation unless it has reason to doubt the statements.

For the foregoing reasons, Chicago Insurance was entitled to summary judgment in this case and the District Court’s decision awarding summary judgment in its favor was affirmed.

ZALMA OPINION

When Mr. Nace, after having a medical malpractice case dismissed because of a procedural error and a new complaint dismissed because it was filed after expiration of the statute of limitations on a suit he had a year and a half to file, answered “no” to the question about potential claims, was either intentionally deceptive or simply ignorant. The lie on the application will cost his law firm $1,750,000 plus interest without insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Applicant has Duty to Tell The Truth

Unfair Trial Tactics Require Retrial

Can A Party Mention Insurance In a Tort Case?

Under any court system it is difficult to attain a true and just result even under the most favorable conditions because of the frailty of man and his subjectivity to various prejudices and other influences that may warp his judgment in attempting to attain the ultimate truth in a given factual situation. When either party to a cause, whether deliberately or inadvertently, of improper influence in a jury trial is a distinct disservice to the administration of justice. Lawyers, as officers of the courts, and the courts, on their own motion if need be, must be ever vigilant to see that no such influence creeps into the proceedings in even the slightest degree because it will subvert the noble purpose of the court system to provide justice under law.

In Kochalka v. Bourgeois, — So.3d —-, 2015 WL 1809568 (Fla.App. 2 Dist., 4/22/15) the Florida Court of Appeal was faced with a trial verdict based on the alleged subversion of justice.

FACTS

Bonnie Kochalka challenged the final judgment entered in favor of Appellee Lyndse Bourgeois in an automobile negligence action and the prevailing party cost judgment entered against her in the same case. Ms. Bourgeois sued Ms. Kochalka for injuries she claimed to have sustained when Ms. Kochalka rear-ended her car while it was stopped at an ice cream shop’s drive-through window. In the appeal from the final judgment, Ms. Kochalka asserts that the trial court erred in refusing to excuse a prospective juror for cause; that it improperly excluded opinion testimony of her only expert witness; and that Ms. Bourgeois improperly informed the jury about Ms. Kochalka’s liability insurance.

FAILURE TO EXCUSE A PROSPECTIVE JUROR FOR CAUSE

During jury selection, Ms. Kochalka’s counsel asked the prospective jury panel if anyone had any life experiences that they thought they could not put aside when considering this case. He offered the prospective jurors an analogy in which he stated that if someone feared snakes, it would be very difficult for them to put that fear aside and be forced to pick up two snakes. Prospective juror Bonfe immediately raised her hand and discussed a prior bad experience she had with the judicial system.

Counsel then moved on to discussions with other prospective jurors, and eventually asked her to explain that life experience, and she described how she no longer believes in the jury system at all.

The test for juror competency includes not only the question of whether the juror can lay aside any bias or prejudice toward the parties but also whether the juror can render a verdict based solely on the evidence presented and the instructions on the law given by the court. When assessing that issue, the trial court must excuse a prospective juror for cause if any reasonable doubt exists regarding his or her ability to render an impartial verdict.

Errors in jury selection are per se errors requiring a new trial.

EXCLUSION OF MS. KOCHALKA’S EXPERT’S OPINION

One of Ms. Bourgeois’ claimed injuries was a torn meniscus in her knee. She claimed that it happened when she struck her kneecap on the dashboard during the accident. Ms. Kochalka had an orthopedic surgeon who was prepared to testify that from an orthopedic standpoint that was not possible. In order for the meniscus to tear, there had to be a rotational or twisting injury, not a blunt force one.

Ms. Bourgeois successfully kept that testimony from the jury’s consideration by arguing that it was a biomechanical opinion—which as an orthopedic surgeon he was unqualified to provide—not a medical opinion. Ms. Kochalka correctly argued the doctor was doing nothing more than engaging in a differential diagnosis analysis and identifying—or in this case eliminating—a potential cause of the injury. The Court of Appeal agreed with Ms. Kochalka’s characterization of the doctor’s testimony. Therefore, it was error for the trial court to exclude the doctor’s opinion as improper biomechanical testimony.

REFERENCES TO INSURANCE

During voir dire, Ms. Bourgeois’ counsel asked the panel members about their prior involvement with accidents and lawsuits. When one potential juror stated that he had been in an auto accident, counsel discussed with him the fact that he hired an attorney, made a claim, and ultimately obtained a settlement. He then asked about the liability insurance.

At that point Ms. Kochalka’s counsel objected and moved to strike the panel, stating at a sidebar conference: “Why are we asking who the carrier was? The carrier is not involved in this case. That’s twice he’s done it. That’s trying to inject that there is insurance involved in this case.” The trial judge asked Ms. Borgeois’ counsel why he was asking that question, and he responded: “I was just trying to see if it was the same as the carrier in this one.” The judge sustained the objection and instructed counsel to stop referencing insurance but denied the motion to strike the panel.

During the evidentiary portion of the case, Ms. Bourgeois described the accident, and then referenced the fact that Ms. Kochalka did have insurance, stating: “She asked if we were okay. You know, she just wanted to-she apologized. She did apologize, and then we exchanged insurance information. We had called the police station, but because it was in a parking lot they don’t come to that scene. So after exchanging information we all left.”

Ms. Kochalka once again objected and moved for a mistrial. The judge reserved ruling at that time but ultimately denied relief on that issue post-trial. For the purposes of remand, we remind the parties and the trial court that in a negligence case the potential existence or amount of a defendant’s insurance coverage has no bearing on the issues and should not be revealed to the jury. See, e.g., Beta Eta House Corp. of Tallahassee v. Gregory, 237 So.2d 163, 165 (Fla.1970) (“The existence or amount of insurance coverage has no bearing on the issues of liability and damages, and such evidence should not be considered by the jury.”). The injection of any insurance issues into the case, whether deliberate or inadvertent, is improper and creates grounds for a mistrial.

ZALMA OPINION

Insurance is an important risk avoidance tool that is purchased to protect the person insured against liability for his or her negligence. However, when a jury learns that a party defendant is insured and may not need to pay a judgment out of the defendant’s pocket, they will be more generous to the plaintiff. Since the existence of insurance has nothing to do with the liability or damages issues it should never be mentioned.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Unfair Trial Tactics Require Retrial

How To Determine Who’s On First

Primary v. Excess Determined by Contract

Construction contracts are, among other things, risk transfer devices. The owner transfers its risk of lost to the general contractor and the sub-contractors, the contractors and sub-contractors transfer the risk to their sub-contractors and all try to transfer the risk to their various insurers by forcing each contractor and sub-contractor to make the owner and contractors into additional insureds. As a result, the parties often dispute, which insurer is primary and which is excess.

In Liberty Ins. Corp. v. Admiral Ins. Co., Slip Copy, 2015 WL 1757136 (N.D.N.Y., 4/17/15) multiple parties and multiple insurers asked a New York Appellate court to determine who was on first.

BACKGROUND

A. The Underlying Actions

On or about October 21, 2013, Kevin Harrington (“Harrington”) commenced an action entitled Kevin Harrington v. State University Construction Fund, Christa Construction, LLC, and Schenectady Steel Co. Inc. Harrington commenced a separate action in the New York Court of Claims, entitled Kevin Harrington v. The State of New York and State University of New York College at Oneonta. Admiral and Liberty seek a declaratory judgment determining whether Liberty has a co-primary duty to defend and indemnify Christa Construction LLC (“Christa”), the State University of New York Construction Fund (“the Fund”), the State of New York (“the State”), and the State University of New York College at Oneonta (“SUNY Oneonta”) in Harrington’s State Court and Court of Claims actions (“the underlying actions”), by virtue of an endorsement in Liberty’s Commercial General Liability (“CGL”) policy.

DISCUSSION

The only issue before the Court was whether Liberty has a co-primary duty to defend Christa, the Fund, the State, and SUNY Oneonta in the underlying actions.

Under New York law, an insurance policy which contemplates contribution with other policies or does not by the language used negate that possibility must contribute ratably with a similar policy, but must be exhausted before a policy which clearly states in its conditions that it is intended to be excess over other excess policies.

The general rule of ratable contribution is inapplicable if it would effectively deny and clearly distort the plain meaning of the terms of the policies.  The purpose of the exception to the general rule, requires New York courts to construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.

Item 11 in the Liberty Endorsement (“Item 11”) includes an other insurance provision that states that the Liberty Policy: “shall be excess over any other insurance available to the additional insured, whether such insurance is on an excess, contingent or primary basis, unless the written agreement with you requires that the insurance provided for the additional insured be primary concurrent or primary non-contributory, in comparison to the additional insured’s own policy or policies.” This provision thus provides that the Liberty Policy is excess as to the additional insureds unless an exception is triggered by a written agreement as described.

The language “the written agreement with you” in the Liberty Policy refers to a written agreement by Schenectady to procure additional insurance coverage.  The Schenectady contract, where Schenectady agreed to obtain coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds, triggered the exception in the other insurance provision of Item 11, because Exhibit C of the Schenectady contract specifies that Schenectady’s coverage for the additional insureds will be on a primary and non-contributing basis.

Liberty asserted that the phrase “in comparison to the additional insured’s own policy or policies” (“the ‘in comparison’ clause”), means that when the exception is triggered, the Liberty Policy would only be primary to the additional insureds’ own policies. Liberty defines “own policies” as policies where the additional insureds under the Liberty Policy are named insureds. Under Liberty’s interpretation, Liberty could be a primary insurer as to “the Fund’s, C[h]rista’s, the State’s, or SUNY’s own policies[,]” but not as to Capital’s policy with Admiral, where Christa, the Fund, the State, and SUNY Oneonta are all additional insureds.

When a court is called upon to resolve a dispute over insurance coverage, it must first look to the language of the policy. The court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect. The Court found that Admiral’s interpretation of the Item 11 other insurance provision would render the “in comparison” clause superfluous, because Liberty would have a primary duty to defend and indemnify in any instance where a written agreement required that the policy holder’s insurance would be primary non-contributory as to the additional insureds’ own policy.

If Liberty’s policy was primary as to all policies available to the additional insured when the exception applied, then the “in comparison” clause would serve no purpose.

On the other hand, Liberty’s interpretation does not disregard or “fail[ ] to give effect to that portion of the Liberty Policy Other Insurance provision stating ‘unless the written agreement with you requires that the insurance provided for the additional insured[s] be primary concurrent or primary non-contributory” (“the ‘unless’ clause”), as Admiral argues. If the Liberty Policy additional insureds were named insureds under the Admiral Policy, Liberty would be a co-primary insurer with Admiral, and the “unless” clause would give Liberty a duty to defend and indemnify the named insured. However, as Christa, the Fund, the State, and SUNY Oneonta are all additional insureds on the Admiral Policy, the “in comparison” clause functions as a limitation on the “unless” clause, leaving Liberty as the excess insurer, and Admiral as the sole primary insurer.

As a result the appellate court concluded that when a dispute arises involving the terms of an insurance contract, New York insurance law provides that ‘an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract.

Admiral’s “PRIMARY/NON–CONTRIBUTING INSURANCE ENDORSEMENT” is evidence of Admiral’s intent to provide the sole primary insurance coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds. In contrast, the Liberty Endorsement is evidence that establishes that Liberty and Schenectady’s intent was that Liberty be an excess insurer as to the additional insureds, except in comparison to their own policies. Further, the Capital Subcontract establishes Schenectady’s and Capital’s intent to make Admiral’s policy primary “on a noncontributory basis before any other insurance.”

If the Court declared Admiral and Liberty co-primary insurers for these additional insureds, it would negate the bargained-for contractual expectation that the endorsements signified. It refused to change the agreed upon contract terms.

ZALMA OPINION

People involved in complex construction agreements must carefully write the construction contract terms to effectively transfer risk and the insurers involved in insuring those risks must carefully write their contracts of insurance, and additional insured provisions, to limit their exposure before there is a loss. It is improper and usually ineffective to attempt to change the wording of the policy by litigation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on How To Determine Who’s On First

Can an Insurer Limit Coverage as It Pleases?

Insurer Has Unquestioned Right to Set Terms of Insurance Contract

Insurers have the unquestioned right to select whom it will insure and the risks it is willing to take as long as the contract is clear, unambiguous and not in violation of public policy. In Byoung Suk An v. Victoria Fire & Cas. Co., — A.3d —-, 2015 WL 1743163 (Pa.Super. 4/28/26) 2015 PA Super 84 a policy that limited coverage to the “named driver only” was upheld by the trial court and Appellant, Byoung Suk An, appealed.

FACTS

Suk An sued Matthew Gilmore (“Gilmore”) and Walker. In the underlying complaint, Suk An alleged he was injured in a motor vehicle accident on March 20, 2011, which involved a vehicle owned by Walker and operated by Gilmore. At the time of the alleged accident, the motor vehicle owned by Walker was insured under a Pennsylvania Personal Automobile Policy (“Policy”) underwritten by Victoria Fire and Casualty Company (“Victoria”). The Policy did not provide liability coverage for any person not listed as a named driver on the Policy. Walker was the sole driver listed on the Policy.

Suk An sued Victoria for declaratory judgment seeking a declaration by the court that Victoria had a duty to defend and provide insurance coverage to Walker and Gilmore for all claims arising out of the alleged motor vehicle accident.

The trial court entered an order denying Suk An’s motion for summary judgment, and a separate order granting Victoria’s motion for summary judgment, thereby dismissing Suk An’s action for declaratory judgment. Suk An timely appealed.

