Health Fraud Case Lawyers Removed

Zalma’s Insurance Fraud Letter

July 1, 2016, Volume 20, No. 13

BZBACKSUIT3

Barry Zalma

Welcome to the July 1, 2016 Issue of ZIFL

Click here to receive the current issue

In this, the thirteenth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on July 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:

  • Health Fraud Case Lawyers Removed
  • First Annual Claims Magazine/Americas Claims Event Legend Award to Barry Zalma
  • Disbarred For Health Insurance Fraud
  • Barry Zalma
  • Claims Commandments 10 – 12
  • Proformative Academy Webinars
  • The Best Defense is Offense
  • Good News From the Coalition Against Insurance Fraud
  • Books from Barry Zalma
  • Wisdom
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Visit the Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

THE “ZALMA ON INSURANCE” BLOG 

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

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Insurable Interest & Coverage

Insurance Dispute Resolved by Recognition of Insurable Interest

First party property insurance does not insure property but, rather, insures a person named as an insured against the risk of loss of property in which the person insured has an insurable interest. An insurable interest is one where the insured will be damaged as a result of a loss to the property caused by a peril insured against.

In Fontana Builders, Inc. v. Assurance Co. of America, Supreme Court of Wisconsin, — N.W.2d —- , 2016 WL 3526408 (June 29, 2016) the Supreme Court of Wisconsin dealt with the review of an unpublished decision of the court of appeals affirming judgments entered in favor of Assurance Company of America (Assurance) against its insured, Fontana Builders, Inc. (Fontana), and Fontana’s lender, AnchorBank, FSB (AnchorBank).

The case involves what the Supreme Court found to be a complicated insurance coverage dispute arising out of a 2007 fire that destroyed portions of a high-end custom home that was still under construction in Lake Geneva. The fire caused major damage not only to the home but also to the personal property of the home’s occupants, who were the presumptive purchasers of the home upon its completion but who had not yet purchased the dwelling which was still owned by the builder, Fontana.

Both the construction contractor, Fontana, and the occupants/presumptive purchasers, James and Suzy Accola (the Accolas), had separate insurance policies. After the fire, the Accolas settled with Chubb Insurance Co. (Chubb), the insurer that provided their homeowner’s policy, and received a substantial payment. Assurance then denied all coverage to Fontana for the fire, relying on the “permanent property insurance” condition in its builder’s risk policy as grounds for the denial.

Before getting to the Supreme Court there were two jury trials and two appeals, although this is the first appeal to reach the Supreme Court. The Supreme Court saw two fundamental questions: First, is the interpretation of the “permanent property insurance” condition in the builder’s risk policy a question of fact for a jury or a question of law for the court? Second, if the interpretation of the “permanent property insurance” condition is a question of law, did that condition terminate Fontana’s coverage under the builder’s risk policy?

FACTUAL BACKGROUND

Fontana designed and built “spec” homes, speculative custom houses for which Fontana obtained financing and began construction before securing a buyer for the finished structure. James Accola was the president and sole shareholder of Fontana Builders, Inc.

Nearly all of Fontana’s assets were invested in the house, which the company planned to use to generate new opportunities for itself in the high-end housing market. The home was larger and included more detailed interior work than any previous Fontana-built home. Accola testified at the second trial that he intended to use the home to “showcase” Fontana as “one of the premier builders in the Lake Geneva area.” As the home’s owner, Accola would have unfettered access to an example of Fontana’s finished work when he courted prospective buyers.

Fontana financed the project’s construction through two mortgages with AnchorBank. The first mortgage, dated November 29, 2005, secured a $1.076 million loan. A subsequent mortgage, dated April 23, 2007, secured a $200,000 loan. Accola provided a personal guarantee on Fontana’s loans and mortgages.

Fontana’s Builder’s Risk Coverage from Assurance

Under the builder’s risk policy, Assurance agreed to “pay for direct physical loss to Covered Property from any Covered Cause of Loss described in [the] Coverage Form.” Covered Property included “[p]roperty which has been installed, or is to be installed in any commercial structure and/or any single family dwelling, private garage, or other structures that will be used to service the single family dwelling.”

A separate section of the policy specified additional conditions for coverage: “We will cover risk of loss from the time when you are legally responsible for the Covered Property on or after the effective date of the policy if all other conditions are met. Coverage will end at the earliest of the following: ¶ Once your interest in the Covered Property ceases; ¶  * * * ¶ When permanent property insurance applies;… (Emphasis added.)”

The Accolas’ Homeowner’s Policy from Chubb

James Accola obtained a 30–day temporary occupancy permit dated May 30, 2007, and, shortly thereafter, the Accolas moved most of their personal property into the home. Although the Accolas began residing in the home, Fontana continued interior work preparing the home for permanent occupancy. Fontana remained the home’s owner and had not yet closed a sale or transferred title to the Accolas.

In anticipation of purchasing the home, the Accolas acquired a homeowner’s policy from Chubb Insurance Co. The policy listed “Jim Accola” and “Susy [sic] Accola” as the named insureds, and it listed “Anchor Bank” as the mortgagee. Effective for one year from June 21, 2007, the coverage summary explained: “Your policy provides coverage against physical loss if your home or its contents are damaged, destroyed, or lost.” It provided $2 million of deluxe coverage for the dwelling and $1 million of deluxe coverage for the home’s contents.

The Fire and Its Aftermath

The fire occurred late on the night of June 28, 2007. A Fontana employee working on the property during the day left rags used for wood staining in the garage, and those rags spontaneously combusted. Awakened by smoke alarms shortly after falling asleep, Accola immediately smelled smoke in the house. With thick smoke filling the home’s interior, Accola retrieved his two youngest children from an upstairs bedroom and exited the house.

After the fire, the Accolas submitted a claim to Chubb for damages to their property. They signed a Non–Waiver Agreement allowing Chubb to investigate the claim without acknowledging that the homeowner’s policy provided coverage for the Accolas. Separate from the Accolas’ claim with Chubb, Fontana made a claim with Assurance under the builder’s risk policy. Assurance began investigating Fontana’s claim after James Accola signed a Non–Waiver Agreement on Fontana’s behalf.

Following the mediation, Chubb entered into a settlement agreement with the Accolas. Chubb agreed to pay the Accolas $1 .5 million to dispose of their claim. The agreement allocated $519,000 of the settlement proceeds toward “replacement costs of the [Accolas’] personal property” and $330,000 toward their “additional living expenses,” with the remainder allocated toward “[a]ny other interest the [Accolas] may have in the premises.”

Assurance denied coverage after concluding that the policy did not cover the fire loss and Assurance concluded that the homeowner’s insurance constituted permanent property insurance that applied, thus terminating the Assurance policy.

INTERPRETING THE ASSURANCE POLICY

When determining insurance coverage the Supreme Court examines the facts to determine whether the insuring agreement provides an initial grant of coverage, and the analysis ends if the policy does not provide an initial grant.

The Assurance policy does not define “permanent property insurance.” Nor does the policy define what it means for permanent property insurance — whatever it may be — to “apply.” Assurance contends that Chubb’s payments to the Accolas demonstrate that permanent property insurance applied to the fire loss, thus terminating the Assurance policy. Fontana counters that its insurable interest as a builder was distinct from the Accolas’ interests as occupiers and potential purchasers.

Policy language is ambiguous when “susceptible to more than one reasonable construction. Where an ambiguity exists in a grant of coverage, the court must construe the policy against the drafter, and in favor of the reasonable expectations of the insured.

An insured builder might reasonably expect builder’s risk coverage to end when the builder completes construction and the owner — be it the builder or a new owner — purchases a policy to provide adequate coverage for the finished structure. On the other hand, a party might conclude that it is reasonable for builder’s risk coverage to end when any other property insurance applies to the property, regardless of the party purchasing coverage or the particular interest insured.

For guidance interpreting the phrase “when permanent property insurance applies,” we expand the analysis to consider the phrase within the context in which it appears. Considering the phrase “when permanent property insurance applies” in context suggests that the phrase speaks to the builder’s interest in the property.

The circumstance at issue in this case — “when permanent property insurance applies” — is the only condition or exclusion in the policy that does not explicitly relate to the builder’s interest in the property. Accordingly, based on its context, the Supreme Court read the phrase “when permanent property insurance applies” as addressed to the builder’s insured interest in the property.  Hence, it examined the interests covered by the Assurance and Chubb policies to determine whether the existence of the Chubb policy terminates Fontana’s coverage with Assurance.

This court has explained the broad scope of insurable interests: “A person need not have an absolute insurable right of property in the thing insured or even a special limited interest. It is sufficient if a person’s relationship to the property is such he would reasonably be expected to suffer a loss by the destruction of the property or to derive a benefit from its continued existence. Neither a legal nor an equitable interest nor any property interest as such in the subject matter is necessary.” Ben–Hur Mfg. Co. v. Firemen’s Ins. Co. of N.J., 18 Wis.2d 259, 262, 118 N.W.2d 159 (1962). An insurer under a builder’s risk policy obtained by a contractor and an insurer under a fire policy obtained by a purchaser, who occupied the dwelling prior to conveyance of the title by the contractor, could not prorate a loss, though each policy contained pro rata clauses, because each policy covered a separate insurable interest.

The Accolas’ acquisition of the Chubb policy for their interest as occupants and prospective purchasers did not trigger the Assurance policy’s termination provision because the Chubb policy did not apply to the same interest as the Assurance policy. The Chubb policy in no way covered Fontana’s interest as a builder and owner; therefore, it did not “apply” so as to supersede the builder’s risk coverage. Furthermore, the Accolas’ settlement with Chubb does not change the analysis because even if Chubb had acknowledged that the policy provided coverage — which the settlement expressly disclaimed — any payments to the Accolas would speak to their interest insured by Chubb rather than Fontana’s interest insured by Assurance.

 Leaving builders exposed to such uninsured risk of loss would thoroughly frustrate their reasonable expectations. Assurance, as the drafter of the policy, had the opportunity to set forth in clear terms the circumstances envisioned by the phrase “when permanent property insurance applies.”

CONCLUSION

Legally distinct entities had different interests in the Lake Geneva property at issue in this case. Although the Accolas occupied the property on the date of the fire, their occupancy did not alter Fontana’s insurable interest: construction on the property continued, and Fontana remained the property’s owner because sale to the Accolas had not yet closed. Reaffirming the longstanding principle that interpretation of insurance contracts generally presents a question of law for the court, it concluded that the homeowner’s policy issued by Chubb to the Accolas did not “apply” so as to terminate Fontana’s builder’s risk policy from Assurance.

ZALMA OPINION

This supposedly complex case was truly simple. The Accolas had an insurable interest in both the contents and structure as a place they were occupying and had the right to make a claim against their homeowners insurer, Chubb for all losses up to the amount of their interest. Fontana had a builders insurable interest in the structure and had a right to make claim for its losses due to the fire. The court so found. It ignored the fact that Chubb had the right to subrogate against Fontana for negligently causing the fire that resulted in a $1.5 million settlement that might be presently pending.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Declaratory Relief Only Available If There is an “Actual Controversy”

Insurer’s Dispute Premature

Insurance companies often seek the help of federal courts to determine disputes over which insurer owe what to an insured in what amounts. In Progressive American Insurance Company v. Kanzer, Slip Copy, United States District Court, Florida, CASE NO: 8:16-CV-1154-T-30AEP (06/24/2016) the USDC in Florida was asked to resolve a dispute between insurers over defense and indemnity of their mutual insureds as a result of an vehicle accident causing bodily injuries.

BACKGROUND

Plaintiff Progressive American Insurance Company seeks a declaration regarding the priority of insurance coverage. Specifically, this declaratory judgment action arises out of an underlying state court action styled, Anthony Gallo v. Stephen R. Kanzer, pending in Pinellas County, Florida Circuit Court (the “underlying action”). In the underlying action, Anthony Gallo filed a single-count negligence action against Stephen R. Kanzer for bodily injuries Gallo suffered as a result of a motor vehicle accident caused by Kanzer’s negligence.

DISCUSSION

Progressive alleges in this case that it issued two insurance policies to Kanzer: a personal automobile policy, with potentially relevant limits of $250,000 each person and $500,000 each accident, and a personal umbrella policy, with a potentially relevant limit of $1,000,000 per occurrence. Progressive alleges that Twin City Insurance Company issued to Kanzer’s employer, Morgan & Morgan, Tampa, P.A., a liability insurance policy, containing business auto coverage, with a relevant limit of $1,000,000 per occurrence. Progressive also contends that North River Insurance Company issued to Morgan & Morgan a commercial umbrella policy, with a relevant limit of $25,000,000 per occurrence.

Progressive does not seek a declaration from this Court on the duty to defend; it concedes that it is providing Kanzer with a defense in the underlying action. Progressive requests the Court to declare that Kanzer is an insured under the Twin City and North River policies issued to Morgan & Morgan, and is therefore entitled to coverage under those policies for the damages Gallo claims in the underlying action. Progressive also asks the Court to declare that there is a specific priority of coverage among the various policies, whereby the Progressive personal automobile policy provides the first layer of indemnity coverage to Kanzer up to its applicable limits, followed by the Twin City policy up to its applicable limits, followed by the Progressive and North River umbrella policies on a pro rata basis according to their respective policy limits.

North River moves to dismiss Progressive’s complaint for declaratory relief for lack of subject matter jurisdiction (a lack of an “actual controversy”) and for failure to state a cause of action pursuant.

DISCUSSION

The test for an “actual controversy” under the Declaratory Judgment Act does not require a present dispute, but only the “practical likelihood” that a dispute will arise. Here, the Court concludes that there are too many contingencies at issue and that the “practical likelihood” that they will occur is too hypothetical at this point. For example, as North River points out, North River’s indemnity obligations to the insured are contingent on the insured actually being held liable in the underlying action. North River’s indemnity obligations are also contingent on the exhaustion of the underlying insurance. Those events may never occur.

On that same note, any declaration regarding the priority of coverage implies that there is a duty to indemnify Kanzer.

Progressive’s declaratory action is premature. The Court should never waste judicial resources and the resources of the parties on speculative, hypothetical injuries.

However, rather than dismiss this case as North River requests, the Court elects to stay the action, pending the outcome of the underlying action.

ZALMA OPINION

Insurance disputes that pose an actual controversy can always be resolved by a declaratory relief action. However, when the issue is speculative and premature courts should ignore the request for declaratory relief. In this Solomon-like decision the USDC punted the case until there is a resolution of the underlying case. If there is a defense verdict there will be no dispute between the insurers and if there is a verdict for the plaintiff then the court can consider the issue.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Court May Not Change LLP to General Partnership

LLP In New Jersey Not Required to buy Tail Coverage on Winding Up

Lawyers did business as a limited liability partnership (LLP) for some years and then decided to wind up, dissolve, the partnership. After the LLP was dissolved and during the winding up period the LLP only existed to collect fees and pay bills and provided no legal services. The trial court tried to get the plaintiff insurance coverage – since a dissolved LLP has no assets – by converting the LLP to a general partnership (GP) that required continuing insurance coverage. The LLP appealed to the New Jersey Supreme Court.

In Mortgage Grader, Inc. v. Ward & Olivo, L.L.P., Supreme Court of New Jersey , — A.3d –—, 2016 WL 3434529 (June 23, 2016) one of the LLP law firm attorney’s client filed suit against attorney, attorney’s partner, and firm for damages arising out of attorney’s alleged legal malpractice in settlement of client’s patent infringement claims. The Superior Court, denied partner’s motion to dismiss for failure to state claim, determined that defendants failed to maintain requisite lawyers professional liability insurance during period of LLP’s dissolution and windup of LLP’s affairs, converted LLP to general partnership as sanction, and concluded that partner could be vicariously liable for attorney’s alleged malpractice. Partner appealed. The Superior Court, Appellate Division, 438 N.J.Super. 202, 102 A.3d 1226, reversed and remanded.

FACTS

In July 2009, Mortgage Grader hired Olivo of Ward & Olivo (“W & O”) to pursue claims of patent infringement against other entities. Mortgage Grader entered into settlement agreements in those matters. In exchange for one-time settlement payments, Mortgage Grader granted those defendant-entities licenses under the patents, including perpetual rights to any patents Mortgage Grader received or obtained through assignment, regardless of their relationship to the patents at issue in the litigation. It is those provisions of the settlement agreement that allegedly gave rise to legal malpractice.

On June 30, 2011, W & O dissolved and entered into its windup period. It is undisputed that W & O continued to exist as a partnership for the sole purpose of collecting outstanding legal fees and paying taxes. The next day, Ward formed a new LLP and began to practice with a new partner. W & O’s claims-made malpractice insurance policy ran through August 8, 2011. W & O did not purchase a “tail policy.”  Olivo sent Mortgage Grader a letter on May 10, 2012 on behalf of both Olivo Law Group, LLC and W & O, informing Mortgage Grader of the termination of legal services.

Mortgage Grader filed a complaint against W & O, Olivo, and Ward in October 2012. The complaint alleged legal malpractice by Olivo, claiming that the settlement agreements resulting from Olivo’s representation harmed Mortgage Grader’s patent rights. Ward filed an answer and subsequently moved to dismiss for failure to state a claim. Ward argued that the requirement in Rule 1:21–1C, which provides that a law firm organized as an LLP must purchase malpractice insurance, is silent as to tail coverage following its dissolution.

The Appellate Division concluded that the UPA did not provide that a law firm organized as an LLP converts to a GP if it fails to maintain malpractice liability insurance. The panel also noted that Rule 1:21–1C(a)(3) states that the only remedies for an LLP’s failure to maintain malpractice insurance are for this Court to terminate or suspend the LLP’s right to practice law or otherwise discipline it. Because of this, and the fact that the Legislature has never amended the UPA to require conversion of an LLP to a GP as a sanction for failing to purchase a tail insurance policy, the panel found that a trial court has no authority to convert an otherwise properly organized LLP into a GP in order to sanction a partner for practicing without malpractice insurance.

ANALYSIS

Mortgage Grader argues that law firms organized as LLPs in the windup period continue to exist as viable entities, and must therefore maintain professional liability insurance as required by Rule 1:21–1C(a)(3).

W & O maintained professional liability insurance during the entire time it was actively engaged in the practice of law, and after its policy lapsed, W & O existed solely to collect outstanding fees and pay taxes in an effort to wind up the partnership.

The New Jersey Constitution grants the Supreme Court jurisdiction over the admission to the practice of law and the discipline of persons admitted.

The Supreme Court could find no indication that the administrative activities characterizing a windup are included within the term “practice of law.”  A partnership’s existence continues during the windup period and is terminated when the winding up of its business is completed.  In that event, the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred

During the windup period, the LLP continues to exist, but only to wind up the partnership’s affairs. The UPA sets forth activities that do not constitute “transacting business”: “collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired. In sum, the important distinction pertaining to LLP liability is the point in time at which an LLP enters dissolution, commences winding up its affairs, and thus ceases to engage in the business for which it was created.

The administrative activities conducted during the windup period are not the transacting of business for which a law-firm LLP was established. Accordingly, under the circumstances, where a law-firm LLP has entered the windup period and has ceased to provide any legal services, the windup period does not constitute practicing law and therefore no acts of malpractice could be committed during this period. A winding up LLP has no obligation to maintain insurance or tail coverage under New Jersey statutes.

Similarly, the date on which W & O incurred its alleged obligation to Mortgage Grader is also dispositive. Partnership obligations under or relating to a tort generally are incurred when the tort conduct occurs rather than at the time of the actual injury or harm.  A law-firm LLP incurs its obligation to a client on the date the alleged malpractice occurred. Here, W & O was a valid LLP with professional liability insurance coverage at the time of Olivo’s alleged malpractice.

