Cooperation Clause Breach Defeats Coverage

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

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

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

FACTS

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

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

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

THE SETTLEMENT AGREEMENTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

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Posted in Zalma on Insurance | 1 Comment

Insurance Companies are Not Treated Equally to Those Who Sue Them

Claim of Bad Faith Enough to See Ostensibly Privileged Documents

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

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

The Attorney-Client Privilege

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

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

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

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

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

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

Relevancy and Trade Secret

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

No Need to Prove Prejudice When Insured Makes Voluntary Payment

Insured’s Settlement With Claimant Destroyed Right to Insurance Benefits

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

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

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Diminished Value in California

New California Jury Instruction

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

2-3900 CACI 3903J

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

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

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

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

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

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

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

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Confabulation!

Some Testimony Cannot & Should Not be Believed

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

Memory Distortion

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

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

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

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

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

Freud: The Crypt of Memory

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

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

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Unambiguous Exclusion Defeats Claim for Defense

Business Policy Not an Auto Liability Policy

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

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

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Fairness Controls Interpretation of “Other Insurance” Language

Escape Clause Fails

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

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

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

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

FACTS

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

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Failure of Promise to Pay Defeats Claim on Contract

Total Failure of Consideration Defeats Claim

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

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

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

BACKGROUND

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

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

DISCUSSION

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Lead Paint is a Pollutant In Georgia

Georgia Concludes Lead a Pollutant and Excluded

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

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

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

FACTS

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

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

THE POLICY

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Insurer Must Be Allowed to Exercise Meaningful Contractual Rights

First Report After Verdict Sufficient to Avoid Coverage

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

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

BACKGROUND FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

THE NEED TO PROVE PREJUDICE

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Bad Faith Set-Up Fails

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

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

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

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

BACKGROUND

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

The Underlying Claim

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

The Insurance Policy

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

Claim Reported, Defense Denied

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

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

DISCUSSION

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

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

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

Whether Plaintiffs’ Damages Are Limited to the Policy Coverage

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

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

Whether the Default Judgment Is Free from Fraud and Collusion

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

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

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

The Settlement Agreement

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Because a Disco Is Not a Deli Policy Rescinded

It’s Not Nice to Lie to Your Insurance Company

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

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

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

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

BACKGROUND

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Panama Papers & Insurance Fraud

Zalma’s Insurance Fraud Letter

April 15, 2016

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

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

The Panama Papers and Insurance Fraud

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

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

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

 THE “ZALMA ON INSURANCE” BLOG 

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

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Broker Responsible to Insured for False Application

Insurer May Increase Premium on Audit

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

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

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

FACTS

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

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

ANALYSIS

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

To Be or Not to Be an Additional Insured?

Contract Must Require Additional Insured Status

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

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

BACKGROUND

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Lawyers Lie to Court About Impartiality of Appraiser Defeats Award

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

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

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

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

FACTS

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

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

The Parties’ Disclosures

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

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

The Appraisal Award

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

The Objection

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Criminal Conduct Defeats Insurance Claim

One Reservation of Rights is Sufficient

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

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

FACTS

AGLI issued Lamond, then a licensed attorney, a professional liability policy covering the period from May 20, 2007, through May 20, 2008. During the policy period, Lamond represented defendant Sean F. Murphy and two defendant companies in which he is the principal – Tremont Realty Investments, LLC, and Seamur Enterprises, LLC (collectively Murphy) – in the purchase of several lots of land for development. Prior to the closing, Lamond learned that the land was the site of an Indian burial ground and was subject to a preservation restriction. He nonetheless certified to Murphy’s mortgagor – Hill Financial Services Company – that titles to the land were free from any encumbrances. After the purchase, the truth was discovered, and Murphy was unable to build on the land as planned and defaulted on the mortgage. Hill foreclosed on the lots, but could not develop or sell them because of the burial ground.

In 2009, Hill brought suit against Murphy and Lamond in the Norfolk Superior Court. Murphy, in turn, brought third-party claims against Lamond for, inter alia, professional negligence and violations of Mass. Gen. Laws Ch. 93A.

In May of 2009, after Hill initiated the state court lawsuit, AGLI sent Lamond a letter informing him that while it had arranged for attorney Joseph Berman of the law firm of Looney & Grossman to defend him, it was “reserv[ing] all rights and defenses available under the Policy and at law to deny coverage on any of the [ ] bases” identified in the letter.  Specifically, the reservation letter quoted that Lamond’s policy does not apply … “[t]o any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest[.]”

The Hill] Complaint alleged the Insured’s failure to advise of the Indian issue was deceitful and claims the Insured’s failure to advise Hill Financial of the Indian issue was done so fraudulently so that Hill Financial would loan money. To the extent that this exclusion applies, American Guarantee advised its insured by the reservation of rights that it may be able to deny coverage and reserves the right to do so.

The reservation letter also noted that the definition of covered damages under the policy excluded “criminal or civil fines, penalties (statutory or otherwise), fees or sanctions; … 5. punitive, exemplary or multiple damages; … legal fees, costs and expenses paid to or incurred or charged by the Insured …”

AGLI did not send Lamond a second reservation letter specifically addressing Murphy’s third-party claims. In 2013, Murphy’s claims against Lamond were tried to a jury, which awarded $20,000 to Murphy for Lamond’s professional negligence, and $397,000 in actual damages for Lamond’s deceptive acts and practices under Chapter 93A, doubled by the jury to $794,000 after it found that Lamond had acted willfully. … Pursuant to Chapter 93A, the court also awarded $111,190.62 in attorneys’ fees to Murphy.

DISCUSSION

To prevail on their negligent misrepresentation claims, the defendants must establish in this context that the plaintiff, in the course of their business, profession or employment, or in any other transaction in which they had a pecuniary interest, supplied false information for the guidance of others in their business transactions without exercising reasonable care or competence in obtaining or communicating the information, that those others justifiably relied on the information, and that they suffered pecuniary loss caused by their justifiable reliance upon the information.

The absence of a second reservation letter is not reasonably understood as a representation that AGLI did not intend to reserve its rights with respect to Murphy’s third party claims against Lamond in light of the first letter.

The policy excluded “any intentional, criminal, fraudulent, and malicious or dishonest act or omission by an Insured.”  The letter identified the allegations that Lamond’s “failure to advise of the Indian issue was deceitful and … [his] failure to advise … was done so fraudulently.” The court noted that as Murphy’s third-party claims were based on the same allegations of misconduct, no new issues were raised.

Assuming, for the sake of argument, that the absence of a second letter implied a conflicting message from the first letter, Lamond’s reliance, without any efforts to rectify the two positions, was not reasonable.

The record is devoid of any evidence that Lamond obtained assurance or clarification from AGLI on his interpretation of the absence of a second letter. As a matter of law, he cannot now “rel[y] on one of a pair of contradictories simply because it facilitates the achievement of [his] goal.”

With respect to the Chapter 93A claim, defendants also allege that AGLI engaged in unfair and deceptive business practices by failing to settle Murphy’s claims against Lamond in good faith.

AGLI’s duty to settle the claims against Lamond does not arise until liability has become reasonably clear. Determining if a claim is covered by the policy is essential to evaluating the reasonableness of the insurer’s response to a demand.

Having identified the specific provisions of the policy that excluded coverage of Lamond’s conduct and damages in its reservation letter (those policy exclusions having also been confirmed by this court), it was never reasonably clear that AGLI’s policy covered the claims against Lamond. Absent such clarity, AGLI had no duty to settle Lamond’s claims.

ZALMA OPINION

A reservation of rights informs the insured that there is a problem with coverage and that there exists a possibility that if certain facts are proved there would be no coverage. In this case a trial court established that the lawyer acted fraudulently to cause damage to the parties suing him. That was sufficient to establish there was no coverage under the policy and his failure to seek clarification is his problem, not that of the insurance company. The loss was clearly excluded.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Additional Insured Added to Policy Without Underwriting Involvement

Stupid to Give Away Underwriting  Duty to Insured

Underwriting is the process by which an insurer evaluates the risks presented to it and decides whether it is willing to take a risk that will make insurance a profitable business. Commercial General Liability insurers have adopted a form of additional insured agreement that makes anyone that the named insured – by contract – agrees to make another an additional insured if the action seeking a defense meets certain requirements. By so doing the insurer transfers the obligation to underwrite the exposure to liability to the named insured and away from the insurer. As a result, until there is a loss, the insurer does not even know who it is insuring and whether it is a good risk or a risk no insurer would be willing to take.

In Old Republic General Insurance Corporation v.  Scottsdale Insurance Company, United States District Court, W.D. Pennsylvania, Defendant, Civil Action No. 15-31 (03/30/2016) the USDC for the Western District of Pennsylvania was asked to deal with a dispute over which insurer was required to defend an entity made an additional insured by the named insured without input from the insurer..

The issue was first presented to a magistrate judge who then presented to the District Court judge a Report and Recommendation (“R&R”) that recommended that the court grant Plaintiff Old Republic General Insurance Corporation’s (“Old Republic”) motion for summary judgment and hold that Scottsdale has a duty to defend a third-party — E.E. Austin & Son, Inc. — for whom Old Republic is currently paying defense costs.

BACKGROUND

Erie Water Works — a public utility company — hired E.E. Austin to serve as its general contractor for a construction and renovation project. In order to complete this project, E.E. Austin hired DH Steel to serve as its subcontractor for all metal installation.  While E.E. Austin already had a general insurance policy with Plaintiff Old Republic, the E.E. Austin-DH Steel agreement required DH Steel to obtain insurance coverage that would indemnify E.E. Austin for any harms stemming from DH Steel’s actions during the project.

DH Steel obtained a comprehensive general liability insurance policy from Scottsdale. The policy provides that the following are covered “Additional Insured” parties: “Who is An Insured is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for ‘bodily injury’…caused in whole or in part, by: ¶ Your acts or omission; or The acts or omissions of those acting on your behalf.”

During the policy period, one of DH Steel’s employees filed a negligence action in state court, naming E.E. Austin as the sole defendant. The employee’s underlying complaint alleged that he was injured while working for DH Steel on the Erie Water Works project. According to the complaint, the employee was injured as a result of E.E. Austin’s failure: to implement an effective daily inspection plan with its subcontractor’s employees; to provide an on-site supervisor; to train and supervise its DH Steel’s employees; and to designate a competent supervisor to review DH Steel’s safety program.

As E.E. Austin’s general insurance company, Old Republic submitted a request for coverage to Scottsdale. Scottsdale denied the claim on the grounds that the employee’s underlying complaint did not expressly state that DH Steel engaged in any acts of negligence and, therefore, did not implicate the Additional Insured Parties provision and was not covered by Scottsdale’s policy. Old Republic then filed the present declaratory action in federal court.

LEGAL STANDARD FOR A DUTY TO DEFEND

Generally, a court examining questions of insurance coverage shall grant summary judgment only if the movant shows that there is no genuine dispute as to any material fact. However, it is well-settled law in Pennsylvania and probably every other state that the duty to defend is broader than the duty to indemnify. In Pennsylvania, the duty to defend arises if there are any facts in the complaint that could “potentially” impose liability upon the insured within the policy’s coverage.

DISCUSSION

The R&R concludes that Scottsdale has a duty to defend E.E. Austin because the employee’s underlying complaint alleges facts that, if true, would potentially impose liability that falls within the scope of the Scottsdale insurance policy.

According to the employee’s complaint, the injuries were caused — at least in part — by the actions of DH Steel’s employees. The complaint seeks to hold E.E. Austin for negligently supervising DH Steel. That is, by implication, it alleges that E.E. Austin should have prevented DH Steel’s employees from engaging in negligent acts which caused the employee’s injury.

The court agreed with Magistrate Judge’s reasoning and entered judgment requiring Scottsdale to defend its additional insured.

ZALMA OPINION

Underwriting is an important part of any insurance business. Proper evaluation of the risk of third party liability takes a professional who can evaluate the persons seeking insurance based upon facts determined by an application and independent investigation by the underwriter. When that obligation is transferred to the named insured it can make an entity with a record of causing damage to be an insured and place its insurer in a situation defending a person or entity it would never have insured directly.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Criminal Activity Should Never Be Insurable

Scofflaws Demand Insurance Protection for Their Crimes

Insurance is designed to protect the persons insured against fortuitous events that are neither intended or expected by the insured. When a person is convicted of a crime it is axiomatic that the conduct resulting in the conviction was not fortuitous but was intentional and expected.

In Darwin National Assurance Company v. Luzerne County Transportation Authority, Stanley J. Strelish and Robb A. Henderson, United States District Court, M.D. Pennsylvania Civil Action No. 3:14-2417 | (03/30/2016) the USDC for the Middle District of Pennsylvania was asked to provide coverage to two criminals who were named as insured in a liability insurance policy.

BACKGROUND

In June 2014, a Pennsylvania statewide investigating grand jury issued a Presentment containing written findings of fact and a recommendation that criminal charges be filed against defendants Strelish and Henderson (collectively, the “Individual Defendants”). The Individual Defendants allegedly conspired to defraud PennDOT by intentionally submitting inflated and false county bus ridership data to PennDOT to obtain excess grant monies. Strelish held the position of Executive Director since 2007 and had overall responsibility for LCTA. Henderson held the position of Operations Manager since 2008 and supervised all LCTA bus drivers.

On September 23, 2014, the government filed Criminal Informations against Strelish and Henderson, respectively, in Pennsylvania state court. The Criminal Informations allege that Strelish and Henderson conspired to create false bus ridership data, which Strelish then submitted to PennDot to obtain excess grant monies, and the monies were then used to pay various operating expenses of LCTA, including the salaries of the Individual Defendants. Strelish and Henderswon were charged with multiple crimes.

The Individual Defendants tendered the Criminal Informations to the plaintiff insurer under the Public Officials Liability and Employment Practices Liability Insurance Policy which the plaintiff issued to LCTA. On September 3, 2015, Strelish executed a document titled, “Guilty Plea Agreement and Colloquy of Defendant Stanley Strelish” (“Plea Agreement”), in his criminal proceeding to several counts of tampering with public records, a felony of the third degree. At a hearing on September 8, 2015, the Court of Common Pleas of Dauphin County accepted Strelish’s plea and sentenced Strelish to five years of probation and ordered him to pay a $5,000 fine.

Plaintiff’s Motion for Summary Judgment

On June 29, 2015, the plaintiff filed a motion for summary judgment along with a supporting brief and a statement of material facts. Henderson and Strelish filed cross-motions.

The Public Officials Liability and Employment Practices Liability Insurance Policy contains, in relevant part, the following provisions regarding coverage for the liability of public officials:

“EXCLUSIONS

The Insurer shall not pay Loss, but shall only pay Defense Expenses, from any Claim brought about or contributed to in fact by:
A. any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured;
B. any willful violation by any Insured of any law, statute, ordinance, rule or regulation; or
C. any Insured gaining any profit, remuneration or advantage to which such Insured is not legally entitled.

The applicability of Exclusions to any specific Insured may be determined by an admission of such Insured, a finding, or final adjudication in the proceeding constituting the Claim or in a proceeding separate from or collateral to the Claim.

DISCUSSION

Prior to defendant Strelish’s guilty plea, the parties agreed that Strelish and Henderson are Insured because they were employees of LCTA. Although the insurer paid some defense expenses, the insurer refused to provide further coverage.

The acts in Strelish’s admission fit within exclusion A(1) of the list, which is “any deliberate misconduct or deliberate dishonest, fraudulent, criminal or malicious act, error, or omission by any Insured.” Strelish pled guilty to a felony of the third degree and admitted to committing a criminal act. As such, the court found that the plaintiff has fulfilled its burden in proving that the Section III.A(1) exclusion applies to Strelish’s claim. Strelish is not covered under the insurance contract, and he is obligated to reimburse the plaintiff for the $50,000 in Defense Expenses the plaintiff advanced to him.