THE APPEAL

Suk An argued that the trial court committed an error of law when the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to the “named driver exclusion” of the Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa.C.S. § 1718(c)(2), and is therefore invalid. He also claimed that the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to public policy in Pennsylvania, and is therefore invalid?

ANALYSIS

A reviewing court may disturb the order of the trial court only where it is established that the court committed an error of law or abused its discretion. The rule governing summary judgment in Pennsylvania, like all other jurisdictions, states that where there is no genuine issue of material fact and the moving party is entitled to relief as a matter of law, summary judgment may be entered.

The trial court concluded that section 1718(c) refers to “named driver exclusion” policies which exclude a particular driver, as opposed to the situation presented in the Policy currently at issue, where only the named driver is provided coverage. Suk An contends that Victoria’s “named driver only” coverage impermissibly expands the legislature’s exclusion outlined in section 1718(c) to include “any person not listed as an insured on your policy” without requiring that the first named insured request that the person be excluded from coverage, or a determination as to whether the excluded person is insured on another policy of motor vehicle liability insurance.

The interpretation of an insurance policy is a question of law for the court. In interpreting the language of an insurance policy, the goal is “to ascertain the intent of the parties as manifested by the language of the written instrument.”  When analyzing a policy, words of common usage are to be construed in their natural, plain, and ordinary sense. When the language of the insurance contract is clear and unambiguous, a court is required to give effect to that language.  A “named driver exclusion” prohibits coverage for a person named in the policy while the Victoria policy excluded coverage for any driver not listed on the policy.

That Application Walker signed when he obtained the policy, included the following statement:

APPLICANT’S STATEMENT—READ BEFORE SIGNING WARNING

“PLEASE NOTE: In order for us to offer you this low cost Lite product, your policy contains a number of coverage restrictions. This policy will not provide coverage when the driver of your auto is not listed on the policy. This policy will not provide coverage when you are driving a vehicle other than those listed on the Declaration page. Automatic coverage for a newly acquired auto is also restricted to 72 hours after the purchase or lease of that auto.” (Emphasis added)

Walker was the only driver identified on the Application. Based on the Application, Victoria issued the Policy to Walker. The Policy,  emphasizing the statement in the application, included the following statement: “PLEASE NOTE: IN ORDER FOR U.S. TO OFFER YOU THIS LOW–COST EXPRESS PRODUCT, YOUR POLICY CONTAINS A NUMBER OF COVERAGE RESTRICTIONS. THIS POLICY WILL NOT PROVIDE COVERAGE WHEN THE DRIVER OF YOUR AUTO IS NOT LISTED ON THE POLICY.”

Clearly, Victoria advised Walker that the coverage only applied when he was driving the vehicle identified in the policy. The appellate court concluded, therefore, that the Policy at issue does not conflict with, nor is it contrary to, section 1718(c), as alleged by Suk An. Rather, section 1718(c) is inapplicable to the Policy in this case since it did not deal with a “driver only” policy.

If the court accepted Suk An’s argument to its logical end, pursuant to ection 1718(c)(2), an insurer would not be liable for damages caused by any (and every) driver only if any (and every) driver was 1) specifically excluded by the named insured and 2) was insured under another policy. The court concluded that such a requirement is absurd.  The court concluded that section 1718(c) is inapplicable to the Policy at issue in this case and the policy language is clear and unambiguous in limiting coverage only to the named driver.

Suk An next argues that the “named driver only” Policy at issue in this case conflicts with, and is contrary to, public policy in Pennsylvania, and is therefore invalid.

Public policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest. As the term “public policy” is vague, there must be found definite indications in the law of the sovereignty to justify the invalidation of a contract as contrary to that policy. In the absence of a plain indication of that policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy.

Our Supreme Court had the opportunity to address public policy concerns arising from the interpretation of automobile insurance policies in Progressive Northern Ins. Co. v. Schneck, 813 A.2d 828 (Pa.2002). The insured in Schneck had named her husband as an excluded driver pursuant to section 1718(c)(2) because he had a suspended driver’s license. In recognizing the exclusion as being consistent with public policy, the Court stated that: “The overarching public policy of the Motor Vehicle Financial Responsibility Law (MVFRL) is concern over the increasing cost of insurance premiums … [t]his public policy is exemplified by 75 Pa.C.S. § 1718(c), which permits named driver exclusions. These exclusions are designed by insurers to avoid covering someone with a bad driving record or in a high-risk category … since the premium for such coverage would be exceedingly high.”

The provision of low-cost, affordable policies in return for motor vehicle liability coverage of only the named driver, and the concomitant risk reduction, does not violate public policy. Any determination that such a cost saving policy is against public policy must be left to the legislature. In the absence of a plain indication of dominant public policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy and should be content to await legislative action.

ZALMA OPINION

Although empathy rests with the injured person he is not without a remedy. He can make claim on his uninsured motorist coverage or can continue with his suit against the tortfeasors and execute on their assets. No matter how sad or severe Suk An’s injuries his injuries are not a basis for changing the terms and conditions of a limited contract of insurance created properly.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Can an Insurer Limit Coverage as It Pleases?

ISO Files Most Important Homeowners Change in 40 Years

When is Your Home Not Where You Reside?

I thank my friend, Bill Wilson, CPCU, ARM, Associate Vice President, the Big I, who kidly gave me permission to reprint his article from the Big “I” Virtual University Newsletter. Unlike everything else in this blog, I did not write the following article, it was written by Bill Wilson and is posted here because it is so important to those of us involved in insurance and homeowners insurance.

Abstract

In 2001, we learned of a potentially catastrophic coverage gap in most homeowners policies. For the past 14 years, we have written about this and discussed it in seminars and webinars across the country. For the past 10 years, we have worked with ISO through our national Technical Affairs Committee in negotiating a resolution to this problem that all affected parties can live with. This effort has culminated in the recently filed ISO changes addressed in this article.

Background

Fourteen years ago, in the March 16, 2001 edition of our (The Big I) Virtual University VUpoint newsletter (Vol. 2, No. 6), we published what I believe was our first article on what would later become known as the “Where You Reside” homeowners insurance issue. That article was followed by several more related articles emphasizing the importance of a potentially catastrophic coverage gap in most homeowners policies we reviewed. In order to bring the issue to focus, in October 2009 we combined all of the articles into a white paper and presented a countrywide webinar on December 3, 2009. Both the white paper and webinar are linked from the Where You Reside page in the “Featured Resources” area of the VU.

In the meantime, in 2005, our national Technical Affairs Committee presented this issue to ISO in our annual meeting with them. For 10 years, we pursued a remedy for ISO HO forms in this forum and at the Mid-America Insurance Conference via a series of points and counterpoints until, in November 2014, we were able to reach a negotiated agreement on changes to ISO’s Homeowners program that we all could live with. Neither viewpoint “won” but we believe the resolution is workable and a starting point for further evolution and tempering of this homeowners issue.

The countrywide ISO filings effecting this change have been made with an effective date in most states of October 1, 2015. The forms changes include a new mandatory endorsement, an optional broadening endorsement, and a nonfiled notice/questionnaire form. The purpose of this article is to provide an overview of the issue and the purpose of the ISO filings. We will also identify several caveats and preview several initiatives we plan to undertake this year.

Loss Examples

Consider the following scenarios:

A homeowner is confined to a nursing home and then learns she will never be able to return home. Her home remains fully furnished, but she no longer lives there and will not be able to return. According to one interpretation by a number of adjusters and courts, at the instant she learns that she will not be able to return to her home, her residency ends and so does the coverage on her dwelling. If it is destroyed overnight by a covered peril, she has no coverage for the damage to her home, the largest asset she owns and one she would probably need to sell in order to afford the costs of long term nursing home care.

  •  You sell your existing home and buy or build another home. Your new home is ready and the purchasers of your old home have qualified for a loan that will be closed in 5 days. In the meantime, you move to your new residence which you have insured on a new HO policy and you allow the purchasers to begin painting, replacing carpeting, etc. in your old home. Your existing HO policy remains in force on your old house until the closing. Unfortunately, a tornado strikes the day before the closing and the adjuster denies the claim because you no longer reside in the home.
  •  You purchase a “fixer-upper” and place homeowners coverage effective on the date of closing. You plan to move into the home in 28 days after your contractor son completes some renovations (hardwood floors, new kitchen countertops and appliances, bathroom remodeling, etc.). Three days after the closing, a fire breaks out overnight causing $186,000 in damage to the dwelling. When the adjuster learns that you have not yet moved into the home, he denies the claim based on a lack of residency, citing three court cases in your state upholding such claim denials.

These are not hypothetical situations. In our original white paper on this issue, we identify over a dozen scenarios where residency may end during the policy term. We also cite a similar number of court cases that have considered this coverage scenario. Some courts overruled the claim denials, but a slight majority of decisions that we have identified have agreed with the interpretation that the end of residency ends the coverage on the dwelling. In addition, based on real-life claims submitted through the VU “Ask an Expert” service or directly by member agents, we are aware of at least a dozen claim denials:

  •  Total loss while insured was in a nursing home (KY)
  • $100,000+ condo rental claim (FL)
  • 5-figure loss while home was being remodeled (AZ)
  • $186,000 renovation claim (GA)
  • $150,000 ten-month house rental (FL)
  • $135,000 four-year house rental (FL)
  • $123,000 two-year house rental (FL)
  • $300,000 “nonclaim” with daughter occupancy (NY)
  • $229,000 total loss with niece occupancy (MN)
  • Small fire loss (NC)
  • Fire loss with daughter’s temporary occupancy (PA)
  • Fire loss while house was undergoing renovation (RI)

The Problem: Three Little Words

  •  Using the ISO HO-3 policy as a model form, this is the language being cited in the claim denials we’ve heard about and most of those in the court cases we’ve reviewed:

HO Insuring Agreement:
“We cover…The dwelling on the residence premises shown in the Declarations….”

HO Definitions:
“’Residence premises’ means…The one family dwelling where ‘you’ reside….”

The basis for these denials is the premise that the insured (“you”) must reside in the dwelling in order for coverage to apply. According to this interpretation of the “residence premises” policy definition, if a “you” (named insured or resident spouse) doesn’t reside in the dwelling at the time of loss, the dwelling is not a “residence premises” and, if it’s not a “residence premises,” then the insurer does not cover, under the insuring agreement, the dwelling because it’s not on the “residence premises.”

The “where you reside” language was not in ISO’s 1976 HO policies, nor was its addition to the 1984 edition mentioned in that filing. The language has been in subsequent ISO HO forms in 1991, 2000, and 2011. Our research also indicates that this language is common in most non-ISO HO forms in the marketplace, though not all policies.

For the record, OUR interpretation does not agree with that of a number of adjusters and courts. Numerous courts have held that, to be enforceable, an “exclusion” must be “clear and conspicuous.” We believe that coverage for the primary asset owned by a family should not hinge on three words in a definition referenced from an insuring agreement. There is nothing “clear and conspicuous” about this language that would lead an insured to believe that an interruption of residency would suspend coverage on the dwelling. From the standpoint of public policy, it makes little sense that, if the insured is operating a meth lab and blows up his home, there is coverage under his HO policy, while there is no coverage for a tornado destroying her home the Friday evening an 80-year-old homeowner learns that she will be confined to a nursing home henceforth.

Courts that have found FOR coverage have generally interpreted the “where you reside” language to be “words of description,” not a warranty of occupancy or a condition for coverage. Additional rationales for our continued position on this are outlined in our original white paper. And, for what it’s worth, in a past Property Loss Research Bureau publication, PLRB also took the position that this language does not preclude coverage for damage to a dwelling.

IIABA/ISO Negotiations

The Big “I” national Technical Affairs Committee meets annually with ISO to discuss changes in, or additions to, ISO policy form portfolios that we believe are beneficial to consumers and businesses. Our agendas are typically 150-200 pages. Some of our recommended changes are accepted fairly quickly by ISO, others are declined, and many others are discussed over a period of years before being accepted by ISO or dropped by our committee. In the case of the “where you reside” issue, we considered a number of options over a ten-year period before we reached a compromise with ISO for changes in their HO forms.

The preference of our committee would be the complete elimination of the “where you reside” language, but that was not a resolution ISO could accept. So, unlike Congress, we compromised on a mandatory conditional “grace period” endorsement and an optional endorsement that does eliminate the “where you reside” language. While, from our perspective, this is not a perfect nor ideal solution, it is one that is workable if certain caveats are followed by all parties, as discussed later in this article. In the meantime, let’s examine the changes being made in two new ISO filings – forms and rules – that have a proposed effective date in most states of October 1, 2015, along with a nonfiled notice/questionnaire form.

ISO Filings

ISO has made two countrywide filings:

Forms Filing HO-2015-ORPFR

  • Homeowners Residence Premises Definition Revised; Optional Endorsements Introduced

Rules Filing HO-2015-RRPRU

  • Homeowners Manual Rules Revised

Forms Filing HO-2015-ORPFR

The forms filing includes the following new endorsements:

Mandatory endorsements

  • HO 06 48 10 15 – Residence Premises Definition Endorsement
  • HO 17 48 10 15 – Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 26 10 15 – Residence Premises Definition Endorsement – Mobilehom

Optional endorsements

  • HO 06 49 10 15 – Broadened Residence Premises Definition Endorsement
  • HO 17 47 10 15 – Broadened Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 27 10 15 – Broadened Residence Premises Definition Endorsement – Mobilehome

The three “Residence Premises Definition Endorsements” are mandatory forms…the HO 17 48 is used with the HO 00 06 condo form while the HO 06 48 is used with all other HO forms. The three “Broadened” endorsements are optional forms…the HO 17 47 is used with the HO 00 06 condo form while the HO 06 49 is used with all other HO forms. There are two complementary Mobilehome program endorsements. You can review the endorsements by clicking on the links above.