Mortgage Grader, therefore, may not maintain a vicarious liability claim against Ward.

In addition the erroneous determination that W & O was still practicing law during its windup period, the trial court improperly relied on Rule 1:21–1C to convert W & O from an LLP to a GP. The Supreme Court also concluded that the statutes provide no support for the trial court’s conversion of W & O from an LLP to a GP.

The Supreme Court also declined to impose a tail requirement on attorneys who choose to practice as LLPs, particularly because a mandate to purchase tail coverage still would not fully protect the public from uninsured risks and that the mandate to purchase professional liability insurance does not include any requirement to purchase tail coverage.

In conclusion:

  1. neither Uniform Partnership Act (UPA), nor rule that incorporated UPA by reference, which required law firm organized as LLP to maintain lawyers’ professional liability insurance to cover claims arising out of performance of professional services by attorneys employed by LLP, required that firm maintain coverage upon dissolution of firm during windup period;
  2. partner was not vicariously liable for attorney’s alleged malpractice;
  3. Supreme Court, and not trial court, had exclusive authority to impose sanction for alleged violation of insurance mandate;
  4. conversion of LLP firm to general partnership was not authorized sanction for firm’s alleged violation of insurance mandate;
  5. UPA did not authorize conversion of LLP firm to general partnership for violation of insurance mandate; and
  6. even assuming that partner was not shielded from vicarious liability for attorney’s alleged malpractice, client was not obligated to serve affidavit of merit on partner.

ZALMA OPINION

E & O insurance for lawyers professional liability are usually, if not always, a claims made or a claims made and reported policy. The claims made policy only applies if a malpractice claim is made during the time the policy was in effect. If the firm dissolves and desires to be protected for claims made after dissolution it can purchase “tail” coverage that allows a claim to be made after the expiration of the policy and dissolution of the law firm. Tail coverage is not required in New Jersey. If the LLP is liable it can be held to pay a judgment but, since it is dissolved, it is judgment proof with no assets.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Failure to Read and Apply Policy Is Expensive

Clear & Unambiguous Exclusion Must be Enforced

I have spoken over the last 48 years, until I was blue in the face, that before a decision is made on a claim, before a suit is filed, the people involved must read the entire policy and be certain that all of the conditions of the policy have been met and the claim can be proved.

In Bakri v. Sentinel Ins. Co., Court of Appeals of Michigan, 2016 WL 3429678 (June 21, 2016) the Michigan Court of Appeals was asked to do what the parties and the trial court failed to do: read the entire policy.

FACTS

After a motor vehicle accident between plaintiff and defendant Youssef Ftouni, in which plaintiff suffered injuries. Plaintiff filed a complaint against Ftouni and claimed that Ftouni’s negligence was the direct and proximate cause of the serious impairment of bodily function he sustained in the accident. He also named Sentinel as a defendant because it issued him an underinsured motorist (UIM) policy, under which it was obligated to pay the damages that exceed Ftouni’s own insurance policy limits.

The case was submitted to the Mediation Tribunal for case evaluation, and the panel recommended two awards in favor of plaintiff: $100,000 (Ftouni’s policy limit) against Ftouni, and $100,000 against Sentinel. On September 17, 2014, the Mediation Tribunal mailed a notification of case evaluation results, which indicated that plaintiff and Ftouni both accepted the award regarding plaintiff’s negligence claim. The notice also indicated that plaintiff and Sentinel rejected the award regarding plaintiff’s UIM claim.

After the notice of the evaluation results was issued, Sentinel advised plaintiff that his UIM claim was barred under a policy exclusion that precluded coverage for any claim settled without Sentinel’s consent. According to Sentinel, the exclusion was triggered when plaintiff accepted the case evaluation award against Ftouni without requesting or obtaining Sentinel’s consent. Had Ftouni or his counsel had read the entire policy before accepting the evaluation of the Mediation Tribunal he asked Sentinal to fund the agreement. Rather, Plaintiff filed a motion for declaratory relief and sought an order that indicated that his case evaluation acceptance did not impact his UIM claim. Alternatively, plaintiff requested that his case evaluation acceptance be set aside. The trial court denied plaintiff’s motion and, pursuant to MCR 2.403(M), entered judgment against Ftouni in accordance with the case evaluation award.

ANALYSIS

Sentinel argued that it was entitled to judgment as a matter of law because plaintiff’s claim was barred by the plain language of the UIM policy. On appeal, Sentinel argues that the trial court erred when it concluded that the exclusion in its policy did not preclude plaintiff’s claim.

A genuine issue of material fact exists (sufficient to defeat a motion for summary judgment) when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ. Further, the construction and interpretation of an insurance policy and whether the policy language is ambiguous are questions of law that the appellate court may review as if it was the trial court.

Insurance policies are contracts and, in the absence of an applicable statute, are subject to the same contract construction principles that apply to any other species of contract. Unlike personal protection insurance, UIM insurance is not required by statute in Michigan. Under traditional principles of contract interpretation, unless a contract provision violates law or one of the traditional defenses to the enforceability of a contract applies, a court must construe and apply unambiguous contract provisions as written. Although exclusionary clauses should be construed in the insured’s favor, an exclusion that is specific and clear must be enforced.

The policy provides: “This insurance does not apply to any of the following: ¶ 1. Any claim settled without our consent. However, this exclusion does not apply to a settlement made with the insurer of … [an] “uninsured motor vehicle,” in accordance with the procedures described in Paragraph A.2.b.”

Regardless of how the settlement was reached in this matter, there is little question that plaintiff has, in fact, settled his claim with Ftouni, the underinsured driver. Plaintiff and Ftouni both accepted case evaluation, and the trial court entered judgment against Ftouni in accordance with the case evaluation award. The parties do not dispute that plaintiff settled his claim with Ftouni without Sentinel’s consent. Therefore, under the clear language of the exclusion coverage does not exist.

Mutual case evaluation acceptance cannot reasonably be construed as a “tentative settlement.” In determining the common meaning of a word or phrase like the term “tentative” as “not fully worked out or developed” is a common dictionary definition.  The purpose of case evaluation is to expedite and simplify the final settlement of cases.  An accepted case evaluation serves as a final adjudication and is therefore binding on the parties similar to a consent judgment or settlement agreement. Thus, if case evaluation acceptance is akin to a consent judgment or settlement agreement and intended to facilitate final settlements, a settlement reached by way of case evaluation cannot reasonably be characterized as not fully worked out or developed.

Moreover, even if the Court accepted plaintiff’s argument that the settlement was “tentative” and that he was able to avail himself of the exception to avoid exclusion of his claim, the procedures outlined in that section were not satisfied in this case. The first requirement of the policy was fulfilled: Sentinel received written notice of the settlement by way of the Mediation Tribunal’s notification of results, as well as plaintiff’s correspondence. However, the second requirement remains unsatisfied because there is no dispute that Sentinel never advanced payment of the case evaluation award to plaintiff.

In sum, because Sentinel did not consent to plaintiff’s settlement with Ftouni, the trial court erred when it concluded that Sentinel was not entitled to judgment as a matter of law. An exclusion that is specific and clear must be enforced and the plain language of the policy excludes plaintiff’s claim for UIM benefits. Additionally, giving the benefit of reasonable doubt to plaintiff regarding the “tentative” nature of mutual case evaluation acceptance, there is no question that the requirement was not satisfied because Sentinel did not advance the settlement funds within 30 days of receiving notice of the settlement.

ZALMA OPINION

Mr. Ftouni could have obtained an extra $100,000 by telling his insurance company he would like to accept the recommendation of the Mediation, ask that they agree and fund the UIM portion of the recommendation and wait a few days for the response. Rather, by accepting without obtaining the permission and agreement of the UIM insurer, Ftouni defeated his UIM claim.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Payment of Appraisal Award Promptly Defeats Bad Faith

Breach of Contract Needed For a Bad Faith Claim

Lay people, and some of their lawyers, believe that if they are not paid exactly what they want on a claim promptly and without question is sufficient to establish a bad faith claim. In Texas, at least, the insured must prove that the insurer breached the contract and acted in a conscious way to deprive the insured of the benefits of the contract. Failure to produce proof defeats a bad faith claim.

In Anderson v. American Risk Insurance Company, Inc., Court of Appeals of Texas, Houston (1st Dist.) NO. 01-15-00257-CV, 2016 WL 3438243 (June 21, 2016) Vanessa Anderson appealed from the trial court’s rendition of summary judgment in favor of American Risk Insurance Company, Inc. (“ARIC”). Anderson brought contractual and extra-contractual claims against ARIC related to an insurance coverage dispute that arose after her house was damaged during a storm. After paying the appraisal award, ARIC moved for summary judgment on all claims. The trial court granted summary judgment and rendered a take-nothing judgment.

BACKGROUND

Anderson’s residence in Spring, Texas was covered by an ARIC homeowner’s insurance policy. During a storm on June 12, 2012, a tree fell through the roof of her home. All told, after the storm, one bedroom and one bathroom were destroyed by the tree, and the home had no water, power, or air conditioning.

ARIC’s summary-judgment evidence showed that, within three days of the tree falling, Steve Mazey inspected the property on behalf of ARIC. Mazey estimated the total loss at $58,784.05.

From June to September 2012, ARIC made a series of payments to Anderson totaling $52,475.22. Anderson lived at the apartment complex Marquis at Woodlands from August 11, 2012, through October 10, 2012. According to her affidavit, she accrued late fees because ARIC was slow to reimburse her though she was “very prompt about submitting” receipts.

On November 8, 2012, Anderson sent a demand letter to ARIC seeking $300,000 to settle her claims: $200,000 for actual damages, $25,000 for mental anguish, and $75,000 for attorney’s fees and expenses amounts that had nothing to do with the falling tree.  ARIC did not pay and she filed suit, asserting claims for breach of contract, breach of the common law duty of good faith and fair dealing, various violations of Chapter 541 of the Texas Insurance Code and Deceptive Trade Practices Act (“DTPA”), and violations of the prompt payment provisions set forth in Chapter 542 of the Texas Insurance Code.

ARIC invoked its right to appraisal, as provided for under the policy. After many delays, some caused by her Appraiser, an award was rendered and ARIC issued checks to Anderson on August 8, 2014, in payment of the appraisal award.

ARIC further asserted that it was entitled to judgment as a matter of law on the extra-contractual claims because there was a bona fide dispute about the amount of covered damages and Anderson’s alleged damages are barred by the economic loss rule. Finally, ARIC argued that no genuine issue of material fact existed on the misrepresentation and fraud claims because Anderson had not identified any particular false representation which she relied upon to her detriment.

DISCUSSION

Anderson contends that the trial court erred in granting summary judgment in favor of ARIC because material issues of Breach of Contract

In her petition, Anderson alleged that ARIC was liable for breach of contract because it failed “to pay appellant’s benefits relating to the cost to properly repair” her property. ARIC argues that it is entitled to judgment as a matter of law on Anderson’s breach of contract claim because the claim is precluded by ARIC’s appraisal award payment.

The Texas Supreme Court has long recognized the validity of appraisal provisions, which provide a means to resolve disputes about the amount of loss for a covered claim. When an insurer makes timely payment of a binding and enforceable appraisal award, and the insured accepts the payment, the insured is estopped by the appraisal award from maintaining a breach of contract claim against the insurer.

The undisputed evidence shows that ARIC invoked the appraisal process, as provided for under the policy, to determine the value of Anderson’s claim. Both parties appointed appraisers and agreed upon an umpire. By August 1, 2014, the appraisal award was set. One week later, ARIC tendered payment of the appraisal award after accounting for the deductible, prior payments, and policy limits. Accordingly, the summary judgment record conclusively shows that ARIC fulfilled its obligations under the contract.

The fact that ARIC did not pay the amount of the award earlier, alone, does not raise a fact issue on Anderson’s claim for breach of contract. The court of appeal concluded that the trial court correctly rendered summary judgment in favor of ARIC on Anderson’s breach of contract claim.

Extra–Contractual Claims

The summary judgment evidence demonstrates that the parties participated in the appraisal process and that an appraisal award was determined on August 1, 2014. It is undisputed that ARIC issued checks in full payment of the appraisal award on August 8, 2014—well within the timeliness requirements of the statutes. Because the summary judgment evidence conclusively demonstrates that ARIC fully and timely paid the appraisal award, Anderson is precluded from maintaining her prompt payment claim as a matter of law.

Breach of the Duty of Good Faith and Fair Dealing

Anderson alleged that ARIC breached its common law duty of good faith and fair dealing “by denying [Anderson’s] claims or inadequately adjusting and making an offer on [Anderson’s] claims without any reasonable basis, and by failing to conduct a reasonable investigation to determine whether there was a reasonable basis for these denials.” ARIC argues on appeal, as it did in the trial court, that it is entitled to judgment as a matter of law on Anderson’s common law bad faith claim because there was no breach of contract, and even had there been, there was a bona fide dispute about coverage.

Under Texas law, an insurer has a duty to deal fairly and in good faith with its insured in the processing and payment of claims. An insurer breaches this duty of good faith and fair dealing if the insurer knew or should have known that it was reasonably clear that the claim was covered, but denies or unreasonably delays payment of the claim. However, absent a breach of contract, the insured cannot maintain a common law bad faith claim in Texas unless the insurer commits some act, so extreme, that would cause injury independent of the policy claim or fails to timely investigate the insured’s claim. Evidence establishing only a bona fide coverage dispute does not demonstrate bad faith.

Here, ARIC’s payment of all covered damages extinguished any breach of contract claim arising from the dispute. Thus, in order to avoid summary judgment on her common law bad faith claim, Anderson had the burden to raise a genuine issue of material fact that ARIC commited some act, so extreme, that would cause injury independent of the policy claim or failed to timely investigate her claim. The summary judgment evidence demonstrates only a bona fide dispute about the amount necessary to compensate Anderson for covered damage to her home. Within 15 days of receiving notice of a claim, insurers are required to acknowledge receipt of the claim, commence investigation of the claim, and request items and forms that the insurer reasonably believes, at that time, will be required from the claimant. Undisputed summary judgment evidence shows that on June 15, 2012— three days after Anderson reported the claimed loss—a representative of ARIC inspected the property.

In sum, because Anderson’s breach of contract claim fails and she has failed to show that ARIC caused her to suffer some injury independent of her policy claim or failed to timely investigate her claim, the court concluded that there is no genuine fact issue on Anderson’s common law duty of good faith and fair dealing claim, and thus the trial court did not err in rendering judgment as a matter of law on this claim in favor of ARIC.

ZALMA OPINION

To assert the tort of bad faith the plaintiff must prove that the insurer acted intentionally to deprive her of the benefits of the contract. The evidence presented established that the insurer acted to thoroughly investigate her claim within days of her first report and to pay her claim promptly as it determined and then paid the difference between its finding and an appraisal award. Although it has been said that “no good deed goes unpunished” the court protected the ARIC but it was required to defend itself at trial and in the appellate court for doing everything right.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

First Annual Claims Magazine/Americas Claims Event Legend Award

Barry Zalma Named an Insurance Legend

I was honored on June 24, 2016 to be the first person awarded the Claims Magazine/America’s Claims Event (ACE) Legend Award.BZBACKSUIT3

In the June 2016 issue of Claims Magazine an article explained some of the reasons why they decided to give me the award. It is available on line at Property & Casualty 360.  

Looking back on my 48 years working in the insurance business I continue to believe insurance is an extremely rewarding career.  I never went to work feeling like it was going to be a bad day, although I knew there would be bad days. If you have a job where you enjoy yourself, where you are challenged every day, it doesn’t feel like work. The challenge of dealing with a different claim with different facts, different investigative needs and different legal issues made working in insurance a pleasure.

One of the most disheartening changes I have seen in the insurance industry is the apparent lack of interest in maintaining and training a staff of competent claims personnel and the concurrent rise of unnecessary and expensive bad faith law suits that could have been avoided by adequate claims handling. This is what motivated me to write books, Zalma’s Insurance Fraud Letter, this blog and my videoblog, webinars and appearance at places like ACE to do what I can to help improve the professionalism of claims personnel.

Whatever success I have had in the insurance industry has everything to do with the excellent initial education my first employer in the insurance business, the old Fireman’s Fund Insurance Co. gave me as a trainee and continued to give me as a field adjuster. The Fireman’s Fund did not cut corners. It made me study insurance by reading an insurance claims text like my Insurance Claims: A Comprehensive Guide, sent me out as an observer with experienced adjusters in each field of insurance covered by the insurer, a full month of classroom training in every aspect of insurance claims handling, and then six months of on the job training.

It is my hope that you can take note of the benefits of providing solid training and continuing education for your claims staff.

To qualify for the award it must be found Claims and ACE state that:

The award is presented to an individual who has made significant contributions to the claims sector of the insurance industry through education, professional development and perseverance. This professional has been involved in or supported the industry for much of his or her career. Understanding the premise that improving an industry for one group or segment of the population improves it for all, this person has shared knowledge, resources and expertise for the benefit of an entire industry.
        Selection criteria includes:
        Education efforts – speaking at industry events, teaching courses, promoting the insurance profession across a wide variety of audiences
            Written contributions – submits articles, white papers, expertise to publications and news outlets to educate professionals and the public on the industry
            Professionalism – exhibits business and personal ethics, is an avid promoter and supporter of the industry, mentors other professionals
            Making it better – contributes time and talents to community and industry events, offers pro bono services
        Career should encompass at least 10 years of experience in some aspect(s) of the insurance industry – e.g., claims, subrogation, legal, SIU, supporting vendor services, workers compensation, property & casualty.

 

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CGL is Not a Surety

Insured Must Damage Property Not Work to Be Covered by CGL

Contractors often have difficulty with their insurers. A CGL policy covers only accidents and do not guarantee the workmanship of the insured. People who obtain judgments against their contractor try to collect from the contractor’s insurer, especially when the insured goes out of business and has no assets available to collect on a judgment.

In Auto-owners Insurance Company v. Timbersmith, Inc., George Fleming, and Janis Fleming, and George Fleming and Janis Fleming v. the Charter Oak Fire Insurance Company, United States District Court, D. Utah Case No:2:12-cv-00786, 2016 WL 3356800 (06/15/2016) an attempt was made to require two CGL insurers to act as sureties.

FACTS

Third-Party Plaintiffs George and Janis Fleming’s (collectively the Flemings’) motion for summary judgment against Third-Party Defendant The Charter Oak Fire Insurance Company (Charter Oak), the Flemings’ motion for summary judgment against Plaintiff Auto-Owners Insurance Company (Auto-Owners), Charter Oak’s cross motion for summary judgment against the Flemings, and Auto-Owners’ cross motion for summary judgment against the Flemings.

This case arises out of allegations of defective construction against LC Builders and Cory Lowder (collectively LC Builders) and Timbersmith, Inc. The relationship between the Flemings, LC Builders, and Timbersmith began in January 2008 when the Flemings hired Timbersmith to construct a home in a ski resort community in Park City, Utah. LC Builders—working as either a subcontractor or as Timbersmith’s employee—framed the house incorrectly and ultimately walked off the job, leaving the home barely standing.

The Flemings established as a matter of law that due to the negligence of the Defendants and their subcontractors the Flemings had to retain the services of new contractors to repair the damage to the Fleming Residence and the state trial court awarded the Flemings $1,099,227.80 in damages for the costs to repair the defective framing, plus costs and expenses.

The Flemmings arbitrated the dispute with Timbersmith and the arbitrators concluded that the Flemings were entitled to judgment against Timbersmith for damages in the amount of $1,099,277.80, as well as costs and fees.

