Insurance Fraud Undeterred

Zalma’s Insurance Fraud Letter

August 1, 2015

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

The current issue of ZIFL reports on:

1.    10% OF Insurance Claims In the Mideast are Fraudulent
2.    Insurance Fraud – An Overview
3.    Running Over Victim in the Course of a Robbery Is Not an Accident
4.    Jury Trial Required for Violation of IFPA in New Jersey
5.    E-Books from Barry Zalma
6.    Suspected Arsonist’s Bad Faith Suit Fails
7.    A Report from the Insurance Fraud Bureau of Massachusetts

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

“INSURANCE FRAUD – AN OVERVIEW”

A Continuing Education Presentation

I have created for Proformative Academy a webinar called “Insurance Fraud – An Overview” that is available at  http://www.proformative.com/courses/insurance-fraud-prevention with a 10% discount for my friends and clients who sign up and enter the discount code: Zalma10.

Insurance Fraud is estimated to take between $80 and $300 billion a year from the property and casualty insurance industry, raising the prices each person pays for insurance by more than $300 a year. It explains to those attending what insurance fraud is, various methods by which insurance fraud is perpetrated, and the various weapons provided by statutory law, legal precedent and professional claims handling to work to reduce the amount stolen by fraud perpetrators. It explains the use of red flags or indicators of insurance fraud and the use of an insurance company Special Investigation Unit (SIU) to gather the evidence necessary to assist in the defeat of insurance fraud.

Continuing Education Credit is available for many, including Certified Fraud Examiners, with 1.5 CPE Credits, in Fraud Prevention and Deterrence.

I hope you find it interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    How to Lose A Judgment by Taking an Assignment – July 31, 2015
•    A Horse is a Horse, of Course – July 30, 2015
•    No Nonsense Application of Plain Meaning of Exclusion – July 29, 2015
•    How to Defeat an Arson for Profit Attempt – July 28, 2015
•    Crime Doesn’t Pay – July 27, 2015
•    Insurance & The Absolute Litigation Privilege – July 24, 2015
•    Why Insurance is Expensive – July 23, 2015
•    Can Murder Ever Be Accidental? – July 22, 2015
•    How to Lose Auto Coverage Without Trying – July 21, 2015
•    How to Obtain Coverage for Malicious Prosecution – July 20, 2015
•    How to Lose an Insurance Coverage Case – July 17, 2015
•    How to Plead a Consumer Fraud Case for Denial of a Claim – July 16, 2015
•    Is Breach of Contract Required for Bad Faith? – July 14, 2015
•    Why a Risk Manager in Louisiana Should be Licensed as an Agent – July 13, 2015
•    Should a Signed Rejection Of UM/UIM Cover Be Ignored? – July 12, 2015
•    Can Murder Be Accidental? – July 8, 2015
•    How Do You Set Aside an Appraisal Award? – July 7, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

NEW FROM THE AMERICAN BAR ASSOCIATION

Diminution in Value Damages

How to Determine the Proper Measure of Damage to Real and Personal Property

This book was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) and includes cases dealing with the use of diminution in value as a method of determining the amount of loss incurred by a plaintiff seeking indemnity for damage to real or personal property.

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired, Diminution In Value Damages assists the reader in answering the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions.

This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.

ISBN: 978-1-63425-295-8, Product Code: 5190524, 2015, 235 pages, 7 x 10, Paperback
Available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972

BARRY ZALMA

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

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

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud – An Overview

A Continuing Education Presentation for Insurance Professionals

I have created for Proformative Academy a webinar called “Insurance Fraud – An Overview” that is available at  http://www.proformative.com/courses/insurance-fraud-prevention with a 10% Discount for my friends and clients who sign up and enter the discount code: Zalma10.

Insurance Fraud is estimated to take between $80 and $300 billion a year from the property and casualty insurance industry, raising the prices each person pays for insurance by more than $300 a year. It explains to those attending what insurance fraud is, various methods by which insurance fraud is perpetrated, and the various weapons provided by statutory law, legal precedent and professional claims handling to work to reduce the amount stolen by fraud perpetrators. It explains the use of red flags or indicators of insurance fraud and the use of an insurance company Special Investigation Unit (SIU) to gather the evidence necessary to assist in the defeat of insurance fraud.

Continuing Education Credit is available for many, including Certified Fraud Examiners ,with 1.5 CPE Credits, in Fraud Prevention and Deterrence.

I hope you find it interesting and informative.

Posted in Zalma on Insurance | Leave a comment

How to Lose A Judgment by Taking an Assignment

Don’t Take Defendant’s Case Against His Insurer in Lieu of a Collectable Judgment

Greed often overrules common sense. When an insurer refuses to defend or indemnify its insured the plaintiff will take an agreed judgment against the defendant, then agree not to execute on the judgment in exchange for an assignment from the defendant of its right to sue the insurer. In so doing it takes a sure thing and exchanges it for a chance to collect from an insurer the bonus of punitive damages. If the defendant is financially able to pay a judgment the potential for punitive damages overcomes the desire to be indemnified.

In P&S LLC, v. National Union Fire Insurance Company of Pittsburgh, PA, Slip Copy, 2015 WL 4550322 (D.Colo., 2015) the District Court for the District of Colorado was faced with just such a situation where the insurer asked for declaratory judgment that an exclusion barred coverage.

FACTS

During the summer of 2007, the manager at P&S contacted Private Escapes Platinum LLC (“Private Escapes”) seeking membership in its luxury destination travel club. Mr. Richard Keith was the CEO of Private Escapes. On September 13, 2007, Private Escapes announced it would be merging with Ultimate Resorts LLC, to create a new entity called Ultimate Escapes Holdings, LLC (“Ultimate Escapes”).

Before the merger, P&S entered into a Membership Agreement with Private Escapes and  asserts that Mr. Keith induced it to enter into the agreement because he represented that P&S’s benefits under the Membership Agreement would be protected or grandfathered after the planned merger. Mr. Keith became Co-CEO of Ultimate Escapes.

After the merger, P&S was informed that it was now a member of Ultimate Escapes and that the terms of its Membership Agreement with Private Escapes would not be honored. Instead, P&S would be required to sign a new agreement with Ultimate Escapes in order to continue its travel club membership. Thereafter, P&S sought a refund of its membership deposit from Private Escapes.

Ultimately, on July 23, 2010, P&S entered into an agreement with Private Escapes and Ultimate Escapes in which Private Escapes and Ultimate Escapes agreed to pay P&S $135,000, in 18 installments, as “a partial refund of the Membership Fee” (the “2010 Settlement Agreement”). After Private Escapes and Ultimate Escapes failed to make the first settlement payment on August 1, 2010, P&S sent them notices of default. Then, on September 15, 2010, P&S filed a lawsuit against Private Escapes and Ultimate Escapes for breach of the 2010 Settlement Agreement. Directly thereafter, on September 20, 2010, Ultimate Escapes filed for Chapter 11 bankruptcy protection. As such, the lawsuit was stayed and eventually administratively closed.

Then, on May 20, 2011, P&S filed a complaint against Private Escapes and Richard Keith, as its CEO, in Denver County District Court (Case No. 11CV3742). In this underlying lawsuit, P&S alleged that Mr. Keith induced P&S to sign the Membership Agreement with Private Escapes by making misrepresentations about having grandfathered rights after the pending merger. In addition, P&S alleged that they failed to disclose Ultimate Escapes’ financial situation when negotiating and signing the 2010 Settlement Agreement.

Mr. Keith sought defense coverage from National Union under the Executive & Organization Liability Insurance Policy (the “Policy”) issued to Ultimate Escapes. National Union declined to provide Mr. Keith with a defense and denied coverage based on the Policy’s Specific Entity Exclusion – which provided that National Union “…shall not be liable for any Loss in connection with any Claim made against…[Private Escapes]…and/or any Executive or Employee thereof…” – via denial letter dated February 9, 2012.

On February 13, 2013, P&S settled the underlying lawsuit with Private Escapes, Mr. Keith, and Continental Casualty. Continental Casualty agreed to pay P&S $25,000. In addition, Mr. Keith also agreed to a stipulated judgment in P&S’s favor (in the amount of $450,000) and assigned his rights against National Union under the Policy to P&S.

P&S then filed this lawsuit (as Mr. Keith’s assignee) against National Union. In its Amended Complaint, P&S sought declaratory judgment, damages, and statutory damages with respect to benefits due, but unreasonably withheld by National Union under the Policy issued to Ultimate Escapes.

It allegedthat National Union owed coverage to Mr. Keith under the Policy for Executive & Organization liability coverage, but has refused to provide coverage.

COVERAGE EXCLUSION

National Union argued that the Policy does not provide coverage for P&S’s underlying claims pursuant to the “Specific Entity Exclusion” which excludes coverage for any loss in connection with any claim made against Private Escapes or its executives. National Union asserts that the Specific Entity Exclusion applies, as a matter of law, to bar coverage of the claims in P&S’s underlying lawsuit brought against Private Escapes and Richard Keith.

The court recognized that an insurance policy is a nothing more than a contract that should be interpreted consistently with the well-settled principles of contractual interpretation. As such, the words of the contract should be given their plain meaning according to common usage, and strained constructions should be avoided. Insurance contracts are not to be technically construed, but are to be construed as they would be understood by a person of ordinary intelligence.

To enforce an exclusion in a particular contract of insurance the insurer must establish that the exemption claimed applies in the particular case, and that the exclusions are not subject to any other reasonable interpretation. The insured has the burden to show that a claim is covered by the policy. Once met, the burden shifts to the insurer to show that a covered claim falls solely and entirely within a policy exclusion.

Endorsement #34 of the Policy contains the Specific Entity Exclusion, which provides that: “In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable for any Loss in connection with any Claim made against or brought by or on behalf of any entity(ies) listed below and/or any Executive or Employee thereof; or by any security holder of the Organization whether directly or derivatively, unless such Claim is instigated and continued totally independent of, or without the intervention of such entity(ies) and/or any Executive or Employee thereof…: Private Escapes Holdings, LLC (including any subsidiary or affiliate thereof).”

The court concluded that the Specific Entity Exclusion is not ambiguous. By its plain language the exclusion applies to any loss “in connection with” any claim against Private Escapes or its executives. Here, the underlying lawsuit is brought against Private Escapes and Mr. Keith in his capacity as a Private Escapes’ executive.

To the extent that the factual assertions within the complaint include an allegation that Mr. Keith wrongfully acted in the underlying situation as an Ultimate Escapes’ executive, it does not change the fact that the loss alleged was in connection with a claim against Private Escapes. As such, it is unambiguously applicable to bar coverage for the loss.

The court rejected P&S’s argument that an “exception to the exclusion” reinstates coverage in this case. P&S maintains that the Specific Entity Exclusion provides coverage for a claim connected with Private Escapes when it is “instigated and continued totally independent of” Private Escapes and its executives.

Accordingly, the court agreed with National Union that the loss sought from Mr. Keith’s actions were clearly a loss in connection with a lawsuit against Private Escapes. The exclusion is unambiguous and applies to the case.  The court found, therefore, that National Union has met its burden to prove that the Specific Entity Exclusion applied with regard to the the claim and National Union is entitled to summary judgment.

BAD FAITH CLAIMS

In addition, because the exclusion applies P&S’s claims seeking relief under common law and statutory bad faith are likewise foreclosed as a matter of law.

ZALMA OPINION

Insurance is, as the court cogently stated, is nothing more than a contract. When the terms of the contract are clear and unambiguous, it must be applied. In this case National Union knew, before it issued its policy, that there was a problem between the named insured and the entity known as Private Escapes so it specifically excluded any events related to that entity. With such a clear exclusion it is surprising that the plaintiffs were willing to take an assignment rather than try to collect from the defendant. The result proves that the decision to take the assignment was not wise.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

A Horse is a Horse, of Course

A Horse is Not “Mobile Equipment”

As Mr. Ed once said, cogently, “a horse is a horse, of course,” and it is nothing more. Although insurance terms and conditions can be interpreted to cover a multiple of sins, it cannot change the obvious.

FACTS

In the fall of 2006, a taxi insured by the petitioner was involved in a collision with a horse. The rider of the horse was seriously injured, and the petitioner paid him nearly $60,000 in no-fault benefits. The petitioner then sought reimbursement of the no-fault benefits that it had paid to the rider by filing a demand for mandatory arbitration against the respondent, American Bankers Insurance Company of Florida (hereinafter American Bankers), the carrier that provided commercial liability coverage to the stables where the horse was boarded. The arbitrator denied the petitioner’s claim, finding, in essence, that the petitioner could not recoup payment from American Bankers because American Bankers was not a motor vehicle insurer subject to the mandatory arbitration provisions of Insurance Law § 5105 and its implementing regulations.

The Supreme Court, Appellate Division, Second Department, New York, in  Fiduciary Ins. Co. v. American Bankers Ins. Co. of Florida, — N.Y.S.3d —-, 2015 WL 4546629 (N.Y.A.D. 2 Dept., 7/29/15), 2015 N.Y. Slip Op. 06343 was called upon to resolve the dispute.

On October 8, 2006, Jared Johnson was riding a horse named Romeo on a path alongside of North Conduit Avenue in Queens when Romeo suddenly bolted into the roadway, and collided with a taxi owned and operated by Parjit Singh. Johnson was thrown from the horse, and suffered serious injuries, including skull fractures and a broken leg. On the date of the accident, Singh’s taxi was insured by the petitioner, Fiduciary Insurance Company. Johnson filed a claim with the petitioner seeking to recover first-party benefits, more commonly known as “no-fault” benefits, under Insurance Law § 5103. The petitioner ultimately paid Johnson a total of $59,906.97 in no-fault benefits.

Romeo was owned by Julius Stanton, who had no insurance coverage in effect for the horse on the date of the accident. Stanton boarded Romeo at Cedar Lane Stables (Cedar Lane), a facility owned by the City of New York, and licensed to the Federation of Black Cowboys, Inc. (hereinafter the Cowboys). Cedar Lane and the Cowboys (the insureds) were insured by American Bankers under a commercial liability policy that provided no-fault coverage only for accidents arising from the use of “mobile equipment,” a category that includes various types of machinery not generally used for travel on public roads.

Following the accident, Johnson commenced an action to recover damages for personal injuries against several parties including the City, the Cowboys, and Singh. In an order dated November 30, 2009, the Supreme Court awarded summary judgment to the City, the Cowboys, and Singh dismissing the complaint insofar as asserted against them, based upon the doctrine of primary assumption of risk.

On October 19, 2012, nearly two years after Johnson’s action was dismissed against the insureds, the petitioner sought reimbursement of the no-fault benefits that it had paid him by filing a demand for mandatory arbitration against American Bankers pursuant to Insurance Law § 5105. That statute allows an insurer that has paid no-fault benefits to obtain mandatory arbitration to recoup its loss from the insurer of the party actually at fault for the accident.  In its arbitration demand, the petitioner asserted that its insured, Singh, was not at fault for the accident because he had done nothing to cause the horse to “attack” his taxi, and that the insureds had negligently created “an extremely hazardous situation.”

In an award dated December 12, 2012, the arbitrator ruled that the petitioner could not obtain reimbursement from American Bankers because it had “failed to provide substantiation that [American Bankers] is a motor vehicle insurer that could be held liable under Section 5105 of Insurance Law.” The arbitrator added that, therefore, “[t]he proper forum would have been litigation.”

In the order appealed from, the Supreme Court (trial court) denied the petition to vacate the arbitration award, granted the cross petition, and confirmed the award. The trial court rejected the petitioner’s argument that the arbitrator had improperly raised and disposed of an affirmative defense by determining that American Bankers was not a motor vehicle insurer liable for the payment of no-fault benefits.

The court concluded that the arbitrator had the authority to rule on the issue of whether the controversy was subject to mandatory arbitration under Insurance Law § 5102 and its implementing regulations.

ANALYSIS

Since the petitioner sought arbitration pursuant to the mandatory arbitration provision of Insurance Law § 5105, the award may be considered to be one arising from a statutory obligation to arbitrate, notwithstanding the arbitrator’s ultimate determination that American Bankers was not subject to arbitration. Thus, we treat the award as one rendered after compulsory arbitration.  Keeping the limited scope of judicial review in mind, and upon an application of the relevant law, we conclude that the Supreme Court properly determined that the arbitrator’s award was supported by a “reasonable hypothesis” and was not arbitrary and capricious.

At issue are certain provisions of the Comprehensive Automobile Insurance Reparations commonly known as the No–Fault Law. Pursuant to the No–Fault Law, every automobile owner must carry automobile insurance covering “basic economic loss” resulting from the use or operation of the vehicle. The No–Fault Law is “aimed at ensuring ‘prompt compensation for losses incurred by accident victims without regard to fault or negligence.’”.

As relevant to this appeal, in certain limited circumstances an insurance carrier that has paid first-party no-fault benefits to an accident victim is afforded the remedy of mandatory inter-company arbitration to recoup those benefits, through a “loss transfer,” from the insurer of the party at fault for the accident.

Insurance Law § 5015 serves to mitigate the effect of placing the entire burden “of loss on the first-party insurer, even where its insured was not at fault” and allows insurers to recover from each other the first-party no-fault benefits paid to their insureds, allocated on the basis of their relative fault. Since, generally, where a vehicle for hire is involved in an underlying accident, mandatory arbitration is the sole remedy.

Not all insurance carriers that insure those actually involved in an accident are subject to the mandatory arbitration provisions.

Here, the American Bankers’ policy did not provide no-fault insurance coverage for the type of accident underlying this dispute. Moreover, American Bankers did not insure a person, vehicle, or animal involved in the underlying accident, but only the stables at which the animal was boarded. Accordingly, American Bankers cannot be deemed to be an “insurer” as that term is defined by Insurance Law article 51 and the pertinent regulations because the accident did not involve mobile equipment owned by the insureds, but, rather, a horse that the insureds merely boarded at their stables.

New York’s No–Fault Law would not preclude American Bankers’ insureds from being held liable to pay damages in an action at law. Since American Bankers did not meet the definition of insurer or self-insurer under the No–Fault Law and the regulations promulgated thereunder the determination of the arbitrator that the claims against it were not subject to compulsory arbitration was supported by a reasonable hypothesis.

Accordingly, the Supreme Court properly denied the petition to vacate the arbitrator’s award, and properly granted the cross petition to confirm the award.

ZALMA OPINION

No-fault insurance is a strange construct that makes sure that the injured person gets paid for his or her injuries. It also allows the insurer of a not at fault person to recover what it pays from the insurer of the at fault person. In this case the at fault entity was a horse that attacked a taxi. Neither the horse nor its owner were insured. The place where it slept was sued and it did not insure the horse and although the Petitioner tried, classifying a horse as “mobile equipment” was a stretch the court was properly not willing to take.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

No Nonsense Application of Plain Meaning of Exclusion

Reasonable Expectations Can’t Be Used to Change an Unambiguous Policy Exclusion

Everyone wants to live peacefully and happily in their homes. When a neighboring business causes fumes to travel to your property and make you live with noxious odors the chance to live peacefully and happily is lost. Litigation becomes certain and insurance coverage disputes arise.

In Brouse v. Nationwide Agribusiness Ins. Co., Not Reported in N.W.2d, 2015 WL 4507996 (Minn.App., 7/27/15) an insurer refused to defend or indemnify its insured because of the existence of an absolute pollution exclusion. The trial court agreed and the case was appealed to the Minnesota Court of Appeal

FACTS

In 2005, a group of investors operating as The Dairy Dozen–Thief River Falls, LLP purchased Excel Dairy, a dairy operation. The Minnesota Pollution Control Agency (MPCA) then received an expansion request from Excel and authorized the construction of an additional barn and two additional manure basins in March 2007. Unfortunately, as the district court found, “[t]he expansion did not go well,” and Excel’s neighbors complained of illnesses related to Excel’s hydrogen-sulfide emissions. Eventually, Excel faced civil and administrative action by the MPCA and criminal charges by Marshall County, as well as other actions by the Minnesota Department of Health and the United States Environmental Protection Agency. In 2010, the Minnesota Court of Appeal affirmed the MPCA’s revocation of Excel’s permit.

Appellants, who are Excel’s neighbors, started this lawsuit in June 2008 against Dairy Dozen, alleging that “invasive, offensive, and noxious odors” were interfering with the enjoyment of their properties. Dairy Dozen filed for bankruptcy in April 2010. As part of the bankruptcy proceeding, the bankruptcy court identified respondents Nationwide Agribusiness Insurance Company and Farmland Mutual Insurance Company as Dairy Dozen’s insurers. Dairy Dozen then agreed to assign its rights in its insurance policies to appellants, permitting appellants to sue respondents on its behalf. In return, appellants agreed not to “levy execution or garnishment or collection” against Dairy Dozen.

Appellants sought a declaratory judgment that respondents had a duty under Dairy Dozen’s insurance policies to pay appellants’ damages. The insurers moved for summary judgment, arguing that the absolute-pollution exclusions in Dairy Dozen’s insurance policies precluded insurance coverage for appellants’ claims.

THE POLICIES

Dairy Dozen’s 2005–2006 insurance policy excludes coverage for “[b]odily injury or property damage which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, release or escape of pollutants at any time.” Under this policy, “[p]ollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

Similarly, Dairy Dozen’s 2006–2007 insurance policy excludes pollution.

ANALYSIS

A motion for summary judgment shall be granted 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. The court must view the evidence in the light most favorable to the party against whom summary judgment was granted.

Interpretation of an insurance policy, and whether a policy provides coverage in a particular situation, are questions of law. A court must construe an insurance policy as a whole and must give unambiguous language its plain and ordinary meaning. But when language in an insurance contract is ambiguous, such that it is reasonably subject to more than one interpretation, the court will construe it in favor of the insured.  Although the insured bears the burden of proof to establish coverage, the insurer bears the burden to show that an exclusion applies. If the insurer meets its burden, the burden of proof shifts back to the insured because the exception to the exclusion ‘restores’ coverage for which the insured bears the burden of proof.

The appellate court concluded that the exclusion provisions are absolute-pollution exclusions. Absolute-pollution exclusions “eliminated” an exception for “sudden and accidental” pollution discharge found in earlier qualified pollution exclusions. Although the majority of jurisdictions limit these exclusions “to situations involving traditional environmental pollution,” Minnesota follows the minority of jurisdictions in applying the exclusions literally and finding the terms clear, unambiguous, and not limited to traditional environmental pollution. Minnesota applies a non-technical, plain-meaning approach to interpreting pollution exclusions.

Applying Minnesota’s “non-technical, plain-meaning approach,” the absolute pollution exclusions here are not ambiguous. Appellants fail to identify any caselaw (and we can find none) in which a Minnesota court has found an absolute-pollution exclusion ambiguous. Instead, appellants attempt to rely upon extrinsic evidence regarding the provisions’ meanings.

Appellants next argue that the district court erred by failing to apply the reasonable-expectations doctrine. The reasonable-expectations doctrine  protects the objectively reasonable expectations of the insured even if close study of the insurance policy would negate those expectations. Because the pollution exclusion was plainly designated as an exclusion and located in the exclusions section of the policy the reasonable-expectations doctrine did not apply.

The pollution exclusions at issue here are located in the exclusions section of the policies and are “plainly designated” as exclusions. Any insured, therefore, would reasonably expect the clause to limit coverage.  The reasonable expectation test is not a license to ignore the pollution exclusion in this case nor to rewrite the exclusion solely to conform to a result that the insured might prefer.

Appellants argue in the alternative that, even if the absolute-pollution exclusions are unambiguous, there are genuine issues of material fact as to whether the odors at issue here fall within that exclusion. Dairy Dozen’s insurance policies excluded coverage for pollutant “fumes. Based on this plain-meaning definition of “fume,” we determined that the allegation regarding “noxious and offensive odors” was “plainly covered by the insurance policy’s pollution exclusion.”

Because appellants’ allegations fall within the plain meaning of the unambiguous absolute-pollution exclusions and no genuine issues of material fact remain, the district court did not err by granting summary judgment to respondents.

ZALMA OPINION

Although the Minnesota court admits it is in the minority it should, in my opinion, be in the majority. Insurance contracts, like the policies in this case, should be read to mean what they say in their plain meaning as understood by the lay person. The exclusions are unambiguous and the allegations of the underlying suit fell within the plain meaning of the absolute pollution exclusion. To provide coverage the court would have to exceed its authority and rewrite the policy. In Minnesota the court refused to make coverage where none existed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Defeat an Arson for Profit Attempt

Suspected Arsonist’s Bad Faith Suit Fails

Arson-for-profit is the most dangerous of all methods of attempting insurance fraud. When an insurer has sufficient evidence to suspect an arson for profit attempt and denies the claim it will expect that the insured will sue the insurer for fraud and bad faith. The best way to defeat such an action is one piece at a time by bringing motions for partial summary judgment removing the expensive part of the suit leaving the insured with a breach of contract action.

Allstate tried that method in Tran v. Allstate Ins. Co., Slip Copy, 2015 WL 4488062 (S.D.Ala., 7/23/2015) after collecting sufficient evidence that led it to believe the insured attempted a fraudulent claim and arson-for profit.

Factual Background

On August 18, 2012, the VIP Nail Salon (“the salon”), located in Daphne, Alabama was intentionally set ablaze and sustained damages. Plaintiff Hau the Tran (“Tran”) owned the salon. At the time of the fire, Tran’s Toyota Avalon (“the vehicle”) was parked behind the salon. The vehicle was also set on fire, resulting in damages.

Tran had insurance coverage on both the salon and the vehicle through Defendant Allstate Insurance Company (“Allstate”). After the fires, Tran made insurance claims on the salon and vehicle. The parties do not dispute that Tran was covered under Allstate policies at the time of the losses, the amount of the policies, the terms of the policies, or that Tran made a timely claim under the policies.

The state fire marshal investigated the fires and concluded that they had been intentionally set. During the course of the investigation, Allstate determined that Tran had been having trouble with the business and had recently significantly changed her insurance coverage. Additionally, Tran had rooms reserved at the Grand Casino in Biloxi, Mississippi in the days prior to the fires. Matches from the Grand Casino were recovered at the scene of the fires. Fire investigator Gary Jones determined that gasoline had been used as an accelerant and there were no signs of forced entry at the salon, indicating that the person who set the fires would require access to the salon via keys.

Tran’s salon insurance policy stated that Allstate would not cover intentional or criminal acts of or at the direction of any persons insured and that the policy is void if the insured intentionally conceal or misrepresent any material facts or circumstances, before or after loss.

As a result of its investigation, Allstate concluded that Tran had been involved in setting or causing the fires to be set. Allstate also determined that Tran had made material misrepresentations during the investigation regarding her whereabouts around the time of the fires, her financial status, and the value and contents lost in the fire. As a result, Allstate denied Tran’s insurance claims on both the salon and the vehicle.

Tran sued Allstate alleging breach of contract, fraudulent suppression, fraud, and bad faith. Allstate removed this action to the U.S. District Court for the Southern District of Alabama on September 10, 2014.

ANALYSIS

Summary Judgment

Allstate has moved for partial summary judgment on Counts Two and Four of the complaint. Count Two alleges fraud and suppression and Count Four alleges bad faith.

Count Two (fraud and suppression)

In Alabama, “[m]isrepresentations of a material fact made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party, or if made by mistake and innocently and acted on by the opposite party, constitute legal fraud.” A claim of fraudulent misrepresentation comprises the following elements: “(1) a false representation (2) concerning a material fact (3) relied upon by the plaintiff (4) who was damaged as a proximate result.” Fisher v. Comer Plantation, 772 So.2d 455, 463 (Ala.2000) (quoting Baker v. Bennett, 603 So.2d 928, 935 (Ala.1992)).

Viewing the facts in the light most favorable to Tran, Allstate represented to Tran that she would be paid on her vehicle policy for the damages to the vehicle sustained as a result of the fire. At depositiion, Ms. Tran testified that even though the adjuster told her they were going to pay her $19,000 she did nothing based on that statement.

Tran’s own testimony specifically negates the reliance element of both a fraudulent suppression and a fraudulent misrepresentation claim, as she denies that she was induced to take any action as a result of Allstate’s representations concerning payment for the vehicle. Moreover, Tran failed to present any evidence of damage. Accordingly, these claims must fail and Allstate’s motion for summary judgment as to Tran’s fraudulent suppression/misrepresentation claim was granted.

Fraud

When evaluating a fraud claim regarding the non-payment of an insurance claim, the Alabama Supreme Court has held: “To recover on a fraud claim, the plaintiff must show that the defendant (1) made a misrepresentation (2) concerning a material fact (3) that the plaintiff relied upon, and that (4) the plaintiff suffered damage that proximately resulted from that misrepresentation … Additionally, when the alleged misrepresentation concerns a future act, as this one does, the plaintiff has two additional things to prove: (1) that at the time the misrepresentation was made the offending party intended not to perform the promised act and (2) an intent to deceive.” Pugh v. S. Life & Health Ins. Co., 544 So.2d 143, 144 (Ala.1988), holding that a plaintiff alleging fraud in connection with refusal to pay an insurance claim constitutes fraud concerning the performance of a future act.
Plaintiff fails to produce sufficient evidence of reliance or damages. Accordingly, Allstate’s motion for summary judgment as to Tran’s fraud claim WAs granted.

Count Four (bad faith)

Count Four alleges that Allstate acted in bad faith when it refused to pay Tran’s claim. Under Alabama law, there is one tort of bad faith refusal to pay a claim, but there are two methods of proof: failure to pay and failure to investigate.  To defeat a bad faith claim, the defendant does not have to show that its reason for denial was correct, only that it was arguable. Ordinarily, if the evidence produced by either side creates a fact issue with regard to the validity of the insurance claim and, thus, the legitimacy of the denial thereof, the bad faith tort claim must fail and should not be submitted to the jury.

What was known to Allstate at the time of its denial of the claim was: 1.) The fire was intentionally set and gasoline was employed as an accelerant;  2.) That Ms. Tran had not been present for a period of time prior to the fire; 3.) That neighboring tenants stated that Tran’s business appeared to be closed for several weeks before the fire;  4.) One tenant said that “Ms. Tran had told her that the business was not doing very well and she wanted to relocate to somewhere else;” 5.) Tran had rooms reserved at the Grand Casino during the week leading up to the fire and matches from the Grand Casino were found at the scene of the fire; 6.) There was no forced entry at the salon; 7.) Prior to the fire, Tran increased her insurance coverage from $15,000.000 to $100,000.00, and then decreased it to $75,000.000; and 8.) Tran was a guest at the IP Casino Resort and Spa in Biloxi from August 17–19, 2012.

The issue is whether the conclusion reached from the known facts is debatable. No reasonable person could say that the conclusion reached by Allstate, that plaintiff directed or participated in the arson, is not a debatable issue of fact. “Alabama law is clear: … regardless of the imperfections of [the insurer’s] investigation, the existence of a debatable reason for denying the claim at the time the claim was denied defeats a bad faith failure to pay the claim.” State Farm Fire & Cas. Co. v. Brechbill, 144 So.3d 248, 259 (Ala.2013),

Accordingly, Allstate’s motion for summary judgment as to Count Four (bad faith) was granted.

ZALMA OPINION

Ms. Tran showed a great deal of “chutzpah” by bringing suit against Allstate for fraud and bad faith after Allstate established eight major red flags of fraud and evidence that would establish that she caused an intentional fire to occur at her salon and car. Although red flags are merely indicators of fraud, the eight established to the trial court are damning. All that remains of her suit is breach of contract which she will lose, either by another motion for summary judgment or at trial, and any criminal proceedings the state of Alabama decides to bring.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Crime Doesn’t Pay

Running Over Victim In the Course of a Robbery Is not an Accident

Insurance, as I have said often, only insures against fortuitous events. If the event is either contingent or unknown it can be insured against.

In Smith v. Patton, Slip Copy, 2015 WL 4469466 (Wis.App., July 2015) Badger Mutual Insurance Company appealed from a nonfinal order denying its motion for summary judgment. The dispositive issue presented to the appellate court was whether its automobile liability policy provides coverage for an individual who injured someone with a car during a premeditated robbery.

FACTS

In February 2011, Deandre T. Patton, then age sixteen, arranged via Craigslist to purchase a Samsung tablet from Carmen Smith. In fact, however, Patton intended to-and did-steal the tablet by having Smith meet him and an accomplice at Patton’s car in a store parking lot and then driving away without paying for the item.

Unfortunately for all involved, Smith leaned into the car while Patton’s accomplice examined the tablet and lunged further into it as Patton began to accelerate away. Patton’s accomplice pushed or punched Smith to force him out of the car. The car then “fishtailed” on the icy surface of the parking lot, running over and seriously injuring Smith.

Patton and his accomplice were convicted on criminal charges related to the incident. Smith subsequently sued Patton and his automobile insurer, Badger Mutual, for his injuries. Badger Mutual disputed coverage and moved for summary judgment on the issue. The circuit court denied the motion. Badger Mutual appealed.

ANALYSIS

Summary judgment is proper when there are no genuine issues of material fact and one party is entitled to judgment as a matter of law. Additionally, the interpretation of an insurance policy is a question of law.

On appeal, Badger Mutual contends that the circuit court erred in denying its motion for summary judgment. Specifically, it argues that its policy provides no coverage because the injury causing event was not an “auto accident.”

Badger Mutual’s policy provides that it “will pay damages for ‘bodily injury’ or ‘property damage’ for which any ‘insured’ becomes legally responsible because of an auto accident.” As “auto accident” is not defined in the policy, Badger Mutual urges us to look to case law for guidance.

One case Badger Mutual cites in support of its argument is Schinner v. Gundrum, 2013 WI 71, 349 Wis.2d 529, 833 N.W.2d 685. In Schinner, West Bend Mutual Insurance Company’s insured, Michael Gundrum, hosted an underage drinking party.  One of Gundrum’s guests, Matthew Cecil, assaulted and seriously injured another guest.  Gundrum knew that Cecil had a tendency to become belligerent when he was intoxicated, but he permitted Cecil to drink anyway. The injured guest sued Gundrum and West Bend to recover damages for his injuries. West Bend disputed coverage on the ground that Gundrum’s actions as a party host were intentional, and thus, there was no “occurrence” or “accident” under its homeowner’s policy.

The Wisconsin Supreme Court accepted review of the case and agreed with West Bend. The court determined that there was no “occurrence” or “accident” under the homeowner’s policy because Gundrum intended to host an illegal underage drinking party and intended to provide alcohol to a guest known to become belligerent when intoxicated, creating a direct risk of harm resulting in bodily injury even though injury was not intended. Finding an occurrence and coverage would allow recovery for intentional and illegal actions. We would be sending the wrong message about underage drinking parties, implying that whatever tragic consequences might occur, insurance companies will be there to foot the bill.