Interpretation of Insurance Contract

Determining the scope of coverage involves interpretation of the insurance contract, which is a question of law for the court to decide. The initial burden of establishing coverage under an insurance policy rests with the insured, however the insurer bears the burden of establishing the applicability of an exclusion under an insurance policy.

With respect to all charged offenses other than dealing in proceeds of unlawful activities, Loss excludes as “fines” and “penalties” the sentencing alternatives including monetary payments upon conviction of these charges.

Limit of Liability

The court agrees with the plaintiff’s conclusion that the Section III.A exclusion bars Strelish from receiving coverage for his criminal proceeding, thereby rendering his cross-motion for summary judgment moot. The court concluded that, regardless of whether Strelish reimburses the plaintiff all or none of the $50,000 owed, the plaintiff is nevertheless obligated to pay Henderson Defense Expenses up to the Limit of Liability of $100,000 per the insurance contract.

Counterclaims for Bad Faith & Breach of Contract

With respect to Henderson’s counterclaim for bad faith, the plaintiff argues that the counterclaim should be dismissed because the plaintiff’s position is grounded in a reasonable basis.

Where an insurer defends itself on the grounds that a policy exclusion applies, the burden shifts to the insurer to prove the applicability of exclusions or limitations on coverage.

Further, in light of the court’s rulings above, it cannot be said that the plaintiff has breached any duty to LCTA. The plaintiff’s motion for summary judgment will therefore be granted with respect to LCTA’s counterclaim for breach of contract

ZALMA OPINION

The policy provided coverage for defense costs until a defendant is convicted. Both defendants were engaged in a massive criminal conspiracy and lost coverage for everything, other than defense costs, regardless of the broad nature of the policy. To do otherwise would be to allow the defendants to profit from their crime.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

No Relief for Insured’s Lack of Diligence

Ph.D Who Failed to Read Policy Loses Suit for Coverage

Most people and their lawyers forget that the covenant of good faith and fair dealing is a two way street. The insured must deal fairly and in good faith to the insurer just as the insurer must deal fairly and in good faith with the insurer. That means the insured must be clear when ordering insurance and read the policy to determine that the policy ordered is the same one that was received.

In Amankwah v. Liberty Mut. Ins. Co., Court of Appeals of Ohio, First District, Slip Copy, 2016 -Ohio- 1321,  2016 WL 1244482 (March 30, 2016) John Amankwah appealed from the decision of the trial court granting summary judgment in favor of Liberty Mutual Insurance Company and insurance agent Robert Walker (the “Liberty Mutual defendants”) on Amankwah’s claims for negligent procurement and contract reformation, arising from an accident in which Amankwah’s vehicle was totaled and Amankwah had no collision coverage.

BACKGROUND FACTS

The relationship between Amankwah and the Liberty Mutual defendants began in 2006, when Amankwah purchased automobile insurance through Walker for a Mercury Sable. Amankwah obtained full, comprehensive coverage for the vehicle, which included collision coverage. At some point, Amankwah purchased a Kia and added this car to the policy as well, which also had full coverage. Amankwah testified that he reviewed the policy in 2006 and again when the Kia was added. Amankwah renewed the policy for the Sable and Kia in March 2011, and approximately one month later, Amankwah purchased a Volkswagen Passat to replace his Sable.

Amankwah called the number for Walker’s office to request an exchange of car insurance. According to Amankwah’s deposition testimony, he spoke with a woman at that office about “roll[ing] over” the policy from the Sable to the Passat. Amankwah recalled that the woman had told him that his total premium for the two vehicles would be increasing because the Passat was a “foreign-made” car, and that the woman would take care of his request. At that time, Amankwah asserts that Liberty Mutual began to automatically deduct his insurance premiums from his bank account on a monthly basis.

Amankwah testified that he “skimmed” through the April 2011 policy after he substituted the Passat, but he did not review the policy declarations page, which explained that Amankwah had no collision coverage on the Passat. The parties do not dispute that Amankwah received two more annual renewal policies, both of which also indicated the absence of collision coverage on the Passat.

In October 2013, Amankwah was involved in a car accident, and his Passat was a total loss, valued at $14,000 and his claim was rejected. Amankwah then filed suit against the Liberty Mutual defendants for negligence and contract reformation based upon mutual or unilateral mistake.

The Liberty Mutual defendants successfully moved for summary judgment on both claims, relying upon Amankwah’s deposition testimony, and an affidavit from a senior branch manager at Liberty Mutual.  Amankwah responded to the Liberty Mutual defendants’ summary-judgment motion with an affidavit addressing the contemporaneous note from his April 2011 call. In his affidavit, Amankwah avers that when he had called Walker’s office to switch vehicle coverage, he had discussed with the agency representative a transfer of the Passat’s warranty from the prior owner, and not the transfer of collision coverage.

NEGLIGENT PROCUREMENT

The appellate court’s review of Ohio case law in actions brought by insureds against insurance agencies for negligence, where the insureds have indisputably breached their duty to review the policies, reveals that courts have reached differing results, not based upon any legal rule, but upon the unique facts of each case.

Several courts have relied on an insured’s failure to review coverage in an insurance policy in barring the insured from recovering from an insurance agency under a negligent-procurement theory.  The loss in this case goes beyond Amankwah’s failure to read the insurance policy according to the Ohio Court of Appeal.

According to Amankwah’s deposition testimony, he is highly educated with a Ph.D. in communications and holds a position as a professor at Mount Saint Joseph University. When he called the number to Walker’s office to “roll over” the insurance from his Sable to his Passat, Amankwah stated that the woman at the office had told him that his total premium would be increasing, because the Passat was a “foreign-made” vehicle. Although Amankwah expected his premiums to increase, he did not notice that his premiums actually decreased. Amankwah attempts to downplay his oversight because, at the time he obtained insurance on the Passat, Liberty Mutual began withdrawing the premiums on a monthly basis from his bank account. Thus, not only did Amankwah fail to read the policy declarations for two years, when a simple glance would have revealed the absence of collision coverage, but he also failed to examine his bank account and take notice that Liberty Mutual had decreased and not increased his premiums.

The change to Amankwah’s insurance policy was brought about by a condition he changed—selling the Sable and buying the Passat—not a periodic renewal of a policy with a condition changed by the insurance company. Amankwah knew his policy would change by virtue of insuring a newer, foreign-made vehicle, causing his premium to increase. Reasonable minds can conclude only that Amankwah’s loss of his vehicle was proximately caused by his negligence, and not the negligence of the insurance agent or Liberty Mutual.

CONTRACT REFORMATION

An insurance policy may be “reformed” to correct a mutual mistake by the insured and the insurer, or to correct a unilateral mistake made by the insurer in failing to issue a policy in accordance with a prior agreement of the parties. Reformation is an equitable remedy that requires the court to treat the parties with fairness, available to a complaining party who has acted with reasonable diligence. Where a complaining party has failed to read a contract, equitable relief in the form of contract reformation is appropriately prohibited.

As a matter of law Amankwah cannot claim relief on the grounds of mistake when the loss occasioned by the alleged mistake was the result of his own negligence.

ZALMA OPINION

Insurance contracts are mutual agreements between the insured and the insurer and are reduced to writing. For a person with a Ph.D in communications to claim he is entitled to relief because he did not read the policy, note that he was charged less for the addition of the Passat rather than the more promised, simply sat on his rights and was neither entitled to a contract interpretation that the policy should be changed to provide collision coverage that was neither ordered nor paid for.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – April 1, 2016

Fraud Schemes

No April Fools Jokes 

Click here to receive the current issue

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

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

The current issue of ZIFL reports on:

  • Fraud Schemes
  • Barry Zalma
  • Litigation Privilege Defeats Claim of Fraud by Lawyer
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
  • New From Barry Zalma
  • Books from Barry Zalma
  • Fraud Conviction Affirmed
  • Wisdom
  • Just for Fun From “Heads I Win, Tails You Lose” – The Tiffany Kid
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Zalma’s Insurance 101
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma’s Insurance Fraud Letter

Special Links

Zalma’s Insurance Fraud Letter – Vol. 20, Number 5

Visit the Website of Zalma Insurance Consultants

ZALMA INSURANCE CONSULTANTS

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

The Zalma Insurance Claims Library

Zalma on Insurance – A Blog

 THE “ZALMA ON INSURANCE” BLOG 

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

 Zalma on Insurance 

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

Multiple Crashes Still One Accident
Policy Properly Rescinded for Misrepresentation of Material Facts
Litigation Privilege Defeats Claim of the Lawyer Committed Fraud
Claim Made Before Policy Not Covered
Special Relationship Needed to Hold Insurance Agent For Negligence
When Insured Commits Fraud or False Swearing It Should Not be Confused with Appraisal
Insurance Is Going to Pot in Colorado
Jury Selection Comments Not Evidence
Deductible Applies to Each Occurrence
No Coverage No Bad Faith
Actual Conflict Required for Independent Counsel
Zalma’s Insurance Fraud Letter, February 15, 2016
Agents May Compete in California
Claims File Sacrosanct Until Coverage Established
Innocent or Intentional Misrepresentation Requires Rescission
Umbrella Excess over Municipal Risk Pool
No Honor Among Insurance Criminals
Speculative Class Action Fails
Exclusion Clear & Unambiguous Applies


Zalma Insurance 101 

I have also created a video blog called Zalma’s Insurance 101 which currently has over 551 three to four minute videos starting with “What is Insurance” and moving forward to the Release of All Claims explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101

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

ZALMA-INS-CONSULT
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Mention of Insurance Defeats Judgment

No Evidence of Exception to Allow Mention of Insurance or Lack of Insurance at Trial

In Maryland, like most states, mention of insurance in a negligence trial is usually prohibited because it can be prejudicial and cause confusion to the party. Maryland allows three exceptions to the general rule of law prohibiting evidence that a defendant is insured against liability:

1. Where the evidence is relevant to the cause of the accident or the liability of the defendant.

2. Where the reference to insurance is made by the defendant or his witness, in which event the testimony is admissible and is subject to legitimate comment and argument.

3. Where the evidence is relevant to an issue of which of two or more defendants was the employer of the operator of the vehicle involved.

In Perry v. Asphalt & Concrete Services, Inc., Court of Appeals of Maryland — A.3d —- 2016 WL 1178073 (March 28, 2016) the issue came to the highest court in the state, the Court of Appeals of Maryland,  that was asked whether evidence of insurance or lack of insurance is admissible to establish a negligent hiring claim. At the core of the case is whether the admission of this evidence likely influenced the jury’s determination of liability for Moran Perry’s (“Perry”) injuries. Perry filed suit against Respondent, Asphalt Concrete Services, Inc. (“ACS”), Higher Power Trucking, LLC (“Higher Power”) and William Johnson, II (“Johnson”) for injuries he suffered when he was struck by a dump truck owned by Higher Power and operated by Johnson.

The Circuit Court for Prince George’s County allowed into evidence witness testimony regarding Johnson’s lack of liability insurance coverage at the time of the accident.

FACTUAL BACKGROUND

On April 28, 2009, Perry was crossing the intersection of Opposumtown Pike and Thomas Johnson Drive in Frederick, Maryland when he was struck by a 2007 Kenworth dump truck operated by Johnson, and owned by Higher Power. As a result of the accident, Perry suffered head trauma and rib fractures. ACS had hired Higher Power to haul asphalt and stone to St. John’s Regional Catholic Church, where ACS was paving a children’s play pad. A preliminary investigation by Officer Joseph Palkovic revealed that neither Johnson nor Higher Power had liability insurance covering the truck because of a lapse in payment on the insurance policy.

Perry sued alleging negligence against Higher Power, Johnson, and ACS. He also alleged that ACS was negligent in its hiring and supervision of Higher Power. ACS filed a motion in limine seeking to exclude evidence that Johnson had a suspended license and that the truck was uninsured at the time of the accident. With respect to lack of insurance, ACS argued that it was inadmissible because liability insurance, based on Maryland Rule 5–411, generally speaking can’t be admitted on the issue of proximate cause of an accident or negligence.

Trial began on October 7, 2013.  Burt Maggio (“Maggio”), President of ACS at the time of the accident, testified and over objection Perry’s counsel asked Maggio to testify about records  and further stated that ACS required proof of insurance because some of their customers required them to show proof of insurance.  On cross-examination, Maggio stated that in April 2009, ACS had fifteen employees and that Johnson was not an employee, but instead worked for Higher Power.

Officer Palkovic testified that he responded to the scene of the accident on April 28, 2009, where Johnson identified himself as the driver who struck the person in the intersection. He stated that Johnson produced evidence of insurance that was not valid due to a lapse in payment.

ISSUE

Did the trial court commit an abuse of discretion by admitting the evidence of insurance?

DISCUSSION

Neither party disputes the trial court’s ruling that the evidence of lack of insurance was not relevant to the claim of ordinary negligence. Perry claims that the evidence of Johnson’s lack of insurance demonstrates it was more likely than not that ACS violated its duty to use reasonable care in hiring Johnson because it knew or should have known of Johnson’s inability to lawfully operate a dump truck.

Under Maryland Rule 5–411 , “[e]vidence that a person was or was not insured against liability is not admissible upon the issue [of] whether the person acted negligently or otherwise wrongfully.” Evidence of liability insurance may, however, be admissible if “offered for another purpose, such as proof of agency, ownership, or control, or bias or prejudice of a witness.”

Establishing Liability for Negligent Hiring

An important issue at trial was determining the relationship between Johnson and ACS: was Johnson (1) an agent, servant, and/or employee of ACS (i.e., in an employment relationship where ACS was the employer) or (2) an independent contractor? An employer is liable for the acts of an independent contractor under the theory of negligent hiring if the harm is caused by “some quality in the contractor which made it negligent for the employer to entrust the work to him.

At trial, the jury found Johnson to be the agent, servant and/or employee of ACS. Therefore, even if Perry failed to prove the negligent hiring count, ACS was liable under the doctrine of respondeat-superior. The trial court found there was enough evidence presented for the jury to determine the type of employment relationship that existed between Johnson and ACS.

Negligent Hiring: Employer’s Duty

Generally, an employer has a duty “to use reasonable care to select employees competent and fit for the work assigned to them and to refrain from retaining the services of an unfit employee” regardless of whether one engages an agent or independent contractor. ACS employees appeared to agree that they were “not allowed to” have truck operators who did not produce insurance information “because of the nature of the work” they did.

Accordingly, under the circumstances of this case, Mr. Johnson’s lack of liability insurance was relevant to whether ACS employed a competent person. Maryland requires vehicles to be covered by liability insurance. The purpose of this law is to ensure that those who own and operate motor vehicles registered in the State are financially able to pay compensation for damages resulting from motor vehicle accidents. ACS hired Higher Power for the specific purpose of transporting materials to job sites.

Negligent Hiring: Causation

The evidence of lack of insurance is relevant to the standard of care exercised by ACS. The requirement that specific negligent conduct be a legally cognizable cause involves a determination of whether it was foreseeable that the negligent act would cause the specific injury complained of in the case.

In this case lack of insurance coverage alone, without more, should not, and did not give ACS an indication of Johnson’s abilities to operate a dump truck. For evidence of insurance to be admissible in a negligent hiring claim, the evidence must also be relevant to the proximate cause of the plaintiff’s injuries. Here, the negligent hiring of Higher Power/Johnson was not, as a matter of law, the proximate cause of the accident. An individual lawfully operating a vehicle covered by liability insurance may nonetheless have a long accident history due to negligent driving or poor driving skills.

Johnson’s lack of liability insurance coverage was irrelevant to the claim of negligent hiring because it was not relevant to the proximate cause of Perry’s injuries, and did not fall within any exceptions to the general rule against admitting evidence of insurance. Irrelevant evidence is not admissible. The Maryland court concluded that it was legal error for the trial court to admit the evidence of lack of insurance coverage.