As a general rule the Flemings are correct that, when an insurer, whose policy requires it to defend its insured, receives notice of a suit against the insured and is allowed an opportunity to defend, but refuses, the insurer is bound by the findings and judgment therein. But the Flemings err in arguing that this general rule precludes Charter Oak from now litigating any issues that are relevant to coverage. An insurance company should be afforded an opportunity to raise and have determined the issue as to its own liability, so long as doing so is not inconsistent with the findings on material issues which were determined between the plaintiff and defendant. Collateral estoppel works, however, only with regard to facts necessarily adjudicated in the lawsuit against the insured.

Indeed, the legal conclusion that LC Builders and its subcontractors’ negligence resulted in the damages reflected in the judgment does not, as the Flemings claim, necessarily mean that there was coverage for this amount under the Charter Oak Policy.

Although the term “accident” is not defined by the Policy, the Utah Supreme Court has explained that “the word ‘accident’ is descriptive of means which produce effects which are not their natural and probable consequences.” Fire Ins. Exch. v. Estate of Therkelsen, 27 P.3d 555, 559 (Utah 2001). Thus, “Under Utah law, when determining whether there is an accident, the court is not to examine whether the underlying act is intentional, deliberate, or foreseeable, but rather whether the result of the act was intended or expected from the perspective of the insured.” Cincinnati Ins. Co. v. Spectrum Dev. Corp., No. 2:11-CV-0015-CW, 2015 WL 730020, at *4 (D. Utah Feb. 19, 2015).

Accordingly, a claim for faulty workmanship, in and of itself, is not an occurrence under a commercial general liability policy because a failure of workmanship does not involve the fortuity required to constitute an accident. Instead, what does constitute an occurrence is an accident caused by or resulting from faulty workmanship, including damage to any property other than the work product and damage to the work product other than the defective workmanship. In other words, although a commercial general liability policy does not provide coverage for faulty workmanship that damages only the resulting work product, the policy does provide coverage if the faulty workmanship causes bodily injury or property damage to something other than the insured’s work product.

The Flemings failed to provide evidence to show that LC Builders or any subcontractors caused damage to property other than that upon which LC Builders or any of its subcontractors were operating that occurred while operations were ongoing.

Even assuming LC Builders used subcontractors whose work was defective, the Flemings do not argue or provide any evidence to suggest that LC Builders’ subcontractors’ negligence caused any property damage that occurred after operations were completed. Indeed, the Flemings have always taken the position that the work performed on the home was defective at the time LC Builders abandoned the project.  And there is some evidence in the record that suggests that no damage occurred after abandonment.

Even assuming that the Arbitration Award or state court judgment against Timbersmith binds Auto-Owners, the Flemings fail to identify any property damage that would be covered by the Auto-Owners Policy. Consequently, the Flemings are not entitled to indemnification from Auto-Owners and the court need not address whether Auto-Owners’ indemnification obligation is discharged because of potential notice issues.

ZALMA OPINION

The decision stated no reason why the insurers failed to defend when their insured’s were sued. Probably, since the insureds disappeared, abandoned the construction, they probably didn’t advise their insurers of the claim. Even if they did there could be no coverage for the losses claimed, regardless of how egregious, because the only damage was to the work of the insureds and clearly not covered losses since there was no bodily injury or property damage other than to the insured’s own work.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insured’s Settlement With Underlying Insurer Is Fatal to Claim to Excess

Excess Insurance Only Applies After Exhaustion of Primary Coverages

Uninsured and Underinsured Motorist (UM/UIM) is designed to protect the public injured by an uninsured or underinsured motorist by purchasing UM/UIM coverage to avoid the risk of being injured by an uninsured or underinsured motorist. Statutes in the various states require insurers to offer UM/UIM coverage but do not require that people buy the coverage.

In Coker v. American Guarantee and Liability Insurance Company, United States Court of Appeals, Eleventh Circuit, — F.3d —-,  2016 WL 3342621 (June 15, 2016) three excess liability insurers—Great American Insurance Company (“Great American”), American Guarantee & Liability Insurance Company (“American Guarantee”), and Endurance American Specialty Insurance Company (“Endurance”) (collectively “the Defendants”)—appeal the district court’s order granting summary judgment in favor of Gary and Teresina Coker (“the Cokers”) with respect to the Cokers’ breach of contract claims against the Defendants. The district court concluded that Georgia’s UM statute imposed upon the Defendants an unconditional obligation to provide UM coverage to Gary Coker as if they were primary insurers, and that the Defendants’ failure to tender payment amounted to a breach of contract. The defendant excess insurers appealed.

FACTUAL BACKGROUND

Car Accident, Consent Judgment, and Relevant Liability Policies

On September 18, 2007, Plaintiff Gary Coker was driving a truck owned by his then employer, Ansco & Associates (“Ansco”), on a Georgia road. Third-party motorist Donald Woodall crossed the center line of the road and struck Coker head on. Coker was severely injured in the accident.

In November 2010, the Cokers obtained a $5.5 million consent judgment against Woodall. Though Woodall had an automobile liability insurance policy, he was considered “underinsured” because his policy limits were $25,000 and were not nearly high enough to satisfy the consent judgment. The Cokers provided Woodall with a limited liability release in exchange for $25,000, the full limit of Woodall’s automobile liability policy.

Despite this partial recovery from Woodall’s insurer, the vast majority of the $5.5 million consent judgment remained unsatisfied. To satisfy the remainder of the consent judgment, the Cokers turned to policies purchased by Coker’s employer, Ansco.

At the time of the accident, Ansco held the following liability insurance policies:

a.     Liberty Mutual Insurance Company (“Liberty Mutual”) Business Automobile Policy No. AS2-631-004260-027 (“the Liberty Mutual policy”), with limits of $5 million;

b.     Westchester Fire Insurance Company (“Westchester”) Umbrella Policy No. G22049860002 (“the Westchester policy”), with limits of $10 million;

c.     Great American Insurance Company Excess Liability Policy No. TUE356014902 (“the Great American policy”), with limits of $10 million;

d.     American Guarantee & Liability Insurance Company Excess Liability Policy No. AEC913878501 (“the American Guarantee policy”), with limits of $25 million; and

e.     Endurance American Specialty Insurance Company Surplus Lines Policy No. ELD10000214301 (“the Endurance policy”), with limits of $25 million.

These policies were vertically structured so that the Liberty Mutual policy provided first-layer primary coverage, the Westchester policy provided second-layer umbrella coverage, the Great American policy provided third-layer excess coverage, the American Guarantee policy provided fourth-layer excess coverage, and the Endurance policy provided fifth-layer excess coverage.

The Liberty Mutual Primary Policy

The $5 million Liberty Mutual policy provides primary automobile liability coverage. The Liberty Mutual policy specifically provides that “[f]or any covered ‘auto’ you own, this Coverage Form provides primary insurance.” The “Uninsured Motorist Coverage Option Form” attached to the Liberty Mutual policy reflects that Ansco explicitly rejected UM coverage in writing on both September 5, 2006, and September 24, 2007.

The Westchester Umbrella Policy

The $10 million Westchester policy provides coverage for “those sums in excess of the ‘Retained Limit’ which the ‘Insured’ by reason of liability imposed by law … shall become legally obligated to pay.” The Schedule of Underlying Insurance notes that the Liberty Mutual policy does not contain UM coverage.

The Great American Excess Policy

The $10 million Great American policy provides coverage to Ansco “only in excess of the Underlying Limits of Insurance” provided by the Westchester policy.

The American Guarantee Excess Policy

The $25 million American Guarantee policy provides coverage for “the sums in excess of the total Underlying Limits of Insurance.

The Endurance Excess Policy

The $25 million Endurance policy provides coverage for losses in excess of the underlying limits of insurance.

Demands for Payment

In March 2011, the Cokers made separate written demands against Liberty Mutual, Westchester, and each of the Defendants for payment of the $5.5 million consent judgment. In March 2012, the Cokers entered into a confidential settlement agreement with Liberty Mutual for substantially less than the $5 million policy limit. In June 2012, the Cokers entered into a confidential settlement agreement with Westchester for substantially less than the $10 million policy limit. Despite the money recovered in the Cokers’ settlements with Liberty Mutual and Westchester, a substantial portion of the $5.5 million consent judgment remained unsatisfied.

The three excess insurer Defendants here did not tender payment in response to the Cokers’ demands.

DISCUSSION

On appeal, the Defendants argue that the district court erred by granting summary judgement in favor of the Cokers on the ground that Georgia’s UM statute imposed upon the Defendants an unconditional obligation to provide UM coverage to the Cokers as if the Defendants were primary insurers. The Defendants principally argue that, regardless of any obligations imposed by Georgia’s UM statute, the terms of the Defendants’ policies required the Cokers to exhaust the limits of the Westchester policy and, if applicable, any other underlying excess insurance policies before seeking payment from the Defendants.

Typically, when interpreting a contract under Georgia law, courts must construe a contract as written and not make a new contract for the parties. Although they acknowledge their statutory obligation to provide UM coverage, the Defendants argue that, pursuant to the terms of their excess liability policies, they were not required to tender payment until the Cokers exhausted the policy limits of the underlying $10 million Westchester policy and, if applicable, any other underlying excess liability policies.

Defendants’ Excess Liability Policies Contain Vertical Exhaustion Requirements

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. Georgia courts have repeatedly recognized the validity of excess policies and the exhaustion requirements necessarily embedded within those policies.

Under Georgia law, when an excess policy clearly sets a threshold starting point for payment, the contract is unambiguous and must be enforced. Here, each of the Defendants’ excess liability policies contain unambiguous language limiting recovery to only those amounts exceeding the policy limits of an underlying insurance policy or policies.

A vertical exhaustion requirement does not undermine the remedial purpose of the UM/UIM statute. The only way an insured might not recover for the full amount of his injuries—and therefore realize the harm the statute was designed to prevent—is if, as is the case here, he settles with an underlying insurer for less than the policy limits.

In that case, the insured voluntarily settled for less than the policy limits and, therefore, is undercompensated of his own volition. In such a situation, it is not the exhaustion requirement that directly contravenes the legislative intent of the statute, but the insured’s own settlement negotiations.

The Defendants are entitled to summary judgment in their favor with respect to the Cokers’ breach of contract claims. Each Defendant’s excess policy contained an unambiguous statement that coverage would not apply until the insured exhausted the $10 million policy limit of the Westchester policy. Indeed, the American Guarantee and Endurance policies even contained further vertical exhaustion requirements with respect to their codefendants. Though the Defendants were obligated by statute to provide UM coverage, they did so in the permissible excess way.

The Eleventh Circuit concluded that because the Cokers failed to exhaust the limits of the underlying Westchester policy, the Defendants were under no obligation to provide any coverage whatsoever. As such, they are entitled to summary judgment on the Cokers’ breach of contract claims.

ZALMA OPINION

The plaintiff, and his lawyers, managed to get settlements from two excess insurers and the primary insurer for sums less than their limits and then went to the excess insurers for more money. Since the three excess insurers who were defendants required a full exhaustion of the underlying insurance, by settling for less than limits the plaintiffs destroyed their own case and the trial court was reversed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

False Alarm Warranty Allows Insurer to Void Coverage

Innocent Material Misrepresentation Sufficient for Insurer to Rescind

The covenant of good faith and fair dealing requires both the insured and the insurer to deal fairly and in good faith when dealing with the acquisition of insurance. When an insurer makes the decision to insure or not insure a person against the risk of loss of his or her property the insurer relies on the honesty of the insured when he or she submits an application.

FACTS

In Certain Underwriters at Lloyd’ s London v. Jimenez, — So.3d —-, District Court of Appeal of Florida,Third District, 2016 WL 3265750 (June 15, 2016) those Certain Underwriters at Lloyd’s London (“Lloyd’s”) appealed a final judgment following a non-jury trial, in which the trial court granted declaratory relief to Raul and Ada Jimenez, the appellees/homeowners, and determined that Lloyd’s was not entitled to rescission of the property insurance policy issued to the homeowners.

In 2007 Raul Jimenez, on behalf of himself and his wife, Ada Jimenez, completed and executed an application for homeowner’s insurance policy on their home built in 1985, with assistance from their insurance agent, A & A Insurance Underwriters (“A & A”). A & A submitted the Jimenez’s homeowner’s insurance application to a managing general agent of Lloyd’s. During the application process, A & A asked whether Mr. Jimenez had a smoke, temperature or burglar alarm, and if so, whether these alarms were monitored. Mr. Jimenez said he had a monitored central station alarm on the property. On the application form, Mr. Jimenez designated the central station monitor as a protection device that monitored for smoke, temperature, and burglary. After signing the application, Mr. Jimenez was given a copy and was given a chance to ask questions and make sure his answers were true and correct. The policy was given a discount because of the representation that the Jimenezes had a central station alarm monitoring for smoke, temperature, and burglary.

The policy was renewed three times with the same representation and warranty about the alarm system.

As a condition of the insurance, the Jimenezes were required to maintain in good working order all fire alarms, security systems and physical protection devices identified in their application for insurance. The Protection Device Endorsement provision provided that all alarms/security systems must be fully operational and engaged at all times. Failure to comply with this condition would render the insurance null and void.

Thepolicy was personally underwritten by Efren Serrate, president of the managing general agent of Lloyd’s. Serrate testified at trial that a representation in the application that the property had central station monitored smoke and temperature alarms was material to the risk. He further stated that, if the property actually did not have those systems, the Protection Device Endorsement would preclude insurance coverage. Serrate specified that he would not have accepted the risk and quoted a premium if he had known that the Jimenezes did not have a central station monitored smoke and temperature alarm.

In August 2009, there was a kitchen fire at the Jimenez’s home.

Delta Alarm Systems monitored and maintained the Jimenez’s alarm system. At trial, Jose Quintero, the corporate representative of Delta Alarm Systems, testified that the Jimenezes had a burglar alarm but not a central station monitored smoke or temperature alarm system. Lloyd’s expert testified why the alarm warranty was material.

Lloyd’s tendered the full return of the insurance policy premium to the Jimenezes  policies. At trial, the parties agreed that the return of the premiums for each of these policy years had been tendered in full to the Jimenezes. The trial court found in favor of the Jimenezes for declaratory relief as to coverage and for breach of contract and held that Lloyd’s was not entitled to rescission.

ANALYSIS

The interpretation of an insurance contract is a question of law.

First, regarding the summary judgment issue, the appellate court agreed with Lloyd’s that the Jimenez’s misrepresentations of the presence of a central monitored alarm system for smoke, temperature and burglary were material as a matter of law to the issuance of Lloyd’s insurance policy. As such, recovery for the Jimenez’s house fire was unwarranted.

Florida Statute section 627.409(1) provides that misrepresentations, omissions, concealment of facts, and incorrect statements on an insurance application will not prevent a recovery under the policy unless they are either: (1) fraudulent; (2) material to the risk being assumed; or (3) the insurer in good faith either would not have issued the policy or would have done so only on different terms had the insurer known the true facts. Lloyd’s relies on (2) and (3) in claiming that the Jimenez’s central monitored system statements in their application prevent recovery under the policy in question.

An insurance company has the right to rely on an applicant’s representation in an application for insurance and is under no duty to inquire further unless it has actual or constructive knowledge that such representations are incorrect or untrue. Under Florida law, an insurer has the right to unilaterally rescind an insurance policy on the basis of misrepresentation in the application for insurance. The misrepresentation need not be fraudulently or knowingly made but need only affect the insurer’s risk or be a fact which, if known, would have caused the insurer not to issue the policy or not to issue it in so large an amount.

Lloyd’s has presented sufficient evidence to show that the misrepresentation regarding the presence of a central monitored system was material to issuance of a policy and that, had Lloyd’s known of such lack of protection, it would not have issued its policy. As discussed previously, the broker explained that the existence of protection device systems was material. The testimony provided by Delta Alarm Systems’ corporate representative, Jose Quintero, indicated that no agent for Lloyd’s had been notified of the lack of a central monitored system on the property until after the fire incident occurred.

The misrepresentation made by the Jimenezes regarding the presence of a central monitored system on the property in the insurance application precludes coverage because the misrepresentation was material and was detrimentally relied upon by Lloyd’s. Secondly, Lloyd’s alternatively contends on appeal that, because the lack of a central monitored system was material to the issuance of the policy and was relied upon, the trial court erred in denying Lloyd’s entitlement to rescind the policy. The appellate court agreed.

If an insured’s misrepresentation was material to the insurer’s acceptance of the risk or, if the insurer in good faith would not have issued the policy under the same terms and premium, then rescission of the policy by the insurer is proper. Misrepresentations in or omissions from an insurance application may fail to meet the knowledge and belief standard (that the information given was correctly recorded, complete, and true to the best of the insured’s knowledge and belief) and entitle the insurer to rescind the policy without the misrepresentation or omission being intentional. Even an insured’s failure to read a policy application in its entirety prior to signing it does not preclude an insurer’s right to rescind the policy for nondisclosure of material information.

Because the appellate court found there was a material misrepresentation sufficient to allow rescission, the case was remanded to the trial court with instructions to enter Final Judgment in Lloyd’s favor because the policy does not provide coverage for the Jimenez’s kitchen fire under the language of the Protection Device Endorsement, and because Lloyd’s is entitled to rescission of the policy due to material misrepresentations in the application.

ZALMA OPINION

It is not only a violation of the covenant of good faith and fair dealing to lie on an insurance application, in some states it is criminal to lie on an application. Rescission is an equitable remedy where the court determines, because Lloyd’s, in this case, was deceived, it did not matter that the insured intended or did not intend to deceive it, the policy was void from its inception and never existed.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Consideration Required for Insurance

Failure to Pay to Be Made Insured Fatal to Request for Coverage

Liability insurance, especially liability insurance with high limits, is a temptation for every plaintiff and defendant, even state governments. In State of New Jersey and New Jersey Department of Education v. Star Insurance Company and Meadowbrook, Inc., Superior Court of New Jersey, Appellate Division, 2016 WL 3199530 (June 10, 2016) the Appellate Division was called upon to resolve an insurance coverage dispute, plaintiffs State of New Jersey and New Jersey Department of Education (collectively, the State) had with Star. The trial court granted summary judgment in favor of defendants Star Insurance Company and Meadowbrook, Inc. (collectively, Star).

FACTS

The Star policy was issued on July 1, 2007. The declarations page listed “Newark Public Schools” as the named insured, and “2 Cedar Street Newark, NJ 07012” appeared as the insured’s address on both the policy and the application for insurance. In addition to the named insured and its employees, the policy provided coverage to anyone “acting as [a] real estate manager” for the named insured. The policy did not define the term “real estate manager.”

The policy did not list the State as an additional insured, nor did it identify the Newark Public Schools as a State-operated school district.

The coverage dispute concerned litigation arising from a 2007 incident in which six gang members attacked four individuals who were sitting in a District school yard at night. Three of the victims were killed and the fourth was severely injured. In 2008, the surviving victim and the administrators of the deceased victims’ estates (the Aeriel plaintiffs) filed a complaint against the attackers, the District, and its State-appointed school superintendent, Dr. Marion Bolden.

The Aeriel plaintiffs also sued the State, on the theory that, because the District was under the State’s control, the State was liable for failing to maintain the school yard in a safe condition. In defending against the Aeriel lawsuit, the State produced legally competent evidence that it had no responsibility for managing or maintaining the District’s real estate. That evidence, which included Dr. Bolden’s sworn testimony, was later presented as part of Star’s summary judgment motion in the insurance coverage case.

In the Aeriel lawsuit, Star defended and indemnified the District as its named insured and the superintendent as a District employee. In 2012, a few months before the scheduled trial date, the State asserted for the first time that it was entitled to coverage under the Star policy. Star denied coverage, and in December 2012, the State filed the insurance coverage lawsuit. In 2013, the Aeriel lawsuit was settled mid-trial, with Star paying two million dollars on behalf of the District and the superintendent, and the State paying three million dollars.

