Insurance Lawyer Expert Striken

Legal Issues Not Proper Expert Testimony

A plaintiff seeking to use an insurance coverage lawyer as an expert to convince a jury that an insurer was responsible for breaching the tort of bad faith, must be careful in the choice of lawyer and the testimony the lawyer will be asked to provide the jury. A lawyer with no claims handling experience will be disfavored as will be a lawyer who insists on testifying about matters of law. In Corinth Investor Holdings, LLC v. Evanston Insurance Company, Not Reported in F.Supp.3d, 2014 WL 7146040 (E.D.Tex., 12/15/14) the District Court for the Eastern District of Texas was faced with a motion to strike the report and proposed testimony of a lawyer/expert.

FACTS

A motion to strike arose out of an underlying medical malpractice lawsuit filed under the terms of an insurance policy issued to Plaintiff Atrium Medical Center (“Atrium”) by Homeland Insurance Company (“HIC”). A lawsuit was filed against Atrium which asserted professional liability claims against Atrium (the “Garrison litigation” or the “underlying litigation”). The Garrisons assert that Mr. Garrison suffered injuries and now faces terminal illness due to the failure of his primary physician to advise him of the results of a CT scan performed at Atrium that revealed a stage I mediastinal mass located in his thymic gland. Atrium was served with notice of this lawsuit. Atrium notified HIC of the lawsuit, and requested that HIC defend it pursuant to the Policy.

HIC denied coverage asserting that the claim was not “first made” against Atrium during the HIC policy period and was excluded by the Policy’s prior knowledge exclusion. Plaintiff alleged Defendant has a duty to defend and indemnify Plaintiff under the policy, and Defendant’s denial of coverage constitutes common law bad faith and violates provisions in the Texas Insurance Code.

Defendant designated Michael W. Huddleston (“Huddleston”), an attorney with experience in insurance law, as an expert witness.

LEGAL STANDARD

Federal Rule of Evidence 702 provides for the admission of expert testimony that assists the trier of fact to understand the evidence or to determine a fact in the issue. In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 590–93 (1993) the Supreme Court instructed courts to function as gatekeepers and determine whether expert testimony should be presented to the jury. Courts act as gatekeepers of expert testimony “to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999).

The party offering the expert’s testimony has the burden to prove by a preponderance of the evidence that: (1) the expert is qualified; (2) the testimony is relevant to an issue in the case; and (3) the testimony is reliable. A proffered expert witness is qualified to testify by virtue of his or her knowledge, skill, experience, training, or education. Moreover, in order to be admissible, expert testimony must be not only relevant, but reliable.
In deciding whether to admit or exclude expert testimony, the Court should consider numerous factors. The decision to allow or exclude experts from testifying under Daubert is committed to the sound discretion of the district court.

ANALYSIS

Plaintiff moves to strike the testimony and report of Huddleston under Rules 702 and 403 of the Federal Rules of Evidence. Plaintiff asserts that Huddleston’s opinions are inadmissible conclusions of law that invade the province of both the Court and the jury.

The Federal Rules of Evidence allow an expert to assert opinions that embrace an ultimate issue to be decided by the trier of fact. Of course, an expert witness may not offer opinions that amount to legal conclusions. The Fifth Circuit has held that while experts may give their opinions on ultimate issues, our legal system reserves to the trial judge the role of deciding the law for the benefit of the jury. Allowing attorneys to testify to matters of law would be harmful to the jury. The jury would be very susceptible to adopting the expert’s conclusion rather making its own decision. There is a certain mystique about the word “expert” and once the jury hears of the attorney’s experience and expertise, it might think the witness even more reliable than the judge.

Plaintiff does not contest Huddleston’s expert qualifications, but argues that his testimony must be excluded at trial because “he intends to give several legal opinions regarding how this case ultimately should be determined. These opinions are impermissible because Mr. Huddleston is simply purporting to usurp the roles of the trial judge and jury” Plaintiff points to numerous examples within Huddleston’s report that supports its argument that Huddleston’s opinions are impermissible legal opinions.

Atrium asserts common law and statutory bad faith claims against HIC. Lawyers may testify as to legal matters when those matters involve questions of fact. After considering the expert report of Huddleston, the Court found that his report invades on the province of both the Court, in instructing the jury on the applicable law, and the jury in determining the facts to be applied to the law. To the extent Huddleston purports to offer expert testimony regarding customs and practices in the insurance industry, the Court finds that his expert report does not do that.

Huddleston is an experience insurance coverage attorney and advocate, and is not a claims adjuster or former claims adjuster. His report is clearly legally-based, and his opinions are not formed from his experiences in the insurance industry, but are formed from a legal analysis of his opinion of the applicable law. Section V, subsection B of Huddleston’s report contains an entire analysis of Texas law, the eight corners rule, and a legal assessment of the arguments of the parties (even discussing the merits of the objections made to the report and recommendation). This section improperly invades the province of the Court. Section V, subsection C of Huddleston’s report goes on to address the issue of reasonableness, first discussing the conflict in the law that pertains to the legal issues in this case, then discussing the reasonableness of the actions taken by HIC with numerous citations to case law. Huddleston goes on to discuss extrinsic evidence, determining that it is permissible to use extrinsic evidence in this case. Huddleston then applies the facts to the law and concludes that HIC’s actions were reasonable. This improperly invades the province of both the Court and the jury. Section V, subsection D is a pure legal conclusion, as Huddleston admits that it is for the Court to determine whether the duty of good faith applies in this setting. Section V, subsection E reads like a legal brief which analyzes the elements of the statutory claims and provides a legal definition of “knowingly.” Simply put, Huddleston’s report contains the legal arguments and analysis that the Court would expect the attorneys for HIC to make regarding the applicable law and the relevant facts that should apply in this case.

The Court agreed that whether an insurer acted reasonably is to be judged by the standards of the insurance industry, not by an attorney offering a legal opinion based on his interpretation of case law.

Plaintiff’s motion to strike the expert report of Huddleston was granted. The Court foud that Section V, subsection A, footnotes one and two should be stricken, along with subsections B, C, D, and E, in their entirety. After those portions are stricken, there is nothing remaining in Huddleston’s report that would assist the finder of fact in understanding the evidence or determining an issue of fact. Therefore, the Court found that Huddleston’s report should be stricken in its entirety.

ZALMA OPINION

In California Shoppers v. Royal, 175 Cal.App.3d 1, 221 Cal. Rptr. 171(1985) the California Court of Appeal, much like the Texas District Court, found that an attorney expert, in no sense was qualified as an expert to testify about the subject on which he purported to testify. There is no question both on the record and as a matter of repute at the bar, but that he is a highly qualified trial attorney, and a particularly aggressive advocate of plaintiffs’ cases against insurance companies. However, no foundation whatsoever was laid to demonstrate that the expert had any special knowledge, skill, experience, training or education such as would qualify him as an expert on insurance company practices. In Texas and California, at least, before an expert can testify about insurance matters the expert must have special knowledge, skill, experience, training or education that qualifies the witness as an expert on insurance company practices. It is why, when I testify, I testify about the custom and practice of the industry, not legal conclusions or application of law.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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A Christmas Story of Fraud

The Sleaze

This year I inadvertently failed to place this story in Zalma’s Insurance Fraud Letter. It is one of more than 80 stories in my e-book, “Heads I Win, Tails You Lose” and is an expression of how insurance fraud perpetrators will even use the Christmas season to profit from fraud. I hope you enjoy it since it is fiction based upon a true story. The entire e-book is available at http://www.zalma.com/zalmabooks.htm.

The Sleaze learned the safe way to steal in prison. A Superior Court Judge sentenced him to two years in state prison for forging his mother’s will. His cell mate, an armed robber bragged about his successful brother. The brother had found a new career claiming the theft of small pieces of jewelry on homeowners’ policies. Insurance companies always paid, whether he owned the jewelry or not, rather than fight. His cell mate explained how prosecutors had no interest in this type of crime. Insurance companies, fearing punitive damages verdicts would pay even when they were sure the claim was fraudulent.

The Sleaze vowed that when he got out of prison he would pursue this safe form of crime.

The Sleaze was a man of his word. Immediately after leaving prison he bought a tenant’s homeowners policy. He asked for, and received without question, a $10,000 jewelry extension from the company. His limit of liability, instead of the standard $1,000, was $10,000.

Within a month of buying the policy, he reported the probable theft of a $10,000 ring. He told the adjuster that he was at the Beverly Wilshire Hotel meeting with a business associate. He removed his ring to wash his hands in the men’s room. He forgot to replace his ring, returned to his lunch and realized the ring was missing about the time he finished lunch. He immediately went back to the restroom, but found the ring missing. He reported the possible theft to the men’s room attendant and to the hotel security office. He told the adjuster that the ring was a family heirloom given to him by his father a week before he died. He had no appraisals or receipts. He had nothing in writing that proved he owned the ring. He had no photographs showing him wearing the ring. He was willing, however, to swear that he owned the ring and that it was probably stolen from the restroom at the Beverly Wilshire Hotel.

The insured, having read up on jewelry, described the ring to the adjuster in detail. He told the adjuster that it was a rather heavy ring. It was  made of eighteen carat gold set with a four-carat center diamond. On each side were two baguette diamonds totaling .5 carats. He did not know the gemological grade of the diamond nor its color. He admitted the center diamond was not a perfect stone. It had a slight yellowish tinge to it. He could see no flaws in the diamond with his naked eye.

The adjuster verified the Sleaze’s story by interviewing the hotel men’s room attendant and the security officer. Both agreed that the insured reported the loss of a ring to them. Neither recall seeing the Sleaze wearing the ring before he reported the loss. He was not a regular guest of the hotel and they had never seen him before or since he reported the loss.

The jeweler evaluated the description of the Sleaze. He told the adjuster that it was probably a Gemological Institute of America J or I color. He could not replace it for less than $3,500 per carat. Adding to the cost of the diamond the cost of the four baguettes and the eighteen carat gold, the jeweler did not believe he could replace the Sleaze’s ring for less than the policy limits.
The adjuster, faced with a sworn proof of loss and no evidence that the Sleaze was lying, paid the policy limits and closed his file.

The Sleaze was pleased. The work was easy. The efforts required were minimal. On a $300 investment in premium he had made, in less than two months, $10,000. More money than any annual salary he received before he went to prison.

He invested a small portion of his profits into a new policy with a different insurer and in less than a year collected $75,000 in claim payments.
The Sleaze did not know there was an organization known as the ISO All Claims Data Base that included the records of the Property Insurance Loss Registry (PILR) and the National Insurance Crime Bureau (NICB). Although all property insurers are not members, many are members. Each member records in the registry all property losses presented to them.

After a year of successful insurance fraud the Sleaze tried his trick on a company that was a member of the Property Insurance Loss Registry (PILR). When they entered the Sleaze into their system, they found recorded in PILR five of his last nine insurance claims. They contacted each insurer and found that two of them had paid claims on property that appeared the same as that claimed by the Sleaze. One, which did not have similar property, had the same loss situation. The Sleaze had told his present insurer that his scheduled diamond earrings had been accidentally thrown out with the Christmas trash. He had told his prior insurer that a scheduled diamond necklace had been accidentally entangled in wrapping paper and thrown out with the wrapping paper for his wife’s birthday. The coincidences were too great to ignore. The insurance company retained counsel to examine the Sleaze under oath.

He appeared for the examination under oath confident in his skill and power. He testified clearly and held nothing back. He admitted the previous losses. He admitted his criminal record. He denied that the claim was fraudulent. He challenged the insurance company to deny his claim. He informed them that he had heard of the tort of bad faith and he was looking forward to pursuing them if they refused to pay his claim. The insurance company, undaunted, denied the claim. It informed the Sleaze the reason for the denial was the claim was made with knowledge that it was false and fraudulent. The insurer also rescinded the policy of insurance because the insured had failed to reveal on his application the prior losses and several prior cancellations.

The Sleaze filed suit in propria persona (acting as his own lawyer) for the value of the earrings and for punitive damages because of the bad faith of the insurer in not paying his claim.

The Sleaze pursued his lawsuit vigorously. The Board of Directors of the insurer had laid down a specific policy to never pay a fraudulent claim. The company had committed its assets to spend as much as necessary to defeat fraudulent claims. It would do so even if the cost of defense exceeded the value of the property that was the subject of the claim. They also committed to aggressively, and legally, attack the insureds who presented fraudulent claims through the courts.

Therefore, after the complaint was served, the insurance company not only answered the allegations made by the plaintiff, but cross-complained for fraud and breach of the covenant of good faith and fair dealing. The insurer demanded damages, including punitive damages, from the Sleaze. Based upon the evidence already gained at the examination under oath, the insurer filed a motion for summary judgment seeking judgment by the court that they owed nothing to the Sleaze on his complaint. The motion also sought judgment for $20,000 in attorneys’ fees and investigation costs incurred as a result of the fraudulent claim. Finally, the insurer asked for punitive and exemplary damages to deter future fraud.

The court granted the motion for summary judgment and awarded the insurance company $20,000 in compensatory damages and $50,000 in  punitive damages. The Sleaze was incensed. He filed a notice of appeal. He also went to the courthouse and ordered a copy of the original file from the clerk. The clerk, as is their practice with such public records, handed the entire court file to the Sleaze. The Sleaze removed the judgment from the file and, using a public typewriter in the courthouse building, typed the words at the bottom of the judgment “Judgment stayed pending appeal.” He then returned the judgment, as he had amended it, to the court file and purchased a certified copy of the now amended judgment. He served this copy on counsel for the insurance company to stop them from executing on the judgment.
Counsel for the insurance company, shocked at the stay without a bond being required, contacted the clerk. The clerk informed him that before any document being filed in the court’s file, it was first microfilmed. At counsel’s request, the microfilm was pulled and a print of the microfilm copy of the judgment was made. The microfilm copy, of course, did not have the stay language on it.

Three weeks later, in open court, a motion was heard to correct the court’s record. The motion was granted and the court referred the Sleaze to the District Attorney for prosecution for tampering with the court file. He was never prosecuted. However, while the Sleaze and counsel for the insurance company argued the motion before the court, the Los Angeles County Marshal served a writ of execution on the Sleaze’s brand new car to satisfy the judgment. The Marshal notified the Sleaze that the car was taken in open court.

The Sleaze was furious. He threatened physical harm to the attorney for the insurance company. Counsel was concerned by the threat. She knew the Sleaze’s first criminal conviction was for the violent act of raping a girl scout cookie salesperson who made the mistake of attempting to sell her cookies at his door.

At all future court appearances counsel was accompanied by a bodyguard.
The Sleaze would not let the matter rest. He filed suit in Superior Court naming counsel and the insurance company for fraud in the taking of his automobile. The insurance company had to retain new counsel to defend its attorney and itself to this new lawsuit. When that was unsuccessful, the Sleaze filed small claims court actions alleging fraud and hoping that the insurer or its attorney would fail to appear. When counsel appeared at the small claims court action, the Sleaze, who was present, faked an illness and begged for a continuance. When this was unsuccessful, judgment was entered on the small claims court action for the insurance company.

On the surface, the Sleaze was unsuccessful in his fraudulent claims against the insurance company. He was successful in committing fraud. He was successful in raising the reasonable costs of defending fraudulent insurance claims beyond logic. His only mistake was getting angry and filing suit acting as his own lawyer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Failure of Contract to Provide Indemnity

Rights of Third Party Beneficiary Limited to Terms of Contract

Whenever a party to a contract wants indemnity from the other party(ies) to the contract it usually will demand such indemnity in writing from each of the other parties to the contract and not rely on others to protect it. It can still receive indemnity as a third party beneficiary but only to the rights given. When a person relies on rights as a third party beneficiary to a contract where he is not a party, he leaves himself at the mercy of the parties making the contract.

This appeal is taken from the trial court’s granting of a motion for summary judgment in favor of Universal Maritime Service Corporation (UMS), and dismissing the third party claims of the Board of Commissioners for the Port of New Orleans (Board). The Louisiana Court of Appeal was asked to overturn the trial court’s decision in Charles v. Gervais, — So.3d —-, 2014 WL 6982471 (La.App. 4 Cir.), 2014-0447 (La.App. 4 Cir. 12/10/14).

The appeal relates to the Board’s claims against UMS for defense, indemnity and insurance coverage pursuant to a clause in the license agreement between UMS and Ceres. UMS sought and was granted summary judgment on the claims asserted by the Board and an appeal followed.

On appeal, the Board argues that the trial court erred in granting summary judgment and by failing to find that the Ceres/UMS license agreement created a stipulation pour autrui (a stipulation in a contract of a benefit for a third person, called a third party beneficiary) requiring UMS to defend and indemnify the Board.

FACTS

The Board owns the Nashville Avenue terminal and leases it to Ceres Gulf, Inc. (Ceres). UMS is allowed access to the terminal pursuant to a license agreement with Ceres. This lawsuit arises from an accident which occurred at the Nashville Avenue terminal. Louis Charles alleges that he was injured during a vehicular accident while working for UMS, and operating a vehicle owned by Ceres. The vehicle he was operating was struck by a vehicle operated by Jason Gervais. At the time of the accident, Mr. Gervais was acting in the course and scope of his employment with the Board.

Mr. Charles filed suit naming Mr. Gervais, the Board, and their insurer as defendants. Later, the Board filed several third-party demands against various parties.

ANALYSIS

Louisiana law is clear, third parties can benefit from contracts for which they were not in privity.  This is considered a stipulation pour autrui.  However, there is no presumption in favor of a stipulation pour autrui. The intent of the party to create the stipulation in favor of a third party must be manifestly clear.  Further, establishing the existence of a stipulation pour artrui rests with the party demanding performance.

In Joseph v. Hosp. Serv. Dist. No. 2 of Parish of St. Mary, 05–2364, pp. 8–9 (La.10/15/06), 939 So.2d 1206, 1212, the Louisiana Supreme Court concisely set forth the requirements of a valid stipulation pour autrui:

(1)   the stipulation for a third party is manifestly clear;

(2)   there is certainty as to the benefit provided the third party; and

(3)   the benefit is not a mere incident of the contract between the promisor and the promisee.

Joseph also stated that “[e]ach contract must be evaluated on its own terms and conditions in order to determine if the contract stipulates a benefit for a third person.”