Prejudicial Effect of Admitting Inadmissible Evidence of Lack of Insurance

Even where evidence is wrongly admitted, under Maryland Rule 5–103(a) , “[e]rror may not be predicated upon a ruling that admits … evidence unless the party is prejudiced by the ruling.”

Since evidence of lack of insurance was irrelevant and immaterial to the claim of negligent hiring. Because references to Johnson’s lack of insurance coverage were not stricken from the record, the admission of that evidence probably influenced the jury in its determination of liability, resulting in prejudice to ACS.

CONCLUSION

The evidence of lack of insurance was brought up repeatedly during trial.

1. Evidence that driver lacked liability insurance was relevant to issue of whether driver’s alleged employer breached a duty by hiring driver;

2. Employer’s alleged negligence in hiring driver who lacked insurance coverage was not the proximate cause of pedestrian’s injuries and, thus, evidence of lack of insurance coverage was inadmissible; and

3. Trial court’s error in admitting irrelevant evidence of driver’s lack of liability insurance prejudiced driver.

ZALMA OPINION

Even though the state of Maryland will allow evidence in a tort case about insurance available or not available to the defendant the exceptions to the general rule that such evidence is not admissible because it will prejudice the defendant. This case must be tried again avoiding the prejudicial mention of insurance to prove the negligence of the person who contracted with the dump truck operator. Their testimony that they did not follow all of their own requirements before hiring a trucker should make the defense difficult.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Policy Must Be Read as Written

P&I Insurance Requires Causal Relationship to Vessel

The difference between marine and land-based incidents and their insurance becomes difficult when land-based events meld with marine activities. When the two are involve in causing an injury insurers who must respond often try to resolve the problems by litigation.

In Naquin v. Elevating Boats, L.L.C., — F.3d —- United States Court of Appeals, Fifth Circuit, 2016 WL 1138516 (March 22, 2016) the Fifth Circuit was called upon to resolve a dispute over whether the incident was causally related to a vessel an require the vessel’s insurer to pay for the judgment entered in favor of Naquin.

FACTS

In employee’s suit against employer under Jones Act, employer was granted leave to file third-party action against liability insurers for breach of contract by failing to provide defense and indemnity under a protection and indemnity (P&I) policy in the employee’s suit to recover for injuries caused by toppling of employer’s land-based crane. The United States District Court for the Eastern District of Louisiana, entered summary judgment in favor of insurer.

The employer appealed. This appeal flows directly from a previous decision by this court. In that matter, Larry Naquin was using an EBI land-based crane to relocate a test block when the pedestal of the crane snapped, causing the crane to topple over. Naquin v. Elevating Boats, L.L.C., 744 F.3d 927, 931 (5th Cir.2014). Upon jumping from the crane house, Naquin sustained a broken left foot, a severely broken right foot, and a lower abdominal hernia.  Despite reparative surgeries and physical therapy sessions, Naquin was unable to return to physical work.

Naquin subsequently sued EBI pursuant to the Jones Act, and after a three-day trial a jury concluded that Naquin was a Jones Act seaman and that EBI’s negligence caused his injury. The jury subsequently awarded Naquin $1,000,000 for past and future physical pain and suffering, $1,000,000 for past and future mental pain and suffering, and $400,000 for future lost wages. EBI appealed, challenging, among other things, the grant of Jones Act seaman status to Naquin and the sufficiency of evidence to establish EBI’s negligence.

Pertinent to this appeal, the Naquin majority affirmed the jury’s verdict as to liability, concluding that the jury correctly determined that Naquin qualified as a Jones Act seaman. Specifically, as to the negligence inquiry, the Fifth Circuit held: “EBI was the only party responsible for welding the LC–400 crane to its base, a weld which was indisputably defective and the direct cause of Naquin’s injuries.” The Fifth Circuit vacated the verdict as it related to damages and remanded the matter to the district court to conduct a new trial on that specific issue.

The district court subsequently granted EBI leave to file a third-party complaint against its insurance companies, SNIC and Certain London Insurers (“London Insurers”). In its third-party demand, EBI complained that both SNIC and London Insurers breached their insurance contracts by denying EBI’s insurance claims arising from Naquin’s accident and by failing to provide EBI with defense and indemnity.

SNIC moved for summary judgment, asserting, chiefly, that EBI was not entitled to coverage under its Protection & Indemnity Policy (the “Policy”) because coverage did not extend to Naquin’s land-based incident and that EBI failed to comply with the notice requirements imposed by the Policy. EBI responded in opposition, explaining that it was entitled to indemnity under the “any casualty or occurrence” language of the Policy.

Scope of Coverage

The “Indemnity” provision of the Policy at the heart of this appeal, provides: “Subject to all exclusions and other terms of this Policy, the Underwriters agree to indemnify the Assured for any sums which the Assured, as owner of the Vessel, shall have become liable to pay, and shall have paid in respect of any casualty or occurrence during the currency of the Policy, but only in consequence of any other matters set forth hereunder …” (emphasis added). The district court interpreted this critical language as excluding coverage to EBI due to the circumstances surrounding its liability in Naquin.

In the absence of a specific and controlling federal maritime rule over this dispute, the Fifth Circuit interprets this maritime insurance contract under Louisiana state law. Under Louisiana law, an insurance policy is a contract between the parties and should be construed using the general rules of contract interpretation set forth in the Louisiana Civil Code.

Words and phrases used in an insurance policy should be construed using their plain, ordinary and generally prevailing meaning, unless the words have acquired a technical meaning. SNIC avers that the terms of the subject Policy—specifically, the “as owner of the Vessel” clause—does not provide coverage for the land-based incident due to EBI’s negligence as described in Naquin. Before the district court, EBI urged a blanket reading of the Policy that would provide coverage for “any casualty or occurrence” for which EBI might become liable.

EBI’s strained interpretation of the Policy is unreasonable in this context. There is no genuine issue that the scope of coverage of the Policy does not extend to EBI’s liability for the Naquin incident. The Fifth Circuit declined EBI’s invitation to read the provision in the piecemeal fashion that it prefers — a policy construction that would directly contradict the well-established Louisiana rules regarding contractual interpretation. The only way to give meaning to both provisions of the Policy is to construe the Policy as limiting coverage to “any casualty or occurrence” which arises out of EBI’s conduct “as owner of the Vessel.”

There must be at least some causal operational relation between the vessel and the resulting injury. The line may be a wavy one between coverage and noncoverage, especially with industrial complications in these ambiguous amphibious operations plus those arising from the personification of the vessel as an actor in a suit. Where injury is done through non-vessel operations, the vessel must be more than the inert locale of the injury.
Naquin’s incident in no way arose out of EBI’s conduct as “owner of the Vessel.” The earlier Naquin decision, devoid of any indication that EBI was liable due to such conditions, confirms as much; this understanding alone forecloses EBI’s arguments to the contrary.

The land-based crane did not break on or even in close proximity to a vessel. Thus, EBI’s attempts to craft a causal connection to a vessel are discharged, plainly and simply, by the underlying facts.

Where there is no causal operational relation between the vessel and the resulting injury, there is no extension of coverage for liability. It was EBI’s actions as platform operator or as a crane operator that caused the harm, and that does not make it a liability of a shipowner.

Bad Faith

Louisiana law instructs that in order for a claim of statutory bad faith to survive, it must be based on a valid underlying claim. The Policy does not extend to EBI’s liability associated with the defective crane; consequently, EBI has no valid underlying claim on which to stand. Accordingly, the district court did not err in dismissing EBI’s claim for bad faith.

ZALMA OPINION

When a policy of insurance clearly and unambiguously limits its scope courts are compelled to enforce the wording. When, as here, a policy limits its coverage to actions of the insured as “owner of the vessel” and, as here, the vessel was no where near the incident there can be no coverage under this policy wording.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

No Insurance for Lawyer who Cheats Client

Lawyer’s E&O Does Not Cover Investment Advice

Lawyers provide legal advice and counsel to their clients. When a lawyer buys errors and omissions (E&O) insurance the lawyer seeks protection from his or her errors in providing legal advice to the client. An E&O policy does not, however, provide coverage for the defense and indemnity of the lawyer for every possible reason that the lawyer might be sued.

In Christensen v. Darwin Nat. Assur. Co., United States Court of Appeals, Ninth Circuit — Fed.Appx. —- 2016 WL 1128033 (March 23, 2016) Christensen Law Offices and Thomas Christensen (Christensen) appeal the district court’s grant of summary judgment in favor of Darwin National Assurance (Darwin) in an insurance coverage dispute.

Christensen sought reimbursement from their insurer, Darwin for costs associated with a malpractice lawsuit brought against Christensen by the Henry Vincent Trading Company (“HVTC”), among others, in Nevada state court.

The case on whether Darwin had a duty to defend Christensen. Under Nevada law, “[d]etermining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy.” United Nat’l Ins. v.. Frontier Ins., 99 P.3d 1153, 1158 (Nev.2004) (en banc). “If there is any doubt about whether the duty to defend arises, this doubt must be resolved in favor of the insured.”

THE POLICY

The coverage exclusions in the policy issued by Darwin to Christensen prohibits claims “based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving, in whole or in part” providing investment advice; the insured’s capacity or status as a part of a business enterprise; or any act of the insured in connection with a trust or estate when the insured is a beneficiary or distributee of the trust or estate.

FACTS

Christensen’s undervaluing of the Harmon property while advising HVTC was directly linked to what occurred next—the acquisition by the TFC Family Trust of half of HVTC’s assets. The Trustees of the TFC Family Trust are Thomas Christensen and his wife, and the trust obtained half ownership in the Harmon property following the undervaluing of the property.

ANALYSIS

Even if the misrepresentation of the value of the property was made before the self-dealing sale, the misrepresentation still fell within the exclusion for acts “in any way involving” the “Insured’s capacity or status as: [ ] an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise, charitable organization or pension, welfare, profit sharing, mutual or investment fund or trust.”

Grasping for straws, Christensen, recognizing the weakness of its coverage claims, for the first time on appeal, argued that the district judge should have sua sponte recused himself from this case because his former law firm represented HVTC in the lawsuit underlying this insurance dispute. Failure to move for recusal at the trial level does not preclude raising on appeal the issue of recusal though it does mean that review is for plain error. Even if there were an error by the District Court judge Christensen failed to demonstrate any effect on substantial rights, as would be required to establish plain error. To be reversed on appeal an error must affect substantial rights to satisfy the plain error standard, and in most cases this means that the error must have been prejudicial: It must have affected the outcome of the district court proceedings. It did not.

In light of Ninth Circuit’s review of the claims in this case, and its conclusion that Darwin was plainly entitled to summary judgment, Christensen could not have suffered prejudice from any error on the part of the trial judge to recuse himself.

ZALMA OPINION

Insurance is available to protect people against almost any risk. Not every policy, however, covers every possible risk. Darwin limited its exposure by an exclusion that clearly eliminated coverage for providing investment advice, especially in a situation where the lawyer apparently misrepresented facts so that the lawyer could profit from the false advice. Fraudulent activities by a lawyer should never be appropriate grounds for insurance funded defense and/or indemnity.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on No Insurance for Lawyer who Cheats Client

New York’s Statutory Version of Notice-Prejudice Rule

Notice Within Two Years Raises Need To Prove Prejudice

For many years New York has refused to apply the notice-prejudice rule that is applied in most jurisdictions across the country. The New York Legislature, as a result of the failure of the state courts to create the rule, enacted a version of the rule by statute.

In Slocum v. Progressive Northwestern Ins. Co., — N.Y.S.3d, 2016 WL 1165334, 2016 N.Y. Slip Op. 02182 (March 25, 2016) the statutory rule was raised before the appellate court after a trial court granted summary judgment to the insurer.

FACTS

Plaintiff was injured in a motor vehicle accident on July 29, 2012, when the vehicle in which she was a passenger was hit from behind by a vehicle operated by a nonparty tortfeasor. At the time, plaintiff was a named insured on an automobile insurance policy issued by defendant to plaintiff’s mother. On September 11, 2012, plaintiff learned that the coverage limit of the tortfeasor’s insurance policy was $50,000. On June 6, 2013, plaintiff underwent cervical fusion surgery.

In August 2014, more than two years after the accident, plaintiff notified defendant of the accident and sought coverage under the supplemental uninsured/underinsured motorist (SUM) endorsement of the policy. Defendant disclaimed coverage on the ground that plaintiff failed to provide timely notice of her SUM claim pursuant to the terms of the policy, and plaintiff commenced this action and thereafter moved for summary judgment seeking a declaration that she is entitled to SUM coverage under the policy.

Defendant opposed the motion, contending that plaintiff’s failure to notify it of her SUM claim in a timely manner vitiated coverage, and cross-moved to compel disclosure of plaintiff’s medical records. The trial court (Supreme Court) denied plaintiff’s motion, determining that plaintiff failed to demonstrate that defendant had not been prejudiced by plaintiff’s “two-plus year delay” in notifying defendant of the accident. The court also denied defendant’s cross motion as moot.

ANALYSIS

The appellate court concluded that the court erred in denying plaintiff’s motion. Initially, it rejected plaintiff’s contention that her delay in notifying defendant of the accident was reasonable. Here, the policy required that notice be given to defendant “[a]s soon as practicable,” which means, “in the SUM context, … that ‘the insured must give notice with reasonable promptness after the insured knew or should reasonably have known that the tortfeasor was underinsured’” (Rekemeyer v State Farm Mut. Auto. Ins. Co., 4 NY3d 468, 474). Plaintiff became aware of the limits of the tortfeasor’s policy in September 2012, and she learned the extent of her injuries at least by June 2013, when she underwent cervical fusion surgery. Under the circumstances, the appellate court concluded that it was unreasonable for plaintiff to wait until August 2014 to notify defendant of her SUM claim.

As a result the appellate court agreed with plaintiff, however, that she is entitled to coverage based on Insurance Law § 3420(a)(5). Effective January 2009, an insurer may not deny coverage based on untimely notice “unless the failure to provide timely notice has prejudiced the insurer”, and prejudice is not established “unless the failure to timely provide notice materially impairs the ability of the insurer to investigate or defend the claim”. Further, “[i]n any action in which an insurer alleges that it was prejudiced as a result of a failure to provide timely notice,” the burden of proof is on the insurer to prove that it has been prejudiced “if the notice was provided within two years of the time required under the policy”.

In the context of this summary judgment motion that plaintiff met her initial burden by establishing that she provided notice within two years of the time required under the policy and that defendant was not prejudiced by the delay. As noted, plaintiff learned the limits of the tortfeasor’s insurance coverage on September 11, 2012, and that date was the earliest “time required under the policy” for plaintiff to provide notice. Plaintiff provided defendant with notice of the accident in August 2014, less than two years later. Thus, prejudice to defendant is not presumed under the Insurance Law.

Plaintiff also established as a matter of law that defendant was not prejudiced by her delay in providing notice, thus shifting the burden to defendant to raise an issue of fact. The insurer failed to meet that burden by demonstrating that its ability to investigate or defend the claim has been materially impaired. Although defendant submitted an affidavit from one of its claims representatives asserting that it was prejudiced because of its inability to examine the vehicles involved in the accident, it is reasonable to conclude that the vehicles would have been repaired in the time between the accident and the date that plaintiff was required to give notice under the policy.

Defendant therefore failed to establish that it would have had the opportunity to inspect the damage to the vehicles even if plaintiff had provided it with timely notice of her SUM claim. Although defendant’s claims representative further asserted that defendant suffered prejudice because it was unable to conduct an examination under oath or an independent medical examination of plaintiff before she underwent cervical fusion surgery in June 2013, we conclude that defendant’s submissions fail to establish that postsurgery examinations and plaintiff’s medical records will not yield the information sought.