The State claims coverage under three theories: the State should be deemed covered under the policy as the District’s “real estate manager”; the State was an additional insured because the listed insured’s name—“the Newark Public Schools” — was ambiguous and should be construed as covering the State; and the State was an “implied insured” under the policy.

ANALYSIS

Whether plaintiff was a “real estate manager” is to be determined by the language of the agreements and the language of the insurance policy.

The insurance policy here did not acknowledge the District’s relationship with the State or put the insurer on notice that it might be called upon to insure the State as well as the District. Moreover the Appellate Division found it was too great a stretch to consider the State as the District’s “real estate manager” based on Bolden’s general statutory authority as superintendent under the Education Act. However, the aim of the Act is not to make the superintendent into a real estate manager, or its equivalent, but to put the superintendent in charge of the District’s educational policies and practices.

The undisputed record evidence in this case is that Bolden did not take over the District’s function of keeping up its property, but she instead left that responsibility in the hands of the District’s employees. Further, although she took direction from the State, by law Bolden was an employee of the District and thus was covered under the Star policy as a District employee. Hence, even if she were also deemed to be a “real estate manager,” she was the District’s manager and not the State’s manager.

Courts “conceive a genuine ambiguity to arise where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.” Zacarias v. Allstate Ins. Co., 168 N.J. 590, 598 (2001) (citations omitted). “In that instance, the policy should be construed to comport with the insured’s objectively reasonable expectations of coverage.” Christafano v. N.J. Mfr.’s Ins. Co., 361 N.J.Super. 228, 234 (App.Div.2003). Conversely, in the absence of an ambiguity, a court should not write for the insured a better policy of insurance than the one purchased, but should instead enforce the policy as written.

The request for proposals issued by the District when it sought insurance for 2007 listed only “The Newark Public Schools, the largest school district in the State of New Jersey” as the proposed insured. There was no mention that bidders were also being asked to write coverage for the State or the State Education Department. There was no evidence that Star should have known that it was writing coverage for the State as an additional insured, without the need for any specific notice or application.  Star’s and the District’s records both indicate that where the District intended to add an insured to one of its Star-issued insurance policies, it specifically applied for the addition of that entity, and the addition was reflected in the declarations page of the policy. For example, the District applied to add the New Jersey Schools Construction Corporation (NJSCC) as an additional insured on one of its policies. Based on that application, Star issued a policy listing NJSCC as an additional insured.

Under the Act, the District remained a corporate entity. It did not become synonymous with the State by virtue of the State’s intervention under the Act. In light of Star’s and the District’s documented course of business dealing, if the District intended to purchase coverage for the State or the State Education Department as an additional insured, it would have specifically requested that coverage and be required to pay extra for that coverage.

ZALMA OPINION

It is common knowledge that you only get what you pay for. The State of New Jersey attempted to get coverage for a $3 million liability without paying for it. The School District, paid for, and obtained the coverage it bought. It did not seek coverage for, nor did it receive coverage for, the State nor did the state pay for any coverage from Star.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

The Best Defense Is an Offense

Affirmative Defense Does Not Translate Into A Suit For Damages

When an insurer is sued for breach of contract and bad faith it presents a thorough and extensive defense. When the insurer learns, through discovery, that its insured perpetrated a fraud in the acquisition of the policy and in the presentation of a claim and that the insured breached its contractual obligations, it must amend its position to seek breach of contract damages from the insured to return funds it paid before it learned of the existence of facts that established no coverage for the claimed loss.

In Militello v. Allstate Property and Casualty Insurance Company, United States District Court, M.D. Pennsylvania, 2016 WL 3254144 (06/14/2016) Allstate Insurance Company, after obtaining a trial verdict in the suit filed against it, tried to get back money it paid to the insured based upon the affirmative defenses it filed in answer to the complaint. It did not affirmatively seek return until after the trial verdict. The defense was effective but there was no offense.

BACKGROUND

Briefly, Plaintiff Guy Militello (“Plaintiff”) owns a horse barn located within the Middle District of Pennsylvania that was insured by Defendant Allstate Property and Casualty Insurance Company (“Allstate”). On October 5, 2012, the roof of the barn collapsed, the cause of which remains in dispute, and Plaintiff thereafter submitted a claim to Allstate for the damage in the amount of $216,170.00. Allsate declined to pay the claim in its entirety and instead provided Plaintiff with a payment in the amount of $109,834.52.

Plaintiff sued and Allstate later filed counterclaims against Plaintiff. The crux of the lawsuit at the time of trial involved Plaintiff’s allegation that Allstate breached the parties’ insurance contract by failing to pay the full value of his property insurance claim, and Allstate’s counterclaim that Plaintiff committed insurance fraud by misrepresenting to Allstate that the property was not used for commercial purposes and by inflating his contractors’ repair estimates in order to receive additional insurance proceeds.

THE COUNTERCLAIMS

Counterclaim I, containing a claim for fraud, alleged that Plaintiff committed fraud by representing to Allstate that no part of the barn was used for business purposes and by altering his contractors’ estimates. Counterclaim I further alleged that Allstate would not have provided Plaintiff with the insurance policy or made payment on the claim had Plaintiff truthfully and accurately represented that the structure was used for business purposes, or if Allstate had known that Plaintiff knowingly misrepresented the value of his claim. Counterclaim II, containing a claim pursuant to Pennsylvania’s Insurance Fraud Statute, 42 Pa.C.S.A. § 4117(b)(4), likewise alleged that Plaintiff misrepresented the use of the structure and intentionally altered estimates. Counterclaim III, alleged that Plaintiff misrepresented the use of the structure and the value of his claim, and that, based on its terms, the insurance policy is void and Plaintiff is not entitled to insurance coverage for the loss. For relief, Counterclaim III sought “a declaration that the insurance policy is void and/or Plaintiff breached the terms of the insurance policy, and order that Plaintiff return all monies paid to him by [Allstate].”

THE TRIAL

Following a four-day jury trial, the jury rendered a verdict in favor of Allstate on Plaintiff’s breach of contract claim, and in favor of Plaintiff on Allstate’s claims for common law and statutory insurance fraud. At issue herein is the jury’s response to Question Number 1 on the verdict sheet in which the jury found that the loss did not occur during the course of repair.  Because the insurance policy at issue would only cover the collapse if it occurred during the course of repair, the jury’s answer to that question necessarily rendered a verdict in favor of Allstate on Plaintiff’s breach of contract claim.

DISCUSSION

Allstate contended that the final judgment dated February 12, 2016 fails to give effect to the jury’s verdict in favor of Allstate on Plaintiff’s breach of contract claim and should be amended by the court. Specifically, Allstate argues that, because the jury found that the collapse did not occur during the course of repair as Plaintiff ultimately represented in his claim and at trial, the jury also found that Plaintiff concealed and/or misrepresented his claim to Allstate. As such, Allstate contends that the claim is not a covered loss for which the policy provides coverage and therefore Allstate  should be reimbursed the $109,834.52 it paid to Plaintiff on the claim.

Allstate’s July 6, 2015 answer primarily asserted counterclaims against Plaintiff for common law and statutory fraud, with a particular emphasis on Plaintiff’s alleged misrepresentations regarding his use of the property.

Many months later and following a four-day jury trial at which the jury rendered a verdict in favor of Plaintiff on Allstate’s previously filed counterclaims for fraud. Allstate is essentially raising, for the first time, a breach of contract claim, having come to the conclusion based upon the verdict form that Plaintiff breached the insurance contract by misrepresenting a material fact regarding the cause of the collapse in the submission of his insurance claim.

Allstate raised its breach of contract claim far too late in the day, and for that reason, the court precluded it from pursuing it now.

As an initial matter and notwithstanding Allstate’s assertions to the contrary, it is clear that an affirmative defense is not a claim for relief but a defense to a claim for relief, and, therefore, it does not provide an avenue for an award of damages.

In its declaratory judgment claim, Defendant sought a declaration, in part, that “Plaintiff breached the terms of the insurance policy.”  While the court may have construed the claim as a breach of contract claim and addressed it as such at trial.  There was no indication whatsoever prior to trial—or even at trial—that Allstate was attempting to pursue a breach of contract claim related to misrepresentations made by Plaintiff during the procurement of his insurance policy or the submission and investigation of his claim.

Instead, all of Allstate’s efforts during the course of this litigation pertained to defending itself against Plaintiff’s breach of contract claim and pursuing its own claim for fraud, which it had the burden of proving by clear and convincing evidence. Only after the jury rendered its verdict in favor of Plaintiff on Allstate’s counterclaims for fraud did Allstate argue that a breach of contract claim should be considered by the court as grounds for granting a declaratory judgment in its favor.

If a judge has wide latitude in limiting parties to the issues that were raised pretrial, then it is only logical that that discretion is even broader when a party completely fails to raise a claim prior to trial, proceeds through trial with the court and the opposition assuming that it is only pursuing its asserted claims, and then drops the bomb of trying to raise, for the first time, a brand new claim following trial as part of its declaratory judgment claim.

Allstate had months to consider the nature of Plaintiff’s alleged misrepresentations and was fully aware of the factual basis for a potential breach of contract claim and the legal arguments it might make.  Allstate put off making any such claim until post-trial, well after Plaintiff had committed itself to a strategy in defending against Allstate’s claims of fraud for which Allstate carried the more taxing burden to prove by clear and convincing evidence. As to the claims Allstate chose to pursue, the jury clearly found that it did not prove those claims by clear and convincing evidence.

CONCLUSION

For the reasons stated above, the court found that Allstate waived its claim for breach of contract.

ZALMA OPINION

Allstate did an effective job defending the suit but forgot or failed to protect its right to reimbursement by not seeking contract damages. Because proof of fraud required clear and convincing evidence Allstate should not have emphasized the fraud and ignore the clear breach of contract.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – June 15, 2016

Zalma’s Insurance Fraud Letter 

June 15, 2016

MBZBACKSUIT3urder for Insurance Fraud

Zalma’s Insurance Fraud Letter – June 15, 2016, Volume 20, No. 12  

I will be speaking at America’s Claims Event in Minneapolis on June 23, 2016 and will also be honored with the Claims Magazine/ACE Legend Award.

Please come. 

Conviction for Insurance Fraud Murder Upheld

In this, the twelfth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on June 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:

  • Conviction for Insurance Fraud Murder Upheld
  • Barry Zalma
  • The Claims Commandments – 7-10
  • Proformative Academy Webinars
  • Insurance Fraud Investigation Techniques
  • Good News from The Coalition Against Insurance Fraud – Convictions
  • First Annual Claims Magazine/Americas Claims Event Legend Award to Barry Zalma
  • Books from Barry Zalma
  • Wisdom
  • Staged Accident Results in Criminal Conviction
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

Visit The Zalma Insurance Claims Library

Insurance Publications by Barry Zalma

THE “ZALMA ON INSURANCE” BLOG 

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/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 881 three to six 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 where you can view some of the following as part of the 881 videos:

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library
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Ventura Loses Judgment Because of Improper Comments by His Counsel

Sniper Lost Right to Fair Trial By Argument He was Insured

People buy insurance to protect against their own negligence. However, the courts have recognized for many years, that mention of the existence of liability insurance to pay for defense and indemnity of an insured, can prejudice the insured party when the jury believes that any judgment they render will be paid by an insurer and not the defendant.

In Jesse Ventura, also known as James G. Janos v. Taya Kyle, as Executor of the Estate of Chris Kyle, United States Court of Appeals, For the Eighth Circuit  (June 13, 2016) the Eighth Circuit Court of Appeals, in a case dealing with two celebrities ignored their celebrity and applied the law requiring that a trial – whether civil or criminal – must be fair.

TRIAL COURT DECISION

Before his death, Chris Kyle was a sniper for a United States Navy Sea, Air and Land (SEAL) team. He authored the book American Sniper: The Autobiography of the Most Lethal Sniper in U.S. Military History (American Sniper). In the book, Kyle described punching a “celebrity” referred to as “Scruff Face” who was making offensive remarks about the SEALs at a gathering following the funeral of a SEAL killed in combat.  In interviews about the book, Kyle revealed “Scruff Face” was James Janos, better known as Jesse Ventura. Ventura, who was at the bar but denied a  fight occurred, sued Kyle in this diversity  action under  Minnesota  law for defamation, misappropriation, and unjust enrichment, alleging Kyle fabricated the incident. The jury found in favor of Ventura on the defamation claim, awarding $500,000 in damages, and found in Kyle’s favor on the misappropriation claim.  Serving in its advisory role as to the equitable unjust-enrichment claim, the jury recommended an award of approximately $1.35 million, which the district court adopted.

BACKGROUND

The alleged altercation underlying this action occurred at McP’s, a bar in Coronado, California, where Kyle and some friends were gathered in October 2006 after the funeral of a fellow SEAL.  According to Kyle, Scruff started running his mouth about the war and everything and anything he could connect to it. Kyle approached Scruff and asked him to “cool it.”  “You deserve to lose a few,” Scruff replied.  Kyle was “calm,” but Scruff swung at him.  Kyle “laid him out.  Tables flew. Stuff happened. Scruff Face ended up on the floor. [Kyle] left.”

On January 4, 2012, the day after his book was released, Kyle was interviewed on “The O’Reilly Factor” to promote the book. During the television interview later that day, host Bill O’Reilly asked Kyle, “[Y]ou say you knocked Jesse Ventura to the floor with a punch. Now, you don’t mention his name, but everybody knows who that is. . . . [T]hat happened?”

After the interviews, Ventura sued Kyle for defamation, misappropriation, and unjust enrichment on the grounds that Kyle fabricated the entire interaction with Ventura.

The case was tried in summer 2014, almost eight years after the alleged altercation. At least seven witnesses testified they overheard some of Ventura’s remarks, and offered generally similar accounts of what Ventura said. At least seven witnesses testified they saw Kyle (or an unidentified man, for those who did not know Kyle) punch Ventura; saw Ventura on the ground or getting up off the ground; or heard a “commotion” or “yelling.”

Kyle’s editor, Peter Hubbard, testified the “Scruff Face” story was not relevant to his decision to enter into a book contract with Kyle.  He characterized the “mention of Jesse Ventura” as having a “negligible” effect on the success of the book.

During closing arguments, Ventura’s counsel opined: “Sharyn Rosenblum testified that she did not know her company’s insurer is on the hook if you find that Jesse Ventura was defamed. Both her and Peter Hubbard also testified that they do not know that their company’s insurer was paying for the defense of this lawsuit. But they are not the disinterested, unbiased witnesses they were put in front of you for you to believe. … Chris Kyle is an additional insured for defamation under the publisher’s insurance policy.”

The jury struggled to reach a verdict.  At noon on the fourth full day of deliberations, the jury reported they could not reach a unanimous decision.  The jury ultimately reached an 8-2 verdict on the fifth full day of deliberations. The jury found for Ventura on the defamation claim, made an advisory recommendation in Ventura’s favor on the unjust-enrichment claim, and found for Kyle on the misappropriation claim.  The jury awarded damages of $500,000 for defamation and recommended damages of approximately $1.35 million for unjust enrichment.  The district court adopted the jury’s recommendations as to the unjust enrichment claim and accompanying damages award.

DISCUSSION

Initially, the court rejected Ventura’s assertion Kyle waived any objection to the insurance testimony and argument because he did not object to the admission of his publishing agreement, which states, “Author will be named as an additional insured under the terms of any insurance policy that Publisher may carry which covers the cost of claims.”  (Emphasis added).  In the event the jury analyzed the lengthy publishing contract’s fine print and learned Kyle may have had insurance, this evidence alone would not permit Ventura’s counsel to argue to the jury that an insurance policy including Kyle actually existed and the “insurer is on the hook.” Counsel’s argument would have been improper and prejudicial, even if the jury already was aware of an insurance policy. The record presented to this jury contained no evidence establishing an insurance policy covering Kyle, which makes Ventura’s counsel’s argument more improper and prejudicial.

The insurance questions posed by Ventura’s counsel assumed facts never in evidence—an insurance policy purchased by HarperCollins that covered Kyle, and Kyle’s attorneys were paid by the insurer.   The district court permitted this cross-examination, by which Ventura’s counsel ostensibly sought to show the HarperCollins witnesses were biased in favor of Kyle because HarperCollins and Kyle were covered by the same insurance policy.

Rule 411  of the Federal Rules of Evidence prohibits  the introduction  of insurance evidence to prove whether a person acted wrongfully but permits it for other purposes, such as proving a witness’s bias.

There is no evidence Rosenblum and Hubbard had any economic tie or “substantial  connection” to HarperCollins’s  insurance  carrier. As a matter of basic evidentiary foundation, Ventura never established by direct evidence or reasonable inference that Rosenblum and Hubbard even knew about  any insurance coverage  or possible insurance  payment.  It is difficult to envision how Rosenblum and Hubbard could have been biased or even influenced by an insurance policy of which they were unaware.

When deciding whether to grant a new trial due to improper remarks by counsel, the court considers whether: (1)  “the  remarks  in question ‘were  .  .  .  minor aberrations made in passing’”; (2) the district court took “‘specific curative action’”; and (3) “‘the size of the damage award . . . suggest[s] that counsel’s comment had a prejudicial effect.’”  Gilster v. Primebank, 747 F.3d 1007, 1011-12 (8th Cir. 2014)

Although relatively brief, Ventura’s counsel’s closing remarks about insurance were not minor aberrations made in passing. Given Ventura’s  repeated efforts to introduce  evidence of HarperCollins’s and Kyle’s insurance at trial, it is difficult to see how Ventura’s counsel’s comments were anything other than “a deliberate strategic choice” to try to influence and enhance damages by referencing an impersonal deep-pocket insurer.

After five days of deliberations, the jury could only reach an 8-2 verdict.  Although there was extrinsic evidence suggesting the falsity of Kyle’s assertions that he punched Ventura and police witnessed that altercation arising from the alleged statements, the trial essentially was a credibility contest between Ventura, Kyle, and their respective eyewitnesses.

Finally, the risk of prejudice is high. Ventura’s counsel’s closing remarks, in combination with the improper cross-examination of two witnesses about Kyle’s insurance coverage, prevented Kyle from receiving a fair trial.  The appellate court, therefore, remanded the defamation claim for a new trial.

The court could not accept Ventura’s unjust-enrichment theory, because it enjoys no legal support under Minnesota law.  Ventura’s unjust-enrichment claim fails as a matter of law.

ZALMA OPINION

Judges must protect the parties to a tort action to keep information about the existence of insurance protecting the defendant from a tort action. In this case Ventura’s counsel improperly attempted to use the existence of insurance to establish that Kyle intentionally defamed Ventura and that Kyle’s widow would not suffer since an insurer would pay any judgment. This convinced eight jurors but not the Eighth Circuit.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Consolidation of Tort & Insurance Action Inherently Prejudicial to Insurer

Never Shall the Liability Insured & Insurer Meet in Suit Brought by Tort Plaintiff

Since insurers are not popular in the minds of the general public tort plaintiffs will often try to bring an insurer into a tort action to convince the jurors that the tort defendant – insured – has unlimited funds to pay any judgment they may award to the plaintiff.

THE LITIGATION

McGinty v. Structure-Tone, — N.Y.S.3d —-, 2016 WL 3148494, 2016 N.Y. Slip Op. 04365 2016 WL 3148494, Supreme Court, Appellate Division, First Department, New York (June 7, 2016) the plaintiff sought to consolidate two actions, a personal injury action and an insurance coverage action.

The New York Supreme Court, Appellate Division, exercising its usual wont to enter a brief, clear, and succinct opinion, found that the two suits do not involve common questions of law or fact. Rather, they involve different contracts, different parties, and different factual issues.