Insurance contracts are construed from the standpoint of what a reasonable person in the position of the insured would believe the contract to mean.  Although Schinner involved a homeowner’s policy, we find its reasoning applicable here. By planning and carrying out a robbery facilitated by the use of a car on icy pavement, Patton created a direct risk of harm even though injury was not intended. Indeed, Patton admitted as much during a deposition.   \

The public policy considerations in Schinner are also applicable to this case. Finding insurance coverage for Patton’s actions would relieve him of the financial consequences of purposefully using his car to facilitate a robbery. No reasonable insured would expect automobile liability coverage for bodily injury resulting from the purposeful use of a car to rob someone.

ZALMA OPINION

The appellate court found, without difficulty, the obvious. Criminal conduct, and any injuries resulting from it, cannot be accidental. A criminal act, like a robbery using an automobile, that results in injury to the victim of the robbery, is sufficient to bar coverage. If not the criminal will profit from his crime a result that no state’s public policy should allow.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insurance & The Absolute Litigation Privilege

Lawyers Are Obligated To Vigorously Defend Their Clients

No one likes to lose a lawsuit. Unable to accept that the case they brought was not viable or their own lawyers were incompetent, the losers strike out at whoever they can strike at, usually, the lawyers for their opponents. Lawyers are required, by their oath, to vigorously act for their client and are protected, usually, by the litigation privilege from claims brought against them by the losers.

BACKGROUND

In O’Callaghan v. Satherlie, — N.E.3d —-, 2015 IL App (1st) 142152, 2015 WL 4123629 (Ill.App. 1 Dist., 07/08/2015) the O’Callaghan’s sued the lawyers who successfully represented their opponents only to lose again in the trial court. They appealed to the Illinois Court of Appeal.

The O’Callaghan’s, Condominium owners, who previously brought action against condominium association for allegedly causing black mold to infiltrate their condominium,sued the attorney and law firm who represented the condominium association for intentional infliction of emotional distress and strict liability for ultrahazardous activity. The Circuit Court, Cook County, granted attorney and firm’s motion to dismiss based on absolute attorney litigation privilege.

OPINION

The trial court dismissed the suit filed by plaintiffs Joseph Michael O’Callaghan and Suzanne T. O’Callaghan (the O’Callaghans) against defendants Jacqueline M. Satherlie and her law firm, Kopka, Pinkus & Dolin, P.C. (Kopka). The O’Callaghans essentially alleged that Satherlie and Kopka, who had represented the O’Callaghans’ adversaries in underlying litigation regarding toxic black mold that had infiltrated the O’Callaghans’ property, had committed intentional infliction of severe emotional distress and were otherwise strictly liable for ultrahazardous activity, specifically, the remediation of toxic black mold.

The Present Action

The O’Callaghans sued Satherlie and Kopka, alleging intentional infliction of severe emotional distress and strict liability for ultrahazardous activity, and seeking punitive damage. The complaint alleged that in the underlying action, Satherlie failed to disclose an expert’s recommendations for remediating the mold in 2007, a report not discovered by the O’Callaghans until some unspecified time later. The complaint also alleged that in light of the report, Satherlie and Kopka knew that the defendants in the underlying action had no meritorious defense but nonetheless contrived a defense that the O’Callaghans had caused the toxic mold to form due to the unapproved modification of their condominium.

In addition,  Satherlie and Kopka, in bad faith, unnecessarily prolonged the underlying action based on a nonmeritorious defense, filed baseless motions and discovery, refused to produce discovery until ordered to do so, contested the O’Callaghans’ meritorious motions and concealed documents.  The O’Callaghans alleged a parade of horribles that they painted on the lawyers.

Satherlie and Kopka  moved to dismiss the complaint. The motion argued that the O’Callaghans’ claims were barred by an attorney’s absolute litigation privilege, res judicata, and a policy against claim-splitting.

The trial, deciding in favor of the lawyers, stated: “The reason I’m granting the [motion] and dismissing it with prejudice and not giving you a chance to amend it or replead it is I don’t see any way in this world that you can plead valid causes of action against your opponents in an underlying suit for things like intentional infliction of emotional distress. There’s no duty here. There is also a public policy against this kind of suit. Litigation about litigation, you know? You had your litigation. You either won or lost, and I’m assuming you lost, because this is [sic ] your response to losing is bring this. So I could be wrong, that’s what the appellate court is for…. But this is one of the strangest—and I think that’s kind to put it that way, strangest lawsuits I’ve ever seen, okay?” (Emphasis added)

ANALYSIS

The motion to dismiss was appropriately filed where the defendant did not challenge the complaint’s failure to plead an element of the claims but raised a public policy argument based on the face of the pleadings, the motion fell within the confluence various statutes. The court can take judicial notice of the underlying action filed by the O’Callaghans. This is particularly appropriate given that the complaint relies on that proceeding. As a result, Satherlie’s and Kopka’s contention that the complaint’s allegations are improperly based on those attorneys’ roles in the prior proceeding do not require consideration of any matter outside the scope of the statute and judicial notice was not at issue. Because the absolute attorney litigation privilege appears on the face of the complaint, the motion was appropriately filed.

Absolute Attorney Litigation Privilege

Illinois’ absolute attorney litigation privilege is generally based on section 586 of the Restatement (Second) of Torts, which provides: “An attorney at law is absolutely privileged to publish defamatory matter concerning another in communications preliminary to a proposed judicial proceeding, or in the institution of, or during the course and as part of, a judicial proceeding in which he participates as counsel, if it has some relation to the proceeding.” Restatement (Second) of Torts § 586 (1977).

This privilege is intended to provide attorneys with “the utmost freedom in their efforts to secure justice for their clients.” Kurczaba v. Pollock, 318 Ill.App.3d 686, 701–02, 252 Ill.Dec. 175, 742 N.E.2d 425 (2000). This privilege also furthers an attorney’s need to fully and fearlessly communicate with his client.

In determining whether the privilege should apply,the Court of Appeal also considered whether a limitation on the privilege’s application would frustrate an attorney’s ability to settle or resolve cases without resorting to expensive litigation, as many disputes are best resolved out of court.  In light of these policies, an attorney’s motives are irrelevant. The privilege is intended to promote zealous advocacy and does not apply where there are no safeguards against abuse of the privilege.

Based on the restatement’s specific reference to defamation and communications, the absolute attorney privilege has historically been applied to attorneys’ communications. The privilege applies to communications made before, during  and after litigation. In addition, the privilege applies to out-of-court communications between an attorney and his client regarding pending litigation as well as out-of-court communications between the litigants’ attorneys.

Limiting the privilege to communications, as opposed to conduct, would undermine the policies behind the privilege. Conversely, the pertinency requirement prevents an attorney from shielding unrelated misconduct from liability. Instead, parties should attempt to redress injuries from misconduct in judicial proceedings in the same litigation. Were it otherwise, litigation would never end. Moreover, it is improper for a trial court to review prior litigation that occurred before a different judge.

In the underlying proceeding, Satherlie and Kopka defended their clients against the O’Callaghans.  Motives and diligence before taking the challenged actions are irrelevant for purposes of the litigation privilege.

Even assuming that Satherlie and Kopka were motivated by economic benefit, that motivation is not mutually exclusive with serving their clients. Each of the alleged acts challenged can fairly be said to be in furtherance of the Association’s interest, i.e., limiting damages, regardless of whether those acts were entirely proper. Where misconduct has occurred in a given proceeding, an injured party may generally seek recourse in that particular proceeding, unlike the method the O’Callaghans have pursued here.

CONCLUSION

Here, the trial court properly dismissed the O’Callaghans’ complaint as the absolute attorney litigation privilege barred their claims.

ZALMA OPINION

Another case where, without even mentioning the word insurance, insurers were compelled to expend enormous amounts of money defending, first, the homeowners’ association and then defending the lawyers who insurers paid to defend the association. The O’Callaghans, and their lawyers, simply refused to accept the fact that they lost their suit against the condominium association and tried to sue the lawyers that beat them. They, rightfully, lost twice. The insurers who had to pay to defeat them also lost and should consider, along with the lawyers they represented, a suit for malicious prosecution.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Why Insurance is Expensive

Statutes to Protect Consumers Not Intended to Allow Insureds to Profit

States, like Pennsylvania, have enacted statutes to protect consumers from insurers who cancel insurance without proper reason and after a policy has been in effect for more than 60 days. These statutes are intended to protect the consumer not give an insurance consumer the right to bludgeon an insurer into providing coverage for a risk of loss it is unwilling to take and pay damages to the insured. In Tighe v. Consedine, — A.3d —-, 2015 WL 4425815 (Pa.Cmwlth., 7/21/2015) a Pennsylvania court was asked to reverse the decision of the Insurance Commissioner that the insurer’s cancellation was proper.

FACTS

Matthew A. Tighe and Laura M. Tighe (the Tighes) sought review of an order of Michael F. Consedine, Insurance Commissioner of the Commonwealth of Pennsylvania (Commissioner) affirming the appropriateness of the cancellation of the Tighes’ homeowners insurance.

The facts, as found by the Commissioner indicate that the Tighes were dissatisfied with their prior homeowners insurance company. The Tighes asked Nathan Stein, an agent of Burns and Burns Agency, an independent insurance agency, to provide quotes for homeowners insurance from other insurance companies. Mr. Stein went to the Tighes’ home and took photographs of the home. The home has a deck that is approximately fourteen feet above ground level at some points. After observing this, Mr. Stein contacted Mr. Tighe and informed him that the deck “was going to be an issue” and that the Tighes were “going to have to put up a railing.” Mr. Stein also informed Mr. Tighe that an insurance company inspector would visit the property for the purpose of evaluating insurance coverage. Mr. Tighe responded to Mr. Stein’s statements by relating an incident involving the deck when Mr. Tighe picked up a running toddler, because he was afraid that she might fall off the deck. Mr. Tighe also stated that he planned to install a railing.

Mr. Stein proceeded to cause a policy to be ordered from Donegal, which the Tighes accepted. Burns and Burns then submitted the insurance application to Donegal, which included a notation that Burns and Burns was sending or emailing photographs of the property to the underwriter. When Donegal received the application, it was unaware of the condition of the deck and issued a policy. The policy became effective on June 19, 2013.

In July 2013, Donegal’s inspector, Patricia Dombroski, performed an inspection of the home and reported, with a photograph of the deck and her observation regarding the height of the deck. Donegal’s underwriter then determined that the condition of the deck without a railing constituted a hazard. On August 13, 2013—approximately fifty-five days after the policy was issued—Donegal sent an email to Burns and Burns, indicating that the agency recommend to the Tighes that they install a railing by September 13, 2013, in order to avoid cancellation of the policy. The Tighes requested an extension of time to install the railing, and Donegal extended the deadline to October 13, 2013. On October 14, 2013, Donegal issued the cancellation notice, noting the Tighes’ failure to comply with Donegal’s demand for the Tighes to install the railing. Donegal determined that “[t]here is a substantial increase in hazards insured against by reason of willful or negligent acts or omissions by the insured.”

The Departments consumer services investigator issued a letter to the Tighes, concluding that Donegal satisfied the requirements of what is referred to as “Act 205,” the Unfair Insurance Practices Act (Act), when it terminated the Tighes’ insurance policy. Subsequently the Commissioner appointed a hearing officer, who conducted a hearing.

The Commissioner issued his adjudication. First, the Commissioner noted that the heart of this appeal concerns the Tighes’ claim that Donegal’s cancellation of their policy violated the Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices. The Act defines such acts to include the cancellation of a homeowner insurance policy that has been in force for sixty days or more, unless the insurer determines that there has been “a substantial increase in hazards insured against by reason of willful or negligent acts or omissions by the insured.”

The Commissioner concluded that Donegal had not violated the Act. The Commissioner noted that the Tighes had not even submitted any design for a railing by the time the hearing officer conducted the hearing. Additionally, the Commissioner found significant the fact that Donegal offered to reinstate the policy if the Tighes installed a railing within four months.  Mr. Tighe refused the offer because he believed that Donegal’s request to extend the railing to cover the entire area of the deck and access steps to be “ludicrous.”

ANALYSIS

The crux of their claim is the fact that the condition of their deck—i.e., the lack of a railing on the deck, is a condition that pre-dated their request for insurance and continued beyond the sixty-day limitation period following the issuance of a policy (during which an insurer may cancel a policy by right).

In this case, Mr. Tighe acknowledged that the deck needed a railing before Donegal issued its policy. The state of the matter at the time the policy was issued was that Mr. Tighe knew he needed to install a railing in order to be eligible for the policy with Donegal. In addition, before the lapse of the sixty-day period, Donegal advised the agent that if the Tighes did not install a railing by the deadline, the policy would be cancelled. Thereafter, the Tighes acted as if they planned to comply with Donegal’s requirement, but they nonetheless failed to do so, even after Donegal provided a second month-long extension of time.

The Tighes knowingly elected not to comply with Donegal’s admonition that, if the Tighes did not install a railing by the deadline, the policy would be cancelled. The court refused to consider Donegal’s forbearance, at the Tighes’ request, in cancelling the policy within the sixty-day period as divesting it of the right to cancel the policy. Rather, the record demonstrates that the Tighes, by failing to comply with the directive to install within the specified time period, willfully created a change in circumstances that caused the substantial increase in hazards against which they sought to be insured.

The Commissioner did not err as a matter of law in reasoning that Donegal did not violate the Act. The Tighes’ continued failure to comply with the condition Donegal imposed upon the Tighes as a requirement for insurance before and after the lapse of the sixty-day cancellation period appears to amount to intentional deception, and, thus, constituted willful conduct that increased Donegal’s risk to insure the Tighes’ property.

Based on the evidence of record, the Commissioner reasonably inferred that the Tighes misled both the agent and Donegal into believing that the Tighes intended to remedy the hazardous condition in the property by erecting a railing, inducing Donegal into extending the deadline to remedy the condition past the 60–day by-right cancellation window. The change in circumstance that substantially increased the hazards insured against was the willful acts or omissions of the Tighes in first misleading the agent and Donegal and second in refusing to remedy a hazardous condition on the property of which they were aware at the time the policy was issued, which they agreed to remedy as a condition of the issuance and continuation of the policy, but which they willfully chose not to remedy.

The Tighes’ claim that Donegal should be held accountable based upon their unsupported claim that the agents deliberately withheld the photos in order to gain a commission for the sale of the policy is meritless.

ZALMA OPINION

The Tighes deck, without a railing, 14 feet above the ground was dangerous. Mr. Tighe even admitted to catching a child who almost ran off the deck to its injury or death. Yet, even after he was told a railing was needed to obtain insurance the Tighes refused to build the railing and instead sued to gain an advantage over their insurer and compel it to insure someone it would not insure if they did not lie about the condition of the property and the intent to build a railing that was never built. Proving that no good deed goes unpunished, the good deed of the insurer giving extra time to build the railing was met with claims to the Commissioner and the expense of hearings and appellate proceedings.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Can Murder Ever Be Accidental?

Tenant is Not an Insured

By definition liability insurance never applies to an intentional act. When a person rents a room in her house to a convicted felon with a history of violence and then gives the tenant a gun to use as he desires, cannot claim that when the felon kills her son-in-law, that the shooting was an accident and covered by her insurance policy for negligently letting him have the gun. Murder, established by a conviction beyond a reasonable doubt, should never be considered an accident or an act for which an insurer must respond with defense or indemnity

In Szerbowski v. Trinka, Slip Copy, 2015 WL 4429230 (Wis.App., 7/21/2015) the Wisconsin Court of Appeal was asked to determine the issue of coverage after a fatal shooting  that resulted in a conviction of first-degree reckless homicide.

FACTS

Amy Szerbowski appeals a judgment concerning an insurance coverage dispute arising out of the shooting death of her husband.

The shooting in this case happened at the home of Szerbowski’s mother, Connie Puerling. George Trinka resided at Puerling’s residence. Puerling was aware that Trinka was a felon with a history of problems with drinking, anger and violence, but she entrusted to Trinka a handgun previously owned by her deceased husband. Trinka produced the weapon during a family dispute some time later and fatally shot Szerbowksi’s husband, Steven. Trinka was convicted of first-degree reckless homicide and felon in possession of a handgun.  At the time of the shooting, Puerling’s homeowner’s insurance policy issued by State Auto Insurance Company indemnified Puerling for bodily injury arising out of an “occurrence,” defined in the policy as an “accident.”

Szerbowski commenced a lawsuit against Trinka and State Auto, alleging negligence on the part of Trinka, and negligent entrustment of the weapon on the part of Puerling although she did not name her mother in the suit. State Auto disputed coverage.

The circuit court concluded Trinka was not an insured under Puerling’s policy because he was not named as an insured nor was he a resident relative of Puerling.

The court further determined that Puerling’s act did not qualify as an accidental “occurrence” under State Auto’s policy because Puerling gave the gun to Trinka deliberately, not by accident. The court therefore granted State Auto’s motion for summary and declaratory judgment. The plaintiff appealed.

ANALYSIS

The construction or interpretation of an insurance policy and the grant of summary judgment present questions of law that an appellate court reviews as if it was a new case brought directly to the appellate court. In doing so the appellate court must consider the words in an insurance policy given the common and ordinary meaning. When the language of the policy is plain and unambiguous, it is enforced as written, without resort to rules of construction. Summary judgment is properly granted on an insurance coverage question if no genuine issue exists as to any material fact and the moving party is entitled to judgment as a matter of law.

Szerbowski concedes there was no coverage for Trinka because he was not an “insured” under State Auto’s policy. Szerbowski nevertheless insists the death of Steven was the result of an “occurrence” within the meaning of State Auto’s policy because Puerling negligently entrusted the gun to Trinka. We disagree.

The Wisconsin Supreme Court recently reviewed the law concerning coverage for an “occurrence,” defined in the standard policy as an “accident.” When analyzing whether there was an “accident” for the purposes of a liability policy, Wisconsin courts take an approach that considers whether the insured acted with lack of intent in a particular incident.

To assess the existence of an accident, courts must focus on the “means or cause” of harm to determine whether it was accidental, even if the result was unexpected.

Here, Puerling’s act of entrusting a handgun to a volatile felon with a known history of drinking problems and a tendency to become belligerent when intoxicated created the means or cause of harm. Szerbowski testified at her deposition that Trinka “pretty much” “drank every day.” Trinka testified that on the day of the shooting, “my blood alcohol was, I think, .143, Steve’s was .200, Connie’s was .095….” Trinka’s anger management issues were also uncontroverted, and the record reveals a strained, aggravated relationship between Trinka and Steven. Trinka testified the two were “no stranger[s] to arguments prior to this incident,” and that they were like “oil and water” from “day one when I first met him.”

Under these circumstances, giving a handgun to Trinka put in place the conditions for a murder and bodily injury to Steven was hardly unforeseeable.

The Court of Appeal concluded, therefore, that the trial court correctly determined that Puerling’s act of entrusting the gun to Trinka did not qualify as an accidental occurrence under State Auto’s policy.

ZALMA OPINION

What amazes me about this case is not the result but that the plaintiff had the unmitigated gall to sue the felon who killed her husband to collect on an insurance policy issued to her mother and not the killer. To add to the insanity the plaintiff then appealed the trial court’s decision to the court of appeal even after admitting that the killer was not an insured. The plaintiff wasted the court’s time with a specious claim.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Lose Auto Coverage Without Trying

Insurable Interest Required for Coverage to Apply

Insurance is a contract of personal indemnity. It does not insure cars or property of any kind but insures people against the risk of loss of their property. People who know nothing about insurance do not understand this essential insurance concept and think that the insurance policy insures the vehicle or house and that misconception can be expensive. That became clear when in Hoskins v. Miller, Not Reported in N.W.2d, 2015 WL 4374121 (Mich.App., 7/16/2015) the Michigan Court of Appeal was asked to resolve a dispute over coverage for an automobile accident.

FACTUAL BACKGROUND

Plaintiff, the adult daughter of Richard and Kathleen Hoskins, was in an accident in a 2003 Ford Focus. While she was residing with her parents, they jointly purchased the 2003 Ford Focus. To help pay for the vehicle, Richard and Kathleen obtained a partial loan. At that time, Richard was the titled owner of the Focus. Richard and Kathleen obtained insurance for the Focus through defendant insurer, and they were each listed as a named insured. Plaintiff was not named as an insured, but was identified as the principal operator.

Before the accident plaintiff moved out of her parents’ home. She also reimbursed her father for the loan, and Richard transferred title of the car to plaintiff on April 18, 2011. The automobile insurance policy was renewed, and Richard and Kathleen remained the named insureds. Plaintiff did not obtain an insurance policy of her own to cover the risks of loss attendant upon use of the vehicle.

In January 2012, plaintiff was driving the Focus when she was involved in an automobile accident. The other driver failed to yield at a stop sign and turned directly in front of plaintiff’s vehicle, causing a collision. Thus, plaintiff initiated this instant action alleging that defendant insurer unreasonably failed to pay personal injury protection (PIP) benefits.

Defendant sought summary disposition contending that neither Richard nor Kathleen had an insurable interest in the vehicle at the time the policy was renewed. It also posited that plaintiff was not a named insured on the policy, and, thus, it was not a priority insurer.The trial court ultimately concluded there were several genuine issues of material fact. Accordingly, it denied defendant’s motion for summary disposition.

INSURANCE COVERAGE

The issues raised on appeal are legal disputes. Whether one has an “insurable interest” is a question of law, as is the interpretation and construction of insurance contracts. The parties first dispute whether plaintiff’s parents, Richard and Kathleen, had an “insurable interest” in the vehicle at the time of the accident. An insurable interest need not be in the nature of ownership, but rather can be any kind of benefit from the thing so insured or any kind of loss that would be suffered by its damage or destruction.

ANALYSIS

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.  It is the obligation of a court to enforces contracts according to their terms. People have the liberty of contracting terms they desire. A contract’s terms are given their plain and ordinary meanings. However, no-fault insurance policies must be construed in a manner that complies with the no-fault act.

“Under the no-fault automobile insurance act, MCL 500.3101 et seq., insurance companies are required to provide first-party insurance benefits, referred to as personal protection insurance (PIP) benefits, for certain expenses and losses. MCL 500.3107; MCL 500.3108.” Johnson v. Recca, 492 Mich. 169, 173; 821 NW2d 520 (2012).

Pursuant to the statute: “Except as provided in subsections (2), (3), and (5), … a personal protection insurance policy described. (1) applies to accidental bodily injury to the person named in the policy, the person’s spouse, and a relative of either domiciled in the same household, if the injury arises from a motor vehicle accident.”

The person named in the policy under the statute is synonymous with the “named insured,” and persons designated merely as drivers under a policy … are neither named insureds nor persons named in the policy. Plaintiff is not listed on the policy as a named insured. She is named only as a principal operator. Nor is plaintiff a “relative … domiciled in the same household.” It is undisputed that plaintiff was no longer residing with her parents at the time of the accident. Therefore, plaintiff is not entitled to PIP benefits from defendant insurer pursuant to the statute.

At the time of the accident, plaintiff was the owner, registrant, and operator of the vehicle. Yet, she did not have an insurance policy under which she was a named insured. The language in the policy indicates that individuals covered are the “named insured shown in the Declarations” and “relatives” of a named insured. A “relative” is defined in the policy as “a person who resides with you and who is related to you by blood, marriage, or adoption.”

Because plaintiff did not reside with Richard and Kathleen, she is not a “relative” as defined in the policy. Accordingly, plaintiff cannot recover PIP benefits from defendant insurer through the no-fault statute or by virtue of the policy. The trial court erred in denying defendant’s motion for summary disposition.

Nevertheless, plaintiff contends that the appropriate remedy is to reform the policy to substitute plaintiff as a named insured. A court in equity generally has the power to reform a contract to conform it to the agreement made. To obtain reformation, a plaintiff must prove a mutual mistake of fact, or mistake on one side and fraud on the other, by clear and convincing evidence. A unilateral mistake is not sufficient to warrant reformation.
No evidence was introduced that defendant made representations to plaintiff intentionally or with culpable negligence that induced her to believe she was covered by the policy.

Though defendant continued to accept premiums from Richard and Kathleen after plaintiff moved out, the policy terms provide that a relative was covered by the policy only if the relative resided in the same household. There is no evidence that defendant knew plaintiff moved out, nor of any intent to mislead Kathleen or Richard. Accordingly, defendant is not estopped from denying plaintiff coverage.

Similarly, with respect to waiver, defendant insurer never made an intentional relinquishment of a known right with respect to covering plaintiff under the policy. There is no evidence that defendant knew plaintiff moved out, nor that no other relative resided with Kathleen or Richard. Plaintiff’s arguments are meritless.

ZALMA OPINION

The injured daughter, the sole owner of the vehicle, made the serious error in failing to purchase insurance when she became the sole owner of the vehicle. That her parents, the prior owner of the vehicle, had purchased insurance when they had no insurable interest in the vehicle could not provide coverage for a person who was not named as an insured nor was she a resident relative. Lack of insurance knowledge left the plaintiff with no coverage at all.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

How to Obtain Coverage for Malicious Prosecution

Court Determines When Malicious Prosecution Arises

When two insurers insure a loss over a period of time it becomes necessary to determine in which insurer’s policy period the event occurred. Rather than work together some insurers will take a hard position and refuse to defend or indemnify the insured leaving a single insurer to protect the interest of the insured.

With regard to a suit for malicious prosecution,  the United States District Court for the Northern District of Ohio in Selective Ins. Co. of the Southeast v. RLI Ins. Co., Slip Copy, 2015 WL 4250364 (N.D.Ohio, 7/13/2015), was faced with a motion for partial summary judgment filed by plaintiff Selective Insurance Company of the Southeast (“Selective”) and a motion for summary judgment filed by defendant RLI Insurance Company (“RLI”) both of whom claimed the other was responsible for protecting the insured..

This coverage dispute arises from the wrongful conviction of Clarence Elkins, who, after spending several years in prison, was exonerated of rape and murder based on DNA evidence. Mr. Elkins sued the City of Barberton and its police officers, who had pursued the criminal case against him, alleging violations of state law and his federal constitutional rights. The civil case was settled for $5.25 million.

THE COVERAGE DISPUTE

During the time period relevant to the instant matter, the City of Barberton had excess insurance policies through Selective and RLI, respectively. The RLI policy had a policy period from June 29, 1997 to June 29, 1998. The Selective policy had a policy period from June 29, 1998 to June 29, 1999. Selective contributed to the settlement, while RLI did not. RLI denied coverage on the ground that the malicious prosecution of Mr. Elkins did not “occur” during RLI’s policy period.

INVESTIGATION AND CRIMINAL PROCEEDINGS

On June 6, 1998, Judith Johnson was raped and murdered, and her six-year-old granddaughter, Brooke Sutton, was raped and assaulted.  On June 7, 1998, Brooke Sutton identified her uncle Mr. Elkins as the perpetrator, and Barberton police officers arrested him. The parties do not dispute that Sutton’s identification provided probable cause for Mr. Elkins’ arrest. Mr. Elkins was indicted by a Summit County grand jury on June 10, 1998.

On January 5, 1999, before the criminal trial, Barberton Police arrested Earl Mann for robbery. During his arrest, Mr. Mann, who was drunk at the time, asked the arresting officer, “Why don’t you charge me with the Judy Johnson murder?”  Mr. Elkins later acquired additional evidence of his innocence. Based on an analysis of male DNA evidence collected at the crime scene, Mr. Elkins’ DNA was excluded from the DNA found there. In 2005, Mr. Elkins obtained a cigarette butt belonging to Earl Mann, who by coincidence was incarcerated in the same facility that he was, and, as a result the case against Mr. Elkins was dismissed and he was released. The State of Ohio awarded Mr. Elkins $1,075,000, after it was determined that he was a wrongfully imprisoned person.

MR. ELKINS CIVIL SUIT

Mr. Elkins presented evidence that the investigating officers intimidated his alibi witnesses.

Prior to mediation, Mr. Elkins made a “bottom line” demand of $5.25 million to settle all claims. Elkins stated that if the case did not settle by the close of business November 16, 2010, the settlement demand would increase to $12 million. The case settled at mediation for $5.25 million.

BARBERTON’S INSURERS AND THE INSTANT DISPUTE

Selective maintains, coverage was triggered under RLI’s policy, whose policy period ended on June 29, 1998. RLI opposes the motion and moves for summary judgment, arguing that the tort of malicious prosecution occurred at the time the officers failed to disclose the Mann Memo, which happened no earlier than January 6, 1999. Because the Selective policy was in effect at that time, RLI argues coverage was triggered under the Selective policy.

The Court was required to determine, based on the relevant insurance policies, when the tort of malicious prosecution “occurred.” The Court began with the language of the applicable insurance policy noting that the starting point for determining the scope of coverage is the language of insurance policies. Contract terms are to be given their plain and ordinary meaning.

The RLI excess policy is occurrence based. As RLI sees it, there can be no coverage under the RLI policy because the only “occurrence” was the alleged violation identified by the district court. RLI contends that the violation occurred when Barberton’s officers failed to disclose the Mann Memo, which occurred no earlier than January 1999. Thus, because the RLI policy period ended in June 1998, there was no coverage for an “occurrence” that occurred six months later.

The court concluded that RLI assigned undue significance to the alleged violation. In fact, during the National/RLI policy period, Barberton officers allegedly failed to preserve biological evidence found at the crime scene; destroyed notes and recordings of witness statements; and ignored evidence of pubic and head hair belonging to someone other than Mr. Elkins that were recovered from Judith Johnson’s body.

These examples of alleged misconduct, among others, all took place while RLI’s policy was in effect, and there is no reason to believe, had the Elkins civil case gone to trial, that this evidence, to the extent it was admissible, would not have been part of Mr. Elkins’ case.

The district court concluded that the alleged failure to disclose the Mann Memo is not relevant to the question of coverage.

This is not to say that because the malicious prosecution claim was never proven to a jury that coverage under the RLI policy was not triggered. Quite to the contrary. Neither the RLI policy nor the National policy require a judgment to trigger an obligation to pay. Instead, under the RLI policy, Barberton became legally obligated to pay when it agreed to settle the case for $5.25 million in exchange for dismissal of the case. The “occurrence” was the pattern of misconduct on the part of Barberton, as alleged in the civil complaint, that occurred while the RLI policy was in effect.

Ohio courts have not directly faced the issue of when the tort of malicious prosecution “occurs” for coverage purposes, but courts from other jurisdictions have staked out two positions on the subject.

In adopting the majority rule, both the Eighth and Third Circuit relied on general principles of insurance law provided by the applicable state law. The Eighth Circuit observed that under Iowa law, “[t]he time of ‘occurrence’ is when the claimant sustains damages, not when the act or omission causing the damage takes place .” Genesis Ins. Co., 677 F.3d at 814 (quoting Tacker v. Am. Family Mut. Ins. Co., 530 N.W.2d 674, 676 (Iowa 1995). Similarly, the Third Circuit noted that “the determination of when an occurrence happens must be made by reference to the time when the injurious effects of the occurrence took place.” City of Erie, 109 F.3d at 162 (quoting Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 61–62 (3d Cir.1982)).

The District court was persuaded that Ohio would follow the majority rule. When determining the triggering event for an occurrence based policy, courts should look to the time when injury began. Similar to the above cases, whether or not anyone was aware that Mr. Elkins’ prosecution was improvident at the time it was initiated, the injury to him began the day of his arrest, although it did not become undeniably apparent (to anyone besides Mr. Elkins) until charges were dismissed.

Selective’s motion for partial summary judgment was granted and RLI’s motion for summary judgment was denied.

ZALMA OPINION

Determining the date of an occurrence is often difficult. In this case Mr. Elkins was damaged over a long period of time and was convicted of a crime he did not commit because of the wrongful conduct of the police who ignored evidence that would have stopped his trial and hid a confession by the real killer. He deserved the settlement he received and it would have been more prudent if all the insurers got together to provide defense and indemnity for the city. In this case, taking a strong position on a weak review of relevant legal authorities, was not wise and will be expensive.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Lose an Insurance Coverage Case

Insured Has Burden to Establish Coverage

Making a claim is not sufficient. It is the obligation of the insured first to establish that there is coverage for the loss that is the subject of the claim. It is never automatic that the insured, by simply presenting a claim, shifts the burden to the insurer.

In Copacabana Realty, LLC v. Fireman’s Fund Ins. Co., — N.Y.S.3d —-, 2015 WL 4257001 (N.Y.A.D. 2 Dept., 7/15/2015), the appellate court, in an action for a judgment declaring that the defendant American Automobile Insurance Company is obligated to provide insurance coverage to the plaintiff for a loss to its property, the plaintiff appeals from an order of the Supreme Court (trial court), which granted the motion of the defendant American Automobile Insurance Company for summary judgment declaring that it is not so obligated.

“In determining a dispute over insurance coverage, the appellate court must first look to the language of the policy” (Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208, 221). Although the insurer has the burden of proving the applicability of an exclusion (see Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 311), it is the insured’s burden to establish the existence of coverage (see Lavine v. Indemnity Ins. Co., 260 N.Y. 399, 410).

Where the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied” (Borg–Warner Corp. v. Insurance Co. of N. Am., 174 A.D.2d 24, 31).

The defendant American Automobile Insurance Company (hereinafter AAIC) established its prima facie entitlement to judgment as a matter of law by demonstrating the applicability of an exclusion in the plaintiff’s policy (see Platek v. Town of Hamburg, 24 NY3d 688, 694; Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324–325).

In opposition to AAIC’s prima facie showing, the plaintiff failed to raise a triable issue of fact regarding the applicability of an exception to the exclusion (see Platek v. Town of Hamburg, 24 NY3d at 694; Zuckerman v. City of New York, 49 N.Y.2d 557, 562; Broome County v. Travelers Indem. Co., 125 AD3d 1241).

Accordingly, the trial court properly granted AAIC’s motion for summary judgment declaring that it is not obligated to provide insurance coverage to the plaintiff for the loss to its property.

Since this is, in part, a declaratory judgment action, the matter must be returned to the trial court for the entry of a judgment declaring that AAIC is not obligated to provide insurance coverage to the plaintiff for the claimed loss

ZALMA OPINION

When an insurer establishes the existence and application of an exclusion the insured must carry the burden of producing evidence establishing that the exclusion does not apply and that there is coverage. When the insured fails to produce evidence that a loss is covered and the exclusion does not apply or that there are no facts to support the exception to the exclusion, the court must rule in favor of the insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Plead a Consumer Fraud Case for Denial of a Claim

Win Some, Lose Some

When people are unhappy with their insurance company they refuse to limit themselves to a suit for breach of contract and obtain the indemnity promised by the policy. Rather, they file lawsuits seeking tort damages for breach of the covenant of good faith and fair dealing and violation of consumer protection acts as well as any other cause of action the imagination of the plaintiffs’ lawyer can conceive of placing into the complaint. Ignoring the principle that in litigation “less is more” they insist on overkill. The tort of bad faith should be sufficient to provide damages to an unhappy insured but they insist on also seeking consumer fraud damages from an insurer who fails to pay what the insured wanted.