Finally, in light of the determination, the appellate court remitted the matter to the trial court to determine the merits of defendant’s cross motion.

ZALMA OPINION

New York has joined the majority states with its enactment of its version of the notice-prejudice rule with a logical, two-year, limit on the argument. Since the plaintiffs cause of action for SUM coverage arose less than two years before giving notice the burden to prove prejudice fell on the insurer who should have performed a thorough investigation to establish the prejudice before taking a position refusing coverage.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on New York’s Statutory Version of Notice-Prejudice Rule

Efficient Proximate Cause

Insured Must Prove Loss & Insurer Must Prove Exclusion

It is the obligation of an insured of a first party policy to prove that a loss occurred that is covered by the policy. Once that proof is received it is the duty of the insurer to prove beyond a preponderance of the evidence that an exclusion applies. The test in California and most states is that coverage is based upon what is the efficient proximate cause of loss.

In Vardanyan v. AMCO Insurance Company, 243 Cal.App.4th 779, 197 Cal.Rptr.3d 195, 16 Cal. Daily Op. Serv. 240, 2016 Daily Journal D.A.R. 136 ( December 11, 2015) the insured rental property owner brought an action against a property insurer, alleging breach of its all-risk insurance contract and breach of the implied covenant of good faith and fair dealing after insurer refused to cover damage to rental property.

The trial court expressed its intention to instruct the jury that plaintiff’s property damage loss was covered by his policy only if it was caused by perils specifically listed in the collapse coverage provision and no others. Because it was undisputed that other perils contributed to some extent to the loss, plaintiff conceded he could not prevail if the jury was so instructed.

FACTUAL BACKGROUND

Plaintiff owned a rental house covered by an insurance policy issued by defendant. On December 6, 2010, he submitted a claim that stated plaintiff believed there was water damage to the flooring that might have come from the walls, and there was mold as well.

The subfloor area lacked adequate ventilation, preventing the moisture below the house from drying. An engineer, Jundt, opined the original construction of the subfloor area without proper ventilation was not up to code at the time of construction. The various sources of moisture—roof leaks, gutters and downspouts that did not channel the water away from the house, a faucet spraying water on the exterior of the house, leaking toilet and bathtub, and humidity—contributed to the damage to the house, along with poor construction, termite damage and decay.

Defendant denied coverage of plaintiff’s loss, citing multiple policy exclusions, including exclusions for damage caused by seepage or leakage of water from a plumbing system, deterioration, mold, wet or dry rot, settling of foundations, walls or floors, earth movement, water damage, neglect, weather conditions, acts or decisions of any person, and faulty or defective design, workmanship, repair, construction, or maintenance.

Plaintiff alleged the house collapsed and the policy provided coverage for collapse.

The policy, excluded coverage for collapse, “other than as provided in OTHER COVERAGES 9.” Other Coverage 9 provided coverage for losses involving collapse of a building or part of a building “caused only by one or more” of a list of perils, including hidden decay, hidden insect damage, and weight of contents, equipment, or people.
Plaintiff’s expert, Robert Bresee, opined the water in the subfloor area came from within the walls, where it was not readily visible to occupants of the house.

The evidence presented by both sides indicated there were multiple causes of the damage to plaintiff’s house. Plaintiff’s theory was that the coverage for collapse due to hidden decay or hidden insect damage applied, if either of those perils was the predominant cause of the collapse of the structure. Plaintiff requested that the trial court give a standard jury instruction explaining that, when a loss is caused by a combination of covered and excluded risks, the loss is covered if the most important or predominant cause is a covered risk. Defendant instead proposed a special jury instruction (No. 12) placing on plaintiff the burden of proving the collapse of the house was “caused only by one or more” of the perils listed in Other Coverage 9. Defendant’s special instruction No. 12 specified that there was no coverage if the cause of the collapse involved any peril other than those listed. Plaintiff opposed giving the special instruction proposed by defendant.

DISCUSSION

Efficient proximate cause doctrine

In California, the efficient proximate cause doctrine is “the preferred method for resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.” (Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 753, 27 Cal.Rptr.3d 648, 110 P.3d 903 (Julian ).)

Plaintiff’s Contentions

Plaintiff contends the language “caused only by one or more of the following” in Other Coverage 9 means that this is a complete list of the perils causing collapse that are covered under the policy. If any one or any combination of the listed perils causes the collapse, the loss is covered. If some unlisted peril contributes to the collapse, the efficient proximate cause doctrine requires that the jury determine which cause is the predominant or most important. If the predominant cause is a peril listed in Other Coverage 9, then the loss by collapse would be covered. If the predominant cause is not a listed peril, then the loss would not be covered.

Defendant’s Contentions

Defendant contends the use of the word “only” means that a collapse is a covered loss only if no peril other than those listed contributes to the collapse. The trial court agreed with defendant and indicated it would instruct the jury with defendant’s proposed special instruction No. 12, and would not give CACI No. 2306. Defendant’s proposed special instruction, as the trial court intended to give it, states: “Mr. Vardanyan contends that the damage to his property is covered under the insurance policy’s provision for ‘collapse’ to a building or any part of a building caused by ‘hidden decay’ or ‘hidden insect or vermin damage.’

Contract Interpretation

The mutual intention of the parties as it existed at the time of contracting governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The policy’s coverage for plaintiff’s house is all-risk or open peril coverage; the policy provides that plaintiff is insured “for risk of direct physical loss to the property,” with specified exceptions or exclusions. One of the exceptions to coverage is “collapse other than as provided in Other Coverage 9.”

Here, the policy provision provides that collapse is covered if caused by specific listed perils. Plaintiff’s interpretation of the Other Coverage 9 provision is the correct interpretation, consistent with the efficient proximate cause doctrine.

A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. To the extent the term “caused only by one or more” of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine. Accordingly, CACI No. 2306, rather than defendant’s proposed special instruction No. 12, was the correct instruction to give to the jury.

Burden of Proof

When an issue of coverage exists, the burden is on the insured to prove facts establishing that the claimed loss falls within the coverage provided by the policy’s insuring clause. Once the insured has made that showing, the burden is on the insurer to prove the claim is specifically excluded. The insurer, though, since it is denying liability upon the policy, must prove the policy’s noncoverage of the insured’s loss—that is, that the insured’s loss was proximately caused by a peril specifically excluded from the coverage of the policy.

Plaintiff’s policy  provided that defendant covered the house for “risk of all direct physical loss to the property,” with specified exceptions and exclusions. One exception was for “collapse other than as provided in Other Coverage 9.” Thus, the burden was on defendant to prove not just collapse, but collapse other than as provided in Other Coverage 9.

Because the instruction improperly shifted the burden of proof, the trial court erred in its decision to instruct the jury with defendant’s proposed special instruction and in granting defendant’s motion for directed verdict based on the decision to give that instruction.

DISPOSITION

The judgment on plaintiff’s claims for breach of contract and breach of the covenant of good faith and fair dealing is reversed and remanded for retrial. On retrial, the trial court is instructed to enter judgment in favor of defendant on plaintiff’s claim for punitive damages, in accordance with the directed verdict already entered.

ZALMA OPINION

There are multiple reasons why there was no coverage for the loss claimed. The insured grasped at straws and claimed collapse even though the apparent cause of the damage was poor maintenance, improper design, leaking pipes, a faucet poring water into the house that eventually resulted in partial collapse of the house. The trial court attempted to find a way around the efficient proximate cause doctrine and was properly reversed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Agent’s Lie to Insurer Causes Policy to Be Void

Independent Insurance Agent Represents Insured not Insurer

Most people do not understand insurance. Most do not understand the importance of the absolute truth of the matters of fact stated in an application for insurance. As a result the average person relies on his, her or its insurance agent/broker to do what is necessary to obtain insurance. When the agent/broker transacting insurance with but not on behalf of an insurer misrepresents material facts to the insurer the person insured can be harmed and found to be without coverage. In all cases when a claim is denied both parties are upset and litigation invariably follows.

In Georgia Cas. & Surety Co. v. Valley Wood, Inc., Court of Appeals of Georgia, — S.E.2d —- 2016 WL 1126495, (March 23, 2016) the Georgia Court of Appeals was faced with a situation where Georgia Casualty and Surety (GCS) lost a jury trial seeking insurance coverage and bad faith damages and appealed the failure of the trial judge to grant a directed verdict. Valley Wood also appealed the refusal of the trial court to grant it bad faith damages.

FACTS

Following a jury trial GCS appealed from a judgment in favor of Valley Wood, Inc. Georgia Casualty asserts that the trial court erred.

Georgia Casualty asserts it was entitled to a directed verdict in its favor based upon OCGA § 33–24–7(b) . This code section provides, in part: “Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy or contract unless: ¶  Fraudulent; ¶ Material either to the acceptance of the risk or to the hazard assumed by the insurer; or ¶ The insurer in good faith would either not have issued the policy or contract or would not have issued a policy or contract in as large an amount or at the premium rate as applied for or would not have provided coverage with respect to the hazard resulting in the loss if the true facts had been known to the insurer as required either by the application for the policy or contract or otherwise.”

The evidence introduced at trial shows that the co-owner of Valley Wood, Richard Ramey, obtained insurance coverage with Georgia and that the insurance applications submitted to Georgia Casualty were not signed. Ramey testified that until the week before trial, he had never seen the application before. He denied being asked the questions in the application “by anybody,” giving permission for anyone to answer the questions or being asked the type of questions in the application by anyone at the Lanier agency. No one from the Lanier agency testified at trial.

An underwriter with Georgia Casualty testified that he received the application through an email from the Lanier agency, that he would have rejected the application for crime coverage if the application had stated that Valley Wood did not audit with a certified public accountant and did not require countersignatures on checks, and that his underwriting decision was based upon the applications. Ramey admitted that Valley Wood did not perform full audits each year or require countersignatures on checks.

ANALYSIS

“A directed verdict is authorized only where ‘there is no conflict in the evidence as to any material issue and the evidence (adduced), with all reasonable deductions therefrom, shall demand a particular verdict.’  OCGA § 9–11–50(a) . [Cit.]”  Massachusetts Bay Ins. Co. v.. Wooten, 215 Ga.App. 386, 387(2) (450 S.E.2d 857) (1994).

A material misrepresentation is one that would influence a prudent insurer in determining whether or not to accept the risk, or in fixing a different amount of premium in the event of such acceptance. While ordinarily the question of materiality is for the jury, where the evidence excludes every reasonable inference except that the misrepresentation was material, the issue becomes a question of law for the court.  It is well-established that the insurer need not show “actual knowledge of the falsity of misrepresentations in order to prevent a recovery under the policy.”  United Family Life Ins. Co. v. Shirley, 242 Ga. 235, 237–238 (248 S.E.2d 635) (1978) .

In this case, the undisputed evidence shows that the use of a CPA audit and a requirement that checks be countersigned were material to Georgia Casualty’s decision to issue crime coverage to Valley Wood and that it would not have issued the policy if it had known the true facts. Where the evidence shows that the insurer would not have issued the policy if it had been aware of the true facts, the evidence demands a finding that the omissions or misrepresentations were material to the acceptance of the risk.

To the extent Valley Wood argues that it cannot be bound by misrepresentations in an unsigned application submitted by its insurance agent, the court concluded that these arguments have no merit. Independent insurance agents or brokers are generally considered the agent of the insured, not the insurer. A principal is bound by all representations made by his agent in the business of his agency and also by his willful concealment of material facts, although they are unknown to the principal and known only by the agent.

In this case, the undisputed evidence shows that the Lanier agency was authorized to procure insurance on behalf of Valley Wood, and its conduct in submitting an application for insurance would undoubtedly fall within the scope of its agency relationship.
Georgia Casualty sought “a declaration that the insurance policy is void because Valley Wood made misrepresentations in its applications for insurance to Georgia Casualty.”

An insurer may file a declaratory action in order to determine whether an insurance policy is voidable. Although a prerequisite to rescission is placing the other party in the status quo ante, it does not follow that the insurer must allege a return of premiums when seeking a declaratory judgment that it is entitled to void the policy. An insurer may want to know whether a policy is, in fact, voidable before seeking to rescind the policy, and a declaratory judgment is an appropriate means to that end.

The trial court’s denial of a directed verdict in favor of Georgia Casualty was reversed on the issue of whether the policy was void based upon misrepresentations in the application. The appeal of the insured was dismissed as moot.

ZALMA OPINION

As I have said often insurance is a contract of utmost good faith. When a person appoints an agent to obtain insurance for him/her/it the agent must deal fairly and in good faith when applying for the insurance. The agent lied about material facts that the insured admitted were false and the insurer’s underwriter testified to the materiality of the facts misrepresented. In simple words lies told to an insurer about material facts voids insurance.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Agent’s Lie to Insurer Causes Policy to Be Void

All Parties Required for Reformation of Insurance Policy

Right to Reformation

New York appellate courts are well known for their truly brief, succinct and well reasoned opinions. When a tenant expected to be made an additional insured on a liability policy it sought to reform a policy that did not name the tenant without including the named insured as a defendant in the action.

In Jerusalem Avenue Taxpayer, LLC v. Liberty Mut. Ins. Co., — N.Y.S.3d —- 2016 N.Y. Slip Op. 02024, 2016 WL 1097021 the appellate court was asked to reverse the January 14, 2015 trial court (Supreme Court) order which, to the extent appealed from as limited by the briefs, granted plaintiffs’ motion for summary judgment seeking to reform defendant’s insurance policy to add plaintiff Jerusalem Avenue Taxpayer, LLC (Jerusalem) as an additional insured, ordered defendant to defend and indemnify Jerusalem in an underlying action and to reimburse plaintiff CastlePoint for reasonable costs and expenses it spent defending and indemnifying Jerusalem in that action because Best Yet Markets, Inc. (Best Yet) was not joined.

The appellate court concluded that Best Yet is a necessary party to the plaintiffs’ reformation claim. Plaintiffs seek reformation of an insurance policy to which they are not parties, and which was executed between defendant Liberty and nonparty Best Yet, on the ground that the parties to the policy intended that Best Yet, as lessor, obtain insurance coverage for plaintiff, Jerusalem, as lessee of the Best Yet premises in Hicksville.

The issue of whether Best Yet intended to obtain coverage from Liberty for Jerusalem, which it was not obliged to do in the underlying lease, and whom Best Yet never expressly requested be included in the Liberty insurance policy, is at the heart of the reformation claim. More importantly, the reformation claim would have adverse effects on Best Yet, which would be obligated to pay the deductible if Liberty is ordered to indemnify Jerusalem, and who could incur increased premiums. It would also affect the amount of insurance coverage available at that Best Yet location. In addition, as Best Yet would not otherwise be bound by the trial court’s order, there could be inconsistent results where Best Yet argues that Liberty improperly paid the claim (see Steinbach v. Prudential Ins. Co. of Am. (172 N.Y. 471, 477–478 [1902] ).

Accordingly, plaintiffs’ summary judgment motion should not have been granted, nor should the case continue without joinder of Best Yet within a reasonable time (CPLR 1001[a]; L–3 Communications Corp. v. SafeNet, Inc., 45 AD3d 1, 10–11 [1st Dept 2007]; Safena v. Giuliano, 53 AD3d 650, 650 [2d Dept 2008]; see also Steinbach, 172 N.Y. at 477–478).

ZALMA OPINION

The appellate court – in this brief opinion – succinctly stated that an issue of coverage available to a person claiming to be an additional insured requires the named insured to be a party to the action since its funds and obligations will come into play if the policy is reformed or it is found that equity requires the insurer to defend and indemnify the tenant.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Bad Faith Charge Trumps Simple Math

Bad Faith Suit Requires Bifurcation

When an insurance claim is denied the person seeking benefits will usually get upset and seek redress from the courts and a bonus of tort and punitive damages. They also try to obtain evidence from the insurer in the breach of contract suit that will hep prove the tort action. Courts are compelled to do justice and protect both sides.