Moreover, litigating an insurance coverage claim together with the underlying liability issues is inherently prejudicial to the insurer. (see Kelly v. Yannotti, 4 N.Y.2d 603, 607 [1958]; McDavid v. Gunnigle, 50 A.D.2d 737 [1st Dept 1975]; D’Apice v. Tishman 919 Corp., 43 A.D.2d 925 [1st Dept 1974] ). Consolidation in this case would result in a single action involving the insured, the insurance policy, and the construction of that policy.

FACTS

In addition, Eurotech did not bring its coverage action against QBE until more than six years after it was named as a third-party defendant in the liability action and almost four years after plaintiff McGinty filed the note of issue and certificate of readiness in the liability action.

DECISION

Litigating the actions separately will allow QBE to take any necessary discovery to which it is entitled, while avoiding prejudice caused by delay to McGinty.

The appellate court, therefore, affirmed the decision of the Supreme Court, Bronx County (Larry S. Schachner, J.) that was entered January 28, 2016, which denied Eurotech Construction Corp.’s motion to join QBE Insurance Corp. as a party to a personal injury action and consolidate the personal injury action with Eurotech’s coverage action against QBE, unanimously affirmed, without costs.

ZALMA OPINION

Why this case was litigated is beyond me since the prejudice to an insurer is obvious. The plaintiff wanted to profit from the prejudice and, wisely, was refused the ability. The law in New York, and across the country, would prevent dragging an insurer into a suit where its insured was named as a defendant and who it is defending.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Pay Premium or Lose Coverage

No Contractual Right to Reinstatement

Insurance is a based on the terms of the contract. It is not a right conferred upon persons by the U.S. Constitution. It requires the insured to keep certain promises made by the insured to the insurer, the most important of which is the obligation to pay the premium. When the insured breaks the promise and fails to pay the premium the policy will usually cease to exist and the insured loses all rights to the benefits of the insurance policy.

In Angel Moreno And Carmelita Moreno v. Wells Fargo, N.A.; American Bankers Life Assurance Company Of Florida, Formerly Known As Union Security Life Insurance Company, …, — Fed.Appx. —- , Ninth Circuit, 2016 WL 3092186 (6/2/16) the Ninth Circuit was faced with the appeal of Angel Moreno and Carmelita Moreno whose suit had been dismissed. Their amended complaint alleged claims under Arizona law against Defendants Wells Fargo, N.A. (Wells Fargo) and American Bankers Life Assurance Company of Florida (American Bankers) for disability benefits.

The Morenos’ claims included those for breach of the duty of good faith and fair dealing, breach of contract, consumer fraud, and unfair and deceptive acts and practices in the business of insurance.

FACTS

This case arises from a home loan that the Morenos obtained through Wells Fargo. In conjunction with this loan, the Morenos elected to purchase disability insurance coverage from Union Security Life Insurance Company, now known as American Bankers. The insurance policy at issue provided that coverage would terminate if and when: “You are considered in default under the terms of your debt agreement with the Creditor, or in default with your monthly insurance premium.”

It was not disputed that the Morenos failed to timely make full mortgage and insurance premium payments beginning in April 2012, several months prior to Wells Fargo’s August 20, 2012 letter notifying the Morenos that their insurance coverage had ended. Accordingly, the Morenos’ failure to make their payments caused them to lose their insurance coverage, not any act or omission by defendants.

To be sure, Wells Fargo’s Truth in Lending Disclosure for Optional Credit Insurance provided that the Morenos would be notified prior to termination. As such, the Morenos contend that had they been notified prior to termination, they would have corrected the deficiency. However, neither the disclosure nor the insurance policy provided a right to cure or to reinstatement, and the statutory right to cure under Arizona law does not apply to insurance agreements. Accordingly, it would not have been reasonable for the Morenos to expect that a right to cure existed.

The parties do not dispute that Mr. Moreno became disabled in December 2012. Nor do the parties dispute that the Morenos seek coverage under the policy in question beginning at that time. The Morenos’ disability insurance coverage, however, terminated several months before Mr. Moreno’s disabling event and, therefore, before any coverage rights under their policy would have accrued.

DECISION

As a result, any failure by defendants to provide prompt notice of termination in April 2012 when the Morenos first failed to make full mortgage and insurance premium payments did not cause the Morenos’ loss.

Because the Morenos cannot overcome their causation problem, any amendment of the complaint would have been futile.

Nor did the district court abuse its discretion in awarding attorneys’ fees. The Morenos’ contention that the district court did not give sufficient consideration to their financial condition is unavailing. The district court acknowledged and discussed the Morenos’ financial condition and dramatically lowered the attorneys’ fees award sought by each defendant as a result.

ZALMA OPINION

The Ninth Circuit, avoiding its usual facility to write a long and convoluted opinion, stuck to the facts and the law and concluded that when an insured breaches the contract by failing to pay the premium and the mortgage payments they are not entitled to recover credit disability benefits.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of theLEGENDAWARD first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Insured v. Insured Exclusion

Exclusion Applies Burden Falls on Insured to Prove Exception

Appellate courts often write opinions that require a wheel barrow to carry. However, when a case gets to a straight-forward point an appellate court will fool the parties and the nation by writing an opinion that is brief, clear, and easy to understand.

AMERCO, Plaintiff  v. National Union Fire…, United States Court of Appeals, Ninth Circuit,Fed.Appx. —-, 2016 WL 3157301 (June 06, 2016) is just such a case where the Ninth Circuit wasted no time or effort to reach a decision.

FACTS

Five plaintiffs filed five shareholder derivative lawsuits against AMERCO and its directors and officers in Nevada state court, and the state court consolidated the cases. AMERCO sought coverage for costs associated with the consolidated action under its directors and officers liability policy (“D & O policy”). Its insurer, National Union Fire Insurance Company of Pittsburgh, PA (“NUF”), denied coverage because one of the plaintiffs in the consolidated action, Paul Shoen, was an “Insured” under the D & O policy. AMERCO sued for breach of the insurance contract. The district court granted NUF’s motion to dismiss.

ANALYSIS

The district court properly dismissed AMERCO’s complaint because AMERCO did not allege that the non-Shoen plaintiffs instigated and continued their claims totally independent of Paul Shoen, an Insured under the policy. The “Insured v. Insured” exclusion in the D & O policy barred coverage for security holders’ claims except when “such security holder’s claim is instigated and continued totally independent of” any Insured. [Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 666 (9th Cir. 2009)] Biltmore interpreted a similar exclusion under Arizona law and explained that “the [shareholder derivative suit] exception to the exclusion only applies if the claims are ‘instigated and continued totally independent of’ the corporation”. Under Arizona law, the insurer has the burden of proving that a policy exclusion is applicable, but the insured carries the burden of proving that his claim falls within an exception to that exclusionary clause.

Here, AMERCO stated in its complaint that the five plaintiffs in the consolidated action were security holders, but it did not allege that the non-Shoen plaintiffs filed or maintained their claims independent of Paul Shoen. AMERCO conceded in its complaint (and in its briefing to the Ninth Circuit) that Shoen participated in the underlying lawsuit.

AMERCO therefore failed to carry its burden of alleging that the non-Shoen claims fell within the exception to the “Insured v. Insured” exclusion, and, therefore, affirmed the district court’s dismissal of AMERCO’s complaint on that ground.

ZALMA OPINION

No insurer is willing to take the risk the potentiality of colussion when an insured sues an insured. For that reason insured vs insured exclusions exist in almost every liability insurance policy and must be applied. Perhaps that is why the Ninth Circuit wrote such a brief and intelligent opinion.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

Mr. Zalma is the first recipient of the alma will be recognized with the first annual Claims Magazine/ACE Legend Award.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Exclusive Remedy of Workers’ Compensation

General Buys Workers’ Compensation Insurance for Sub-Contractor

It is axiomatic, applied universally, that recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage against the employer or an employee of the employer. The purpose of workers’ compensation law is to provide an injured worker with benefits immediately without a need to prove negligence or any other cause of the injury, just that the injury happened when working.

When an employee is seriously injured at work the benefits provided by the policy is inadequate and he will seek tort damages from people not the injured person’s employer to gain additional damages to compensate for the serious injury.

The Texas Supreme Court was asked, in TIC Energy and Chemical, Inc. v. Martin, Supreme Court of Texas — S.W.3d —-,  2016 WL 3136877 (June 3, 2016) in a personal-injury case to determine whether a subcontractor is entitled to the exclusive-remedy defense as a fellow employee of the general contractor’s employees by virtue of the general contractor’s written agreement to provide workers’ compensation insurance to the subcontractor.

THE STATUTES

Under section 406.122(b) of the Labor Code, a subcontractor is not an employee of the general contractor if the subcontractor (1) is operating as an independent contractor and (2) has agreed in writing to assume the responsibilities of an employer for the performance of the work.  However, section 406.123 of the Labor Code expressly confers statutory-employer status on general contractors who provide workers’ compensation insurance to their subcontractors pursuant to a written agreement. This case involves a written agreement that ostensibly meets the terms of both sections.

The trial court denied the subcontractor’s summary-judgment motion asserting the exclusive-remedy defense, and in a permissive interlocutory appeal, the court of appeals affirmed.

FACTUAL BACKGROUND

Union Carbide Corporation employed Kevin Martin at its facility in Seadrift, Texas. Martin lost one of his legs in a workplace accident and recovered workers’ compensation benefits through an owner-controlled insurance program (OCIP) administered by Union Carbide’s parent company, Dow Chemical Company.  Martin subsequently sued TIC Energy & Chemical, Inc., a subcontractor providing maintenance services at the Seadrift facility, alleging TIC’s employees negligently caused his injury.

TIC filed a traditional motion for summary judgment based on the Workers’ Compensation Act’s exclusive-remedy provision.  TIC claimed the statutory defense as Martin’s deemed fellow employee. TIC produced evidence of a written agreement with Union Carbide that extended workers’ compensation insurance coverage under the OCIP to TIC and its employees, with the cost of coverage premiums excluded from TIC’s bid.

In response, Martin argued the exclusive-remedy provision does not apply because TIC was an independent contractor and had entered into a written contract with Union Carbide under which TIC “assume[d] the responsibilities of an employer for the performance of work.

STATUTORY REVIEW

The Texas Workers’ Compensation Act provides reciprocal benefits to subscribing employers and their employees. Covered employees sustaining work-related injuries are guaranteed prompt payment of their medical bills and lost wages without the time, expense, and uncertainty of proving liability under common-law theories. In exchange, the Act prohibits employees from seeking common-law remedies from their employers by making workers’ compensation benefits an injured employee’s exclusive remedy. The exclusive-remedy defense extends to the employer’s servants, meaning covered employees secure additional benefits under the Act in the form of protection from personal-injury claims by co-workers. The issue in this case is the extent to which statutory benefits and protections afforded to a subscribing general contractor and its employees may be shared with subcontractors and their employees.

A general contractor who has, pursuant to a written agreement, purchased a workers’ compensation insurance policy covering its subcontractors and its subcontractors’ employees becomes the statutory employer of its subcontractor’s employees, and is thus entitled to the benefits conferred on employers by the Act.  Furthermore, because a contractor can provide workers’ compensation, even when it has not purchased the insurance directly, multiple tiers of subcontractors thereby qualify as statutory employers entitled to the exclusive-remedy defense.

Such a scheme seems consistent with the benefits offered by controlled insurance programs, which are designed to minimize the risk that the subcontractors’ employees will be left uncovered. The Supreme Court explained that a construction and application of the statute that favors blanket coverage to all workers on a site accords with legislative intent and the Legislature’s decided bias’ for coverage.

In this case, the summary-judgment record conclusively establishes that Union Carbide and TIC had an agreement complying with the statute and for purposes of this appeal, TIC does not dispute it was engaged as an independent contractor for Union Carbide under an agreement meeting the criteria specified in the statute, the matter in dispute is the legal effect the statutes have in the subcontractor relationship.

DISCUSSION

Applying well-established statutory-construction principles, the Supreme Court discerned no ambiguity in the relevant statutory provisions and construed it according to its plain language as informed by the statutory context without resorting to canons of construction and extrinsic aids.

The Workers’ Compensation Act defines the terms “employee” and “employer” in different ways depending on the context. Even acknowledging the potential for redundancy, however, that circumstance alone is too thin a reed to justify contorting the statute’s natural flow and creating disharmony in the application of the statutes in multi-tier contractor scenarios.

Affording the legal effect of the statutes dictated by plain terms and supported by the statutory structure, reciprocal-benefit scheme, and Texas precedent, the Supreme Court held that TIC is entitled to rely on the Workers’ Compensation Act’s exclusive-remedy defense as Martin’s co-employee.

ZALMA OPINION

Although we can feel for the plaintiff who lost his leg should receive the benefits of the workers’ compensation law he must take the benefits of the workers’ compensation law and by so doing must give up his right to sue his employer or fellow employees. When the general contractor buys workers’ compensation insurance for itself and all of its subcontractors all of the employees of the general and the subcontractors are covered and the exclusive remedy applies.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

The First Annual Claims Magazine/ACE Legend Award

Honored for a 48 Year Love of Insurance Law

Please visit http://www.propertycasualty360.com/2016/06/01/fraud-insurance-and-the-law-an-interview-with-barr where, although I was sworn to secrecy, it seems that Claims Magazine has issued the news in advance of the ACE Conference, you will understand why I was asking all of you that can to attend the ACE Conference in Minneapolis to do so. I hope to see everyone of my readers there.

The article conveys my advice for anyone entering the insurance field today simple — enjoy yourself. “It’s a great business and one of the only white-collar jobs where you get to meet new people every day — in person or on the phone — have to educate yourself, learn new things every day, and you can make a fairly good living at it.”

“I never went to work feeling like it was going to be a bad day, although I knew there would be bad days. If you have a job where you enjoy yourself, it doesn’t feel like work.”

Barry Zalma has helped to educate hundreds of professionals by sharing his hard-earned lessons through articles, presentations, videos, blogs, books and other outlets. For his many contributions to the insurance industry over a lifetime, Zalma will be recognized with the first annual Claims Magazine/ACE Legend Award at the America’s Claims Event Conference in Minneapolis, Minn., this month.

Read more at http://www.zalma.com; http://zalma.com/blog and http://www.zalma.com/videoblog

Posted in Zalma on Insurance | 1 Comment

Staged Accident Results in Criminal Conviction

Lie to Insurer About Claim

Go Directly to Jail

Insurance fraud is a general intent crime. It is important to prosecute and convict those who stage an accident and then intentionally present a false claim to an insurer. Arguing against a jury conviction is often difficult and without a showing of false testimony, bias, prejudice or lack of adequate representation is impossible after admitting the crime. Why the defendant appealed is curious.

In State v. Alston, Slip Copy, Court of Appeals of North Carolina 2016 WL 2865469 (May 17, 2016) Patrick Henry Alston (“Defendant”) appealed following a jury verdict convicting him of insurance fraud. Following the verdict, the trial court sentenced Defendant to 15 to 27 months imprisonment.

Factual and Procedural Background

The prosecution proved that the Defendant unlawfully, willfully and feloniously did, with the intent to defraud and deceive an insurer, Repwest Insurance Company, present a written and/or oral statement as part of and in support of a claim for payment pursuant to an insurance policy, knowing that the statement contained false and misleading information, alleged a vehicle accident, claiming self and two children as being in the vehicle. Another party involved gave a confession, that the accident was staged and occupants were not inside the vehicle.

The evidence presented at trial, taken in the light most favorable to the State, tended to show the following: On 29 May 2013, Defendant contacted his friend, Cleve Fleming (“Fleming”). Defendant wanted to “try to get some money, insurance money” by staging an automobile accident on a rural road “[o]ver there off of … Sam Powell Dairy Road.” The two agreed they would file personal injury claims and “well, basically whenever the money came through, [they] would just bust it up or split it up” amongst themselves.

Fleming agreed to rent a U–Haul truck but he only had $3.00 to rent the truck. Defendant drove Fleming towards a U–Haul dealer in Roanoke Rapids, North Carolina. On their way, they stopped at a Wal–Mart and Defendant transferred $160.00 to a pre-paid credit card and gave it to Fleming.

Defendant dropped Fleming off at the U–Haul dealer and Fleming “told [the dealer] [he] wanted insurance with the rental.” He paid the rental fee with the $160.00 Defendant gave him, and signed the rental form. Fleming drove the U–Haul truck and met up with Defendant. Defendant drove his daughter’s Nissan Maxima with the following people inside: his daughter, Christina Patrice Alston; the father of Christina’s children, Phillip Putney, Jr.; and Christina’s and Phillip’s two infant children. The group traveled to a predetermined spot on State Road 1429 and parked.

Fleming got out of the U–Haul truck, and everyone exited the Maxima. Defendant drove the U–Haul truck into the back of the Maxima. Nobody was inside the Maxima at the time of the collision. Defendant got out of the U–Haul truck and stood on the side of the road with everyone else.

EMS paramedics arrived and Fleming told them he had a hurt shoulder, back, and arm. The paramedics took Fleming to the emergency room in an ambulance.

At 11:55 p.m., North Carolina State Trooper Levern Bynum traveled to the scene of the collision. He explained this section of State Road 1429 is not perfectly straight or all that curvy; rather, it eases back-and-forth “[like] how a snake crawls.” At the scene, Trooper Bynum found “a U–Haul truck and a [Nissan Maxima], the U–Haul truck being behind the [Maxima] off the roadway to the right.” Trooper Bynum determined the U–Haul truck traveled eighty-three feet after impact, and the Maxima traveled 102 feet after impact. The U–Haul truck sustained some damage on its front right side, and the Maxima sustained “approximately $1,000 [.00] of damage” to its back left side.

Following the accident, Fleming filed a claim with his insurer, Dairyland Insurance, but his policy had lapsed and he “couldn’t get no [sic] money.” Defendant filed an insurance claim with U–Haul’s insurer, Repwest Insurance Company (“Repwest”). Christina Patrice Alston also filed a claim with Repwest.

When Repwest investigated the insurance claim, Fleming told Repwest that a deer ran in front of Defendant’s Maxima and Defendant hit the brakes before he could slow down the U–Haul truck. He told Repwest that he did not know Defendant and that he was “sorry about the accident since [he] noticed there were two small children in the car.”

Fleming called Repwest “several times regarding the claims in this case….” He spoke with Repwest’s Special Investigator Audrey Dumas. Repwest’s Special Investigation Unit investigated the collision and gave its findings to Investigator Selby Bass, of the North Carolina Department of Insurance.

Investigator Bass reviewed information gathered by Repwest, including the U–Haul truck’s “black box,” similar to an airplane’s black box, which records the speed of the vehicle and whether the brakes were applied by the driver. Investigator Bass interviewed Fleming who admitted the accident was staged. Then, Investigator Bass interviewed Defendant. Defendant stated, “that he was not going to lie and say that the whole wreck was legitimate but that there is more to the story than [Investigator Bass] may know.”  He at no point acknowledged — nor ever denied the accident was staged.

The jury, in less than an hour of deliberation, found Defendant guilty of insurance fraud and attempting to obtain property by false pretenses.

Analysis

After reviewing the language the Court set out the following elements for insurance fraud: (1) the accused presented a statement in support of a claim for paying under an insurance policy; (2) the statement contained false or misleading information concerning a fact or matter material to the claim; (3) the accused knew that the statement contained false or misleading information; and (4) the accused acted with the intent to defraud.  Taking the evidence in the light most favorable the State, the record refers to Defendant as the “claimant driver.”  The record shows, through Defendant’s cross-examination of Investigator Bass, that Repwest representatives spoke with Defendant and “[h]e advised he was the driver [of the Maxima] at the time of the incident.” Further, Defendant gave a recorded statement to Repwest that was transcribed in Exhibit 4 and admitted at trial.