The Board contends that it is owed a defense and indemnification due to the stipulation pour autrui created by the following language within the license agreement: “UMS shall at all times relieve, indemnify, protect, defend and hold harmless Ceres and the Board … from and against any and all claims … caused, directly or indirectly, by (a) the use and operations of the Equipment by UMS, (b) the use or occupation of the Terminal by UMS, (c) the conduct of stevedore operations by UMS on or about the Terminal, (d) any act, omission or negligence of UMS or any UMS Related Person and/or (e) any failure by UMS or any UMS Related Person to comply with any application federal, state, regional, or municipal law, ordinance, rule or regulation, or any operating rules and restrictions …”

The Court of Appeal agreed with the Board that the language creates a contractual indemnity clause that stipulates a benefit to the Board, or a stipulation pour autrui. The clause clearly meets the criteria. First, the stipulation is clearly in favor of the Board in a contract for the Board is not in privity since it neither made nor signed the contract. Secondly, the benefit provided is clear, the Board will be defended, indemnified, and held harmless for actions by UMS that result in damages. Lastly, the benefit is not incidental to the contract, but expressly created within the license agreement to protect the Board from actions by UMS in its performance under the contract.

The Board maintains that the obligation extends to acts of the Board’s own negligence. As the party demanding performance of this obligation, the Board bears the burden of proving the existence of this obligation.

Here, the language of the agreement is clear and unambiguous. In such a situation a Court should not seek to interpret that language in a broader manner than was intended.  Furthermore, the Louisiana Supreme Court in Polozola v. Garlock, 343 So.2d 1000, 1003 (La.1977), specifically addressed this issue. In Polozola, the language in the indemnity clause was unequivocal and provided that National Union would indemnify Dow whether cause by Dow’s negligence or otherwise.

As the Polozola Court stated: “A contract of indemnity whereby the indemnitee is indemnified against the consequences of his own negligence is strictly construed, and such a contract will not be construed to indemnify an indemnitee against losses resulting to him through his own negligent act, unless such an intention was expressed in unequivocal terms.”

In this case, the indemnity clause simply does not provide, in unequivocal terms, indemnity for damages caused by the Board’s own negligence.

ZALMA OPINION

A person seeking indemnity must have a contract that clearly and without any ambiguity provides for such indemnity. In this case the contract, although apparently made for the benefit of the putative indemnitee – the Board – failed to provide, in unequivocal terms, indemnity for damages caused by the putative indemnitee’s own negligence. As a result the putative indemnitee also lost the right to the insurance coverage it sought.

This could have been cured by causing simple language to be added to the contract agreeing to indemnify the Board against its own negligence except when its negligence is it’s the sole negligence involved in the accident. It could also have required that it be made an additional insured on its policy. Since the Board was not a party to the contract its reliance on others to protect it was not well founded.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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You Only Get What You Pay For

Special Assault & Battery Exclusion Applies

Insurance, as I have said often, is nothing more than a contract where a liability insurer – for example – promises to defend and indemnify the insured against certain identified risks of loss in exchange for the insured’s promise to pay premium and comply with the conditions of the policy. In Century Sur. Co. v. Spurgetis, — Fed.Appx. —-, 2014 WL 6985627 (C.A.9 (Wash.) 12/11/14) the insurer promised to defend and indemnity James Spurgetis (Spurgetis) against certain risks of loss and excluded assault and battery. The insurer, Century Surety (Century) allowed Spurgetis to buy back the exclusion but only for a limit of $250,000, not the full $1 million limit.

FACTS

James Spurgetis, as Guardian for the estate of Gary Dvojack (Dvojack), appealed the district court’s summary judgment grant in favor of Century in this insurance coverage dispute.
The district court concluded that Century’s assault and battery $250,000 policy limit applied rather than the general $1 million bodily injury coverage.

Dvojack’s state court complaint alleges an assault and battery by Abbott, and the plain language of the general liability policy excludes coverage for any injury arising out of or resulting from any “actual, threatened or alleged assault or battery” anywhere in the chain of events, including any negligent employment, supervision or training of any person in connection with such actual, threatened or alleged assault and battery.

ANALYSIS

This is a coverage case, not a duty to defend case. Century properly agreed to defend the lawsuit under a reservation of rights, made a settlement offer based on what it reasonably believed to be the applicable policy limit, and then sought a declaratory judgment to determine the actual policy limit.

ZALMA OPINION

Much to the chagrin of plaintiffs’ lawyers insurance is a contract that, if clear and unambiguous, must be enforced. The policy had a special limit of liability for actions related to an assault or battery. That special limit was agreed to by the insured who paid extra premium to eliminate the assault and battery exclusion. The insured bought back the exclusion but only for one quarter of the available limit. It might have been able to buy back more but did not do so. An insured who agrees to a coverage should not be able to challenge that which it agreed to when the policy was acquired. The Ninth Circuit, in a brief opinion, got this decision right.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Zalma’s Insurance Fraud Letter — December 15, 2014

Merry Christmas & Happy Chanukah

In the 24th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on December 15, 2014, continues the effort to reduce the effect of insurance fraud around the world while wishing all its readers a Merry Christmas and a Happy Chanukah. The issue establishes that, regardless of some success, the efforts to defeat fraud must be increased.

The current issue of ZIFL reports on:

1.        The Three Major Types of Insurance Fraud
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.        Fraud Decision
4.        Allstate Sues Fraudster
5.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.      The Eight Corners Rule Defeats Right to Defense – December 12, 2014
2.      Insurance Fraud – December 11, 2014
3.      A Dam Case – December 10, 2014
4.      Doubt About Exclusion Requires Coverage  – December 9, 2014
5.      What is Liability Insurance? – December 8, 2014
6.      Business Risks Never Insurable – December 8, 2014
7.      The Claims Interview  – December 5, 2014
8.      Resident Relative Must Abide in House – December 4, 2014
9.      Fishing Expedition Prohibited in Texas – December 4, 2014
10.    Indemnity & Insurance – Who Goes First – December 3, 2014
11.     Inadequate Adjusting Expensive – December 2, 2014
12.     Fraud Struggle Continues – December 1, 2014
13.     Failure to Promptly Rescind – November 28, 2014
14.     Thanksgiving – November 26, 2014
15.     Lie To Your Insurer – Lose All Coverage – November 25, 2014
16.     Mold Damage Requires Proof – November 25, 2014
17.     Illusory Policy Disfavored – November 23, 2014
18.     Equitable Fraud Supports Rescission – November 21, 2014
19.    Agent’s Obligations Limited – November 20, 2014
20.    Insurer’s Language Used Against It – November 19, 2014

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Infrared Detection of Mold

An Excerpt from the

Mold Coverage Guide

Experts can bring infrared technology to the examination of the property to allow the inspector to see where water leaks not visible to the naked eye exist.

Infrared Thermography (IT) is a technique that detects infrared energy, converts it to temperature and produces an image showing temperature distribution.

The most typical type of thermography camera resembles a typical camcorder and produces a live TV picture of heat radiation. More sophisticated cameras can actually measure the temperatures of any object or surface in the image and produce false color images that make interpretation of thermal patterns easier. An image produced by an infrared camera is called a thermogram or a thermograph.

To understand IT as a tool it is necessary to understand how it works. Thermal or infrared energy is light that is not visible to humans because its wavelength is too long to be detected by the human eye. Infrared energy (IR) is the part of the electromagnetic spectrum that we perceive as heat. Unlike visible light, in the infrared world, everything with a temperature above absolute zero emits heat. Even very cold objects, like ice cubes, emit infrared. The higher the object’s temperature, the greater the IR radiation emitted.

IT cameras produce images of invisible infrared or “heat” radiation. The IT camera can provide precise non-contact temperature measurement capabilities. The existence of moisture—a substance cooler than normal construction materials—can be used to detect conditions that promote mold growth. Mold-related problems can be identified before the mold is visible to the eye or detectable by the nose. IT cameras are extremely cost-effective, valuable diagnostic tools in construction-related problems of water intrusion and mold growth.

Infrared cameras that incorporate temperature measurement allow professionals to make well-informed judgments about the operating condition of a structure. Temperature measurements can be compared with historical operating temperatures, or with infrared readings of similar structures at the same time, to determine whether a significant temperature rise will compromise the structural integrity or encourage mold growth.

Digital image storage, available on most FLIR Systems infrared cameras, produces calibrated thermal images that contain over 78,000 independent temperature measurements that can be measured at any time with FLIR Systems infrared software products on standard PC platforms.

When used properly, a thermal imaging camera can provide valuable information during moisture assessments, remediation oversight, energy audits, roof and electrical system inspections, and water damage investigations. Temperature difference caused by evaporation, radiation, thermal bridging, infiltration/exfiltration and other sources must all be carefully evaluated. The inspector trained to properly use the IR camera can read the information to spot suspect areas. The findings can later be verified using electronic, data-logging moisture detection equipment and in some cases core samples from the roofs or walls.

An inspector can use the thermal imaging and data logging moisture detection equipment to establish that all areas of concern have been assessed. The extra verification gives additional assurance that the findings from the IR camera are defensible. All property owners and their insurers faced with a claim alleging mold infestation can find these tools essential to the decision process and proper maintenance of the structure.

When suspect areas are found they can be visually documented using the IR camera. Images from an IR camera are easier for a lay person or non-technical person to understand. Findings from the IR camera can be explained to the property owner or the insurer’s personnel combined with the verification obtained by using data-logging moisture detection equipment with a time stamp and/or destructive testing.

Using an IR camera for larger areas, can save time and money by providing a faster, more efficient, and more reliable survey. An IR camera can detect moisture located behind interior walls under the right conditions, so the temperature difference created by the presence of moisture on the inside surface of a wall will appear differently than the surrounding area.

IR and IT experts recommend that property owners or their insurers should use IR cameras and IT for moisture detection under the following circumstances:

  • after any water damage event like a flood, broken water lines, equipment failure, roof leaks, etc;
  • before warranty expiration on new construction;
  • before acquiring real estate suspected of having hidden moisture damage;
  • when basement walls are covered by finish materials and the inspector cannot give a definitive answer on moisture issues;
  • when suspected plumbing leaks have occurred from in-slab water supply and/or waste lines;
  • when doors, windows, or other openings in the structure are suspected of leaking;
  • when performing an energy audit of the building to determine areas of infiltration and exfiltration;
  • to determine adequacy of insulation—wet insulation is a poor insulator but is a great heat conductor;
  • infrared inspection of the roof can determine potential for ice dams, plugged drains, and water retention that may cause roof damage and/or leakage;
  • locating hidden leakage and/or dampness under resilient flooring; or
  • locating wet areas in non-accessible crawl spaces.

Infrared technology is especially useful for inspecting flat roofing systems and synthetic stucco systems, which rarely give any visual clues as to their condition or the location of leaks and moisture retention. Litigation involving synthetic stucco or exterior insulating finish systems (EIFS) is rampant nationwide. Many property owners blame EIFS exterior cladding for retaining moisture behind the EIFS artificial stucco and encouraging mold growth and deterioration of the structure. The property owners claim that EIFS, because it retains water, promotes mold growth and rotting within exterior wall cavities.

IR technology is being supplemented with a living tool: dogs trained to sniff out the existence of mold. Mold-sniffing dogs can detect certain categories of mold. The dogs cannot, however, differentiate one genus of mold from another. Typically these mold-sniffing dogs are trained to give an “alert” when they have found one of approximately 18 – 19 genera of mold. These mold-sniffing dogs are not expected to determine how toxic the mold is, or even the genus of mold, but just to confirm the existence of mold in an area. While a mold-detection canine can quickly find mold inside a home or commercial building, infrared thermal imaging has the edge on the exterior and in detailing—with imagery, location, and extent of mold infestation.

High definition (or high resolution) thermal imaging refers to the fine detail and clarity of a thermal image. This means it contains a large number of pixels per unit of area. In this case, a thermal imaging camera taking a high definition photo means you will find smaller problems at greater distances. More pixels mean greater temperature measurement accuracy, particularly for small objects. A high definition thermal imager means a strong competitive advantage.

A high definition thermal imager is ideal for a work environment that demands the best thermal imaging camera and technology. This type of thermal imager can result in time and money saved.

Other typical inspection methods involve guesswork and random cutting of core samples or pieces of walls—both inside and out—to analyze for mold and moisture. A combined mold detection dog and infrared thermal imaging inspection can protect a potential buyer from acquiring a run-down or mold-infested property or from incurring repair and remediation costs far beyond a building’s value.

A mold problem is always a moisture problem since mold cannot grow without moisture. When IR is used to find moisture, it becomes possible to prevent mold and rot from taking hold or to remove the mold that actually grows.

Online resources list examples of IR cameras that can be used for IT inspections.

Various firms are trying to revolutionize air pollutant detection technologies by using new, extremely small micro-electro mechanical sensors (MEMS). Future air quality studies could benefit from cheaper sensors that could be deployed in networks of hundreds of devices. Next-generation particle detectors employing super-compact MEMS devices are being developed. One development is a miniature device to measure the concentration of nanometer-sized particles by detecting the electrical charge they carry.

Cost-effective, networkable methods for sizing airborne particles using electric fields to separate them by size alert occupants to the presence of the smallest, most dangerous nanoparticles.[5] The technology continues to improve and these miniaturized sensors can be placed throughout a structure in a network that communicates with each sensor and a monitor that can be read by the structure’s security staff.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This was an excerpt from my book Mold Claims Coverage Guide. It is available from the National Underwriter Company,  for the new Zalma Insurance Claims Library.

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

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

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

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

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

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

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The Eight Corners Rule Defeats Right to Defense

No Accident If You Shoot a Person In the Head at Close Range

Terry Graham, Jr., shot and killed would-be burglar, Hiram Joshua Chambers, at Graham’s ranch house in Smith County, Texas by shooting him in the face at close range with a shotgun. Graham successfully defended the resulting wrongful death lawsuit by Chambers’ family members. Since his insurer refused to defend him, Graham incurred $130,841.43 in defense costs. He sued Texas Farm Bureau Underwriters (Underwriters), the issuer of Graham’s Texas Farm and Ranch Owner’s Insurance Policy, to recover his defense costs.

Both parties filed motions for summary judgment and the trial court granted Graham’s motion. Underwriters appealed in Texas Farm Bureau Underwriters v. Graham, — S.W.3d —-, 2014 WL 6911570 (Tex.App.-Texarkana, 12/5/14).

FACTS

It is uncontested (1) that Graham was an insured under the policy, (2) that he had paid all premiums required under the policy, (3) that he had personal liability coverage for bodily injury occurring on the resident premises as of the date of the incident, (4) that the incident occurred on the resident premises, and (5) that Underwriters received timely notice of Graham’s request for defense. Seeking reimbursement of the money he paid to his defense attorneys, Graham sued Underwriters for breach of contract, breach of the duty of good faith and fair dealing under Chapter 542 of the Texas Insurance Code (the Prompt Payment of Claims Act), and attorney fees in bringing this lawsuit.

Underwriters filed a legal denial based on the governing “eight corners rule,” which provides that an insurer is entitled to rely solely on the factual allegations contained in the four corners of the complaint in conjunction with the four corners of the liability policy to determine whether it has a duty to defend.

ANALYSIS

Underwriters is correct in its assertion that this case is governed by the eight corners rule that allows an insurer to rely solely on the factual allegations contained in the petition in conjunction with the terms of the policy to determine whether it has a duty to defend. If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured.

When applying the eight corners rule, a Texas court will construe the allegations in the pleadings liberally.   The factual allegations are considered without regard to their truth or falsity, and all doubts regarding the duty to defend are resolved in the insured’s favor

An insurer is obligated to defend the insured if the facts alleged in the petition present a matter that could potentially be covered by the insurance policy.
The insured has the initial burden to establish coverage under the policy.  Interpretation of insurance contracts in Texas is governed by the same rules as interpretation of other contracts. When construing a contract, the court’s primary concern is to give effect to the written expression of the parties’ intent.

The policy defines the term “occurrence” as “an accident, including exposure to conditions which results in bodily injury or property damage during the policy period.” It also contains the following exclusion: “Coverage C (Personal Liability) … do[es] not apply to: … bodily injury or property damage which is caused intentionally by or at the direction of an insured.”

The Chambers family alleged both that Graham committed “a violent assault and battery” on Chambers and, in the alternative, that Graham was “negligent and grossly negligent” in causing Chambers’ death. The petition contained the following allegations: “Plaintiff alleges that just before Terry Graham, Jr.’s vicious assault on [Chambers], he had directed [Osborn] to bring to him a loaded 410 shotgun. Before the death of [Chambers], [Graham] had instructed [Osborn] to shoot [Chambers], but [Osborn] refused to do so. Instead, [Osborn] carelessly, negligently, and very foolishly handed the shotgun to [Graham], who then used it to carry out his intent and purpose of bringing about the death of [Chambers].”

Even though the eight corners rule prohibits the court from looking beyond the Chambers family petition and the terms of the insurance policy, Graham asks this Court to consider extrinsic evidence in our analysis. To demonstrate that Underwriters had a duty to defend, Graham relies on a fact that was not included in the underlying petition—that Chambers was burglarizing the property when he was shot, on the jury’s verdict absolving Graham of liability for Chambers’ death, and on the deposition of Underwriters’ corporate representative who testified that had the Petition been amended to take away intent he would have reconsidered the decision to deny defense.

Reliance on this kind of extrinsic evidence violates the eight corners rule. Consequently, Graham asks this Court to recognize a rule exception referenced in a Texas Supreme Court opinion. In Pine Oak Builders, Inc., 279 S.W.3d at 654 the Texas Supreme Court noted that some courts have recognized an exception “permitting the use of extrinsic evidence only when relevant to an independent and discrete coverage issue, not touching on the merits of the underlying third-party claim.”  Without expressly recognizing or approving the exception, Pine Oak Builders, Inc. warned that “any such exception would not extend to evidence that was relevant to both insurance coverage and the factual merits of the case as alleged by the third-party plaintiff.”

To date, neither the Texas Supreme Court nor the Tyler Court of Appeals has officially embraced any exception to the eight corners rule, and our sister courts have declined to apply the exception referenced in Pine Oak Builders, Inc.

The court was required to determine whether the Chambers family’s petition alleged that Graham committed a negligent act in addition to an intentional one. Graham claims that the Chambers family pled two distinct positions with regard to state of mind. In support of his argument that the petition alleged a negligent state of mind.

An accident is generally understood to be a fortuitous, unexpected, and unintended event. Reviewing the Chambers family’s pleadings in light of the policy provisions, the court must focus on the facts alleged instead of the legal theories. The underlying petition’s causes of action for negligence and gross negligence, on their own, were insufficient to require Underwriters to defend Graham in the Chambers lawsuit.

Nothing suggests that Graham’s act in shooting Chambers was anything other than intentional because (1) there is no suggestion that Graham slipped, fell, or otherwise mistakenly pulled the trigger, and (2) other language used in the petition described the shooting as intentional.