The U.S. District Court, District of New Jersey, was faced with such a problem in Abiona v. GEICO Indemnity Company, Slip Copy,  United States District Court, D. New Jersey, 2016 WL 1046791 (03/16/2016) and found a method to do justice for both sides. Although a relatively small dollar amount involved in the contract action the court’s decision resolves some important issues faced by insurers sued for bad faith.

FACTS

Abiona asserts that his car insurance provider, Geico Indemnity Company, wrongfully denied him under-insured motorist (UIM) coverage under the parties’ insurance policy.
Presently before the Court is Geico’s Motion to Dismiss, which asserts: (1) this Court’s lack of subject matter jurisdiction for failure to exceed the statutory minimum amount in controversy; and (2) failure to state claims for common law bad faith denial of insurance coverage, and violation of the New Jersey Consumer Fraud Act.

Geico asked the Court to stay and sever the bad faith and consumer fraud claims pending the disposition of Abiona’s claim for breach of the insurance contract.

In March, 2014, Abiona was involved in a car accident in Manhattan, New York. Allegedly, the driver of the other car suddenly, and “at a relatively high rate of speed,” pulled out from the right parking lane, merged into Abiona’s lane, and struck Abiona’s vehicle. Abiona alleges he suffered “severe” injuries to his neck and back as a result of the accident.
It is undisputed, at least for purposes of this motion, that the other driver’s insurance company conceded liability and paid out the policy limit for bodily injury coverage, which was $25,000.

Abiona contends that $25,000 does not cover all of the costs associated with treating his injuries. He asserts that, in addition to epidural steroid and facet block injections, he “require[s] [a] surgical procedure in the future to attempt to eliminate the cause of [his] constant back pain.”

Accordingly, Abiona alleges that he made a claim on his own underinsured motorist policy with Geico. Geico allegedly “completely den[ied] [Abiona] UIM benefits.” Abiona further asserts that Geico has acted in bad faith by declining to participate in non-mandatory binding arbitration and “failing to present [Abiona] with a good faith offer to settle [his] claim,” despite Abiona’s submission of extensive medical documentation supporting his claim that his injuries are severe and permanent. Most notably, such documentation allegedly “include[s] an IME report by [Geico’s] chosen medical professional, Dr. Solomon, who opines that [Abiona] is a surgical candidate from the injuries sustained by this accident if the epidural injection therapy does not resolve the significant pain from the herniated lumbar disc caused by this accident.”

DISCUSSION

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. If a complaint is subject to dismissal, a district court must permit a curative amendment unless such an amendment would be inequitable or futile.

Amount in Controversy

Geico’s jurisdictional argument is based on relatively simple arithmetic: Abiona’s policy limit with Geico is undisputedly $100,000; he has been paid $25,000 from the other driver’s insurer; therefore the amount in controversy is $75,000. This amount, of course, does not “exceed” $75,000; thus, according to Geico, this Court lacks subject matter jurisdiction over this suit.

The argument, however, is dependent on Geico successfully obtaining dismissal of the other two claims asserted. If Abiona could possibly recover just one cent in additional damages associated with those other claims, this Court cannot hold with legal certainty that the amount in controversy does not exceed $75,000.

Count 2-Common Law Bad Faith Denial of Insurance Benefits

In a case of denial of insurance benefits, bad faith is established by showing that no debatable grounds existed for the denial of benefits. To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.The lack of a reasonable basis may be inferred where there is a reckless indifference to facts or proofs submitted by the insured.

The Complaint’s allegation that Geico’s own IME opined that “if [Abiona] fails conservative therapy … he could be a surgical candidate” nudges the assertion that Geico recklessly disregarded the lack of a reasonable basis for denying Abiona’s claim “’across the line from conceivable to plausible.

As a result the Court held that the Complaint adequately states a bad faith claim and Geico’s motion in this regard was denied.

Amount in Controversy

Consequential and punitive damages are available for bad faith claims under New Jersey law. Those potential damages, added to the $75,000 of potential damages associated with the breach of contract claim carry the amount in controversy over the statutory threshold of $75,000.

The Court held that the diversity statute authorizes the exercise of subject matter jurisdiction over this suit. Geico’s jurisdictional motion was, as a result, denied. The prevailing practice in both state and federal court is to sever breach of insurance contract claims from bad faith claims, and to proceed with the contract claim before turning to the bad faith claim (if still necessary after adjudicating the contract claim).

Severance of a bad faith claim will often be desirable because, as courts have recognized, there is real potential for prejudice to the insurer should it be required to produce its claim file prematurely. Such premature discovery may also jeopardize the insurer’s defense of the UM or UIM claim by the disclosure of potentially privileged materials.

Indeed, in this case Geico asserts that it will suffer prejudice absent severance. In response, Abiona merely argues that interests of judicial economy weigh against severance— an argument that is undermined by much of the above-cited case law.

The Court concluded that the interests of judicial economy, as well as the avoidance of prejudice to Geico, weigh in favor of severing Counts 2 and 3 (if Abiona successfully amends Count 3) from Count 1. Geico’s Motion to Stay and Sever Counts 2 and 3 pending resolution of Count 1 was granted.

ZALMA OPINION

A bad faith claim usually cannot proceed if the insured fails to prove the insurer breached the contract and did so without a fairly debatable reason for breaching the contract or a genuine dispute between the insurer and its insured. In this case, therefore, Abiona must first prove that he was entitled to UIM benefits and that Geico refused to pay those benefits without good or reasonable cause and then the second part of the bifurcated case can be tried. If there was no unreasonable breach of contract there is no reason to proceed to the second part of the trial.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Bad Faith Charge Trumps Simple Math

Insurance and Diminution of Value Claims

How to Determine The Quantum of a Loss

Since insurance was invented in ancient Sumeria, when insurance policies were written on clay tablets, there have been disputes between the insured and the insurer. Since tort law first came into existence before the writing of the Old Testament there have been disputes between the tortfeasor and the victim as to the extent of the damages recoverable.

Insurers and their insureds continue to struggle with establishing a fair method to properly compensate the person insured for the property lost or damaged as a result of a peril insured against. Insurance, by definition, is a contract where one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The key item of dispute is to determine how much is needed to indemnify the person insured.

The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court, in 1915, said: “Indemnity means an obligation to make good a loss…”

On its face, calculating indemnity seems to be a simple task. Since few jurisdictions agree completely on the method to properly compute damages or to properly indemnify the persons insured by an insurance policy courts have considered diminution in value of property damaged and repaired in an accident are justified as one method of reaching true indemnity.

Common sense indicates that the measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury or the amount promised by an insurance policy. The proper measure is often difficult to determine and no single measure fits every type of damage. The measure of damages, true indemnity, seldom fit into a hard rule of thumb. Every possible means of providing complete indemnity can be, and is, considered when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.

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

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

No promise was made to pay for more than actual cash value or the cost of repair, whichever is less. The issue was with regard to damage to automobiles and loss in value after repairs were completed was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) (“Mabry”).   Mabry raised serious concern among insurers because it required payment of sums greater than that for which a premium was collected. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired.

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

Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass payment for the diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policy’s wording, endorsements or definitions, that establish that the insurer does not intend to, nor will it, pay for diminution of value after the automobile was repaired while others have simply increased premium to cover the additional payments.

When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repaired vehicle or property. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired more than other types of property. The resale value of an automobile most likely will be less for one repaired after an accident than that for a comparable automobile that has not been damaged and repaired. This is not true, however, of all types of property. A 50-year-old house that is damaged by fire and rebuilt, new for old, will usually be more valuable than it was before the fire. To date no insured has sought to return to the insurer the increase in value since the policy promised to pay the amounts needed to repair replacing new for old.

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

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

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

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

In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but states nothing about compensating the insured for a reduction in value due to the same accident.

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

The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.

If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the  amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.

Some states apply the rules strictly, some apply the general rule of fairness, others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims.

ZALMA OPINION

Diminution in value for insurance claims seems to be limited to automobile insurance claims and in Georgia and a few other states. A class action is pending in Georgia attempting to extend the diminution of value case law to all kinds of property.

This article was adapted from my book, “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance and Diminution of Value Claims

The Examination Under Oath

The Reasons For the EUO

The insurance Examination Under Oath (“EUO”) is a formal type of interview authorized by an insurance contract. It is taken under the authority provided by a condition of the insurance contract that compels the insured to appear and give sworn testimony on the demand of the insurer or find his, her or it claim rejected for breach of a condition. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

The EUO is a tool used sparingly by insurers in the United States when a thorough claims investigation raises questions about the application of the coverage to the facts of the loss, the potentiality that a fraud is being attempted, or to assist the insured in the obligation to prove to the insurer the cause and amount of loss. Although rarely used the EUO is an important tool needed by insurers when there is a question of coverage.

Courts that construe submission to an EUO as a condition precedent to recovery generally do not require the insurer to prove that it suffered actual prejudice from an insured’s unexcused refusal to submit to an examination. Lorenzo–Martinez v. Safety Ins. Co., 58 Mass. App. Ct. 359, 790 N.E.2d 692, 695–96 (2003). The EUO provides a mechanism for the insurer to corroborate the claim by obtaining information that is primarily or exclusively within the possession of the insured.

The adjuster, the independent adjuster, the Special Investigation Unit (“SIU”) investigator, the independent insurance adjuster and, in complex cases, the attorney retained to represent the insurer questions the person interviewed in a manner similar to a deposition in a legal proceeding. Because of the formality of the proceeding — it includes an oath, and the presence of a certified shorthand reporter — the task of establishing rapport with the person interviewed so that relevant information may be obtained from the insured is more difficult than in an informal interview. Unlike legal proceedings where questions are limited to those seeking a “yes” or “no” or brief answer the EUO seeks narrative responses from the person questioned.

The person taking the EUO, therefore, must be capable of transitioning from lawyer like questions in litigation to the broad, inquisitive, narrative seeking questioning. An EUO should never be conducted as if it is an adversarial activity but merely a fact seeking activity that is directed to the needs of an insurance policy and the need to prove a loss is either compensable or not.

Because the EUO is a tool for gleaning the maximum amount of information the EUO is an effective weapon against insurance fraud. This is because the person taking the EUO is knowledgeable about insurance and insurance law while the person being questioned is only aware of the claim presented and the fraud he or she may be attempting.

Often, however, the purpose of the EUO is not to stop fraud but to allow an insured the opportunity to prove his or her claim of loss in cases where evidence has been destroyed by a casualty or is otherwise unavailable.

The authority to take an EUO is provided by the insurance contract and exists, as a result of statutes, establishing a state mandated fire insurance policy that must be incorporated in every policy in the state that insures against the peril of fire. For example the New York Standard Fire Policy provides as follows:

The insured, as often as may be reasonably required, shall exhibit to any person designated by this company all that remains of any property herein described and submit to EUO by any person named by this compa­ny, and subscribe the same; and as often as may be reason­ably required, shall produce for examination and copying all books of account, bills, invoices, and other vouchers…

Similarly, the 1991 edition of the Homeowners policy provides, in easy to read language:

2.       Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:

* * *

“f.         As often as we reasonably require:

            “(1)      Show the damage property.

            “(2)      Provide us with records and documents we request and permit us to make copies; and

            “(3)      Submit to EUO, while not in the presence of any other “insured” and sign the same.” [ISO form HO 00 03 04 91, PAGE 9 OF 10]

In Shaw v. State Farm Fire and Cas. Co., 37 So.3d 329, 35 Fla. L. Weekly D1020 (2010) Florida concluded that State Farm had every right to include the EUO provision in its contract as a condition precedent to payment or suit, just as insurance companies have done in Florid for over a century; State Farm had every right to expect and require that the EUO requirement be complied with by any person or organization making a claim or seeking payment so that State Farm can determine whether the claim Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884)] is proper or fraudulent; and State Farm had every right to require and expect that this clause be complied with by assignees of PIP benefits who are no less capable of filing fraudulent claims than insureds. According to the Florida Court of Appeal, the insured and his assignees—the Appellants—do not have the right to take this valuable contract right and investigative tool away from State Farm through the mere expedient of an assignment.

Although the EUO is a formal proceeding it is not part of a judicial process. The EUO is not controlled by the rules of civil procedure. In most states it is considered a condition precedent to recovery under a policy of insurance. The EUO is not limited by any statute relating to civil discovery. Some states have enacted regulations that try to limit insurers taking of the EUO and place certain requirements upon the insurer to chill the desire to take an EUO.

Depositions and examinations under oath serve vastly different purposes. First, the obligation to sit for an examination under oath is contractual rather than arising out of the rules of civil procedure. Second, an insured’s counsel plays a different role during examinations under oath than during depositions. Third, examinations under oath are taken before litigation to augment the insurer’s investigation of the claim while a deposition is not part of the claim investigation process. Fourth, an insured has a duty to volunteer information related to the claim during an examination under oath in accordance with the policy while he would have no such obligation in a deposition. [Beasley v. GeoVera Specialty Ins. Co., Slip Copy, 2015 WL 2372328, 2015 WL 2372328 (E.D.La., 2015)]

An insurer’s right to ask questions at EUO is basically unlimited.

As early as 1884, the U.S. Supreme Court explained the purpose of the EUO, as follows:

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an EUO, 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. 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. A false answer as to any matter of fact material to the inquiry, would be fraudulent. If it made, with intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if it failed it would be a fraud attempted. And if the matter were material and the statement false, to the knowledge of the party making it, and willfully made, the intention to deceive the insurer would be necessarily implied, for the law presumes every man to intend the natural consequences of his acts. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed; and if they are knowingly false and willfully made, the fact that they are material is proof of an attempted fraud, because their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them, and to whom they are addressed. [Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884)]

ZALMA OPINION

The EUO is an important tool that, if used responsibly, can help an insured prove his or her loss or allow an insurer to obtain sufficient evidence to prove coverage does not apply or fraud is being attempted.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on The Examination Under Oath

Expert Witnesses May Not Testify to Legal Conclusions

Unwise to Settle for Claimed Policy Limits Without Investigating All Available Coverages and Funds

Litigation of serious injuries will often be sidelined by limited available insurance and assets to pay a judgment for the true value of an injury. Injured parties and their lawyers will determine the available coverages and will often settle for policy limits because going to trial to prove larger damages would be expensive and uncollectible. In reaching such a settlement the plaintiffs will rely on the statements of the defendant directly or in response to discovery. When the plaintiffs’ lawyers are deceived as to available insurance new legislation will proceed and experts will be retained to establish the new case.

In Turubchuk v. E.T. Simonds Construction Company, United States District Court, S.D. Illinois,  Slip Copy 2016 WL 1029371 (03/15/2016) plaintiffs claimed that the defendants in an underlying lawsuit concealed available coverages and retained the services of a expert to establish their case. The defendants tried to eliminate the testimony of the expert.

BACKGROUND

In 2007, Plaintiffs filed a negligence action seeking to recover for injuries resulting from a single vehicle rollover accident on August 21, 2005 (“the underlying action”). Plaintiffs sued Defendants E.T. Simonds Construction Company (“ETS”) and Southern Illinois Asphalt Company, Inc. (“SIAC”), alleging that Defendants were contractors on a State of Illinois road construction project responsible for repaving a stretch of Interstate 24.

Plaintiffs alleged that the vehicle in which they were riding went off the paved road in the construction zone, slipped off of a severe edge drop-off, left the highway and rolled.

At the time of the accident, ETS and SIAC were insured as a joint venture through an insurance policy issued by Bituminous Insurance Company. In addition to the Bituminous policy, both Defendants were individually insured through several policies.