Mandatory Endorsements

Using an excerpt from the above forms, the mandatory endorsements redefine “residence premises” to mean the “dwelling where you reside…on the inception date of the policy period shown in the Declarations and which is shown as the ‘residence premises’ in the Declarations.” The highlighted language is new and is explained by ISO in the filing as follows [emphasis added]:

These endorsements introduce revised language to more explicitly describe that the residency requirement, when determining coverage applicability, will be satisfied as long as the insured resides at the residence premises on the inception date of the policy period. Currently, depending on insurer claims practices, a policyholder may or may not have coverage when they cease to reside at the residence premises mid-term or at renewal. These revisions will provide coverage through the end of the policy period despite mid-term changes in residency while allowing an insurer the opportunity to confirm residency as part of the renewal underwriting process.

In other words, if the insured resides in the dwelling at the inception of the (new or renewal) policy period, coverage remains in force even if the insured should discontinue residency later in the policy period. This “grace” period lasts throughout the policy term but should be reaffirmed by the carrier on each renewal.

Optional Endorsements

The optional endorsements completely remove the “where you reside” language from the “residence premises” definition for a specified period of time indicated on the endorsement. As we read these new endorsements, they can be used in two ways.

First, the inception and termination dates on the endorsement can be identical to the policy’s inception and termination dates. This is the solution IIABA sought from the beginning. Our position has always been that residency is an eligibility issue, not a coverage issue, and should be dealt with as an underwriting consideration, as it was in the pre-1984 HO forms.

Second, these endorsements can be used to temporarily remove the “where you reside” language during a specified portion of the entire policy term. The best example of this use is when a policy if first issued on a newly built or purchased home. Residency in the home may not take place for several days or a week or more following the closing of a loan. Or, as presented as a scenario at the beginning of this article, the homeowner may wish to spend a month or longer renovating the home…this endorsement could serve to clarify that there is no residency until the renovations are complete.

Rules Filing HO-2015-ORPFR

The rules filing primarily addresses the use of the Broadened endorsements on a “temporary” nonresidency basis, though there’s nothing that appears to preclude that period encompassing the entire policy period if the carrier’s eligibility and underwriting guidelines permit. This filing indicates that the Broadened endorsements, under ISO rules, are premium bearing so that the Base Premium can be increased, for example, by up to 12% (2% per month) for a six-month nonresidency period.

Nonfiled Notice/Questionnaire Form

ISO has also developed the following nonfiled form:

  •  HO N 009 10 15 – Residence Premises Questionnaire

 

This form can be used by carriers on new and renewal business to provide notice to insureds of the importance of residency and, based on the insured’s responses, identify whether the Broadened endorsement is appropriate. We suspect that carriers might prefer a “stronger” notice of the importance of residency and notification of the insurer when residency is discontinued. We plan to work with ACORD in the coming months to draft an ACORD notice/questionnaire form and to determine what changes might be indicated in other ACORD forms such as the ACORD 80 Homeowner Application.

Caveats

As indicated earlier, this resolution is not perfect or exactly what we believe is in the best interest of consumers, agents, and the industry at large. However, it is a reasonable compromise that we believe can serve as a starting point for a more complete market-based solution in the coming year. Still, there are caveats to this change that must be acknowledged.

First, even with a mandatory endorsement, there is still a potential for a coverage gap at policy inception for carriers who interpret the “where you reside” language to be a residency requirement for coverage. For example, on new business it is customary to provide a policy (or, more likely, a binder) effective on the date of the loan closing. However, as is often the case, the insured may not move into the home and begin residency on the date of closing. As a result, for carriers with a restrictive interpretation of “where you reside,” a Broadened endorsement should likely be used at policy inception and the insured made to understand the importance of revising the termination date on the form if move-in takes longer than expected.

Second, since renewals are usually processed a month or two in advance, even with a notice form, it’s possible that an insured might unexpectedly discontinue residency (e.g., medical conditions, unanticipated work relocation, military deployment, etc.) between completing the renewal paperwork and renewal policy inception. Again, it is critical when placing or renewing insureds with carriers that hold to a restrictive interpretation of “where you reside” that the insured fully understand the importance of providing notice of nonresidency. In such instances, then Broadened endorsement may be used until (and if), the account needs to move from a Homeowners to a Dwelling Fire policy.

Third, when we originally presented this issue to ISO for consideration, one of the points we made was our belief that this is an eligibility, not a coverage, issue. We illustrated that with ISO’s own eligibility rules that permit the use of an HO policy on a home under construction. Obviously, no one can reside in a home under construction, so our argument is that a literal reading of the “where you reside” language couldn’t preclude coverage because every unoccupied home under construction would have illusory coverage, something courts have uniformly found to be prohibitive. But, for insurers who hold the restrictive interpretation of “where you reside,” the Broadened endorsement should be attached at inception for the duration of construction.

Next Steps

In the months prior to October 1, we will be approaching ACORD about the need to amend any existing ACORD forms and develop an industry-standard residency “notice” form.

We will be issuing a news release on this change in the near future and making contact with various industry and consumer media. We recommend that agents do the same in their local communities and communicate this change to their customers.

We plan to initiate a dialog with independent agency carriers about adopting the Broadened language that eliminates the “where you reside” language. We continue to believe that the restrictive interpretation of this language is detrimental to consumers and to the image of the insurance industry, and we believe that residency has always been, and should continue to be, an eligibility and underwriting consideration for new and renewal business, not an unclear and inconspicuous “exclusion.”

In order to provide greater detail about this change and to enable Q&A from agencies and carrier staff, we will be holding a FREE live countrywide webinar on July 8, 2015:

“Biggest Homeowners Change in 40 Years Explained”

FREE nationwide webinar

July 8, 2015 – 3:00 – 4:00 p.m. EDT

Click here to register

We are limited to 1,000 internet connections for this broadcast. When we announced the webinar on April 9, three months in advance, we had 50 registrations within two hours. So, we encourage you to register immediately. However, if you are unable to attend or we reach capacity, we do plan on recording the webcast and will publish a link to the archived recording shortly after the live broadcast. In addition, we plan to maintain, if warranted, a Q&A document in our “Where You Reside” web area.

How to learn more…

If this issue is new to you, you can download our original white paper and review our original webinar on the Where You Reside page in the “Featured Resources” area of the VU.

How can you stay abreast of emerging issues and announcements regard this change? Subscribe to our free, biweekly Virtual University newsletter, The VUpoint. This award-winning newsletter is the primary communications vehicle we use to bring emerging, relevant, and urgent insurance coverage issues and developments to your attention. Each issue usually features a personal lines coverage article, a commercial lines coverage article, and a rotating third article on agency management, sales, customer service, or technology. You do not have to be a member agency to subscribe…many of our 10,000 subscribers in 70 countries are company underwriters, adjusters, regulators, risk managers, and defense attorneys.

Bill Wilson, CPCU, ARM is the Assoc. VP of Education & Research for the Independent Insurance Agents & Brokers of America and director of their Virtual University.

Copyright 2015 by the Independent Insurance Agents & Brokers of America. All rights reserved.

Republished with permission.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Comments Off on ISO Files Most Important Homeowners Change in 40 Years

When Has Litigation Gone Too Long?

More on the Dam Case

Some litigation seems to continue forever. When a dam was destroyed by flood in 1997 litigation began between the owners of the dam and their insurer. The litigation has gone through trial, appeal, back to the trial court, trial again, and now motions for reconsideration and clarification. The issue should have been simple:

  1. whether the insured can elect to take only the ACV of the dam; or
  2. full replacement cost if the dam is rebuilt if the insured elects to rebuild;
  3. how long the insured has to complete the rebuild; and
  4. whether the insured is entitled to pre-judgment interest.

FACTUAL BACKGROUND

This case involves a dispute regarding insurance coverage that Sierra Pacific procured from Defendants. Sierra Pacific operates power generation stations in Nevada and California. Defendants insure Sierra Pacific’s facilities, including the Farad Dam on the Truckee River in California (“the Dam”). The Dam was completely destroyed by a flood in 1997, at which point Sierra Pacific filed a claim for damages with Defendants.

Following a three-day bench trial on April 8 to 10, 2008, as well as written briefing and written closing arguments by the parties, the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. [See report at http://zalma.com/blog/a-dam-case/]

On December 5, 2014, the Court affirmed that the ACV of the Dam when it was destroyed was $12,216,600 and awarded prejudgment interest to Sierra Pacific on this amount less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. On December 31, 2014, Defendants filed a Motion to Reconsider, and Sierra Pacific filed a Motion to Clarify. On February 5, 2015, the Court reaffirmed its ruling that prejudgment interest is appropriate in this case. The Court clarified its prior ruling to state that any prejudgment interest should begin to run starting on April 3, 2001, and that Sierra Pacific was at a maximum entitled to prejudgment interest based on the estimated replacement cost of the Dam in 2001, $16,205,303, less reductions described in that Order. The Court held further that its orders on the parties’ motions to amend did not disturb the September 30, 2008, Findings of Fact and Conclusions of Law that the applicable insurance policies “provide Sierra with full replacement cost coverage subject to the sublimit liability for flumes and waterways of $29,000,000 and the sublimit of liability for California locations of $62,000,000.”

On March 5, 2015, Sierra Pacific “reluctantly” filed the present Motion for Further Clarification, asking the Court to confirm that if Sierra Pacific rebuilds or replaces the Dam, it could recover “the actual expenditures incurred by Sierra, up to the policy limits of $29,000,000 (TIV Dams), $62,000,000 (California locations) and an additional $10,000,000 of coverage for Demolition and Increased Costs of Construction (DICC).”

Sierra Pacific also asked the Court to clarify that the time for calculating or computing the actual expenditures incurred is “three years after the conclusion of all litigation, including all appeals.” In its own Motion to Reconsider, Defendants again request that the Court reconsider its ruling granting prejudgment interest to Sierra Pacific, this time arguing that the Court exceeded the scope of the Ninth Circuit’s remand when it granted prejudgment interest on December 5, 2014.

DISCUSSION

The Court found that the law of the case doctrine does not preclude Sierra Pacific from recovering more than $19,800,000 if it decides to rebuild the Dam and costs in good faith exceed that figure.

First, neither this Court nor the Ninth Circuit explicitly decided that the $19,800,000 replacement cost figure constituted an absolute maximum such that Sierra Pacific could not recover if replacement costs exceeded that figure. Second, the Court’s original Findings of Fact and Conclusions of Law found that the estimated replacement cost of the Dam was $19,800,000, but that the insurance policy’s limits were $29,000,000 for flumes and waterways, $62,000,000 for California locations, and $10,000,000 for demolition and increased costs of construction. The Ninth Circuit upheld the $19,800,000 replacement cost figure, and did not disturb the Court’s holding regarding sublimits of liability. Accordingly, the law of the case doctrine does not limit Sierra Pacific’s recovery for rebuilding the Dam to $19,800,000, and the Court reaffirms its finding that the sublimit of liability for flumes and waterways is $29,000,000, the sublimit for California locations is $62,000,000, and the policy provides for a limit of $10,000,000 in demolition and increased costs of construction.
Tolling of Three–Year Period for Rebuilding the Dam

Sierra Pacific requests that the Court clarify that the “period of time for determining the limitation on replacement costs … shall continue for a three-year period after the conclusion of all litigation, including all appeals.” The Court found in the September 30, 2012, Findings of Fact and Conclusions of Law that it was “equitable to extend the two-year time period laid out in the policy to replace Farad for an additional three-year period.” The Ninth Circuit affirmed the finding “that the time limit to rebuild the dam should be three years rather than two years.”  The court added that “the three-year period granted for rebuilding Farad Dam should be tolled until the conclusion of the litigation, including during the pendency of any appeal.” The court also ordered that Sierra Pacific was required to decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.

The Court reaffirmed its decision that if Sierra Pacific elects to rebuild the Dam, it shall have three years to do so after all appeals are resolved, and Sierra Pacific shall inform Defendants whether it will rebuild the Dam or recover its ACV within ninety (90) days of the completion of all appeals.

Defendants’ Motion to Reconsider

Defendants argue for the second time that the Court erred in granting prejudgment interest on amounts to which Sierra Pacific was entitled beginning April 3,
The Ninth Circuit did not decide, explicitly or by necessary implication, whether Sierra Pacific was entitled to prejudgment interest. In addition to requesting recovery under the policy and attorney fees, Sierra Pacific’s original Complaint requests “such other and further relief as this Court deems just and proper.” Thus, the fact that Sierra Pacific did not explicitly request prejudgment interest in its Complaint does not preclude an award of prejudgment interest.

Despite their opportunity to raise this argument twice before, Defendants attempts a third bite at the apple by raising an entirely new argument in this second Motion to Reconsider. The Court denied Defendants’ attempt to reargue the prejudgment interest, noting that motions cannot be used merely to reargue an issue that has already been decided.

Defendants have a complete right of appeal if they believe that the Court’s Order awarding prejudgment interest was in error, but it is improper to repeatedly reargue an issue in motions to reconsider in lieu of a timely appeal.