Although the court found that the act causing the damage was intentional, we recognize that an intentional act can still be considered an accident because whether an event is accidental is determined by its effect. A deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.

A claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured’s actions, that is, was highly probable whether the insured was negligent or not.

In this case the four corners of the petition demonstrate that Graham’s use of a “loaded 410 shotgun … to carry out his intent and purpose of bringing about Chambers’ death was intentional. Because Chambers’ death was the type of injury that ordinarily follows from pointing a shotgun at a person’s head and shooting him or her “at very close range,” the court concluded that the injury was a natural and probable result of Graham’s act. Where acts are voluntary and intentional and the injury is the natural result of the act, the result was not caused by accident.

Under the terms of the policy, coverage applied only to accidents causing bodily injury and was expressly excluded for acts “caused intentionally by … an insured.” Because the incident was not an accident, Underwriters had no duty to defend. Therefore, the trial court erred in granting Graham’s cross-motion for summary judgment and in denying Underwriters’ summary judgment.

ZALMA OPINION

The four corners/eight corners rule sometimes results in odd decisions that can be cured by extrinsic evidence. Texas refuses to deal with extrinsic evidence when an insurer makes a decision to defend or not defend the insured. In this case extrinsic evidence would not have helped. In fact the ruling in the wrongful death case proved that the death was intentional and proper because the decedent was in the process of burglarizing the insured’s home at the time he was shot. The shooting and resulting death were the intent of the insured and coverage did not, nor would it have applied even if the extrinsic evidence was considered.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Insurance Fraud

Insurers are faced with three major types of insurance fraud:

  • fraud in the inception The insured misrepresents or conceals facts material to the decision of the insurer to insure or not insure the prospective insured. If the insured lies in the application about a matter that would have, had the truth been known, affected the decision of the insurer, the insurer may have the right to rescind the policy, determine it never existed, return the premium, and deny the claim presented by the insured;
  • fraud (by the insured) in the presentation of the claim. The insured lies about a fact material to the decision of the insurer to pay or not pay a claim. The insurer faced with a fraudulently presented claim can deny the claim in accordance with the policy provisions or declare the policy void and deny the claim; and
  • fraud in the presentation of a claim by a claimant against the insured. In these cases, the third party claimant makes a false and fraudulent claim against the insured.

In all three cases, the insurer is faced with the same challenges: how to investigate fraud and how to prove that the fraud is a valid ground for denying a claim.

Denying a Claim

When fraud is discovered, the natural response of an insurer is to deny coverage. However, various factors must be considered before such a decision is made. Perhaps the most important is determining the grounds for denial and the level of proof that would be required by a judge or jury if the case were taken to court.

To constitute fraud, an insured must have concealed or misrepresented a material fact with the intention of inducing an insurer to pay a claim. The facts that are deemed to be “material” for purposes of denying a claim or voiding a policy are not clearly defined and therefore each case must be evaluated separately.

Generally, a fact is material to the application for insurance if it might have influenced a reasonable insurer in deciding whether to accept or reject the risk. Material facts intentionally concealed or misrepresented with intent to mislead the insurer are fraud, which, at the option of the insurer, void the policy. A misrepresentation after a loss as to a single material fact will forfeit the entire insurance contract.

An insured cannot commit a “small” fraud any more than he can be just a little dead. Once caught in a small fraud, the insured cannot demand that he or she be paid the legitimate part of the claim.

As the following case demonstrates, however, determining “misrepresentation” is not always straightforward. In Suggs v. State Farm Fire and Casualty. Co., 833 F.2d 883 (10th Cir.1987), an initial investigation by an insurer and the state fire marshal concluded that a residential fire was the result of arson. The fire marshal further concluded that it was the insured who set the fire. The insured was arrested and charged with arson. With criminal charges pending, the insured hired experts who concluded that the fire was probably caused by an electrical malfunction. Criminal proceedings were then dismissed. Another expert retained by the insurer later concluded that the fire was not of electrical origin, and the insurer denied the insured’s fire damage claim on the ground that the insured had intentionally set the fire. The insured responded by suing for benefits under the policy, as well as for bad faith. A jury found in favor of the insured on both causes of action.

On appeal, the Tenth Circuit reversed the bad faith judgment. The termination of the arson prosecution was found to be immaterial because the disposition of criminal cases involves different criteria than civil cases. In any event, substantially conflicting evidence existed regarding the nature of the fire. Based on this conflict, the Suggs court held that the only reasonable conclusion the jury could have reached was that the insurer had not acted in bad faith. The insurer had good reason to believe that the insured, Suggs, misrepresented facts material to the claim by denying he set the fire. The insurer was unable to convince the jury that the insured lied but was able to convince the Tenth Circuit Court of Appeal that the denial was made in good faith.

Although this case resulted in a beneficial or partially beneficial verdict on behalf of the insurer, it reveals the need to deal fairly and in good faith with all insureds and even more so with insureds suspected of fraud. If the insurer treats the suspected fraud with the utmost of good faith, it will avoid unnecessary litigation, will have sufficient facts to deny a claim, and will explain to the insured all of the reasons for the denial.

In some states, like California and New York, when misrepresentations as to material facts are made in an application for insurance, existence of a fraudulent intent to deceive is not essential to the avoidance of the policy. In these states, a policy can be rescinded (that is, declared void from its inception) for an innocent misrepresentation or concealment of a material fact.

In the presentation of a claim, however, the insured’s act must have been intended to defraud the insurer. Even a gross overvaluation of a claim will not permit an insurer to deny the entire claim or declare the policy void unless the insurer can prove that the overvaluation was not an honest mistake.

In a Massachusetts case, the court found that an insured furnished insurers with a schedule wherein he “knowingly exaggerated the sound value of the property in order to be in a more advantageous position to be paid for the real loss suffered, but not with the intent to defraud the insurers.” As a result it held:

When it is established … that the insured has not only made false statements, even in such a matter as value, for the purpose of influencing the adjustment of the loss, public policy demands that the contract be so construed as to discourage such conduct and to give full protection to the insurer. Gechijian v. Richmond Insurance Co., 11 N.E. 2d 478 (Mass. 1937); and Bennie Bockser v. Dorchester Mutual Fire, 1951.M.A.144, 99 N.E. 2d 640, 327 Mass. 473 (1951).

Materiality of false statements is not determined by whether or not the statements deal with a subject later determined to be unimportant. If, for example, false statements are made about factors other than those that caused a loss, the false statements are nevertheless material. False sworn statements are material if they might have affected the attitude and action of the insurer. They are equally material if they were calculated to discourage, mislead, or deflect the company’s investigation in any area. A fact is material to a claim if it concerns a subject relevant and germane to the insurer’s investigation of the claim.

Another key element needed to prove the defense of fraud is reliance. The general rule is that an insurer need not suffer detriment or rely on an insured’s fraud before being allowed to declare a policy void. If the insurer is deceived and could incur detriment if the deceit is successful, this is sufficient to establish the fraud defense. There is no need for the insurance company to wait to be damaged when the deceit itself is the proscribed activity, and the stated penalty is forfeiture of all benefits. The principle that attempted fraud defeats coverage is necessary as a deterrent to would-be fraudsters. Without this protection in place, even more insureds would try fraud, just in case it might be successful and undetected. After all, they would have nothing to lose by trying.

False Swearing

False swearing is a special category of misrepresentation or concealment because it is made under oath. In criminal law, false swearing is called perjury.

In Mutual of Enumclaw v. Cox, 757 P. 2d 499 (1988), the Washington Supreme Court was asked to interpret a homeowners policy that stated the entire policy would be void if “There has been fraud or false swearing.” Even though the insured’s fraud involved only his unscheduled personal property, the court held that the entire policy was void and the insured was not entitled to any recovery. This appears to be the majority position.

An insured’s ulterior motive in misrepresenting material facts to the insurer is irrelevant in determining whether a fraud and concealment provision provides a defense to the insured’s claim. The California Court of Appeal stated:

First, plaintiff admits that she knew she was lying to the defendant and did so with the intent that defendant not find out the actual facts. Second, under Claflin, the intent to defraud the insurer is necessarily implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity. Thus, plaintiff’s intent to deceive was established as a matter of law Cummings v. Farmers Ins. Exchange, 202 Cal. App. 3d 1407, 249 Cal. Rptr. 568 (Cal. App. 2 Dist. 1988). (Emphasis added.)

This conclusion is in no way avoided by the plaintiff’s contention that the motivation for the false statements was her very reasonable fear of her son. As expressed by the US Supreme Court in Claflin, an insured’s ulterior motive in misrepresenting material facts to the insurer is simply irrelevant. In the context of the Cummings case, the plaintiff’s motive of fear of her son’s violence was irrelevant to the question of whether she intended to deceive the insurer. Cummings, supra.

The Californian Court of Appeal, in Watts v. Farmers Insurance Exchange,
98 Cal. App.4th 1246, 120 Cal. Rptr.2d 694 (2002) broke new ground in the defense of fraudulent insurance claims. The Court of Appeal resolved, to the benefit of insurers, the issue of whether a fraud or false swearing defense to an insurance claim can be established without proof that the insurer relied on the misrepresentation to its prejudice. However, by applying “public policy” it also decided that an innocent co-insured who holds property jointly with an insured that has committed fraud is not automatically excluded from coverage, even if the language of the policy preventing such recovery is clear and unambiguous.

The court held that the false swearing defense can be raised in the absence of reliance and that under the wording of the policy in question applying the public policy of the state as evidenced by the California standard form fire insurance policy, an innocent co-insured may recover for his or her percentage share of the losses despite the transgressions of the other insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book   Insurance Claims: A Comprehensive Guide available from the National Underwriter Company at the Zalma Insurance Claims Library, available at www.nationalunderwriter.com/ZalmaLibrary.

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

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

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

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

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

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

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A Dam Case

When ACV is RCV Less Depreciation

The definition of the insurance term “actual cash value” (ACV) has resulted in multiple definitions depending on jurisdiction. Some define it as fair market value, some define it as replacement cost value (RCV) less physical depreciation and others apply the broad evidence rule combining the various definitions to reach the promised full indemnity. Since a first-party-property policy agrees to pay ACV first and then, after the property is replaced the difference between RCV and ACV, it is in the best financial interest of the insured to obtain the highest possible ACV, especially if the insured does not want to rebuild.

In Sierra Pacific Power Co. v. Hartford Steam Boiler Inspection and Ins. Co., Slip Copy, 2014 WL 6883056 (D.Nev., 12/05/14) the United States District Court for the District of Nevada was called upon to resolve a dispute over the value of a dam and the amount required to be paid to the owner of the dam by its insurers after the dam was destroyed by a flood. The owner claimed the ACV was RCV because the value of the dam, when rebuilt, would be the same as it was before the loss. The insurers claimed ACV must be determined by RCV less physical depreciation. The case was tried, appealed to the 9th Circuit, reversed, and retried.

FACTUAL BACKGROUND

Sierra Pacific operates power generation stations in Nevada and California. Defendants insure Sierra Pacific’s facilities, including the Farad Dam on the Truckee River in California (the “Dam”). The Dam was completely destroyed by a flood in 1997, at which point Sierra Pacific filed a claim for damages with Defendants.

Following a three-day bench trial the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. The Court determined that the actual cash value (“ACV”), with proper deduction for depreciation, of the Dam was $1,261,000.  The Court further determined that the replacement cost of the Dam was $19,800,000.

The parties appealed and the Ninth Circuit Court of Appeals issued a Memorandum vacating the Court’s finding that the ACV of the Dam was $1,261,200, and remanding for a determination of the ACV based on reducing the replacement cost of $19,800,000 by the “appropriate” depreciation, and to fashion an appropriate order tolling the three-year period for replacing the Dam until the conclusion of the litigation in this matter.

The Ninth Circuit rejected the proposed ACV of $1,261,200 because it was not related to the figure found as the replacement cost ($19,800,000).

On retrial the trial court then held that based on the evidence presented at trial, it was appropriate to apply a 50% rate of depreciation for the in-river Dam and a 5% rate of depreciation for the wing wall, and that subtracting this depreciation from the full replacement cost yielded an ACV of $12,216,600.

DISCUSSION

Depreciation

Sierra Pacific argues that the Court’s calculation of depreciation and ACV is incorrect because the Court (1) based its determination of the appropriate depreciation factor on a mistake as to the age of the Dam, (2) failed to apply the legally-mandated methodology for determining depreciation in the casualty insurance context, (3) relied on invalid, factually unsupported assumptions regarding the relationship between the age of the Dam and its value, (4) relied on evidence for establishing the 50% depreciation factor that the Ninth Circuit rejected as a basis for making any valuation determinations, and (5) incorrectly interpreted the order of the Ninth Circuit as mandating that the replacement cost of the Dam be reduced by a depreciation factor greater than zero.

As an initial matter, the Court acknowledges that it inadvertently stated that the Dam was 100 years old at the time of the flood; it is undisputed that the Dam was thirty-four years old. By itself, however, the Court’s inadvertent use of that date does not require amendment of the rate of depreciation, which was based on evidence presented at trial.

Despite multiple opportunities—at trial and after the Ninth Circuit’s July 27, 2012 Memorandum—to present evidence regarding the proper depreciation rate to apply to the Dam, Sierra Pacific has maintained that the Court should determine that the ACV is equivalent to replacement cost because the value of a newly constructed Dam would be equivalent to the destroyed Dam.

The Hartford and Zurich policies each state that valuation is “actual cash value (with proper deduction for depreciation) of the property destroyed.” The Ninth Circuit has held that “[s]ince the Policy uses these precise words, the ACV should be determined as replacement cost less depreciation of the dam.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 665 F.3d 1166, 1171 n. 2 (9th Cir.2012) because the term was clearly defined in the policy.

The Ninth Circuit also noted that “where the property to be replaced has no sales market, such as the Farad Dam, California Courts have sanctioned the use of replacement cost less depreciation as an acceptable method for determining ACV.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 490 Fed. Appx. 871, 875 (9th Cir.2012).

The Hartford and Zurich polices also include the standard California language on appraisal for disagreements that arise as to amount of loss. There is no evidence that Sierra Pacific ever demanded an appraisal to determine ACV of the Dam when it was destroyed. Additionally, although no document indicates that Sierra Pacific agreed to the 50% depreciation rate, Defendants testified at trial that Risley, a Sierra Pacific employee at the time, agreed to the 50% depreciation rate. Such an agreement would void Sierra Pacific’s argument that it was not bound by the 50% depreciation rate.

The Ninth Circuit has rejected Sierra Pacific’s argument that it is entitled to replacement cost without a reduction for depreciation. Additionally, Sierra Pacific failed to produce any evidence—either at trial or after the Ninth Circuit’s Memorandum—that the Court should apply a lower depreciation rate than the trial court applied in its order. Accordingly, the Court denied Sierra Pacific’s Motion to Amend on this ground and affirms that the ACV of the Dam when it was destroyed was $12,216,600.

If Sierra Pacific decides to rebuild the Dam, it shall recover prejudgment interest on the full replacement cost of $19,800,000, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. If, on the other hand, Sierra Pacific does not rebuild the Dam, it shall recover prejudgment interest on the $12,216,600 ACV, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. Interest shall accrue at ten percent per annum pursuant to California Civil Code § 3289(b).

Good cause appearing, the Court concludes that the ACV of the Dam is $12,216,600. If Sierra Pacific rebuilds the Dam, it shall be entitled to the full replacement cost of $19,800,000 less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the replacement cost less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.

If Sierra Pacific does not rebuild the Dam, it shall be entitled to the $12,216,600 ACV less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the ACV, less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.

The Court also reaffirms its prior Order that the three-year period granted for rebuilding the Dam shall be tolled until the conclusion of this litigation. Due to the interest in maintaining reasonable prejudgment interest, Sierra Pacific shall decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.

ZALMA OPINION

Because this case involves a great deal of money to replace the dam litigation ensued over the determination of ACV. Had the parties been interested in avoiding unnecessary litigation either the insurers or the insured could have demanded appraisal and allowed a panel of appraisers (arbitrators) to determine ACV and RCV. They chose to litigate instead and forced the court to determine the amount of loss. It did so and now Sierra has three months to decide if it will rebuild the dam to recover the difference between the ACV and RCV. That they fought so hard to have ACV and RCV determined to be the same amount one could speculate that the plaintiff has no intent to rebuild.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Doubt About Exclusion Requires Coverage

If any Part of Suit Requires a Defense The Entire Suit Must Be Defended

An insurer’s duty to defend, although not unlimited, is extremely broad and requires an insurer to provide a defense for insured and uninsured events if there is a potential for coverage of any of the allegations made against an insured. Refusing to defend an insured is often a difficult task and was once explained as seeking coverage on an automobile comprehensive policy for a fire at a commercial building. Insurers keep trying to refuse to provide a defense only to be slapped by a trial or appellate court.

In Khatib v. Old Dominion Ins. Co., — So.3d —-, 2014 WL 6851418 (Fla.App. 1 Dist., 12/05/2014) the Florida Court of Appeal was faced with the refusal to defend an insured because of the claimed applicability of an exclusion.

Old Dominion Insurance Company was faced with a multi-faceted action for fraud, conversion, civil conspiracy, breach of contract, and other causes of action, being prosecuted by certain physicians against the president and founder of a medical practice they all once worked at together. It is not seriously questioned that the doctors are insureds under the policy and that the insuring clause of the insurance policy would afford coverage to the doctors. The dispositive question is whether coverage is precluded by a policy exclusion.

BACKGROUND

This case stems from a dispute between Dr. Majdi Ashchi and the appellants, Drs. Yazan Khatib, Vaqar Ali, Youssef Al–Saghir, and Sumant Lamba. Dr. Ashchi was the president and founder of First Coast Cardiovascular Institute (“FCCI”), a professional service organization that treats heart and cardiovascular disease. Appellants are FCCI’s other officers and directors.

After wresting control of FCCI from Dr. Ashchi, appellants, acting through FCCI, sued Dr. Ashchi and others for fraud, negligently supplying false information, breach of contract, reformation, unjust enrichment, breach of fiduciary duty, and conspiracy. Dr. Ashchi denied all allegations and believing that a good offense is the best defense joined his former colleagues in the action individually, through a third-party defamation complaint.

The third-party complaint alleged that appellants launched a systematic plan to take control of FCCI and oust Dr. Ashchi from power. The complaint further alleges that as part of the plan the doctors made baseless allegations against Dr. Ashchi at an FCCI shareholders meeting and that each published defamatory statements about Dr. Ashchi to third parties.