Attorney Richard Green represented ETS and SIAC in the underlying action. Plaintiffs were represented by Komron Allahyari. On May 14, 2007, Allahyari made a $1,000,000.00 policy-limits settlement demand after allegedly receiving confirmation from Green that the Bituminous policy was the only policy available to cover Plaintiffs’ claims against the Defendants. Defendants never disclosed their individual policies.

Nearly six years later, Plaintiffs filed the instant action seeking damages for Defendants’ failure to disclose their individual policies in the underlying action. Plaintiffs allege that if Defendants had disclosed the individual policies, Plaintiffs would not have settled for what they believed were “policy limits” of the only policy disclosed to them. In the Second Amended Complaint, Plaintiffs assert claims for intentional misrepresentation, fraudulent concealment, negligent misrepresentation, and constructive fraud.

LEGAL STANDARD

In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) the U. S. Supreme Court instructed courts to function as gatekeepers and determine whether expert testimony should be presented to the jury. Courts function as gatekeepers of expert testimony to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999).

In order to be considered reliable, proposed expert testimony must be supported on good grounds. Equally important to the gate-keeping function is a determination of whether the proposed testimony is relevant. Of particular relevance to an expert proffered for his experience, when determining whether an expert’s testimony is admissible, it is critical that there be a link between the facts or data the expert has worked with and the conclusion the expert’s testimony is intended to support. The court is not obligated to admit testimony just because it is given by an expert.

The expert must explain how experience leads to the conclusion reached, why that experience is a sufficient basis for the opinion, and how that experience is reliably applied to the facts. An expert’s qualification and experience alone are not sufficient to render his opinions reliable. The testimony must also assist the trier of fact.

DISCUSSION

In his report, Murphy, an attorney in private practice and a former federal district judge, states that he is familiar with the initial disclosure requirements of Rule 26 and that Plaintiffs are “stretching FRCP 26(a)(1)(A) well past its breaking point”  Murphy asserts that “the comments [to the Rule] make clear that initial disclosures are just that and a party should make its initial disclosures based on the pleadings and the information then reasonably available to it” and that “it is anticipated that initial disclosures will be supplemented as time passes.” Murphy contends that Green had no reason to believe there was other insurance available to cover the joint venture and that Plaintiffs’ attorney negligently failed to serve detailed discovery requests to find out whether additional coverage existed beyond the joint venture policy. Murphy then propounds the following four opinions:

1. If there is coverage beyond that disclosed by Mr. Green, the plaintiffs’ lawyers neglected their duty to their clients by submitting a time-limited settlement demand before conducting the routine discovery that due diligence requires;

2. Mr. Green, as attorney for the defendants, did exactly what FRCP 26 required of him and he was not required at that time to conduct a thorough and complete investigation as to what other policies of insurance might provide additional coverage for plaintiffs’ claims. He made completely accurate “initial disclosures;”

3. It is not reasonable to rely only on information in initial disclosures to determine insurance coverage in a serious case (emphasis in report); and

4. The plaintiffs’ lawyers had ample time to satisfy themselves whether there was additional insurance available even after they had agreed to the $1,000,000.00 settlement as the release was not signed until twenty months later.

Plaintiffs first contend that Murphy’s second opinion is an improper legal conclusion. Next, Plaintiffs assert that the remaining opinions should be barred because they are based upon an assumption that the initial disclosures prepared by Green were appropriate and they shift the burden of discovery onto Plaintiffs when Defendants were under an obligation to automatically produce insurance agreements pursuant to Rule 26.

It is well-established that expert witnesses may not testify to legal conclusions or to the applicability or interpretation of a particular statute or regulation. Further, an expert witness may not offer an opinion or legal conclusion on issues that will determine the outcome of the case.

The Court concluded that Murphy’s second opinion invades on the province of the Court to interpret the requirements of Rule 26. Whether Green complied with Rule 26 is a question of law that is clearly reserved for this Court. Similarly, whether Plaintiffs’ Counsel’s actions were “negligent” is also an inadmissible legal conclusion which Mr. Murphy may not proffer.

However, Murphy’s remaining three opinions are relevant to the issue of sole proximate cause and he is clearly qualified by experience to give them. Further, the Court found that his testimony in that regard will assist the jury in determining issue of sole proximate cause.

CONCLUSION

For the foregoing reasons, Plaintiffs’ Motion to Strike is GRANTED as to Murphy’s above-stated second opinion and opinion that Plaintiffs’ Counsel was negligent.

ZALMA OPINION

The court properly limited the testimony of the expert whose report exceeded propriety by making conclusions of law and the ultimate issue. However, he can testify as to proximate cause. There is no question that a lawyer, before agreeing to settle a major injury case, must establish every available insurance policy and all assets available to pay a judgment. The plaintiffs’ lawyers in this case relied on a discovery response and did not look further and now seek to recover for their own errors and sloth.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Expert Witnesses May Not Testify to Legal Conclusions

Sit on Your Rights & You Will Lose Them

Statutes of Limitation Serve an Important Function

In an attempt to clean up with damages after hurricane Katrina after sitting on its rights for many years, Marion’s Cleaners, LLC  sued its insurer seeking indemnity from its insurer for damages that resulted from Katrina. In Marion’s Cleaners, LLC v. National Fire & Indemnity Exchange, Slip Copy, 2016 WL 952247 (March 14, 2016) the United States District Court, E.D. Louisiana,  was faced with a claim that although the suits were filed late the limitation period (called prescription in Louisiana) was tolled.

National Fire & Indemnity Exchange (“National Fire”) filed two motions, first, a motion for summary judgment and second a motion for judgment on the pleadings. Both motions were opposed by Plaintiff Marion’s Cleaners, LLC (“Marion’s” or “Plaintiff”).

BACKGROUND

This consolidated matter addresses two post-Hurricane Katrina insurance-coverage lawsuits filed by Marion’s Cleaners against National Fire. Prior to Hurricane Katrina, National Fire issued policies of insurance to Marion’s Cleaners for its commercial properties located at 106 Severn Avenue in Jefferson Parish, Louisiana, and at 3142 Calhoun Street in New Orleans. The parties agree the insurance policies were in effect when Hurricane Katrina made landfall in Louisiana and Mississippi on August 29, 2005. According to Marion’s, Hurricane Katrina inflicted “serious and devastating damages” to its business locations in Jefferson Parish and New Orleans, causing Marion’s to incur a “loss of inventory, loss of use and loss of business income” at both locations.

DISCUSSION

National Fire contends, in both motions, that it is entitled to judgment as a matter of law because Marion’s claims are prescribed. Because jurisdiction in this case is premised on diversity of citizenship, the Court must apply the applicable Louisiana prescriptive period. Under Louisiana law, the deadline for filing insurance claims for property damages and losses caused by Hurricane Katrina was September 1, 2007. Both parties agree Marion’s claims against National Fire were subject to the September 1, 2007 deadline. Nevertheless, Marion’s filed the instant lawsuits years later.

It is beyond dispute that Marion’s did not sue National Fire prior to the September 1, 2007 prescriptive deadline. As a general rule, the burden of proving prescription rests with the moving party.  However, if the petition is prescribed on its face, prescription is presumed and the burden of proof shifts to the Plaintiff to negate that presumption by proving suspension or interruption. Marion’s claims against National Fire are prescribed on their face. As a result it is Marion’s burden to prove that the prescriptive period was either suspended or interrupted.

To receive the benefit of the suspension of prescription provided for in the statutes an individual filing an independent suit must establish three predicate facts: (1) the existence of a timely filed class action proceeding against the defendant; (2) that he or she is a member of the class described or defined in the identified class petition; and (3) that the claims asserted in the independent action arise “out of the transaction or occurrences described” in that petition.

The Motion to Dismiss

Because Marion’s claims are prescribed on their face, it is Marion’s burden to show the prescriptive period was suspended or interrupted. But nowhere in its state-court petition does Marion’s even mention the class-action tolling doctrine or allege that Marion’s is or was a member or putative member of a class. Marion’s only invokes the class-action tolling doctrine in its opposition to National Fire’s motion, and it does so summarily.

Marion’s state-court petition does not even list the class or putative class actions which Marion’s claims to be a part of, let alone identify itself as a member of those classes or explain how its claims are similar to the claims asserted therein. Summary, conclusory allegations are not sufficient to invoke the class-action tolling doctrine.

Based on these allegations, the Court found that Marion’s state-court petition does not state a plausible claim for relief, and granted National Fire’s Rule 12(c) motion.

The Motion for Summary Judgment

In the motion for summary judgment, National Fire contends, as above, that Marion’s claims are prescribed and that it is entitled to summary judgment as a result. Marion’s two state-court petitions are identical and deficient. Assuming, however, that the petition did satisfactorily state a plausible claim for relief on its face, Marion’s has still failed to establish, by pointing to undisputed facts in the record, that the prescription of its claims was suspended.

However, unlike its opposition to National Fire’s motion for judgment on the pleadings, Marion’s opposition to the motion for summary judgment specifically identifies the class of which Marion’s contends it is a member. That class action is Louisiana State, et al. v. AAA Insurance, et al. (E.D. La. 07-5528), known as the “Road Home litigation.” Marion’s argues the Road Home litigation, which was filed in Louisiana state court on August 23, 2007, interrupted the running of prescription on its claims against National Fire, because Marion’s was a member of that class and National Fire was involved in the action as a defendant.

Because there has been no allegation that Marion’s applied for Road Home benefits prior to July 31, 2007, Marion’s has failed to carry its burden to show that the filing of the Road Home class suspended the prescription of its claims. Moreover, the Road Home litigation involved plaintiffs who sustained damages and losses to residential properties. In fact, the class in the Road Home litigation was defined as “current and former citizens of the State of Louisiana who have applied for and received or will receive funds through The Road Home Program…and to whom insurance proceeds are due and/or owed for damages sustained to any such recipient’s residence.”

Therefore, even if Marion’s alleged it had applied for Road Home benefits prior to July 31, 2007, it is not clear whether Marion’s would qualify as a member of that class, as Marion’s seeks to recover for damages sustained by commercial properties. Therefore the motion for summary judgment was granted.

ZALMA OPINION

Grasping at straws the plaintiff, Marion’s, argued tolling of the statute of limitations without even reading the class action – limited to residences – that they claimed supported the tolling. The reason for prescription – statutes of limitation – is to protect defendants from stale claims where witnesses memories have faded and physical evidence has changed. Regardless of the horrors and damages caused by Katrina attempting such a belated lawsuit is a waste of legal and judicial time and effort.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Sit on Your Rights & You Will Lose Them

Damage not Negligent Acts Is Occurrence

An Insured Can Only Kill a Child Once

When a person is injured or killed as the result of the negligence of another an insurer is obligated to defend and indemnify its insured up to the limits of liability of the insurance policy. Almost every liability insurance policy contain a per-occurrence limit of liability and an aggregate limit of more than one person is injured by the same occurrence.

In Davis v. Kentucky Farm Bureau Mutual Insurance Company, Court of Appeals of Kentucky — S.W.3d —- 2016 WL 929362 (3/11/2016) the Kentucky Court of Appeals was asked to apply an aggregate limit to a single death because multiple acts of negligence brought about the death.

FACTS

On October 17, 2011, two-year-old Ja’Corey Davis died from asphyxiation after swallowing and choking on a push-pin while in the care and protection of Trina’s. After Ja’Corey’s death, the Cabinet for Health and Family Services investigated Trina’s and discovered multiple violations of Kentucky Administrative Regulations: (1) push-pins within the reach of young children; (2) inadequate staff-to-child ratios; and (3) negligent supervision. The Cabinet issued an emergency order suspending the license and operation of Trina’s.

Davis and Woods, Ja’Corey’s parents and as co-administrators of Ja’Corey’s estate, filed an action against Trina’s in the Jefferson Circuit Court. In a second amended complaint, Davis and Woods alleged direct negligence claims against Trina’s and vicarious liability claims against Trina’s for the acts or omissions of its employees, including the multiple violations cited by the Cabinet.

At the time Ja’Corey choked on the push-pin, Trina’s was insured by a commercial general liability policy issued by Kentucky Farm Bureau covering Trina’s and its employees. The Kentucky Farm Bureau policy limits coverage by the number of occurrences from which the claims arose, stating that each occurrence is limited to $500,000 and provides for an aggregate maximum of $1,000,000. The policy further provides that each occurrence limit is the maximum Farm Bureau will pay “because of all ‘bodily injury’ and ‘property damages’ arising out of any one ‘occurrence.’” Occurrence is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Kentucky Farm Bureau and Davis and Woods resolved the claims against Trina’s, its officers and employees subject to an agreement that the dispute concerning the number of occurrences remained unsettled. Subsequently, Kentucky Farm Bureau filed this declaratory judgment action to resolve the dispute. The trial court ruled that the alleged negligent acts “combined to form a single occurrence, which resulted in the death of [Ja’Corey].”

DISCUSSION

Kentucky appellate courts interpret an insurance contract as a matter of law and review the case as if it was sitting as a trial court. In doing so, the appellate court applies certain rules of construction, including that when the terms of an insurance contract are unambiguous and not unreasonable, the terms will be enforced as written.

Although ambiguous terms are to be construed in favor of the insured there is no requirement that every doubt be resolved against the insurer. Moreover, there must be an actual ambiguity. The mere fact that a party attempts to muddy the water and create some question of interpretation does not necessarily create an ambiguity.

The trial court concluded the claims arose from a single cause and a single occurrence and granted summary judgment in favor of the insurer. Davis and Woods appealed contending that the trial court erred because it was required to determine the amount of insurance coverage available by the number of causative acts that contributed to Ja’Corey’s death.

Every accident is an occurrence. But not every occurrence is, strictly speaking, an accident. In the context of an insurance policy, “occurrence” is construed as synonymous with an accident or kindred act — an unforeseen occurrence resulting in bodily injury to a person other than the one indemnified which may give rise to a claim against the insured.

For purposes of triggering insurance coverage, the prevailing rule is that the time of the occurrence of an accident is when the complaining party was actually damaged or injured and not the time when the wrongful act was committed. This approach is based on the fundamental notion that the tort of negligence is not deemed to have been committed unless and until some damage is done.

The same approach is not necessarily taken when the question is whether there were multiple occurrences for purposes of the policy limitations. Although in most instances it is clear whether there are one or multiple occurrences, the question of what constitutes a single “occurrence” or “accident” within the meaning of a policy limits clause in a liability insurance policy generally arises under the prevailing cause approach, the number of occurrences is determined by whether there is but one proximate, uninterrupted and continuing cause which resulted in all of the injuries and damages.

The maximum limit of liability of the insurer for any one occurrence was $50,000.00. The policy provided that all bodily injury arising out of continuous exposure to substantially the same general conditions shall be considered as arising out of one occurrence. Davis and Woods present an innovative argument that even where only a single injury results, under the cause approach, the amount of coverage available depends upon the number of negligent acts that caused the injury.

While a novel argument in Kentucky, it is arguably supported by only a handful of cases from other jurisdictions.  Following the reasoning in Nationwide Mut. Fire Ins. Co. v. Kubacko, 124 Ohio App.3d 282, 706 N.E.2d 17 (1997), the Court considered the definition of occurrence in a case involving burns suffered by a child while in the care of an insured. After the child was burned, the child was placed in a bathtub containing hot water and the insured did not seek treatment for the child until several hours later. The Ohio Court of Appeals concluded that despite the number of negligent acts, the child’s injuries arose from a single occurrence.

Finally, the Court of Appeal was also in agreement with the succinct summation given in Koikos v. Travelers Ins. Co., 849 So.2d 263, 271 (Fla. 2003): “The insured’s alleged negligence is not the ‘occurrence’; the insured’s alleged negligence is the basis upon which the insured is being sued by the injured party. Focusing on the immediate cause-that is the act that causes the damage-rather than the underlying tort-that is the insured’s negligence-is also consistent with the interpretation of other forms of insurance policies.”