In Robert J. v. Liberty Mut. Ins., Slip Copy, 2015 WL 4138990 (D.N.J., 7/8/2015) the U.S. District Court for the District of New Jersey was called upon to limit the litigation brought by a victim of Hurricane Sandy against their insurer Defendant Liberty Mutual Insurance (“Liberty Mutual”). Liberty Mutual, attempting to bring the litigation to reasonableness, moved the court to dismiss Plaintiffs’ claims for violations of the New Jersey Consumer Fraud Act, punitive damages, and attorneys’ fees.

FACTUAL BACKGROUND

Plaintiffs Robert and Jaime Ryan, New Jersey residents whose home was damaged during Hurricane Sandy, initiated this action against Liberty Mutual on October 10, 2014. Plaintiffs allege that they purchased homeowner’s insurance from Liberty Mutual, with maximum coverage of $1,635,740, and that their “home and its contents were essentially destroyed by Hurricane Sandy.”

Plaintiffs alleged that “Liberty Mutual has unreasonably and in bad faith denied coverage and underpaid for the damage.”  They assert that Liberty Mutual’s agents “improperly adjusted and denied Plaintiffs’ claims without adequate investigation, even though Plaintiffs’ losses were covered by the Policy.”  They also claim, among other things, that Liberty Mutual was “deceptive in the adjustment of this claim” by “fraudulently creating values and assigning them to the covered loss to increase its own profitability” and by “fraudulently telling its policyholder that the losses were not covered despite evidence that they were.” Plaintiffs further allege that Liberty Mutual’s response to their claim was part of “an ongoing, widespread and continuous scheme to defraud its insureds in the payment of benefits under their policies of insurance.”

Plaintiffs assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the New Jersey Consumer Fraud Act (“NJCFA”). They seek compensatory, consequential, punitive, and statutory damages as well as attorneys’ fees and costs. Liberty Mutual moved to dismiss Plaintiffs’ NJCFA claim, their claim for punitive damages, and their claim for attorneys’ fees and costs.

DISCUSSION

Liberty Mutual moves to dismiss Plaintiffs’ NJCFA claim. Def.’s Mem. 5–9. The NJCFA “is remedial legislation” that the New Jersey Supreme Court “construe[s] liberally to accomplish its broad purpose of safeguarding the public.” Furst v. Einstein Moomjy, Inc., 182 N.J. 1, 11–12, 860 A.2d 435 (2004). In relevant part, the statute prohibits “[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false promise, [or] misrepresentation … in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby….” N.J. Stat. Ann. § 56:8–2.

There are three elements to an NJCFA claim: “1) unlawful conduct by defendant; 2) an ascertainable loss by plaintiff; and 3) a causal relationship between the unlawful conduct and the ascertainable loss.”   D’Agostino v. Maldonado, 216 N.J. 168, 184 (2013) (citing Bosland v. Warnock Dodge, Inc., 197 N.J. 543, 557, 964 A.2d 741 (2009)).

Liberty Mutual argues that Plaintiffs’ claim must be dismissed because the NJCFA “does not apply to disputes about insurance benefits or coverage.” In the 1980s, the New Jersey Appellate Division held that the NJCFA does not apply to the payment of insurance benefits. The New Jersey Appellate Division has since maintained that “while the [NJ]CFA encompasses the sale of insurance policies as goods and services that are marketed to consumers, it was not intended as a vehicle to recover damages for an insurance company’s refusal to pay benefits.” Myska v. New Jersey Mfrs. Ins. Co., No. A–027514T4, 2015 WL 2130870, at *13 (N.J.Super.Ct.App.Div. May 8, 2015).

Most recently the Third Circuit noted in dicta that “New Jersey courts … have consistently held that the payment of insurance benefits is not subject to the Consumer Fraud Act.” Granelli v. Chicago Title Ins. Co., 569 F. App’x 125, 133 (3d Cir.2014).

Here, Plaintiffs’ NJCFA claim goes to Liberty Mutual’s subsequent performance of its obligations under the insurance contract. Plaintiffs do not merely claim that Liberty Mutual underpaid their benefits, which would amount only to breach of contract, but instead assert that Liberty Mutual acted deceptively and fraudulently when investigating their property damage. Their NJCFA claim accuses Liberty Mutual of “telling its policyholder that the losses were not covered despite evidence that they were,” in “creating values and assigning them to the covered loss to increase its own profitability,” and “in falsely misrepresenting what its responsibilities were under the policy.” By alleging that Liberty Mutual’s investigatory conduct was deceptive, Plaintiffs make clear that their NJCFA claim targets Liberty Mutual’s conduct in performing its contract obligations-which distinguishes their NJCFA claim from the type of mere underpayment allegation that concerns the New Jersey Appellate Division. This Court predicts that the New Jersey Supreme Court would apply the NJCFA to Liberty Mutual’s allegedly deceptive conduct in investigating Plaintiffs’ property damage. Liberty Mutual’s motion to dismiss Plaintiff’s NJCFA claim is denied.

Plaintiffs’ Claim for Punitive Damages Is Insufficient

Liberty Mutual argues that Plaintiffs’ claim for punitive damages must be dismissed because the complaint omits “any allegation of an outrageous intentional tort.” Deliberate, overt, and dishonest dealings, insult and personal abuse constitute torts entirely distinct from the bad-faith claim.  Plaintiffs have not pled facts that rise to the level of egregiousness necessary for punitive damages in an insurance contract case. Their claim for punitive damages is dismissed.

Plaintiffs May Be Entitled to Attorneys’ Fees

Plaintiffs’ complaint includes two requests for attorneys’ fees, in connection with their claim for breach of the implied covenant of good faith and fair dealing and in their Request for Relief. The New Jersey Supreme Court’s holdings bar the recovery of attorneys’ fees in connection with Plaintiffs’ claim for breach of the implied covenant. Plaintiffs’ request for attorneys’ fees arising from their breach of implied covenant claim is dismissed.
Plaintiffs argue that they are still “entitled to attorney’s fees by virtue of their Consumer Fraud Act claims.”

The NJCFA mandates the recovery of attorneys’ fees. As such, the Court denied Liberty Mutual’s motion to dismiss Plaintiffs’ claim for attorneys’ fees in the Request for Relief.

ZALMA OPINION

This is, at best, a Pyrrhic victory for Liberty Mutual. They eliminated a claim for punitive damages for breach of the covenant of good faith and fair dealing only to lose on its claims for statutory based damages. If, as the plaintiffs allege, Liberty acted wrongfully in dealing with the insurance claims, it will be punished. This is, however, just an analysis of pleadings, including an interpretation where there is a split in district court finding concerning the application of the statute to insurance. It would be useful if the New Jersey Supreme Court clarified the issue and determined that its consumer fraud act either applies to or does not apply to insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter – July 15, 2015

 Prosecutions Continue for Perpetrators of Health Insurance Fraud

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

The current issue of ZIFL reports on:

1.    Ties to Democrats Failed to Protect Crooked Doctor
2.    Fairly Debatable Defeats Claim by Criminal Doctor
3.    Exposing Fraud Saves UK Customers $5.588 Million a Day.
4.    The End of a Never Ending Story.
5.    The Orphan Child of the Criminal Justice System.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    Is Breach of Contract Required for Bad Faith? – July 14, 2015
•    Why a Risk Manager in Louisiana Should be Licensed as an Agent – July 13, 2015
•    Should a Signed Rejection Of UM/UIM Cover Be Ignored? – July 12, 2015
•    Insurance Fraud Is Epidemic – July 9, 2015
•    Can Murder Be Accidental? – July 8, 2015
•    How Do You Set Aside an Appraisal Award? – July 7, 2015
•    What Is Needed to Refuse a Defense? – July 6, 2015
•    Why Insured Should Never Sign a Release Without Advice of Counsel – July 3, 2015
•    You Can’t Con an Honest Person – July 2, 2015
•    Sometimes Insurance Fraud Doesn’t Pay – July 1, 2015
•    Heads I Win, Tails You Lose – June 30, 2015
•    When Does an Endorsement Supersede the Base Coverage Wording? – June 30, 2015
•    When is a “Known Loss” Not Known? – June 29, 2015
•    Can Insured Get Back Premium if No Loss? – June 26, 2015
•    SIU Regulations Webinar – June 25, 2015
•    Can an Insured Receive Coverage for Breach of Fiduciary Duty – June 25, 2015
•    What is a “Residence Premises” & Who Are Resident Relatives? – June 24, 2015
•    Condition Precedent Enforced – June 24, 2015
•    Does the Notice-Prejudice Rule Unfairly Disadvantage an Insurer of Its Contractual Rights? – June 23, 2015
•    When Must An Appraisal Award Be Reversed? – June 22, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Is Breach of Contract Required for Bad Faith?

Payment of Appraisal Award Fulfills Policy Promises

An insurance company and its insured disagreed on the scope of damage due to hail. Eventually appraisal was demanded and an award was rendered and paid, including interest. Regardless, the insureds, unhappy, sued the insurer. In Burks v. Metropolitan Lloyds Ins. Co. of Texas, Slip Copy, 2015 WL 4126654 (S.D.Tex., 7/8/2015) the U.S. District Court for the Southern District of Texas, resolved the dispute and tendered an opinion regarding the ability to sue for bad faith even when the insurer fulfills its obligations under the policy of insurance.

BACKGROUND

This suit arises from a dispute between Plaintiffs Michael Burks and Cynthia Burks (“Plaintiffs”) and their homeowners insurance provider, Defendant Metropolitan Lloyds Insurance Company of Texas (“Defendant”), which at all relevant times insured Plaintiffs’ home in Magnolia, Texas (the “Property”).  Approximately three months after an April 27, 2013 hailstorm caused damage to the Property, Plaintiffs filed a claim with Defendant on their Homeowners Insurance Policy (the “Policy”).  Defendant engaged Tailored Adjustment Services (“Tailored”) to perform an inspection of the Property, and Michael Eason (“Eason”), a licensed adjuster with Tailored, promptly inspected the Property within two weeks of when Metropolitan received Plaintiffs’ claim.

Excerpts of Eason’s appraisal in the summary judgment record indicate that he made detailed inspections of the Property, and included detailed measurements of the surface areas of the roof, their total perimeter lengths, the numbers of squares, and the total ridge lengths. Eason noted in his report that the Property’s main roof and garage roof had been replaced due to storm damage in 2009, and did not find any storm-related damage to the shingles of the main roof or garage roof. Eason did note hail damage to three HVAC caps and a window bead, and recommended full replacement of a metal roof and a fiberglass roof on lean tos attached to the garage, four metal panels on a separate carport, and a metal gazebo roof. Eason estimated a total replacement cost of $5,080.68.

Plaintiffs state that during his inspection, “Eason informed [a local roofing contractor present at the Property] and Mr. Burks that he was instructed by Metropolitan not to pay for the roof because Metropolitan paid to replace the roof in 2009 and was not going to pay for it again.”

Three days after Eason’s inspection, Defendant notified Plaintiffs of the estimate and, after applying their $3,900 deductible, issued payment of $1,180.68. Plaintiff Michael Burks called Defendant to complain that the amount was “totally insufficient,” that “we would be probably taking other action,” and asked what he should do with the check. He was told just to void it and Metropolitan would cancel it. Defendant, apparently misinterpreting Plaintiffs’ intent, sent to Plaintiffs a letter stating in relevant part: “This letter will confirm our conversation of 8/12/13, in which you stated you were no longer interested in pursuing this claim. Since you are voluntarily withdrawing your claim for 4/27/13, we will not be investigating this loss any further. Our file will be considered closed.”

Six months after the foregoing exchange, Plaintiffs filed this suit alleging breach of contract, fraud, breach of the covenant of good faith and fair dealing, and violations of Sections 541 and 542 of the Texas Insurance Code. Defendant removed the case to the federal District Court and shortly thereafter Defendant’s counsel wrote to Plaintiffs’ counsel that Defendant “would like to reissue the check for $1,180.68,” which was not accepted.

Thereafter an appraisal was conducted and the two party-appointed appraisers and their chosen umpire made an appraisal award finding that the replacement cost value was $28,912.02, and the actual cash value was $23,648.07.  Defendant then paid to Plaintiffs $20,088.93, representing the actual cash value of the appraised loss less the $3,900 deductible, plus $340.86 in penalty interest. Plaintiffs accepted the payment from Defendants, but argue the appraisal award is inadequate “because Metropolitan’s proposed settlement did not include for elements of damages such as attorneys’ fees and statutory penalties.”

ANALYSIS

Plaintiffs allege that Defendant’s “failure and/or refusal … to pay adequate compensation,” constitutes a breach of Defendant’s insurance contract with Plaintiffs. Defendant argues that Defendant’s prompt payment of the appraisal award to Plaintiffs fulfills Defendant’s contractual obligations under the Policy and precludes Plaintiffs’ claim for breach of contract. “Under Texas law, 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].’” Blum’s Furniture Co. v. Certain Underwriters at Lloyds London, 459 F. App’x 366, 368 (5th Cir.2012)

Plaintiffs do not dispute that the parties engaged in the binding appraisal process established by the Policy, but argue that their dispute with Defendant is “not about the valuation of damage to the roof,” but rather “whether the roof damage would be covered at all,” such that the appraisal process did not fully resolve their dispute. Plaintiffs’ theory seems to be that if the insured claims storm damages to a half dozen structures on the insured property, but the insurer finds storm damages to only four of the structures, that the insurer has breached the contract if the appraisal process results in a finding of damage to either or both of the other two structures, even though the insured accepts the insurer’s payment of the full appraisal award.

Defendant argues that Plaintiffs’ remaining claims must be dismissed because there was no breach of the insurance contract and bad faith claims require such a breach. Under Texas law, “in most circumstances, an insured may not prevail on a bad faith claim without first showing that the insurer breached the contract.” Liberty Nat. Fire Ins. Co. v. Akin, 927 S.W.2d 627, 629 (Tex.1996).

Plaintiffs argue that the Akin rule generally prohibiting bad faith claims without a breach of contract should be limited to cases where in fact there is no insurance coverage. Such a distinction has not been found in the Texas cases and appears entirely unwarranted.
Defendant Metropolitan Lloyds Insurance Company of Texas’ Motion for Summary Judgment is granted and Plaintiffs Michael Burks and Cynthia Burks’ claims are dismissed with prejudice.

ZALMA OPINION

The tort of bad faith is an anomaly allowing tort damages for breach of the terms of a contract of insurance. Because of the availability of punitive and other tort damages plaintiffs and their lawyers attempt to stretch the tort to cases, even where the insurer, fulfills the terms and conditions of the policy. In this case the insurer fulfilled the terms of the contract and paid everything it owed. There should never be a right to a tort of bad faith if the insurer fulfills the terms of the contract and there is no evidence of breach.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 2 Comments

Why a Risk Manager in Louisiana Should be Licensed as an Agent

Risk Manager Can Be Liable For Failing to Provide Coverage Ordered

Insurance Risk Management companies help their client obtain insurance by negotiating on behalf of an insured with insurance agents and brokers. The insured uses a risk manager to take on an obligation to provide needed coverage that the insured does not feel competent or have the time to acquire directly. In Plata v. Triton Diving Services LLC, Slip Copy, 2015 WL 4129144 (E.D.La., 7/8/15) a risk manager was alleged to have failed to acquire appropriate coverage leaving the insured uninsured for an important and needed coverage. The insurer and agent were granted judgment by the court and the case was limited to the claim against the risk manager.

FACTUAL BACKGROUND

This action arises out of the alleged breach of business relationship and/or contract between the plaintiff, Shore, and the defendants, Risk Management Underwriters, Inc. (“Risk Management”), Midwest, and CRC Insurance Services, Inc. (“CRC”). Shore contracted with Risk Management to obtain insurance covering its business activities. Risk Management then contacted CRC and Midwest for assistance. Shore claims that it provided Risk Management and Midwest with a Master Service Agreement (“MSA”) between it and Conrad Industries, to which it provided employees for work in the marine industry. Shore also claims that it supplied Risk Management and Midwest with the following description of its work: “[Shore] supplies our employees to our clients to perform specific job tasks within the oil and marine industry. These tasks include welding, fitting, rigging, helpers, and burners to work on platforms, jackets, skids, modules, ships, tugs, boats, barges, etc …”

Defendants ultimately procured a Colony Insurance Company Commercial Policy. The policy included several dozen forms, including a Maritime Operations Exclusion and Watercraft Amendment. Shore claims that because of these exclusions, it was denied coverage for costs arising from defending a personal injury lawsuit by its employee, Hector Plata, who was injured while working at Conrad’s Shipyard. Rec. Shore also claims that since then, a second employee, Francisco Villareal, has filed suit for injuries sustained while working for Conrad, and Shore expects that Colony will likewise deny coverage, requiring Shore to shoulder further costs.

Shore commenced this action in state court alleging 1) breach of fiduciary duties and 2) negligent misrepresentation. The action was subsequently removed to this Court. The Court has since dismissed Shore’s claims against CRC.Midwest now moves the Court to dismiss Shore’s claims against it.

LAW & ANALYSIS

Midwest advances several arguments for why the Court should dismiss Shore’s claims against it. In its first motion, Midwest argues that Shore has failed to state a claim for breach of fiduciary duty and negligent representation under Louisiana law. In its second motion to dismiss as well as a supplemental memorandum, Midwest also argues that Shore’s claims are perempted.

PEREMPTION

Midwest argues that under Louisiana law, actions against insurance agents are perempted after one year. La. R.S. § 9:5606(A) provides: “No action for damages against any insurance agent, broker, solicitor, or other similar licensee under this state, whether based upon tort, or breach of contract, or otherwise, arising out of an engagement to provide insurance services shall be brought unless filed in a court of competent jurisdiction and proper venue within one year from the date of the alleged act, omission, or neglect, or within one year from the date that the alleged act, omission, or neglect is discovered or should have been discovered. However, even as to actions filed within one year from the date of such discovery, in all events such actions shall be filed at the latest within three years from the date of the alleged act, omission, or neglect.”

However, the state of Louisiana defines as follows: “‘Insurance producer’ or ‘producer’ shall mean a person required to be licensed under the laws of this state to sell, solicit, or negotiate insurance, and includes all persons or business entities otherwise referred to in this Code as ‘insurance agent’ or ‘agent’, or ‘insurance broker’ or ‘broker’, or ‘insurance solicitor’ or ‘solicitor’, or ‘surplus lines broker’.” [La. R.S. 22:1542.]

A  plain reading of Louisiana statutory law leads the Court to conclude that unlicensed entities do not fall within the ambit of the statute. Furthermore, the Court is persuaded by the principle that when interpreting prescriptive and peremptive statutes, courts should construe in favor of maintaining enforcement of the action. Peremptive statutes are to be construed against prescription and peremption and in favor of the claim that is to be extinguished. Therefore, the Court finds that because Midwest was not licensed at the time that it provided services to Shore, actions against Midwest are not regulated by the statute.

Although actions against insurance agents in Louisiana are treated normally as tort actions Shore alleges that it engaged Risk Management which in turn engaged Midwest to assist it in procuring insurance for Shore which is more like a contract action. Shore further alleges that Midwest and Risk Management “made representations to Shore that they would procure proper insurance sufficient to provide coverage for the business risks specifically explained to them by Shore.” Finally, Shore claims that it provided Midwest with a specific description of its work which stated that Shore provided employees to clients to perform specific job tasks which could not be covered as a result of the exclusion.

Applying the standard of review for a motion to dismiss to these allegations, which requires the Court to take all well-pleaded allegations as true and to draw all reasonable inferences in favor of the plaintiff, the Court finds that Midwest did warrant a specific result. Specifically, under the facts alleged in the complaint, Midwest warranted that it would procure insurance to cover the full range of Shore’s particular business activities, after receiving Shore’s description of what these business activities entailed. Thus, the ten-year prescriptive period for breach of contract applies.

BREACH OF FIDUCIARY DUTY

To prevail on a claim for breach of fiduciary duty, Shore must prove:

1) an undertaking or agreement by the insurance agent to procure insurance;

2) failure of the agent to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly if he has failed to obtain the insurance; and

3) actions by the agent warranting the client’s assumption that the client was properly insured.  Midwest does not dispute that there was an agreement between Midwest and Shore for Midwest to procure insurance.

While an insurance agent is under no duty to “spontaneously identify” the client’s needs, it is required to “provide coverage for the client’s specific concerns.” The Fifth Circuit in Offshore Production Contractors, Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224, 229–30 (5th Cir.1990), held that: “[A]n insurance agent is more than a ‘mere order taker’ for the insured … Where an agent is familiar with the insured’s business, has reason to know the risks against which an insured wants protection, and has experience with the types of coverage available in a particular market, we must construe an undertaking to procure insurance as an agreement by the agent to provide coverage for the client’s specific concerns.”

Following the Fifth Circuit’s guidance, the Court finds that Shore has sufficiently alleged a failure by Midwest to use reasonable diligence. According to Shore’s complaint and amended complaints, Shore provided Midwest with a specific description of the type of work in which it engaged. The description included an explicit reference to marine industry work and work aboard marine vessels. Contrary to Shore’s wishes, Midwest procured a policy with a “Maritime Operations Exclusion” and a “Watercraft Amendment,” which Shore alleges excluded coverage of many activities that Shore had notified Midwest its employees performed. Midwest failed to use reasonable diligence in procuring insurance coverage.

NEGLIGENT MISREPRESENTATION

Midwest also argues that Shore has failed to state a claim for negligent misrepresentation. In order to recover for negligent misrepresentation, Shore must show 1) a legal duty to supply correct information; 2) breach; and 3) damages resulting from justifiable reliance on the misrepresentation.

The complaint now includes the allegation that defendants “ensured Shore that the subject policy contained maritime employers liability coverage, with an In Rem endorsement and the Watercraft exclusion deleted.” Midwest does not challenge the remaining elements of Shore’s negligent misrepresentation claim. Thus, the Court found that Shore has stated a claim of negligent misrepresentation and the claims must go to trial.

ZALMA OPINION

By concluding the action was a breach of contract action the court increased the statute of limitations from one year to ten years allowing the case to proceed against the risk manager. Clearly, by allowing the Maritime Operations Exclusion to be in the policy the risk manager was negligent and breached the contract. Since the Risk Manager was not a licensed agent the court held it to answer while letting the agent and insurer free because of the statute of limitations.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Should a Signed Rejection Of UM/UIM Cover Be Ignored?

Can an Insurance Agent Be Negligent for Not Obtaining UM Coverage After the Insured Rejects Coverage?

In Arizona, like most states, a statute requires that an insurer offer each insured both Uninsured Motorist and Underinsured Motorist Coverage and holds that it can only be excluded if the insured signs a document specifically rejecting the coverage. In Wilks v. Manobianco, — P.3d —-, 2015 WL 4132181 (Ariz., 7/9/15) the Arizona Supreme Court was called upon to rule on the effect of Arizona Revised Statutes § 20–259.01 on a claim of negligence against an insurance agent. The statute requires insurers to offer uninsured motorist (“UM”) and underinsured motorist (“UIM”) coverage to their insureds. Insurers can prove compliance with the statute by having their insureds sign a Department of Insurance (“DOI”) approved form selecting or rejecting such coverage.

The insured, Wilks, claimed that they had requested the agent, Manobianco, obtain UM/UIM coverage although they admitted signing the form rejecting coverage.

FACTUAL BACKGROUND

For two years, Lesley Wilks had car insurance from State Farm Mutual Automobile Insurance Company, which she obtained through John Manobianco at the Manobianco Insurance Agency (collectively “Manobianco”). Her policy included liability and both UM and UIM coverage. Wilks later replaced the State Farm policy with a policy from another insurance company. A year later, she decided to switch back to State Farm. When doing so, Wilks asked Manobianco to obtain “the exact same coverage that [she] had previously, full coverage.” Manobianco did not look up Wilks’s prior coverage and procured insurance that did not include UIM coverage. In the course of signing several insurance forms, Wilks signed the DOI-approved form, which had been filled out by Manobianco to reject UIM coverage.

Several years later, Wilks was rear-ended by an underinsured driver. State Farm denied the UIM claim she made under her policy. Wilks and her husband then sued Manobianco for malpractice for failing to procure the insurance coverage they had requested.

Manobianco moved for summary judgment, arguing that it satisfied its duty of care as a matter of law by complying with A.R.S. § 20–259.01.

The trial court found “that [Manobianco’s] compliance with A.R.S. § 20–259.01 demonstrated that [it] fulfilled [its] duties to Plaintiffs regarding offering the UM/UIM coverage,” and therefore Manobianco “breached no duty owed to Plaintiffs.” The court of appeals reversed. The Court of Appeal, reversing the trial court, held the statute did not abolish that duty because the statute does not apply to insurance agents, and it is not broad enough to bar common law negligence claims against them. The Arizona Supreme Court granted review.

DISCUSSION

Under Arizona’s common law, insurance agents owe a duty of reasonable care when obtaining insurance on behalf of their clients. That duty is founded on an agent’s status as one with “special knowledge,” who “undertakes to act as an advisor” to a client. Manobianco argues that the legislature modified insurance agents’ common law duties to their clients by enacting § 20–259.01, which creates a “safe harbor” if the insured signs a DOI-approved form rejecting UM or UIM coverage:

When interpreting a statute, the Supreme Court’s primary goal is to give effect to the legislature’s intent.  Absent a clear manifestation of legislative intent to displace a common-law cause of action, a court must interpret statutes with every intendment in favor of consistency with the common law.

The statute at issue provides insurance companies with a method for proving that they offered UM and UIM coverage to their insureds. It does not purport to bar common law professional negligence claims such as the claim asserted here. Manobianco argues, however, that the statute implicitly bars such negligence claims because the statute’s mandate that “rejection of coverage … shall be valid for all insureds” precludes any action involving a fact-based inquiry related to a plaintiff’s UIM coverage. The “shall be valid” language in A.R.S. § 20–259.01(B) guarantees that if an insurer provides and the insured signs a DOI-approved UM/UIM selection form, the insurer has satisfied the statutory requirement to ‘make available’ and ‘by written notice offer’ UM/UIM coverage.”  Thus completing the DOI-approved form eliminates fact questions concerning “whether UM/UIM coverage was sufficiently offered” by the insurer and “whether the terms of the offer were understood.”

It therefore only bars inquiries related to the insurer’s offer of UM and UIM coverage.  Because Wilks concedes that she was offered UIM coverage on a DOI-approved form, which she signed, her claim that Manobianco failed to procure the UIM coverage she requested does not frustrate the purpose of § 20–259.01(B). The Supreme Court recognized that the distinction between the facts surrounding an insurer’s offer of UM and UIM coverage and those surrounding a client’s request for such coverage is slight, that distinction is important given the language and purpose of the statute.

The statute imposes a duty on insurers to make an offer of UM and UIM coverage, but it does not discuss or affect whether an agent must honor a client’s request for such coverage.  An agent’s common law duty to its clients to procure requested UIM coverage therefore remains distinct from the duties prescribed by § 20–259.01. Whether Manobianco failed to honor the Wilkses’ alleged request for UIM coverage, and whether that failure breached Manobianco’s common law duty of care, are questions for the trier of fact.

Although the statute speaks only in terms of protecting “insurers”—that is, those who write automobile insurance policies—Manobianco maintains that the statute also applies to insurance agents because the term “insurer” necessarily includes insurance companies and their agents.

Because the statute does not bar the Wilkses’ negligence claim, Mrs. Wilks’s admitted failure to read the DOI-approved form she signed—despite its bold print “WARNING” and directive to “read carefully before signing”—may be submitted to the jury to consider during its assessment of comparative negligence. A jury may also weigh the fact that Manobianco complied with the requirements of A.R.S. § 20–259.01 as evidence that he acted reasonably under the circumstances.

The Wilkses’ negligence claim is based on a duty distinct from that imposed by A.R.S. § 20–259.01. Whether Manobianco breached its common law duty by failing to procure the UIM coverage Wilks allegedly requested and whether Wilks should be assigned comparative fault for failing to read the related paperwork are questions for the jury. The trial court therefore erred by granting summary judgment to Manobianco as a matter of law.

ZALMA OPINION

This is a situation where an insurance agents and his lawyers were too smart by half. Rather than arguing the straight-forward admitted fact that the plaintiff Wilks had rejected UM/UIM coverage in writing there was no reason to argue that the statute helped the agent. This is a straight factual issue that should have been found, as a matter of law. The insured, Wilks, admitted that the form was signed providing instructions to their insurance agent that UM/UIM coverage was rejected. It should overcome the oral claim that Wilks’ asked for UM/UIM coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud Is Epidemic

The Most Difficult Problem Facing Insurers

Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States range from $87 billion to more than $300 billion every year.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

No one will ever be able to place an exact number on the amount lost to insurance fraud. Everyone who has looked at the issue knows – whether based on their heart, their gut or empirical fact determined from convictions for the crime of insurance fraud – that the number is enormous.

When insurers and governments put on a serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-government-based or funded insurers drops logarithmically.

Insurance fraud is not limited to the US. In Britain fraud costs the British economy amounts estimated in billions of British pounds. Since the amount of fraud actually detected is a small portion of what was actually found, the estimates published are little more than an educated guess.

In the United States a similar study by Aite Group speaks of a new report[1] that provides an overview of the North American P&C insurance fraud battlefield, including its history and evolution. Based on July 2012 to March 2013 Aite Group interviews with North American P&C industry stakeholders and industry fraud-prevention organizations, the report sizes the cost of fraud, details fraud types and their perpetrators, and describes anti-fraud solutions being developed and deployed.

Aite group concluded that insurance fraud impacts not only every insurance company but virtually every consumer and taxpayer worldwide. The extent of insurance fraud shows no sign of easing. Aite Group estimated that claims fraud in the U.S. P&C industry alone cost carriers US $64 billion in 2012 and will reach US $80 billion by 2015. P&C carriers are just now beginning to focus their fraud management strategies and investments on solutions that enable fraud detection as early in the claims process as possible, before claims payments are made and valuable investigative opportunities are lost. The educated guesses don’t even try to estimate health, life, disability and workers’ compensation fraud. Better guesses for the extent of insurance fraud in the United States, not counting Medicare and Medicade fraud, approaches $300 billion every year.

As the industry attempts to keep pace with fraudsters’ varied, ever-shifting tactics, it must deploy more innovative, effective anti-fraud technologies or risk dire losses. Vendors and organizations mentioned in the Aite Group report include the Coalition Against Insurance Fraud (CAIF), CSC, Detica NetReveal, Equifax, Experian, FICO, IBM, Innovation Group, Insurance Bureau of Canada (IBC), ISO/Verisk, KPMG, LexisNexis, Mattersight, Mitchell, the National Insurance Crime Bureau (NICB), SAP, SAS, and TransUnion. Insurers must also generate a close relationship with the state insurance department’s fraud division or fraud bureau, local police agencies, the FBI, the ATF, the Postal Investigation Service, the local fire department’s arson unit, local prosecutors, and the local U.S. Attorneys.

Wherever insurance is written insurance fraud exists. It is an equal opportunity fraud committed by people of every race, religion or national origin.

Insurers who do not exercise serious anti-fraud efforts often complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud. No matter how seriously the insurers work to prove fraud the authorities often ignore them. In response, police and prosecutors complain that the insurers do nothing that police and prosecutors can use to prosecute the crime of insurance fraud while insurers complain that prosecutors ignore them when they present evidence of a fraud. There is truth in both complaints.

This E-book is written to make it clear to insurers, police and prosecutors that it is necessary to stop complaining and start working together to reduce the extent of insurance fraud. If they do not work together the crime will continue to metastasize until it will be impossible to write insurance at a profit or for a price anyone can afford.

The logarithmic growth of fraud against insurers and government based programs like Medicare and Medicaid, will eat away any chance insurers – and their shareholders – not to mention the tax burden of those who pay taxes to support Medicare and Medicaid will be insufferable.

Insurers are almost universally ignored by police agencies when the insurer victim reports the crime. When insurance criminals are caught in the act they are seldom arrested, even less often prosecuted and almost never punished seriously.

Police and prosecutors must deal with insurers who are not equipped to perform an adequate criminal investigation. Insurer employees seldom have police or prosecutorial experience. They are in business to provide to those who buy insurance the benefits promised by the policy. When faced with fraud employees of insurers are only qualified to conduct the investigation necessary to protect the insurer from civil litigation by a fraud perpetrator.

If prosecution of insurance fraud is to be successful it is necessary that insurers, prosecutors and police agencies work together as a team dedicated to defeat the crime of insurance fraud. To do so the insurers must train their staff to recognize the elements of both the crime of insurance fraud and the elements of the civil tort of insurance fraud. If well trained, insurance personnel collecting information about a potential insurance fraud, will know the type and quality of information that either a prosecutor or a civil defense lawyer will need to prove fraud was attempted.

Some estimates indicate that more money goes out fighting fraud than is saved. Others show that every dollar spent by insurers to defeat fraud save the insurer as much as seven dollars in fraudulent claims. Although insurance fraud is a crime in almost every jurisdiction in the United States, it is the only crime where the victim is required to perform the investigation from its funds and to pay special taxes to support investigation and prosecution by public agencies of crimes committed against it. The Departments of Insurance across the country continue to add taxes on insurers and the insurance buying public to pay for the state’s portion of the fight against insurance fraud.

Insurers are compelled by statute and Regulation to maintain Special Fraud Investigation Units, publish and fulfill a detailed anti-fraud program and train all of their anti-fraud personnel. Compliance by insurers is less than constant across the industry. Some have effective fraud units while others simply identify one employee as its anti-fraud director although his or her work is almost totally adjusting claims and not investigating fraud. The expense of staffing and pursuing the anti-fraud efforts required by statute and regulation reduces the profits earned by the insurer and is believed to be offset by the lack of payment to fraud perpetrators. Of course these efforts are also made difficult by the imposition of fair claims settlement practices regulations that require quick, complete, thorough investigations and fair treatment and prompt payment of insureds even when fraud is suspected. The two opposing sets of laws create a Catch-22 from which insurers find difficulty complying with both.

The Departments of Insurance audit insurers regularly to be sure that each insurer works hard to train its people to investigate and seek prosecution of the crime of insurance fraud. Failure to do so sufficiently allows the state Department of Insurance to fine the insurer for not doing the work traditionally the duty of the state to investigate and prosecute crime.