The insurance policy in this case is a commercial general liability insurance policy. FCCI is the named insured on the policy. The policy also insures FCCI’s “‘executive officers’ and directors … but only with respect to their duties as officers and directors.” The third-party doctor defendants are executive officers or directors of FCCI, and in some cases both. It is alleged that at a shareholders meeting Dr. Ashchi was accused of stealing money from FCCI to pay for improvements to his home, intentionally overcharging FCCI millions of dollars in rent through his real estate affiliates, and engaging in acts of embezzlement.

ANALYSIS

We have little difficulty in concluding that at least some of these alleged wrongs were performed by the third-party defendant doctors “with respect to their duties as officers and directors.” Some, if not all, of the wrongs alleged occurred while the third-party doctor defendants were either discharging their obligation at a shareholders meeting or executing other official duties.

Old Dominion argues that the employment-related practices exclusion found in one of the endorsements to the insurance policy excuses it from any coverage obligation in this case. This exclusion reads in pertinent part:

This insurance does not apply to:

“Personal injury” to:

(1) A person arising out of any

(a) Refusal to employ that person;

(b) Termination of that person’s employment; or

(c) Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person….

The exclusion goes on to specify that it applies: “(1) Whether the insured may be liable as an employer or in any other capacity…”

The third-party defendant doctors argue that the emphasized language found in subsection (1)(c) of the employment-related practices exclusion is ambiguous as a matter of law because it negates the coverage afforded under Coverage B, subsection 1.b, which affords coverage for “personal injury” caused by an offense “arising out of [the insured’s] business.”

The third-party defendant doctors are correct on the law but wrong on the interpretive facts. It is true that an insurance policy cannot, with impunity, grant a right in one paragraph, then retract the very same right in an exclusion.

Unfortunately for the third-party doctor defendants, however, a cursory consideration of the two clauses on which they place their reliance for this argument reveals the provisions do not conflict. Contrary to the argument of the third-party doctor defendants, a defamatory utterance might easily “arise out of [a company’s] business” while being not at all “employment related.”

One of Florida’s canons of construction provides that when a drafter uses two different phrases in the same context when he might have used one, it is presumed the drafter meant two different things. A contract is not to be read so as to make one section superfluous, and so all the various provisions of a contract must be so construed as to give effect to each.

However, it is further axiomatic in the law of insurance coverage in Florida that if a complaint alleges some facts within and some facts outside of coverage under an insurance policy, the insurer must nevertheless defend the entire suit.

The third-party complaint contains the following “examples” of defamatory statements allegedly made about Dr. Ashchi by the third-party doctor defendants to their staff members, referring physicians, and patients:

a. Dr. Khatib told Dr. Imran Sheikh that Dr. Ashchi had embezzled from FCCI;

b. Dr. Khatib told Dr. Jessica Barbare that Dr. Ashchi was guilty of financial improprieties;

c. Dr. Khatib told Victoria Kozel that Dr. Ashchi was due to be prosecuted for his conduct at FCCI;

d. Dr. Khatib told Dr. Juzar Lokhandwala that Dr. Ashchi orders unnecessary procedures; and

e. Dr. Al–Saghir told Dr. David Grech that Dr. Ashchi was a thief.

There is no indication in the third-party complaint that these allegedly defamatory statements were “employment related” at all. It is quite possible, for example, that these utterances were made at a business-related conference or business-related social event, therefore “arising out of [the insureds’] business” for insuring agreement purposes, while at the same time not being “employment related” in any of the narrow senses discussed above.

Moreover, “[i]f the allegations of the complaint leave any doubt regarding the duty to defend, the question must be resolved in favor of the insured requiring the insurer to defend.” Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So.2d 810, 814 (Fla. 1st DCA 1985).  Our study of the third-party complaint in this case leaves us with sufficient doubt.

CONCLUSION

For the reasons stated, we find that Old Dominion Insurance Company owes the third-party defendant doctors a duty of defense on the allegations of the third-party complaint. At the same time, we hold that the decision of the trial court exonerating Old Dominion Insurance Company from a duty to indemnify the third-party defendant doctors is premature.

ZALMA OPINION

When faced with the question of a duty to defend an insurer should do the type of analysis that was made by the Florida Court of Appeal. When reviewing a lawsuit to determine if coverage applies the claims handler and the lawyers for the insurers must look at the complaint and extrinsic facts to see if there is any doubt about the applicability of an exclusion. If the doubt exists coverage should be extended and a defense provided. Failure to do so can expose the insurer to suits for breach of contract, breach of the covenant of good faith and fair dealing, and claims of exemplary and punitive damages.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

What is Liability Insurance?

How Do I Buy It?

Insurance, by definition, is a contract where the insurer, for consideration (premium) agrees to indemnify another against a contingent or unknown risk of loss. It is used as a method to spread losses among many people who are insured with the same company. The insurer, by its policy, promises, in exchange for a premium, to pay to defend and indemnify the insured, in the event that a certain type of loss occurs within a specified period of time called the “policy period.” By spreading the risk of loss among many, each individual only pays a minuscule portion of the risk of loss insured against.

Liability insurance is limited to insurance against the risk of losses that can be incurred by a person for damages done to the person or property of another by an accidental or fortuitous cause.

The California Insurance Code defines liability insurance as follows:

Liability insurance includes:

(a) Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

(b)(1) With respect to operations or property covered by a policy of liability insurance as defined in subdivision (a), insurance of medical, hospital, surgical and funeral loss or expense of the insured or other persons injured, and in the case of an automobile liability policy disability benefits to the insured or other persons injured and in the event of their death, funeral and accidental death benefits to their dependents, beneficiaries or personal representatives irrespective of legal liability of the insured, when issued with or supplemental to the insurance defined in sub-division (a);

(2) When issued with or supplemental to the insurance defined in subdivision (a), the disability insurance covering the insured and members of his household, or other persons who customarily operate any automobile covered by such a policy and who are named in such policy; and such disability insurance may cover against accidental injury, death or dismemberment caused by any or all hazards as defined in such coverage;

(c) Insurance covering injuries sustained by an insured resulting from a tort committed by a third party against which such third party is not himself covered by liability insurance;

(d) Insurance coverage against the legal liability of the insured, and against loss, damage, or expense incident to a claim arising out of the death or injury of any person as the result of negligence or malpractice in rendering professional services by any person who holds a certificate or license. [California Insurance Code § 108.]

In exchange for the promise to pay the premium charged, the insurance company agrees to provide the insured protection from various risks faced by an owner, developer, or builder of real property. The risks of loss taken by the insurer are listed on the policy. For each promise made by the insurer it charges a premium.

The Commercial General Liability policy (CGL), issued by most insurers, promises to protect the insured against the risk of loss, as follows:

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit that may result.” [Insurance Services Office (ISO) form CG 00 01 10 01]

The policy will provide coverage for the following:

  • bodily injury and property damage to persons injured by the insured;
  • medical payments regardless of fault;
  • personal and advertising injury; and
  • contractual liability.

These are the principal coverages available in CGL policies. There are other coverages available to cover special needs of individual people, corporations, partnerships or joint ventures. If special needs exist for a particular construction project that faces risks not contemplated by a CGL, it is prudent to consult with a professional and major insurance brokerage that specializes in the industry involved in the case. You can find such brokers by conferring with others who specialize in similar projects, your state Department of Insurance, professional risk managers, or Chartered Property and Casualty Underwriters (CPCU), who act as insurance consultants.

Purchasing CGL Insurance For People in the Construction Industry

When purchasing insurance as a named insured, it is imperative to purchase only the insurance coverages needed. Seek the advice and assistance of the insurance brokers and agents with whom insurance is sought, at least three months before the inception date of the policy needed. Regardless of whether the policy sought is a new policy or a renewal, the agents and brokers will need sufficient time to shop the available insurance market. The person seeking insurance should not rely on the broker to simply renew the previous policy for the same price with the same insurer. Coverages available and prices vary considerably every year. Insurers will enter and leave the market for the construction industry every year. The prudent insured will shop wisely and diligently every year.

The prudent person seeking insurance will provide the broker with a list of coverages needed, the status of the insurer with whom the broker is to shop
(e.g., a Best’s Rated A or better and admitted to do business in your state or an approved surplus line insurer). The prudent person will have the agent or broker avoid, if possible, unapproved and not admitted insurers and recognize that the surplus lines market is the market of last resort. The person seeking insurance should ascertain that the broker knows and advises the prospective insurers of the following:

  • each person and entity that must be named as an insured;
  • the location and a description of all properties under construction or to be under construction while the policy is in effect;
  • the gross earnings of the insured(s) for the year before the inception of the policy;
  • the gross earnings anticipated by the insured(s) for the year following;
  • the type of work done by the insured(s):

–    general contractor who supervises subcontractors but has no employees work on project;

–    general contractor who supervises subcontractors and uses his own carpenters;

–    carpentry only;

–    plumbing only; or

–    framing and dry wall installation;

  • the loss history of the person(s) to be insured(s);
  • whether the insured(s) require(s) every subcontractor to indemnify the insured(s);
  • whether the insured(s) require(s) all subcontractors to name him or her as an additional insured on their CGL;
  • whether the insured(s) require(s) only a certificate of insurance from the subcontractors;
  • the identity of the owners of the insured(s);
  • the financial condition of the insured(s) (different from gross earnings, which is needed for calculation of premium);
  • the number and identity of individuals or entities the named insured is required to name as additional insured;
  • the number of indemnity contracts signed by the insured;
  • whether the contracts entered into by the insured require waivers of subrogation;
  • the value of the projects that will be worked on by the insured(s) during the year the policy will be in effect;
  • the amount the insured is willing to pay as a deductible or a self-insured retention; and
  • the territory where the insured(s) operate(s).

When an additional insured endorsement is issued, the named insured is paying for the protection of the owner, general contractor, or some other person or entity that the construction contracts require to be named as an additional insured. The named insured still has control over the insurance and the insurer owes the named insured a duty of care to properly defend and indemnify the named insured. By accepting a person as an additional insured, the insurer is promising to defend and indemnify the additional insured subject to the terms and conditions of the additional insured endorsement as if the additional insured is the named insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book  Construction Defects Coverage Guide.

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Business Risks Never Insurable

Insurance of a Business Risk Creates a Perverse Incentive to Sue Corporate Officers and Shareholders

Being in business is always a risk. When a person or entity builds something – a yacht, for example – it always runs the risk of displeasing the client. Commercial General Liability Insurance (CGL) policies are designed to protect the person insured against the potential loss or damage to property of others for damage due to contingent or unknown events that caused the damage. However, no insurance policy covers every potential risk of loss and every CGL policy I have read excludes damage to the insured’s product or work since that is a business risk rather than a risk of harm to others.

FACTS

Lyman Morse Boatbuilding, Inc. (LMB) of Maine contracted to build a luxury yacht for Russ Irwin. Unhappy with the completed yacht, in 2011 Irwin brought an arbitration proceeding against LMB and Cabot Lyman, the controlling owner of LMB, alleging that the vessel had numerous defects. LMB and Cabot Lyman tendered defense of the arbitration complaint to their insurer, Northern Assurance Company of America, but Northern Assurance refused to defend the insureds. Unhappy with the insurer’s decision, the insureds filed suit in 2012 seeking to recover the costs and attorneys’ fees that they incurred in the arbitration proceeding.

The district court held that Northern Assurance had a duty to defend Cabot Lyman, the individual, but not LMB, the corporation; it then awarded to Cabot Lyman 50 percent of the attorneys’ fees incurred during the arbitration by the two insureds together. Each side was unhappy and we are faced with appeals and cross-appeals.

In Lyman Morse Boatbuilding, Inc. v. Northern Assur. Co. of America, — F.3d —-, 2014 WL 6765781 (C.A.1 (Me.) 12/2/14) the First Circuit Court of Appeal was asked to resolve the dispute.

THE ARBITRATION DEMAND

On July 22, 2011, Irwin filed an arbitration complaint against LMB and Cabot Lyman, claiming damages related to the allegedly defective construction of a 52–foot custom sailing vessel. Irwin alleged that LMB and Cabot Lyman had agreed to build the vessel “with the ‘best practices for quality yacht construction’ using the ‘highest quality materials’ “ for a price of $2,155,000. However, there were cost overruns, and Irwin eventually ended up paying over $3,400,000 for the completed vessel.  As of the date of filing of the arbitration complaint, the quality of the vessel was still unsatisfactory to Irwin.

That complaint alleged eight causes of action: fraud, negligent misrepresentation, constructive fraud, breach of contract, rejection and revocation of acceptance under the Uniform Commercial Code, breach of the implied warranty of fitness for a particular purpose, breach of the implied warranty of merchantability, and violations of Maine’s unfair trade practices laws. Irwin requested rescission of the agreement and a refund and damages for the time he spent and the expenses he incurred during the period when he repeatedly rejected the yacht because of its defects.

The arbitration complaint contained two paragraphs naming Cabot Lyman. First, Irwin alleged that Cabot Lyman, the controlling owner of LMB, was the alter ego of the corporation, and alleged that “[a] unity of interest exists between [Cabot] Lyman and [LMB] and injustice and fraud can only be avoided by piercing the corporate veil” and holding Cabot Lyman jointly and severally liable for the wrongs alleged.

THE CGL INSURANCE POLICY

Northern Assurance had issued a package insurance policy to LMB and Cabot Lyman. The named insureds listed in the Declarations of the policy are “Lyman Morse Boatbuilding Co., Inc.” and “Cabot & Heidi Lyman ATIMA.” “ATIMA” stands for “as their interests may appear.”

In addition to providing the general bodily injury and property damage coverages common to a CGL policy, importantly, the policy excludes from coverage “‘[p]roperty damage’ to ‘your product’ arising out of it or any part of it.” This exclusion, common to CGL policies, is generally called the “your product” exclusion.

THE PROCEEDINGS IN THE DISTRICT COURT

On cross-motions for summary judgment, the district court held that Northern Assurance had no duty to defend LMB, but that it did have an obligation to defend Cabot Lyman in the arbitration proceeding. Lyman Morse Boatbuilding, Inc. v. N. Assurance Co. of Am., Inc., No. 2:12–cv–313–DBH, 2013 WL 5435204, at *1 (D.Me. Sept.27, 2013) [hereinafter Lyman I ]. It applied the exclusion to the corporate defendant but the court determined that Northern Assurance did have a duty to defend Cabot Lyman, the individual, notwithstanding the “your product” exclusion, because “[t]he yacht was the boatyard’s product, not Cabot Lyman’s product.”

In a separate order on the issue of damages, the district court held that Cabot Lyman was entitled to recover 50 percent of the attorneys’ fees that LMB and Cabot Lyman jointly incurred in defending the arbitration proceeding

THIS APPEAL

Northern Assurance has appealed, arguing that it did not owe a duty to defend Cabot Lyman in the arbitration proceeding, and LMB and Cabot Lyman have cross-appealed, arguing that Northern Assurance did owe a duty to defend LMB. Both parties contend that the district court’s ruling on the duty to defend and the damages issue was error.

Irwin’s Arbitration Demand is strident, but simple. It complains about the failure to build the yacht as promised, as well as overbilling. There is no suggestion that somehow the yacht’s defects damaged other property. There is no suggestion, for example, that the buyer put cushions and equipment on the yacht that were damaged on account of defects. Thus the complaint did not allege any facts that even suggest the potential for a covered claim.

In Baywood Corp. v. Maine Bonding & Casualty Co., 628 A.2d 1029 (Me.1993), the Maine Law Court found that a complaint alleging that the insured inadequately designed a sewer system for a condominium complex did not fall within the coverage of a CGL policy because it sought only “the cost to replace or upgrade the [sewer] system.” Although “the complaint refer [red] generally to property damage,” the Law Court explained, it “allege[d] no physical damage to the [condominium] units.”  Thus, the insurer had no duty to defend.

So it is here. While referring generally to a “risk” to personal property, Irwin’s arbitration complaint did not allege any damage to such property or request any relief for personal property damage. Instead, the complaint requested several specific items of relief related to the damage sustained by the defective vessel itself and the expense that Irwin went to in discovering and attempting to rectify its defects.

Interpreting this insurance contract the court’s task is to “‘effect the parties’ intentions … construed with regard for the subject matter, motive, and purpose of the agreement, as well as the object to be accomplished.’” State v. Murphy, 861 A.2d 657, 661 (Me.2004).

Irwin’s complaint alleged damages to the yacht; the policy excludes damages to “your product”; “you” is defined as, inter alia, LMB; the yacht is LMB’s product; thus, the policy unambiguously excludes the allegations of the complaint. Accordingly, on these facts, the First Circuit found that Northern Assurance had no duty to defend Cabot Lyman in the arbitration proceeding. To hold otherwise would undercut the well-recognized purpose of CGL insurance policies, as articulated by the Maine Law Court. CGL policies are designed to cover “occurrence of harm risks” but not “business risks.”   A “business risk” is a risk that the insured will not do his job competently, and thus will be obligated to replace or repair his faulty work. A CGL policy covers an occurrence but specifically excludes a business risk.

A contrary holding would create perverse incentives when plaintiffs sue a corporation for defective workmanship.

If these plaintiffs could trigger a duty to defend on the part of the corporation’s CGL insurer not otherwise obligated to provide a defense by simply adding a corporate officer or employee as a defendant, they would often have the incentive to do so in order to add another pocket to the other side of the negotiating table. As a consequence, the “your product” exclusion, long a staple of CGL policies, would be rendered a dead letter.

The First Circuit declined to read the policy to allow such a result, absent any evidence, of which there is none, that this was the parties’ intent.

ZALMA OPINION

CGL policies are designed to cover “occurrence of harm risks” but not “business risks”; an “occurrence of harm risk” is a risk that a person or property other than the product itself will be damaged through the fault of the insured, whereas a “business risk” is a risk that the insured will not do his job competently, and thus will be obligated to replace or repair his faulty work. Since the entire claim against the insureds was a “business risk” there was no duty to defend nor indemnify.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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The Claims Interview

The Interview is a Structured Conversation

The beginning of every claim investigation is the interview of the insured and/or the claimant. Every person involved in claims needs to know the basics of the interview.

The Interview is a structured conversation. It is not an interrogation. It is not the stuff of spy films, police investigations, or prisoner of war camps.

Interviews are everywhere. Interviewing is an art. Use of methods similar to those used by scientists conducting experiments is a more accurate description of interviewing than police interrogations.

Everyone has been interviewed. Everyone has, at some point in his or her life, interviewed someone.