Davis and Woods allege various acts of negligence and theories of liability against Trina’s and its employees. As noted by Davis and Woods, they may pursue causes of action against Trina’s for its own negligence and for respondeat superior liability due to the negligent acts or omissions of its employees. They may also pursue claims against the employees individually for their negligence. Moreover, if there had been more than one insurance policy, Davis and Woods would have claims under those policies even though only one accident occurred.

However, merely because there were multiple negligent acts that combined to cause a single injury or multiple causes of action may be asserted does not mean there were multiple occurrences as that term is unambiguously defined in the Kentucky Farm Bureau policy. There are frequently multiple acts of negligence that cause a single injury. Under the unambiguous language of the policy, the meaning of “occurrence” in the Kentucky Farm Bureau policy is “accident.” There was only one accident, Ja’Corey’s choking on a push-pin. The $500,000 limit applies.

ZALMA OPINION

Insurance is not a benefit provided to those wrongfully injured. It is a contract that must be enforced in accordance with its terms and conditions. Although the loss of a child is tragic and the parents should recover as much as they can from those responsible, the tragedy cannot change the meaning of the contract of insurance nor change the amount of coverage purchased.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Damage not Negligent Acts Is Occurrence

Shooting Arises out of Use of a Vehicle

UIM Cover Exceedingly Broad in Washington State

A truly stupid person fired a weapon from an automobile – claiming no intent to harm anyone but striking plaintiff Heidi Kroeber and injuring her. She claimed she was entitled to underinsured motorist (UIM) coverage because the shooting arose out of the use of the auto the shooter was in when he shot her. GEICO disagreed.

In Certification from the United States District Court for the Western District of Washington in Heidi Kroeber a/k/a Heidi Lazenby v. GEICO Insurance Company, 2016 WL 166528 (No. 91846–5. (Jan. 14, 2016) the Washington Supreme Court answered questions posed by a US District Court.

FACTS

The Supreme Court was faced with two certified questions from the United States District Court for the Western District of Washington. First, the Supreme Court was asked to determine for the purposes of underinsured motorist (UIM) coverage whether an injury to an insured pedestrian “arose out of” the intentional firing of a gun from an uninsured pickup truck. Second, it was asked whether it is material if the shooter intended to harm anyone when firing the gun.

On February 12, 2012, plaintiff Heidi Kroeber was shot outside the Bad Monkey Bar in Kent, Washington by Matthew Atkinson, who was driving an uninsured truck belonging to a friend at the time he opened fire. Plaintiff and her boyfriend had antagonized Atkinson earlier that evening. After pleading guilty to the crime of “Drive–By Shooting” Atkinson claimed that he had not intended to injure anyone with his shot and later claimed that he did not know that he was shooting where people were standing.

Plaintiff filed a claim with defendant, GEICO Insurance Company, to recover damages under the UIM coverage provision of her own automobile insurance policy. Under the relevant parts of this policy, GEICO is liable for damage’s an insured is legally entitled to recover from the owner or operator of an underinsured motor vehicle. GEICO denied plaintiff’s claim, asserting that her injuries did not arise out of the use of Atkinson’s truck.

Plaintiff sued GEICO, claiming that she was entitled to UIM coverage under her automobile insurance policy. The district court found that the shooting constituted an “‘accident’” for the purposes of plaintiff’s policy, that plaintiff’s policy unambiguously requires GEICO’s liability to “‘arise out of’” the shooter’s use of the truck, and that the vehicle was “‘in use’” at the time of the shooting as contemplated by the insurance contract.

ANALYSIS

Question 1

Insurance contracts are considered as a whole and given a fair, reasonable, and sensible construction—the same way an average person would when purchasing insurance. For the purposes of UIM insurance contracts, Washington cases have not provided a clear rule to determine where an injury “arises out of” vehicle use. Washington case law has established, though, that some causal connection must exist between the use of an automobile and the resulting injury. The words “arising out of the use” are unambiguous and require a degree of causality between the injury and the use of the vehicle.

The phrase “arising out of” does not force the interpretation that before coverage can exist it must appear that the injury was the proximate result of the use of the automobile. Such a construction would do violence to the normal meaning of those words.

Washington cases have neither explicitly embraced nor rejected the “but for” analysis plaintiff proposes. It follows that the accident would not have happened as it did but for the use of the vehicle; that Heidi’s injuries originated from, had their origin with, grew out of, or flowed from her use of the truck; that the truck causally contributed in some fashion toward producing the injury; and that the truck was more than a coincidental place at which the injury occurred. What Washington cases have established is that for an injury to “arise out of” vehicle use, the vehicle itself or an attachment to it does not need to be the direct cause of the injury. Rather, the facts must establish that the accident involved some causal relationship between a condition of the vehicle, a permanent attachment thereto, or some aspect of its operation.

Washington insurance statutes are to be liberally construed for the benefit of the public. The purpose of Washington UIM coverage is to protect innocent victims of motorists of underinsured motor vehicles.

The Washington Supreme Court held that no causal connection exists where it is established that the vehicle serves as the “mere situs” of the accident. The fact that a vehicle is the mere situs of an accident, however, is not sufficient to establish the required causal connection. The vehicle must contribute in some fashion toward producing the injury; the vehicle must be more than the coincidental place in which the injury occurred.
Determining whether a vehicle is the mere situs of an accident is a factual determination to be made by the trial court.

To assist in such a determination, the Supreme Court added that an automobile is more than the mere situs of an accident if some causal connection does in fact exist between the use of the vehicle and the injury. In such circumstances, liability attaches to the insurer “under an insurance contract providing for coverage of an accident arising out of use of the vehicle. Thus, the rule is that some causal connection exists when the events leading up to an injury involve vehicle use, unless the vehicle is merely the coincidental location of the accident. Since Atkinson drove the pickup to the location from which he fired his weapon the Supreme Court concluded that there was a causal connection between the pickup and the injury and UIM coverage was required.

Question 2

With regard to question two whether the driver/shooter’s intent to fire the gun is legally significant for triggering UIM coverage. The shooter’s intent informs the “accident” prong of UIM coverage. Here, Kroeber asserts—and GEICO concedes—that the injury was caused by an “accident” as contemplated by both the automobile insurance policy and the statutory definition. As such, the shooter’s intent does not affect whether the injury “arose out of” the use of the automobile.

CONCLUSION

An injury “arises out of” vehicle use if some causal connection exists between a condition of, an attachment to, or some aspect of the vehicle’s use and the resulting injury. Conversely, an injury does not “arise out of” vehicle use when the vehicle is merely the situs of the accident. The Supreme Court answered the second question in the negative because both parties agreed that the injury was caused by “an accident.”

ZALMA OPINION

The test adopted by the Washington Court is very broad. Under this test, “but for” causation is not necessary nor is “proximate causation” to find coverage under a UIM policy. All that is needed is that the trier of fact find “some causal connection.” By applying such a subjective and wide open test just about any injury that can be connected to the use of an automobile would be covered under a UM/UIM policy in Washington state. UM/UIM insurers in that state should direct their investigations to determine whether some causal connection exists and if it does the claim must be paid.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Shooting Arises out of Use of a Vehicle

Zalma’s Insurance Fraud Letter March 15, 2016, Volume 20, No. 6

Zalma’s Insurance Fraud Letter March 15, 2016,
Volume 20, No. 6
BZINCLOGO-copy1
Zalma’s Insurance Fraud Letter
Welcome to the March 15, 2016 Issue of ZIFL
Click here to receive the current issue

In this, the third issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on January 15, 2016 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.
Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.
The current issue of ZIFL reports on:

  • Doctor-Lawyer Conspiracy
  • Barry Zalma
  • Man Bites Dog Story — Six Million to Allstate From Fraudulent Clinics
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
    • Fraud of the Month
    • Convictions
  • Books from Barry Zalma
  • Wisdom
  • Ethics & Insurance Fraud Investigations
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association
  • Zalma Insurance Consultants
  • Zalma’s Insurance Fraud Letter
  • Zalma’s Insurance 101

Zalma’s Insurance Fraud Letter – Vol. 20, Number 6


Visit the Website of Zalma Insurance Consultants


Insurance Publications by Barry Zalma
The Zalma Insurance Claims Library

Insurance Claims: A Comprehensive Guide

     For Readers of ZIFL a Special 25% Discount
In addition the standard FC&S Online published by The National Underwriter Company now includes a Fraud Channel with the majority of the information taken from my work on insurance fraud. It is available at http://www.nationalunderwriterpc.com/Pages/default.aspx. The Fraud Channel covers issues like: Fraud Basics, Checklists and Charts, Investigation, Ethics, Reference Materials, Fraud Of The Week, and  both the full text and summaries of insurance fraud Cases.

Buyer Bonus:

You automatically receive-AT NO ADDITIONAL COST-a subscription to the author’s e-newsletter: The Monday Claims Report, a weekly e-newsletter featuring coverage and analysis on the top insurance law court decisions from across the country.

From The American Bar Association
by Barry Zalma 
How to Determine the Proper Measure of Damage to Real and Personal Property
This book was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) and includes cases dealing with the use of diminution in value as a method of determining the amount of loss incurred by a plaintiff seeking indemnity for damage to real or personal property.
Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired, Diminution In Value Damages assists the reader in answering the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions.
This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.
ISBN: 978-1-63425-295-8, Product Code: 5190524, 2015, 235 pages, 7 x 10, Paperback

00-285-2221. Available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

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

The full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allows claims personnel and their lawyers to understand what errors would cause a defeat or a not-guilty verdict. The effort to reduce insurance fraud requires the assistance of both civil and criminal courts.
 The Insurance Fraud Deskbook can assist the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit, and insurance company management to attain the information needed to deal with state investigators and prosecutors.

ISBN: 978-1-62722-676-9  Product Code: 5190506
2014, 486 pages, 7 x 10, Paperback

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.

Learn More 

Zalma on Insurance – A Blog

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

Zalma’s Insurance 101

I have also created a video blog called Zalma’s Insurance 101 which currently has over 462 three to four minute videos starting with “What is Insurance” and moving forward to the Appraisal explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at Zalma’s Insurance 101

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Waiver of Subrogation Only Applies to Those Insured

Creative Argument Against Negligence Action Fails

On February 1, 2014, a seven alarm fire caused catastrophic damage to a seven story condominium complex with thirty-one commercial and residential units at 31 Massachusetts Avenue in Boston. The plaintiffs, who own apartments within the complex, allege that defendant Anthony Siracusa started that fire. A Boston Fire Department investigation allegedly determined that the fire originated in Mr. Siragusa’s condo after he left a smoldering marijuana glass pipe next to an open window, newspaper clippings and a cloth couch.

Siragusa defended the negligence action claiming that by agreeing to obtain insurance on their own units and promising to cause their insurers to waive the right of subrogation against other unit owners. The plaintiffs, however, sued Siragusa in their individual capacities since they failed to purchase unit owner insurance. Basically Siragusa sought summary judgment because the stupidity of the plaintiffs for not buying insurance caused them to waive their right to sue him.

DISCUSSION

Plaintiffs, as individual unit owners, were either required or strongly encouraged to buy insurance against personal property damage and other losses and that such insurance, had it been obtained, would have waived subrogation rights against co-tenants of the condominium complex. Specifically, he points to the Insurance Resolution (paragraph 6), which states: “Each Unit Owner is solely responsible to obtain his or her own insurance coverage in appropriate kinds and amounts to insure his or her unit, personal effects and contents, unit improvements and coverage for the Condominim Trust’s deductible as well as insuring for liability and all such other coverages which said Unit Owner desires.”

The defendant interprets this passage to indicate that each unit owner was required to individually insure their unit. He reads it in combination with section 5.13 of the condominium trust agreement, which provides that any insurance obtained by unit owners must waive the right of subrogation against “[u]nit [o]wners.”

Massachusetts courts interpret unambiguous contracts according to their plain meaning, with terms construed in their usual and ordinary sense. Mr. Siracusa is correct to the extent that that a plain reading of the Insurance Resolution is a message to all unit owners that if they do not insure their personal property and other potential individual losses related to their own unit, they do so at their own peril. The Plaintiffs failure to follow the recommendation and buy insurance – although unwise – does not deprive them of the right to sue a tortfeasor who they claimed caused them property damage.

Siragusa’s interpretation does not foreclose the plaintiffs’ claims as a matter of law. Though they took a risk in not obtaining insurance, they are nonetheless still able to pursue compensation from the defendant for their financial losses caused by his alleged negligence.

There is no basis to conclude that the requirement to waive subrogation if insurance is procured necessarily precludes unit owners from suing each other if individual losses are incurred, but not covered by insurance. No language in the Insurance Resolution, the condominium trust agreement, or in the Massachusetts law governing condominium arrangements indicates otherwise. The defendant likewise cannot point to any Massachusetts appellate decision that disallows condominium unit owners from suing each other in the particular circumstances presented here.

Subrogation is only available to a person, or insurance company, that pays the debt or obligation of another. It is a right often waived by insurance companies who receive sufficient premium to cover the additional risks. An agreement to waive subrogation, however, is not an agreement to waive the negligence of third parties who cause damage.

The Defendant’s Motion for Summary Judgment—Emotional Distress and Related Claims

One purpose of summary judgment is to avoid the expense and delay of further proceedings by the filing of claims that lack supporting evidence to an early conclusion. Mr. Siracusa argues that the plaintiffs have put forth no evidence supporting their claims as to emotional distress. In the face of such assertions, the plaintiffs cannot rest on mere allegations in their pleadings.

After reviewing the summary judgment record, the Court found no evidentiary bases supporting the plaintiffs’ claims to emotional damages.

The Plaintiffs’ Cross–Motion for Costs

The plaintiffs argue that the defendant’s motion for summary judgment was frivolous and triggers their right to attorney’s fees and costs. The Court disagreed since it granted par of the motion there was no question that Mr. Siracusa’s motion was not unsubstantiated, frivolous, or demonstrative of bad faith to the level requiring discipline.

For the foregoing reasons, the Court ordered:

The defendant Anthony Siracusa’s motion for summary judgment on Count I of plaintiffs Dan Koch and Christina Montalvo’s Fifth Amended Complaint be DENIED, except as to any claim for damages relating to emotional distress;

The defendant Anthony Siracusa’s motion for summary judgment on Count I of plaintiffs David Romano et al’s First Amended Complaint be DENIED;

The defendant Anthony Siracusa’s motion for summary judgment on Count II of plaintiff David Romano et al’s First Amended Complaint be ALLOWED; and

The plaintiffs’ cross-motion for attorney’s fees and costs be DENIED.

ZALMA OPINION

Since this motion was made against the plaintiffs’ Fifth Amended Complaint it is obvious that they had difficulty asserting a viable claim against Siragusa. His negligence, if proved, will result in an award for the plaintiffs property damages and their alleged emotional distress will not be tried. The contract, as written was enforced.The insurers who paid for the insured unit owners do not have the right to sue Siragusa because they waived subrogation.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk

Posted in Zalma on Insurance | Comments Off on Waiver of Subrogation Only Applies to Those Insured

Only Insured Can Stack Policies

 Only an “Insured” Person Possesses Standing to Stack Insurance

Stacking of insurance policies allows an insured with two different policies to combine the limits of the policies even though each have a single per occurrence limit of liability. In Montana, a statute governs who can stack insurance policies and what is needed than to stack insurance policies.

In Hecht v. Mountain West Farm Bureau Mutual Insurance Company, United States District Court,  D. Montana, Slip Copy, (2016)  2016 WL 837932 (03/03/2016) Plaintiff Don Hecht, as guardian and conservator for his daughter Sunni Hecht, brought a declaratory action in Montana state court seeking a declaration that the liability limits for two recreational vehicles insured under a policy issued by Defendant Mountain West Farm Bureau Mutual Insurance Company (Mountain West) stack under Montana law which was removed to the U.S. District Court.