ZALMA OPINION

When large amounts of money are involved – and this dam case involves many millions – the parties appear to forget the purpose of insurance is to indemnify an insured against damages resulting from certain identified risks of loss for either the ACV of the property destroyed or its full replacement cost as specified in the policy. The parties in this case appear to prefer to litigate than resolve the dispute. Since the court ended its opinion with an invitation to appeal the order it seems this case will continue to keep the lawyers for the parties busy for a long time when they should be working to resolve the dispute.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When Has Litigation Gone Too Long?

Does Extended Reporting Period Extend Claims Made?

Claims Made & Reported Policy Limits Exposure to Loss to a Specific Time

Insurers institute a claims made and reported liability policy to limit their exposure to loss to a specific period of time so that they have no concern for late made or reported claims like those faced by insurers who expose themselves to long tails with an occurrence policy. It allows lower premiums because of the limitation on the period of time the insurer is exposed to potential liability.

Continental Casualty Company (“Continental”) sough summary judgment in Schleusner v. Continental Cas. Co.. Not Reported in F.Supp.3d, 2015 WL 1609202 (D.Mont.), arguing to a district court in Montana that it is not obligated to provide insurance coverage in an underlying state case because notice was not timely given by the insured.

BACKGROUND

The Policy

Continental issued a claims-made-and-reported Real Estate Professional Errors and Omissions Policy (the “Policy”) to RE/MAX Realty Consultants, LLC (“Re/Max”) for the period September 6, 2007, to September 6, 2008. The Policy’s insuring agreement stated that “[a] claim must be first made during the policy period and must be promptly reported to [Continental] in accordance with Section VI, Conditions, paragraph B .”   The Policy defines “claim” as “an oral or written demand received by the Insured for money or services, including a demand alleging personal injury, arising out of an act or omission in the rendering of professional real estate services. The service of suit or the institution of an arbitration proceeding against the Insured will be considered a demand.”

Regarding notice of claims to the insurer, the relevant portion of the Policy states: “[t]he Insured, as a condition precedent to our obligations, must promptly give written notice to us during the policy period or any renewal policy period: ¶ a. of any claim made against the Insured during the policy period; ¶ b. of any notice, advice or threat, whether written or verbal, that any person or organization intends to hold the Insured responsible for any alleged breach of duty or other act or omission. ¶  This condition will not be a barrier to coverage for those Insureds who do not have personal knowledge of a claim or potential claim. However all Insureds must promptly comply with this condition upon obtaining such knowledge.”

FACTUAL BACKGROUND

On June 27, 2008, Re/Max was advised that the Policy was set to expire on September 6. On August 28, 2008, Re/Max received a renewal invoice informing it that coverage under the Policy would terminate on September 6 if Re/Max did not renew it. Re/Max did not renew the Policy. The non-renewal automatically triggered the Policy’s extended reporting period. The automatic extended reporting period will terminate after sixty (60) days.  It also made clear that the “extended reporting period” shall not be construed to be a new Policy and any claim submitted during such period shall otherwise be governed by the terms of the policy.

The Underlying Lawsuit

On April 18, 2008, the Schleusners filed a state court action against Re/Max and one of its real estate agents, alleging damage as a result of Re/Max’s conduct while acting as their real estate agents. The Schleusners’ counsel mailed written notice of the action and a copy of the complaint to Re/Max on November 4, 2008, and Re/Max received this notice on November 5. According to the Schleusners, Judith Wahlberg, the former owner of Re/Max, reviewed the letter and complaint and sent the claim to Continental on November 5, 2008, the same day she received it.

The Schleusners settled their claims against the Re/Max real estate agent in October 2013 and against Re/Max in April 2014. According to the settlement agreements, both Re/Max and its agent confessed to entry of judgment against them in the amount of $2,191,828.90 and assigned their claims for coverage from any insurer to the Schleusners. Judgment was entered accordingly and, on July 31, 2014, the Schleusners sued the insurer.

ANALYSIS

The interpretation of an insurance policy is a question of law. Courts will not rewrite clear and explicit language in an insurance contract. The primary issue before the Court was one of notice. Under Montana law, “a notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company.”

Under claims-made policies, “coverage is determined by claims made within the policy period, regardless of when the events that caused the claim to materialize first occurred. Claims-made policies are further classified as either claims-made or claims-made-and-reported policies. Claims-made policies contain no requirement that the claim be reported by a set date, but in the case of claims-made-and-reported policies, notice is the event that actually triggers coverage and is generally required within the policy period or extended reporting period.

On its face, the Policy  is a claims-made-and-reported policy, conditioning indemnity and defense coverage on claims made during the policy period and reported prior to the expiration of the extended reporting period. Whether the claim was timely made turns on the question of whether the initiation of the lawsuit against Re/Max on April 18, 2008, constituted making a claim or whether a claim was initially made on November 5, 2008, when Re/Max first was made aware of the claim. Continental asserts a “claim” requires that a demand for money or services be received by the insured and it must be received when the Policy is in effect. Pursuant to the plain language of the Policy a claim was made on November 5, 2008, the day Re/Max received notice of the underlying lawsuit.

Next the court found it needed to decide whether a claim made during an extended reporting period, and not during the policy period, is timely.

The Policy defines an extended reporting period as “the period of time after the end of the policy period for reporting claims by reason of an act or omission, which occurred prior to the end of the policy period and is otherwise covered by this Policy.” Additionally, the Policy states, “[a] claim must be first made during the policy period.”

The clear language of these provisions reveal that to trigger coverage, a claim, as defined by the Policy, must be made on the insured within the policy period itself and not during an extended reporting period. The claim was, therefore,  made beyond the policy term.

Because the condition precedent of a timely claim was not met, Continental had no duty to defend or to indemnify in the underlying case because  notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company and the summary judgment was granted in favor of the insurer.

ZALMA OPINION

This is another case where greed and the hope of punitive damages from an insurer trumped good sense. ReMax, unless it was bankrupt or judgment proof, had assets to pay some or all of the judgment.  The reason for a claims made and reported policy is to give the insurer confidence that its exposure to loss is limited in time. There is no long tail. There is no tail at all as there is in an “occurrence” based policy. The insurer in this case was generous and gave the insured an additional sixty days to report a loss that occurred during the policy period. The extended reporting period was just that, it was not an extra sixty days of coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Does Extended Reporting Period Extend Claims Made?

Not Nice To Sue Your Spouse

Defense Required for Cross-Claim In Suit For Injuries to Spouse

Sue Kim (hereinafter Sue) allegedly was injured in a two-car accident that occurred in Pennsylvania disputes arose over insurance coverage. When she was injured Sue was a passenger in an automobile driven by her husband, the defendant Young S. Kim (hereinafter Young). The other vehicle involved in the accident was operated by the defendant Elmer Glick. Sue commenced an action in Pennsylvania against Young, Glick, and Amos R. Beiler, who owned the property at the intersection where the accident occurred.

Glick asserted a cross claim against Young, who is insured by the plaintiff Metropolitan Group Property and Casualty and Insurance Company (hereinafter Metropolitan).
The trial court granted Metropolitan’s motion for summary judgment because of the policy provision and the law that prevented coverage for suits between members of the same family. The trial court denied Glick’s cross motion, and declared that Metropolitan is not obligated to defend and indemnify Young with respect to Sue’s complaint or Glick’s cross claim in the underlying action.

THE STATUTE

Pursuant to Insurance Law § 3420(g), “[i]n the absence of an express provision in an insured’s policy, a carrier is not required to provide insurance coverage for injuries sustained by an insured’s spouse” (State Farm Mut. Auto. Ins. Co. v. Harkins, 30 AD3d 502, 502–503. Insurance Law § 3420(g) “was enacted to prevent the possible fraud and collusion that might arise in actions wherein an injured spouse seeks to recover for injuries resulting from the negligence of an insured spouse” (Matter of General Acc. Ins. Co. v. Elbaum, 236 A.D.2d 472, 473).

In Metropolitan Group Property v. Kim, — N.Y.S.3d —-, 2015 WL 1652319 (N.Y.A.D. 2 Dept.), 2015 N.Y. Slip Op. 03138 the appellate court noted that the chance of fraud and collusion, however, is slight where a passenger-spouse is suing a third-party who brings a claim for relative contribution against a driver-spouse as the recovery of the injured spouse is not dependent upon proving the liability of the driver-spouse.

ANALYSIS

Therefore,the  appellate court concluded that Insurance Law § 3420(g) does not preclude liability insurance coverage on a third-party claim for contribution against an insured (joint tortfeasor) spouse of an injured person.

Here, although Insurance Law § 3420(g) precludes liability insurance coverage of Young vis-vis Sue’s complaint against him in the underlying action, the statute does not preclude coverage of Young with respect to Glick’s cross claim. The language of Metropolitan’s policy endorsement providing coverage for third-party claims should be broadly construed to apply to Glick’s cross claim. Therefore, contrary to Metropolitan’s contention, Metropolitan is required to defend and indemnify Young with respect to Glick’s cross claim in the underlying action.

Accordingly, the appellate court concluded that the trial court should have granted Glick’s cross motion, in effect, for summary judgment declaring that Metropolitan is obligated to defend and indemnify Young with respect to Glick’s cross claim in the underlying action, and denied that branch of Metropolitan’s motion which was, in effect, for summary judgment declaring that it is not so obligated.

ZALMA OPINION

In another brief and to the point decision from the New York appellate courts the decision makes clear that laws that prevent suits between members of the same family to avoid collusion, apply to direct actions, but do not apply to claims for contribution from a third party who is alleged to have injured a spouse. Mr. Kim gets no coverage for the suit by the wife for her injuries but gets coverage for the claim for contribution by one of Mrs. Kim’s suit for her injuries claiming that Mr. Kim contributed to her injury.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | 1 Comment

Zalma’s Insurance Fraud Letter – April 15, 2015

What Is Insurance Fraud?

In this, the Eighth issue of the 19th  year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on April 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Insurance Fraud – Adapted From “The Insurance Fraud Deskbook
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Intent to Commit Insurance Fraud Not a Defense to Burglary.
4.    Kentucky Adds Anti-Fraud Law to Its Statutes
5.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    Why the “Bad Faith” Expert Couldn’t Testify – April 14, 2015
2.    May Insured Lie To Insurer When Applying? – April 13, 2015
3.    May Regulator Exceed Power to Protect Public? – April 10, 2015
4.    A Fictionalized Story of Real Insurance Fraud – April 9, 2015
5.    Broker Need Only Acquire Insurance Requested – April 8, 2015
6.    When Is an Intentionally Set Fire Not Vandalism? – April 7, 2015
7.    What the Heck is an Honorable Engagement Agreement? – April 6, 2015
8.    Emotion Should Never Be Basis of Judgment – April 3, 2015
9.    Is Entrustment Exclusion Enforceable? – April 2, 2015
10.    “Insurance Law” A New Book From Barry Zalma – April 1, 2015
11.    Zalma’s Insurance Fraud Letter – April 1, 2015
12.    False Application For Health Insurance is a Crime In Connecticut – March 31, 2015
13.    Join Me at the 19th Annual America’s Claims Event – March 30, 2015
14.    Can Reinsured Allocate Claims Payments? – March 30, 2015
15.    The Use of the Insurance Examination under Oath – March 27, 2015
16.    Plaintiffs’ Lawyers Need to Understand Insurance – March 26, 2015
17.    Is Drunken Brawl Resulting In Death Covered? – March 25, 2015
18.    MCS-90 Controls – March 24, 2015
19.    Captive Agent Must Use Ordinary Care – March 23, 2015
20.    No Way to Avoid Workers’ Compensation – March 20, 2015

New From the ABA:

The Insurance Fraud Deskbook
by Barry Zalma, Esq., CFE
2014 Paperback, 638 Pages, 7×10
Available from the American Bar Association at http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

NEW FROM NATIONAL UNDERWRITER

“Insurance Law”

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

Today, mold claims are common, but they continue to grow in complexity, involving not only property damage but bodily injury as well. Mold-related lawsuits have dramatically increased over the past few years, and the numbers continue to rise. Coverage requirements—and related issues—can be complicated and confusing.  This resource will remove the complexity and allow the insurer, insured, property owner or developer and their counsel to deal with mold quickly and effectively and, if possible, avoid unnecessary litigation.

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims.

Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation.  If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively.

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

Insurance contracts and clauses are specific in nature—but the manner in which insurance claims are pursued and resolved can be remarkably different.  Mistakes in handling a claim can undermine the outcome—and ultimate value—of the claim itself.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – April 15, 2015

Why the “Bad Faith” Expert Couldn’t Testify

Bifurcated Case Limited to Breach of Contract

Cases seeking damages for the tort of bad faith are often bifurcated so that the jury first is asked to decide if there was a breach of the insurance contract. If the jury finds the contract was breached then the bad faith portion of the trial goes forward. If, however, the jury finds no breach of contract the case is over. By bifurcating the trial the court saves a long and contentious trial and avoids confusing the jury by mingling tort issues with contract issues.

After a ten day trial, a jury agreed with Federal Insurance Company (“Federal”) in an insurance coverage dispute with property owners Jerome and Deborah Tannenbaum. Although the Tannenbaums claimed that strong winds had caused significant damage to their property in Nashville, Tennessee, the jury determined that landslides, which were excluded from policy coverage, were the primary catalyst for the damage, as Federal had contended. The Tannenbaums appealed and the Sixth Circuit Court of Appeal resolved the dispute in Tannenbaum v. Federal Ins. Co., — Fed., Appx. —-, 2015 WL 1543080 (C.A.6 (Tenn., 4/7/15)

FACTS

In August 2009, the Tannenbaums took out a one-year insurance policy from Federal for their property in Nashville, Tennessee. The policy, in relevant part, defines a “covered loss” as including “all risk of physical loss to your house or other property covered … unless stated otherwise or an exclusion applies.” One of the enumerated exclusions to coverage is “earth movement including volcanic eruptions, landslides, mud flows, and the sinking, rising or shifting of land.” Wind damage, on the other hand, is not excluded from coverage.