In addition, adding insult to the injury, courts and juries assess tort and punitive and exemplary damages against insurers who under the compulsion of the Departments of Insurance to defeat fraudulent claims and, as required, accuse their insured’s of fraud. If the insurer fails to prove the fraud and the police agencies, including the Departments of Insurance, fail to prosecute following the direction of the Departments of Insurance are dangerous.

Similar businesses in the financial sector, who are also regular victims of fraud and other crimes, are not taxed or compelled to investigate crimes committed against them. No state agency or person demands that a local or national bank pay for prosecuting embezzlers or armed robbers. No state agency or person demands that convenience store owners pay for prosecuting people who hold up 7-11 stores. No Regulator requires stockbrokers to investigate money laundering or fraudulent transactions.

The imposition upon the insurance industry – and the attendant cost passed to the insurance consumer – is unique. Insurers are treated differently than all other businesses in the United States. George Orwell was right when, to paraphrase what he had a character in “Animal Farm” say, “all businesses are equal, some are more equal than others.”

Clearly, insurers are less equal with regard to crimes perpetrated against them than are other businesses. They are the only business required to pay for special investigators and prosecutors to investigate crimes against them. They are the only business required, by statute, to investigate crimes against them and produce the evidence to the prosecutors. Without the power and immunity available to police agencies insurers are damned and fined if they don’t comply and are damned with tort and punitive damages plus the cost of defending bad faith suits if they comply with the statutes and regulations.

ZALMA OPINION

This article is an excerpt from a book I am working on called “Insurance Fraud & Weapons to Defeat Fraud.” I hope to have the book, presently about 2000 pages, published soon. It will cover insurance fraud from the claims investigation to the end of litigation with full cases of important appellate decisions in the text so that readers can understand how courts deal with the issue and the evidence necessary to effectively deny a claim for fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Can Murder Be Accidental?

Conviction of Murder Establishes Beyond a Reasonable Doubt that Killing Was Intentional

It seems that some judges believe that insurance is an entitlement rather than a contract that can be interpreted beyond reason to provide benefits to victims of persons insured even if that person intentionally causes injury. In so doing they forget that insurance is a contract that provides indemnity only for fortuitous actions and can never provide coverage for intentionally caused injury.

In Kentucky Farm Bureau Mutual Insurance Company v. Conley, Not Reported in S.W.3d, 2015 WL 4040058 (Ky.App., 7/25/2015) the Kentucky Court of Appeal was faced with an appeal from a trial court decision that required coverage for defense and indemnity of an insured who was convicted of the crime of murder.

FACTS

This appeal arises from a homeowner’s insurance coverage dispute between Kentucky Farm Bureau Mutual Insurance Company (Farm Bureau) and Keith Justin Conley (“Conley”), and coverage for any judgment that might be entered against Conley, resulting from a wrongful death action filed against him based upon his shooting and killing of Jessica Newsome.

In 2006, Keith Justin Conley (“Conley”) was convicted of murdering his girlfriend, Jessica Newsome, who he fatally shot in the home of his father, Keith E. Conley. Conley and Jessica were living in Keith E. Conley’s home at the time of the shooting. Gregory and Loretta Newsome (“the Newsomes”) brought a wrongful death cause of action against Conley for damages arising from their daughter’s death.

At the time of the shooting, Keith E. Conley’s home was insured through a homeowner’s insurance policy issued by Kentucky Farm Bureau. Subject to a reservation of rights, Kentucky Farm Bureau provided a defense to Conley for the Newsomes’ claims against him. Kentucky Farm Bureau also intervened in the action for the purpose of seeking a declaration that the homeowner’s insurance policy issued to Conley’s father did not provide coverage to Conley for the claims arising from Jessica Newsome’s murder.
After Conley’s conviction became final in 2007, Kentucky Farm Bureau moved the trial court for a ruling on its petition for a declaratory judgment. On June 23, 2011, the trial court ruled that the homeowner’s insurance policy provided coverage for Conley’s acts, and ordered Kentucky Farm Bureau to satisfy the judgment or provide a defense in the claim against Conley.  The trial court entered an order on August 30 denying Kentucky Farm Bureau’s  motion.

THE ISSUE

The overarching issue presented in this matter is the interpretation of an insurance policy. The argument that Farm Bureau raised before the circuit court regarding the insurance policy at issue accurately summarized the relevant provisions of the insurance policy. Its argument was, in pertinent part: “The policy of insurance issued to Keith E. Conley clearly provides that the personal liability coverage under that policy is limited to coverage or damages because of a “bodily injury” or “property damage” caused by a “covered occurrence”. Excluded from coverage is “bodily injury” which is expected or intended by one of its insured’s [sic]. The policy, therefore, included an exclusion that recorded the fortuity doctrine.

ANALYSIS

Keith Justin Conley has been found guilty of murder and as defined by Kentucky law murder is an intentional act and as such those actions are not covered under the homeowner’s policy of Keith E. Conley. However, Farm Bureau’s argument, noted above, clearly indicated and put the circuit court on notice that an “occurrence” was a defined term under the policy and that its definition does not include what Kentucky has statutorily defined as murder.

In its review, the circuit court took notice of—and found dispositive to its review—an endorsement which it acknowledged was never a part of Keith E. Conley’s policy. Specifically, the circuit court determined that the endorsement contained an alternative definition of the word “intent”; and, based upon that alternative definition of intent (which the circuit court apparently believed conflicted with the ordinary meaning of the word “intent”) the circuit court determined that the policy’s use of the word “intent” was ambiguous. As such, it mandated coverage under the circumstances.

The Kentucky Court of Appeal concluded that the circuit court manufactured an ambiguity by looking beyond the four corners of the contract. This was impermissible.

The rules of contract interpretation dictate that the parties’ intentions are to be discerned only from the four corners of the contract itself. Absent ambiguity, extrinsic evidence should not be considered, and a court is required to interpret the contract terms by assigning language its ordinary meaning.

With this in mind, “intent” or “intention” is not ambiguous as used in Keith E. Conley’s policy. The statute’s use of “intent” is consistent with the general definition of the word. As described elsewhere in the definitions section of Kentucky’s penal code, a person acts “intentionally” “with respect to a result or to conduct described by a statute defining an offense when his conscious objective is to cause that result or to engage in that conduct.” KRS 501.020(1). When read with the definition of “intentionally” in KRS 501.020, KRS 507.020(1)(a) designates as murder a homicide that results from conduct of a person whose conscious objective is to cause another’s death.

Simply put, when the jury in Conley’s criminal trial found him guilty of murder it determined beyond a reasonable doubt that Jessica Newsome’s death resulted from Conley’s act of shooting her, and that Conley’s conscious objective in shooting her—his reason for acting in that way—was to cause her death.

Therefore, under either the statute or the policy, Jessica Newsome’s death was the result of Conley’s intentional act.

In light of the foregoing, the Court of Appeal reversed the trial court and directed the circuit court to enter judgment in favor of Farm Bureau finding that Keith E. Conley’s homeowner’s insurance policy does not obligate Farm Bureau to either provide a defense for Conley or satisfy any judgment that might be entered against him as a result of the Newsomes’ wrongful death action.

ZALMA OPINION

Murder, by definition, is an intentional act. Insurance, by definition, only insures the liability of the insure against loss, damage, or liability arising from a contingent or unknown event. Murder, being an intentional act is neither contingent nor is it unknown to the murderer. The appellate court slapped the trial court judge who tried to change the meaning of insurance and the insurance contract to provide benefits to the victim of the crime rather than limit the benefits in accordance with the terms of the contract. In simple language murder cannot be accidental.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

How Do You Set Aside an Appraisal Award?

Umpire Must Be Unbiased

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What Is Needed to Refuse a Defense?

Duty to Defend Is Difficult to Disclaim on Summary Judgment

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

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

ISSUES

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

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

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

ANALYSIS

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

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

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

DECISION

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why Insured Should Never Sign a Release Without Advice of Counsel

Release Means What It Says and Says What it Means

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

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

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

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

BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

You Can’t Con an Honest Person

Insured Must Read Application For Insurance

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

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

FACTS

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

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

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

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

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

CONCLUSION

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Sometimes Insurance Fraud Doesn’t Pay

Zalma’s Insurance Fraud Letter

July 1, 2015

Compliance With The California SIU Regulations

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

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

Sometimes Insurance Fraud Doesn’t Pay

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Sometimes Insurance Fraud Doesn’t Pay

Heads I Win, Tails You Lose

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

Posted in Zalma on Insurance | Comments Off on Heads I Win, Tails You Lose

When Does an Endorsement Supersede the Base Coverage Wording?

Coverage Determined by What Is not What Might Be

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

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

BACKGROUND

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Does an Endorsement Supersede the Base Coverage Wording?

When is a “Known Loss” Not Known?

Know Loss Exclusion Requires Knowledge of the Damage Claimed

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When is a “Known Loss” Not Known?

Can Insured Get Back Premium if No Loss?

Risk of Loss Is Transferred to Insurer on Inception of Policy

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

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

FACTS

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Can Insured Get Back Premium if No Loss?

SIU Regulations Webinar

Webinar – Compliance With The California SIU Regulations

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on SIU Regulations Webinar

Can an Insured Receive Coverage for Breach of Fiduciary Duty

Trustees Should Not Cheat Beneficiaries

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

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

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

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

BACKGROUND

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

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can an Insured Receive Coverage for Breach of Fiduciary Duty

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

Homeowners Policy Requires Insured to Reside at Dwelling

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

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

FACTS

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What is a “Residence Premises” & Who Are Resident Relatives?

Condition Precedent Enforced

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

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

ISSUES

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | Comments Off on Condition Precedent Enforced

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

Montana Adopts Notice Prejudice Rule

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

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

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

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When Must An Appraisal Award Be Reversed?

Appraisal Panel Must Appraise Loss Not Claim

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

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

FACTUAL BACKGROUND

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

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

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

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

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

(6)     An arbitrator making the award either:

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

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

Law Governing Insurance Appraisals

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

Compelling Appraisal of Disputed Items

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Must An Appraisal Award Be Reversed?

What is The Covenant of Good Faith and Fair Dealing?

The Covenant of Good Faith Is Mutual

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What is The Covenant of Good Faith and Fair Dealing?

What is Insurance

A video blog.

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Millions for Defense and Never Accept Fraud

Fraud Fails – Insured Must Pay Insurer

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

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

FACTS

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

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

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

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

FINDINGS OF FACT

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

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

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

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

THE EXCLUSION

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

PAYMENTS MADE IN GOOD FAITH

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Millions for Defense and Never Accept Fraud

Is an Arson Fire Vandalism in Tennessee?

Lack of Definition Makes Exclusion Unclear

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

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

FACTS & PROCEDURAL HISTORY

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

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

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

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

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

ISSUES PRESENTED

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is an Arson Fire Vandalism in Tennessee?

May Insurers Insure Against Punitive Damages?

Insurance For Punitive Damages Against Public Policy

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

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

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

BACKGROUND

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

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

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

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

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

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

DISCUSSION

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

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

Motion in Limine

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on May Insurers Insure Against Punitive Damages?

Innocent Misrepresentation Supports Rescission

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

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

FACTS

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

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

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

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

The trial court sustained the demurrers without leave to amend.

DISCUSSION

Law Generally Governing Rescission

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

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

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

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

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

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

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

Unjust Enrichment

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

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

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

DISPOSITION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Innocent Misrepresentation Supports Rescission

The “Chutzpah” of Fraud Perpetrators

Zalma’s Insurance Fraud Letter

June 15, 2015

The ACE Conference

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

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

The “Chutzpah” of Fraud Perpetrators

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on The “Chutzpah” of Fraud Perpetrators

Appraisal Can Stay Litigation

Appraisal Compelled to Resolve Dispute Over Quantum of Loss

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

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

FACTS

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Appraisal Can Stay Litigation

Conflict of Interest Required To Remove Counsel

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

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

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

The trial court order was affirmed.

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Conflict of Interest Required To Remove Counsel

Appraisal Award Binding

Payment of Appraisal Award Satisfies Policy Promise to Indemnify

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Appraisal Award Binding

Vicarious Liability & Additional Insured Endorsement

Duty To Defend Based on Extrinsic Evidence

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

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

THE CONTRACTS

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

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

THE INCIDENT

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Vicarious Liability & Additional Insured Endorsement

Insured vs. Insured Exclusion

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

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

FACTS

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insured vs. Insured Exclusion

Why Is There An Insurance Adjuster?

The Adjuster

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

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

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

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

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

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

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

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

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

Zalma Opinion

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

Is There Coverage for Assaulting Your Employee?

Business Dispute Not Covered by Homeowners

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is There Coverage for Assaulting Your Employee?

When Does Assault & Battery Exclusion Apply ?

Assault & Battery Exclusion Easy to Prove When Patrons Shot

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

BACKGROUND

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

THE  POLICY

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

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

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

The second provision is a weapons exclusion which states,

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

APPLICABLE LAW

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

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

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

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

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

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

ZALMA OPINION

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

© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

New York’s Difficulty With The Tort of Bad Faith

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

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

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

BACKGROUND

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

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

DISCUSSION

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

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

N.Y. Gen. Bus. Law § 349

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

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

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

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

Bad Faith & Consequential Damages

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Does Breach of Warranty Void Insurance Coverage?

Strict Compliance With Marine Insurance Warranty is Required

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

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

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

BACKGROUND

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

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

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

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

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

HULL AND MACHINERY POLICY AND THE LACK OF CERTIFICATION

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

When Is a Landslide a Fire?

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

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

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

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

FACTS

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

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

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

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

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

Arizona requires, by statute, that all fire insurance policies conform to a standard policy, which is based on New York’s standard fire policy of 1943.  If a policy conflicts with the provisions in the standard policy, the standard policy provisions govern. The standard fire policy states that an insurer will provide coverage against all direct loss by fire, lightning and by removal from premises endangered by the perils insured against in this policy.

The key question under Arizona law is then whether the mudslide that damaged Stankova’s house was “directly” caused by fire. Stankova argues that the mudslide was directly caused by the fire, and that therefore the damage to her home is covered under the policy. Metropolitan argues that Stankova’s insurance policy unambiguously excludes water damage and earth movement and asserts that the fire was not a direct cause of the damage to Stankova’s house.

Fire insurance is intended to cover every loss, damage, or injury proximately caused by fire. The Ninth Circuit also believes that it also covers every loss necessarily following directly and immediately from such peril or from the surrounding circumstances, the operation and influence of which could not be avoided.  Under the definition of direct and proximate cause adopted by Arizona, it is possible that the fire directly caused Stankova’s loss in an unbroken sequence and connection between the wildfire and the destruction of the house.  A reasonable fact finder could conclude that the destruction of the house was caused by the fire, which likely caused the mudslide, the operation and influence of which could not be avoided.

Thus, although an efficient proximate cause analysis is not appropriate under Arizona law, we need not apply that doctrine in order to find that the damage here could have been directly and proximately caused by the wildfire.

There is no doubt that Metropolitan attempted to limit its coverage with its anti-concurrent causation provision. However, this provision is inconsistent with Arizona’s standard fire insurance policy, which insures against all direct loss by fire. We know of no case that would allow Metropolitan to contract out of the standard fire policy’s purpose so as to exclude coverage for this type of direct loss from fire.

There is a triable issue as to whether the fire directly caused the destruction of Stankova’s home. The district court’s grant of summary judgment was reversed and the case remanded for trial or further proceedings.

ZALMA OPINION

I believe a reasonable trier of fact would find the direct cause of loss was landslide and mudflow, two causes specifically excluded, much easier than finding the direct cause of the loss was fire since there is no way to determine that the mud would not have flowed but for the fire. This is not a finding that fire caused the damage. It is only a finding that a reasonable jury might find that it is the cause of loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When Is a Landslide a Fire?

The Amount of Fraud Influences Sentence

Zalma’s Insurance Fraud Letter

June 1, 2015

In this, the eleventh issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on June 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    How Big Was the Fraud
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Guilty of Arson-For-Profit But Avoids Reverse Bad Faith
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Misrepresentations Concerning Theft Claim Voids Coverage
6.    Webinar: “Set-Up of Insurer Bad Faith, Defense of Bad Faith Suits and “Reverse Bad Faith” Claims: Insurer v. Policyholder Perspectives
7.    Something Different – Bimbo Commits Fraud
8.    The Need to Keep Politicians Out of the Insurance Business.

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    May a Lender Force Place Insurance? –  May 29, 2015
2.    Speculative Conflict & The Right to Independent Counsel – May 28, 2015
3.    Webinar by Barry Zalma – May 27, 2015
4.    Is an Insurer Obligated to Pay For Coverage Not Requested? – May 27, 2015
5.    What Are the Insurance Obligations of a Condo Unit Owner? – May 26, 2015
6.    An Important Tool – The Examination Under Oath – May 25, 2015
7.    Are Intentional Acts Insurable? – May 22, 2015
8.    Is The Car an Innocent Bystander to Road Rage? – May 21, 2015
9.    Can a Person Be a Member of a Household Living in a Separate Structure? – May 21, 2015
10.    Arson-For-Profit Must Repay Insurer – May 20, 2015
11.    Does the AIA Construction Contract Avoid Litigation? – May 19, 2015
12.    When a Customer Is Not a Customer – May 18, 2015
13.    What Happens When State Formed Insurer Acts in Bad Faith? – May 18, 2015
14.    Murder For Insurance – May 15, 2015
15.    When Are Intentional Acts Also Accidental? – May 14, 2015
16.    Is It Time to Reconsider the Notice-Prejudice Rule? – May 13, 2015
17.    Free Claims Magazine Subscription – May 12, 2015
18.    California SIU Regulations – May 12, 2015
19.    Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer – May 11, 2015
20.    How to Avoid the Tort of Bad Faith – May 9, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Comments Off on The Amount of Fraud Influences Sentence

May a Lender Force Place Insurance?

 Profits, Commissions & Force Placed Insurance

No one likes to pay insurance premiums and would prefer to buy insurance the day before the fire. Unfortunately true psychics are rare so we all buy insurance to protect against unknown future losses.

Mortgage contracts invariably require that the borrower protect the security with hazard insurance. When the homeowner fails to purchase the hazard insurance the mortgagee has the right to place insurance at the expense of the borrower. This force placed insurance is limited to protecting the structure and is invariably more expensive than a property owner can purchase in the open market because of the increased morale hazard caused by an owner who refuses to insure the property. In Johnson v. Green Tree Servicing LLC, Slip Copy, 2015 WL 2452680 (N.D.Miss., 5/22/15) the property owner tried to avoid paying for the force placed insurance by claiming the lender profited from the transaction. The District Court for the Northern District of Mississippi was asked to resolve the dispute.

FACTS

The defendant, Green Tree Servicing LLC (“Green Tree”) is a mortgage servicing company. The plaintiff, Rayar Johnson, has a mortgage serviced by Green Tree. Johnson’s claim arises out of the force-placed insurance (“FPI”) Green Tree acquired on Johnson’s home in Buckatunna, Mississippi. Johnson claims Green Tree illegally benefited from a scheme of unearned “kickbacks” from the insurance company for placing the insurance. Green Tree asserts that Johnson was aware that hazard insurance on the property was required to protect Green Tree’s interest in the property, and that if Johnson did not obtain her own hazard insurance, Green Tree would force place insurance on the property.

Johnson executed a mortgage on her home in 2005, and in 2013 that mortgage was transferred to Green Tree, at which time Johnson no longer had hazard insurance on the property. Section 5 of the mortgage required Johnson to maintain hazard and flood insurance on the property. If Johnson failed to maintain this insurance coverage the mortgage provided the following: “If Borrower fails to maintain coverage described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage…. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained.” (Emphasis added)

Green Tree sent Johnson a letter advising her that she did not have adequate hazard insurance. The letter asked for proof of insurance within 45 days, and if adequate insurance was not obtained in that time period, Green Tree “may exercise [its] right to obtain insurance coverage on the collateral to protect [its] interest.” The letter continued, in bold face type, “Please note that if we do buy insurance coverage on the collateral, we will do so through an affiliated insurance agency that will earn a commission on the insurance policy.”

Johnson never provided proof of coverage and Green Tree purchased force placed policy from American Security Insurance Company. Green Tree sent Johnson a notice of this purchase and again told Johnson that Green Tree purchased the insurance through an affiliated insurance agency and that Green Tree may earn a commission on the insurance policy. Green Tree again urged Johnson to provide proof of her own insurance, and indicated that, if she did so, the policy Green Tree had acquired would be canceled.

ANALYSIS

Johnson alleged breach of contract and breach of the duty of good faith and fair dealing arising out of the hazard insurance Green Tree force placed on Johnson’s property because of Johnson’s failure to obtain hazard insurance.

Plaintiff is not challenging the rates themselves but rather Green Tree’s performance under the terms of the mortgage.  Viewed in a most favorable light, the substance of Johnson’s claim is that the insurance rates were unreasonable or inappropriate. The rate Green Tree charged Johnson was filed with and approved by the Mississippi Insurance Commission. The approved rate included the alleged “kickbacks” and other costs. Since the rate was approved by the Commission, the rate is per se reasonable. Therefore, the District Court found that Johnson’s claims that she was over-charged and cheated are barred by the filed rate doctrine which made the rate charged fair and reasonable.

In addition to being barred by the filed rate doctrine, the court also found that Johnson failed to state a claim for breach of contract or bad faith. The mortgage instrument required Johnson to acquire hazard insurance. Nothing in the mortgage instrument prohibits Green Tree from earning commissions from force placed insurance.

Green Tree repeatedly admonished Johnson to acquire hazard insurance and warned of the consequences of not doing so. Green Tree disclosed the nature and cost of the insurance it would force place on the property and further disclosed that Green Tree may earn a commission on the insurance.

Based on the complaint, a reasonable jury could not find Green Tree either breached the contract or acted in bad faith towards Johnson.

ZALMA OPINION

Every property owner should protect the property from unknown or contingent losses with insurance. To do otherwise exposes the property owner to a total risk of loss. When the property is subject to a mortgage the mortgage agreement requires that the property – the collateral given for the loan – be protected by insurance. The plaintiff not only failed to insure, she refused to insure, and was therefore obligated to pay for the forced placed insurance. To sue the mortgagee for her defalcation was simply an expression of unmitigated gall.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on May a Lender Force Place Insurance?

Speculative Conflict & The Right to Independent Counsel

Construction Defect Suit Defended Under Reservation of Rights

Liability insurers commonly have a duty to control defense of any suit against its insured. If an insurer issues a specific reservation of rights that creates a conflict of interest between the insurer and the insured in jurisdictions like California, the insured is entitled to independent counsel. However, the courts refuse to assume that the insurer is evil and will instruct counsel it retains to harm the insured and allow it to eventually refuse coverage. People insured, especially in construction defect actions, assume that the insurer will act, as would the developer, in its own interest over that of the insured. That assumption, of course, would be a violation of the implied covenant of good faith and fair dealing.

A Developer, who was the defendant in underlying construction defect litigation, brought suit against its subcontractors, alleging breach of contract to indemnify, defend, and obtain insurance and also sued the insurers seeking declaratory relief seeking equitable indemnity, contribution and repayment, against the subcontractor’s insurer.

The insurance coverage dispute arose from underlying construction defect litigation in which Corona homeowners have sued the developer, plaintiff and appellant Centex Homes (Centex), for work performed by Centex’s subcontractors. One of the subcontractors, Oak Leaf Landscape, Inc. (Oak Leaf), is insured by defendants and respondents, St. Paul Fire & Marine Insurance Company and St. Paul Mercury Insurance Company (Travelers). Centex is named as an additional insured on the Travelers’s policy. Centex sought defense and indemnity from Travelers in Centex Homes v. St. Paul Fire and Marine Insurance Company, — Cal.Rptr.3d —-, 2015 WL 2437957 (Cal.App. 4 Dist., 5/22/15) and demanded independent counsel after receiving a reservation of rights letter from the Travelers. Travelers demurred and the trial court sustained the demurrer to the causes of action dealing with independent counsel and the reservation of rights. Centex appealed.

FACTUAL  BACKGROUND

When ruling on a demurrer, the facts alleged in the complaint are taken as true. Centex alleges that it was a developer of single-family residences in Corona. In May 2012, Centex was sued by Corona homeowners in Riverside County Superior Court for construction defects. Centex tendered the defense to Travelers, which accepted the defense subject to a reservation of rights, including the right as provided by the contract of insurance to choose and control defense counsel.

Centex filed the present action against 57 subcontractors, alleging six causes of action for breach of contract to indemnify, defend, and obtain insurance, for equitable indemnity, and for contribution and repayment. The complaint specifically alleges that Centex “has incurred, is incurring, and will incur defense fees and costs” to defend the Corona plaintiffs’ claims, all of which are recoverable through defense and indemnity provisions in its agreements with its subcontractors and through various insurers who named Centex as an additional insured under general liability policies issued to the subcontractors.

In its demurrer, Travelers argued that Centex had not alleged any specific facts to demonstrate Travelers is manipulating the defense, thus entitling Centex to independent counsel. Furthermore, the allocation of defense costs and fees is premature because the amount of fees, the parties involved, and the relevant facts are still unknown.

DISCUSSION

Centex argues that, to the extent Travelers controls the defense of both the subcontractors and Centex, Travelers can manipulate the litigation against Centex’s interests, creating an ethical conflict requiring independent counsel: “There is a large block of authority recognizing what also seems relatively obvious: when an insured is obligated to provide defenses for two or more insureds with adverse interests, there is a sufficient conflict of interest that the insurer must provide independent counsel for each insured at its own expense.” (14 Couch on Insurance (3d ed. 2014) § 202:24.) Additionally, Centex claims that, when Travelers seeks reimbursement of defense fees, its right to reimbursement and the issue of allocation must be resolved as part of the action against the subcontractors.

The Eighth Cause of Action

“A reservation of rights by an insurer does not necessarily constitute a conflict of interest requiring the insurer to provide independent counsel. The conflict must be significant, not merely theoretical, actual, not merely potential.” (Emphasis added) [Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1421, 120 Cal.Rptr.2d 392; James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101–1102, 111 Cal.Rptr.2d 181]  Nor is a general reservation of rights sufficient to trigger the right to independent counsel.

The facts alleged by Centex do not support its claim of a conflict of interest with Travelers. An insurer has the right to control a defense. Centex argues Travelers will manipulate experts to its advantage without giving any explanation about how that will be accomplished. Similarly, Centex offers a host of allegations about how Travelers will control the litigation without describing how this is occurring in the underlying construction defect litigation. Centex is alleging conclusions without substance, not facts. The California Court of Appeal, in reaching its decision, concluded that as “Gertrude Stein famously said about Oakland, there is no there there.”

Public policy dictates that leave to amend be liberally granted. If there is any reasonable possibility that the plaintiff can state a cause of action, it is error to sustain a demurrer without leave to amend. As an alternative, Centex requests a reversal to allow Centex the opportunity to amend its complaint.

Unfortunately for Centex it did not request leave to amend from the trial court. On appeal, it does not sufficiently propose how the seventh and eighth causes of action could be amended to state a claim based on an actual, present, existing, or ripe controversy. For that reason, the court rejected Centex’ argument.

ZALMA OPINION

Because major development contracts require multiple versions of risk shifting by each developer requiring the general contractor to defend, indemnify and insure the developer and each sub-contractor required to defend,indemnify and insure the developer and the general contractor, and down the line. That is why Centex sued over 50 subcontractors seeking defense and indemnity from multiple entities and insurers all running in different directions as if they were 50 clowns running out of a Fiat 500. It makes litigation in claims of construction defect a certainty and is a full employment act for the defense bar. This one suit will require the services of over 60 law firms defending each party. Centex speculated evil conduct by Travelers with no facts so it could control the defense. It failed. The entire situation is Nuts!

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Comments Off on Speculative Conflict & The Right to Independent Counsel

Webinar by Barry Zalma

Set-Up of Insurer Bad Faith, Defence of Bad Faith Suits and “Reverse Bad Faith” Claims: Insurer vs. Policyholder Perspectives

Attend Live Online Training Only

http://www.complianceonline.com/set-up-of-insurer-bad-faith-and-defence-of-bad-faith-suits-and-insurer-policyholder-perspectives-webinar-training-703922-prdw?channel=suraj

June 05, Friday 10:00 AM PDT | 01:00 PM EDT

Why Should You Attend:

This webinar will highlight the multi-billion dollar business of insurance and how the tort of bad faith has grown to be a force that bleeds the insurance industry of potential profits. It will explain what the tort of insurance bad faith is, various methods by which insurers are set up by lawyers to obtain actions they can later claim are tortious, and the various weapons provided by legal precedent and professional claims handling to work to reduce the amount claimed by plaintiffs’ bad faith lawyers.

Areas Covered in the Webinar:

  • The tort of bad faith and why it was created.
  • How the tort of bad faith grew from payment of an excess verdict to multi-million punitive damage judgments.
  • The methods used to set up an insurer for claims of bad faith.
  • The appropriate responses to an attempt to set up the insurer for a claim of the tort of bad faith.
  • The type of evidence available to prove the insurer was set up.
  • How to convince courts that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.
  • The defences available to insurers who are charged with the tort of bad faith.

Who Will Benefit:

  • Insurer Claims Executives
  • Insurer Claims Representatives
  • Independent Insurance Adjusters
  • Insurance Agents and Brokers
  • Operational Risk Managers
  • Insurance Coverage Lawyers
  • Insurance Claims Lawyers

The covenant of good faith and fair dealing has been applied equally to both the insurer and the insured since, at least, 1766 when Lord Mansfield in the British House of Lords ruled in a case called Carter v. Boehm. However, since the invention of the tort of bad faith in the 1960’s breach of the covenant by an insurer became a tort but breach of the covenant by the insured is not a tort but may be raised as a defense to claims that the insurer tortuously breached the covenant.

As a result of the lack of equal treatment lawyers who represent plaintiffs in suits against insurers for the tort of bad faith are tempted to use techniques to set up insurers to do things that can later be trotted out as evidence of bad faith rather than attempt to promptly and fairly settle a claim. Insurers may use the bad faith conduct of the insured and the insured’s counsel as a defense to the tort of bad faith suits.

Insurers must refuse to fall into the set up traps laid by plaintiffs’ counsel and must aggressively defend claims of bad faith when they believe they were set up and bring to the fore evidence that the insured treated its insurer in bad faith as a defence to the bad faith suit.

Insurance bad faith was created as a tort to protect the public against abuses by the insurance industry that was perceived to take advantage of unwitting members of the public. In practice, over the last 50 years, the tort of bad faith often is used to bludgeon an insurer into paying claims it does not owe because the expense of defending such actions exceed the amount it would cost to defend. Many insurers pay extortion to avoid the expense of defending cases claiming the tort of bad faith and the extreme cost if the insurer loses at trial.

Courts also must be educated to recognize a set up from a real act of bad faith. The tort of bad faith has run its course and should either be totally done away with or made mutual so that an insurer can recover tort damages from an insured whose conduct breaches the promise to treat the insurer with good faith and fair dealing.

Sign up here.

Posted in Zalma on Insurance | Comments Off on Webinar by Barry Zalma

Is an Insurer Obligated to Pay For Coverage Not Requested?

You Only Get What You Pay For

It is almost expected that no one reads their insurance policy until after a loss. Similarly, people only complain about the inadequacy of the policy acquired if it, as it was ordered, does not provide coverage for the loss incurred. In Siddique v. Western Heritage Ins. Co., Slip Copy, 2015 WL 2451734 (E.D.Okla., 5/21/15) the insured sought to obtain insurance coverage and other damages because the policy acquired did not cover the loss incurred.

On May 19, 2014, Plaintiff Muhammad L. Siddique filed this action in state court against Defendants Western Heritage Insurance Company (“Western Heritage”); Specialty Insurance Managers of Oklahoma, Inc.; Wardlaw Claims Service, LLP; and Dennis Ray Eastep, Jr. Defendant Western Heritage removed the case to the U.S. District Court and subsequently filed the present Partial Motion to Dismiss, challenging the Plaintiff’s Petition for failing to allege sufficient facts to state a claim upon which relief may be granted.

BACKGROUND

The Plaintiff alleges that he suffered property damage to his home arising from a hailstorm in May 2013, and that the Defendant did not properly adjust his insurance claim.

ANALYSIS

To survive a motion to dismiss a complaint must contain a short and plain statement of the claim showing that the pleader is entitled to relief. Detailed factual allegations are not required, but the statement of the claim must be more than an unadorned, the-defendant-unlawfully-harmed-me accusation.

Breach of Fiduciary Duty

The Plaintiff asserts in his Petition that a special relationship akin to that of a fiduciary existed between the Plaintiff and Defendant due to unequal bargaining power, the quasi-public nature of insurance, and the potential for the Defendant to exploit the Plaintiff’s vulnerability. He further alleged that the Defendant’s specialized knowledge and duty to act reasonably created this special relationship.

Fiduciary relationships are not limited to any specific legal relationship, but can arise anytime the facts and circumstances surrounding a relationship would allow a reasonably prudent person to repose confidence in another person. The four elements of a breach of fiduciary duty claim are:

(1)     the existence of a fiduciary relationship,
(2)     a duty arising out of the fiduciary relationship,
(3)     a breach of the duty, and
(4)     damages proximately caused by the breach of duty.

The Plaintiff’s assertion ignores that the Oklahoma Supreme Court has already determined that the special relationship between insurer and insured and that although the state recognizes a duty of good faith and fair dealing that duty does not enlarge to a fiduciary duty.

The District Court noted that the Plaintiff pleaded no facts that support such an allegation of a fiduciary duty, nor has he asserted facts disclosed during discovery would lend support to such an allegation.  The existence of the duty of good faith and fair dealing implied in insurance contracts does not necessarily mean Plaintiffs’ petition states a claim for breach of fiduciary duty.

The court found, therefore, that the Plaintiff failed to state a plausible claim for breach of fiduciary duty against the Defendant Western Heritage. Since the Court has already found that plaintiff has sufficiently pled a cause of action for breach of the duty of good faith and fair dealing, the Court found that plaintiff’s breach of fiduciary duty claim should be dismissed.

Negligent Procurement of Insurance

Next, the Plaintiff asserts that Defendant Western Heritage is vicariously liable for the actions of its agent, former co-Defendant Specialty Insurance, and that Western Heritage owed him a duty to act in good faith and to exercise reasonable care, skill and diligence in the procurement of insurance. Plaintiff in his Petition has not alleged that the agent failed to procure insurance at all, but is rather complaining of the policy that was procured, and that Western Heritage is vicariously liable for the inadequacies of said policy. However, no duty exists upon an insurer to provide an ‘adequate amount’ of coverage when the insurer did not fail to procure insurance for the insured. There is no legal basis for Plaintiff’s negligence claim based on an alleged failure of Defendant’s agent to properly advise Plaintiff regarding its insurance needs or to procure a policy that provided an adequate amount of replacement cost coverage. Accordingly, the Court found that the Defendant is entitled to dismissal of this claim.