BACKGROUND

Sunni Hecht was injured while riding as a passenger in a 2013 RZR Polaris ATV recreational vehicle in Idaho on May 30, 2014. Sunni suffered significant and permanent catastrophic injuries. Sunni’s damages may exceed $600,000.

Dustin McKay owned the Polaris RZR. Dustin’s father, Richard McKay, insured the Polaris RZR as a “recreational vehicle” under a Mountain West farm/ranch liability policy (the Policy).  The Policy also insured a second recreational vehicle at the time of the accident — a 2009 Polaris Ranger.

The Policy’s Recreational Motor Vehicle Endorsement extended personal liability coverage under Section II, Coverage F (liability) “for loss arising out of ownership, maintenance, use, loading or unloading of [a covered] ‘recreational motor vehicle.’”  Richard Mckay paid a separate annual liability insurance premium of $29.70 for the Polaris RZR and the Polaris Ranger.

Gabby Moore drove the Polaris RZR at the time of the accident. The parties assume, for purposes of this action, that Moore’s negligence in driving the Polaris RZR caused the accident. Moore qualified as an “insured” person under the Policy. The Recreational Motor Vehicle Endorsement defines an “insured” person to include any person “legally responsible for a [covered] ‘recreational motor vehicle’ owned by an ‘insured.’”

Section II, Coverage F of the Policy, as endorsed, limited liability for bodily injury to $300,000 per “each occurrence.” The parties agree that the tragic accident in this case involved a single occurrence. Mountain West has paid Sunni $300,000 in personal liability coverage. Plaintiff seeks to recover an additional $300,000 in personal liability coverage in this action given that the Recreational Motor Vehicle Endorsement also provided liability coverage for the Polaris Ranger.

POSITIONS OF THE PARTIES

Plaintiff argues that the liability limits for the Polaris RZR and the Polaris Ranger should stack for several reasons. Plaintiff argues first that Richard McKay paid a separate liability premium on each of the two covered recreational vehicles. Plaintiff contends that Montana law has allowed stacking of uninsured motorist coverage, underinsured motorist coverage, and medical payment coverage to occur when the insurer charges separate premiums for each motor vehicle covered under an automobile policy. Plaintiff next argues that the “Limits of Liability” provision in Section II of the Mountain West Policy, which purports to prohibit stacking, should not be enforceable because it fails to comply with Montana’s anti-stacking statute, Mont. Code Ann. § 33-23-203.

Mountain West argued that only an “insured” person possesses standing to stack insurance coverages under Montana law. Sunni did not qualify as an “insured” under the Recreational Motor Vehicle Endorsement. Mountain West further argued that stacking of insurance coverages in Montana has been confined to personal and portable coverages in motor vehicle policies. These potential portable coverages encompass uninsured motorist coverage, underinsured motorist coverage, and medical payment coverage. Mountain West claimed that liability coverage has not construed as personal to an insured or portable under Montana law.

APPLICABLE LAW

Montana law allows a claimant to stack multiple insurance coverages only if the claimant can show that he or she qualifies an “insured” under all of the coverages to be stacked.

The Definitions Section of the Mountain West Policy and the Recreational Motor Vehicle Endorsement, read together, define an “insured” person to include a named insured, a relative or minor child residing in a named insured’s household, and any person legally responsible for a covered recreational motor vehicle owned by an insured. Sunni failed to qualify as a named insured under the Policy. She was not a relative of a named insured. She was not legally responsible for a covered vehicle owned by an insured. Sunni was merely a passenger in the Polaris RZR. As such, she does not qualify as an “insured” under Section II – Liability or the Recreational Motor Vehicle Endorsement.  Since Sunni was not an insured under the Mountain West Policy stacking does not apply under Montana law.

ZALMA OPINION

Allowing an insured to stack various coverages, although an odd interpretation of an insurance policy, makes sense under some circumstances such as UIM coverages where separate premiums are paid for coverages that can apply separately or when, as here, it is allowed by statute. Unfortunately for the seriously injured Sunni, she did not qualify as an insured for the purpose of stacking under the statute and must limit her search for indemnity to the assets of the person responsible for the accident.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Only Insured Can Stack Policies

No Coverage for Intentional Tort

Malicious Prosecution Suit Not Accidental

A standard liability insurance policy insures against bodily injury or property damage caused by an occurrence. Intentional torts, by definition, can never be an occurrence since they are both expected and intended by the tortfeasor.

In Grinnell Mutual Reinsurance Company v. Sleeper, United States District Court, W.D. Missouri,  Slip Copy,  2016 WL 868850 (March 7, 2016) the U. S. District Court was asked to compel an insurer to provide a defense to the insured for a case alleging only the intentional tort of malicious prosecution.

BACKGROUND

Plaintiffs Mary Ellison and Susan Sleeper asserted claims against defendants Linda Fry, and four other family defendants. Sleeper and Ellison asserted they had been unlawfully deprived by these defendants of property that should have passed to Sleeper and Ellison on the death of Vincil and Willa Fry.

In response, the state court defendants brought a counterclaim for malicious prosecution against Susan Sleeper. The counterclaim alleged that Sleeper’s claims were barred by the statute of limitations, that she and her counsel were aware of this impediment, and therefore that she had brought suit without probable cause and solely as a means of harassment. In defense Sleeper alleged that the defendants had concealed their unlawful activity and therefore the statute of limitations had been tolled. Ultimately, the Missouri Supreme Court acknowledged and abrogated the line of cases that supported Sleeper’s position and ruled Sleeper’s claims were barred by the statute of limitations.
Sleeper holds an insurance policy with CFM Insurance, Inc. for which Grinnell Mutual Reinsurance affords potential liability coverage. Grinnell filed suit before the Court seeking a declaratory judgment that this policy does not cover the malicious prosecution counterclaim.

DISCUSSION

To determine whether there is insurance coverage a Court must first interpret Sleeper’s policy. The interpretation of an insurance policy is a question of law. When performing this assessment, a court will consider the terms of the policy, attaching to those terms the meaning which would be attached by an ordinary person of average understanding if purchasing insurance. Sleeper bears the burden of establishing coverage under her insurance policy.

Because neither party disputes the contents of Sleeper’s policy or of the underlying state court case, there are no factual disputes at issue and the Court shall grant summary judgment if Grinnell is entitled to judgment as a matter of law.

Interpretation of the Policy

Sleeper’s insurance policy contains a coverage form entitled “Personal Liability Coverage.” Grinnell argues that “accident” plainly suggests an injury caused by negligence, which necessarily precludes acts of an intentional nature. The concepts of negligence and intentional conduct are contradictory and mutually exclusive.

Sleeper does not appear to dispute this argument. Although she maintains “accident” is an ambiguous term in the policy, and consequently it should be construed against Grinnell, she proceeds to offer third-party definitions of “accident” that define the term as “an unfortunate incident that happens unexpectedly or unintentionally” and “an unfortunate event resulting from carelessness, unawareness, ignorance or a combination of causes.” These definitions are consistent with Grinnell’s argument that an accidental act bespeaks negligence. Accordingly, as with all third party policies, Sleeper’s policy provides coverage for injuries caused by negligence.

Duty to Defend

An insurer has a duty to defend when the underlying action alleges facts which state a claim potentially within the policy’s coverage. Conversely, where the underlying claim is outside the coverage of the insurance policy, no such duty exists.

In response, Sleeper argues that the malicious prosecution counterclaim lacked merit.  Sleeper maintains she had probable cause to file the underlying lawsuit and thus the only possible way that these counterclaimants could succeed is under a theory of negligence which would be fully covered by this policy.

The  Court’s task in this case is not to reexamine the merits of a state lawsuit by parsing allegations for factual support. Rather, the Court must only look at the allegations as they are contained in the complaint. At no point does the counterclaim suggest Sleeper acted negligently. Instead, regardless of its ultimate merits, the counterclaim charged Sleeper solely with intentional, malicious acts.

Therefore, the court concluded that the malicious prosecution counterclaim falls outside the coverage of Sleeper’s policy and Grinnell has no duty to defend.

Duty to Indemnify

Unlike the duty to defend, the duty to indemnify is determined by the facts as they are established at trial or as they are finally determined by some other means, for example through summary judgment. Missouri courts have found that an insurer’s duty to defend is broader than its duty to indemnify. Accordingly, where there is no duty to defend, there is no duty to indemnify.

Given that Grinnell has no duty to defend Sleeper, it follows that Grinnell also has no duty to indemnify her regarding the malicious prosecution counterclaim.

ZALMA OPINION

Ms. Sleeper’s case against Grinnell failed because of the effect of the fortuity doctrine which is embedded in the definition of “occurrence.” Intentional acts, like malicious prosecution, can never be an occurrence. Like every risk, if a person is willing to pay a sufficient premium, can be covered even events that are intentional acts.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 2 Comments

Misrepresentation & Breach of Warranty Grounds to Rescind

Surreal to Ask a Court to Believe a Lie on Application Is Not Material

Insurers are not able to conduct a thorough investigation into representations made by a prospective insured at the time an application is submitted. Rather, the insurer relies on the covenant of good faith and fair dealing that the insured will be truthful in submitting an application. It is only after a claim is submitted that an insurer might learn of a misrepresentation concerning the risk that would cause the insurer to void the coverage.

In Essex Ins. Co. v. Galilee Medical Center S.C., — F.3d —- United States Court of Appeals, Seventh Circuit, 2016 WL 851688 (March 4, 2016) was faced with a trial court decision rescinding a policy of insurance and the claim of the defendants that their misrepresentations were really honest answers.

FACTUAL BACKGROUND

Plaintiff Essex Insurance Company (“Essex”) sued Galilee Medical Center S.C., doing business as MRI Lincoln Imaging Center (“Galilee”), and Luis Angarita, M.D., a physician employed by Galilee, seeking rescission of an insurance policy issued to Galilee.

Galilee provides medical services in Chicago. Essex issued a professional liability insurance policy to Galilee (the “Essex Policy” or the “Policy”) under which Essex was obligated to pay for claims against Galilee, the “insured,” for personal injuries caused by “any act, error or omission” in Galilee’s professional services. The Policy also covered claims against Galilee physicians, including Angarita, “solely while acting on behalf of [Galilee] and within the scope of his/her duties as such.”

To obtain coverage, Essex required both Galilee and Angarita to fill out applications. The applications contained a notice that Essex would rely on the answers provided by the applicants when issuing the policy. Accordingly, the Essex Policy deemed all information and statements made in the applications “material to the acceptance of the risk or hazard assumed by” Essex. Coverage under the Essex Policy was conditioned on Galilee’s acceptance that the applications were part of the Policy, that Essex had relied on the truth of the representations made in the applications, and that Essex had deemed the representations material to the acceptance of the risk assumed by Essex.  Essentially, the defendants, warranted the truth of all of the statements made  in the application were absolutely true.

The applications submitted falsely represented that Galilee did not use drugs for weight reduction for patients. ? Galilee also answered “no” to the question of whether its employees or independent contractors performed any experimental procedures.  Likewise, Angarita answered “no” to similar questions and that he does not use experimental procedures, devices, drugs, or therapy in treatment or surgery?

Medical Negligence Action

In June 2011, Rosa Ravelo, one of Angarita’s former patients, sued Angarita and an affiliated Galilee corporation, Galilee Medical Center S.C., doing business as Affiliated Physicians (“Galilee Affiliated Physicians”), for medical negligence based on mesotherapy treatments recommended and administered by Angarita. Mesotherapy is a non-surgical medical treatment involving injections into subcutaneous layers of fat. According to Angarita, “mesotherapy is intended to dissolve deposits of subcutaneous fat to reduce the size of isolated portions of the body in order to provide a more desirable body shape and contour for patients. Common examples include flattening areas of cellulite and smoothing … [such as the] pouching of a woman’s stomach following birth.” Mesotherapy has not been approved by the U.S. Food and Drug Administration for any purpose. Angarita admitted to providing mesotherapy treatment to more than 5,000 patients, including Ravelo.

Ravelo’s first appointment with Angarita occurred on November 8, 2008, at Galilee Affiliated Physicians. From November 15, 2008 to July 30, 2009, Angarita treated her with mesotherapy at his home office in Riverside, Illinois.

DISCUSSION

Defendants1 argue that the district court erred in holding that they made material misrepresentations in their insurance policy applications.  The parties agreed that Illinois law governs this suit. Section 154 allows insurers to deny coverage and rescind a policy if (1) a statement in the policy application is false and (2) the false statement either was made with the intent to deceive the insurer or materially affects the acceptance of the risk assumed by the insurer.

Illinois courts construe terms in an insurance application in accordance with their plain meaning and from the standpoint of an ordinary, reasonable person. Gillen v. State Farm Mut. Auto. Ins. Co., 215 Ill.2d 381, 294 Ill.Dec. 163, 830 N.E.2d 575, 582 (Ill.2005).

Applying that standard, the Seventh Circuit agreed with the district court that the term “use” is not ambiguous, nor should it be interpreted narrowly to encompass only the act of administering mesotherapy. Essex wanted to know whether Galilee doctors were recommending and administering such procedures. Defendants did not disclose this information, and thus, Essex was not able to correctly price the insurance policy based on the risk it was undertaking. The Seventh Circuit refused to permit the defendants, who did not pay for coverage for suits arising out of weight loss procedures, to circumvent their duty to make truthful representations to their insurer by reading ambiguity into a clear insurance policy application.

Any reasonable person would have understood from the insurance policy application questions that Essex wanted to know whether Galilee doctors performed non-traditional weight loss procedures. Experimental procedures used to eliminate fat in certain parts of the body, such as mesotherapy, certainly fall within that category.

Finally, defendants’ misrepresentations were sufficiently material to warrant rescission. To determine materiality, Illinois courts use an objective test that asks whether a “reasonably careful and intelligent” underwriter “would regard the facts as stated to substantially increase the chances of the event insured against, so as to cause a rejection of the application.” Small v. Prudential Life Ins. Co., 246 Ill.App.3d 893, 186 Ill.Dec. 841, 617 N.E.2d 80, 83 (Ill.App.Ct.1993). Testimony from an insurer’s underwriter may be used to establish the materiality of omitted information.  Accordingly, Essex submitted an affidavit from the managing director of Essex’s underwriter stating that if Galilee and Angarita had answered “yes” to the disputed questions, Essex would not have issued the policy or would have issued it for a much higher premium. That conclusion is consistent with the insurance policy application, which asked several questions about non-traditional and experimental weight loss procedures, and with the Policy itself, which noted that all statements made in the application were material to the acceptance of the risk assumed by Essex.

Although defendants argue that summary judgment is warranted only if the insurer can show that truthful statements by the insured would have caused the insurer to reject the application entirely, defendants’ interpretation of the materiality inquiry is too limited. A  misrepresentation is material by statute, if it “affects either the acceptance of the risk or the hazard assumed” by the insurer.

Here, the misrepresentations involving the scope of Angarita’s medical practice significantly increased Galilee’s exposure, and thus, Essex’s risk. Because Angarita’s use of mesotherapy led directly to Essex’s exposure in the Ravelo suit, it borders on the surreal to think that the nondisclosure was immaterial.

ZALMA OPINION

The covenant of good faith and fair dealing requires that neither party do anything that will prevent the other from enjoying the benefits of the contract. By misrepresenting – lying – to the insurer about the use of experimental techniques and drugs in the weight loss practice, the defendants (Insureds) deprived the insurer of the right to properly evaluate and price the risk they were asked to take. As a result, equity required that the parties be put back in the position they were in before the policy was issued as if no policy was ever issued.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Misrepresentation & Breach of Warranty Grounds to Rescind