During the weekend of May 1–2, 2010, storms passed through Tennessee over the Tannenbaums’ property while the Tannenbaums were not present. Although the parties dispute how the damage occurred, both sides agree that the storms damaged the property extensively. The Tannenbaums assert that violent winds caused the damage by uprooting trees and hurling them into the house, a theory which, if true, would entitle them to full coverage for the damage. Federal, on the other hand, through the analysis of its two primary claim adjusters, as well as several experts, concluded that landslides had caused the majority of the damage. The only wind damage Federal found was damage to the roof caused by a single fallen tree. Federal paid the Tannenbaums $58,418.50 for the tree damage caused by the wind, but denied coverage for all remaining damage, since landslide damage was an enumerated exclusion from coverage under the policy.

The Tannenbaums sued Federal in the Circuit Court for Davidson County, Tennessee. The complaint raised four claims: 1) breach of contract; 2) failure to adjust the claim; 3) violations of the Tennessee Consumer Protection Act (“TCPA”); and 4) bad-faith refusal to pay. The district court granted Federal’s motion to bifurcate, dividing the trial into a breach-of-contract phase and a bad-faith phase. The case then proceeded to trial on October 22, 2013, beginning with the breach-of-contract phase.

On the sixth day of the trial of the breach-of-contract claim, the Tannenbaums called their expert, Charles Howarth to the stand, despite the district judge’s previous statement he could only testify in the bad faith portion of the trial. Federal objected, insisting that Howarth was the Tannenbaums’ bad-faith witness and thus his testimony would be irrelevant to the breach-of-contract phase of the trial. The court sustained the objection.

That same day, the jury returned a verdict in favor of Federal on the breach-of-contract claim.

ARGUMENT

The Tannenbaums first argue that the district court erred by excluding testimony from their expert witness during the first phase of the bifurcated trial.

The Tannenbaums contended at trial that even though Charles Howarth would have been their “bad-faith” expert witness had the trial proceeded in just one phase, they had instructed him not to testify about bad-faith issues during the breach-of-contract phase of the bifurcated trial. Howarth, they argued, would have testified about whether Federal had met the applicable standards for adjusting the type of policy the Tannenbaums had purchased..

The report submitted by Howarth to the court outlining his expert opinions, however, is littered with references to “bad-faith.” Although he discusses the industry standards on claim adjustment in the report, these standards merely form the basis for his conclusion that Federal acted in bad-faith throughout the claim adjustment process. The district court had relegated all bad-faith argumentation to the second phase of the trial, if one were needed. The Sixth Circuit concluded that there was no error in postponing the testimony of the Tannenbaums’ bad-faith witness to the bad-faith phase, especially because even the proposed, potentially relevant testimony about industry standards would not have been helpful to the jury.

A trial judge has authority to refuse to give a proposed instruction about permits for reconstruction if insufficient evidence supports it. Athough only a “slim amount” of evidence is required to support a proposed jury instruction, allowing the Tannenbaums’ claim here would strain the definition of “slim.” During a ten day trial, the Tannenbaums can point to at most a handful of, and, more realistically, two, definitive statements about permits in the entire trial transcript.

The Tannenbaums argue finally that the district court erred by not including a jury instruction on resolving ambiguity in insurance contracts. The Tannenbaums proposed an instruction stating that ambiguous language in an insurance policy is always construed against the insurer and in favor of effecting coverage. They argue on appeal that the district court’s decision removed from the jury the question of whether ambiguities in fact existed and, if so, the impact those ambiguities had on coverage for their losses.

Although, in a rush of wishful thinking perhaps, the Tannenbaums argue that the jury might have found certain provisions of the contract ambiguous had the judge instructed them on contract ambiguity, this threshold inquiry is for the judge, not the jury. And the district court never found any provisions of the policy to be ambiguous. The Tannenbaums’ proposed ambiguities are simply complaints about Federal’s application of the policy to their claims disguised as purported problems with the contract language. Thus, even if the jury were the proper avenue for resolving contract ambiguities, the proposed instruction would not have helped the Tannenbaums.

ZALMA OPINION

Since the insurer paid what it owed for windstorm damage and the jury found there was no breach of contract for the remainder of the claim because of the exclusion the purpose of a bifurcated trial was met and the parties were saved from trying the bad faith portion of the trial. The Tannenbaum’s were not happy with the result but, rather than using a bad faith expert to help them get excess damages, they should have invested in an engineer who could have convinced the jury that the damages were caused by wind, not landslide.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Why the “Bad Faith” Expert Couldn’t Testify

May Insured Lie To Insurer When Applying?

Failure to Disclose Involvement With Ponzi Scheme Fatal to Insurance

Many policyholder lawyers forget that the obligation to deal fairly and in good faith in insurance transactions is mutual. The insured owes the duty to the insurer to deal fairly and in good faith and the insurer owes to the insured the duty to deal fairly and in good faith with the insured so that neither deprives the other of the benefits of the policy. In simple language neither should lie to the other.

When a securities firm applied for professional liability insurance, it disclosed one of the customer claims against it, but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. In Crown Capital Securities, L.P. v. Endurance American Specialty Insurance Company, — Cal.Rptr.3d —-, 2015 WL 1607164 (Cal.App. 2 Dist., 4/10/15) the insurer refused to defend the securities firm against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim.

BACKGROUND

On October 26, 2009, investor George Bou–Sliman transmitted a letter to plaintiff and appellant Crown Capital Securities, L.P., (Crown Capital), which letter attached a summary of the Final Report of the Examiner (Bou–Sliman Claim). Bou-Sliman advised Crown Capital that a bankruptcy proceeding established the principal of DBSI, was the operator of a ponzi scheme  and provided a copy of the examiner’s report that contained sad evidence contrary to your plan.

Darol Paulsen, on behalf of Crown Capital, executed an “Application for Professional Liability Insurance” from defendant and respondent Endurance American Specialty Insurance Company (Endurance) for a professional liability insurance policy for work performed by its security broker-dealers and investment advisors. Concerning Crown Capital’s claims experience Paulsen answered that question, “Yes” and disclosed the Bou-Sliman claim.

However, with regard to Question 10 of the application asked, “Is the Applicant (after diligent inquiry of each principal, partner, managing member, director or officer) aware of any fact, circumstance, incident, situation, or accident (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) that may result in a claim being made against: (a) the Applicant; … ?” Paulsen answered that question, “No.”

The application warned: “NOTE: It is agreed that any claim or lawsuit against the Applicant, or any principal, partner, managing member, director, officer or employee of the Applicant, or any other proposed insured, arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed in response to Questions 9, 10 and/or 11, is hereby expressly excluded from coverage under the proposed insurance policy.

Shortly thereafter multiple claims resulting from the alleged “Ponzi Scheme” were brought against Crown Capital.  Endurance denied insurance coverage to Crown Capital under the Policy for the three new claims, and refused to defend Crown Capital against those claims.
The trial court granted Endurance summary adjudication on its cross claims as to the three claims, ruling that those claims were excluded from coverage under the Policy’s Application Exclusion and that there was no potential for coverage. The trial court reasoned that the Final Report of the Examiner that was attached to the Bou–Sliman claim “disclosed an array of investments under the DBSI umbrella, the failure of which were tied to the DBSI activities. [¶] The evidence shows that the Bochner, Biles, and Grana claims all arise out of a ‘fact, circumstance, act, error or omission’ that was previously disclosed.”

DISCUSSION

Whether an insurer owes its insured a duty to defend is made, in the first instance, by comparing the allegations in the complaint with the terms of the policy. If there is no potential for coverage under an insurance policy’s terms, an insurer acts properly in denying a defense. If there is any doubt about whether there is a duty to defend, the matter is resolved in the insured’s favor. If an exclusion is not ambiguous, however, it will prevail over the insuring clause and preclude coverage.

Bou–Sliman’s claim concerned his investment in a DBSI investment property known as Northpointe Towers, which investment Crown Capital broker-dealer Naylor recommended. The three additional claims concerned his investment in DBSI; a claim concerned investment in DBSI investment properties other than Northpointe Towers. Crown Capital argued that the three claims did not arise from the Bou–Sliman Claim because none of the claims involved the same investor or the same investment that was at issue in the Bou–Sliman Claim, and none of the investments at issue in the claims were recommended by the same Crown Capital broker-dealer who recommended the Northpointe Towers investment to Bou–Sliman.

It is undisputed that Crown Capital was aware of the Bou–Sliman Claim when Crown Capital applied for the Policy, for that claim was reported in the application. Like the Bou–Sliman Claim, the other three claims arose out of the DBSI Ponzi scheme.
Crown Capital was aware that DBSI had declared bankruptcy and allegedly had been operating a Ponzi scheme, that Bou–Sliman had claimed that Crown Capital had failed to exercise due diligence in connection with a DBSI investment, and that its broker-dealers had sold other DBSI investments to their customers—i.e., investments that were part of a Ponzi scheme that was the subject of a bankruptcy proceeding. Crown Capital, therefore, was obviously aware of facts and circumstances that might result in a claim or claims being made against it. The facts of which it was aware, including the report showing it was selling investments in a Ponzi scheme, required it to disclose under Question 10 of the application for the Policy.

With respect to the scope of the “arising from” language, the trial court correctly stated, “ ‘ “[a]rising out of” is ordinarily understood to mean “originating from, having its origin in, growing out of, or flowing from, or in short, incident to, or having connection with.’ Davis v. Farmers Ins. Group (2005) 134 Cal.App. 4th 100, 107. ‘California courts have consistently given a broad interpretation to the terms ‘arising out of’ or ‘arising from’ in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.’ Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App. 4th 321, 328.”

Although advancing various theories, all of the causes of action that the three asserted in their claims against Crown Capital and its broker-dealers concerned the purchase of DBSI investments. At the time that Crown Capital applied for the Policy, it was aware of facts and circumstances that might result in a claim being made against Crown Capital—i.e., DBSI’s bankruptcy, the alleged operation of a Ponzi scheme, and the investment by Crown Capital’s customers in DBSI investments.

The awareness of those potential claims brought such claims within the Application Exclusion regardless of the theory upon which such claims might be based. Accordingly, the trial court properly ruled that the entire Bochner, Biles, and Grana Claims, regardless of the theory of liability, were excluded from coverage under the Application Exclusion.

ZALMA OPINION

Crown Capital attempted to confuse the issues by claiming each of the claims and suits filed by its investors were different from the Bou-Sliman claim it did report. In so doing it lied on the application and allowed the insurer to defend based on the exclusion contained in the application. The insurer could, had it desired, also rescinded the policy from its inception because of the misrepresentations and concealment of material fact in the application. Either way it did not pay for Crown Capital to deceive its insurer and, as a result, it is without the ability to obtain defense or indemnity from its insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on May Insured Lie To Insurer When Applying?

May Regulator Exceed Power to Protect Public?

Regulator Not Allowed to Protect Insured From Insured’s Mistake

Modern homeowners insurance policies insure against the risk of loss to the home up to the full cost to repair or replace up to the limit of liability chosen by the insured or even a greater amount – usually 150% of the policy limit – if necessary. Generally, the amount to replace is chosen by the insured. Insurers, insurance agents, and insurance brokers, will assist the insured in determining the amount necessary to repair or replace, but do not, nor can they, guarantee the accuracy of the estimate. Insurance professionals are not construction experts. Especially in catastrophe situations, where the costs of materials and labor necessary to replace a damaged property increase exponentially, estimates of replacement cost accurate in a one off fire will not be accurate in a fire storm situation.

Insurance Regulators are consumer protection agencies and often consider the insurers they regulate to be the enemy trying to prevent people they insure from receiving the benefits of the insurance contract. As a result they often try to micro-manage the business of insurance in order to make the insurance policies issued in the state pay as many claims in sufficient amounts to indemnify the people insured, even if the policy wording agreed to does not allow payment. In Association of California Insurance Companies v. Jones, — Cal.Rptr.3d —-, 2015 WL 1569669 (Cal.App. 2 Dist., 4/8/15) the California Court of Appeal was asked to decide whether the Insurance Commissioner (Commissioner) had authority to promulgate California Code of Regulations, title 10, section 2695.183 (the Regulation) under the authority delegated to him by the Unfair Insurance Practices Act (UIPA), Insurance Code sections 790–790.15. The trial court found that he did not.

FACTUAL BACKGROUND

The Regulation

The Regulation at issue involved homeowner insurance, and specifically replacement coverage in the event of a covered event like a fire. In general, there are three kinds of replacement cost coverages. Each requires an insurer to pay replacement costs up to a limit defined in the policy or up to a set amount above the policy limit. If the cost of repairing or rebuilding a home damaged or destroyed by a covered event exceeds that limit, the homeowner has to pay the difference. The Regulation provides a lengthy and detailed methodology for determining the replacement cost of a dwelling the risk of loss of which might be insured.

Insurance Code Section 2051.5, subdivision (a) defines replacement cost, in pertinent part, as “the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.”