Constructive Fraud/Negligent Misrepresentation

In the Plaintiff’s fifth cause of action, he alleges that he was misled by Specialty Insurance’s misrepresentations to purchase Western Heritage’s insurance policy.

Plaintiff argues generally that Defendant owed a duty to exercise reasonable skill and diligence in procuring the insurance Plaintiff requested and that an insurance agent should be held accountable for misrepresenting the terms or limits of an insurance policy. Plaintiff, nevertheless, failed to address the argument that he had received a copy of the policy and that the policy as written was applied to his claim. The lack of factual allegations demonstrating a specific breach of duty renders plaintiffs’ negligent procurement claim insufficient.

Negligent Underwriting

Plaintiff alleges in his sixth cause of action that the Defendant Western Heritage breached its duty of good faith by failing to “conduct an appropriate underwriting analysis” and that the breach “resulted in both inconsistent and inaccurate replacement cost valuations whereby the Plaintiff paid premiums for policy limits that did not accurately reflect the risks insured.”  The Defendant asserts that this is not a recognized claim under Oklahoma law, and the Court agreed.  The Court found no law to suggest that a common law action for negligence may be based on an insurer’s decision to raise an insured’s premium.

If every insured could bring a claim for negligence against the insurer under the insurance contract, there would be no need for claims of breach of contract and bad faith. Negligence actions would swallow insurance jurisprudence.

After reviewing the Plaintiff’s factual allegations and construing them in the light most favorable to the Plaintiff, the Court nevertheless concluded that he failed to state a claim of negligent underwriting, or to support its existence under Oklahoma law.  Plaintiff has simply alleged a claim of bad faith, which remains as the Plaintiff’s eighth cause of action. Without an underlying duty, their constructive fraud/misrepresentation claim and negligent underwriting claims also fail.

ZALMA OPINION

Insurers are obligated to deal fairly and in good faith with those they insure. They are not obligated, however, to compel an insured to buy insurance not ordered. The obligation is to provide the insured the coverage ordered and the limits requested. No matter how unhappy the insured is he will only be able to recover the benefits promised by the policy he ordered and acquired. If he can prove, as unlikely as it seems, that the insurer acted in bad faith, he may still obtain the damages he seeks.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is an Insurer Obligated to Pay For Coverage Not Requested?

What Are the Insurance Obligations of a Condo Unit Owner?

Must Condo Association Buy Insurance to Protect Contents of Unit Owner?

Condominium Associations are, by the documents that cause them to exist, put the Association in control of the exterior of the structures and the common areas. Condominium unit owners are responsible for the improvements and betterments in the units and their contents. Almost every such association insures the parts of the structures that it controls and advises the unit owners to obtain condominium owners insurance policies to protect their units and the contents of the units.

When the unit owners coverage is inadequate they will attempt to obtain extra payments from the insurance obtained by the Association or from the association itself. In State Farm Fire and Cas. Co. v. Chardonnay Village Condominium Ass’n, Inc., — So.3d —-, 2015 WL 2449422 (La.App. 5 Cir.), 14-959 (La.App. 5 Cir. 5/21/15) the Louisiana Court of Appeal was asked to resolve a claim by a unit owner’s insurer against the Association and the Association’s insurer for more than received from the unit owner’s policy.

FACTS

On February 14, 1997  Mrs. Theodora Lourie, purchased Unit 26C of Chardonnay Village Condominiums in Kenner, Louisiana. On November 8, 2010, a fire occurred in the kitchen of Mrs. Lourie’s condo unit. As a result of the fire, Mrs. Lourie’s insurer, State Farm Fire and Casualty Company (“State Farm”), paid her $28,200.00 for damages to her condo unit, plus $34,330.07 for damages to the contents of her condo unit and $16,645.88 for living expenses.

On November 7, 2011, Mrs. Lourie filed a petition for damages against appellee, Chardonnay Village Condominium Association, Inc. (“the Association”), and its insurer, Underwriters at Lloyd’s, London (“Lloyd’s”). The petition alleged that pursuant to the Louisiana Condominium Act, the Association’s insurance policy with Lloyd’s provided coverage for the damages at issue, and thus the Association and/or Lloyd’s must reimburse Mrs. Lourie not only for the payments State Farm made to her or on her behalf, but also for additional damages sustained to her condo unit not covered under the State Farm policy.

The Association filed a successful motion for summary judgment arguing that it was not liable for the damages occasioned by the fire. According to the Association, it properly exempted itself from insuring the interior of Mrs. Lourie’s condo unit by notifying her on multiple occasions that it would not be maintaining insurance on the interior of her condo unit.

According to the trial court, Mrs. Lourie was given constructive notice pursuant to the public records’ law. The court also found that it was uncontroverted that she was hand-delivered the Association’s 2009 revised Rules and Regulations, and furthermore, as proof of actual notice, Mrs. Lourie had obtained insurance coverage for her unit through State Farm, who then paid for her claims as allowed under its policy.

LAW AND ANALYSIS

In their assignments of error, appellants argue that genuine issues of material fact remain as to whether the Association exempted itself from the requirement to insure the interior of Mrs. Lourie’s condo unit pursuant to the statute that provides, in part: “A. Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent reasonably available: ¶ (1)Property insurance on the common elements and units, exclusive of improvements and betterments installed in units by unit owners, insuring against all risks of direct physical loss commonly insured against. The total amount of insurance after application of any deductibles shall be not less than eighty percent of the actual cash value of the insured property, exclusive of land, excavations, foundations, and other items normally excluded from property policies; [ ] ¶ * * * ¶ B. If the insurance described in Subsection A is not maintained, the association promptly shall cause notice of that fact to be hand-delivered or sent prepaid by United States mail to all unit owners. The declaration may require the association to carry any other insurance, and the association in any event may carry any other insurance it deems appropriate to protect the association or the unit owners.”

The Association advised Ms. Lourie at the time she purchased the unit that the Association holds hazard, property damage and liability insurance policies as required by the Declaration but not the interiors of the units and stated: “It is suggested that each Unit Owner obtain his own insurance covering property damage to his Unit (not covered by the Association policy) and personal property contained therein as well as insurance covering personal liability. You are urged to consult with your insurance agent.” (Emphasis added.)

At the time Mrs. Lourie purchased her condo unit, the Association’s established policy clearly provided that the Association would not be responsible for any interior damage to individual condo units. Further, it is undisputed that in her acquisition of her condo unit, Mrs. Lourie acknowledged in writing (through her agent) that the purchase of her condo unit was made and accepted subject to the covenants, conditions, restrictions, easements, liens for assessments, powers of attorney and limitations on title.

The Court of Appeal found that it was apparent from a plain reading of the 2009 revised Rule that the revised Rule merely restated the earlier Rule and simply reminded unit owners of their responsibility to purchase insurance covering the interior of their units. The court concluded that reasonable persons could reach only one conclusion, that the revised Rule merely repeats and reaffirms that the unit owner must take responsibility for insuring the interior of his/her unit, and thus, there was no obligation on the part of the Association to purchase insurance to protect the interiors of the units and specifically were not required to insure the contents and improvements of Ms. Lourie’s unit.

ZALMA OPINION

Condominium associations are governed by a contract commonly known as the “Covenants, Conditions and Restrictions” that are binding on the Association and the individual unit owners who are the members of the Association. Most, if not all, condominium associations insure only the common areas and the exteriors of the units. The Insurance Services office has created the form HO-6 designed to protect unit owners with a policy like the State Farm policy acquired by Ms. Lourie. State Farm attempted to get its money back from the Association and its insurer, by improperly suing the Association and Lloyd’s Underwriters. Every condominium unit owner should acquire an HO-6 or its equivalent or will find itself uninsured in the event of a loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on What Are the Insurance Obligations of a Condo Unit Owner?

An Important Tool – The Examination Under Oath

 False Answer at EUO Is Fraud

A False Answer as to Any Matter of Fact Material to The Inquiry, Knowingly And Willfully Made, With Intent to Deceive The Insurer, Would Be Fraudulent

The position taken by the U.S. Supreme Court in Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 3 S.Ct. 507, 28 L.Ed. 76 (1884) that the object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims, has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F.2d 6, 13 (C.A. 7, 1945) the Seventh Circuit stated:

 “We think there is no escape from the conclusion that these witnesses purposefully refused to answer ques­tions upon examination under oath which were materi­al to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy.   We would think that defendants had a right to examine as to any matter material to their liability, as well as to its extent ” (Emphasis added)

In Kisting v. Westchester Fire Insurance Co. 290 F. Supp. 141 (W.D. Wis, 1968) affirmed 416 F.2d 967 the District Court granted summary judgement because of the refusal of the insured to answer material ques­tions. The court stated:

 “It is well settled in other jurisdictions that noncompliance with a provi­sion in an insurance policy requiring the insured to submit to an examination under oath precludes recovery by the insured.”

In Hudson Tire Mart, Inc. v. Aetna Casualty and Surety Co., 518 F.2d 671 (C.A.2d, 1975) the insured sought injunctive relief against the examination under oath provision of the standard fire policy because it would deprive him of his Fifth Amendment right against self incrimination. The court rejected the request and held that:

The purpose of the cooperation clause is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved while the information is fresh in order to protect itself from fraudulent and false claims Only after the incriminating question is asked, is he in a position to assert his immunity and seek a protective order. 

Consequently at this stage of the proceedings the dilemma which the appellant attempts to present is a fictitious one.

The failure to appear at examination under oath was held to be an absolute defense in Lentini Brothers Moving & Storage Co., Inc. v. New York Property Insurance Underwriting Assoc., 428 N.Y.S.2d 684 (1980) affirmed 51 N.Y.2d 740 (1981). The court stated:

 “Compliance with the policy provisions is a condition precedent to recovery. No compliance with the provisions as to written proof of loss or sworn examination occurred. Thus, recovery is barred.”

To protect its right to the examination under oath the insurer should always “require” the insured’s attendance at the examination under oath . The insurer, its Insurance Claims Professional or attorney should never “request” the presence of the insured.

If the insurer only “requests” the insured’s presence, the insured, can correctly contend he did not violate a policy condition if he fails to appear. If the insurer, through its Insurance Claims Professional or attorney, “requires” his presence it should be clear that a failure to appear and testify will void coverage.

An Examination Under Oath Is a Serious and Important Part of the   Insurer’s Investigation

The attorney, Insurance Claims Professional or investigator who takes the examination under oath can take a role similar to the role of a prosecutor without the usual constitutional restraints effecting the examination under oath . [Hickman v. London Assurance Corporation, 184 Cal. 524, 195 P. 45 (1920).] A false statement as to any material fact during the examination under oath can cause the policy to be declared void, even if the fact has no relationship to the loss.

In Claflin the false testimony concerned a witness that would not affect the amount payable under the policy but to protect his reputation for veracity. The Supreme Court found that the witness of the injury was material to the investigation and declared the policy void for fraud because he made false statements under oath.

Contrary to the Belief of Lawyers for the Insured, the Examination under Oath Is Not an Adversary Proceeding like a Deposition in a Lawsuit.

The examination under oath is an investigative tool made available to the insurer. It allows the insurer to delve deeply and under oath into all aspects of the policy and the loss. It is not constrained by the rules of discovery or the Codes of Civil Procedure.

The only restraint on the examination under oath is reasonableness. Unlimited questions are allowed. Only totally irrelevant and unreasonable questions dealing with facts completely outside the policy, its acquisition or the loss are not favored.

Irrelevant questions are tolerated if there is any possibility the question may lead to an inquiry about facts relevant to the policy or claim.

The EUO is A Duty Owed by the Insured to the Insurer

Every fire insurance policy issued in the U.S. provides that, in the event of a loss, the insurance company can require the insured to produce documents and testify at an “examination under oath.” The examination under oath is not a deposition; there is no prerequisite lawsuit, nor is the examination subject to formal rules of procedure.

The purpose of examinations under oath was first described in Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 94-95 (1884):

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath . . . was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured.

The examination under oath and the requirement that insureds produce relevant documents in the event of a fire are essential tools to insurers faced with a possible fraud or other issue affecting insurance coverage. Insureds, and their counsel, will often argue that they are not required to produce tax returns or other financial documents because to do so would violate the so-called “taxpayers privilege” or right of privacy. They may refuse to testify about subjects they claim are irrelevant or protected by a privilege or right of privacy. In most states, refusals to testify or produce documents can result in a forfeiture of claims presented by the insured. If, as a result of a fire, the insured has lost the documentary evidence necessary to adequately prove the loss, then the insured can only prove the loss by oral testimony.

By his or her testimony, the insured can remove the suspicions of the insurer. The purpose of the examination under oath is to allow the insured a medium to prove the loss. Sworn testimony is as, or more, effective evidence than documents for an insured to prove his or her loss.

In Rymsha v. Trust Insurance Company, 746 N.E. 2d 561 (Mass. App. CT. 2001), the insured failed or refused to provide financial records including her income tax returns, credit card information regarding the purchase of items reported stolen, photographs and receipts. When she failed the insurer denied her claim. The Massachusetts appellate court reasoned:

We think resolution of Rymsha’s appeal is controlled in all respects by Mello v. Hingham Mut. Fire Ins. Co., 421 Mass. 333, 337 (1995). In that case, the court agreed with those authorities therein cited which hold that the “submission to an examination, if the request is reasonable, is strictly construed as a condition precedent to the insurer’s liability.” Id. We see no basis for a distinction between an obligation to submit to a reasonably requested examination under oath and the duty to produce documents pertinent to the claimed loss. Rymsha does not contend otherwise. Indeed, she does not even cite to, let alone discuss, Mello. Rather, she argues only that, because she informed Trust from the outset that many of the items she reported as stolen had been given to her, the information sought by Trust (specifically, her personal and corporate income tax returns for the years 1988 through 1994) was not pertinent to her claim. In considering whether the documents requested by Trust were pertinent to Rymsha’s claim, the Superior Court judge concluded that Rymsha’s examination under oath and the undisputed circumstances of her claim gave rise to the reasonable suspicion that she did not have the resources to purchase the allegedly stolen items, that she had a ‘motive to stage the loss,’ that Trust had the right ‘to assure itself of the validity of [the] claim,’ and that the requested documents were relevant to that question. We see no error. See Sidney Binder, Inc. v. Jewelers Mut. Ins. Co., 28 Mass. App. Ct. 459, 462-463 (1990) (in theft claim, evidence of insured’s business affairs and personal finances relevant to show that insured had motive to stage burglary). Numerous other jurisdictions have held that the financial status of an insured can be relevant to an insurer’s investigation of a claim. See, e.g., Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 160 (S.D.W. Va. 1987); Pisa v. Underwriters at Lloyd’s, London, 787 F. Supp. 283, 285 (D.R.I.), aff’d, 966 F. 2d 1440 (1st Cir. 1992); DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601, 612 (App. Div. 1995); Dlugosz v. Exchange Mut. Ins. Co., 176 A.D. 2d 1011, 1013 (N.Y. 1991); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wash. App. 712, 720-721 (1997). In the circumstances here presented, the Superior Court judge was not in error in concluding that the challenged documents were pertinent to Rymsha’s claim.

The insured in Rymsha attempted to defeat the insurer’s argument by claiming the insurer was not prejudiced by her failure to produce documents. The Court rejected the argument and found that the failure to produce the reasonably requested pertinent information put the insurer in the untenable position of either paying the claim without question and without any means by which to investigate its validity, notwithstanding the circumstances and amount of the loss described in her unsworn statement and examination under oath testimony, or being sued for breach of contract and unfair acts and practices. The court concluded that, without finding that a showing of prejudice was necessary, the prejudice to the insurer was “too obvious to warrant discussion.” It was enough to state that the insured’s blanket refusal to provide the reasonably requested documents even stymied the insurer’s ability to show actual prejudice.

Concluding that a breach of an examination under oath clause and an Indiana Supreme Court decision, Morris v. Econ. Fire & Cas. Co., 848 N.E.2d 663, 666 (Ind. 2006), held that breaches of examination under oath  clauses do not require a showing of prejudice; rather an insurance company only needed to show a material breach to prevail. [Collins v. State Farm Fire and Casualty Co., No. 06-C-801 (E.D.Wis. 02/28/2008)] The same position as taken in Hanover Insurance Co. v. Cape Cod Custom Home Theater, Inc., No. 07-P-188 (Mass.App. 8/08/2008) where refusal to produce required documents and failure to testify destroyed the insured’s right to recover indemnity. Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 08/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

      Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 8/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on An Important Tool – The Examination Under Oath

Are Intentional Acts Insurable?

Intentional Acts and Insurance

“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22] As a result an intentional or intended action that causes damage to a third party is not available to defend or indemnify an insured since an  intentional and known event is not insurable.

In Albert v. Mid-Century Insurance Company, Not Reported in Cal.Rptr.3d, 2015 WL 1915339 (Cal.App. 2 Dist., 5/38/26) Plaintiff Shelly Albert appealed from the judgment in favor of defendant Mid–Century Insurance Company after the trial court granted defendant’s motion for summary judgment. Plaintiff sued defendant for breach of the insurance policy and insurance bad faith after defendant denied her tender of the defense of a lawsuit brought by nonparty Henri Baccouche.

FACTUAL BACKGROUND

Plaintiff purchased a homeowners insurance policy from defendant in January 2008. The policy was in force on January 3, 2011, when plaintiff was sued by her neighbor, Mr. Baccouche, for damage plaintiff caused to his property when plaintiff erected an encroaching fence, and pruned nine mature olive trees on Mr. Baccouche’s property. Plaintiff tendered the claim to defendant to provide a defense, and defendant denied plaintiff’s claim.

The Insurance Policy

The policy defined an “occurrence” as “an accident, including exposure to conditions, which occurs during the policy period, and which results in … property damage … during the policy period. Repeated or continuous exposure to the same general conditions is considered to be one occurrence.” (Boldface omitted) The definition closely tracks the definition of insurance quoted above.

The policy also set forth a number of exclusions, including one for “Intentional acts,” which the policy defined as “property damage … which is caused by, arises out of or is the result of an intentional act by or at the direction of the insured.

Mr. Baccouche’s Lawsuit

Baccouche’s verified complaint alleged causes of action for trespass to real property and trees, abatement of private nuisance, declaratory relief, and for quiet title. The complaint alleged that Mr. Baccouche and plaintiff owned adjacent parcels of land which were subject to a reciprocal roadway easement providing both parcels (and another parcel not at issue here, belonging to another landowner) access to the main public road. Plaintiff erected a permanent fence over a portion of the roadway easement, which also intruded onto Mr. Baccouche’s parcel. The fence enclosed a 644 square foot portion of Mr. Baccouche’s land, which included a grove of nine mature olive trees. The complaint further alleged that plaintiff “willfully and maliciously damaged nine mature olive trees on [Mr. Baccouche’s] property … by severely hacking cutting and pruning those trees so as to greatly reduce their canopies, foliage, limbs, etc., without permission….”

Mr. Baccouche later filed a first amended complaint, newly alleging a cause of action for negligent damage to his trees.

Defendant’s Investigation and Denial of Plaintiff’s Claim

On January 26, 2011, plaintiff provided a recorded statement concerning her claim to defendant. In the recorded statement, plaintiff asserted that the fence she erected was within her property line. Plaintiff did not believe any of her fencing encompassed Mr. Baccouche’s property. As to the trees at issue in Mr. Baccouche’s complaint, plaintiff asserted that the trees were “boundary trees” and that the trunks of the trees essentially straddled the property line between Mr. Baccouche’s and plaintiff’s properties.

Field Claims Manager Kristin Ferren denied plaintiff’s claim, asserting that the allegations in both the initial and first amended complaint “do not meet the definition of occurrence resulting in bodily injury or property damage as defined by your policy.”

The trial court granted defendant’s motion concluding that plaintiff had failed to demonstrate a potential for coverage, as the conduct at issue in Mr. Baccouche’s lawsuit was nonaccidental, intentional conduct.

DISCUSSION

An insurer owes its insured a broad duty to defend against claims creating a potential for indemnity.  When determining whether a duty to defend exists, the court looks to all of the facts available to the insurer at the time the insured tenders its claim for a defense. Initially, the court compares the allegations of the complaint with the terms of the policy. (Frake, supra, at p. 578.) The proper focus is on the facts alleged in the complaint, rather than the alleged theories for recovery. Nevertheless, the insured may not speculate about unpled third party claims to manufacture coverage, and the insurer has no duty to defend where the potential for liability is tenuous and Facts extrinsic to the complaint may also be examined and may either establish or preclude the duty to defend.

When an insured intends the acts resulting in the injury or damage, it is not an accident merely because the insured did not intend to cause injury. The insured’s subjective intent is irrelevant.

It is completely irrelevant that plaintiff did not intend to damage the trees, because she intended for them to be pruned. Moreover, it is undisputed that the contractor intended to cut the trees, and absolutely no facts exist, in the complaint or otherwise, indicating that some unforeseen accident (such as a slip of the chainsaw) caused the damage to the trees.

The appellate court concluded that under any view of the underlying events, the trimming of the trees was no accident.

ZALMA OPINION

Insurance, by definition, does not cover intentional torts or acts that the insured intends to do that cause damage to another. The plaintiff intended to have the trees cut and did so. By so doing there was no potential for an insured peril and the trial court’s summary judgment was affirmed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Are Intentional Acts Insurable?

Is The Car an Innocent Bystander to Road Rage?

Road Rage Assault Out of Car Not Part of Use of the Car?

Road rage is a common event in heavy traffic situations where a person making a long commute becomes frustrated and any slight can result in aggression. People have intentionally crashed their cars into others, shot a pistol at an offending driver, or got out of the car and entered into a fist fight.

FACTS
When an insured and insurer dispute whether an insured vehicle was in “use” when the insured’s employee got out of the vehicle, assaulted a pedestrian rendering him unconscious, and then dragged him to the side of the road before fleeing the scene of the altercation, the U.S. District Court in California was asked to resolve the dispute. The district court held that the car was not in use and dismissed the suit with prejudice. The plaintiff appealed and the Ninth Circuit resolved the dispute in Wincor Nixdorf Inc. v. Discover Property & Cas. Ins. Co., — Fed.Appx. —-, 2015 WL 2374113 (C.A.9 (Cal.) 5/8/15).

Discover Property and Casualty Insurance Company (“Discover”) provided auto insurance coverage for Wincor Nixdorf, Inc. (“Wincor”) and its employees, including Robert Kane (“Kane”). Allianz Global Risks U.S. Insurance Company (“Allianz”) provided commercial general liability coverage for Wincor. On May 21, 2009, Kane was driving in the service of his employer when he came to a controlled intersection in downtown San Francisco. Although the traffic light was green for Kane, a pedestrian, Cameron Rodriguez (“Rodriguez”), crossed in front of his car and caused him to stop. Rodriguez and Kane traded verbal insults at which point Rodriguez gave Kane “the bird.” Kane then got out of his car and punched Rodriguez, knocking him to the ground. Kane returned to his work vehicle, but had second thoughts because he “felt bad” and did not want to “just leave this guy … laying in the street.” Kane thus picked up the unconscious Rodriguez by the armpits and moved him to the side of the road where Kane dropped him in the gutter, causing him to hit his head. Kane then drove away. Rodriguez sustained a broken eye socket and a fracture to the back of his head.

Kane was criminally convicted of felony assault and battery, and Rodriguez also settled a civil lawsuit against Kane and Wincor for $1,250,000. Wincor tendered to Discover defense of the company in the civil lawsuit, but Discover refused. Allianz defended Wincor under a reservation of rights. Wincor and Allianz now sue Discover based on the auto-insurer’s refusal to defend Wincor.

ANALYSIS

The District Court concluded that Discover did not owe a duty to defend Wincor against Rodriguez’s civil suit where the claims arose out of Kane’s assault and subsequent dragging of Rodriguez to the side of the road, rather than out of the “use” of the vehicle. The California Supreme Court in State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 100–01 (1973), “left open” the “exact nature of the required causal connection” to show a vehicle was in “use” for purposes of the insurance code, but since then the majority of California Courts of Appeal have held that the “predominating cause/substantial factor test” should apply. Am. Nat’l Prop. & Cas. Co. v. Julie R., 76 Cal.App. 4th 134, 139–40 (1999); see State Farm Mut. Auto. Ins. Co. v. Grisham, 122 Cal.App. 4th 563, 566–67 (2004).

The Ninth Circuit concluded that the district court properly held “there is no causal connection—predominating, substantial, minimal, or otherwise—between the use of the Vehicle and the injuries Rodriguez sustained when being moved off the street.” At most, the car provided transportation to the situs of the tort, but remained an innocent bystander thereafter.

The Ninth Circuit could not even imagine how Kane’s momentary reentry into the vehicle before having second thoughts would dictate a different outcome from the numerous other cases that have held similar road rage incidents to have no causal link to the vehicle. Moreover, even if Kane had been attempting to move Rodriguez out of the vehicle’s path in order to drive away, this fact alone would not change the outcome. Therefore, the Ninth Circuit held that there was no possibility of coverage, and therefore, no duty to defend.  Absent a duty to defend, Discover did not breach its contract with Wincor, and all of the other claims asserted by Wincor and Allianz fail as a result.

ZALMA OPINION

It is seldom that litigation between insurers, like this one, are filed since the position of the Ninth Circuit should have been obvious. What is interesting is that Allianz paid the claim since the conduct of Kane was obviously intentional and should have been sufficient to allow it to join with Discover in its decision to refuse to defend Kane and his employer. Kane was also outside the scope of his employment since no employer – other than a boxing promoter – expect their employee to beat up a pedestrian.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is The Car an Innocent Bystander to Road Rage?

Can a Person Be a Member of a Household Living in a Separate Structure?

What the Heck Is Curtilage?

Allstate Insurance Company brought this action seeking a declaration that Gordon Hammers’s umbrella insurance policy did not cover damages arising out of a car accident with Ellery Chacksfield for which Gordon’s brother Robert had been found responsible because Robert was not a “resident of [Gordon’s] household.”

In response to cross-motions for summary judgment, the district court concluded that Robert was a resident of Gordon’s household and granted summary judgment to Chacksfield. The Ninth Circuit, in a non-officially published opinion, Allstate Ins. Co. v. Chacksfield, — Fed.Appx. —-, 2015 WL 2389248 (C.A.9 (Cal.) 5/20/15), resolved the issue by a discussion of curtilage (An area of land attached to a house and forming one enclosure) as it applied to the insurance coverage analysis.

ANALYSIS

Residents of the same household must live “under one roof or within a common curtilage.” Jacobs v. Fire Ins. Exch., 278 Cal.Rptr. 52, 58 (Ct.App.1991). Robert and Gordon did not live “under one roof” because Robert lived in a separate trailer and had been prohibited to enter Gordon’s house. Regardless, the district court concluded that Robert and Gordon lived within a common curtilage.

California courts seem to apply the same definition of “curtilage” in both the insurance coverage and Fourth Amendment contexts. To determine the extent of a home’s curtilage, courts consider:

(1)     the proximity of the area claimed to be curtilage to the home;
(2)     whether the area is included within an enclosure surrounding the home;
(3)     the nature of the uses to which the area is put; and
(4)     the steps taken by the resident to protect the area from observation by people passing by.

Applying these factors, the Ninth Circuit concluded that Robert and Gordon did not live within a common curtilage.

First, Robert’s trailer was more than 100 feet from Gordon’s home, and even in rural areas, it is rare for curtilage to extend more than 100 feet beyond the home. Second, Robert’s trailer was enclosed within its own fence. Third, Robert’s trailer and Gordon’s home did not share uses in common. Thus, three factors weigh decisively in favor of the conclusion that Robert and Gordon did not share a common curtilage. The fourth factor is not obviously to the contrary, and would not outweigh the other three factors even if it were.

ZALMA OPINION

Insurance is always limited by the insurance contract’s terms and conditions. When a person must be a member of the named insured’s household to obtain coverage, that person must be more than a relative. Living in a separate structure – a mobile home – surrounded by a fence, more than 100 feet from the named insured house is not a member of the household because they do not share a common curtilage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Can a Person Be a Member of a Household Living in a Separate Structure?

Arson-For-Profit Must Repay Insurer

No Chance of Case by Insurer Against Insured for Tort of Bad Faith

A homeowners’ insurer sued in state court to declare an insured’s policy void, based on allegations that insured intentionally set fire to her home. Following removal of suit to federal court, the insured asserted counterclaims for breach of contract under Kentucky common law, and for bad faith under Kentucky common law, the Kentucky Consumer Protection Act (KCPA), and the Kentucky Unfair Claims Settlement Practices Act (KUCSPA). Following the insured’s indictment for conspiracy to use fire to commit wire fraud, the insurer moved for partial summary judgment, and filed amended complaint seeking damages for insurance fraud and asserting Kentucky common law claim for reverse bad faith.

In State Auto Property and Cas. Ins. Co. v. Hargis, — F.3d —-, 2015 WL 2081922 (C.A.6 (Ky.) 5/6/15) the appeal presented to the Third Circuit Court of Appeal whether it was error for the district court to dismiss the claim asserted by the insurance company against its insured for “reverse bad faith” because it has not been recognized in Kentucky (or any other jurisdiction).

State Auto Property and Casualty Insurance Company (“State Auto”) argued that the district court erred by summarily dismissing the claim without attempting to predict what the state court would do.

FACTS

Lori Hargis’s home located in Henderson, Kentucky, was insured by State Auto under a standard homeowner’s policy when it burned to the ground in the early morning hours of December 9, 2007. No one was home at the time of the fire, but investigations by the Kentucky State Police and State Auto determined that the fire was intentionally set. Hargis filed what she would only later admit was a fraudulent insurance claim for approximately $866,000. State Auto paid out in excess of $425,000—including a mortgage payoff of $386,720.34—before commencing this action in state court to declare the policy void.

State Auto alleged that Hargis caused or conspired to cause the fire and falsely inflated the property loss resulting from the fire in breach of the “intentional loss” and “concealment or fraud” provisions of the policy. The evidence summarized in the district court’s April 2010 Order included circumstantial evidence that Hargis had the opportunity and financial motive to commit the arson.

Trial would not be necessary in the end, however, because State Auto’s investigation eventually led to Hargis’s admission that she had solicited a friend to burn down her house to collect the insurance proceeds. Specifically, the investigation resulted in the return of a federal indictment in January 2011 that charged Hargis and Leslie Veshaun White with conspiracy to use fire to commit wire fraud in violation of 18 U.S.C. § 844(h) and (m).

Hargis pleaded guilty in January 2012, and admitted during the change-of-plea hearing that she solicited White to burn down her house for $10,000 from the insurance proceeds; that she called White on the day of the fire to tell him that she and her children would be out of the house; and that she knowingly filed the fraudulent insurance claim to collect the proceeds of the homeowner’s policy. Hargis was sentenced to a 60–month term of imprisonment and was ordered to pay restitution to State Auto totaling $672,497.80. The restitution ordered was the full amount sought by State Auto and consisted of: $386,720.34 for the mortgage payoff; $11,500 for debris removal; $27,994.43 for living expenses; and $195,116.70 for investigation costs and attorney fees incurred by State Auto (including $80,000 that was attributable to the defense of Hargis’s bad faith claim).

As soon as the indictment was returned against Hargis, State Auto moved for partial summary judgment in its favor with respect to Hargis’s bad faith claims. The district court granted that motion because “State Auto’s refusal to pay Hargis’s claim was at least reasonably debatable” and “[t]he indictment simply provides further support for the Court’s belief.”

CAN THE INSURER MAINTAIN A REVERSE BAD FAITH ACTION?

Absent controlling decisions from the Kentucky Supreme Court, “we must predict how the court would rule by looking to all the available data.” Allstate Ins. Co. v. Thrifty Rent–A–Car Sys., Inc., 249 F.3d 450, 454 (6th Cir.2001). Unable to point to any decisions in Kentucky (or elsewhere) that have recognized a common law claim for reverse bad faith, State Auto argues that there is no reason to conclude the Kentucky Supreme Court would not decide to allow tort recovery (i.e., compensatory and punitive damages) for an insured’s bad faith since the implied covenant of good faith and fair dealing imposes contractual obligations on both parties. Specifically, echoing arguments made in several law review articles, State Auto complains that without reverse bad faith, insureds can take a “no-risk gamble” by seeking punitive damages, while their insurers (and by extension shareholders and policyholders) bear the burden of the high investigation and defense costs associated with those claims.

The strongest argument for recognizing a reverse bad faith cause of action can be made where the insured commits fraud when making a claim under a first-party policy.

Kentucky law implies a covenant of good faith and fair dealing in all contracts that impose on the parties thereto a duty to do everything necessary to carry them out. A separate tort claim for bad faith arises from a violation of a duty to act in good faith that is imposed by the common law, not by the terms of the contract. However, an independent tort claim for breach of that duty is only permitted where there is a special relationship between the parties and where distinct elements are present, such as: unequal bargaining power, vulnerability, and trust among the parties; nonprofit motivations for contracting and inadequacy of standard contract damages.

A common law tort claim for reverse bad faith (bad faith by the insured in the insured’s interaction with an insurer) has not been recognized in any jurisdiction. The California Court of Appeals held that: “An insurer has no claim against its insured in tort for breach of the covenant of good faith and fair dealing.” Agricultural Ins. Co. v. Superior Court, 70 Cal.App.4th 385, 82 Cal.Rptr.2d 594, 595 (Cal.Ct.App.1999) (cited with approval in Kransco v. Am. Empire Surplus Lines Ins. Co., 23 Cal.4th 390, 97 Cal.Rptr.2d 151, 2 P.3d 1, 12 (Cal.2000) (rejecting comparative bad faith defense)).

The court in Agricultural Insurance explained that a relationship including specialized circumstances of reliance and dependence is necessary to transmute such a contractual breach into a tort. Such circumstances do not exist in the context of an insured’s responsibilities toward its insurer, or in the reciprocal context of an insurer’s legitimate expectations from its insured. An insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of “insurance bad faith.”

Hargis’ fraudulent conduct resulted in a civil judgment against her for all of the damages incurred by State Auto and subjected her to incarceration and an order of restitution to State Auto.

Further, even if the prosecution had not gone forward, there is no suggestion that State Auto could not have brought a common law claim for fraud. The Third Circuit found it hard to imagine that a possible claim for reverse bad faith would be more a deterrent than the threat of criminal prosecution.