When Edward Lloyd opened his coffee shop in the shipping center of the city of London, England he knew information was the essence of insurance. An Underwriter who was not fully informed lost his investment. Because his customers needed to be fully informed, Mr. Lloyd kept a chalk board in his coffee shop on which the latest intelligence concerning shipping at the port of London was written. Insurance underwriters, customers of Mr. Lloyd, could gather much of the information they needed to properly evaluate the risks their customers asked them to take. As insurance, and the people who bought insurance, became more sophisticated, underwriters found a need to gather and evaluate information more efficiently.

The Underwriters borrowed techniques from detectives at Scotland Yard. They developed techniques that were unique to insurance. Insurers found that they needed trained investigators before they could properly evaluate a risk or a claim. They learned that minimal investigation before they took a risk could save enormously expensive investigation after a loss.

Other businesses, faced with fraud, embezzlement, employee dishonesty, and competition found that accurate information was necessary to operate a competitive business. In every business the gathering of intelligence about the business and its competitors is essential. News organizations like Reuters, UP, AP, the radio and television networks, CNN, Fox News, and the Internet were all designed to provide credible and useful information to those who needed it.

Whenever two or more people meet, information passes between them. Effective conversationalists are skilled interviewers. A good interviewer uses an ability to listen and ask open ended questions  to use the basic human need to share expertise to gain information.

Interviewing in a social setting bears no resemblance to a police interrogation or cross-examination in a court. Interviewing in a social setting is conversational and pleasant. To be effective the interviewer must:

·    Ask questions that call for a narrative response,

·    Listen to the response to each question,

·    Look directly at the person to whom the question is posed. Eye contact convinces the person to whom you are speaking that you are interested and encourages a detailed response, and

·    Avoid questions that seek “yes” or “no” answers.

The claims person investigating a first or third party claim must be prepared to conduct a low-key interview that determines details about the insured, the claimant, what caused the loss and where, when, how and why the loss occurred. With this information the claims person can establish the existence of coverage for the loss, the amount of the loss and how much is owed by the insurer.  This article is designed to provide a working knowledge of the interview process for the claims professional.

1.    General Principles

The essence of the scientific experiment is that no matter how often an experiment is repeated, as long as the conditions are consistent, the results will be the same.  However, this is not true of an interview.  The information gained in an interview, coupled with the physical evidence collected as part of an investigation creates a complete story.  In every interview there are three variables: the witness, the interviewer, and the subject in question, and these variables prevent the establishment of definite rules.  An experienced interviewer may formulate general principles that are useful on most occasions.
i.    The Witness

No two witnesses are exactly alike.  Because of this, a technique used successfully in one interview will not automatically ensure success in other cases of a similar nature.

During the course of an interview, a witness may change dramatically, exemplified either by their responses or attitude.  For example, a witness who appears very worried prior to the interview may relax considerably during the interview itself.  This may be because the witness now feels in control of the situation.  On the other hand, a witness who does not appear particularly worried before the interview, can become extremely worried if the adjuster appears to have complete control of the interview.  This is more often the case with those submitting a fraudulent claim as they fear that the adjuster may discover the falsified application or some other form of misrepresentation.  The adjuster must take these aspects into consideration and be extremely flexible.  He or she must be able to change approach seamlessly to whichever is the most effective for the witness at any particular moment.

Some worldly and sophisticated people are calm and forthcoming in an interviewer’s office, while others who are unaccustomed to formal proceedings find the process intimidating and somewhat frightening. Conversely, it sometimes happens that the experienced, sophisticated person will cautiously refuse to communicate in an interviewer’s office, while the “average” person will feel perhaps uncharacteristically at ease in the presence of an impressive professional interviewer. And then there is the doctor who will talk freely about medicine, but not at all about her real property holdings, or the mechanic who will talk constantly about cars, but not say a word about his recreational activities or family life outside work. In short, no situation—and certainly no person—is ever the same as another.

The varieties are endless: while one subject will listen and respond cooperatively to reason and logic, another will be more susceptible to an emotion-based appeal. It is up to the interviewer to constantly amend and update the tactics of the interview to fit the personality of the person interviewed.

There is a key to each person interviewed that, when found, will unlock even the most guarded information. By careful and patient questioning, it is the task of the interviewer to find the key, and then to exploit it to extract the truth. Once the key is discovered, even the subject may be surprised at how much previously concealed information he or she is ready to reveal.

ii.    The Interviewer

Just like anybody else, the moods, outlook, and personality of the interviewer can change.  Some are more alert and flexible in the morning while others function better later in the day.  At the end of a hard day, an interviewer may show the effects of physical fatigue and mental exhaustion by conducting an ineffective interview, rushing through the questions without listening to the answers.

Interviewers may react differently to particular sorts of claims.  A good-looking witness making a $1,500 burglary claim may be treated gently, whereas an arson for profit suspect may be treated aggressively due to the adjuster’s emotions concerning the potential for injury or death of innocent children.  However, the good looks of one witness should cause no more effect on the adjuster than the possible offensive actions of another.  The sophisticated language of a witness should have no more effect than the uneducated, crude language of another.  The adjuster conducting the interview must adapt his or her technique to establish a rapport with each witness.  If emotion, rather than reason, is allowed to control the interview, it will fail.  The witness will return the emotion.  The experienced interviewer knows that information will not flow unless the interviewer can use the emotions of the witness to his or her advantage.

In order to conduct a successful interview, the interviewer must control everything about the interview.  An interviewer who is emotionally unprepared for the interview will be unsuccessful, even if he or she is prepared factually.

iii.    The Subject of the Interview

The subject matter in question will have an effect on every interview.  A fire to a residence will raise different questions than a fire to a commercial structure.  A theft claim raises questions about security devises while a water damage claim may raise questions about plumbing fixtures and repairs performed in the past.

However, all claims require questions to be asked about the insured, the claimant, and any previous experience they have with insurance and insurance claims.

iv. Types of Interview

The varieties are endless: while one subject will listen and respond cooperatively to reason and logic, another will be more susceptible to an emotion-based appeal. It is up to the interviewer to constantly amend and update the tactics of the interview to fit the personality of the person interviewed.

There is a key to each person interviewed that, when found, will unlock even the most guarded information. By careful and patient questioning, it is the task of the interviewer to find the key, and then to exploit it to extract the truth. Once the key is discovered, even the subject may be surprised at how much previously concealed information he or she is ready to reveal.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This Article was adapted from my book  Insurance Claims: A Comprehensive Guide.

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

Resident Relative Must Abide in House

Mother’s House Not Son’s Residence

Susan and Peter White (White), appealed an order of the Superior Court denying their petition for a declaratory judgment that respondent Charles Matthews (Matthews) was covered under a homeowner’s insurance policy issued to his mother by respondent Vermont Mutual Insurance Company (Vermont Mutual).  The issue devolved to the New Hampshire Supreme Court to resolve in White v. Vermont Mutual Insurance Company, — A.3d —-, 2014 WL 6533298 (N.H., 11/21/14).

FACTS

When a dog owned by Matthews caused an accident that injured Susan White on July 3, 2011 she sued Matthews. He had no insurance of his own. Because the incident occurred while Matthews was staying with friends at a home owned by his mother in Moultonborough, New Hampshire. The Moultonborough home was covered by an insurance policy issued to Matthews’s mother by Vermont Mutual.

The policy defined an “insured” to include “residents of your household who are … your relatives.” Matthews’s mother also owns a home in Naples, Florida, where she lives for approximately half of the year, and where Matthews usually visits only at Christmas. The Florida residence is Matthews’s mother’s primary residence. There was no evidence, and no one claimed, that Matthews is a resident of the Florida home.

Matthews was born in Boston and lived in Massachusetts until he moved to Moultonborough when he was thirteen years old. As a teenager, he lived at the Moultonborough residence and attended Moultonborough Academy. In 2000, after graduating from Boston University, he began working and living in Massachusetts full–time. In 2005, he bought a building in Somerville, Massachusetts, which he converted into condominium units. He sold several units and retained three: one for his own use, and two for rentals. Since 2005, Matthews has served as the head of the condominium association for that building.

Matthews has been unemployed since 2009 and receives financial assistance from his mother. He uses his Somerville address on his resume. Matthews testified that since graduating from college, if asked, he tells people that he lives in Massachusetts. The last time Matthews filed tax returns prior to the 2011 incident leading to this case, he used his Somerville address. His only telephone has a Massachusetts area code.

Matthews testified that he resides in Massachusetts for 80% or more of the year. He voted in Moultonborough in the 2012 election, a month before the hearing in this case. Matthews also has a New Hampshire driver’s license and his vehicle is registered in New Hampshire. However, his decision to register his car in New Hampshire was motivated by his desire to avoid buying automobile insurance, which is required in Massachusetts.

Matthews refers to the Moultonborough house as his mother’s home, not his home. He goes to Moultonborough occasionally for vacations, long weekends, and to visit his family. He typically notifies his mother in advance to obtain her permission to stay at the house, especially if he is bringing friends.

Following the 2011 incident involving Matthews’s dog, the petitioners sought a declaratory judgment that Vermont Mutual is responsible for any damages they may recover from Matthews. After a bench trial, the trial court denied the petition, as well as the petitioners’ motion for reconsideration.

ANALYSIS

The interpretation of insurance policy language is a question of law for the court to decide. Vermont Mutual bears the burden of proving that its policy does not provide coverage.

Although Matthews is one of the respondents in this action, his arguments are in line with the petitioners’ because he is seeking coverage under the Vermont Mutual policy at issue. The petitioners and Matthews assert that Matthews is a “resident relative” within the meaning of his mother’s insurance policy.

Because Matthews’s arguments overlap with the petitioners’ arguments, we will consider them together. In contrast, Vermont Mutual asserts that Matthews is a resident of Massachusetts and did not qualify as a resident of his mother’s household, and, consequently, was not entitled to coverage under the policy insuring the Moultonborough home.

The Vermont Mutual policy at issue defines an “insured” to include “residents of your household who are … your relatives,” but does not define the term “resident.” However, courts have considered the meaning of this term in the insurance context on multiple occasions, and have defined “residence” as “the place where an individual physically dwells, while regarding it as his principal place of abode. The definition considers two factors that must occur simultaneously: (1) the person must physically dwell at the claimed residence; and (2) the person must regard the claimed residence as his principal place of abode.

Additionally, in New Hampshire, the term “household” is understood to be a group of people dwelling as a family under one head and under one roof.

When a court interprets policy language, it looks to the plain and ordinary meaning of the policy’s words in context. Matthews independently owns and spends most of his time in his own home in Massachusetts. He considers himself a resident of Massachusetts and refers to the Moultonborough property as his mother’s home rather than his own. Although Matthews lived at the Moultonborough property as a teenager and college student, his statements and actions over the years following his college graduation express his intent to disregard the Moultonborough property as his residence and emphasize his decision to reside in Massachusetts.

Even if Matthews occupied the Moultonborough home at the time of the 2011 incident, he did not regard that residence as his principal place of abode. Therefore, the New Hampshire Court concluded he was not a “resident relative” of the Moultonborough home within the meaning of the policy.

Rather, the objective facts indicate that Matthews is not a resident of that home. Matthews is an educated, independent adult, who for many years has had his own residence in Massachusetts. He spends more than 80% of his time at that residence and visits his mother’s Moultonborough home only on occasion. Matthews notifies his mother before visiting and seeks her permission to bring friends to the home. Moreover, Matthews listed his Massachusetts home as his residence on his resume, he used his Massachusetts address on his tax returns the last time he filed taxes, and his telephone has a Massachusetts area code.

Even if we were to assume that the Moultonborough property is a vacation home and that a person can have more than one residence for insurance purposes when one of the residences is a vacation home, the policy here, requires that the additional insured be a resident relative of “your [the named insured’s] household.” To satisfy this requirement of sharing the same household, Matthews also would have to be a resident of his mother’s primary residence in Florida. As noted previously, the petitioners do not claim that Matthews is a resident of his mother’s Florida home.

ZALMA OPINION

When people are injured and sue the person who is responsible for the injury it is always best for the injured person if the tortfeasor is insured. Even if a judgment is obtained it is often difficult to collect, especially in a situation like this, where the tortfeasor is unemployed. For that reason is was worth the attempt to make Matthews insured because his mother was insured. It didn’t work because there was simply no evidence that established the house as his residence and a part of the named insured’s household.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Fishing Expedition Prohibited in Texas

Scouring Claim Files Not Related to Insured Wrong

The business of insurance requires each party to the insurance contract to treat each other with good faith so as to not prevent the other from receiving the benefits of the insurance contract.  When the insured accepts settlement of her claims and then files suit and seeks evidence about other claims that the insurer handled in the community, is fishing for evidence that would support a bad faith claim. To do so the request must be limited and relevant to the claim of the plaintiff. By making an excessive demand the insured is not treating the insurer in good faith and fair dealing.

In a case involving allegations of underpaid insurance claims, the Supreme Court of Texas was asked to consider whether a trial court abused its discretion in ordering the defendant insurer to produce evidence related to insurance claims other than the plaintiff’s. Plaintiff’s intent was to prove that the insurer treated her differently than others similarly situated.

FACTS

In September 2011 and June 2012 storms swept through the City of Cedar Hill and caused damage to Mary Erving’s home. Erving filed claims with her homeowner’s insurer, National Lloyds Insurance Company. National Lloyds sent adjusters to inspect Erving’s residence in response to each claim.

Following those inspections, National Lloyds paid the claims.

Concerned that National Lloyds had undervalued her claims, Erving brought suit against the company. She alleged breach of contract, breach of duty of good faith and fair dealing, fraud, conspiracy to commit fraud, and violations of the Texas Deceptive Trade Practices Act and chapters 541 and 542 of the Texas Insurance Code. During discovery, Erving requested production of all claim files from the previous six years involving three individual adjusters. She also requested all claim files from the past year for properties in Dallas and Tarrant Counties involving Team One Adjusting, LLC, and Ideal Adjusting, Inc., the two adjusting firms that handled Erving’s claims. Erving sought via interrogatory the names, addresses, phone numbers, policy numbers, and claim numbers associated with the requested claim files.

National Lloyds objected to the requests as overbroad, unduly burdensome, and seeking information that was neither relevant nor calculated to lead to the discovery of admissible evidence. Erving moved to compel production. After reviewing the discovery requests, the trial court ordered production of the files for claims handled by Team One and Ideal Adjusting. The trial court also limited the order to claims related to properties in Cedar Hill and to the storms that caused the damage to Erving’s home. National Lloyds filed a petition for writ of mandamus with the court of appeals, which denied relief. National Lloyds now seeks mandamus relief in this Court. The case finally made its way to the Texas Supreme Court who decided the issues in In re National Lloyds Insurance Company, — S.W.3d —-, 2014 WL 5785871 (Tex.), 58 Tex. Sup. Ct. J. 64 (10/31/14).

ANALYSIS

A discovery order that compels production beyond the rules of procedure is an abuse of discretion for which mandamus is the proper remedy. The Texas Rules of Civil Procedure provide for discovery of any matter that is not privileged and is relevant to the subject matter of the pending action.
Even these liberal bounds have limits, and discovery requests must not be overbroad. A request is not overbroad merely because it may call for some information of doubtful relevance so long as it is reasonably tailored to include only matters relevant to the case. The Supreme Court has, in the past, held that overbroad requests for irrelevant information are improper whether they are burdensome or not.

In this case, the trial court’s order compelled production of information relating to insurance claims filed by Cedar Hill residents in connection with the two storms that damaged Erving’s house. The order was also limited to claims that were assessed by the adjusting firms that assessed the damage to Erving’s home.  Essentially, then, Erving has proposed to compare National Lloyds’ evaluation of the damage to her home with National Lloyds’ evaluation of the damage to other homes to support her contention that her claims were undervalued.

The Supreme Court found it impossible to see how National Lloyds’ overpayment, underpayment, or proper payment of the claims of unrelated third parties is probative of its conduct with respect to Erving’s undervaluation claims at issue in this case. Requests for information about damage to other properties that were not tailored to include the information actually used in adjusting the plaintiffs claim amounts to an improper fishing expedition. This is especially so given the many variables associated with a particular claim, such as when the claim was filed, the condition of the property at the time of filing (including the presence of any preexisting damage), and the type and extent of damage inflicted by the covered event. Scouring claim files in hopes of finding similarly situated claimants whose claims were evaluated differently from Erving’s is, at best, an impermissible fishing expedition

Erving is correct that discovery must be reasonably limited in time and geographic scope. Because the information Erving seeks is not reasonably calculated to lead to the discovery of admissible evidence, the trial court’s order compelling discovery of such information is necessarily overbroad.  Accordingly the Supreme Court granted mandamus relief and directed the trial court to vacate its discovery order.

ZALMA OPINION

Erving’s claims were paid. After accepting payment of her claim she sued because she believed her insurer did not treat her fairly. Apparently having no evidence to establish that her claim was improperly handled she sought the right to scour through every claim file from the same storm in her neighborhood in hopes of finding that some were treated differently than she. Since every claim and every property is different the search she sought was to prove a suspicion without a factual basis based upon claim files that would invariably be different than Erving’s because the property and the damage would be different. In so doing Erving was breaching the implied covenant of good faith and fair dealing by fishing for a way to get damages from her insurer after her claim was paid to her satisfaction.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Indemnity & Insurance – Who Goes First

Additional Insured Must Collect from Insurance Before It Can Seek Contractual Indemnity

Many contracts have dual purposes when it comes to shifting the risk of loss. Usually the owner requires the contractor to name it as an additional insured on its liability insurance policy and to defend and indemnify it to certain tort claims. In Hercules Offshore, Inc. v. Excell Crane & Hydraulics, Inc., — S.W.3d —-, 2014 WL 6601644 (Tex.App.-Hous. (1 Dist., 11/20/14) the Texas Court of Appeal was called upon to determine issues relating to defense, indemnity, and insurance obligations.

FACTS

This dispute between Hercules Offshore, Inc. and The Hercules Offshore Drilling Company, LLC (collectively “Hercules”) and Excell Crane & Hydraulics, Inc. arises from the parties’ conflicting interpretations of indemnity and insurance provisions in their Master Service Agreement (MSA).

Hercules contended that the “additional assured” language in the MSA’s insurance provision means that Excell’s insurance must be exhausted before Hercules’s indemnity obligation is triggered. Excell, on the other hand, argues that Hercules’s indemnity obligation is primary, notwithstanding any other provision of the MSA, including the insurance provision.