The Regulation was promulgated in 2010 in response to complaints received from homeowners who lost their residences in the wildfires in Southern California in 2003, 2007, and 2008. These complaints arose when homeowners learned that they did not have enough insurance to cover the full cost of repairing or rebuilding their homes because when they bought their homeowner insurance, the estimates of replacement value were too low.

The introductory sentence of the Regulation prohibits a “licensee” from “communicat[ing] an estimate of replacement cost to an applicant or insured in connection with an application for renewal of a homeowners’ insurance policy that provides coverage on a replacement cost basis” that does not satisfy the content and format provisions in the Regulation. The Regulation, therefore, requires an insurer or its agents and representatives to become experts in the replacement costs of a dwelling and punishes them if they fail.

The estimate must itemize “the projected cost” of each expense listed in subdivision (a)(1)–(4), and the assumptions as to the components listed in subdivision (a)(5). (Reg., subd. (g)(2).) A copy of the estimate and any update of the estimate “must” be given to the applicant. (Reg., subds.(g)(1), (h).) Subdivision (e) requires that “reasonable steps” be taken to “verify … sources and methods used to generate the estimate of replacement cost” “no less frequently than annually.” The Regulation also imposes recordkeeping obligations on the licensee. (Reg., subd. (i).)

Subdivision (j) of the Regulation provides that “communicat[ing] an estimate of replacement value not comporting with divisions (a) through (e)” to an applicant for homeowner insurance “provid[ing] coverage on a replacement cost basis,” or any renewal thereof, “constitutes making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.”

Furthermore, the Regulation renders as unfair and deceptive estimates that are accurate, but not in the format dictated by the Regulation. At the same time, the Regulation does not sanction an inaccurate estimate that complies with the format and content requirements of the Regulation.

DISCUSSION

Read as a whole, the UIPA did not give the Commissioner authority to promulgate the Regulation. The Commissioner has only the authority conferred on him by the Legislature. An appellate court must deduce that authority from the language of the statute itself by applying familiar maxims of statutory construction.

The expression of some things in a statute necessarily means the exclusion of other things not expressed.

The language of the UIPA reveals the Legislature’s intent to set forth in the statute what unfair or deceptive trade practices are prohibited, and not delegate that function to the Commissioner. Thus, section 790.02 states, “No person shall engage in this State in any trade practice which is defined in this article as, or determined pursuant to this article to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.”

The Commissioner did not have authority to add content and format requirements for replacement cost estimates in homeowner insurance to the list of practices set forth in section 790.03 under the guise of deeming nonconforming estimates misleading. Section 790.04 gives the Commissioner “power to examine and investigate into the affairs of every person engaged in the business of insurance … in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 790.03 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance.” It does not give the Commissioner the authority to add to the list of deceptive practices since, if the Legislature intended that to be in the statute it would have added it.

The Legislative Evolution of the UIPA as Well as Other Sections in the Insurance Code Support the Conclusion That the Commissioner Was Without Authority to Promulgate the Regulation

The UIPA as originally enacted in 1959 (Stats.1959, ch. 1737, § 1, p. 4187) did not include all the acts and practices currently deemed unfair and deceptive in section 790.03. Section 790.03, subdivision (h), regarding unfair claims settlement practices, was added to the UIPA in 1972. Section 790.03, subdivision (h) covers categories of claims settlement practices that could have been regulated under the Commissioner’s interpretation of his authority under sections 790.03 and 790.10 without amending the statute.

The decision, according to the court “is limited to one conclusion—that the UIPA has not as of yet given the Commissioner authority to regulate the content and format of replacement cost estimates.”

ZALMA OPINION

Anyone with knowledge of construction recognizes that estimating replacement cost of a dwelling before it is damaged is nearly impossible because of the need to determine the amount of demolition, the amount of the structure that can be saved, the cost of materials and labor at the time of the loss, and changes in codes and regulations between the time of the estimate and the loss.

The statute gives the Commissioner broad powers but it does not give the Commissioner carte blanche authority to regulate whatever he wants when he sees what he believes is a social wrong. He is limited by the statute. The court did not discuss, but I am sure noticed, that the Regulation – almost impossible to comply with in the normal course of the business of insurance – was a full employment act for policyholder’s lawyers whose clients chose to limit the premium paid by selecting a low policy limit. Regulators must remember that they are also required to keep the insurers they regulate viable so that they can pay claims and not set them up for multiple unnecessary bad faith lawsuits.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on May Regulator Exceed Power to Protect Public?

A Fictionalized Story of Real Insurance Fraud

The Trees that Washed Away

The story that follows is based on fact. I was the lawyer who represented the insurer. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. It is adapted from my e-book, “Heads I Win, Tails You Lose” which is available at http://www.zalma.com/zalmabooks.htm.

Northern San Diego County, California is avocado country. Trees grow everywhere. The heavy green fruit is a cash crop.

The hills and valleys of California were once the bottom of the sea. Bedrock, at best, is sandstone. The soil is thin and porous. It is perfect for growing avocados because it drains well. We irrigate the roots to have enough, but not too much, water.

The farmers cannot control the rain. If Southern California receives one of its rare, real, rainstorms, the soil turns to viscous slime. Gravity moves the hillsides into the valleys.
Property owners rebuild and replant regularly. Topographical maps become inaccurate after five to ten years. Mapping companies, to keep current, get aerial photographs as often as once every three years.

The insured was a successful businessman. He had made his fortune in manufacturing. The insured sold his business, and, wanting to be a gentleman rancher purchased  a fifty-acre avocado ranch on a hillside in Northern San Diego County. He planted the hill with trees ranging in age from three to eight years. All bore the Haas variety of avocado. The insured irrigated with a drip irrigation system that provided the right amount of water to create the maximum amount of crop. The insured knew nothing about avocado ranching. He intended to learn, on the job. He did not need the income from the crop to survive. He could live a life of luxury without any income from the ranch. He was a businessman. He understood that agriculture was a risky business. Risks he understood.

The purchase of insurance can spread risks. He went to his corporate broker, told the broker of his concerns, and got a policy insuring against the loss of the trees. He had talked with his neighbors and  knew, from his experience, that the risk faced by an avocado rancher was the loss of the trees from fire or an overabundance of rain.

The broker he used was the same broker who handled his manufacturing business. A major multinational brokerage firm with the purchasing power to insure anything their clients desired. The insured told his broker what he wanted. The insurer created a special policy by adding to the normal perils of fire, lightening, windstorm and hail, the peril of rain. At the time he bought the policy the insured knew that his ranch had lost, to mudslide, half its trees six years before. He also knew most of the trees fell down the hill five years before that. The insurer, in the application for insurance, only asked if the insured had incurred prior losses. Since he was a new owner of this property, he replied “New venture, no losses.”

The insurer issued the policy and for six months the insured enjoyed his leisure and supervised his small staff of farmhands. The insured harvested his first crop in February. The proceeds equaled his expenses. He was a happy man.

In March, the rains came. First, the gentle Southern California shower that dropped an inch of rain in forty-eight hours and turned the hillside green with new grass. Then, the remnants of typhoon Pacita pulled up along the Southern California shore and stopped. Water dropped from the sky as if a giant tap had opened. Raindrops didn’t fall they cascaded out of the sky. The hillside became saturated within the first hour. The hill could absorb no more water. The rain continued. Rivers formed in every crease of every hill. The once stable hillside began to slide. Chunks of earth fifty feet wide and ten feet deep would pop off the hillsides and fall to the valleys below. Looking up through the rain, the insured saw his neat rows of trees begin to waver. Straight lines of trees danced, like an out-of-control conga line, down the hillside. By the end of the day only two hundred of his ten thousand trees still stood on his hillside. The remainder were in the pasture of his downhill neighbor with their roots pointing to the sky.

When the rains stopped the insured called his broker to report a loss as a result of rain. The trees had a fair market value between $50 and $300 each. The insured could purchase them from commercial nurseries at various stages of development. The loss seemed a simple one to resolve. The insurer could not question, from the reports of the weather bureau, that the loss of the trees would not have occurred but for the unusual rain.
The insurer was faced with a massive loss. California law bound it to conduct a thorough investigation before rejecting the claim.

The insurer learned that aerial photographs, taken regularly, were available. They purchased those photographs of the insured’s property going back thirty years before the loss. Surprised, the insurer found that in every ten year span, portions of the hillside, and its trees, washed away. After each storm, the person owning the property replanted the trees. The insurer documented seven landslides destroying trees in the thirty years before the issuance of the policy.

Since the first insurance policy was written on a clay tablet in ancient Sumeria insurers and insureds have recognized that it is a business of the utmost good faith. For an insurance contract to be effective the insurer must be fully informed of the risk it is taking. If the insurer is deceived, whether intentionally or unintentionally, the contract survive. Good faith requires the insured to reveal everything he knows about the risk that would be material to the decision of the insurer to insure or not insure him. Failure to reveal material facts is concealment. When an insured conceals a material fact from the insurer, he is committing fraud in the inception of the policy. When an insured conceals or misrepresents a material fact in the presentation of a claim then he has committed fraud.
The insurer confronted the insured with the aerial photographs. They asked if he had known about the slide. He admitted knowledge of one or two prior slides. He claimed he did not tell his insurer about the slides because they did not ask him.

The claims man consulted with the underwriter. The underwriter said that he would never have written the policy had he known of the regularity with which the property suffered landslides. The only way he would insure the property was if the insured agreed to a specific exclusion for loss due to landslide, surface water or excessive rain. The claims man sought advice of counsel. Counsel informed the insurer that the evidence it provided established a material concealment of fact. A concealment of material fact authorizes an insurer in California to rescind even if the concealment was innocent. If it wanted, the insurer could rescind the policy.

Counsel further advised that the insured would almost certainly sue. The suit would include a claim for breach of the covenant of good faith and fair dealing and would seek punitive damages. The suit would be expensive to defend. Counsel further advised that jurors, because of their dislike for insurers, had a tendency to ignore a clear statement of the law given to them by the court. Jurors more frequently find the need to punish insurers.

The insurer decided to be practical rather than aggressively pursue its rights. Counsel met with the insured, showed that the number of trees counted from the aerial photographs showed less trees than those for which the claim was presented. Over a fine restaurant meal the insured and counsel for the insurer settled the claim for the value of the tress counted in the aerial photographs less the value the remaining trees. Both considered the settlement to be a favorable settlement. The underwriters for the insurer vowed to never insure trees on a hillside again.

This is not the type of fraud insurers’ normally face. There was no intent of the insured to defraud the insurer. In fact he did deceive the insurer but he had none of the malice required to prove fraud with regard to the acquisition of the policy. He did, however, overstate the number of trees he claimed lost because he had never counted them and that, if intentional, would have been a provable fraudulent claim.

Paying his claim was a economic decision. If justice could have been done he would have been paid nothing. The insurer paid the insured because he was willing to reduce his claim to something close to his real loss and because the insurer knew it was less expensive to settle than to fight.  They insisted that the settlement be kept secret to keep others from learning its willingness to pay off a fraudulent claim. Hopefully, the insurer will not do so again.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on A Fictionalized Story of Real Insurance Fraud

Broker Need Only Acquire Insurance Requested

The Least Expensive Insurance is Not Always Best

People who are not knowledgeable about insurance will select their insurer based upon the lowest premium price and will pick the lowest possible coverage limits available when deciding on the insurance to acquire. When the insured incurs no loss that practice works. However, when there is a loss, there may not be sufficient coverage to indemnify the insured for the loss incurred. Rather than recognize that the insured – shopping for the lowest price – is at fault for the shortfall, they blame the insurer or the insurance broker for not forcing them to buy sufficient coverage.

Insurance brokers are only required to buy the insurance the insured requests. It has no further duty unless the insured and broker establish a special relationship where the agent agrees to use its expertise to properly value the property. Merely telling an insured to obtain insurance for the replacement value of the property does not create the special relationship but, rather, puts the insured on notice to protect herself.

THE RESULT WHEN INSURED SEEKS LEAST EXPENSIVE INSURANCE

New York appellate courts are well known for writing opinions that are brief, clear, concise and definitive. In Kaufman v. BWD Group LLC, — N.Y.S.3d —-, 2015 WL 1526154 (N.Y.A.D. 1 Dept. 4/7/15), 2015 N.Y. Slip Op. 02905 is another example of that trend in avoiding lengthy and incomprehensible opinions. In the Kaufman case the broker was sued for breach of contract and negligence alleging that defendant insurance brokerage company failed to procure sufficient insurance coverage to fully compensate her for her loss of personal property after a fire damaged her Massachusetts home in June 2009.

The court concluded that the brokerage made a prima facie showing of its entitlement to judgment as a matter of law by submitting evidence that plaintiff never specifically requested that it obtain a certain level of contents coverage for the home and that there was no special relationship between the parties requiring it to obtain appropriate coverage. The record demonstrates that plaintiff did nothing to change the contents coverage in the six months before the fire, even though defendant had informed her in January 2009 of the amount of the coverage and that it was at its lowest available limit.

In opposition, the court concluded that the plaintiff failed to raise a triable issue of fact. That plaintiff’s husband, who was not an insured, believed that the policy provided full compensation was of no moment since defendant’s employee had informed plaintiff in January 2009 of the amount of coverage. Further, it was undisputed that plaintiff never paid for an evaluation of the home’s contents and that defendant never agreed to conduct such an evaluation. Moreover, there is no evidence that defendant told plaintiff that she would be completely compensated for any damaged personal property should an insurable loss occur.

Although plaintiff had been purchasing insurance from defendant for over 20 years, this alone does not raise an issue of fact as to a special relationship, especially since the evidence shows that plaintiff chose the coverage amounts and did not rely on defendant for any advice as to the appropriate amounts.