Reviewing the elements of insurance fraud, along with the record evidence and Defendant’s statements, it is clear (1) Defendant made a statement to Repwest in support of an insurance claim, (2) his statement that he was driving the Maxima was false or misleading and concerned a fact or matter that is material to the insurance claim, (3) he knew his statement contained false or misleading information, and (4) he acted with the intent to defraud Repwest.

The testimony from Fleming and Investigator Bass provides substantial evidence that a reasonable mind might accept as adequate to support a conclusion that Defendant committed insurance fraud when he made false statements to Repwest.

Although Defendant contended he received ineffective assistance of counsel, the appellate record does not disclose whether the actions of Defendant’s counsel were inadequate.

ZALMA OPINION

Insurance fraud is a dangerous crime, especially when it involves a staged accident, since innocent people can be injured or killed. By exiting the vehicles the Defendant in this case avoided injury to anyone but himself since the people who were to be claimants stood outside the vehicle while the Defendant drove a U-Haul truck into the rear of his car and then claimed he and all the passengers in his car were injured. The jury spent more time than necessary in finding him guilty after less than one year in jail for the crime.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Ten Years & Still Litigating With Vigor

No Right to Read Opponent’s Litigation File

Sometimes lawsuits live longer than the career of the judge assigned to hear it. Sometimes the lawsuit takes on a life of its own. In Genesis Insurance Company v. Magma Design Automation, Inc., United States District Court, N.D. California 2016 WL 3057375 (05/31/2016)the USDC for the Northern District of California was called upon to resolve a discovery dispute in an insurance coverage lawsuit that has been pending for ten years.

INTRODUCTION

The discovery dispute arises in litigation involving the following parties:

  1. Magma Design Automation, Inc. (“Magma”), a local high technology company that carried Director’s and Officer’s (D&O) liability insurance during the time in question;
  2. Executive Risk Indemnity Inc. (“ERII”), which provided primary D&O coverage to Magma for the policy year 2004 and again for 2005;
  3. Genesis Insurance Company (“Genesis”), which covered Magma under a D&O excess policy for a year that spanned 2003-2004 (“the 03-04 policy”); and
  4. National Union Fire Insurance Company (“National Union”), which covered Magma under a D&O excess policy for years spanning 2004-2006 (“the 04-06 policy”).

FACTS

A patent infringement action was filed against Magma in 2004. As sometime happens, the patent action spawned two shareholder securities lawsuits against Magma that were filed in 2005. For insuring purposes under the D&O policies, the parties needed to prove when the securities actions arose. There was no dispute that ERII had the primary coverage for both 2004 and 2005 but they could not agree which excess carrier had coverage for them. The dispute, still pending after almost ten years was to determine whether National Union, who was on the risk at the time the suits were filed, or Genesis, who was on the risk the year before when the patent case was filed.

Under the terms of the Genesis policy, it would actually have been Genesis if it had received from Magma at the time of the patent action’s filing, a proper “notice of circumstances” advising that a securities lawsuit was looming in the future. Magma said that the notice it had caused to be sent to Genesis back in 2004 said what it needed to say and was sufficient to trigger coverage under the Genesis 03-04 policy for the 2005 securities lawsuits. ERII agreed with Magma, although it also acknowledged that its primary coverage could be deemed invoked for either its 2004 or its 2005 policy (which year made no difference to ERII). Genesis disputed the sufficiency of the “notice” and denied coverage. National Union denied coverage.

The present litigation began by Genesis filing a declaratory relief action against Magma challenging the sufficiency of the “notice.” Before that suit could be addressed by the court, the parties in the securities actions negotiated a settlement. ERII paid its $10,000,000 limits. Genesis, under reservation of rights, paid its $5,000,000 limits. After the settlement, Genesis wanted its money back, either from National Union or Magma. National and ERII also became parties in a flurry of cross-claims and counterclaims. National said it had good policy defenses. Magma just wanted one of the two excess carriers to be held responsible and did not much care which one it was.

The first court ruling on the merits was a summary judgment that declared the 2004 “notice” to Genesis was sufficient, triggering coverage for the 2005 securities actions under the Genesis 03-04 policy. National Union was off the hook.

Genesis appealed the summary judgment, and the Ninth Circuit not only reversed but specifically held that the “notice” was not effective to trigger coverage under Genesis’s 03-04 policy. Genesis was vindicated.

In a subsequent summary judgment ruling, the District Court found that National Union had the excess coverage for the 2005 securities actions and that National Union must reimburse Genesis for the $5,000,000 that it had paid toward the settlement. National Union was back in the picture.

National Union appealed, and the Ninth Circuit reversed. It did not rule out that National Union might ultimately have to come up with the $5,000,000. However, it held that there was no such obligation yet because there had been no exhaustion of ERII’s $10,000,000 primary limit of its 2005 policy.  For the moment, National Union could keep control of its funds.

THE LATEST MOTIONS FOR SUMMARY JUDGMENT

Again, summary judgment motions were brought, and the court made a series of rulings:

  • The exact same “notice” that Magma sent to Genesis, a notice that the Ninth Circuit held did not trigger coverage under the Genesis policy, was also sent to ERII. Therefore, as a matter of law, the notice to ERII was not sufficient to trigger coverage under ERII’s 2004 primary policy. Thus, ERII was mistaken to book its $10,000,000 payment under its 2004 policy and shall adjust its records to apply it instead to its 2005 policy;
  • It followed, then, since ERII’s primary limits for 2005 had been exhausted, that National Union’s excess obligation kicked in;
  • Since Genesis paid what National Union should have paid, Genesis was entitled to equitable subrogation, to be reimbursed by National Union for the $5,000,000. Judgment was entered in favor of Genesis and against National Union for that amount, plus interest.
  • Based on the record presented, the court declined to rule that National Union had breached its contractual obligations to Magma. That remains an open question. (So does Magma’s bad faith claim against National Union.)
  • National Union appealed from the judgment in favor of Genesis. That appeal is pending.
  • National Union also moved for summary judgment on Magma’s claims for breach of contract and bad faith. That motion is set for hearing soon.

DISCUSSION

Magma seeks an order requiring National Union to produce its “claims handling information” (presumably, documents). National Union says, and Magma does not dispute, that this information was produced for the time period starting with the initiation of the securities claims and going up to the date that Magma filed suit against National Union. That is, National Union produced the documents it had about the securities claims, from when they were made to when they were settled. That’s not what Magma wants now. Now it wants the claims handling information about its claim against National Union for excess coverage. In other words, it wants National Union’s claim file for the very claim that is currently in litigation between them.

In opposing this discovery request, National Union primarily relies on the litigation privilege created by California Civil Code § 47(b), which protects any “publication” made “[i]n any…judicial proceeding….”

Magma wants these documents because it believes National Union stubbornly refuses to step up to the plate and acknowledge it is liable for the $5,000,000 excess. Magma relies for support on White v. Western Title Ins. Co., 40 Cal. 3d 870 (1985). There, the court upheld a bad faith judgment against a title insurer that was based on the evidence that the insurer had made two low-ball settlement offers to the insured. True, that decision opened a crack in the very door that Magma seeks to open wide but subsequent courts have not opened it any further and have mostly limited it to its facts. Indeed, the insurer has an absolute right to defend against its insured’s claims, and opening up its litigation file to its insured would undermine its right to a fair day in court.

Ironically, National Union’s initial coverage position (to deny coverage) was precisely the position advocated by its insured, Magma. It was only after Magma’s choice to put the excess risk on Genesis’s 03-04 policy backfired, that Magma then came back to National Union.

As the litigation progressed National Union decided it may have policy defenses that it had not had at the very beginning of the securities actions. It may have been wrong, and–if the latest summary judgment holds up on appeal–will ultimately have to pay, but it seems it should be able to litigate the correctness of its legal position without opening up its litigation strategy.

CONCLUSION

Magma has not cited and the court did not find any precedential decision that permitted discovery such as is sought here. Magma’s request for post-litigation “claims handling information” (including reinsurance and reserves) is denied.

ZALMA OPINION

Although, it often seems that when insurance litigation is concerned that an insurer is less equal than the insured in the eyes of the court. Here, the USDC determined that the insurer was the equal of the insured and would not let the insured peek into the work and plans of its opponent in the lawsuit. The work product protection kept the insurer’s litigation strategy closed to those suing it.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Leave a comment

Named Insured May Cancel a Policy At Any Time

Policy Cancelled Before Loss

Disputes over cancellation of insurance policies usually center around cancellations by insurance companies. In Ged v. Select Portfolio Servicing, Inc., United States District Court, D. New Jersey, 2016 WL 3033683 (05/26/2016) the USDC was faced with a claim presented for a loss that occurred after the named insured cancelled the policy insuring the risk.

Defendants, American Security Insurance Company (“ASIC”) and Select Portfolio Servicing, Inc. (“SPS”) (collectively, “Defendants”) move the USDC, New Jersey, for summary judgment in their favor.

DISCUSSION

 Ged “is a citizen of the State of Florida who … reside[s] … [in] Parkland, Florida ….” ASIC is “an insurance company or entity duly organized in the State of Delaware, selling and issuing policies of flood insurance within the State of New Jersey.”  SPS “is … a corporation engaged in the mortgage servicing business within the State of New Jersey.”

The Property and Insurance Policy

Ged owns a house located at 6 Stoney Road, Point Pleasant Beach, New Jersey (hereinafter “the Property”). SPS was the designated servicer of the mortgage for the Property on or about December 1, 2011. ASIC issued a residential flood insurance policy (“the Policy”) to SPS. The Policy covered the Property, and identified SPS as the “Named Insured Mortgagee[.]” The Policy also listed Ged as “an additional insured[.]”

ASIC mailed a copy of the Policy to Ged at an address in Plantation, Florida. SPS, as a Named Insured Mortgagee, paid the Policy’s annual premium of $1,816.20 in monthly installments. The following terms governed cancellation of the Policy: “1. Cancellation ¶ a. Coverage under this Policy shall automatically and without prior notice, cancel when the named insured no longer has an interest in the described location or when the named insured has been provided with another policy that meets the requirements of the named insured as set forth in the mortgage agreement applicable to the described location. ¶ b. This Policy may also be cancelled by the named insured by returning it to us or notifying us in writing of the date cancellation is to take effect. ¶ c. We may cancel this Policy by mailing notice of cancellation to the named insured at the address shown on the Additional Insured Endorsement or by delivering the notice not less than 30 days prior to the effective date of cancellation.”

Short Payoff Settlement

Ged and SPS negotiated a short payoff settlement  (SPS) of the mortgage on the Property from January 2012 through July 2012.  The SPA advised Ged that SPS “agree[d] to accept [his] proposed Short Payoff [of $375,000.00] and … release the lien on the [P]roperty ….”

The SPA, which was the only document that governed the short payoff settlement, stated that “[u]pon satisfaction of all terms of this approval, the mortgage [would] be discharged in its entirety with any deficiency rights waived, and a lien release document [would] be forwarded ….”  The terms of the SPA did not address the Policy. Ged accepted the terms of the SPA, and paid SPS $375,000.00 shortly thereafter.

Cancellation of the Policy

SPS, upon executing the SPA, informed ASIC that Ged paid his mortgage in full effective July 16, 2012. ASIC then proceeded to cancel “the Policy in accordance with instructions from SPS[.]” ASIC refunded SPS $79.81, as a portion of the unearned premium for the month of July 2012.

ASIC forwarded a cancellation notice via letter dated July 26, 2012 (“7-26-12 Cancellation Notice”). The 7-26-12 Cancellation Notice read, in relevant part, as follows: “The Named Insured Mortgagee/Lender has requested cancellation of the lender-placed insurance that was issued in compliance with your mortgage/lien agreement. This cancellation is effective at 12:01 a.m. on [07-16-2012]. The reason for this cancellation is: ¶ Named Insured’s Request. You have paid off your loan and the mortgagee/lender no longer has an insurable interest in the [P]roperty.”

Superstorm Sandy

The Property sustained flooding damage during Superstorm Sandy on October 29, 2012.  Ged “filed an insurance claim [with ASIC] … seeking compensation for direct loss by flood” in February 2013. Ged claimed he was “required to demolish the … Property and rebuild in order to return the home to pre-loss condition and comply with local zoning requirements.”

ASIC informed Ged “that it was unable to confirm that there was any coverage in force for the Property on … October 29, 2012 ….” ASIC, upon further reviewing the claim, issued a letter dated February 13, 2013 (“2-13-13 Letter”) to Ged.  The 2-13-13 Letter informed Ged “that ASIC had been unable to locate any active policy for the reported date of loss of October 29, 2012, given that the Policy terminated before the date of loss upon the short payoff of … Ged’s loan.”

APPLICATION OF LEGAL STANDARD

Ged conceded that the issues for determination by this Court pertain to the breach of contract and the Policy cancellation.

Ged’s Arguments

Ged alleges that Defendants failed to provide: (1) coverage warranted under the Policy; and (2) “proper notice of cancellation[.]”  Ged conceded that the SPA “did not confer any rights to him with respect to the Policy.” Ged also admitted that “there was no contract directly between [himself and] ASIC [.]”

Ged contends that the Policy was effective on October 29, 2012 on the grounds that he was: (1) an additional insured under the Policy; and (2) a third-party beneficiary under the Policy.  According to Ged, payments made “on the Policy as part of his monthly mortgage payment to SPS …. demonstrate that the Policy was intended to confer a direct benefit to him and as such he is entitled to third-party beneficiary status ….”  Ged also argues that ASIC had an obligation to: (1) verify his address; and (2) forward the 7-26-12 Cancellation Notice to his verified address. Thus, Ged argues, with respect to the 7-26-12 Cancellation Notice, that “there is a genuine dispute as to whether [Ged] was provided with effective notice” by the cancellation of the Policy.

ASIC’s Arguments

ASIC argued that Ged “cannot maintain a claim for insurance coverage against ASIC … because the Policy terminated more than three months before the date of the loss[,]” thereby extinguishing SPS’ interest in the Property. With respect to the 7-26-12 Cancellation Notice, ASIC argues, inter alia, that it “fully complied with its notice obligations by sending Confirmation of Cancellation to the named insured, SPS, which had full authority under the Policy terms to receive notices of cancellation on behalf of [Ged], the additional insured.”

SPS’ Arguments

SPS argued, inter alia, that Ged was not a third-party beneficiary under the Policy because after SPS and Ged executed the SPA, “SPS no longer had an insurable interest in Ged’s home ….” According to SPS, “New Jersey law would have prevented SPS (and therefore Ged) from pursuing a claim for the 2012 flood damage to Ged’s property, regardless of whether SPS formally cancelled the [P]olicy in July 2012, because SPS ceased to have an insurable interest after the short payoff settlement in July 2012.”

Analysis

The Court was unable to find a dispute of material fact as to whether the Policy was effective on October 29, 2012, the date of Ged’s claimed loss. ASIC issued the 7-26-12 Cancellation Notice pursuant to the Policy terms.  Moreover, Ged provided no evidence that: (1) ASIC was required to verify his address pursuant to the terms of the Policy; or (2) he was a third-party beneficiary under the Policy.  Accordingly, the Court concluded that there was no genuine dispute of material fact regarding the claims at issue, and granted summary judgment in favor of ASIC and SPS.

ZALMA OPINION

Mr. Ged was a victim of bad timing and a failure to protect himself against loss by flood that his lender had required as a condition of lending him the money to buy the house. When he paid off the loan he was no longer bound by the loan’s requirement for flood insurance and the lender – without an insurable interest – had no right to maintain the policy. The policy was cancelled by the named insured immediately upon its request by notice to the insurer. The only way Ged could have been insured when Sandy hit was to buy insurance in his name.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

Late Notice Defense Difficult to Prove

Notice Requirement Must be Clear & Unambiguous

Every liability insurance policy contains a requirement that the insured report claims promptly. Each policy contains a variation on that requirement. Excess policies contain different reporting clauses than do primary policies. In Essex Insurance Company v. Village of Oak Lawn, United States District Court, N.D. Illinois 2016 WL 3058407  (05/31/2016) Essex Insurance Company (“Essex”) asked the USDC, Northern District of Illinois for a declaration that it has no duty to indemnify its insured, the Village of Oak Lawn (“Village” or “Oak Lawn”), because Oak Lawn breached the notice condition of Essex’s insurance policy with respect to an underlying lawsuit. Third-Party Defendant Cannon Cochran Management Services, Inc. (“CCMSI”) seeks a declaration that it provided timely notice of that lawsuit to Essex on behalf of Oak Lawn.

BACKGROUND

Charles Petrishe, Nikki Caputo-Petrishe, and Dianne McGann sued the Village and obtained a $3 million settlement agreement between the parties, with Defendants’ two insurance companies—Essex and non-party Illinois Union Insurance Company (“ACE”)—paying out $1 million and $2 million, respectively. Essex now seeks to recoup that $1 million payment, along with applicable interest, pursuant to a Non-Waiver Agreement that it entered into with Oak Lawn as a condition precedent to settlement. Essex argues that: (i) it is entitled to a finding that Oak Lawn breached its insurance policy; and (ii) Oak Lawn must therefore reimburse Essex for its settlement payment under the Non-Waiver Agreement. Oak Lawn disagrees, arguing that it did not breach the insurance policy and therefore has no obligation to reimburse Essex.

Essex issued to Oak Lawn an Excess Liability Policy covering a policy period of March 15, 2010 to March 15, 2011 (the “Essex Policy”). The Essex Policy had a liability limit of $10 million per occurrence and $10 million in the aggregate, and was excess over other underlying policies, including the ACE Policy.

The Essex Policy also contained the following condition (the “Notice Condition”): “Duties in the Event of Accident, Occurrence, Claim or Suit. ¶ You must see to it that we or our authorized representative and your underlying insurers: ¶ a. are notified as soon as practicable of any accident or occurrence which may result in a claim if the claim may involve this policy or any underlying insurance; b. receive notice of the claim or suit as soon as practicable. Notice shall include: ¶ 1) How, when and where the accident or occurrence took place; ¶ 2) The insured’s name and address; ¶ 3) The names and addresses of any injured persons and witnesses; and ¶ 4) The nature and location of any injury or damage arising out of the accident or occurrence. ¶ c. are assisted, upon our request, in the enforcement of any right against any person or organization which may be liable to you or any other Insured because of injury or damage to which this insurance may apply; and ¶ d. receive the Insured’s full cooperation in the investigation, adjustment, settlement, or defense of any claim or suit.” (emphasis added)

Factual Background

Both CCMSI and the Village were aware that the underlying plaintiff, Petrishe had been in the ICU for six weeks following the shooting.  By March 2011, Petrishe’s claimed medical expenses had surpassed $672,000 – more than the Village’s SIR.

At least by May 2011, the Village and its claims handlers knew that the Village’s exposure—but not its liability—could exceed the $150,000 SIR.  Yet, the Village and CCMSI did not believe that the Petrishe claim implicated either the ACE Policy or the Essex Policy because they “did not believe that there would be liability for the allegations in the Petrishe matter until Mr. Petrishe was found not guilty” in the parallel criminal action since Petrishe was charged with attempted first-degree murder for his attack on the Oak Lawn police officers. At this time, the officers’ actions appeared justified and warranted and therefore, they did not impose any negligence on the Officers and didl not post a loss reserve for Petrishe’s claim.