ZALMA OPINION

The tort of bad faith is an anomaly. It provides tort damages for breach of contract allowing the insured to collect both contract and tort damages for the same series of events. It should not exist any more than an Aardvark – part mammal and part bird – should exist. They both do.

It is a waste of time to attempt to get tort damages from an insured for the insured’s bad faith conduct. If, as in this case, the insured’s bad faith conduct is a fraud or an attempted arson-for-profit then the insurer can sue the insured for fraud and seek punitive damages as a result of the fraudulent conduct. If the insured is just a pest who acts unfairly to the insurer it is best to just deal with the claim, adjust it and go on to future claims.

If insureds, like the defendant in this case, continue to abuse the tort of bad faith by suing the insurer for punitive damages when she knew that she had caused the fire for the sole purpose of defrauding her insurer, that abuse will have repercussions. Abuse of the law by insureds will eventually do away with the tort of bad faith as abuses by insurers caused the judicial creation of the tort of bad faith.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Comments Off on Arson-For-Profit Must Repay Insurer

Does the AIA Construction Contract Avoid Litigation?

Insured May Effectively Waive Subrogation

Subrogation is an equitable remedy where an insurer that pays to indemnify its insured will be able to step into the shoes of the insured and sue any tortfeasor who is responsible for the property damage that its policy of insurance was required to indemnify its insured because of the property damage.

Like all rights the right of subrogation can be waived. Most Commercial Property Insurance contracts authorize the insured to waive subrogation as long as the waiver happens before the loss and is a clear, unambiguous written agreement. When people enter into a construction contract published by the American Institute of Architects (“AIA”) the written agreement includes a waiver of subrogation against each other. What that means in understandable language is that the parties agree – rather than sue each other for tort damages – to rely on their own insurance in the event of a loss. By so doing the builder can charge less to do the work and the owner can be sure to avoid litigation.

FACTS

The County, which had entered into construction project contract with general contractor for courthouse renovation, filed suit against general contractor and subcontractors, alleging negligence, breach of implied warranties, and breach of contract, alleging that subcontractor’s negligence was primary cause of fire that occurred during renovation that severely damaged courthouse. Defendants filed motions for summary judgment, arguing that the county had agreed to provide insurance for project, and that county had waived its subrogation rights against them and, thus, was not entitled to recover damages.

Property owners and contractors routinely agree to waive subrogation rights for damages. Here, the parties did so by incorporating an American Institute of Architects (“ALA”) standard form into their contract for the repair of the Jefferson County courthouse. While the repairs were underway, a fire severely damaged the courthouse.

The AIA contract waives subrogation rights for all “damages caused by fire or other perils to the extent covered by property insurance.” The parties now dispute the meaning of the subrogation waiver. Owner seeks to subrogate all damages unrelated to repairs, arguing that the subrogation waiver applies only to construction-related damages. Contractor argues that all damages covered by Owner’s property insurance policy are waived. Both parties cite other states’ precedent to support their position, and the decision below created a split of authority in our own Court of Appeals. We granted transfer in this matter of first impression to establish the Indiana approach.

On May 20, 2009, a fire destroyed much of the Jefferson County courthouse, located in Madison, Indiana. Jefferson County alleged that the fire began while Daniel Gutapfel—a roofing subcontractor—was soldering copper downspouts near the wood frame of the courthouse as part of a four-phase plan to remodel and renovate the entire building. The damages far exceeded the remodeling costs, but were fully covered by Jefferson County’s property insurer, which paid Jefferson County under its policy after the fire.

Jefferson County could satisfy its property insurance requirements in one of two ways: either (1) procure a separate policy to cover only the renovations-commonly referred to as “builders-risk insurance”-or (2) rely on its existing “all-risk” property insurance policy to cover the entire courthouse, including the renovations. Jefferson County chose to rely on its existing “all-risk” policy that it maintained with St. Paul Fire and Marine Insurance Company (“St. Paul policy”).

Discussion and Decision

We must decide whether, under the plain meaning of the AIA contract, property owners waive subrogation rights for construction damages by maintaining “all-risk” property insurance policies that cover both their construction-related damages and their entire property.

The AIA subrogation waiver is well-known in the construction industry and it plays a critical role in the AIA contract’s scheme of remedying construction losses through insurance claims, not lawsuits. The court had no choice but to presume the waiver represents the freely bargained agreement of the parties.

The waiver applies to all “damages caused by fire,” but only “to the extent covered by property insurance obtained pursuant to this Paragraph 11.3 or other property insurance applicable to the Work.” Thus, to determine which fire damages are covered by the subrogation waiver, we must look at everything that follows the phrase “to the extent.” The positioning and plain meaning of the word “covered” restricts the scope of the subrogation waiver based on the source and extent of the property insurance coverage, not the nature of the damages or of the damaged property.

CONCLUSION

The Supreme Court of Indiana, in Board of Com’rs of County of Jefferson v. Teton Corp., — N.E.3d —-, 2015 WL 2242352 (Ind., 5/13/15), concluded that the plain meaning of the contract defines the scope of the waiver based on the extent and source of coverage, not the nature of the property damaged. Accordingly, it agreed with the majority of jurisdictions that have applied this plain meaning to bar recovery for all damages covered by the same property insurance policy used to cover construction-related damages-commonly referred to as the “any insurance” approach. Because Contractors have shown that Owner’s insurance covered all damages, the subrogation waiver applies to bar Owner’s claim.

The Supreme Court’s holding is supported by the majority of other jurisdictions that have adopted the “any insurance” approach when interpreting similar AIA waivers. The contract also waived all subrogation rights for damages “to the extent covered by property insurance obtained pursuant to this [agreement] or other property insurance applicable to the Work.

Jefferson County agreed to waive its rights to bring this subrogation claim by relying on its existing “all-risk” property insurance policy that covered the work and all other losses suffered in the courthouse fire. The Supreme Court reached this decision because the plain language of the AIA contract restricts the scope of the waiver based on the source and extent of property insurance coverage, not the nature of the damages. Accordingly summary judgment in favor of Contractors and against Jefferson County was proper.

ZALMA OPINION

Waivers of subrogation are important tools for owners of property, whether dealing with contractors, or lessees. It gives each party to a contract with an owner of real property that regardless of the cause of damage to the property or who was responsible for the cause, both parties agree that they will rely on their own insurance rather than go to the trouble, inconvenience and expense of litigation. The county and its insurer tried to change the terms of their agreements and the Supreme Court insisted on requiring the parties to rely on their own insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Does the AIA Construction Contract Avoid Litigation?

When a Customer Is Not a Customer

Bankers’ Bond Requires Loss to Bank’s Customer

In an unusually brief, succinct and intelligent decision the Ninth Circuit Court of Appeal interpreted an insurance contract, called a financial institution bond, as it was written in First Nat. Bank of Northern California v. St. Paul Mercury Ins. Co., — Fed.Appx. —-, 2015 WL 2225044 (C.A.9 (Cal.) 5/11/15).

First National Bank of Northern California (“the Bank”) appealed from a grant of summary judgment against it and in favor of St. Paul Mercury Insurance Company (“the Insurer”).

This insurance coverage dispute arises from a loss caused by the Bank’s payment of two fraudulent wire transfers from the Edwards Living Trust, which the Bank reimbursed. The Bank seeks indemnity from the Insurer under its financial institution bond.

The critical question is whether the Edwardses, who created the Trust, were “customers” within the meaning of the bond. To qualify as a “customer” under the bond, among other things, an individual or entity is required to have a written agreement with the Bank to rely on wire transfer instructions communicated by phone or fax. The undisputed facts show that there was no written agreement.

The Bank argues that the signature card, account agreement, and security procedures may be combined under the incorporation by reference doctrine to establish a written agreement authorizing wire transfers on the basis of voice or fax authorization. Under California law, which governs this dispute, parties to a contract may validly incorporate by reference into their agreement the terms of another document when specific factors are met. The prerequisites for incorporation by reference are:

(1)  a clear and unequivocal reference by the parties;

(2)  the reference must be called to the attention of the other party;

(3)  the party must consent; and

(4)  the terms of the incorporated document must be known or easily available to the contracting parties.

The district court, according to the Ninth Circuit, properly concluded that, under California law, the signature card, account agreement, and security procedures did not qualify as a “written agreement” under the bond definition. The signature card, which is the only document that the Edwardses actually signed, does not refer to the account agreement or the security procedures. The security procedures were not provided to the Edwardses. The signature card does not contain any authorization for a wire transfer from the account by voice or fax authorization.

Under these undisputed facts the combined signature card, account agreement, and security procedures did not constitute a written agreement with the Bank authorizing it to rely on wire transfer instructions communicated by phone or fax. Therefore, the district court correctly concluded that the Edwardses did not qualify as “customers” within the meaning of the bond.

ZALMA OPINION

Financial Institutions Bonds are insurance contracts where the insurer agrees to indemnify the bank if it is defrauded in the course of its business. In this case it only protected losses incurred by the bank’s customers, a term defined by the policy. The Ninth Circuit concluded that since there was no written contract between the bank and the people whose funds the bank improperly transferred. Banks, like everyone who buys insurance, should carefully read the insurance contract and determine if its procedures will allow it to obtain the benefits of the insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When a Customer Is Not a Customer

What Happens When State Formed Insurer Acts in Bad Faith?

First Party Bad Faith Creature of Statute in Florida

Citizens Property Insurance Corp. (Citizens) was created by the state of Florida to deal with wind damage claims from the annual damage caused by hurricanes passing through the state that standard, for profit, insurers were unwilling to risk. To limit the liability of the state funded insurer the Florida Legislature granted Citizens immunity from most suits with certain exceptions.

In Citizens Property Ins. Corp. v. Perdido Sun Condominium Ass’n, Inc., — So.3d —-, 2015 WL 2236719 (Fla., 5/14/15) the issue raised was whether the Florida Legislature intended Citizens to be liable for statutory first-party bad faith claims as an exception to its statutory immunity from suit. The First District Court of Appeal in Perdido Sun Condominium Ass’n v. Citizens Property Insurance Corp., 129 So.3d 1210 (Fla. 1st DCA 2014), determined that the “willful tort” statutory exception to Citizens’ immunity applied to statutory first-party bad faith claims and certified conflict with the Fifth District Court of Appeal’s decision in Citizens Property Insurance Corp. v. Garfinkel, 25 So.3d 62 (Fla. 5th DCA 2009), disapproved on other grounds by Citizens Property Insurance Corp. v. San Perdido Ass’n, 104 So.3d 344 (Fla.2012), which held to the contrary that Citizens is statutorily immune.  The issue before the Florida Supreme Court was stated as: “Whether the Immunity of Citizens Property Insurance Corporation, as Provided in Section 627.351(6)(S), Florida Statutes, Shields the Corporation from Suit under the Cause of Action Created by Section 624.155(1)(B), Florida Statutes[,] for Not Attempting in Good Faith to Settle Claims?”

BACKGROUND

After prevailing in a breach of contract action against its insurance company, Citizens, Perdido Sun Condominium Association sued Citizens a second time. In the second lawsuit, Perdido Sun alleged a statutory first-party bad faith claim, pursuant to section 624.155(1), Florida Statutes (2009).

Specifically, Perdido Sun claimed that Citizens

(1) refused to pay the full amount owed to Perdido Sun under the insurance policy;

(2) refused to take part in the required appraisal process and instead used that process in an attempt to forestall litigation;

(3) delayed payment of the appraisal award and improperly attempted to condition payment of the award upon the execution of a universal release; and

(4) engaged in a pattern and practice of seeking to avoid or delay full settlement of claims.

Citizens moved to dismiss the complaint, citing its immunity from suit under section 627.351(6)(s)1., Florida Statutes (2009), which provides: “There shall be no liability on the part of, and no cause of action of any nature shall arise against, any assessable insurer or its agents or employees, the corporation or its agents or employees, members of the board of governors or their respective designees at a board meeting, corporation committee members, or the office or its representatives, for any action taken by them in the performance of their duties or responsibilities under this subsection. Such immunity does not apply to:  ¶ a. Any of the foregoing persons or entities for any willful tort; ¶ b. The corporation or its producing agents for breach of any contract or agreement pertaining to insurance coverage; ¶  c. The corporation with respect to issuance or payment of debt; ¶ d. Any assessable insurer with respect to any action to enforce an assessable insurer’s obligations to the corporation under this subsection; ¶ e. The corporation in any pending or future action for breach of contract or for benefits under a policy issued by the corporation; in any such action, the corporation shall be liable to the policyholders and beneficiaries for attorney’s fees under s. 627.428.” (Emphasis added.)

ANALYSIS

Examining the relevant statutory provisions at issue the Supreme Court found no support that the Legislature intended for Citizens to be liable for a breach of the duty to act in good faith by allowing its policyholders to bring a statutory first-party bad faith cause of action. Although the Legislature codified Citizens’ duty to handle claims in good faith, the Legislature never listed statutory first-party bad faith claims as one of the exceptions to Citizens’ immunity. To the contrary, the Legislature chose to immunize Citizens for “any action taken by [it] in the performance of [its] duties or responsibilitie” which necessarily includes a breach of the duty of good faith.

As this Court has recognized, where the Legislature made one exception clearly, if it had intended to establish other exceptions it would have done so clearly and unequivocally. The Legislature has not included statutory first-party bad faith claims among the limited exceptions to Citizens’ immunity when it could have easily chosen to do so. Besides the failure to include a specific exception for statutory causes of action the statutory cause of action for first-party bad faith is a tort or specifically a “willful tort” —  a principle that becomes clear after considering the history of first-party bad faith causes of action.

Unlike common law causes of action for third-party bad faith, first-party bad faith actions are purely a creature of statute that did not previously exist at common law.  The Legislature addressed this issue in 1982 by the adoption of section 624.155, Florida Statutes Citizens also argues that subjecting it to statutory first-party bad faith claims would reduce the funds available to pay insureds’ claims for property damage so that further amounts that might be awarded would be borne by the taxpayers.

In this case, Perdido Sun’s complaint does not allege that Citizens committed a “willful tort.” As Florida Courts have previously recognized, where a plaintiff claims a defendant engaged in egregious and outrageous actions, bad faith can be elevated to a willful tort, an issue that could turn on the facts of the case.  Perdido Sun’s complaint is based solely on the statutorily created first-party bad faith cause of action under section 624.155.

No additional allegations of willful misconduct outside of the statutory bad faith claim are alleged.  Because specific allegations of willful misconduct are not contained in the complaint, the trial court properly dismissed the complaint.

ZALMA OPINION

Because the first-party bad faith tort in Florida exists only as a result of statute and is not a common law (i.e., created by court decision) tort the tort cannot fall within the exception to the immunity. If Perdido Sun wishes to get tort damages from Citizens its only avenue available is the common law tort of fraud which has a much more difficult proof requirement and proof of willfulness. If they thought they could prove fraud I would expect that Perdido Sun would have alleged the tort of fraud in the first place rather than try to change the law.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on What Happens When State Formed Insurer Acts in Bad Faith?

Murder For Insurance

Zalma’s Insurance Fraud Letter

May 15, 2015

In this, the tenth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on May 15, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    The California Supreme Court on Murder for Insurance
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    From New Jersey & The Coalition Against Insurance Fraud
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Misrepresentations Concerning Theft Claim Voids Coverage
6.    The National Underwriter Company Publishes The Zalma Insurance Claims Library
7.    Mississippi Sues State Farm for Katrina Fraud
8.    State Farm Gets Judgment from Fraudulent Clinic
9.    Florida Deceptive and Unfair Trade Practices Act
10.  Barry Zalma on World Risk & Insurance News – http://www.wrin.com

Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    When Are Intentional Acts Also Accidental?  – May 14, 2015
2.    Is It Time to Reconsider the Notice-Prejudice Rule? –  May 13, 2015
3.    Free Claims Magazine Subscription – May 12, 2015
4.    California SIU Regulations – May 12, 2015
5.    Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer – May 11, 2015
6.    How to Avoid the Tort of Bad Faith – May 9, 2015
7.    I Spoke On Avoiding Bad Faith – May 8, 2015
8.    Policy Definition Controls – May 7, 2015
9.    What is Needed to Prove You are an Insured – May 6, 2015
10.    Can Defendant Depose Plaintiff’s Counsel? –  May 5, 2015
11.    Conflict Stays Declaratory Relief –  May 4, 2015
12.    Advertising Injury Coverage Does Not Cover Breach of Contract – May 1, 2015
13.    Why Insurance Fraud Succeeds – May 1, 2015
14.    Extrinsic Evidence Eliminates Duty to Defend – April 30, 2015
15.    Subrogation – April 29, 2015
16.    A “Heads I Win, Tails You Lose” Story – April 29, 2015
17.    Diminution – April 28, 2015
18.    Is a Liability Policy a First Party Policy? – April 27, 2015
19.    Applicant has Duty to Tell The Truth – April 24, 2015
20.    Unfair Trial Tactics Require Retrial – April 23, 2015

NEW FROM NATIONAL UNDERWRITERThe Zalma Insurance Claims Library

Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Comments Off on Murder For Insurance

When Are Intentional Acts Also Accidental?

When Herbicides Destroy Crops Litigation Follows

Insurance policies are said to give everything in large print and take it away in fine print. That canard is no longer true since all modern policies are written in common language and each part of the policy is written in the same size print with headings even larger. However, insurance policies provide coverage for every possible risk of loss except those specifically excluded. Some exclusions are written broadly and then give back coverage for certain types of risks of loss so that what looks like an exclusion is actually a grant of limited coverage. This method of writing insurance policies causes confusion and often leads to litigation with each side reading the same language differently.

In National Union Fire Ins. Co. of Pittsburgh, PA v. Florida Crystals Corp., Slip Copy, 2015 WL 2195092 (S.D.Fla., 5/11/15) the U.S. District Court for the Southern District of Florida, was called upon to resolve such a dispute.

BACKGROUND

This case involves a dispute over insurance coverage in a related state-court action. Plaintiff National Union Fire Insurance Company of Pittsburgh, PA (“National Union”)  issued an insurance policy (the “Policy”) to a third party, Fanjul Corp. Defendants Florida Crystals Corporation (“Florida Crystals”) and Sugar Farms Co-op (“Sugar Farms”) are insured under the Policy.

On October 24, 2013, Date Palm Wholesalers, Inc. (“Date Palm”), sued Defendants in state court (the “Date Palm Action”). Date Palm operates a commercial nursery in Palm Beach County.  Florida Crystals and Sugar Farms own and maintain nearby sugar-cane growing and processing operations.

Defendants contract with a company specializing in the aerial application of chemicals, Roma Air Corp. (“Roma”), to apply herbicide at their operations. The Complaint in the Date Palm Action alleges that in March 2013, Defendants directed Roma to spray a powerful herbicide on a large area of land. (“Date Palm Complaint”) This area included not only Defendants’ operations, but also Date Palm’s nursery. The herbicide damaged many of Date Palm’s trees. Date Palm thus sued Defendants and Roma for negligence, strict liability, and trespass.

National Union subsequently commenced the instant lawsuit, seeking a declaration that the Policy imposes no duty to defend Florida Crystals or Sugar Farms in the Date Palm Action. National Union’s Complaint advances numerous theories as to why the claims in the Date Palm Action fall outside the Policy’s scope.

DISCUSSION

National Union contends that the Date Palm Complaint alleges no accident that could give rise to coverage under the Policy, and that the claims in the Date Palm Action come within the scope of the Policy’s various exclusions.

National Union first contends that it owes no duty to defend because the Date Palm Complaint does not rest upon an accident. The Policy covers damage caused by an “occurrence” arising out of the use of certain aircraft. The Policy defines an occurrence as “an accident during the policy period….” National Union argues that the Date Palm Complaint alleges only intentional wrongdoing, thus there is no accident that could give rise to a covered occurrence.

The Date Palm Complaint contains allegations of accidental. Paragraph 21(h) of the Date Palm Complaint states that the spraying of Date Palm’s property arose from a failure to investigate the ownership of the property. Though not pled with exacting clarity, this allegation can plausibly be read as attributing the failure of investigation to Defendants, in addition to Roma. Date Palm premises its negligence claims in part upon the resulting mistaken designation of its property among the land to be sprayed with herbicide. In other words, Date Palm alleges not only that negligence was involved in the act of spraying its property with herbicide, but also that the designation of its property for spraying was an accident.

In the Date Palm Action, Defendants allegedly failed to investigate the ownership of Date Palm’s property, resulting in the mistaken designation of the property for the application of herbicide. This allegation plausibly alleges a mistake giving rise to damage to property of a third party that Defendants neither expected nor intended. Therefore the Date Palm Complaint pleads an “accident.” That Roma intentionally sprayed herbicide on the mistakenly designated property does not require a different outcome.

National Union next argues that the language of Endorsements Seven and Thirteen of the Policy exclude the claims in the Date Palm Action from coverage. Endorsement Seven provides that the Policy “does not cover claims directly or indirectly occasioned by, happening through or in consequence of … pollution and contamination of any kind whatsoever.” To “contaminate” means, among other things, “to soil, stain, corrupt, or infect by contact or association.”

Endorsement Thirteen extends Coverage B to include the aerial application of chemicals “of benefit to or of direct use in the business of” Defendants. This explicit addition of coverage for the aerial application of chemicals in the course of Defendants’ business conflicts with Coverage B’s exclusion of claims for damage resulting from services performed on Defendants’ behalf. Where an endorsement conflicts with the body of an insurance policy, the endorsement controls. Because Endorsement Thirteen appears to create coverage for a portion of the claims in the Date Palm Action, the Policy’s exclusion for services performed on Defendants’ behalf does not relieve National Union of a duty to defend.

CONCLUSION

In sum, National Union has not shown its entitlement to summary judgment on the absence of a duty to defend in the Date Palm Action. The Date Palm Complaint alleges accidental harms that could qualify as an “occurrence” giving rise to coverage under the Policy.

Although a number of the Policy’s exclusions might have applied to claims in the Date Palm Action, Endorsement Thirteen restores coverage at least for parts of those claims. The Court rejected National Union’s argument that Defendants necessarily exercised “control” over Date Palm’s property when Roma sprayed herbicide on it from above.

ZALMA OPINION

To read, understand and properly apply an insurance policy it is necessary to read the entire policy, each and every endorsement, and all of the words that make up the promises of the insurer to defend and indemnify its insured. Then, a thorough investigation of the facts of the claimed loss must be completed with the facts applied to the wording of the policy. The District Court did what was necessary and found that the policy wording was sufficient to allow the potential for coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When Are Intentional Acts Also Accidental?

Is It Time to Reconsider the Notice-Prejudice Rule?

Insured’s Inaction Defeats Coverage

New York, unlike many other states, is willing to enforce provisions requiring report of a loss as soon as practicable. When an insured takes as much as seven to ten months to report a loss it will not be able to obtain defense or indemnity from its insurer. New York does not apply the notice prejudice rule that allows coverage to be provided even after a late report if the insurer is not prejudiced by the delay. New York prefers, logically, to apply the contract of insurance as written.

In Kleinberg v. Nevele Hotel, LLC, — N.Y.S.3d —-, 2015 WL 2097612 (N.Y.A.D. 3 Dept.), 2015 N.Y. Slip Op. 03891 (5/7/15) the Plaintiffs sued Lexington Insurance Company for declaratory relief seeking a declaration that Lexington is obligated to defend and indemnify defendant Nevele Hotel, LLC in an underlying personal injury action. In the underlying action, plaintiffs allege that Nevele’s negligence caused plaintiff Robert Kleinberg to sustain an injury on the slopes of Nevele’s ski resort. Lexington moved for summary judgment, seeking dismissal of the complaint against it and a declaration that it was not obligated to defend and indemnify Nevele in regard to plaintiffs’ underlying action. Lexington argued, among other things, that Nevele had cancelled its insurance policy prior to the date of the alleged injury, and that, even if the policy were in effect, Lexington was not required to provide coverage given that it did not receive timely notice of the potential claim.

FACTS

Plaintiffs alleged that Nevele, rather than themselves, provided Lexington with the necessary notice. In support of its motion for summary judgment, Lexington submitted its policy with Nevele, which contained an “as soon as practicable” notice clause. Through further submissions, Lexington established that Nevele had generated an incident report on the day the accident occurred, in February 2006, and plaintiffs and Lexington agree that Nevele received notice by letter from plaintiffs in March 2006.

Even assuming that Nevele was not put on notice on the day of the accident Lexington established a delay of approximately 10 months between Nevele’s receipt of plaintiffs’ March 2006 letter and its January notice to Lexington. The appellate court noted that the March 2006 letter was submitted by plaintiffs in opposition to defendants’ motion. Even if it relied on the June 2006 letter from plaintiffs to Nevele that defendants submitted in support of their motion—rather than on plaintiffs’ and Lexington’s agreement that the court could consider the March 2006 letter—that seven-month delay would also fail to provide Lexington with timely notice.

Plaintiffs failed to raise a material issue of fact as to its reasonable efforts to identify Lexington as the relevant insurer. Because an injured party is allowed by law to provide notice to an insurance company he or she is also generally held to any prompt notice condition precedent of a policy. However, such an injured party can overcome an insurance company’s failure to receive timely notice—which would otherwise vitiate coverage—by a demonstration that he or she did not know the insurer’s identity despite his or her reasonably diligent efforts to obtain such information.

As proof of their reasonably diligent efforts, plaintiffs submitted two letters that they had sent to Nevele with an attached questionnaire. The letters provided notice of the contemplated personal injury action, requested that Nevele complete the questionnaire and requested that Nevele either kindly refer the letter to Nevele’s insurance company or inform plaintiffs if Nevele was not insured. The attached questionnaire requested insurance carrier information. However, despite the fact that Kleinberg’s accident did not involve any automobile, that questionnaire only specifically requested insurance information regarding Nevele’s automobile insurer. Nevele responded to the second correspondence, but it did not respond to the question relating to insurance coverage. The record is devoid of evidence that plaintiffs took any further efforts to ascertain Lexington’s identity.

The foregoing demonstrates that Nevele responded to plaintiffs’ correspondence and that Nevele neither supplied misinformation nor explicitly refused to provide the relevant insurance information. Moreover, the record fails to demonstrate that plaintiffs made any investigatory efforts outside of their correspondence to Nevele or that they ever responded to Nevele’s correspondence before Nevele eventually gave notice to Lexington.

The combination of plaintiffs’ initial failure to specifically ask for the relevant insurance information, their failure to ask for such information after Nevele’s communication and their failure to promptly follow up in any other manner, plaintiffs failed to raise a triable issue of fact as to their reasonable efforts to ascertain Lexington’s identity.

ANALYSIS

Lexington met its prima facie burden by establishing that it did not receive timely notice of the potential claim. “Where a policy of liability insurance requires that notice of an occurrence be given ‘as soon as practicable,’ such notice must be accorded the carrier within a reasonable period of time” (Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 5 NY3d 742, 743 [2005] [citation omitted] ).  Accordingly, Lexington was entitled to summary judgment dismissing the complaint against it and a declaration in its favor.

Given this determination, Lexington’s remaining contentions, including its arguments regarding the cancellation of the policy and plaintiffs’ obligation to duplicate the notice provided by Nevele, are rendered academic.

The trial court order was, therefore, reversed on the law, with costs, motion granted, summary judgment awarded to defendant Lexington Insurance Company, complaint dismissed against said defendant, and it is declared that Lexington has no duty to defend or indemnify defendant Nevele Hotel, LLC in plaintiffs’ underlying personal injury action.

ZALMA OPINION

The reason for clauses in insurance policies requiring prompt notice of a loss is to allow the insurer to immediately fulfill the promises made to thoroughly investigate all reported losses and protect the interests of the insured. If the insured fails to report the loss promptly the right to investigate promptly is lost.

The notice-prejudice rule has been adopted across the United States by the majority of jurisdictions. This case is an example of why the rule is inappropriate and would raise arguments in a case like this that would prevent the summary judgment approved by the appellate court. An accident on a ski slope, reported ten months later, after the snow has melted and the plaintiff has been treated would probably raise a finding of prejudice but would cause extensive investigation and litigation. By finding the report was too late the court cut off the unnecessary litigation.

Perhaps it is time to reconsider and do away with the notice-prejudice rule and adopt the methodology of the courts of New York.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is It Time to Reconsider the Notice-Prejudice Rule?

Free Claims Magazine Subscription

As a subscriber of Claims magazine, in appreciation of my loyalty Claims Magazine  offered me the opportunity to invite you to subscribe for FREE to the publication that provides complete coverage of the claims industry. Since I write for the magazine and have subscribed for decades I believe it is worthwhile for anyone interested in claims. The price, FREE, can’t be beat. Subscribe at http://list.sbmedia.com/t/5862905/173949378/763872/141/

Don’t let your colleagues miss out on comprehensive analysis of industry trends in insurance claims and market developments to help them stay ahead of the competition.

Sincerely,
Lynn Kruetzkamp
Audience Marketing Director

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California SIU Regulations

The Minimum Standards for Dealing With Potential Insurance Fraud in California

California’s SIU Regulations are designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”).  To enforce the statute the  California Department Of Insurance (CDOI) issued regulations that were created to enforce the statute. Every insurer admitted to do business in California must comply with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and annually train all integral anti-fraud personnel to recognize indicators of insurance fraud.

The SIU Regulations define the term “Integral Anti-Fraud Personnel” as follows:

“Integral anti-fraud personnel” includes insurer personnel who the insurer has not identified as being directly assigned to its SIU but whose duties may include the processing, investigating, or litigation pertaining to payment or denial of a claim or application for adjudication or claim or application for insurance. The personnel may include claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff, and other insurer employee classifications that perform similar duties. (Emphasis added.) [SIU Regulations, Section 2698.30 (k).]

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state.

The SIU Regulations

The CDOI enacted a set of regulations starting in 2003 and finalized in 2005. The SIU Regulations have been enforced haphazardly and the training requirements have been ignored by most insurers doing business in the state of California.

The SIU Regulations are designed to micro-manage the work of insurance company efforts against insurance fraud.

The CDOI has audited some insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. The CDOI is authorized to assess major fines, as much as $10,000 per violation, on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can, but probably will not, result in a fine from $500,000 to $1 million.

All insurers admitted to practice insurance business in California must recognize that by the SIU Regulations the CDOI has made almost every employee part of what it considers the insurer’s integral anti-fraud personnel. The CDOI requires that the insurer, or its Special Investigation Unit (SIU), train all of the insurer’s integral anti-fraud personnel annually and train all new hires within 90 days of employment.

When deciding who needs to be trained California Insurers should recognize that the SIU Regulations require almost everyone employed by the insurer to be trained annually.

Fraud Division

The CDOI controls a police agency called the Fraud Division. The Fraud Division is the largest law enforcement unit that makes up the Enforcement Branch of the CDOI.

The Fraud Division’s mission is to protect the public from economic loss and distress by actively investigating and arresting those who commit insurance fraud and to reduce the overall incidence of insurance fraud through anti-fraud outreach to the public, private, and government sectors.

The Fraud Division accomplishes its mission through its staff of more than 260 dedicated employees, of which at least 194 are sworn officers. Fraud Division Detectives are sworn Peace Officers. Fraud Division Detectives conduct a variety of specialized criminal investigations that pertain to insurance fraud within four primary programs:  Auto Insurance Fraud; Workers’ Compensation Fraud; Property/Casualty Fraud, and Healthcare/Disability Fraud.

Crimes investigated under these programs can be prosecuted as a violation of  Section 550 of the Penal Code (Insurance Fraud), violations of the criminal statutes in the California Insurance Code, and other related crimes such as conspiracy, theft, and automobile theft statutes.

For further information about the Fraud Division and its programs, go to the Fraud Division home page at http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/Fraud-About.cfm. The Insurance Code provides a limited immunity to insurers and their employees for reporting a potential fraud to the Fraud Division. The statute provides, in summary, that no insurer, or the employees or agents of any insurer, shall be subject to civil liability for libel, slander or any other relevant cause of action by virtue of providing information concerning a suspected fraudulent claim to law enforcement, including the California Department of Insurance, Fraud Division.

The Fraud Division was developed to help the public and the insurers of the state who are victims of insurance fraud. Any person needing more information or assistance with fraud related matters can contact the Fraud Division directly. [See http://www.insurance.ca.gov/0300-fraud/0100-fraud-division-overview/0400-regional-offices/]

Statutory Duty To Report Fraud

Insurers have a statutory duty to report any suspected insurance fraud to the Fraud Division.

The SIU Regulations are not intended to be a text on the handling of suspected fraudulent insurance claims that must be followed slavishly. They do not even claim to be a complete guide to claims handling or the investigation of suspected insurance fraud. The Regulations are, rather, an outline of basic claims handling techniques when fraud is suspected.

Although the training required by the Regulations is compulsory, the prudent insurer will see that the training requirements provide a benefit to the insurer. The training required by the SIU Regulations can act as a starting point to develop a more professional claims staff fully aware of insurance fraud and how to recognize the red flags or indicators of insurance fraud. There is no downside to a thoroughly and competently trained claims staff that, in addition to knowing the requirement of the Regulations, know how to resolve claims presented to the insurer where fraud is suspected in a professional and competent fashion.

If the insurer has not trained its integral anti-fraud personnel and if the insurer does not have a training program in force the insurer is subject to a finding it is in violation of the SIU Regulations. If there is no training program that can train all employees who fit within the definition of “integral anti-fraud personnel” within ninety (90) days of their employment the insurer will be in violation of the SIU Regulations.

An insurer violates the SIU Regulations if it fails to annually train all: claims handlers; underwriters; agents; policy handlers; call center staff; legal staff; or  other insurer employees that perform similar duties. Very few people employed by an insurer are excluded in this list. Insurers who do not consider underwriters or clerks who answer telephones to be part of their anti-fraud mechanism may find itself fined by the CDOI for failure to train those people on anti-fraud subject matter. Arguably, the Chairman of the Board, the President and the Vice Presidents of Claims and Underwriting of the insurer must also be trained.

Failure to train these individual executives can result in the same fine as a failure to train claims adjusters.

The Regulations also require that the admitted insurer maintain: “[R]ecords of the anti-fraud training provided to all staff [and that it] shall be prepared at the time training is provided and be maintained and available for inspection by the Department on request. The training records shall include the title and date of the anti-fraud training course, name and title and contact information of the instructor(s), description of the course content, length of the training course, and the name and job title(s) of participating personnel.” [Section 2698.39 (d)]

The SIU Annual Report describes the insurer’s anti-fraud operations as mandated by the California Code of Regulations, Title 10, §2698.30 – .43. These regulations require licensed California insurers to submit an annual report. The report must be signed by an officer of the holder of or applicant for the Insurer’s Certificate(s) of Authority.