ZALMA OPINION

Price should only be one point of consideration when deciding to purchase insurance. The risks faced by the property, the value of the property at risk, the cost to replace or repair the property, and the sufficiency of the limits acquired must all be considered. When there is valuable personal property like antiques and art, an appraisal by a professional should be used to avoid problems and to separately insure the valuable items on a personal articles floater. Kaufman did nothing necessary and since there was no special relationship with the broker, the suit was properly summarily dismissed.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Broker Need Only Acquire Insurance Requested

When Is an Intentionally Set Fire Not Vandalism?

A Fire Started on a Kitchen Floor is not Friendly

As a young adjuster I learned the difference between a friendly and an unfriendly fire. A friendly fire is one in a place where it can be contained like an oven or a fireplace. An unfriendly fire is one where it burns property not intended to hold a fire. A fire in a house with no electricity or gas service set in the middle of a kitchen floor is, by definition, an unfriendly fire and the person who sets such a fire is a vandal and an arsonist even if he subjectively only intended to set the fire to keep warm.

In Ong v. Fire Insurance Exchange, — Cal.Rptr.3d —-, 2015 WL 1524464 (Cal.App. 2 Dist., 4/3/15) the majority of the California Court of Appeal reached an amazing and difficult to support decision that ignored reality to send the case back to the trial court for decision. Plaintiff contends that the trial court erred in concluding that a vacancy exclusion in his policy for a loss from “vandalism or malicious mischief” applied to fire damage caused by a warming fire started by a transient that spread to other parts of the property.

FACTUAL BACKGROUND

The property was vacant for more than a year when, on December 20, 2011, Ong submitted a claim to Defendant for a fire at the property. Defendant retained an experienced fire investigator, Guy Childress. On December 23, 2011, Childress went to the property to investigate and made a written report concluding, “it appears the fire may have been initiated as the result of an uncontrolled warming fire started by an unauthorized inhabitant.”  The property did not have a fireplace.

A claims log indicated that a claims adjuster for Defendant, Debra Kryklund, met with Childress and others on December 23, 2011, and noted the following: “Kitchen. Multiple pts of origin. Bed in kitchen. Unintentional incendiary. Likely transient in house and warming fire got out of hand. Firewood found inside house.”

On February 10, 2012, Kryklund sent Plaintiff a letter disclaiming coverage for his claim.

DISCUSSION

On appeal, Plaintiff contends that the trial court erred because the fire was negligently lit and since the definition of vandalism requires an intent to destroy property it was not vandalism under the ordinary and popular sense of the term. Plaintiff, grasping at straws also argued that the trial court erred because the dwelling was inhabited by a transient and therefore not vacant.

INSURANCE LAW PRINCIPLES

The California Supreme Court has recently reiterated the principles that apply when interpreting an insurance policy in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 194–195: “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract.  If contractual language is clear and explicit, it governs. A term is not ambiguous merely because the policies do not define it. If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist  in order to protect the insured’s reasonable expectation of coverage.

ANALYSIS

Vandalism refers to a willful or malicious destruction or defacement of public or private property.  “Malicious” in turn is defined in the dictionary as “having or showing a desire to cause harm to someone.” Using these dictionary definitions, vandalism in the ordinary and popular sense, means the willful destruction of property or the destruction of property with a “desire to cause harm.” The trial court, however, did not look to the dictionary to define “malicious” in its “ordinary and popular sense.” Rather the trial court relied on the meaning of malice in the “legal sense,” and specifically of “malice in law” in two criminal cases cited by Defendant.

Under the Penal Code, a person is guilty of arson when he or she “willfully and maliciously sets fire to or burns or causes to be burned … any structure, forest land, or property” (Pen.Code, § 451) and “maliciously” is defined as involving “a wish to vex, defraud, annoy or injure another person, or an intent to do a wrongful act, established either by proof or presumption of law” (Pen.Code, § 450, subd. (e)). Even if the plain meaning of “malice” included malice in the legal sense—i.e., that it can be presumed from a wrongful act, done intentionally and without justification, excuse of mitigating circumstances—the majority of the court of appeal believed that there would be a question of fact as to whether there were mitigating circumstances in this case precluding summary adjudication as Childress’s report indicated that the transient may have attempted “to throw burning wood outside when the warming fire got out of control.”

While a vacancy exclusion serves to protect the insurer against the increased risks of loss that occur when premises are vacant for an extended period of time such an exclusion does not protect against all increased property risks but only those within its terms. Defendant as the party drafting the policy had the opportunity to include property risks other than vandalism in its vacancy exclusion. Here, the vacancy exclusion in Plaintiff’s policy was limited to “vandalism and malicious mischief.” Defendant could have listed fire as a risk excluded under a vacancy provision but did not do so.

The trial court’s grant of summary judgment was reversed and the matter is remanded to the trial court for proceedings consistent with this opinion.

DISSENT

Rothschild, P. J., dissented with analysis that make more sense than the majority.

Presiding Justice Rothschild noted that it was undisputed that the insurer’s investigators concluded that a transient intentionally started the fire on the floor of the kitchen in order to keep warm but did not intend the fire to grow as large and destructive as it did. Starting  a fire in the middle of a kitchen floor would inevitably damage or deface the floor. It therefore constitutes vandalism under the dictionary definition. And it does not matter that the person who started the fire did not intend for it to become as destructive as it did.

The insurance policy exclusion applies to both direct and indirect loss from vandalism. Starting the fire was vandalism (because it was willful destruction or defacement), so the loss resulting from the fire is not covered. It also does not matter that the person who started the fire did it to keep warm. What is relevant is that someone intentionally started the fire on the kitchen floor, which constitutes willful destruction or defacement of property.

The damage was caused by a fire started on the kitchen floor (not in a fireplace) by a transient. That is the kind of willful destruction that becomes much more likely when the property is left vacant for an extended period. Therefore, in addition to fitting within the literal terms of the exclusion, it seems like the kind of thing to which the exclusion ought, in fairness, to apply.

ZALMA OPINION

I, like Justice Rothschild, can only wonder what the majority of the court was thinking. It seems they, rather than apply the facts to the policy and the law, decided to find some way to get coverage for Mr. Ong. Ong left his property vacant for more than a year. It was invaded by a person who unlawfully occupied the property and intentionally set a fire on the kitchen floor – whether to keep warm or to destroy the house – can only be speculation since the arsonist is not available. Anyone setting an unfriendly fire in a dwelling house in a place where it will obviously cause damage to the house is acting maliciously to cause damage. The majority based its decision on speculation. Hopefully at trial that speculation will not be allowed and the trier of fact will reach a proper decision more in concert with the dissent.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When Is an Intentionally Set Fire Not Vandalism?

What the Heck is an Honorable Engagement Agreement?

Arbitration Not Necessarily a Way to Resolve Problems

A party that implores a court to vacate an arbitration award normally faces a steep uphill climb: the scope of judicial review of arbitration awards is among the narrowest known in the law. In First State Ins. Co. v. National Cas. Co., — F.3d —-, 2015 WL 1263147 (C.A.1 (Mass.) 3/20/15) primary insurers filed a petition pursuant to Federal Arbitration Act to confirm the arbitrators contract interpretation award against reinsurer over reinsurance and retrocessional agreements.

BACKGROUND

A primary insurer may cede risk to another insurer who becomes a reinsurer. When a reinsurer cedes assumed risk to yet another insurer, that transfer is called a retrocessional agreement.

First State Insurance Company and New England Reinsurance Corporation (collectively, First State) entered into a number of reinsurance and retrocessional agreements with a reinsurer, National Casualty Company (National). First State demanded arbitration under eight of these agreements to resolve differences of opinion about billing disputes and the interpretation of certain contract provisions relating to payment of claims.  By agreement of the parties, all the arbitrations were consolidated in a single proceeding before a panel of three arbitrators.

After briefing and argument, the arbitrators handed down a contract interpretation award. This award established a payment protocol under the agreements. It provided that National’s payment obligations were to be triggered “upon its receipt of a billing supported by a Proof of Loss and Reinsurance Report(s) prepared by First State in a form and content generally as those introduced with the briefings on this motion.” The award further noted that “[s]aid payments may be made subject to an appropriate reservation of rights by [National] in instances where it has or does identify specific facts which create a reasonable question regarding coverage under the subject reinsurance agreement(s)” but “[p]ayment obligations on the part of [National] are not conditioned upon the exercise of its right to audit or the production of additional information or documents, other than those provided by First State as described … above.”

First State filed a petition to confirm the award. National thereafter cross-petitioned to vacate the contract interpretation award.

ANALYSIS

National’s claims of error relate only to the contract interpretation award. First State asserts that National’s cross-petition to vacate the contract interpretation award was filed outside this temporal window and is, therefore, time-barred.

A federal court’s authority to defenestrate (throw out of the window) an arbitration award is extremely limited.  Here, the sole inquiry is whether the arbitrators “even arguably” construed the underlying agreements and, thus, acted within the scope of their contractually delineated powers. A legal error (even a serious one) in contract interpretation is, in and of itself, not a sufficient reason for a federal court to undo an arbitration award. Only if the arbitrators acted so far outside the bounds of their authority that they can be said to have dispensed their “own brand of industrial justice” will a court vacate the award. As long as an arbitration award “draw[s] its essence” from the underlying agreement, it will withstand judicial review—and it does not matter how “good, bad, or ugly” the match between the contract and the terms of the award may be.

National submits that this case represents one of the rare instances in which the vacation of an arbitration award is warranted because the arbitrators exceeded the scope of their powers by re-writing the terms of the parties’ agreements. In its view, the payment protocol fashioned by the arbitrators is “ultracrepidarian,” that is, they criticized, judged, or gave advice outside the area of his or her expertise,  since it obligates National to pay billings that may not fall within the terms and conditions of any applicable agreement. National further submits that the award effectively forecloses or at least significantly impairs its broad access rights under the inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights. This reservation of rights procedure, National says, is plucked out of thin air and not derived from any contract term.

The contract interpretation award mirrors this separation; it provides that National’s payment obligations are independent of and not conditioned upon the exercise of National’s right to inspect and audit First State’s records.

This brings us to National’s complaint that the reservation of rights procedure outlined in the contract interpretation award does not draw its essence from the underlying agreements. That procedure, National says, operates to circumscribe its broad inspection and audit rights under those agreements.

Each of the eight reinsurance agreements, as well as the agreement to consolidate the arbitrations, contains an honorable engagement provision. This language directs the arbitrators to consider each agreement as “an honorable engagement rather than merely a legal obligation” and goes on to explain that the arbitrators are “relieved of all judicial formalities and may abstain from following the strict rules of law.”

We believe that an honorable engagement provision empowers arbitrators to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement. This is a huge advantage: the prospects for successful arbitration are measurably enhanced if the arbitrators have flexibility to custom-tailor remedies to fit particular circumstances. An honorable engagement provision ensures that flexibility.
Honorable engagement provisions in the arbitration clauses of the underlying agreements authorized the arbitrators to grant equitable remedies. The appellate court concluded that the reservation of rights procedure is such a remedy. Consequently, National’s objection to that procedure did not carry the day.

First State acknowledged both in its brief and at oral argument in this court that the contract interpretation award does not condition National’s inspection, audit, or recoupment rights on its submission of an appropriate reservation of rights. As First State concedes, the contract interpretation award leaves National, upon receipt of a billing from First State, with three options: it may (i) reject the billing, (ii) pay the billing without comment, or (iii) pay the billing with a reservation of rights.

Whether National employs the second or third option when paying a particular billing, it retains the right thereafter to inspect First State’s records, audit the claim, and seek recoupment through a subsequent arbitration should it conclude that payment was improperly made. First State has endorsed this reading of the contract interpretation award and, therefore, it cannot assert either the absence or inadequacy of a reservation of rights as a defense to future recoupment efforts by National.

ZALMA OPINION

One must wonder why an honorable engagement provision was placed in the contracts between the reinsurers and the retrocessionaires since it gave the arbitrators a wide latitude and removed the restrictions of the law when reaching their decision. The honorable engagement provision gave great power to the arbitrators to create an award that did, what the arbitrators in their sole discretion, believed to be justice rather than the letter of the contracts. By including an honorable engagement provision the parties left the right to argue their position based  on the law to the whim of three arbitrators with no chance of setting aside the award. We can only hope such an agreement does not find its way into an insurance policy.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on What the Heck is an Honorable Engagement Agreement?

Emotion Should Never Be Basis of Judgment

Judgments Must Only Be Based on Evidence

Litigants are entitled to a fair trial culminating in a jury verdict rendered after consideration of properly admitted evidence and the law. Often, although equal in the eyes of the law, insurance companies are not treated equally and fairly by trial courts who treat plaintiffs suing insurers as more equal than the insurers.

A jury verdict infused with sympathy for a litigant is based on emotion, not the evidence or the law, and may be set aside on application to an appellate court.

Government Employees Insurance Company (GEICO) invoked these well-established principles in Government Employees Insurance Company v. Madeline Kisha, — So.3d —-, 2015 WL 1470104 (Fla.App. 5 Dist., 4/2/15), claiming that it did not receive a fair trial in the underlying declaratory judgment action because the trial court erroneously allowed Madeline Kisha to introduce evidence of her long relationship with GEICO, as an insured, regarding prior policies that had expired long ago. GEICO argued that this evidence was erroneously admitted because it was irrelevant to the issue of whether GEICO cancelled Madeline’s current policy for nonpayment of premiums prior to her automobile accident and her claim for personal injury protection (PIP) benefits. GEICO also argued the evidence was highly prejudicial because it filled the jury with sympathy, thus tainting the verdict and judgment declaring Madeline’s entitlement to those benefits.