The trial court granted summary judgment in favor of Excell and denied Hercules’s motion for summary judgment.There is an additional wrinkle. This case arises out of a personal-injury lawsuit by Hercules employee Dennis  Brunson, who sued Hercules and Excell in Texas state court. Meanwhile, another Hercules employee, Kevin Currey, who was injured in the same incident, sued Hercules and Excell in Louisiana state court. Excell prevailed against Hercules in the Louisiana litigation.

The Louisiana judgment in Excell’s favor became final while the appeal was pending. Excell now argues that the Louisiana judgment precludes further litigation in this case and that Excell is entitled to judgment based on principles of res judicata and collateral estoppel.

THE ACCIDENT

In 2007, Hercules was serving as the drilling operator of a semi-submersible drilling rig off the shore of Louisiana. Three Hercules employees, including Brunson and Currey, were injured when the rig elevator in which they were riding went into a free-fall. Excell had inspected and tested the elevator two months earlier, and it performed this work under the terms of the MSA.

TRIAL COURT ACTIONS

Excell moved for summary judgment on its cross-claim, arguing that the indemnity provision unambiguously required Hercules to defend and indemnify Excell against Brunson’s claims. Hercules counterclaimed for breach of the MSA, arguing that it was not obligated to indemnify Excell under the MSA until the insurance that Excell was obligated to provide Hercules had been exhausted.

Hercules moved for traditional summary judgment on Excell’s claim for indemnity and on its own claim for breach of the MSA.

The trial court granted Excell’s motion for summary judgment. The trial court entered a final judgment, ordering Hercules to defend and indemnify Excell for Brunson’s claims pursuant to the MSA.

DISCUSSION

Hercules contends in a single issue that the trial court erred in granting summary judgment for Excell and denying Hercules’s motion for summary judgment as to the contract interpretation issue, because federal maritime law, which the parties agree applies here, dictates that the “additional assured” language in the MSA’s insurance provision means that Hercules’s indemnity obligation is triggered only after Excell exhausts the insurance it agreed to obtain.

Both parties agree that federal maritime law governs the substantive dispute in this case. Well-settled Fifth Circuit law, beginning with Ogea v. Loffland Brothers Company, 622 F.2d 186 (5th Cir.1980), holds that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

In Ogea, the Fifth Circuit held that contractor Loffland Brothers’ insurance obligation must be exhausted before Phillips Petroleum Company’s indemnity obligation was triggered. The Fifth Circuit noted that the insurance and indemnity obligations in a maritime contract “must be read in conjunction with each other in order to properly interpret the meaning of the contract.”

Since Ogea, the Fifth Circuit has consistently held that a party “who has entered into a contractual indemnity provision but who also names the indemnitor … as an additional assured under its liability policies, must first exhaust the insurance it agreed to obtain before seeking contractual indemnity.”

ANALYSIS

The appellate court conclude that this case is controlled by Ogea. The MSA provided that Hercules would indemnify Excell against claims by Hercules’s employees. The MSA provided that Excell shall maintain at its sole expense the minimum insurance coverage requiring that all insurance policies, except Worker’s Compensation, shall name all such parties as additional assureds. All such policies shall be endorsed to provide that additional assureds shall not be liable for premiums and that such policies shall be primary as to additional assureds, regardless of any “excess” or “other insurance” clauses therein.

The coverage extended an additional assured shall not be less than that provided to the Contractor. All policies will cover investigation and defense of claims. All policies will include contractually assumed liability coverage.

The controlling fact is the existence of the ‘additional assured’ coverage whereby Excell agreed to procure insurance coverage for the benefit of Hercules. The import of the additional assured clause is emphasized here because the MSA also required that insurance procured by Excell must afford primary coverage to Hercules. It also made clear that the policy must include contractually assumed liability coverage, and it did not limit the insurance requirement to liability coverage assumed by Excell.

When there are conflicting indemnity and insurance requirements, the insurance of the indemnitee must first respond up to the dollar limit of coverage. Only then must the indemnitor honor its hold harmless obligation.

Hercules is seeking coverage for Brunson’s injuries, which allegedly arose as a result of a free fall in an elevator that Excell had certified for use only 50 days earlier. The MSA limits the scope of the agreement such that the insurance referenced could apply only to work by Excell, its affiliates, and its subcontractors for Hercules or its affiliated companies.

Accordingly, following well-settled Fifth Circuit maritime law, the court concluded that Hercules is not obligated to indemnify Excell until the limits of insurance coverage that Excell was obligated to purchase by the MSA have been exhausted.

RES JUDICATA

After briefing in this appeal was complete, Excell sought leave to file a supplemental brief in which it argued that the doctrines of res judicata and collateral estoppel preclude further litigation and that Excell is entitled to judgment in its favor. The basis of the argument is that a Louisiana state court adjudicated the same issue presented in this case and entered a final judgment in Excell’s favor. The Louisiana case arose from the same incident. Currey, who was injured in the same elevator accident as Brunson, sued in Louisiana, and Excell and Hercules litigated in Louisiana the very same insurance and indemnity issues presented in this appeal.

Because the final judgment upon which Excell relies was rendered by a Louisiana court, Louisiana law governs its res judicata and collateral estoppel effect.

The appellate court declined to apply res judicata and collateral estoppel. While Louisiana substantive law controls the effect of the Louisiana judgment, Texas procedural rules control how that effect is determined. In Texas, res judicata and collateral estoppel are affirmative defenses that are waived if not raised in the trial court, and cannot be raised for the first time on appeal.

The court recognized that Excell could not raise these defenses in the trial court because the Louisiana judgment did not become final until the Louisiana Supreme Court denied Hercules’s writ application in February 2014, when this case was already on appeal. The appellate court concluded that it may not affirm a summary judgment on a ground not included the motion.

The trial court’s summary judgment was reversed in favor of Excell and judgment was rendered granting Hercules summary judgment with respect to liability on its breach of contract claim.

ZALMA OPINION

This is a “who’s on first” type litigation that is not funny like the Abbott and Costello routine. It is a clear understanding of the type of contract found in almost every construction and personal service contract where the contractor – to obtain the benefit of the contract work – agrees to insure the owner as an additional insured, and, as additional security agrees to indemnify the owner from the contractor’s personal assets. This case makes it clear that if the insurance is adequate to indemnify the owner nothing further is required from the contractor. If it is not sufficient, once the insurance is exhausted then, and only then, is the contractor required to use its on funds to indemnify the owner.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Inadequate Adjusting Expensive

Failure to Establish ACV Promptly

Insurance companies know how to settle property damage claims under a policy with replacement cost value (RCV) coverage. They obtain the agreement with the insured the full cost to repair or replace and the actual cash value (ACV) of the loss, usually applying the deduction of physical depreciation from the replacement cost. The insured can then elect to take the ACV loss with an agreement to pay the difference between ACV and RCV once the repairs are completed unless the actual amount expended is less than the difference between RCV and ACV.

However, when there is a question of coverage or a suspicion of fraud the common practice disappears and litigation ensues. That was the case in Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., — Cal.Rptr.3d —-, 2014 WL 6679263 (Cal.App. 1 Dist., 11/24/14).

FACTS

Fireman’s Fund Insurance Co. issued an insurance policy covering loss from property damage, including rent, on a building owned by plaintiff Stephens & Stephens XII, LLC ( Stephens XII). Three days after the policy became effective, Stephens XII discovered the property had sustained serious damage from burglars who stripped it of all electrical and other conductive materials. Stephens XII sought reimbursement for the damage from Fireman’s Fund, but Fireman’s Fund delayed resolving the claim. Stephens XII, tired of waiting, sued.

The policy provided two different measures for reimbursing covered damages. Stephens XII could recover either the full RCV, so long the repairs were actually made, or the ACV. As of the date of trial, Stephens XII had not repaired the damage. The jury nevertheless awarded Stephens XII the full cost of repairing it.  The trial court granted Fireman’s Fund judgment notwithstanding the verdict (JNOV), finding that neither of the awards was permitted under the policy.

The property was burglarized sometime after June 8, when the property was inspected and found sound. Burglary hardly begins to describe the nature of the crime. Virtually all conductive material was stripped from the building and taken away. An electrician who examined the damage said “[t]he copper theft was the most complete job I’ve ever seen.” There was water damage throughout; walls were damaged; fire-protection equipment was rendered inoperable; and virtually all electrical components had been taken away. The estimated cost of repair exceeded $1 million.

Although Fireman’s Fund eventually paid Stephens XII for emergency repairs, it neither accepted nor denied coverage for the loss. From virtually the beginning of its investigation, Fireman’s Fund was concerned that the damage was too extensive to have occurred in the brief period of the policy’s coverage.

Replacement or Repair Cost

Fireman’s Fund is not required to pay replacement cost “until the lost or damaged property is actually repaired or replaced and unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.”

As an alternative to seeking replacement cost, the insured may claim “Actual Cash Value,” which is defined as the actual, depreciated value of the damaged property. As the policy acknowledges, the actual cash value might be “significantly less” than the replacement value. If an insured makes a claim for actual cash value, it may still repair the damage and claim the additional amount necessary to equal the replacement cost, so long as the insured notifies Fireman’s Fund of its “intent to [make a claim for the additional costs] within 180 days after the loss or damage.”

These provisions are common in property-damage insurance policies. RCV insurance is optional additional coverage that may be purchased to insure against the hazard that the improvements will cost more than the ACV and that the insured cannot afford to pay the difference. Unlike standard indemnity, replacement cost coverage places the insured in a better position than he or she was in before the loss.

Because replacement cost coverage places the insured in a better position than before the loss, there is a moral hazard that the insured will intentionally destroy the insured property in order to gain from the loss. For this reason, most RCV policies require actual repair or replacement of the damaged property as a condition precedent to recovery of RCV.

During the three years between the burglary and the initiation of this lawsuit, the parties engaged in an extended series of ultimately fruitless discussions about reimbursement for the damage. During the course of the discussions, it appears never to have been suggested by either party that Stephens XII seek an actual cash value payment, thereby providing it the seed money to start repairs. At trial, Stephens XII presented no evidence of the ACV of the damaged property and expressly disclaimed any intent to seek recovery under this measure.

The trial court found that Stephens XII was required to complete the repairs before it was entitled to receive replacement cost. It also found that Stephens XII’s claim that it was excused from the repair requirement was unsupported by the language of the policy.

DISCUSSION

Although Stephens XII is not entitled to an immediate award for the costs of repairing the damage, it is entitled to a conditional judgment awarding these costs if the repairs are actually made.

The insurer can be required to pay ACV immediately and to pay RCV conditionally on the insured’s completion of repairs promptly from the date of the judgment. The rationale for this approach excusing the insureds’ performance of the repair/replace condition was only temporary.  Where the insured can still conduct the repairs/replacements and be reimbursed by the insurer, then the good faith denial of liability should not operate to give the insured a benefit it did not contract for.

When an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused. If coverage is ultimately resolved in favor of the insured, the insured should remain eligible to receive replacement cost, but only so long as the insured complies with other applicable policy terms, such as a repair requirement. In other words, a coverage dispute should not give the insured a benefit under the policy it never had in the absence of the dispute—such as the right to receive replacement cost without actually repairing the damage.

Had Stephens XII sought damages based on ACV and proved them at trial, it would have been entitled to an immediate award of such damages. When Stephens expressly disclaimed recovery of ACV damages, it waived an award based on this measure. Stephens XII, nonetheless, remains entitled to a judgment awarding replacement cost consistent with the repair requirement if it actually completes the repairs “as soon as reasonably possible” after the judgment becomes final.

The court of appeal recognized that “[g]enerally, a party’s failure to perform a condition precedent will preclude an action for breach of contract.” ( Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1192.) But here, Stephens XII’s repair of the property is not a condition precedent to Fireman’s Fund’s liability under the policy.

The judgment must accommodate an additional limitation on Stephens XII’s ability to recover RCV. Stephens XII submitted proof of likely replacement cost and received a monetary award of those costs from the jury. The court found no basis for the failure to repair and no basis for awarding Stephens XII a specific amount of RCV before it makes the actual repairs. Stephens XII is only entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs have actually been performed in a timely manner, and in an amount equal to Stephens XII’s actual expenditures for them.

On the other hand, the award bears a striking correlation to Stephens XII’s theory of lost rent. Where, as here, a jury’s verdict precisely matches an expert’s testimony, logic and common sense tells us that the jury accepted the expert’s analysis and calculations.

ZALMA OPINION

It is not obvious whether the greed of Stephens XII or the failure to adjust by the Fireman’s Fund was the reason for this suit and appeal. To me, it is both. If the Fireman’s Fund believed the loss did not occur during its policy period it should have conducted an immediate investigation to determine exactly when the loss occurred. The police caught one of the thieves so he was available to give that information to the Fireman’s Fund. The insured and Fireman’s Fund could have agreed on the ACV and RCV loss, paid the ACV loss and agreed to pay up to the difference once repairs were completed. Stephens XII wanted RCV and did not want to repair. As a result of the greed of the insured and the failure of adjustment by the insurer both lost.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Fraud Struggle Continues

Zalma’s Insurance Fraud Letter

December 1, 2014

In the 23rd  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on December 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue establishes that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.        Blatant BP Deepwater Horizon Fraud Requires Severe Punishment
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide“; and
iii.    “Mold Claims Coverage Guide
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook
3.        The Fight Against Insurance Fraud Moves Forward in Canada
4.    Arson for Profit Fails – Conviction Affirmed
5.    More on Death Master File Abuse – $1.2 Million Settlement
6.    Lawyer Guilty of Insurance Fraud
7.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Failure to Promptly Rescind – November 28, 2014
2.    Thanksgiving – November 26, 2014
3.    Lie To Your Insurer – Lose All Coverage – November 25, 2014
4.    Mold Damage Requires Proof – November 25, 2014
5.    Illusory Policy Disfavored – November 23, 2014
6.    Equitable Fraud Supports Rescission – November 21, 2014
7.    Agent’s Obligations Limited – November 20, 2014
8.    Insurer’s Language Used Against It – November 19, 2014
9.    Not All Relatives Are “Resident Relatives” – November 18, 2014
10.    No Good Deed Goes Unpunished – November 17, 2014
11.    The Fight Against Fraud Continues – November 14, 2014
12.    Bad Faith “Set-Up” Fails – November 14, 2014
13.    Subrogation – November 14, 2014
14.    No Claim, No Settlement, No Coverage – November 13, 2014
15.    Location of Injury & Employment Controls – November 12, 2014
16.    Clear & Unambiguous Language Controls – November 11, 2014
17.    Collapse or Sewer Backup – November 11, 2014
18.    Insured May Reject or Limit UM Coverage – November 10, 2014
19.    Incorrectly Denying Claim Not Bad Faith – November 7, 2014
20.    Erroneous Denial Not Bad Faith – November 6, 2014

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

If for some reason the current issue is not attached it will be available for a month at http://www.zalma.com/ZIFL-CURRENT.htm.

Posted in Zalma on Insurance | Leave a comment

Failure to Promptly Rescind

Breach of Contract Not Enough for Summary Judgment

When an insurance company receives facts that support rescission of an insurance policy it is imperative that the remedy be exercised promptly. When the claim comes it becomes necessary to complete a thorough investigation, including demands for documents and the examinations under oath (EUO) of the insured. In Certain Underwriters at Lloyd’s, London v. Lee Group Shelbyville Holding Co., LLCSlip Copy, 2014 WL 6601975 (Ind.App., 11/20/2014) the Indiana Court of Appeal was faced with what to do when the insured failed to appear for EUO.

Certain Underwriters at Lloyd’s, London (“Underwriters”) appeal the trial court’s denial of their motion for summary judgment against The Lee Group Shelbyville Holding Company, LLC (“Lee Group”). Underwriters raised only one issue on appeal, that the failure to appear for EUO bars the lawsuit and their summary judgment should have been granted.

FACTS

Underwriters insured commercial property of Lee Group through a policy (the “Policy”) for a period between March 28, 2011, and June 28, 2011. On April 29, 2011, Lee Group submitted a property loss notice to Underwriters asserting that it sustained damage to its roof during a windstorm on April 27, 2011. Underwriters commenced an investigation to adjust the loss.

On June 3, 2011, Robert Trombley, a property claims examiner  sent an e-mail message to Murray Edward and attached the adjuster report and the property loss notice and certificate of insurance. Trombley provided some details regarding the claim and stated that Lee Group was not in compliance with the “80% co-insurance.” Trombley wrote that Roxanne Logan “advised the branch underwriter that based on these issues she was mailing out DNOC (direct notice of cancellation) to be effective 6/1/2011 in lieu of letting the policy expire on 6/28/2011. Trombley alleged that “it appears this risk was represented to us incorrectly.” He stated that the “DNOC [was] processed at 10:17 AM on the 29th of April prior to receiving notification of the loss.” He requested Edward to “review and advise how Underwriters wish to proceed with the claim.”

On June 8, 2011, Daniel Mahoney sent an e-mail message to Trombley and Edward stating “Lead Underwriter has noted W.P. With the amount of discrepancies and issues on this Risk” and asked why the underwriter should have better placed in action work to rescind the policy due to material misrepresentation and return the premium.  On June 14, 2011, Trombley sent an e-mail message to Mahoney and stated that “we do feel that there was material misrepresentation but wanted to provide Underwriters with all the facts and strongly feel that this should be referred to counsel” and recommended Walker Wilcox and Matousek. On June 16, 2011, Chris Bristow e-mailed Trombley and stated that Underwriters had agreed to the selection of Walker Wilcox and Matousek and were awaiting their advice.

In a letter dated May 24, 2012, counsel for Lee Group wrote counsel for Underwriters and alleged that Lee Group suffered damage to their structure on April 27, 2011. The letter alleged that the roof was damaged and began to leak due to severe winds, that over the course of the next week or so, the Shelbyville area received over two inches of rain, and that due to the damaged roof, the rain was able to enter the structure and do serious, irreversible damage.

On October 1, 2012, Burns filed a motion to dismiss, which the court later granted. In a letter dated October 3, 2012, Underwriters’ counsel wrote a letter to Lee Group’s counsel which stated: “A deposition in the Lawsuit is no substitution for the EUO, which is a condition precedent to coverage. They are two entirely different things. Your letter also overlooks that the Lee Group breached the Policy when it sued Underwriters before sitting for the EUO and before producing documents to support the loss.”

On September 13, 2013, the court held a hearing on Underwriters’ motion for summary judgment and took the matter under advisement. On September 23, 2013, the court denied Underwriters’ motion for summary judgment.