Every insurer that fails to train its integral anti-fraud personnel annually, as required by the statute, is asking the CDOI to punish them severely. Every insurer that actually trains its integral anti-fraud personnel annually and effectively, will find its payment of indemnity and claims expenses reduced logarithmically and many more attempted insurance frauds will be discovered and defeated to the profit of the insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

Posted in Zalma on Insurance | Comments Off on California SIU Regulations

Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer

Serious Injuries Not Enough To Get UIM

Uninsured Motorist Coverage (UM) exists to provide coverage for insured injured by an uninsured motorist. When that motorist carries insurance only to find the insurer becomes insolvent, is technically uninsured. If an admitted insurer state insurance guarantee statutes allow for payment of claims made against the insolvent insurer or its insureds with limited coverage available.

The Eighth Circuit Court of Appeal, in McHone v. State Farm Mut. Auto. Ins. Co., — F.3d —-, 2015 WL 2151776 (C.A.8 (Ark.) 5/8/15) was called upon to resolve an UM claim where the defendant’s insurer was declared insolvent. The insolvency cased Christine McHone to sue her UM insurer State Farm Mutual Automobile Insurance Co. (“State Farm”) to recover UM benefits pursuant to her personal policy of insurance issued by State Farm. State Farm moved for summary judgment on the basis that McHone was not entitled to uninsured motorist benefits under Tennessee law and the terms of her policy. McHone filed a counter-motion for summary judgment. The district court granted State Farm’s motion for summary judgment and denied McHone’s counter-motion.

FACTS

On December 15, 2008, a collision occurred between McHone and Jessie Whirley on Interstate 40 in West Memphis, Arkansas. McHone was driving a 2000 Pontiac Grand Prix when she was struck by a tractor trailer driven by Whirley and owned by Diamond S. Express, Inc. McHone, a Tennessee resident, was insured by State Farm. McHone’s policy included coverage for uninsured motor vehicles with bodily injury limits of $100,000 for each person. The trucking company defendants were insured by Gramercy Insurance Company, with liability limits of $1,000,000.

As a result of the collision, McHone suffered bodily injuries, including back related injuries, and sustained medical bills exceeding $400,000. McHone also claims her treating physicians estimate future medical care that will exceed an additional $400,000.  McHone’s alleged damages exceed $800,000.

After the collision, McHone filed suit against Whirley, Diamond Express and its owner, M.C. Mauney. The matter was scheduled for trial in February 2013. However, prior to trial, Gramercy Insurance Company was placed into Rehabilitation by an agreed upon order of the District Court of Travis County, Texas. The Texas court’s order, in part, appointed a rehabilitator and issued an automatic stay with respect to actions against any insured of Defendant for which Defendant was liable under a policy of insurance or was obligated to defend.  McHone’s lawsuit was stayed and the trial date was continued.

On March 4, 2013, McHone’s counsel submitted a letter to State Farm outlining the problems with Gramercy and demanding $100,000 uninsured motorist benefits under McHone’s State Farm policy. On March 14, 2013, State Farm denied McHone’s claim and took the position that no coverage existed. At about the same time, McHone began negotiating with Gramercy’s receivership estate’s third party claims administrator. As a result of those negotiations, McHone agreed to settle her claims against Whirley, Diamond Express, and Young for $300,000. McHone argued the settlement was not based on available insurance.

THE POLICY

McHone’s State Farm policy states (in part): “If the Uninsured Motor Vehicle Coverage limits provided by this policy are greater than the minimum limits required by law, then such limits will be reduced by an amount equal to the sum of the limits of all liability insurance and liability bonds that apply to the accident are collectible to the insured.”
In addition the State Farm policy provided that it would not pay for any damages: “that have already been paid to or for the insured; ¶  a. by or on behalf of any person or organization who is or may be held legally liable for: ¶ i. bodily injury to the insured; or ¶ ii. property damage, ¶ whether such damages are characterized as compensatory or punitive damages.”

State Farm successfully moved for summary judgment asserting McHone was not entitled to uninsured motorist benefits under Tennessee law and the terms of her policy. McHone appealed.

ANALYSIS

Summary judgment is proper only if, viewing the record in the light most favorable to the non-moving party, there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law.

On appeal McHone argued the State Farm policy’s reference to “the minimum limits required by the law” actually refers to the legal requirement of interstate carriers to have a minimum of $1,000,000 insurance coverage. Therefore, McHone’s position is the $300,000 she received from the receiver falls short of the applicable minimum limits required by law.

The district court held State Farm was entitled to a credit for the $300,000 settlement McHone received from the Gramercy receivership, $200,000 more than the State Farm policy limit, and therefore, McHone is not entitled to recover the $100,000 uninsured benefits under her policy.

The relevant Tennessee statutes state: “The uninsured motorist insurance carrier shall be entitled to credit for the total amount of damages collected by the insured from all parties alleged to be liable for the bodily injury or death of the insured whether obtained by settlement or judgment and whether characterized as compensatory or punitive damages.” (emphasis added)

The language of McHone’s State Farm policy states State Farm is not liable under its Uninsured Motor Vehicle Coverage for “any damages that have already been paid to or for the insured; by or on behalf of any person or organization who is or may be held legally liable for: bodily injury to the insured.”

The Eighth Circuit concluded, therefore, that State Farm is entitled to a credit of $300,000 for the money McHone received from her settlement with Gramercy’s receivership. McHone’s argument that the credit is not applicable because the payment was made by the receivership rather than by Gramercy itself is unpersuasive and supported neither by the policy language nor Tennessee law.

ZALMA OPINION

Ms. McHone was not the victim of an uninsured motorist. She recovered, by settlement, $300,000 from the receivership estate of the insurer for the person who caused her injuries. Since the amount recovered was more than the policy limit in her UM policy there was no UM loss. Since the jurisdiction allows credit to the UM insurer for the amounts received in settlement, there was no loss McHone could receive from her UM insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Uninsured Motorist Carrier Gets Credit for Payment by Insolvent Insurer

How to Avoid the Tort of Bad Faith

You Need a Professional Claims Staff

I was honored to speak on avoidance of the tort of bad faith by the Pacific Claims Executives Association on May 7, 2015. I explained to the executives attending my opinion for avoiding the tort of bad faith. I spoke for an hour and will provide the main portion of my talk here.

The tort of bad faith was created in the 1950’s to provide more than contract damages to allow an insured to be compensated by an insurer for its bad conduct and abuses of the insured that courts believed existed. Although such abuses were rare they opened all insurers to tort and punitive damages that have enriched many policyholder attorneys.

A PROFESSIONAL CLAIMS STAFF

In my opinion there is only one way to avoid suits for the tort of bad faith: create and maintain a professional claims staff.

A professional claims staff must include people who:

  • Understand insurance.
  • Can read and understand an insurance policy.
  • Understands and can evaluate property losses.
  • Understands tort law.
  • Knows how to take a thorough recorded statement from the insured, claimant or independent witnesses.
  • Knows how to investigate the causes of property losses.
  • Knows how to investigate the causes of bodily injury losses.
  • Knows how to investigate every type of loss the risk of loss of which were insured.
  • Knows how to evaluate the facts gained by a thorough investigation and apply the results to the wording of the insurance policy.
  • Knows how to empathize with the insured or claimant who has incurred a loss.
  • Understands the valuation of used personal property.
  • Understands how to evaluate bodily injury.
  • Understands the difference between bodily injury and personal injury as defined by a liability insurance policy.
  • Knows when to retain experts to assist in the evaluation and analysis of a claim, like:
    • Forensic engineers.
    • Fire cause and origin experts.
    • Forensic accountants.
    • Private investigators.
    • Salvors.
    • Reconstruction contractors.
    • Construction consultants.
    • Insurance coverage lawyers.
    • Insurance defense lawyers.
  • Knows what local juries will award for bodily injury.
  • Knows what local juries will award for breach of an insurance contract.

The insurer needs to develop such a professional staff by training and continuing education of its claim staff.

A new claims person should be required, before allowing him or her to deal with an insured or a claimant, to first learn about insurance and claims handling by requiring the new employee to read and understand a basic insurance claims handling book like “Insurance Claims: A Comprehensive Guide.” After the new claims person has read through the insurance text materials available in the insurer’s office the new adjuster should then be required to ride with, listen to, and learn from an experienced claims person handling every type of claim the insurer writes. For example, when I was a trainee adjuster I rode with and learned from adjusters who handled bodily injury claims, fire and other property claims, surety claims and workers’ compensation claims.

After the ride alongs and practical experience with claims where the new claims person listens and says nothing, the new claims person should be required to attend a classroom based claims training school like those presently maintained by some large insurers and two large independent adjusting firms. This training should include:

  • The methods used by courts to interpret insurance policies.
  • The basic law of negligence.
  • The basic law of contracts.
  • Basic medicine dealing with bodily injuries.
  • Basic knowledge of medical billing.
  • Investigation techniques.
  • How to repair a fire, wind, flood, earthquake or other damage to dwellings and commercial structures.
  • How to conduct a physical inventory of a business.
  • The state’s fair claims settlement statutes and regulations.
  • The state’s special fraud investigation unit statutes and regulations.
  • The use of experts.
  • The use and control of defense and coverage lawyers.

Only after the training can the new claims person be allowed to deal with insureds and claimants and only under close supervision by an experienced and professional claims supervisor or claims manager.

The insurer, even after it has properly trained its new claims person, must inculcate in the claims  person that insurance claims requires a process of never ending education and learning. They must understand that the law of dealing with insureds and claimants change constantly. Education about insurance must be continuous and a daily exercise. They must subscribe to and read insurance trade journals – most of which are available free over the internet or the insurance company’s intranet. They must subscribe to newsletters from counsel who represent the insurer and provide new information on a regular basis. They can read Zalma on Insurance as you are doing now.

Without a professional claims staff mistakes will be made, untrained or inexperienced claims personnel will fall for attempts by claimants, insureds, public insurance adjusters, and policyholder’s lawyers to cause them to do something that can later be trotted out as evidence of bad faith, bad faith suits will be filed and the cost of defense of those suits – even if they eventually result in a defense verdict – far exceed the savings by paying a young and untrained claims person rather than paying the value of an experienced and professional claims person. Training and continuing education will save millions of dollars in bad faith defense costs and tort damages paid to resolve such suits.

By spending the funds needed to complete and maintain a professional claims staff will save millions by avoiding bad faith suits because all claims owed will be paid in full and with empathy so that the claimant and insured leave the process satisfied.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on How to Avoid the Tort of Bad Faith

I Spoke On Avoiding Bad Faith

The Pacific Claims Executives Association honored me by asking me to speak to them about methods to avoid the tort of bad faith at their meeting yesterday in Monterey, California. For that reason, as I travel back to my home there will be no summary today.

I’ll try to write something next week on the subject.

Have a great weekend.

Posted in Zalma on Insurance | Comments Off on I Spoke On Avoiding Bad Faith

Policy Definition Controls

The Reason for Non Owned Auto Provisions

Auto liability insurance policies are often limited to provide coverage only for the automobile whose risk of loss is insured.  Policies contain Non Owned Auto provisions to avoid coverage for autos that are not normally used by the driver and that change the risk the insurer agreed to insure. In Cowin v. Shelter Mutual Insurance Company, — S.W.3d —-, 2015 WL 2089773 (Mo.App. W.D., 5/5/2015) the Missouri Court of Appeal was asked to ignore the language of a policy and provide coverage to an insured driving a commercial vehicle whose use was not anticipated when the policy was issued. It refused.

FACTS

Paul and Doris Cowin brought an equitable garnishment action against Shelter Mutual Insurance Company seeking to satisfy a judgment against its insured, Jonathon Parsons Jr., in their personal injury case arising out of a car accident. On cross-motions for summary judgment, the trial court entered summary judgment in favor of Shelter finding that the Cowins’ claim against Mr. Parsons fell outside the coverage of the insurance policy and Shelter owed no duty to pay the claim.

Paul and Doris Cowin were injured in an automobile accident on February 20, 2009, when a 1987 Western Star log truck owned by Todd Lumber Company and driven by its employee, Jonathon Parsons Jr., struck the rear of the Cowins’ automobile. Mr. Parsons was authorized by his employer to use the log truck for business purposes. He did not have authority to use the log truck for personal purposes. He did not need to ask specific permission before using the truck. Mr. Parsons used the log truck for business purposes in excess of 50 times in the nine months prior to the accident without seeking specific permission for those uses. On the day of the accident, Mr. Parsons was using the log truck for business purposes, and he did not seek permission that day to use it. The log truck was insured by an insurance policy through State Farm Mutual Automobile Insurance Company with limits of $100,000 per claim.

At the time of the accident, Mr. Parsons had an automobile insurance policy on his 1999 Ford F250 through Shelter Mutual Insurance Company. The insuring agreement contained in the Shelter policy provided bodily injury coverage of $50,000 each person and $100,000 each accident.

The Cowins filed a personal injuries suit against Todd Lumber Company and Mr. Parsons. Thereafter, the parties entered into a settlement agreement, and a consent judgment was entered by the Crawford County Circuit Court. The consent judgment was in the amount of $300,000 with execution of the judgment limited to available insurance coverage. State Farm, which insured the log truck, satisfied $200,000 of the judgment; and the Cowins initiated this equitable garnishment action against Shelter seeking to collect the balance of the judgment.

THE MOTIONS FOR SUMMARY JUDGMENT

The Cowins and Shelter filed cross-motions for summary judgment. In Shelter’s motion, it argued that because the damages sought by the Cowins arose from Mr. Parsons’s use of the log truck owned by his employer that was neither the “described auto” or a “non-owned auto” under the policy, those damages were not covered by the policy and it was not obligated to satisfy any portion of the judgment.

The trial court granted Shelter’s motion for summary judgment and denied the Cowins’ motion. It found that the definitions of non-owned auto and general consent in the Shelter policy were clear and unambiguous and that the Cowins’ claim fell outside the coverage of the Shelter policy and Shelter owed no duty to pay the claim in this case. This appeal bythe Cowins followed.

ANALYSIS

The general rule in interpreting an insurance policy is to give the language of the policy its plain meaning. The entire policy and not just isolated provisions must be considered.  If the policy’s language is not ambiguous, the policy must be enforced as written.

If an ambiguity exists, the language of the policy is construed against the insurer. In determining whether policy language is ambiguous, it is considered in the light in which it would be understood by the lay person who bought and paid for the policy. Courts may not unreasonably distort the language of a policy or exercise inventive powers for the purpose of creating an ambiguity where none exists. Generally, if a term is defined in the insurance policy, a court looks to that definition and nowhere else.

Under the Shelter policy, coverage is provided for damages arising out the ownership or use of the described auto or a non-owned auto. It is undisputed that the log truck was not the described auto in the Shelter policy. The dispute between the parties is on the question of whether it was a non-owned auto. The policy defines a non-owned auto as any auto used, maintained, or occupied with permission but specifically excludes an auto that the insured has general consent to use. General consent is defined in the policy. It is “the authorization of the owner of an auto of another to use it on one or more occasions without the necessity of obtaining permission for each use. General consent can be expressed or implied.”

The Cowins do not argue that Mr. Parsons was not authorized to use the log truck on one or more occasions without first seeking permission for each use. Instead, they contend that because Mr. Parsons only had permission to use the log truck for limited purposes, i.e. only for business, he did not have general consent to use the log truck.

The definition of general consent does not require consent to use the vehicle for any or all purposes. The unambiguous language of the definition requires only that the insured had the auto owner’s permission to use the vehicle on one or more occasions without the necessity of obtaining permission for each use. The uncontroverted facts of this case satisfy the definition and bar coverage. Mr. Parsons was authorized by his employer to use the log truck for business purposes, and he did not need to ask specific permission before using it. He used the log truck for business purposes in excess of 50 times in nine months prior to the accident without seeking specific permission for those uses. On the day of the accident, Mr. Parsons was using the log truck for business purposes, and he did not seek permission that day to use it.

A court’s function is to construe, not make, insurance contracts. Where a term is specifically defined in the policy, a court must look to that definition and nowhere else. Where the policy’s language is not ambiguous, the policy is enforced as written. The uncontroverted facts of this case reveal that Mr. Parsons was authorized to use the log truck on one or more occasions without first seeking permission for each use. Mr. Parsons had general consent to use the log truck; thus, the truck was not a non-owned auto and was excluded from coverage.

The rationale behind non-owned auto provisions in policies, which is to cover occasional or incidental use of other cars without payment of an additional premium but to exclude coverage for habitual use of other cars, which would increase the risk on the insurance company without the corresponding increase in the premium. Mr. Parson’s use of the log truck was more than incidental and to hold otherwise would extend liability under the policy well beyond what the parties intended.

ZALMA OPINION

Although the injured parties argued valiantly to obtain an additional $100,000 in coverage they failed because to grant them coverage under the Shelter policy the court would have been required to change the wording of the policy Shelter and the insured agreed to when the policy was issued.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Policy Definition Controls

What is Needed to Prove You are an Insured

To be Insured Party Must Fit Definitions in Policy

FACTS

Plaintiff sued his insurer seeking a declaration that he is a “covered person” under a liability policy issued by defendant Stella Maris Insurance Company, Ltd. (SMI). SMI is a single-parent captive insurance company doing business in the Cayman Islands. Its sole shareholder, Catholic Health East (CHE), a not-for-profit Pennsylvania corporation, has a joint operating agreement with Catholic Health System, doing business as Sisters of Charity Hospital (hereafter, Sisters Hospital) in Buffalo. CHE and its affiliates, including CHS and, in turn, Sisters Hospital, are named as ‘covered persons’ in the professional liability policy issued by SMI to CHE.

In the underlying medical malpractice action, defendant Nicholas Serio alleges medical malpractice by plaintiff in connection with the birth of his daughter at Sisters Hospital. Plaintiff sued the insurer seeking a declaration that SMI is obligated to indemnify him in connection with the underlying medical malpractice action.

SMI moved for summary judgment dismissing the complaint against it, alleging that plaintiff failed to provide timely notice pursuant to the provisions of the policy and that plaintiff is not a covered person under the policy because he was not employed by Sisters Hospital and he was not acting under his contract as an on-call physician when he was the attending physician at the labor and delivery. Plaintiff cross-moved for summary judgment with respect to the declaration sought in the complaint, asserting that the policy is ambiguous and must therefore be construed against SMI. Defendants Mary Serio and Nicholas Serio supported plaintiff’s cross motion.

SMI contends that this declaratory judgment action is premature because the indemnification policy provides that no action shall lie against it until liability is established by judgment or settlement and, here, plaintiff’s liability has not been determined in the underlying medical malpractice action.

ANALYSIS

It is undisputed that CHE and Sisters Hospital are insured as covered persons by SMI. Inasmuch as CHE and Sisters Hospital possess information relevant both to the underlying medical malpractice action and to this declaratory judgment action, and Sisters Hospital is a defendant in the underlying medical malpractice action, the court concluded that they are necessary parties to this action.

The court properly denied SMI’s motion based on plaintiff’s alleged failure to provide timely notice pursuant to the provisions of the policy. Even assuming, arguendo, that SMI met its initial burden, the court concluded that plaintiff raised an issue of fact sufficient to defeat the motion on that ground.

Plaintiff asserted in an affidavit that he was unaware of the existence of the policy until SMI commenced a declaratory judgment action in federal court in 2010. Plaintiff also provided an excerpt from the deposition testimony of SMI’s president and chief executive officer in the underlying medical malpractice action wherein SMI’s counsel stated that “there’s no issue about notice in this case … Notice has absolutely nothing to do with his case.” Furthermore, there had been no discovery with respect to the timing of SMI’s notice of the “medical incident” pursuant to the policy or notice of plaintiff’s claim for excess coverage with respect to his potential liability in the underlying medical malpractice action.

The court also concluded that there is an issue of fact whether plaintiff is a covered person under the policy and thus that neither SMI nor plaintiff is entitled to summary judgment in that respect. Although the record establishes that plaintiff was not acting either as an employee of Sisters Hospital or as the scheduled on-call physician at the time of the alleged malpractice, the court rejected SMI’s contention that the policy provides liability coverage for plaintiff only in the event that he was acting pursuant to his contract with Sisters Hospital to provide on-call coverage.

SMI itself raised an issue of fact whether plaintiff was acting pursuant to the policy provisions and thus is a covered person by providing plaintiff’s deposition testimony in the underlying medical malpractice action, wherein he testified that it was a hospital rule that residents be present for the delivery of twins, as was the case here, for purposes of their education and to assist the attending physician. It is undisputed that two residents were present during Mary Serio’s labor and the delivery of the twins, one of whom is the subject of the underlying action.

SMI failed to establish that plaintiff lacked any responsibility with respect to the supervision or proctoring of the residents who were present for the labor and delivery of twins. Plaintiff, however, failed to establish that his contract with Sisters Hospital covers the situation here.

That he supervised or proctored residents while attending a private patient, or that he supervised or proctored residents who were present pursuant to a rule or policy of Sisters Hospital that residents be present for the delivery of twins for purposes of their education and to assist the attending physician. Therefore, the court concluded that plaintiff’s affidavit stating that he provided “necessary supervision” is conclusory and thus is insufficient to establish his entitlement to judgment and the physicians’ affidavits provided by SMI regarding the responsibility of the on-call physician with respect to the residents treating hospital or other non-private patients are not relevant here.

The appeal was dismissed.

ZALMA OPINION

Insurance policies are nothing more than a contract. To be defended or indemnified as an insured the person seeking coverage must fit within the definition of “insured” in the policy. The plaintiff was in the hospital working for a private patient and was not, therefore, an insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on What is Needed to Prove You are an Insured

Can Defendant Depose Plaintiff’s Counsel?

Lawyer As Witness

Insurance bad faith cases are never easy. Often the parties, and the counsel for the parties, become combative and do not always act professionally. Each side tries to gain an advantage over the other. The specter of punitive damages raises the efforts of each side. In Cooper v. Omni Ins. Co., Slip Copy, 2015 WL 1943802 (D.S.C., 4/29/15) the District court for the District of South Carolina was faced with what should be, but is not, an unusual attempt by the defendant to depose the plaintiff’s counsel.

Defendant Omni Insurance Company’s (“Defendant” or “Omni”) moved  to Compel the deposition of Plaintiff’s counsel, Pamela R. Mullis, Esquire (“Attorney Mullis”).

STANDARD

The court may restrict discovery of otherwise allowable information, however, if it determines that the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive it can restrict the discovery.

DISCUSSION

The parties do not dispute the factual background giving rise to this motion. This action involves a bad faith claim asserted by Plaintiff against Defendant.  Plaintiff alleges that the bad faith arose in connection with an underlying automobile accident/tort claim (“the underlying action”), where Plaintiff brought suit against Omni’s insured, Benjamin Spears (“Spears”). Spears’s policy limits provided for the minimum liability coverage limits ($25,000/$50,000/$25,000). Plaintiff, however, obtained an excess verdict of $854,075.00 against Spears at trial.  Spears then assigned his bad faith claim against Omni to Plaintiff, who sued Omni. Plaintiff alleges that Omni wrongfully failed to settle her claim against Spears within Spears’s policy limits. Plaintiff’s counsel, Attorney Mullis, also represented the Plaintiff during the underlying automobile accident/tort suit against Spears.

Defendant seeks to compel Attorney Mullis’s deposition, asserting that she “is a witness concerning the facts of this case.” Defendant argues that the present bad faith claim calls into question the facts and circumstances surrounding the underlying case and the failure of the claim to settle. Defendant notes that while deposing opposing counsel is typically unusual, in a bad faith situation like this it is logical, as Plaintiff’s counsel was an active participant in the very events that gave rise to the alleged bad faith claim.

Defendant argues that it has a legitimate basis in seeking the deposition, as the information sought relates to the facts and circumstances surrounding the underlying action’s failure to settle.

ANALYSIS

The party seeking to depose opposing counsel must satisfy a three prong test, showing that:

(1)     no other means exists to obtain the information than to depose opposing counsel,
(2)     the information sought is relevant and nonprivileged, and
(3)     the information is crucial to the preparation of the case.

The purposes of this burden was to guard against the harassing practice of deposing opposing counsel that does nothing for the administration of justice but rather prolongs and increases the costs of litigation, demeans the profession, and constitutes an abuse of the discovery process.

The Fourth Circuit has not adopted a specific approach regarding deposing opposing counsel. Several cases involving facts similar to thist case are instructive. For example, in a case from the Eastern District of California, a defendant sought to depose plaintiff’s litigation counsel in an insurance coverage/bad faith action regarding the facts and circumstances of an underlying lawsuit which settled. See Riverbank Holding Co. v. N.H. Ins. Co., No. 2:11–cv–2681–WBS–GGH, 2012 WL 4748047, at *1 (E . D.Ca. Oct. 3, 2012). The court explained that the party seeking the deposition had not attempted to seek the depositions of other individuals involved in the settlement negotiations who might provide similar insight.

The Eastern District of Pennsylvania reached a similar conclusion when it addressed this scenario. This same situation arose, where the insurance company defendant sought to depose plaintiff’s counsel in a bad faith action regarding his handling of an underlying auto accident case. See Slater v. Liberty Mut. Ins. Co., No. CIV A. 98–1711, 1999 WL 46580, at *1 (E.D.Pa. Jan. 14, 1999). The Court found this was inappropriate, noting that the defendant had other means of discovering what its employees may have said to plaintiff’s attorney. Accordingly, the Court found that compelling the deposition would be inappropriate.

Defendant failed to show that there is any information peculiarly with Attorney Mullis’s knowledge and/or that no other means exist from which to obtain the information.

In its motion, Defendant notes that Attorney Mullis was involved in settlement related communications with Omni. However, Attorney Mullis is not the sole source of information regarding any of these communications. Defendant already has in its possession copies of emails and letters between Attorney Mullis, Omni employees, the attorneys representing Spears through his coverage with Omni in the tort suit, and the attorney representing Spears in his criminal case. Defendant notes that Attorney Mullis participated in settlement negotiations with Omni (not the Plaintiff herself), and thus her testimony may shed light on the failure of the claim to settle.

To the extent Defendants seeks to depose counsel regarding communications with its own client, Attorney Mullis certainly is not the sole source of information. Defendant may depose its employees and agents who engaged in communications with Attorney Mullis in order to obtain that information. Attorney Mullis, as only one side of the settlement negotiations, is not the sole source of information regarding any of these communications.

The Court’s task was to determine whether the facts and circumstances surrounding the negotiations were peculiarly within Attorney Mullis’s knowledge. As the communications involved multiple parties, the Court found that none of the information sought falls into that category. The mere fact that Defendant desires to get Attorney Mullis’s “version of events” is not enough to meet Defendant’s burden.

ZALMA OPINION

This is an example of no-holds-barred litigation. All counsel could get from Attorney Mullis is her thought processes that resulted in a failure to settle the underlying claim, information that is privileged. Plaintiff made the decision to settle or not yet she claimed to have not participated in settlement negotiations. If so the basis of the bad faith case is weak and the attorney’s testimony will not add anything that could be obtained elsewhere. Another case establishing that bad faith litigation should be restrained.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Can Defendant Depose Plaintiff’s Counsel?

Conflict Stays Declaratory Relief

Whisky Infringement & Declaratory Relief

National Trust Insurance Company (“National Trust”) sued Heaven Hill Distilleries, Inc. (“Heaven Hill”) seeking a declaration from the District Court for the Western District of Kentucky, that it has no duty under the terms of various insurance policies to indemnify or defend Heaven Hill in an underlying lawsuit pending in Ontario, Canada (the “Canadian Litigation”). Diageo Canada, Inc. (“Diageo”) filed the Canadian Litigation on March 26, 2014, asserting that Heaven Hill had infringed its Canadian trademark registrations based on alleged similarities in the bottling and labeling of Heaven Hill’s “Admiral Nelson’s” rum and Diageo’s “Captain Morgan” line of spirits. In particular, Diageo accused Heaven Hill of either willfully and deliberately infringing its rights in the Captain Morgan trade dress, or having a reasonable basis to suspect that Diageo’s rights would be violated.

In National Trust Ins. Co. v. Heaven Hill Distilleries, Inc., Slip Copy, 2015 WL 1931961 (W.D.Ky., 4/28/15)  the District Court, Western District of Kentucky was asked to stay the declaratory relief action until the Canadian Litigation was resolved because there was a conflict between the insurer and Heaven Hill.

FACTS

Heaven Hill acquired rights and interest in the Admiral Nelson’s label in June 2011. Shortly thereafter, National Trust sold Heaven Hill six insurance policies, each containing commercial liability insurance provisions.  Heaven Hill timely notified National Trust of the Canadian Litigation and requested that it defend and indemnify Heaven Hill in accordance with the provisions of the applicable insurance policies. Subject to a reservation of rights, National Trust conditionally acknowledged and responded to its duty to provide Heaven Hill with a defense in the Canadian Litigation.

Thereafter, National Trust sued its insured claiming that it has no duty to indemnify or defend Heaven Hill in the Canadian Litigation under any of its insurance policies. National Trust alleges that coverage for the Canadian Litigation is barred by a number of different provisions of the relevant insurance policies. One of those provisions is an exclusion that bars coverage for any conduct that constitutes a knowing violation of the rights of another. National Trust alleges that Heaven Hill knowingly or willfully infringed upon Diageo’s product trade dress, thereby relieving National Trust of its duty to indemnify or defend Heaven Hill.

Heaven Hill asserts that discovery would prejudice its position and defense in the Canadian Litigation. Furthermore, Heaven Hill argues that permitting National Trust to attempt to discover and prove in this case that Heaven Hill knowingly violated Diageo’s legal rights, while maintaining an obligation to defend Heaven Hill in the Canadian Litigation, is an irreconcilable conflict of interest.

DISCUSSION

Courts weighing a stay based on related foreign litigation have balanced multiple factors, including “the similarity of the issues, the order in which the actions were filed, the adequacy of the alternate forum, the potential prejudice to either party, the convenience of the parties, the connection between the litigation and the United States, and the connection between the litigation and the foreign jurisdiction.” Pexcor Mfg. Co. v. Uponor AB, 920 F.Supp.2d 151, 153 (D.D.C.2013) (citation omitted); see also Ronar, Inc. v. Wallace, 649 F.Supp. 310, 318 (S.D.N.Y.1986).

Heaven Hill asserts that its defense in the Canadian Litigation would be unduly prejudiced if a stay were not issued in this matter. National Trust cannot be found to be fulfilling its duty to defend Heaven Hill free of prejudice while simultaneously compelling it to litigate on two-fronts: both against the plaintiffs in the Canadian Litigation and against National Trust in this case.

The Court has also considered the potential prejudice to National Trust and found that any such prejudice would be minimal by comparison.

Suits are generally considered similar if substantially the same—although not necessarily identical—parties litigate substantially the same issues in different forums.  Romine v. Compuserve Corp., 160 F.3d 337, 339–40 (6th Cir.1998). The declaratory relief action and the Canadian Litigation are both connected. Moreover, both cases stem from the same set of underlying facts.

In the Canadian Litigation, Diageo claims damages under Canadian law for trademark violation, based in part on Heaven Hill’s knowing or willful violation of that law. Similar, if not identical, issues surround both cases.

Courts typically defer to proceedings that are already underway, preferring not to begin anew in a second forum. The Canadian Litigation was filed before the present declaratory judgment matter. Similarly, counsel in this matter have informed the Court of the relative progress of the Canadian Litigation and they anticipate a resolution of that suit by the end of 2016.

CONCLUSION

Without a stay of this action, Heaven Hill would likely be forced to simultaneously litigate the same issue both here and in the Canadian Litigation, resulting in prejudice to the parties, waste of judicial resources, and risk of inconsistent judgments. The balance of the relevant factors weighs in favor of granting a temporary stay. Accordingly, discovery and other proceedings in this case relating to the question of whether Heaven Hill willfully or knowingly violated the rights of Diageo Canada, Inc. was temporarily stayed pending the resolution of the underlying lawsuit pending in Ontario, Canada, or until further Order of this Court.

ZALMA OPINION

Sometimes insurers forget that insurance is a business of utmost good faith. To force an insured into a second lawsuit over the same issues where its insurer – defending it in the Canadian Litigation – seeks to prove the same thing that the plaintiff in the Canadian Litigation is seeking to prove. The court, without ever mentioning the covenant of good faith and fair dealing, reminded the insurer of its obligation to not harm an insured while seeking to protect its rights to refuse defense. Eventually, if it is right, it can recover what it paid for defense of Heaven Hill.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Conflict Stays Declaratory Relief

Advertising Injury Coverage Does Not Cover Breach of Contract

There Must Be Alleged or Actual Advertising Injury to Require Defense

Last year I wrote, here, a posting called “Insurer Fails To Assert Exclusions to its Detriment” which can be read at http://zalma.com/blog/insurer-fails-to-assert-exclusions-to-its-detriment/ . Since then Maryland’s highest court has changed the decision I summarized.

Charles L. Simmons, Jr. of Groman & Williams in Baltimore was kind enough to pass on the decision in Maryland Cas. Co. v. Blackstone Intern. Ltd., — A.3d —-, 2015 WL 1798960 (Md., 4/21/15) to me so that I can update the blog on the changes brought about by this new decision. In the original posting I took umbrage at the failure of the insurer to use its effective exclusions to avoid liability to its loss in the lower courts. Maryland’s highest court proved me wrong. Without considering the exclusions it concluded that none of the acts of the plaintiffs involved advertising injury and there was no obligation on the Insurers to defend or indemnify Blackstone.

FACTUAL BACKGROUND

Under Maryland law, an insurance company has a duty to defend its insured for any claims brought against it that are potentially covered under the insured’s policy. Thus, a duty to defend may extend even beyond instances in which an insured is liable and the insurer must indemnify. In this case, the court was asked to assess whether an insurance company had a duty to defend its insured under a commercial general liability policy’s “advertising injury” clause against a suit sounding in breach of contract and arising out of a joint business venture.

In October 2006, Robert M. Gray, President of RMG Direct, Inc. (“RMG”), first met John F. Black, President and Chief Executive Officer of Blackstone International, Ltd. (“Blackstone”). During their initial conversation, Black informed Gray that he “was in the business of manufacturing and selling lamps and other lighting products designed to assist low vision consumers.” Gray then informed Black of his role at RMG and his “professional background in the vision field.” The two men then proposed a joint venture to “market and sell lighting products to people with low vision problems,” and agreed to discuss the venture at a later date.

Throughout the next four years, Gray—working on behalf of RMG—worked in collaboration with Black and Blackstone employees to develop and market their joint venture. During this time, Gray performed multiple tasks without compensation. As part of his work with Blackstone, Gray participated in the development of a sales presentation to Wal–Mart Stores, Inc. (“Wal–Mart”) in an effort to place the product line for sale in its stores.