FACTS

The current policy had a designated policy period from December 19, 2010, to June 19, 2011, and provided PIP and underinsured/uninsured motorist coverage to Madeline and her husband, Stephen Kisha.

The Kishas chose to make monthly premium payments. On March 14, 2011, GEICO sent the Kishas the monthly bill requiring payment of $195.20 by March 29th. When GEICO did not receive the payment by the due date, it sent a Notice of Cancellation for Nonpayment of Premium to the Kishas on April 4th. This Notice was in conformance with the cancellation provisions in the policy and advised the Kishas that unless they submitted the past due payment prior to April 20th, the effective date of cancellation, their policy would be cancelled as of that date. The Notice stated in pertinent part, “As of 12:01 a.m. local time Apr. 20, 11, your policy will cancel due to nonpayment of your premium. It added, in boldface, larger font: “Please submit a payment immediately to prevent the cancellation of your policy.”

The Notice also advised that if they chose to pay by mail, the payment had to be postmarked by the cancellation date to avoid a lapse in coverage. The Kishas admitted they received the Notice, but neither recalled reading it.

Stephen Kisha testified that he wrote the check for $195.20 to GEICO on April 17th. Although the check was dated April 17th, the postmark on the envelope was April 25th, five days past the cancellation date. Several weeks later, on May 8th, Stephen and Madeline were injured in a rear-end collision. The Kishas were treated in the emergency room and released. They both filed claims for PIP benefits under the current policy.

THE MOTION IN LIMINE

Prior to trial, GEICO filed a motion in limine seeking to exclude evidence of the length of time the Kishas had been policyholders (between seventeen and twenty-four years), arguing that such evidence was irrelevant and prejudicial because it would enrage and curry sympathy from the jury. The court denied the motion and the case proceeded to trial.

THE TRIAL VERDICT

The jury found GEICO had waived its right to deny insurance coverage to Madeline and that GEICO was estopped from denying coverage. GEICO appealed.

INAPPROPRIATE CLOSING ARGUMENT

In closing argument counsel argued: “Now, they have been paying premiums for 17 to 24 years. I think we heard both, 17 and 24. Either way it’s a long time to have an insurance company and to pay premiums month in and month out. It’s thousands of dollars that they’ve been paying to GEICO for this coverage to protect them. This was coverage to protect them, and this is the one time that she has made a claim in all of those years and they leave her out in the cold. After all those years.” He also argued: “An insurance company like GEICO, they want to try and deny claims. They investigate, they do their evaluation. They take statements. They look over records. What way can we find to deny this claim? GEICO has the obligation to inform its insureds—in this case the Kishas—if they do not have coverage as soon as possible so they can fix that problem. They owe it to the Kishas for all those years.”

ANALYSIS

The Florida appellate court concluded that the length of time the Kishas had been insured by GEICO was not relevant to prove or disprove any material fact and was, therefore, inadmissible since relevant evidence is evidence tending to prove or disprove a material fact. The fact that the Kishas had been insured with GEICO for more than 17 yeaars did not tend to prove any of the elements of waiver: the existence of a right by GEICO that was waivable; GEICO’s knowledge of the right; or GEICO’s intention to relinquish the right. The length of her history with GEICO did not tend to prove the Kishas detrimentally relied on any act or omission of GEICO in connection with the April late payment. Madeline’s argument was that GEICO’s cashing of the late check on April 29th, nine days after the policy had been cancelled and ten days prior to the accident, and its retention of the funds after the date of the accident created the detrimental reliance—not anything that had previously occurred in the Kishas’ payment history.

There was no evidence that the Kishas had ever before made a payment after a cancellation date, such as occurred here, and thus their payment history was not relevant to the instant situation.

It also found that it was patently obvious that Madeline’s attorney used this evidence to appeal to the jurors’ sympathy when it referenced, for example, “all the years of” and “thousands of dollars of” payments the Kishas had made and argued GEICO left the Kishas “out in the cold” upon her first claim. Madeline’s attorney even argued that GEICO “owe[d] it to the Kishas” to provide coverage after all those years. This evidence did nothing more than portray Madeline as a pitiable individual who had been injured in an automobile accident and then abandoned in her time of need by GEICO after many years of paying premiums for insurance from which she never derived a benefit. To suggest, as Madeline does, that it did not unduly influence the jury is to suggest that this court indulge a naive assumption that we are not inclined to do.

The right to a fair trial necessarily imposes on jurors the duty to fairly and impartially determine the facts from relevant evidence presented to them and apply those facts to the applicable law. Fidelity to that duty prohibits a jury from being swayed by sympathy for any party when rendering its verdict. The irrelevant evidence of the Kishas’ long history with GEICO became one of the centerpieces of Madeline’s case and constituted an impermissible plea for sympathy that impeded the jurors’ ability to fulfill their duty and intruded too far into GEICO’s right to a fair trial. Accordingly, the judgment under review is reversed, and this case is remanded for a new trial.

ZALMA OPINION

It is axiomatic that when a lawyer has no facts in his favor he argues the law, when there are no facts in his favor he argues the law, and when he has neither he pounds the table and tugs at the jury’s heartstrings. That is what happened here. The only issue was whether the policy had been effectively cancelled. If not coverage would apply if so the plaintiffs would recover nothing. That they had insurance with the same insurer for many years meant nothing to the issue of whether the policy was cancelled. Had the Kisha’s mailed the check on the date it was allegedly written they would have had coverage.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Emotion Should Never Be Basis of Judgment

Is Entrustment Exclusion Enforceable?

Do Not Entrust Your Property to a Thief

Businesses and people, as a matter of course, will entrust their property to others. They place product in a commercial warehouse; they let friends or relatives have control of their property; and they consign property to others for sale. When the person entrusted with the property is not trustworthy losses occur.

Insurance is designed to protect the insured against the risk of loss of property from designated risks of loss. The all risk or direct risk of physical loss policies, insure conceivable risks of physical loss not specifically excluded. Because the insurer has no way of gauging the risk of loss when an insured entrusts its property to another insurers have developed exclusions for losses to property when it is damaged, destroyed or stolen by the person to whom it was entrusted.

In Warehouse Wines & Spirits, Inc. v. Travelers Property Cas. Co. of America, Slip Copy, 2015 WL 1454883 (S.D.N.Y., 3/31/15), the District Court for the Southern District of New York, was asked to apply the exclusion to a theft by a warehouseman of property entrusted to it.

FACTS

On July 23, 2013, plaintiff Warehouse Wines & Spirits, Inc. (“Warehouse Wines”), a retail seller of wine and liquor, sued Travelers Property Casualty Company of America (“Travelers”) after Travelers denied Warehouse Wines’ insurance claim for stolen product.Warehouse Wines alleges that it lost over 4,000 cases of its wine and liquor when the product was stolen by James Ceseretti, who ran the warehouse in which Warehouse Wines stored excess inventory. In 2015 Ceseretti pled guilty to grand larceny in the second degree for the theft of property from Steven Goldstein, President of Warehouse Wines, in excess of one million dollars.

Warehouse Wines submitted a claim under its first party property insurance policy with Travelers for loss of inventory. Travelers denied the claim based on the “Dishonest Acts” exclusion in the policy, which precludes coverage where a loss is caused by the dishonest acts of a person “entrusted with the property”. The parties agree that Warehouse Wines entrusted its wine and liquor to Ceseretti and his warehouse. As Ceseretti has already admitted guilt to the theft, there is also no dispute as to a dishonest act occurring.

Ceseretti and his Bestway Warehouse & Transportation company were conducting business as a warehouse when the theft occurred. Warehouse Wines had a written agreement for the warehousing of its merchandise. There was no time limitation to their storage and the warehouse was not used as a temporary way station while the goods waited to be transported elsewhere.  Ceseretti stole Warehouse Wines’ wine and liquor while the goods were in storage at the warehouse—not while they were in any stage of transport.

In February 2011, Ceseretti was unable to deliver cases of Captain Morgan rum to Warehouse Wines despite records indicating that there should have been 31 cases in the warehouse. In November 2011, he was unable to deliver 3 cases of Dom Perignon although the cases should have been in the warehouse. By early December 2011, he was unable to deliver a particular Belvedere vodka although he was supposed to have 60 cases. Warehouse Wines’ order on December 23, 2011 was short 53 of the 591 expected cases. On January 3, 2012, Goldstein inspected the warehouse and discovered a loss of approximately 4,000 cases he calculated to be worth approximately $1,200,000.

On May 23, 2013, James Ceseretti was arrested and charged with the theft of property belonging to Warehouse Wines and Herman from his warehouse. Ceseretti, Bestway Logistics Transportation, and Bestway Warehouse & Transportation were each indicted in connection with the theft. On January 9, 2015, Ceseretti pled guilty in the Supreme Court of the State of New York County of Suffolk to grand larceny in the second degree to Count One of the Indictment. In exchange for Ceseretti’s guilty plea, indictments against the two companies through which Ceseretti conducted business with Warehouse Wines—Bestway Warehouse & Transportation, Inc. and Bestway Logistics Transportation, Inc.—were dismissed as being “covered by [Ceseretti’s] plea.”

THE INSURANCE POLICY

Prior to the theft, Warehouse Wines and Travelers had agreed to a first party property insurance policy (the “Policy”) which insured Warehouse Wines against certain risks of direct physical loss to its property. The “Property Floater Coverage” section of the Policy provided coverage only while the goods were in storage at the Bestway warehouse, subject to a limit of $4 million and a $25,000 deductible.

The Policy provided: “2. We will not pay for a “loss” caused by or resulting from any of the following: ¶  * * *  ¶ d. Dishonest acts by you, anyone else with an interest in the property, your or their employees or authorized representatives or anyone entrusted with the property, whether or not acting alone or in collusion with other persons or occurring during the hours of employment.”.

On April 24, 2012, Warehouse Wines filed its Sworn Statement in Proof of Loss, stating a loss of 4,095 cases of wine and liquor with a claimed value of $1,155,480. The statement asserted that the amount of insurance in force was “$4,000,000 at Location”, reflecting a claim made under the “Property Floater Coverage” which applies only to property in storage at the Bestway warehouse. Travelers denied coverage and rejected the Proof in a letter dated August 6, 2013.

DISCUSSION

There is no dispute as to the existence of an insurance contract wherein Travelers agreed to “pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” That policy, however, contains an exclusion covering loss resulting from the dishonest act of someone entrusted with the insured property. There is no dispute that Ceseretti stole Warehouse Wines property that he was entrusted to store in his own warehouse. That fact is made clear by Ceseretti’s guilty plea.

DISHONEST ACT EXCLUSION

Once a plaintiff has established that it sustained a loss to covered property, the burden shifts to the insurance company to prove that the claimed loss is subject to an exclusion. The “Dishonest Acts” exclusion in the contract between the parties bars coverage where a claimed loss results from a dishonest act by, among others, anyone entrusted with the insured property. Although the parties dispute exactly which entity was the custodian of the property at the time of the theft, it is undisputed that Warehouse Wines entrusted its property to James Ceseretti and whichever of his companies that operated the warehouse.

Courts in New York have held that exclusions for the dishonest acts of persons to whom the insured entrusts its property are enforceable. [Superior Steel Studs. Inc. v. Zurich N.A., Inc., 368 F.Supp.2d 208 (E.D.N.Y.2005) (applying the exclusion to bar insurance coverage for theft of steel coils by officers of the company who had been given the property for processing); Cougar Sport, Inc. v. Hartford Ins. Co., 737 N.Y.S.2d 770, 771–72 (Sup.Ct.N.Y.Cty.2000), aff’d, 733 N.Y.S .2d 151, 152 (1st Dep’t 2001) (applying the dishonest acts exclusion to bar coverage for thefts committed by a warehouseman).

In Cougar Sport, the plaintiff was an importer of children’s clothing who arranged for some of its goods to be delivered directly to one of several warehouses for storage. When one of the warehouses sold all of the goods without authority from the plaintiff, the plaintiff made a claim to its insurer for the loss. The insurer denied the claim based upon a similar exclusion for dishonest acts as exists here. That court found that “entrust” must be given its ordinary meaning, and that the plaintiff’s surrender, delivery or transfer of possession of its goods to the warehouse with confidence that the property would be used for the purpose it intended amounted to entrustment. Here, the parties admit that Warehouse Wines entrusted its property to Ceseretti when it directed its suppliers to deliver excess inventory to his warehouse.

Warehouse Wines’ loss was caused by the dishonest acts of someone “entrusted with the property.” There can be no dispute that Travelers has met its initial burden of showing that the “Dishonest Acts” exclusion applies to Warehouse Wines’ claimed loss.

There is no dispute of material fact that James Ceseretti operated the warehouse from which he stole over one million dollars of wine and liquor goods under the name Bestway Warehouse & Transportation. It was responsible for warehousing the goods and cannot be construed to be a carrier for hire.

ZALMA OPINION

Although the guilty plea made the decision with regard to cause the insured argued against the application of the Dishonest Acts exclusion none of which were convincing. The property was entrusted to the warehouseman who stole the property. The exclusion is clear and unambiguous and once the chaff had been taken from the argument the court granted summary judgment.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is Entrustment Exclusion Enforceable?

“Insurance Law” A New Book From Barry Zalma

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