In June 2012 and again in November 2012, defense counsel in the Underlying Action informed the Village and ACE that the criminal proceedings were ongoing. Throughout this period, the Village and CCMSI held quarterly meetings to discuss the Underlying Action and other civil matters pending against the Village. At no time during 2011 and 2012, however, did the Village’s “potential liability would involve the ACE Policy or the Essex Policy.

On February 1, 2013, the criminal court acquitted Petrishe of all charges. Defense counsel in the Underlying Action advised the Village that the Plaintiff was acquitted in his criminal trial and plaintiff’s attorney told defense counsel that the plaintiff’s medical bills are in excess of $1,000,000. The Village had been confident that the attempted murder charges brought against the plaintiff would result in a conviction. The unexpected acquittal eliminates any number of legal defenses and raises the possibility that the Village of Oak Lawn and the two responding officers could potentially be held liable. Counsel advised the Village that he expected that a demand from the plaintiff’s attorney well in excess of $5,000,000 –and likely in excess of $10,000,000 was forthcoming.

On January 21, 2014, the Petrishe plaintiffs made a $12 million settlement demand in the Underlying Action. On January 22, 2014, Essex issued a reservation of rights letter, reserving its right to deny coverage to the Village on several grounds, including “on the basis that the Village failed to comply with the policy condition which requires notice as soon as practicable of any accident or occurrence which may result in a claim if the claim may involve the Essex Policy or any underlying insurance.”

ANALYSIS

In construing the language of an insurance policy, a court must view the policy “as a whole and take into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract.” Illinois courts recognize that primary and excess insurance policies “inherently serve different functions, cover different risks and attach at different stages.

The Notice Condition contains two principal notice provisions – Subsection (a) relating to “any accident or occurrence,” and Subsection (b) relating to “the claim or suit. The language clearly specified that, in the event of “a” claim made or “ ‘suit’…brought against any insured,” MHM must give notice and forward copies of legal papers received “in connection with the ‘claim’ or ‘suit.’ ” This provision is non-discretionary.

Considering the nature of excess insurance, Essex does not need—and chose not to require—notice of each and every claim made or lawsuit filed, regardless of coverage implications. The Essex Policy, therefore, did not require the Village to notify Essex of the Underlying Action unless and until it believed such lawsuit “may involve” either the underlying insurance (including the ACE Policy) or the Essex Policy.  Concluding that the “may involve” clause at issue is ambiguous and subjective and the fact that no evidence resolves the ambiguity, the Court found it must construe the clause it in favor of the Village.

The Village’s Awareness of a Potentially Covered Event

The Village knew about the Petrishe shooting on December 8, 2010, knew about the Underlying Action and its allegations on December 15, 2010, and gave ACE notice on March 15, 2011. Yet, Essex argues, the Village did not inform Essex of the incident or the lawsuit until May 21, 2013.

The Village responds that, while it had “awareness” of the Petrishe claim in 2010, it did not believe that such claim “may trigger insurance coverage” until February 2013, after Petrishe’s acquittal. Indeed, the record reflects that CCMSI set an initial reserve of only $10,000 and—prior to 2013—did not anticipate the Petrishe claim exceeding the Village’s $150,000 SIR.

The Village’s Diligence in Ascertaining Coverage Availability

The fourth factor—the Village’s diligence in ascertaining the availability of excess coverage—also weighs in favor of the Village. The Court is not convinced by Essex’s argument that the Village’s delay had nothing to do with its belief about its liability. The Court further notes that defense counsel in the Underlying Action continued to view the case as “highly defensible” on liability grounds, even after the unanticipated acquittal.

Prejudice to Essex

Lastly, the Court considers prejudice to Essex resulting from the 30-month delay in receiving notice of the Underlying Action. Once the Underlying Action became active, Essex waited several months to issue a reservation of rights letter, and then participated in settling the action through its eventual dismissal in November 2014.

ZALMA OPINION

A potentially effective denial of a claim was destroyed by inadequate policy wording. By making the notice requirement of the policy subjective – only requiring a report when it “may” result in a claim it made it impossible to prove that the insured did not, in good faith, believe until the plaintiff was acquitted of the charge that he attempted to kill the police officers and eliminated the civil defenses available to the police for shooting the plaintiff. The adverse result could have been eliminated by requiring notice of the filing of suit rather than a “suit that ‘may’ result in a claim.”

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – June 1, 2016

Arson for Profit

    Zalma’s Insurance Fraud Letter June 1, 2016, Volume 20, No. 11

IBZBACKSUIT3n this, the ninth issue of the 20th year of publication of Zalma’s Insurance Fraud Letter (ZIFL), Barry Zalma, on June 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:

  • Arson for Profit
  • Barry Zalma
  • Claims Commandments 4 – 7
  • Proformative Academy Webinars
  • Good News From the Coalition Against Insurance Fraud
  • Barratry Class Action Filed Against Texas Hail Attorneys – Roofing Contractor
  • Books from Barry Zalma
  • Wisdom
  • Pennsylvania Fraud Requirements
  • The Zalma Insurance Claims Library
  • Health Insurance Fraud Convictions
  • Books from the American Bar Association by Barry Zalma
  • Other Insurance Fraud Convictions
  • Zalma Insurance Consultants Provides the Following Services to Its Clients
  • Zalma’s Insurance 101
  • Zalma’s Insurance Fraud Letter

ZALMA INSURANCE CONSULTANTS

Insurance Publications by Barry Zalma

The Zalma Insurance Claims Library

 Zalma on Insurance – A Blog

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

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

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

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

Has this email been forwarded to you by a colleague? Register with Zalma’s Insurance Fraud Letter at this link. to receive the latest news directly to your inbox regularly.

ZALMA INSURANCE CONSULTANTS
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Beating a Person Unconscious Is an Intentional Act

No Coverage for Bar Room Attack

I have, until I was blue in the face, reminded my readers that liability insurance only applies to fortuitous events – there must be an accident, an occurrence, an injury without intent to cause the injury – for insurance to apply. Regardless, injured people and their lawyers attempt to gain insurance proceeds by artfully pleading a complaint in an attempt to make an intentional act into an accident.

In State Farm Fire and Casualty Company v. Massi, 2016 WL 3014890, United States District Court, E.D. Pennsylvania, Civil Action No. 16-00169 (05/25/2016) the USDC for the Eastern District of Pennsylvania was asked by State Farm Fire and Casualty Company (“State Farm”) to declare that it has no duty to defend or indemnify Mark Massi (“Massi”) in an underlying lawsuit stemming from Massi’s alleged involvement in a bar fight.

FACTS

Ronald Mannon (“Mannon”) sued Massi alleging that Massi violently assaulted and injured Mannon at “R.P. McMurphy’s” in Holmes, Pennsylvania. Mannon’s complaint alleges that Massi was “visibly intoxicated and acting in a violent, uncivilized, unruly and inappropriate manner.” Before assaulting Mannon, Massi was purportedly involved in multiple verbal and physical confrontations with other bar patrons. At approximately 1:33 a.m., security asked Massi to deescalate “an altercation with other patrons inside [the bar].” Massi  punched Mannon in the face and knocked him unconscious. Mannon also alleges that adding to the injury Massi struck him “in the face with a billiard ball.”

Mannon’s complaint includes causes of action against Massi for negligence (Count I) and assault and battery (Count II). Mannon’s negligence claim alleges that his injuries “were caused solely by the intentional act of [Massi] combined with the[ ] carelessness and negligence of [Massi]….” Within the same count, Mannon includes a number of causal allegations with the prefatory phrase: “As a result of the negligent, careless, reckless, malicious and/or violent actions of [Massi]….”

The assault and battery claims allege that Massi “unlawfully, willfully, maliciously and with force and arms assaulted [Mannon] and…unlawfully, willfully, maliciously, wrongfully and offensively stricken [sic] [Mannon] in the face with a billiard ball….” Also included are claims against the bar which contend, in relevant part, that it provided alcohol to Massi when he was “visibly intoxicated” and “present[ing] an[ ] unreasonable danger of hazard to [himself], members of the public and other patrons….”

When the alleged incident occurred, Massi was insured under a homeowner’s policy issued by State Farm. The policy defined “Occurrence as, among other things, “an accident….”

State Farm is currently defending Massi in the underlying suit pursuant to a reservation of rights.

ANALYSIS

It is axiomatic that the duty to defend is broader than the duty to indemnify. Accordingly, “there is no duty to indemnify if there is no duty to defend.” In determining whether State Farm owes a duty to defend Massi in the underlying lawsuit, the Court must examine the allegations in Mannon’s complaint and the language of the State Farm policy.

If the complaint comprehends an injury which may be within the scope of the policy, the company must defend the insured until the insurer can confine the claim to a recovery that the policy does not cover. It is the substance, not the form, of the allegations that is the focus of the coverage inquiry.

The Pennsylvania Supreme Court has defined “accident” within an insurance policy as an unexpected and undesirable event occurring unintentionally, and that the key term in the definition of the ‘accident’ is ‘unexpected’ which implies a degree of fortuity. Qualifying something as an accident, therefore, depends on both the degree of foreseeability and the state of mind of the actor in intending the result. Conduct is not “accidental” if the resulting injury was the natural and expected result of the insured’s actions.

Neither party disputes that Mannon’s injuries were the foreseeable consequence of Massi’s actions. If the allegations establish that Massi lacked the ability to formulate intent, if he was incompetent as a result of alcoholic intoxication, the resulting act cannot be intentional. The mere fact that Massi was intoxicated, however, does not mean his actions should be automatically classified as accidental. Massi’s level of intoxication would have to be so severe that a court could find that [he] did not intend the natural and probable consequences of his actions. Of course, since he intentionally became intoxicated, the natural and probable consequence of the intoxication is that he would cause injury just as the intentional act of driving while intoxicated will naturally and probably cause injury to third parties.

In this case the district court concluded that Massi’s actions cannot reasonably be classified as anything other than intentional conduct. Despite Mannon’s “artful pleading,” the factual allegations portray an intentional act for which there is no coverage under the policy. Massi punched Mannon in the face and knocked him unconscious. Massi “maliciously, wrongfully and offensively” struck Mannon “in the face with a billiard ball.” Nothing alleged indicates that Massi did not intend the “natural and expected” consequences of his actions.

The facts in the underlying complaint portray an allegedly intoxicated person whose violent behavior culminated in Mannon being struck in the face and/or struck with a billiard ball, rendering him unconscious. Indeed, Mannon’s negligence claim states that his injuries “were caused solely by the intentional act of [Massi] combined with” his carelessness and negligence; even the negligence claim alleges intentional conduct. The complaint is not just “thin on detailed facts,” as Massi alleged, supporting negligence or a lack of intent, it lacks such facts entirely.

State Farm also contends that it has no duty to defend against Mannon’s claim for punitive damages. Pennsylvania public policy provides that punitive damages are not covered under insurance policies. Massi concedes that the policy cannot cover a punitive damage claim.

State Farm owes no duty to defend Massi in the underlying lawsuit. Because there is no duty to defend, there is no duty to indemnify.

ZALMA OPINION

When a person becomes intoxicated it is because of the intentional act of consuming a sufficient volume of alcoholic beverages to cause a lack of control, violence and other anti-social conduct brought on by the intoxication. Punching someone in the face and hitting him with a billiard ball until he is unconscious is an intentional act and not fortuitous. The plaintiff is not without a remedy, he can take whatever assets Massi has to pay for his injuries and his lawyer’s attempt at artful pleading will not obtain Massi insurance coverage.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on Beating a Person Unconscious Is an Intentional Act

Corrosion Determined as a Matter of Law

Insurance Policies are Creatures of Contract

Insurance contracts must be interpreted like any other contract. When there is a dispute between an insurer and insured on the meaning of a term or condition in the insurance policy the court must determine the intent of the parties from the clear and unambiguous language of the insurance contract. In  Lantheus Medical Imaging, Inc. v. Zurich American Insurance Company, United States Court of Appeals Second Circuit .No. 15-1717 (May 25, 2016) Lantheus Medical Imaging, Inc. (“Lantheus”) appealed a decision of the United States District Court for the Southern District of New York granting summary judgment to Zurich American Insurance Co. (“Zurich”).

FACTS

An insurance coverage dispute that arose between the parties after Lantheus experienced a supply chain disruption in late spring 2009. The supply chain disruption occurred due to a fifteen month shutdown of a National Research University nuclear reactor (“NRU Reactor”) that forced Lantheus to suspend dozens of production runs for one of its products. Lantheus sought coverage from Zurich for the resulting losses, but Zurich denied the claim.

Since insurance policies are, in essence, creatures of contract, and, accordingly, subject to principles of contract interpretation The Second Circuit Court of Appeal, applying  New York law noted that  the interpretation of a contract is a matter of law for the court to decide.

Where contractual language is ambiguous and subject to varying reasonable interpretations, intent becomes an issue of fact and summary judgment is inappropriate. Only where the language is unambiguous may the district court construe it as a matter of law and grant summary judgment accordingly.

ANALYSIS

When an insurance contract contains an exclusion provision, the insurer generally bears the burden of proving that the claim falls within the scope of an exclusion by establishing that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.

The Second Circuit concluded that the District Court’s analysis was thorough and sound. From the outset, the District Court drew all inferences in favor of Lantheus, accepting that “the breach occurred because of a ‘pressure surge … act[ing] upon an already weakened point.’ ” It specifically declined to resolve certain outstanding factual ambiguities that were not necessary to decide Zurich’s summary judgment motion, including whether “General Corrosion precipitated the NRU Reactor shutdown.”

Honoring the anti-concurrent causation language of Exclusion 5b, the District Court found as a factual matter (and based on agreement of both of Lantheus’s experts) “that a thinning over time of the aluminum wall of the reactor vessel, referred to as [redacted] Penetration, was a necessary component to the through wall breach that occurred after a rapid shift in pressure.” The District Court then concluded as a legal matter that the definition of “corrosion” as used in Exclusion 5b “fully embraces” this condition, including Lantheus’s assertion that an electrochemical cell caused the [redacted] Penetration.

Lantheus argues that Exclusion 5b must be read as a whole and “generally connotes a process by which material is gradually consumed or worn away, either by external forces or the material’s own inherent qualities.” Lantheus also argues that the ordinary meaning of corrosion is a “gradual process” that does not occur rapidly.

Relying on expert testimony provided by Lantheus’s metallurgist and nuclear engineer, it was not error for the District Court to draw the factual conclusion that “the [redacted] Penetration contribute[d] concurrently or in any sequence to the … damage.” Nor was it error for the District Court to grant summary judgment to Zurich on the basis of its finding “that the formation of the [redacted] Penetration and its concurrent involvement in the through wall breach that shut down the NRU Reactor is sufficient to bring the loss within the corrosion exclusion.”

Taking the facts in the light most favorable to Lantheus, the [redacted] Penetration of the reactor vessel wall took approximately twenty nine days to occur and was caused at least in part by the differential aeration cell. Thus, there is no question of material fact that the NRU Reactor shutdown falls into Exclusion 5b, even accepting Lantheus’s proposed version of events.

ZALMA OPINION

Most insurance policies insuring against damage to real or personal property exclude losses due to corrosion, whether specifically defined in the policy, or using the common meaning of corrosion. Since the reactor was shut down because of a slow – 29 day – wearing down of the material the court easily concluded that the loss was due to corrosion acting allow or concurring with other causes.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

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Intentional & Wrongful Eviction Not Covered

  A“Wrongful Eviction” May or May Not Be Intentional

Liability insurance policies, under the personal injury cover, agrees to insure against certain offenses including the offense of wrongful eviction.

In State Farm Fire and Cas. Co. v. Otten, Not Reported in N.W.2d 2016 , Court of Appeals of Minnesota , WL 2946110 (May 23, 2016) was asked to hold State Farm responsible for an agreed judgment arising from an intentional wrongful eviction. The insured complained that the offense was specifically insured against while the insurer convinced the trial court that the intentional nature of the eviction was not an “occurrence” and intentional conduct was specifically excluded.

FACTS

Joseph and Kristen Otten and T.E.O. Properties, Inc. own a rental home insured under a Rental Dwelling Policy issued by State Farm.

The policy provides business-liability coverage as follows: “If a claim is made or a suit is brought against any insured for damages because of bodily injury, personal injury, or property damage to which this coverage applies, caused by an occurrence, and which arises from the ownership, maintenance, or use of the insured premises, we will: ¶ 1. pay up to our limit of liability for the damages for which the insured is legally liable; and ¶ 2. provide a defense at our expense by counsel of our choice. We may make any investigation and settle any claim or suit that we decide is appropriate. Our obligation to defend any claim or suit ends when the amount we pay for damages, to effect settlement or satisfy a judgment resulting from the occurrence, equals our limit of liability.” (Emphasis added.)

The policy also contains an intentional-acts exclusion, which excludes coverage for: “a. bodily injury, personal injury, or property damage: ¶ (1) which is either expected or intended by an insured; or ¶ (2) to any person or property which is the result of willful and malicious acts of an insured; b. bodily injury, personal injury, or property damage arising out of the rendering or failing to render professional services….”

In addition, the policy contains a separate exclusion related to mold.

In May 2011, Braun and his then wife entered a lease agreement to rent the home from June 1, 2011 to May 31, 2012. Before entering the lease, the Brauns inquired about the presence of mold in the home because Braun’s stepdaughter had respiratory problems. The Ottens said they were unaware of any mold.

On May 16, 2012, a toilet malfunctioned in the home, causing water to flood the bathroom floor. When Joseph Otten visited the home to perform repairs, Braun asked him to have the home inspected for mold. According to Braun, Joseph Otten then revealed that the home had mold when he purchased it. Joseph Otten refused to have the home inspected and asked the Brauns to move out.

On May 18, 2012, the Ottens gave the Brauns a letter titled “Notice to end lease,” stating: “The rental agreement ends May 31, 2012 12:00 noon. You must be moved out by that time. An unlawful detainer will be filed if this is not met.” The Brauns vacated the home on May 31.

Braun sued the Ottens and T.E.O., alleging several claims, including wrongful eviction. The parties in Braun’s lawsuit entered a Miller–Shugart agreement in which the Ottens and T.E.O. agreed there was a substantial likelihood they would be found liable and (1) consented to pay $500 on Braun’s fraudulent-inducement claim and all issues related to mold and (2) consented to a $35,892 judgment on Braun’s breach-of-contract and wrongful-eviction claims. Braun agreed not to collect the judgment from the Ottens and T.E.O. but only to “seek to satisfy this judgment from State Farm.” The district court entered judgment for Braun against the Ottens and T.E .O. in the amount of $35,892.

State Farm sued the Ottens, the Brauns, and T.E.O., seeking a declaratory judgment that it had no duty to indemnify the Ottens and T.E.O.

DECISION

A district court must grant summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law.” Generally, the extent of an insurer’s liability is determined by its insurance contract with its insured. The district court concluded both that coverage was not triggered because there was no “occurrence” and that, even if coverage had been triggered, the intentional-acts exclusion applied because the injuries were expected or intended.

Braun is correct that the insurance policy generally contemplates coverage for wrongful eviction. The policy generally provides coverage for “personal injury,” including injury arising from a “wrongful eviction.” The policy, however, provides coverage for personal injury only if the injury is “caused by an occurrence.” An “occurrence” is defined as an “accident.” While “accident” is not defined by the policy, our supreme court has defined “accident” as it appears in an insurance policy to mean an unexpected, unforeseen, or undesigned happening or consequence. The policy also contains an intentional-acts exclusion, which excludes from coverage claims for “personal injury” when the injury is “expected or intended” by the insured. The plain and unambiguous language of the “occurrence” requirement and the intentional-acts exclusion requires a wrongful eviction to be accidental and the resulting injury to be unintended for coverage to apply.