RMG filed suit against Blackstone and Black in the Circuit Court for Baltimore County.

BLACKSTONE’S INSURANCE POLICY

Blackstone has been insured by Maryland Casualty Company and Northern Insurance Company of New York (collectively, “Insurers”) for commercial general liability insurance since 2001. Its Commercial General Liability Coverage Form (the “Policy”) included coverage for Personal and Advertising Injury Liability.

Blackstone and Black wrote to Insurers, requesting coverage and litigation defense under the personal and advertising injury provisions of the Policy. The Insurers filed a Complaint for Declaratory Judgment, seeking a judgment that they had no duty to defend the claims because, they argued, the Second Amended Complaint did not allege that Blackstone had engaged in advertising, that RMG had suffered an advertising injury, or that there was any “causal connection between any of RMG’s claimed damages … and any advertising conducted by Blackstone.” Insurers also contended that all six counts in the Second Amended Complaint were excluded from coverage by the Policy’s terms. The Insurers asserted that there was no potentiality of coverage for Blackstone’s claim and that the Insurers had no duty to defend.

DISCUSSION

In Brohawn v. Transamerica Insurance Company, 276 Md. 396, 347 A.2d 842 (1975), the Maryland high court recognized an insurance company’s duty to defend its insured for all claims which are potentially covered under an insurance policy.

In determining whether a liability insurer has a duty to provide its insured with a defense in a tort suit, two types of questions ordinarily must be answered: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy? (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage? The first question focuses upon the language and requirements of the policy, and the second question focuses upon the allegations of the tort suit.

In Maryland, an insured may rely on extrinsic evidence where the underlying complaint neither conclusively establishes nor negates a potentiality of coverage However, if the terms of Blackstone’s Policy and the allegations in RMG’s Second Amended Complaint are conclusive there is no need to consider any extrinsic evidence.

Advertising Injury In Commercial General Liability Policies

Blackstone contends it is entitled to insurance coverage under the advertising injury provision of its commercial general liability insurance policy. In the Second Amended Complaint, RMG asserted breach of contract, promissory estoppel, unjust enrichment, quantum meruit, intentional misrepresentation, and accounting for allegations including: (1) developing the product brand name “Vision Enhance”; (2) creating graphics for use in sales sheets; (3) developing and reviewing packaging and marketing of “Vision Enhance”; (4) contacting low vision experts and sufferers on behalf of the venture, including obtaining written testimonials; and (5) introducing the “Vision Enhance” brand by placing a full-page color advertisement in an industry journal.

Provisions offering coverage for advertising injury became common in commercial general liability policies during the second half of the Twentieth Century. A court should consider three inquiries when determining whether a policy provides coverage for advertising injury:

(1)     Is there an ‘advertising injury’ offense as defined by the policy?;

(2)     Was the offense committed in the course of advertising your goods, products or services?; and

(3)     Is there a causal connection between the advertising and the injury?”

These three elements have been recognized and applied in Maryland.

THE CAUSAL CONNECTION REQUIREMENT

The Insurers maintained that the Court of Special Appeals disregarded the requirement that there be a causal relationship between the advertising injury and the claimed damages and contend that RMG did not allege its damages were causally related to any Blackstone advertisement. For its part, Blackstone counters that the Court of Special Appeals considered the causal connection between advertisement and damages and properly concluded that it was subsumed in the Policy’s definition of “advertising injury.”

Advertising injury provisions are typically specified risk coverages whose terms are designed to provide coverage for the enumerated claims only and not to provide generalized liability coverage. A highly attenuated connection to advertising is not sufficient to create coverage.

To meet the causal connection requirement, the advertising injury claimed must be caused by an offense committed in the course of advertising. The question is whether the advertising did in fact contribute materially to the injury.

Although expressed in six counts, the crux of RMG’s complaint is that Blackstone failed to accord RMG a share of profits or an equity interest in return for Gray’s services as called for in an oral contract between them.

RMG plainly alleged that Gray and Black formed an oral contract—that they mutually promised to perform their ends of the bargain. One of the aims of the enterprise was for Blackstone to use Gray’s work in its advertisements. Given this agreement, it cannot be fairly said that RMG suffered injury from the use of advertising materials Gray willingly delivered to Blackstone for that purpose. The wrong RMG alleged was Blackstone’s failure to pay RMG a percentage of profits and give it an equity stake in the venture involving the sale of Blackstone’s product.

The fallacy in Blackstone’s current claim against the Insurers is that Blackstone’s use of RMG’s creative ideas could only enhance RMG’s claims for profits or an equity share, not injure him.

RMG’S UNJUST ENRICHMENT COUNT

RMG’s remaining unjust enrichment claim did, however, depend on Blackstone’s use of RMG’s advertising ideas. In that count, RMG alleged that Blackstone was unjustly enriched by retaining the benefit flowing from its use of RMG’s ideas in advertisements for Blackstone’s products. The complaint’s count for unjust enrichment therefore bore a “direct and substantial” relationship to the use of RMG’s advertising ideas in Blackstone’s advertisements, making that claim an “advertising injury” under the parties’ insurance agreement.

The Court of Appeals disagreed because it saw the same causation problem for the unjust enrichment count as for all other counts.

RMG was allegedly injured by Blackstone’s refusal to pay to RMG its share of the fruits of that advertising, i.e. profits. But the profits from the sale of Blackstone’s product were enhanced by the advertising which was the subject of RMG’s complaint.

In sum, in all of the counts alleged by RMG, the advertising done by Blackstone using Gray’s ideas was all for the positive—it enhanced the value of the profits and joint venture interest to which RMG claimed entitlement. The advertising, even though utilizing Gray’s ideas, did not injure RMG. Unlike the majority of cases finding an advertising injury, it had no competing business.

In conclusion, after reviewing the coverage and defenses under the Policy and the allegations in the underlying action, the court held that there was no potentiality of coverage. Blackstone did not show an advertising injury because none of the allegations of the underlying suit brought by RMG identified any injury that was caused by the advertisements created by RMG. Thus, the Insurer had no duty to defend its insured.

ZALMA OPINION

When I wrote about the lower court decision I said:

“Sometimes it is not intelligent to be too smart by half. The insurers had viable and provable exclusions that would have supported its refusal to defend. In an attempt to convince the trial court to grant their motion for summary judgment the Insurers simplified their argument and told the court not to “get bogged down” with the wording of the policy and its exclusions.

“Insurance companies write the words in an insurance policy to express the risks that they are willing to take and the risks they refuse to take. The policy contract must be read as a complete document and eliminating part of the contract is a disservice to the people who wrote the contract. By limiting the argument and waiving the exclusions the Insurers will pay more than one million dollars they probably did not owe.”

The insurers’ avoided the cost of defense or indemnity because the plaintiffs could not convince Maryland’s highest court that although advertising was involved there was no injury as a result of that injury.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Advertising Injury Coverage Does Not Cover Breach of Contract

Why Insurance Fraud Succeeds

Zalma’s Insurance Fraud Letter

May 1, 2015

Happy Law Day – Celebrate the Magna Carta

In this, the Ninth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on May 1, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Celebrate Law Day and the American Bar Association’s Theme – “Magna Carta: Symbol of Freedom Under Law.”
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Punitive Damages and Taxes.
4.    Barry Zalma to Speak at 19th Annual ACE Conference 6/17/15.
5.    Some Insurance Fraud Appellate Cases
6.    The Staged Loss
7.    Why Insurance Fraud Succeeds
8.    Do Insurers Get Their Money’s Worth From Fighting Fraud?
9.    Medicaid Fraud Control Units Fiscal Year 2014 Annual Report.
10.   Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    Extrinsic Evidence Eliminates Duty to Defend – April 30, 2015
2.    Subrogation – April 29, 2015
3.    A “Heads I Win, Tails You Lose” Story – April 29, 2015
4.    Diminution – April 28, 2015
5.    Is a Liability Policy a First Party Policy? – April 27, 2015
6.    Applicant has Duty to Tell The Truth – April 24, 2015
7.    Unfair Trial Tactics Require Retrial – April 23, 2015
8.    How To Determine Who’s On First – April 22, 2015
9.    Can an Insurer Limit Coverage as It Pleases? – April 21, 2015
10.    ISO Files Most Important Homeowners Change in 40 Years – April 20, 2015
11.    When Has Litigation Gone Too Long? – April 17, 2015
12.    Does Extended Reporting Period Extend Claims Made? – April 16, 2015
13.    Not Nice To Sue Your Spouse – April 16, 2015
14.    Zalma’s Insurance Fraud Letter – April 15, 2015
15.    Why the “Bad Faith” Expert Couldn’t Testify – April 14, 2015
16.    May Insured Lie To Insurer When Applying? – April 13, 2015
17.    May Regulator Exceed Power to Protect Public? – April 10, 2015
18.    A Fictionalized Story of Real Insurance Fraud – April 9, 2015
19.    Broker Need Only Acquire Insurance Requested – April 8, 2015
20.    When Is an Intentionally Set Fire Not Vandalism? – April 7, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Comments Off on Why Insurance Fraud Succeeds

Extrinsic Evidence Eliminates Duty to Defend

Intentional Pollution Not Covered

In California determining the existence of a duty to defend is not limited to the zealous or artful pleading of the plaintiff the court must also consider extrinsic evidence. In Hollyway Cleaners & Laundry Co., Inc. v. Central Nat. Ins. Co. of Omaha, Inc., Not Reported in F.Supp.3d, 2015 WL 1884311 (C.D.Cal., 4/23/15) an insurance coverage dispute between insureds, Plaintiffs Hollyway Cleaners & Laundry, Inc., Milton Chortkoff, Burton Chortkoff, Edythe Chortkoff and Wilma Chortkoff, and their carrier, Defendant Central National Insurance Company of Omaha, Inc. was presented to the District Court for the Central District of California. The suit alleged that the Defendant breached, and continues to breach, its duty to defend in an underlying action potentially covered by their insurance policy. Defendant contends there is no duty to defend because the policy does not cover the environmental damage in the underlying action.

FACTUAL BACKGROUND

Central National Insurance Company of Omaha, Inc. (“CNI”) issued a standard comprehensive general liability insurance policy (“the Policy”) to Hollyway Cleaners & Laundry Co., Inc. (“Hollyway”), Milton Chortkoff, and Burton Chortkoff. (P. SUF ¶ 1.) Under the Policy, Milton and Burton Chortkoff’s wives, Edythe Chortkoff and Wilma Chortkoff, are also insureds.

Originally, the Policy was issued for a three-year period from November 1, 1983 to November 1, 1986, but was cancelled on November 1, 1985. The Policy limits liability to $500,000 per occurrence, in the aggregate, and per year. According to the Policy: “CN will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages of … property damage to which this insurance applies, caused by an occurrence and arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental to the business of the Named Insured at or from the insured premises, and CN shall have the right and duty to defend any suit against the Insured, seeking damages on account of such … property damage, even if any of the allegations of the suit are groundless, false, or fraudulent….”

The Policy contains a “chemical discharge exclusion,” which provides that: “[t]his insurance does not apply * * * to … property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalies, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.”

Holloway and the Chortkoffs were sued for allegedly causing environmental contamination to the soil and groundwater at and around the site where their dry cleaning business was located.

Coverage Dispute

Three days after Echo filed suit, Bret Stone, Cumis counsel for Hollyway, tendered the complaint to CNI. “CNI agreed to defend Hollyway, under a reservation of rights, in its capacity as a dissolved corporation.” After the individual Chortkoffs were added as defendants in the Underlying Action, CNI denied that it had any duty to “fund a defense in which the interests of the individual Chortkoffs, whom CNI was not defending, were prioritized over the different and conflicting interests of Hollyway as a dissolved corporation, which CNI was defending.”

According to CNI, the Underlying Action “is directly related” to a 1989 federal lawsuit-Sunset/Echo Corporation v. Hollyway Real Estate and Development, et al., No. 89–1490 WMB (“1989 Action”). CNI alleges that, during their depositions, Milton and Burton could not recall any chemical leaks or spills at the property, including any spills resulting from the delivery of chemicals, transfer of clothes from the cleaner to the dryer, or from an earthquake or any other natural event. CNI further alleges that Milton and Burton admitted that “the regular practice at Hollyway Cleaners was the intentional and deliberate disposal of the chemical waste—i.e. ‘muck’—and/or the filters containing the chemical waste into the dumpster and other trash receptacles on the Subject Property.
On September 23, 2013, Hollyway and the Chortkoffs filed suit against CNI in Los Angeles Superior Court for: (1) declaratory relief; (2) breach of contract; (3) breach of the implied covenant of good faith and fair dealing; and (4) unjust enrichment. On October 9, 2013, CNI removed the action to federal court.

DISCUSSION

Duty to Defend

“The duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source.” Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993) (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 276–77, 54 Cal.Rptr. 104, 419 P.2d 168 (1966)) (original emphasis). Whether an insurer has a duty to defend turns on “those facts known by the insurer at the inception of a third party lawsuit, even though the face of the complaint does not reflect a potential for liability under the policy. Because the parties agree the Policy includes a duty to defend, the Court must determine whether extrinsic evidence eliminates the possibility of coverage under the Policy and thus Defendant’s duty to defend.

The extrinsic evidence at issue is Milton and Burton’s deposition testimony from the 1989 Action, which was filed decades before the Underlying Action. During their depositions, Milton and Burton explained that the regular practice at Hollyway for disposing of chemical waste and filters containing chemical waste was to throw such materials in the dumpster and other trash receptacles on the property. Finding no evidence that “such discharge, dispersal, release or escape” of chemical waste was “sudden and accidental,” Defendant concludes that it has no duty to defend.

Milton and Burton’s deposition testimony shows that, over twenty-four years before the filing of the suit for which defense is requested, the regular practice at Hollyway was disposing of chemical waste and filters containing chemical waste in the dumpster and other trash receptacles on the property. Such “discharge, dispersal, release or escape” of chemical waste is neither “sudden” nor “accidental” and therefore not covered by the Policy. The Court finds that this extrinsic evidence conclusively eliminates the possibility of coverage under the Policy.

Plaintiffs argue that it is “possible that a sudden and accidental release that caused the property damage during the CNI Policy could be discovered during the course of the Underlying Case.”

A good many things are technically possible. However Plaintiffs failed to produce a single piece of evidence to show that one of the technically possible causes contributed to or caused the contamination. Plaintiffs’ speculation is not sufficient to create a genuine issue of material fact. Plaintiffs must, and have failed to, provide evidentiary support to substantiate their claims.

ZALMA OPINION

I have written here many times concerning the four corners or eight corners rule where coverage determination is based on the artful pleading of the plaintiff rather than what actually happened. Here, had the case been in a four corners state the insurer would be required to defend the plaintiffs who admitted that they intentionally contaminated the property. Those states that apply the four corners rule should reconsider and follow the lead of the state of California.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Extrinsic Evidence Eliminates Duty to Defend

Subrogation

Injured Parties Owe Fiduciary Duty to Health Insurer

Automobile Accident Leads to Settlement, Insurance Payments

William and Regina Angel are married and have two children, William, Jr., and Josephine. On July 30, 2009, the Angel family was in an automobile accident caused by Michael Nagel. All four members of the family sustained injuries. At the time of the accident, William Angel was an employee of Montgomery County, Ohio. As a benefit of his employment, Mr. Angel had health insurance for himself and his family through a plan operated by the county.

The plan contained the following provisions: “[I]f a Covered Person receives any payment from any Responsible Party or Insurance Coverage as a result of an injury, illness or condition, the plan has the right to recover from, and be reimbursed by, the Covered Person for all amounts the plan has paid and will pay as a result of that injury, illness or condition, from such payment, up to and including the full amount the Covered Person receives from any Responsible Party.  * * *  This plan shall be entitled to full reimbursement on a first dollar basis from any Responsible Party’s payments, even if such payment to the Plan will result in a recovery to the Covered Person which is insufficient to make the Covered Person whole or to compensate the Covered Person in part or in whole for the damages sustained. * * *  For purposes of this provision, the term Insurance Coverage refers to any coverage providing medical expense coverage or liability coverage including, but not limited to, uninsured motorist coverage, underinsured motorist coverage, * * * or any first party Insurance Coverage.”

The Angel family received treatment for the injures they sustained, and their health-insurance plan paid $63,513.89 of those expenses. A few months after the accident, Montgomery County put the Angel family on notice that it claimed a lien on any proceeds that they might receive from a third party as a result of injuries they sustained in the accident.

In March of 2010, the Angel Family hired attorney Eric Deters and his law firm to represent them in a lawsuit against State Farm Insurance Company. State Farm was their automobile insurance company, and the Angels were seeking compensation under their underinsured-motorist provision, because the party who caused the accident was underinsured. The matter was quickly settled for at least $180,460.92. The Deters firm was paid $54,020 for its work, but Montgomery County was not compensated for its lien.
Because Montgomery County was not compensated, it filed suit against the Angel family members, Deters, and the Deters law firm to recover the proceeds. After some initial discovery, Montgomery County filed a motion for summary judgment. The trial court granted the motion, and entered judgment in favor of Montgomery County. The Angel family, Deters, and the Deters law firm (hereinafter “appellants”) have appealed.

ANALYSIS

In one assignment of error in Montgomery Cty. v. Deters, Slip Copy, 2015 WL 1843667 (Ohio App. 1 Dist., 4/22/15), 2015 -Ohio- 1507, appellants claim that the trial court improperly granted Montgomery County’s motion for summary judgment.

A health insurer that has paid medical benefits on behalf of its insured and has been subrogated to the rights of its insured may recover from the insured after the insured recovers from the insured’s auto policy. Appellants’ first argument is that it is unfair for Montgomery County to recover anything, because the appellants did all the work in order to recover from Nagel and State Farm.

The Ohio Supreme Court noted in a similar case, “[a]lthough some may view a subrogation provision granting priority to the insurer as unfair, courts should not rewrite contracts. * * * Cases of contractual interpretation should not be decided on the basis of what is ‘just’ or equitable. This concept is applicable even where a party has made a bad bargain, contracted away all his rights, and has been left in the position of doing the work while another may benefit from the work. Where various written documents exist, it is the court’s duty to interpret their meaning, and reach a decision by using the usual tools of contractual interpretation (e.g., the written documents, the intent of the parties, and the acts of the parties) and not by a determination of what is fair, equitable, or just.” [Ervin v. Garner, 25 Ohio St.2d 231, 239–240, 267 N.E.2d 769 (1971)]

“[A] contract is illusory only when by its terms the promisor retains an unlimited right to determine the nature or extent of his performance; the unlimited right, in effect, destroys his promise and thus makes it merely illusory.” [Century 21 Am. Landmark, Inc. v. McIntyre, 68 Ohio App.2d 126, 129–130, 427 N.E.2d 534 (1st Dist.1980).

In exchange for having their medical bills paid under the plan, the Angels agreed to hold aside the money they recovered for repayment to Montgomery County. When they failed to do so, they breached their fiduciary duty under the plan. The trial court properly granted Montgomery County’s motion for summary judgment.

ZALMA OPINION

Insurance is a contract. When the employee accepted health insurance for himself and his family from his employer he also agreed to give the insurer – in exchange for prompt payment of medical expenses without a need to prove negligence — agreed to pay the insurer back if he recovers from a tortfeasor. He did recover and refused to pay the lien improperly. The covenant of good faith and fair dealing is a two way street. The insured owes the same duty of good faith to his insurer that the insurer owes to the insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Subrogation

A “Heads I Win, Tails You Lose” Story

Help, My House Is Falling Into The Sea

The following is a story from my e-book, “Heads I Win, Tails You Lose” which is a fictionalized story based on a true story with the names and places changed to protect the guilty. The full e-book with more than 80 stories is available at http://zalma.com/zalmabooks.htm

Career criminals are not the only people who perpetrate insurance fraud. The temptation has become so great that almost anyone will try.

A few years ago residents of a hillside community received a letter from the county engineer informing them that their houses sat on an active landslide. The engineers concluded that an unusual amount of irrigation water, water from septic systems, and rainfall lubricated an ancient landslide under their homes. The slide was moving. The engineers were concerned because it was moving at the rate of three inches a year. The houses sitting on the landslide were also moving a few inches a month. Within ten years the houses would be torn apart by the movement if nothing was done to stabilize the hillside.

Homeowners, living on the hill, noticed cracks in the plaster walls. Concrete block walls split at the mortar seams. Cracks formed in the foundation systems. Since the homes on the hill were all valued from  $500,000 and $5,500,000, the monetary value of the potential loss of 300 homes on the landslide was enormous. Many of the homeowners gathered and hired counsel to pursue persons responsible for their damage.

On advice of counsel, the homeowners reported claims to their insurers. Most of the insurers denied the claims. The insurers concluded that the predominant cause of the damage was the excluded peril of earth movement. The claims were fairly and reasonably rejected. Some of the homeowners accepted the decision of their insurers. Some of the homeowners sued their insurers. The imaginative homeowners, like the insured, found a better way.

The insured was a real estate lawyer. He had experience in dealing with insurers for commercial developers he represented. He knew that, in addition to the basic retail insurance market, there was a surplus and excess lines insurance market that would insure almost anything.

Without informing his broker of the landslide situation on the hillside he asked the broker to seek a specialty insurance policy for his home. He wanted insurance that covered him for both earthquake and earth movement, landslide, mudslide or other types of earth movement normally excluded by homeowners policies. He explained to the broker a concern that the wild fires that often devastate hillside communities in Southern California remove vegetation from the hillsides and increase the hazard of mudflow and landslide. He had invested a great deal of money in his home and wanted to protect against that risk.

The broker found a policy offered by a surplus lines insurer. The policy insured dwellings only for the perils of earthquake and earth movement. The premium was a reasonable 3.75 percent of the value of the dwelling with a deductible equal to 5 percent of the total amount at risk. All the insurer required, by way of application, was the name of the insured, the address of the property to be insured, and the amount of insurance requested.
After receiving a signed application from the insured the insurer agreed to insure the property because it did not fall within certain specified earthquake fault areas. The insured obtained a $2,500,000 policy for a premium of only $9,375.00. At the time the insured bought the policy he had received and read the letter from the County. He knew there was a landslide actively affecting his house. At the time he bought the policy the insured had already seen cracks in his plaster walls. When he bought the policy the insured applied the old maxim “ask me no questions – I’ll tell you no lies.”

His experience as a real estate attorney convinced the insured that if he told his prospective insurer his house was sitting on an active landslide they would not insure him. The insurer did not ask. The insured did not offer the information.

After the policy had been in effect for three months and the cracks in the plaster had grown to a size that he could place his index finger inside the crack he reported a loss to the earth movement insurer. He presented a claim for the total loss of the house. He demanded payment of policy limits less the deductible.

The insurer sent its adjuster to meet with the insured. They retained a geologist to inspect the property and determine the cause of the damage. The geologist learned of the active landslide from the public records kept by the city and County. He informed the insurer that thirteen months before it issued the policy the county had sent notice to all homeowners, including the insured, advising the homeowners of the active landslide.

After completing its investigation, with the advice of counsel, the insurer did the following:

1.    It advised the insured that the policy was rescinded from its inception because of the concealment of a material fact. The insured had concealed the fact of the landslide. With notice the insurer returned the $9,375.00 premium.

2.    It advised the insured that even if it had not rescinded the policy it would have denied his claim as one that was not fortuitous. Its investigation showed that the landslide had started before the inception of the policy. It further advised the insured that the loss in progress rule barred any recovery.

3.    The insurer recommended that the insured present his claim, if he still wished to pursue it, to the insurer who insured him a against earth movement at the time of the loss.
The insurer, reasonably concluded that although the loss was progressive and continuous it was fairly certain that a loss had occurred on or before the insured learned of the landslide.

Of course, the insured did not have earth movement insurance at the time of the notice and bought the insurance from the surplus line insurer in an attempt to recover for the loss that had already occurred.

The insured, if asked, would testify that he had no intent to defraud his insurer. He would testify that the insurer, if it had asked him, would have been told the truth. All he was doing was taking an economic advantage over a lazy insurer who did not bother to ask. What the lawyer/insured would have said sounds reasonable. It wasn’t true. He knew of a material fact that would affect the decision of his insurer to insure him. He concealed that fact from the insurer. He intended to conceal the fact from the insurer. Had the insurer known the truth it would not have issued a policy for a loss that was in progress. The insured attempted a fraud. His action in fraudulently getting an earth movement policy was reprehensible. His actions in buying the earth movement policy were no less a fraud than if he set the house aflame and made claim on his fire insurance.

Insurance is, as the lawyer should have known at the time: “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” [California Insurance Code Section 22]

“Concealment” is defined by California Insurance Code Section 330 as “[n]eglect to communicate that which a party knows, and ought to communicate.” In addition, section 332 states: “Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.” Therefore, the insured was actively failing to comply with the public policy stated in the California Insurance Code since the facts were within the insureds knowledge and material to the contract.

As a lawyer the intentional concealment of a material fact with the intent to deceive an insurer to its detriment is fraud and grounds for disbarment. For that reason the insured accepted the denial and did nothing further about the claim.

Had the insurer not done the minimum investigation and retained the services of a competent engineer it would have paid the $2,500,000.00 claim.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on A “Heads I Win, Tails You Lose” Story

Diminution

Is There a Right to Diminution In Value After Repairs

This is an excerpt from my e-book Diminution in Value Damages available at http://www.zalma.com/zalmabooks.htm.

 

Since the Georgia Supreme Court decided Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) I have written several articles concerning the right to recover damages for diminution of value of property even after the damaged property is repaired.

The subject caused concern to the insurance industry, every person insured with a policy of insurance that promised to pay only the cost to repair or replace the property with material of like kind and quality, appraisers, adjusters, and lawyers.

Because of the apparent confusion I created an e-book to more thoroughly review how the United States deals with questions of diminution in value. It covers each of the fifty states of the United States, the District of Columbia, the 12 federal Circuit Courts of Appeal and the U.S. Supreme Court and how they dealt with the issue of establishing the amount of loss to property.

It also covers in detail how each of the jurisdictions dealt with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how much tortfeasors, or their insurers, must pay to those whose property is damaged by their actions.

Since insurance was invented in ancient Sumeria when insurance policies were written on clay tablets, insurers and their insureds have struggled with establishing a fair method to properly and fairly compensate the person insured for the property lost or damaged as a result of a peril insured against. Since insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event, the key question to be answered is how much is needed to indemnify the person insured? The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court said: “Indemnity means an obligation to make good a loss…” Although, on its face, calculating indemnity seems to be a simple task, as the cases in this E-Book are reviewed the reader should be in a position to understand why diminution in value is a concept that has given litigants, insurers and courts serious problems and what seems to be a constant deluge of litigation.

That few jurisdictions agree on methodology and proper computation of damages justify this exercise.

The measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury.  The measure is often difficult to determine. The measure seldom fits into a hard rule of thumb. Every possible means of providing complete indemnity is required when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.

The courts of the various states and federal jurisdictions do not use identical rules to calculate the proper measure of damages. To understand the issue and to apply the proper remedy requires an understanding of how each state applies, what it believes to be, the proper measure of damages for tort, for contract breaches and for insurance claims situations. Although each court should reach the result of true indemnity the same way diversity of opinion is the rule rather than the exception.

For example, automobile insurance policies usually promise to pay the insured, when an automobile is damaged by collision or some other insured cause, the costs to repair the vehicle or if unrepairable, the actual cash value of the vehicle. Most policies say nothing about the difference in value of a vehicle that is repaired after an accident. Because the policies were silent and only promised repair or actual cash value, insurers decided it was unnecessary to even mention the difference in value before the accident and the value after repairs. Since no promise was made to pay for more than actual cash value or the cost of repair the issue was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001).  Mabry caused serious concern among insurers. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired. Insurers believed this decision was a judicial rewriting of the wording of the policy and generated suits across the country seeking recovery for diminution of value in suits against insurers and third-party-defendants.

Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass repair of diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policies wording that establishes that the insurer does not intend to, nor will it, pay for diminution of value.

When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repair. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired. The resale value most likely will be less than that for a comparable automobile that has not been damaged. In other words, the damage results in a reduction — or “diminution”— in the resale value of the automobile. On the other hand, when real property is repaired replacing old material with new the resale value of the real property is often increased. No one, however, has suggested that the insurer or tortfeasor is entitled to a reduction in its payment for repair because the insured profits from the repair and is not, therefore, truly indemnified.

When the property is insured, the insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s automobile or it may arise from a first-party claim against the insured’s own physical damage coverage. The key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by state insurance departments, and the holding of the various courts.

With regard to first-party claims by a person insured against an insurer, while it is perhaps arguable, the ISO contract language — specifically the Limit of Liability condition — appears to cover only the actual cash value  of the damage or the actual cost to repair the damage, some states require payment of additional sums to indemnify the owner for loss in value. Although there is nothing in the policy wording that even appears to contractually cover any reduction in market value, some courts require that the insurer pay extra. Even if the insured could prove the amount of reduction in value collecting from an insurer should require a change in the policy wording.

The policy usually allows the insurer to deduct for “betterment” or depreciation, although the burden of proof is on the insurer to demonstrate such depreciation or betterment.  In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but will not compensate the insured for a reduction in value due to the same accident.

Third-party claims (claims against an insured person for damages done to the property of some third person) for “diminution of value,” on the other hand, have generally been found by the courts to be covered by auto insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in value of the property before the loss and the value of the property after the loss.

For example, Texas court cases have found that legal liability for third-party damages includes diminution of value. However, no single measure of damages can serve in every case to adequately compensate an injured party. For the award of damages to be fair, recognizing that diminution of value is not always accurate, an award of restoration damages, according to some courts, must be available to compensate a plaintiff fully for damages to property when diminution in value fails to provide an adequate remedy.

The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value, unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.  If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the  amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.

There is a disparity between the various states on the subject. Some apply the rules strictly, some apply the general rule of fairness while others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims. The following is a review of how the various states deal with the issue of the proper measure of damages to achieve complete indemnity.
In this book, by including the full text of the court decisions, the issue of diminution  of value damages, is covered thoroughly for every state of the United States and all federal jurisdictions.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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Is a Liability Policy a First Party Policy?

Unambiguous Statute Must Be Interpreted as Written

Insurance parlance defines the first party as the person insured, the second party as the insurer and the third party as a person who claims injury as a result of actions of the first party. First party insurance causes the second party to pay indemnity to the person insured. Third party insurance pays to defend and indemnify its insured against claims of negligence causing injury to a third party who receives the payment. The state of Washington instituted a statute called the Insurance Fair Conduct Act (IFCA) which allows insured’s, harmed by the unfair conduct in a first party claim, to obtain punitive damages from their insurers.

In King County v. Travelers Indem. Co., Slip Copy, 2015 WL 1867098 (W.D.Wash., 4/23/15) the U.S. District Court for the Western District of Washington was asked to resolve a claim by King County for defense and indemnity coverage provided by insurer defendants and for violations of the IFCA. The defendants moved to dismiss only the IFCA claim.

BACKGROUND

Plaintiff King County claimed defense and indemnity coverage under third-party liability policies issued by multiple insurer Defendants for costs arising from Plaintiff’s defense associated with the cleanup of two superfund sites in the county. Plaintiff filed its original complaint on December 23, 2014; on February 5, 2015 (before any answers had been filed), Plaintiff amended its complaint to allege violations of the IFCA.

ANALYSIS

Defendants assert that, as a matter of law, Plaintiff cannot state a claim under IFCA arising from demands for insurance coverage under a third-party liability insurance policy. The District Court has twice addressed this issue (Cox v. Continental Casualty Co., C13–2288MJP, 2014 WL 2011238, 2014 WL 2560433; and Central Puget Sound Regional Trans. Authority v. Lexington Ins. Co., C14–778MJP, 2014 WL 5859321) and twice determined that “IFCA … applies only to first-party insurance.”

Plaintiff attempts a third bite at this apple, arguing that preceding proponents of its position have failed to present to the Court the legislative history of IFCA which the County alleges supports its position. Plaintiff asserts that this Court must follow Washington’s principles of statutory construction, and that those principles direct the Court to employ statutory construction to carry out the intent and purpose of the Legislature.

While Plaintiff urges the Court to consider IFCA’s legislative history in accord with Washington principles of statutory construction, it fails to place those principles in context. The Washington Supreme Court counseled that resort to the tools of statutory construction only under certain circumstances.

In determining the meaning of a statute, the court must apply the general principles of statutory construction. These principles begin with the premise that if a statute is plain and unambiguous, its meaning must be derived from the language of the statute itself. Ambiguity exists if the language of a statute is susceptible to more than one reasonable interpretation. If a statute is ambiguous, resort to the tools of statutory construction is appropriate. A finding of ambiguity must precede any inquiry into legislative intent.

A cause of action arises under IFCA when “[a]ny first party claimant to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.” [RCW 48.30.015] The statute defines “first party claimant” as “an individual, corporation, association, partnership or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.” (emphasis added) [RCW 48.30.015(4)]

The Court saw no ambiguity in the language of the statute or the statutory definition of who may assert an IFCA claim. The Washington Supreme Court has defined “first-party insurance” as any policy that pays specified benefits directly to the insured when a determinable contingency occurs, allowing an insured to make her own personal claim for payment against her insurer. The statute defines “first party claimant” narrowly, in a way that applies only to first-party insurance.

The County points to no ambiguity in the language of the statute and the Court found none. In the absence of any ambiguity, the meaning of IFCA must be derived from the language of the statute itself.

Neither will the Court adopt Plaintiff’s argument that public policy should be allowed to dictate the meaning of the statute. Punitive damages such as those levied under IFCA are, as a rule, contrary to public policy. Brown v. MHN Gov’t Serv., Inc., 178 Wn.2d 258, 277 (2013). Further, Washington adheres to the principle of statutory construction [that] statutes in derogation of the common law must be construed narrowly.

As it has previously, the Court declines to adopt the expansive reading of IFCA propounded by Plaintiff.

CONCLUSION

“First party claimant” as used in IFCA does not apply to an insured with a third-party insurance contract, and thus Plaintiff’s IFCA cause of action in its amended complaint must be DISMISSED as to all defendants. Because there is no further amendment possible which could remedy this defect, the dismissal of the IFCA claim will be with prejudice.

ZALMA OPINION

It is interesting that although the punitive damages are contrary to the public policy of the state of Washington it still enacted the IFCA. The court made clear that, as a result, the application of the IFCA must be narrowly construed to limit its application to first party policies and claims of the first party. Plaintiffs, after failing to stretch the statute by court rulings should give up and lobby the state Legislature to change the statute if it believes such a change is worthwhile.

ZALMA-INS-CONSULT© 2015 – Barry Zalma