DISCUSSION

The issue is whether the trial court erred in denying Underwriters’ motion for summary judgment. Summary judgment is appropriate only where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

Underwriters argue that they are entitled to judgment as a matter of law based on Lee Group’s refusal to produce documents and sit for an EUO before suing Underwriters. They assert that they are entitled to judgment on all of Lee Group’s causes of action, “whether sounding in breach of contract, bad faith or for punitive damages, based on Lee Group’s breach of the Underwriters Policy Conditions.”  They contend that Lee Group’s breach prevented Underwriters from determining the basis for the $753,347 claim made in Lee Group’s May 24, 2012 letter, prevented them from concluding their claim investigation, and put them to the expense of this suit and appeal. Underwriters also appear to argue that Lee Group’s claims for bad faith and punitive damages fail as a matter of law because the “undisputed material facts establish that Lee Group breached the Underwriters Policy’s ‘Duties In the Event of Loss or Damage’ Condition and ‘Legal Action Against Us’ Condition by failing to produce requested documents and sit for an EUO….”

A contract for insurance is subject to the same rules of interpretation as other contracts. Thus, if the language in the insurance policy is clear and unambiguous, it should be given its plain and ordinary meaning. However, if the language of the policy is ambiguous, we may apply the rules of construction in interpreting the language. When an insurance policy contains an ambiguity, it should be strictly construed against the insurance company. A policy is ambiguous only if it is “susceptible to more than one interpretation and reasonably intelligent persons would differ as to its meaning.”

Based upon review of the designated evidence, issues of material fact exist as to whether Underwriters acted in bad faith or breached the contract, and the court was unable to say that the trial court abused its discretion in denying Underwriters’ motion for summary judgment.

To the extent that Underwriters argue summary judgment is proper based on Lee Group’s refusal to produce documents and sit for an EUO before suing Underwriters, the court noted that a party first guilty of a material breach of contract may not maintain an action against the other party or seek to enforce the contract against the other party should that party subsequently breach the contract. Accordingly, because the court concluded that issues of material fact exist because Underwriters did not eliminate the claim that they breached the contract or whether Underwriters acted in bad faith. As a result the appellate court concluded that the trial court did not abuse its discretion in denying Underwriters’ motion for summary judgment.

ZALMA OPINION

When a prospective insured misrepresents material facts in the application for insurance, as did the Lee Group in this case about the value of the property, the proper remedy available to an insurer is rescission. The insurer declares the policy void from its inception and offers to return the premium paid or returns the premium paid. That is what the leading underwriter suggested when it determined that Lee Group misrepresented a material fact in the application. Counsel for the Underwriters took what appeared to be an easy course, summary judgment based on a clear breach of the contract, the refusal to appear for EUO. This should have been sufficient, as a matter of law, to deny the claim for breach of contract. Because of the weakness in the motion for summary judgment, and the fact that many judges are loathe to grant motions for summary judgment, it was denied and the appellate court found an issue of fact, that is, whether Underwriters had breached the contract before the breach by the insured. The case teaches that even when there is an excellent ground for summary judgment failure to properly document the motion and failure to assert the material misrepresentations led to a suit that will need to be resolved at trial.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Thanksgiving

What I am Thankful For

My family and I have much to be thankful for this year, not the least of which is you, my friends, clients and readers of my blog “Zalma on Insurance”, “Zalma’s Insurance Fraud Letter,” and my other writings.We Americans have celebrated Thanksgiving when we were just a colony of Great Britain to give thanks for the good things in life at least once a year. It took Abraham Lincoln, our greatest President, to make it an official holiday. The Thanksgiving holiday gives me the opportunity to consider the blessings my family and I have received and to thank all who have made it possible.

Please allow me this opportunity to explain to you all the things I, and my family, can give thanks for:

 

  1. I have loved my wife of 47 years since she was 9 and I was 12 when we first met. I am thankful that she still loves me and lets me make clear every day that I love her more now than I did when I was 12.
  2. My three adult children who are successes in their own right.
  3. That my three children and one grandson live nearby, put up with my wife and me, and are healthy, successful, and mostly happy in what they do.
  4. My clients who, for the more than 42 years have allowed me to earn a living doing what I love.
  5. My parents and grandparents of blessed memory, for having the good sense to leave the Mediterranean at the beginning of the 20th Century so we could avoid the Holocaust.
  6. My country for giving me a place to live and work in peace and complain about it without fear.
  7. Those of you who read what I write and gain something from it.
  8. Seventy two years of mostly good health that gives me the ability to continue to work – albeit at a reduced rate.
  9. The hundreds of friends I have never met but with whom the Internet has allowed me to communicate in parts of the world I have never visited.
  10. My publishers and editors who help me make whatever I write intelligible and in proper English.
  11. The wonder of the Internet that allows me to publish E-books, ZIFL and my blog instantly on line.
  12. That my family can get together tomorrow to express our thanks for each other and our happiness this year again without a need for anything but enjoying each other’s company.
  13. That most of you can gather with your families to express your thanks.

When I started practicing law in 1972 new technology allowed a typewriter to erase errors from the keyboard, legal research was done in a large library and took days to find support for an issue, and I needed three professional legal secretaries to keep up with my dictation. Now, using modern technology, I can do the same legal research in 30 minutes on line, need no secretary, and can operate my law firm and consulting business with no employees.

I hope, on this Thanksgiving weekend, that you can join my family and me remembering that it is more important to think about our blessings and those things that we have to be thankful for than to get in line for “Black Friday” to buy an inexpensive flat screen t.v. or tablet computer.

Thanksgiving is a day to think about the good things we have in this life, eat a great deal of food, and enjoy the company of family and friends. I cannot express how thankful I am for all of you and that I have been able to enjoy the life my forbears could not even dream of achieving.

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Lie To Your Insurer – Lose All Coverage

Total Mold Exclusion Effective

When a contractor installed a freezer that was improperly installed, leaked into an adjoining premises, and infested the property with mold the insured presented a claim for defense and indemnity. In Canopius U.S. Ins., Inc. v. Cresco, Inc., Slip Copy, 2014 WL 5107063 (E.D.Va., Oct. 6, 2014) the United States District Court for the Eastern District of Virginia was called upon to resolve the coverage issues raised by the insurer in its declaratory judgment action regarding misrepresentations in the application for insurance and the effectiveness of a Total Mold Exclusion.

THE POLICY

Plaintiff Canopius issued defendant Cresco a commercial general liability insurance policy (“Canopius Policy”). The Canopius Policy includes a declarations page and related supplements that contain pertinent information provided by the insured Cresco as part of its application for insurance.

On its application, Cresco made representations regarding its scope of business and its gross receipts. Specifically, Cresco represented that the company’s scope of business was limited to “trim work” and “painting” services with classifications for carpentry and painting interior.  Cresco also indicated on the application form that the company does not “draw plans, designs, or specifications,” it does not perform “demolition work” or “roofing work” and it does not “install, service, or demonstrate products” or “perform structural work.”  In addition, Cresco made representations that it is an “artisan contractor—100%” and was not a subcontractor or general contractor. Moreover, Cresco represented that its gross receipts were $65,000 for the 2012 application year and $95,000 for the previous year.

The policy contains a “Total Mold Exclusion” clause which excludes coverage for any “bodily injury,” “property damage,” “advertising injury,” and “medical payments” arising out of, resulting from or caused by any “mold.”

FACTUAL BACKGROUND

The underlying incident arises from property damage stemming from the installation of a walk-in freezer performed by one of Cresco’s subcontractors. The damage is alleged to have occurred on or about July 4, 2013 on adjacent properties owned by defendant WTLJ and Pacific located in Centreville, Virginia.

Defendant Pacific asserts that as a result of the freezer installation, condensation from the freezer entered into its unit causing water damage and mold to the drywall. Plaintiff anticipates a claim for indemnity or contribution against Cresco for the work performed. Plaintiff asserts that it is not obligated to defend or indemnify Cresco because the damages alleged and the work performed fall outside the scope of the policy issued to Cresco.

Investigation and discovery in the case established that the representations made by Cresco in the application were material and false.

THE MOLD EXCLUSION CLAUSE BARS THE MOLD CLAIMS

Defendants WTLJ and Pacific have made mold-related claims in connection to the freezer installation. The magistrate judge finds that these mold claims are not covered under the Canopius policy. The policy contains a Total Mold Exclusion provision that specifically excludes any property damage or bodily injury claims related to mold including costs related to mold remediation. Accordingly, the mold-related property damage for which WTLJ and Pacific seek damages is expressly excluded from coverage under the policy.

In addition, the court found, that:

1)     Defendant Cresco, Inc.’s material misrepresentations on its application for insurance result in the Canopius Policy being void ab initio.

2)     Any matters alleged by the defendants Cresco, Inc.; Pacific Realty, Inc.; TK Services, Inc.; and The World of Tous Les Jours, Inc. and any potential cross-claims alleged against Crecso, Inc. that arise from work that falls outside the classifications limitations in the Canopius Policy are excluded from coverage.

3)     The mold allegations of Pacific Realty, Inc. fall within the specific mold exclusion of the policy and are therefore excluded from coverage.

4)     Plaintiff is not obligated to defendant Cresco, Inc. or any other individual or entity with respect to the claims made or any anticipated claims, including the cross-claims.

5)     Plaintiff is not obligated to indemnify Cresco, Inc. or any other individual or entity with respect to the claims, including cross-claims.

6)     As necessary and otherwise proper, all defendants named herein are bound by the Court’s determinations herein, and have no right to make any claim under the Canopius Policy for any losses or damages related to the incident at issue.

ZALMA OPINION

This case is an example of an insurer acting proactively. When the claim was reported to it it conducted a complete and thorough investigation. It found that the claim involved allegations that its insured caused mold damage, a cause and type of damage specifically excluded. It also learned that representations upon which the insurer relied in deciding to insure the insured was false. Because it anticipated problems it immediately filed a suit for declaratory relief. The court agreed that there was no ground for coverage under the policy, because of the total mold exclusion and that, regardless, the entire policy was void from its inception because the insured lied to the insurer when it acquired the policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Mold Damage Requires Proof

First Party Policy Does Not Cover Bodily Injury of Insured

The Phelpses owned a two-story residence in Somerset, Kentucky, that was insured by Kentucky Farm Bureau Mutual Insurance Company (KFB). The residence had been in foreclosure since May 21, 2001. The mortgagee, Greentree Servicing, LLC, purchased its own insurance policy on the residence through American Reliable in order to protect its interests.

On or about December 10, 2008, a windstorm caused shingles to blow off the roof of the residence. The Phelpses also alleged that rain water entered through the damaged roof and caused water damage in multiple rooms. They also alleged that this water damage resulted in mold damage to the residence and personal property. They also claimed that the mold exacerbated Mrs. Phelps’s preexisting asthma condition. KFB sent a claims adjuster and contractor to the residence a couple of days after the storm to inspect the damage. KFB arranged for a repairman to patch the roof shortly after the storm.

The Phelpses later alleged that a second windstorm occurred on February 11, 2009, and caused similar damage. The Phelpses made a claim on their KFB policy and demanded that the residence and personal property be declared a total loss. They requested that they be paid their policy limits of $425,100 for the dwelling and $212,550 for the personal property. They also asked to be compensated for Mrs. Phelps’s personal injury.

KFB made some payments to the Phelpses. These payments totaled $58,110. KFB eventually learned that the Phelpses had made an insurance claim in 2004 for wind and water damage to Safeco Insurance. KFB believed that much of the damage alleged by the Phelpses was preexisting and refused to make any more payments.

The Phelpses filed suit. KFB argued that the Phelpses’ claim exceeded the actual damage and that most of the damage was preexisting. KFB did not seek to recover any money it had already paid to the Phelpses. The jury found that the Phelpses were not entitled to any more than the $58,100 they were already paid.

Around two years after the initial insurance claim, counsel for KFB discovered that additional shingles were missing from the roof of the residence. KFB requested that the court allow its experts to inspect the residence again, which the court permitted. After this inspection, the court allowed KFB to supplement its discovery responses and include new expert opinions.
The American Reliable policy had an escape clause which would preclude the Phelpses from recovering under that policy. The clause stated: “If at the time of the loss there is other valid and collectible insurance on the covered property, this policy will be void.”

In Phelps v. American Reliable Insurance Company, Not Reported in S.W.3d, 2014 WL 6113365 (Ky.App., 11/14/14) the Kentucky Court of Appeal was asked to reverse the trial court.

ANALYSIS

The Phelpses’ first argument on appeal is that the trial court erred in failing to rule as a matter of law on the issue of coverage and failed to properly instruct the jury on this issue. The record is over 2,000 pages long and includes 8 days worth of video recordings.

It is well established that construction and interpretation of a written instrument are questions of law for the court. Although the trial court did not grant a directed verdict on this issue as the plaintiffs requested, it still properly instructed the jury on this issue.

The Phelpses argued on appeal that the trial court improperly excluded Mr. Phelps’s testimony about statements made to him by Richard Madison, an employee of Environmental Safety Technologies, who inspected the residence for mold. During Mr. Phelps’s testimony, he was explaining that he attempted to remove the mold from the residence himself, but stopped the work because of what he had been told by Mr. Madison. Defense counsel objected on the basis of hearsay and the trial court sustained the objection.

We are unable to consider this issue because there was no testimony set forth in the record to inform us (proffered outside the presence of the jury) as to what Mr. Madison told Mr. Phelps. Furthermore, the Phelpses do not state in their brief what Mr. Madison said to Mr. Phelps.

The Phelpses argue that Kentucky has deemed escape clauses such as the one at issue to be against public policy. The Phelpses would have us hold that escape clauses such as the one at issue are always against public policy; however, they cite to no Kentucky case law supporting this position and the court was unable to find such.

Because the Phelpses were able to collect on their KFB insurance, the American Reliable escape clause was invoked and they had no case against American Reliable.

ZALMA OPINION

Mold, under some policies, can result in indemnity for damages caused by or resulting from mold infestation. However, if the insured is either unable or unwilling to prove the existence of mold or the existence of mold caused by an insured against peril, that claim will fail. In this case the insureds had a mold expert who told them about the infestation and need for remediation. Rather than call the expert at trial the plaintiffs unsuccessfully failed to call the expert but attempted to get his opinions in by use of hearsay testimony from Mr. Phelps. To add insult to the injury the plaintiffs did not proffer what the expert would have said outside the hearing of the jury and deprived the court of the ability to deal with the issue.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Illusory Policy Disfavored

Ambiguous Policy Term Construed Against Insurer

Insurance companies must, when dealing with a claim, deal with the policy written not the policy they intended to write. When an insurer writes a policy that contains an ambiguous exclusion that it cannot prove reasonably applies to the facts of the case it will always be construed against the insurer and in favor of coverage.

In Century Sur. Co. v. Gene Pira, Inc., Not Reported in F.Supp.3d, 2014 WL 6474987 (C.D.Cal., 11/19/2014) the US District Court for the Central District of California was presented with motions for summary judgment filed by Plaintiff Century Surety Company (“Century” or “Plaintiff”), Defendant Gene Pira, Inc. (“Pira”), and Defendants Lexington Insurance Company (“Lexington”) and Chartis Property Casualty Company (“Chartis”). The motions dealt with a request that it determine whether insurance applied to damage caused by a water hammer that flooded a hotel while testing a fire sprinkler system.

BACKGROUND

The facts underlying the action are largely undisputed, and arise from state court proceedings in Lexington, et al. v. Gene Pira, Inc., Los Angeles Superior Court Case No. BC507142.Pira is a commercial plumbing contractor. Century issued Pira a commercial general liability policy (“the Policy”) for a one-year period beginning on December 11, 2009.

The Policy

The Policy included several endorsements, each of which excluded certain types of claims from coverage. One such endorsement was a “Testing or Consulting Errors and Omissions” exclusion, which stated that the Policy did not apply to injuries “arising out of [ ] an error, omission, defect, or deficiency in [ ] any test performed ….” A separate, “Professional” exclusion disclaimed coverage for injuries “which would not have occurred … but for the rendering or failure to render any of the following professional services … [, including] [i]nspection, construction management, or engineering services.”

The Policy also contained an integration clause, which stated, “This policy contains all the agreements between [Pira] and [Century] concerning the insurance afforded…. This policy’s terms can be amended or waved only be endorsement issued by [Century] and made a part of this policy.]

Inquiries to Agent

On July 27, 2010, over seven months after Century issued the Policy, Pira’s independent insurance broker, Andrew Breckenridge, contacted Century’s agent, Dan Cullinan, by e-mail, writing “Please have the ‘testing’ exclusion removed from the policy as we stated clearly … that as a plumber they do some ‘backflow testing.’ If this is two different things we are talking about and they are covered let me know either way.” In response, Century’s agent, Cullinan, wrote, “This is just excluding E[rror] & O[mission] coverage,” and attached the testing exclusion once more.  Cullinan did not issue an endorsement removing the testing provision. Pira’s agent replied, “I take your response as E & O isn[‘]t covered but [b]ackflow testing is and its [sic] ok….”

The Loss

As alleged in the underlying state action, approximately two months after the inquiry about the exclusion, on September 21, 2010, Pira conducted a fire pump test on sprinkler lines at a Four Seasons Hotel in Los Angeles. During the test, the formation of a water hammer caused sprinkler heads in the hotel owners’ penthouse residences to activate. The state complaint alleges that the water hammer formed when Pira re-pressurized the sprinkler system too quickly. The fire sprinkler discharge caused over $2 million in damage.

As a result of the water damage, the hotel made a claim to its insurer, Lexington, and the hotel owners, whose residences were damaged, made separate claims to their insurer, Chartis. Chartis and Lexington subrogated to their respective insureds’ rights, and brought the underlying state suit against Pira.

Century defended Pira against the state suit under a reservation of rights, and filed this action for a declaratory judgment that, as a result of either the Policy’s testing or professional exclusions, or both, Century has no duty to defend or indemnify Pira.

DISCUSSION

The question presented is whether the Policy covers Pira’s acts at the hotel, notwithstanding the testing and professional services exclusions.

Interpretation of an insurance policy presents a question of law governed by general rules of contract interpretation. Accordingly, it is an insurer’s burden to demonstrate that an exclusionary clause, which is interpreted narrowly against the insurer, plainly, clearly, and conspicuously disclaims coverage.

Century’s exclusive focus on the word “test,” however, ignores the full context in which the general commercial liability Policy was issued. Century does not dispute that Pira was a commercial plumber, or that the Policy covered claims which could be brought against a plumber. Century concedes, for example, that damages resulting from a faulty bathtub installation, failure to shut off water before attempting a pipe repair, or a welding-related fire would likely be covered.