Neither definition of wrongful eviction requires intent. It is possible for a landlord to accidentally dispossess the wrong tenant or to make another mistake that unintentionally results in a wrongful eviction and, in such a case, coverage would apply.

The questions of whether an injury is the result of an accident and whether coverage is excluded because the injury is the result of an intentional act are for all practical purposes, identical issues.  On May 18, 2012, the Ottens provided notice to the Brauns to vacate the home by May 31, just 13 days later. There was, as a result, no genuine issue of material fact that the Ottens intentionally provided inadequate notice to the Brauns.

In her deposition, Kristen Otten testified that the Ottens knew that the Brauns would incur costs associated with moving and finding a new place to live. This undisputed evidence supports the conclusion that the Ottens intended “some harm.”  

Because there is no genuine issue of material fact that the Ottens knew that the notice given was inadequate and that the Brauns would suffer financial losses, the trial court properly concluded that the insurance policy does not cover the Ottens’ intentional and wrongful eviction of the Brauns as a matter of law. State Farm therefore was not required to indemnify the Ottens, and the district court did not err by granting summary judgment to State Farm.

ZALMA OPINION

For insurance to cover a claim of damages the injury causing event must be fortuitous. Since the landlords intentionally, without proper notice, and with an intent to cause damage to the tenant, wrongfully evicted them there could be no coverage. The plaintiff was damaged again, when their lawyers agreed to take an assignment against the insurer who owed nothing instead of collecting against the assets of the landlord who caused them damage and get nothing for their effort.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Intentional & Wrongful Eviction Not Covered

Marine Insurance Requires Insured to Exercise Uberrimae Fidei

Insured May Not Hide Material Information From a Marine Insurer

Marine insurance is, because of the risks taken, applies the doctrine of  uberrimae fidei (utmost good faith) strictly. In Fireman’s Fund Ins. Co. v. Great American Ins. Co. of New York, United States Court of Appeals, Second Circuit, — F.3d —- 2016 WL 2943139 (May 20, 2016) an insurer sought contribution from a marine insurer who claimed its policy was void because of the insureds failure to fulfill its obligation to treat its insurer with utmost good faith. The Second Circuit was called upon to resolve the dispute.

Fireman’s Fund Insurance Company (“Fireman’s Fund”) and Signal International, LLC (“Signal”) appealed from judgments of the United States District Court for the Southern District of New York granting summary judgment to Great American Insurance Company of New York (“Great American”) and Max Specialty Insurance Company (“MSI”). Fireman’s Fund, Great American, and MSI underwrote insurance policies that included coverage for a dry dock that Signal owned. After the dry dock sank, Signal and Fireman’s Fund sought contribution for losses and cleanup costs from Great American and MSI. Fireman’s Fund initiated this action to resolve disputes regarding coverage.

The district court held that the Great American and MSI policies were void because (1) Great American’s pollution insurance policy was a marine insurance contract subject to the doctrine of uberrimae fidei, and Signal’s failure to disclose that the dry dock had deteriorated and that repairs recommended over several years had not been made violated its duty of utmost good faith under that doctrine, and (2) Signal materially misrepresented the dry dock’s condition when it applied for coverage from MSI.

BACKGROUND

 Signal is a marine construction firm involved principally in building and repairing ocean-going structures such as offshore drilling rigs, platforms, and barges. In 2003, Signal purchased six facilities—two in Mississippi and four in Texas—for use in its business of repairing, upgrading, and converting offshore drilling rigs. One of the Texas facilities was a dockyard in Port Arthur, Texas. In acquiring that facility, Signal assumed an existing lease of a dry dock (“the dry dock”) located along the Sabine–Neches Waterway near the Gulf of Mexico.  The dry dock was built in 1944 at the direction of the United States Navy to repair Navy ships. In early 2005, Signal accepted an offer from the lessor to purchase the dry dock, which Signal had been using in its operations since it assumed the lease.

Throughout its lease and ownership of the dry dock, Signal received a number of reports on the dry dock’s deteriorated condition. Signal never replaced the dry dock’s pontoons or pontoon decks. Instead, Signal continued to use inserts and doublers to patch holes in the decks. In 2009, Signal decided to implement the seven-pontoon configuration by removing Pontoon H. On August 20, 2009, it attempted to remove that pontoon, but during that procedure the entire dry dock sank.

Shortly after the sinking, Signal notified the Texas General Land Office (“GLO”), which regulates pollution affecting Texas shoreline waters, about what had occurred. In September 2009, the GLO advised Signal to “initiate immediate action to recover the … dry dock from Texas coastal waters.” Removal and cleanup efforts were not completed until March 2012 and resulted in $12,395,026 in costs.

The Insurance Policies Covering the Dry Dock

Signal had obtained five insurance policies that insured against risks related to the dry dock at the time of its sinking: (1) a marine general liability policy issued by Fireman’s Fund; (2) a marine excess liability policy issued by Fireman’s Fund; (3) a pollution policy issued by Great American (the “Pollution Policy”); (4) a primary property insurance policy (the “PPI Policy”) issued by Westchester Surplus Lines Insurance Company (“Westchester”); and (5) an excess property insurance policy issued by MSI, which provided coverage in excess of the PPI Policy (the “EPI Policy”). Only the Great American Pollution Policy and the MSI EPI Policy are at issue here.

Great American first underwrote the Pollution Policy in 2004 and renewed it annually through 2009. To obtain the renewal of the policy for 2009, Signal completed and submitted Great American’s standard “Vessel Pollution Liability Application” along with a “Schedule of Vessels,” which included the dry dock. To apply for the policy, Signal submitted its “2009–2010 Property Insurance Submission.” This document included a “Statement of Values” that described the dry dock’s value as $13.6 million and the 2009 Heller Report, but it did not include other information from experts suggesting that the dry dock was in need of repair and was valueless.

DISCUSSION

Admiralty Jurisdiction and the Doctrine of Uberrimae Fidei

Great American argues—and the district court concluded—that the Pollution Policy is void under the maritime doctrine of uberrimae fidei. For the doctrine to apply, Fireman’s Fund’s suit against Great American must be sustainable under the court’s admiralty jurisdiction.

Under federal law, a marine insurance contract is subject to the federal maritime doctrine of uberrimae fide, or utmost good faith.  Under the doctrine, the party seeking insurance is required to disclose all circumstances known to it which materially affect the risk. Thus, the insured is bound, although no inquiry be made, to disclose every fact within his knowledge that is material to the risk. The standard for disclosure is an objective one, that is, whether a reasonable person in the insured’s position would know that the particular fact is material.

In respect to the duty of disclosing all material facts, the obligation is one uberrimae fidei. The duty of communication, indeed, is independent of the intention, and is violated by the fact of concealment even where there is no design to deceive.

Therefore, the primary object of the Pollution Policy’s coverage of the dry dock was to insure against the risk of liability for pollutants emitted during Signal’s ship repair and maintenance operations there. Insurance policies protecting against such risks have long been considered marine in nature.

Signal Violated Its Duty of Utmost Good Faith by Failing To Disclose the Dry Dock’s Condition

Signal breached its duty to Great American and no genuine disputes of fact exist as to either the materiality of Signal’s non-disclosures or Great American’s reliance. Signal’s insurance broker submitted only Great American’s standard “Vessel Pollution Liability Application” along with a “Schedule of Vessels,” which listed the dry dock. It appears that the only information in those materials related to the dry dock’s condition was that it was built in 1945, that it was constructed from steel, and that its gross tonnage was less than 27,000 tons; neither Signal nor Fireman’s Fund has argued otherwise. Signal did not provide any surveys to Great American when it applied for coverage for the dry dock.

Notwithstanding the paucity of relevant information furnished by Signal to Great American, it is undisputed that by 2009 Signal had in its possession numerous surveys and reports concluding that the dry dock had substantially deteriorated and that necessary long-term repairs were not being made. At least one survey estimated that the dry dock’s value was “below zero.” Nevertheless, Signal did not disclose this information to Great American.

This undisclosed information was clearly material—that is, it “would have influenced the judgment of a reasonable and prudent underwriter.” If disclosed, this information would have raised significant concerns about the likelihood of pollutant emissions from the dry dock.

The underwriter testimony established that, in agreeing to underwrite the policy, she was acting on the understanding that Signal was complying with its duty of utmost good faith. She testified as follows: “If the insured had information that could materially affect our policy, it would be their obligation to furnish us with that information…. [F]or example, if you were to read a survey that said that you had a vessel that was about ready to collapse or something like that, that would be something that you should bring to the attention of your broker, who would then bring it to our attention.”

The appellate court concluded that Signal breached its duty of utmost good faith by failing to disclose information about the dry dock’s condition to Great American. Because this information was both material and relied upon, Great American is entitled to void the Pollution Policy.

Material Misrepresentation under Mississippi Common Law

If the applicant for insurance undertakes to make a positive statement of a fact, if it be material to the risk, such fact must be true. It is not sufficient that he believes it true, but it must be so in fact, or the policy will be avoided, provided, always, that the misstatement be about a material matter.

Because there is no genuine dispute that Signal induced MSI to underwrite the EPI Policy by materially misrepresenting the dry dock’s condition when it applied for coverage, the district court correctly held that MSI was entitled to void the EPI Policy under Mississippi law. Consequently, Fireman’s Fund may not succeed on its claim for equitable contribution against MSI that it was granted on summary judgment below, as the validity of the EPI policy is a prerequisite to such a claim.

Great American’s Pollution Policy is a marine insurance contract and that Great American was entitled to void the policy under the doctrine of uberrimae fidei due to Signal’s failure to disclose material information indicating that the dry dock was in a deteriorated condition and that recommended long-term repairs were not being made. MSI was entitled to void the EPI Policy under Mississippi law because Signal materially misrepresented the dry dock’s condition when it disclosed to MSI only reports reflecting positively on the dry dock, while failing to disclose numerous other reports indicating that the dry dock was in a dilapidated state and nearing the end of its useful life.

ZALMA OPINION

Although people applying for insurance believe they are only obligated to answer questions posed to them on an application, if they are applying for a marine insurance policy subject to the Admiralty jurisdiction of a federal court, the potential insured is obligated to advise the insurer of material facts even if not asked. Signal knew the dry dock was valueless and at a risk of sinking and did not disclose material facts to the insurer that deceived the insurer and allowed it to cause the policy to be void.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | 1 Comment

Intentional Acts Can’t Be Insured

No Fortuity – No Coverage

Insurance, by definition, insures only against contingent or unknown events. To obtain coverage for defense or indemnity an insured only needs to establish that the suit against the insured was fortuitous – accidental – unintentional acts.

In Mid-Century Insurance Company v. Windfall, Inc., Mettle, LLC D/B/A Mettle Strategic Marketing Solutions, Jim Mcgowan, Brooke Redpath, Tara Halls, Tia Metzger, And Megan Richter, United States District Court, D. Montana CV 15-146-M-DLC (05/23/2016) the USDC for the District of Montana was asked to provide coverage for defense and indemnity as a result of intentional acts. The District Court reviewed all of the defendants arguments in copious detail before reaching its decision.

BACKGROUND

This action presents a dispute among the parties regarding whether Mid-Century has a duty to defend the Respondents against litigation pending in state court. Lee Enterprises, owner of local newspaper The Missoulian, brought charges against Respondents in the underlying state proceeding, alleging that Respondents wrongfully used Lee Enterprises’ confidential and proprietary information to compete with Montana Marketing Group (“MMG”), a marketing and advertising agency that operates on behalf of The Missoulian. Mid-Century insures Windfall, Inc. (“Windfall”), which is named as one of the Respondents and which employs or employed McGowan, Richter, and Metzger. Mid-Century accepted the defense of Windfall, McGowan, Richter, and Metzger under a reservation of rights. Metzger has also secured independent counsel.

Five individuals and two business entities are named defendants in the underlying proceeding; the same seven individuals and entities are the Respondents in the present action. All of the individual Respondents worked for The Missoulian and had some connection to the newspaper’s advertising department. Each resigned from The Missoulian during the spring of 2015. In 2001, McGowan, formerly The Missoulian’s Sales Director, formed Windfall, an advertising and marketing agency in Missoula, and he worked there while also employed by The Missoulian. Additionally, McGowan, along with Halls and Redpath, owns Respondent Mettle, L.L.C. (“Mettle”), a business based in Missoula that develops marketing strategies for its clients.

ANALYSIS

Mid-Century argues that it is entitled to judgment as a matter of law because Windfall’s insurance policy does not provide coverage for the allegations against Respondents in the underlying state proceeding. Respondents agree that summary judgment is appropriate, but they argue that it should be granted in their favor, claiming that Mid-Century has a duty to cover their defense in the state court litigation.

COVERAGE

Coverage for Mettle, Halls, and Redpath

Mid-Century argues that Mettle, Halls, and Redpath are not insureds under the policy. Respondents have not addressed this claim in their brief, and justifiably so—Mid-Century correctly asserts that there is no grant of coverage to these Respondents. Insurance is a contract of personal indemnity so if not named as an insured or made an insured by definition there is no potential for coverage.

Coverage for Windfall & Mettle

Windfall is the named insured under the Mid-Century policy. Windfall’s Businessowners’ Liability insurance policy listed the following as insureds under the policy: Windfall itself; Windfall’s “executive officers and directors … , but only with respect to their duties as [Windfall’s] officers or directors”; Windfall’s stockholders, “but only with respect to their liability as stockholders”; and Windfall’s employees and managers, “but only for acts within the scope of their employment … or while performing duties related to the conduct of [Windfall’s] business.”

Mettle is a separate business entity from Windfall. It is not a partner, member, or shareholder of Windfall. Halls and Redpath are principals and owners of Mettle, and they have no established connection to Windfall. The policy does not apply to Halls, Redpath, or Mettle. Mid-Century, who did not insure them, owes no duty to defend them.

The Initial Grant of Coverage

 The parties dispute whether Mid-Century’s duty to defend was triggered by the filing of the complaint in the underlying matter. Metzger joins Respondents in arguing that the policy extends to the actions alleged in the state court proceeding. Argument on this issue proceeds along two lines: (1) whether there was “bodily injury” or “property damage” caused by an “occurrence,” and (2) whether there was a “personal or advertising injury.” The Court considers each in turn.

“Bodily Injury” or “Property Damage”

Mid-Century argues that there was no initial grant of coverage because Lee Enterprises did not allege either “bodily injury” or “property damage” in the underlying litigation. The Court agreed with Mid-Century. There is no coverage under a theory of “bodily injury” or “property damage.”

Here, there was neither “bodily injury” nor “property damage” because there can be no serious argument in favor of coverage under a theory of bodily injury, and Lee Enterprises has alleged damage only to intellectual and not to tangible property. Further, even had there been “property damage,” it would not have been caused by an “occurrence.” Under Montana law, there is no “occurrence” when the insured acts intentionally and “the consequences of those acts are objectively intended or expected from the standpoint of the insured ….” Employers Mut. Cas. Co. v. Fisher Builders, Inc. __ P.3d __, 2016 MT 91, ¶ 18 (Mont. 2016).

Lee Enterprises has not claimed that Respondents accidentally took and used confidential and proprietary information. Nor has it alleged that Respondents intentionally took its intellectual property but merely accidentally or negligently solicited its customers. If the allegations contained therein are true, the underlying complaint gives rise to only one possibility—that Respondents intended both their actions and the ensuing consequences.

There may be a factual dispute as to the wrongfulness of Respondents’ conduct; however, there can be no dispute that the same conduct was intentional. Regardless of the merits of Respondents’ defense before the state court, there are no facts suggesting that their conduct constituted an “occurrence” such that Mid-Century’s duty to defend was triggered.

“Personal and Advertising Injury”

Mid-Century also argues that there was no initial grant of coverage because Lee Enterprises did not allege “personal and advertising injury” in the state proceeding.

There is no statutory or standalone federal constitutional right to privacy. Thus, if Lee Enterprises had a “right of privacy,” it would have to exist under the common law. Under Montana law, a common law cause of action for invasion of privacy exists when there is a wrongful intrusion into one’s private activities in such a manner as to outrage or cause mental suffering, shame or humiliation to a person of ordinary sensibilities.

The common law right of privacy is limited to natural persons. Lee Enterprises has not alleged a violation of its right of privacy because it has no violable right of privacy. As a corporation, it cannot bring a claim limited to natural persons. It is incapable of mental suffering, shame or humiliation. The policy defines an “advertisement” as “a notice that is broadcast or published to the general public or specific market segment about your goods, products or services for the purpose of attracting customers or supporters.”

There was neither an “advertising idea” nor an “advertisement.” There was no initial grant of coverage.  Summary judgment for Mid-Century regarding coverage is appropriate.

DUTY TO DEFEND METZGER

The duty to defend arises when a complaint against an insured alleges facts, which if proven, would result in coverage. Mid-Century had no duty to defend Metzger at the time the underlying complaint was filed because the allegations in the complaint, if true, did not trigger coverage.

ZALMA OPINION

Here, the underlying suit alleged intentional acts that resulted in neither bodily injury, property damage, or advertising injury. Rather, it claimed that the defendants stole its intangible intellectual property to its damage. The loss claimed was not fortuitous. The loss claimed was not a risk insured against. The loss claimed was against some who were not insureds of the policy. The arguments by the defendant insureds were creative but non-availing.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Intentional Acts Can’t Be Insured

Bad Faith “Set Up” Fails

No Duty to Defend Breach of Contract

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

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

FACTS

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

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

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

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

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

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

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

THE EXCLUSION

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

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

A House is Also a Home

Where You Reside Is A Question of Fact

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

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on A House is Also a Home

Written Notice to State Required to Sue State

Strict Compliance With Statute Required to Sue State

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

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

ARGUMENT

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

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

FACTS

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Written Notice to State Required to Sue State

An Insurer Who Pays a Claim Negligently May Obtain Restitution

Don’t Look a Gift Horse in the Mouth

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

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on An Insurer Who Pays a Claim Negligently May Obtain Restitution

Requirements for Bad Faith in Alabama

Tort of Bad Faith Different from Wanton and Negligent Conduct

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

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

FACTS

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

DISCUSSION

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

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

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

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

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

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

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

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

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

ZALMA  OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Requirements for Bad Faith in Alabama

Negligent Entrustment of Auto Requires Ownership

Sell a Car & Eliminate Responsibility for its Operation

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

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

BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Negligent Entrustment of Auto Requires Ownership

Health Insurance & the U.S. Supreme Court

Why Government Should Not Require Insurance

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

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

FACTS

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

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

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

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

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

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

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

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

ZALMA  OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Health Insurance & the U.S. Supreme Court

Zalma’s Insurance Fraud Letter – May 15, 2016

N.Y. Speaker Guilty

Zalma’s Insurance Fraud Letter

May 15, 2016, Volume 20, No. 10  bz-9

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

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

The current issue of ZIFL reports on:

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

Zalma on Insurance

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – May 15, 2016

Affordable Care Act Not Affordable

Constitution Requires Congress to Appropriate Funds Before It Can Be Spent

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

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

FACTS

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

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

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

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

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

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

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

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

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

ANALYSIS

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

The Secretaries’ Textual Arguments

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

“Conspicuously absent” text

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

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

Post–ACA legislation

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

Unintended consequences

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

 

 

Posted in Zalma on Insurance | Comments Off on Affordable Care Act Not Affordable

Subrogation Right Sacrosanct

Anti-Subrogation Rule Misapplied

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

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Subrogation Right Sacrosanct

London Market Tradition Must Change

London Market System of Communication Waives Attorney Client Privilege

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

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

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

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

BACKGROUND

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

The London Insurance Market

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

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

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

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

Amtrak’s Motion to Compel

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

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

DISCUSSION

Attorney–Client Communications Distributed through London Brokers

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

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

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on London Market Tradition Must Change