As Defendants point out, however, examination and evaluation are integral parts of plumbing work, including the type of installation and repair projects Century lists as exemplars of covered activities. Were “test” to be interpreted as Century suggests, Defendants argue, no type of plumbing would be covered, rendering Pira’s commercial liability coverage wholly illusory.

The District court agreed. “Insurance coverage is deemed illusory when the insured receives no benefit under the policy.” Jeff Tracy, Inc. v. U.S. Specialty Ins. Co., 636 F.Supp.2d 995 (C.D.Cal.2009). Insurance policies may not provide illusory coverage. The District Court found it unclear how Pira could undertake any plumbing activity without examining, evaluating, or observing the item upon which he was engaged to work. Similar logic applies to the professional services exception.

The exclusion’s lack of clarity is illustrated by the exchange between Pira’s agent and Century’s agent. Prior to the loss at issue here, Pira’s agent communicated one interpretation to Century. Pira’s agent asked that the testing exclusion be removed, as Pira admittedly conducted “backflow testing.” Pira’s agent also drew attention to the ambiguity of the exclusion, pointing out the possibility that “testing,” as used in the policy, and the “backflow testing” conducted by Pira might be “two different things,” and asking Century’s agent to clarify. Century’s agent did not disabuse Pira’s agent of any misconception regarding the term “testing,” but rather, at best, reinforced the ambiguity by responding that the testing exclusion was “just excluding E[rror] & O[mission] coverage.”  In other words, Pira’s agent asked whether the testing exclusion covered a broader or narrower set of possibilities and Century’s agent responded that the exclusion applied “just” to a certain set. It was, therefore, reasonable for Pira to interpret the Policy as covering the types of testing he conducted.

Pira’s question regarding the extent of the exclusion, Century’s agent’s response, and the tensions between Century’s all-encompassing dictionary definition of testing and its alternative “stand alone testing” construction illustrate that the meaning of the testing exclusion was ambiguous. To the extent Century intended the exclusion to apply to plumbing tests unconnected to some contemporaneous repair, it could have drafted language to that effect with relative ease. Absent any such elucidation or definition of the word “test,” its meaning in the Policy is ambiguous, and must be construed in Pira’s favor.

Century’s Motion was denied. Pira’s motion and Chartis and Lexington’s Motion were both granted.

ZALMA OPINION

This case teaches that insurance companies must carefully draft insurance policies to mean what they intend. It also notes that a simple special definition of the term “test” could have established the intent of the insurer without confusion. Finally, when an inquiry about coverage is presented to an insurer’s representative, the insurer must make sure that the answer is correct and comports with how the claims and legal department will act in the event of a loss. Clearly, in this case, the insurer failed to have its representative before the loss give the same answer its claims department used after the loss.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “Zalma on California Claims

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Equitable Fraud Supports Rescission

It Doesn’t Pay to Lie To Your Insurer Even If You Didn’t Mean It

An insurer sought declaratory relief because of several alleged misrepresentations that a recreational boat owner made on an application form when obtaining an insurance policy for his vessel. After the boat caught fire and was damaged, the owner filed a claim with the insurer. The insurer disclaimed coverage and cancelled the policy upon determining that the owner had made several false statements on his application. In moving for that relief, the insurer invoked alternative legal theories of breach of contract, equitable fraud, and the common-law doctrine of “uberrimae fidei.” The insurer also sought damages and other remedies from the owner under the Insurance Fraud Protection Act (“IFPA”). In turn, the owner sued the insurer, alleging, among other things, its bad faith denial of coverage.

After the two lawsuits were consolidated and discovery was completed, the trial court granted summary judgment in the insurer’s favor and dismissed with prejudice the boat owner’s own affirmative claims. The court awarded the insurer a total sum of $119,992.02 under the IFPA, including its costs of investigation and counsel fees.

FACTS

The recreational vessel in question is a 1977 Uniflite cruiser known as “Sanity Chek.” Appellant Gary M. Hochschild purchased the used boat in 1996 from Essex Boat Sales at a marina in Baltimore. After certain repairs were done, Hochschild eventually docked the boat in New Jersey, where he resides.

On or about June 30, 2008, Hochschild completed, signed, and submitted a one-page, two-sided application form for marine insurance with Continental. The standardized form contains a series of typewritten questions asking about the boat owner, the vessel itself, and the boat’s location and intended use. The form also sets forth various special conditions and other information, including details about additional coverages, discounts, and premiums.
At the bottom of the back page of the policy application, the following language appears in italicized print: “While my signature verifies this information to be true, this application does not bind me to accept insurance, nor does it bind Boat U.S. or the Insurance Company to accept me as an applicant for insurance. …  Omitting, misrepresenting or stating information falsely on this application constitutes insurance fraud, voids all coverage, and is subject to criminal and civil penalties. …” Hochschild’s signature and the date appear immediately below this italicized language.
Continental established the falsity of  five separate responses on Hochschild’s application that it contends were false or misleading. The five items concern: (1) boat purchase price; (2) prior claims or losses; (3) prior damage; (4) previous insurance company and prior premium; and (5) prior insurance refusals or cancellations.

MISREPRESENTATIONS

The record shows that Hochschild’s vessel had an extensive prior history of claims or losses, including some that potentially occurred during the three-year pre-application period inquired about on the form.

The court noted that it was readily apparent that Hochschild’s responses on the form —— disclosing only a previous theft and vandalism claim of an unspecified amount “over three years ago,” and “small damage” in the Erie Canal, in or near “Champlain Lock number six”  —— do not accurately reflect his actual claim history.

The record shows that Hochschild did have prior marine insurance for the vessel with at least two successive companies: Travelers and Continental. The Travelers coverage existed prior to 2002. In 2002, Hochschild obtained a Continental policy, but that policy lapsed approximately in the 2005–06 time frame.

ANALYSIS

Uberrimae fidei has its roots in British jurisprudence. The doctrine has historically been applied to certain types of insurance contracts in the United States, dating back to 1828. The doctrine imposes the highest duty on parties to an insurance contract to disclose facts that materially affect the insurer’s risk. Several federal cases have applied the duty of uberrimae fidei in the marine insurance setting. Under uberrimae fidei, any failure to disclose a material fact not known by the underwriter that is, or should be, within the knowledge of the insured party, is grounds for rescission of the policy, even if the omission or misstatement is the result of the insured’s mistake, accident, or forgetfulness.

The second alternative basis for cancellation invoked by Continental is breach of contract.  The insurance policy that was issued to Hochschild contains the following anti-fraud language: “There is no coverage from the beginning of this policy if you or your agent has omitted, concealed, misrepresented, sworn falsely, or attempted fraud in reference to any matter relating to this insurance before or after any loss.”

The contract provisions do not require that the insured misrepresent or omit facts knowingly, or with an intent to deceive the insurer, in order to enable Continental to cancel the policy.

Both the doctrine of uberrimae fidei and the anti-fraud language included in Continental’s standardized policy form and contract allow the cancellation of coverage because of material misrepresentations or omissions, even in instances where an insured has not knowingly or intentionally tried to deceive the insurer. Those legal theories each impose a high degree of care upon an insured to assure the utmost accuracy in the responses that he or she provides on his or her policy application.

Unlike common-law legal fraud, the concept of equitable fraud does not require that a defendant make misstatements with an intent to deceive the plaintiff. Instead, equitable fraud requires proof of only three elements: (1) material misrepresentation, (2) a defendant’s intent that a plaintiff rely on those statements, and (3) plaintiff’s detrimental reliance.

This record, even when considered in a light most favorable to Hochschild, clearly show that his false or misleading responses to several objective questions on the 2008 application satisfy the three classic elements of equitable fraud. There are no genuine issues of material fact that need to be tried to a jury as to those elements.

Several of the misrepresentations Hochschild made on the 2008 application form are unquestionably material. Information provided to an insurer is material if a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.  The questions posed on the application form probed into relevant questions about the value of Hochschild’s vessel, any prior damage to the vessel, its claims history for the preceding three years, the identity of prior insurers, and the insured’s track record in maintaining past policies.

These are all topics that logically would affect the underwriting process, both as to the carrier’s decision to insure the vessel at all and, if so, as to what premium to charge.

It is obvious from the circumstances that Hochschild submitted his answers on the 2008 application with an intent and expectation that Continental would rely on his answers.

The uncontroverted record establishes that Continental relied on Hochschild’s material misrepresentations on the completed application to its detriment. Continental’s reliance was corroborated by the certification of James Holler, a Senior Vice President who heads Continental’s underwriting department. Holler certified that Continental would not have insured this vessel “at all” if Hochschild had supplied accurate answers responding to the five queries at issue.

Given this vessel’s checkered history with multiple prior incidents of damage and claims, it is entirely logical to accept Holler’s unrebutted testimony that Continental would not, in fact, have underwritten the 2008–09 policy for Sanity Chek if Hochschild had truthfully disclosed that material background in his application responses.

Because all three elements of equitable fraud are manifestly established by the record, the trial court appropriately granted summary judgment upholding Continental’s cancellation of coverage and its denial of Hochschild’s fire loss claim.

The court remanded for a trial on Continental’s IFPA claim, in which the sole liability question will center upon Hochschild’s alleged knowledge of the falsity of the material misrepresentations that appeared on his 2008 policy form.

ZALMA OPINION

The idea of equitable fraud supporting rescission is followed in several states. In a situation like this one, it should be obvious. The insured lied on the application and the insurer, relying on the false statements, issued a policy. The court found, rightly, that whether he intended to deceive or not, the insurer was deceived and had the right to rescission. As to fees under the IFPA the court requires a trial to prove the misrepresentations were intentional. If so, Continental will obtain money from its putative insured. If not, it will not. In no event will the insured recover anything.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

Mr. Zalma e-book, “Zalma on California Claims

 

Posted in Zalma on Insurance | 1 Comment

Agent’s Obligations Limited

Insured’s Failure of Due Diligence Eliminates Case Against Agent

People who buy insurance are trusting souls. They believe that if they ask an insurance agent to obtain a homeowners policy for them that the agent will do everything necessary to obtain the best, most comprehensive and least expensive insurance available. However, that is not how the law looks at the situation.

In Siegfried v. Pacific Specialty Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 5861339 (Cal.App. 2 Dist., 11/13/14) Elaine Siegfried appeals from the judgment entered following the trial court’s orders granting summary judgment in favor of Pacific Specialty Insurance Company (Pacific Specialty) and Cappuccino Insurance Agency (Cappuccino).

Appellant purchased a homeowner’s insurance policy from Pacific Specialty through Cappuccino. She filed a claim with Pacific Specialty after her home was destroyed in a fire, but she requested an appraisal when Pacific Specialty paid an amount less than the policy limit. After Pacific Specialty paid the policy limit, appellant sought payment under her extended replacement cost coverage. Pacific Specialty denied the claim. Appellant filed a complaint asserting negligence by Cappuccino and breach of contract and breach of the implied covenant of good faith and fair dealing by Pacific Specialty.

FACTUAL BACKGROUND

The Homeowner’s Insurance Policy

Appellant purchased residential property in West Hills, California in 1994 and has maintained homeowner’s insurance on the property since she purchased it. In 2008, appellant purchased a homeowner’s insurance policy for the property from Pacific Specialty through Joey Cappuccino (Joey), whom she knew through his work as a mortgage broker. Appellant had occasionally worked for Joey as a real estate appraiser, and she considered him a work colleague.

Appellant contacted Joey when her policy came up for renewal, and he asked appellant for the address and size of her home “so he could run the numbers.” Other than giving him the address and size of her home, appellant did not speak with Joey about the amount of insurance she needed. She did not ask Joey about the amount of insurance she needed, and she did not recall him asking her how much insurance she wanted. Appellant trusted Joey and assumed he would choose the correct amount of coverage for her.

Appellant’s application for the insurance policy described her home as “Standard,” which resulted in an estimated value of $144,375, based on Pacific Specialty’s cost estimator. Including estimates for a garage and fireplace, the total estimated replacement cost was $171,000. The application included “Extended Replacement Cost Dwelling” coverage of 20 percent at a cost of $34. It was undisputed that Joey did not explain the insurance policy, the replacement cost, or the extended replacement cost coverage to appellant.

The application contained a statutorily-mandated “Replacement Cost Disclosure,” which stated that “Limited Replacement Cost Coverage” applied to appellant’s policy, and explained as follows: “In the event of any covered loss to your home, the insurance company will pay to repair or replace the damaged or destroyed dwelling with like or equivalent construction up to a specified percentage over the policy’s limits. See the declarations page of your policy for the limit that applies to your dwelling. Appellant did not read the disclosure.

The policy warned that “it is ultimately the insured’s responsibility to obtain adequate insurance coverage. If you feel that the dwelling replacement cost estimated above is insufficient, you should increase the coverage to the appropriate amount.”

Appellant scanned the policy and did not read the details. She did not look at the policy to see the amount of the insurance. Appellant renewed the homeowner’s insurance policy in May 2010. She paid for the renewal without examining the policy, based on the assumptions that the insurance was “working … fine so far,” and that she could trust Joey and Pacific Specialty. The renewed policy increased the estimated replacement cost to $184,000. As pertinent here, the renewal provided a limit of $190,000 under Coverage A, Dwelling, plus 25 percent extended replacement cost coverage.

The Insurance Claim

On December 19, 2010, a fire caused extensive damage to appellant’s home. Appellant submitted a claim for the loss to Pacific Specialty.  Appellant and the insurer could not agree on the amount of loss and submitted their differences to appraisal.  The appraisal panel determined the replacement cost value of the home to be $273,813.04. Based on the appraisal, Pacific Specialty paid an additional $8,742.07 to reach the policy limit of $190,000, but stated that it would not make any further payments.

In December 2011, appellant sought payment under her extended replacement cost coverage. Pacific Specialty denied appellant’s claim for extended replacement cost coverage, stating that it “must respectfully deny coverage under the Extended Replacement Cost endorsement because the home was not insured to its full replacement cost immediately prior to the loss.”

The Lawsuit

Appellant sued seeking damages for broker negligence against Cappuccino. Appellant alleged that Cappuccino was obligated to use reasonable care in procuring insurance coverage and that it breached its duty by failing to obtain adequate coverage and failing to discuss the extended replacement cost coverage with her.

DISCUSSION

Negligence Claim Against Cappuccino

Appellant contends that the trial court erred in granting summary judgment in favor of Cappuccino on her negligence claim.

Ordinarily, an insurance agent assumes only those duties normally found in any agency relationship. This includes the obligation to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. An insurance agent generally has no duty to volunteer that an insured should obtain different or additional insurance coverage. The rule changes when—but only when—one of the following three things happens: (a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided, (b) there is a request or inquiry by the insured for a particular type or extent of coverage, or (c) the agent assumes an additional duty by either express agreement or by “holding himself out” as having expertise in a given field of insurance being sought by the insured.

There is no evidence that Cappuccino assumed a greater duty to appellant by express agreement or by holding itself out as having special expertise.
Although appellant presented evidence that she never questioned Joey or asked him any questions because she trusted him and assumed he would provide adequate coverage for her, she presented no evidence that he assumed a special duty to her. Despite her testimony that she assumed he would provide her “full” coverage in case of a loss, she never testified that she communicated to Joey what her expectations were regarding the coverage. Nor did she ask him any questions regarding the coverage.

Appellant has presented no evidence that Joey or Cappuccino ever did or said anything to make her believe that Cappuccino was an expert in homeowner’s insurance or was assuming a special duty of care to her.

Summary judgment in favor of the agent was granted. Separately, the court found that there were issues of fact concerning the claim that Pacific Specialty acted in bad faith and reversed the summary judgment in its favor.

ZALMA OPINION

The California Appellate court, following the rule of law in almost all states that an insurance agent’s liability is limited to obtaining the insurance that the insured asks for unless the agent assumes extra duties. The agent in this case did not and the Appellant failure to use due diligence to obtain the insurance she needed was fatal to her case against the agent. She still has a case against the insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Insurer’s Language Used Against It

Terms Defined for Liability Policy Should Not be Used In First Party Cover

Writing a clear and unambiguous insurance contract is a difficult task. To avoid problems insurers define special terms to prevent confusion. In Strauss v. Chubb Indem. Ins. Co., — F.3d —-, 2014 WL 6435314 (C.A.7 (Wis.) 11/18/14) the insurer’s definition of “occurrence” for the third party portion of a homeowners policy caused it difficulty when it used the same term in the first party portion of the policy.

FACTS

Randal and Diane Strauss constructed a home in Mequon, Wisconsin in 1994. The Strausses insured the home with a number of policies (collectively, “the Policy”) issued by Chubb Indemnity Insurance Company, Vigilant Insurance Company, Federal Insurance Company, and Great Northern Insurance Company (collectively, “the Chubb Defendants”) from October 1994 to October 2005. Water infiltrated and damaged the home through a defect present since the completion of construction; however, the damage went undiscovered until 2010, well after the Policy expired.

When the Strausses submitted a claim to the Chubb Defendants seeking recovery for the damage, they refused coverage, contending that because the damage manifested in 2010 and the “manifestation” trigger applies to first-party property insurance, it could not be responsible for the damage. The Chubb Defendants additionally asserted that the claim was submitted well beyond the applicable statute of limitations. The Strausses sued. The district court concluded that the “continuous” trigger theory applied due to the language of the Policy such that coverage existed for the entire loss. Because the continuous trigger theory applied, the district court found that the claims were not time-barred. The Chubb Defendants now appeal, arguing that (1) the manifestation trigger theory applies to first-party property insurance policies universally and (2) the Strausses’ suit was not timely filed. For the following reasons, we affirm.

The Strausses built their home in Mequon, Wisconsin in 1994. To insure the home, they purchased a “Chubb Masterpiece Deluxe Home Coverage” first-party property insurance policy. The Policy was issued by the Chubb Defendants over the years, from the time of construction in October 1994 through October 2005.  From 2005 onward, the Strausses obtained insurance coverage for the home from other providers.

The Policy states that coverage is limited “only to occurrences that take place while this policy is in effect.” “Occurrence” is defined as “a loss or accident to which this insurance applies occurring within the policy period. Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.” Under the Policy taken out by the Strausses, a “ ‘covered loss’ includes all risk of physical loss to [the] house or other property … unless stated otherwise or an exclusion applies.” In addition, the Policy includes a “Legal Action Against Us” clause, mandating that any action against the Chubb Defendants be brought “within one year after a loss occurs.”

In October 2010, the Strausses discovered that water infiltration had been causing damage within the building envelope of the home. The infiltration was ongoing and progressive in nature, beginning around the time of original construction and continuously occurring with each subsequent rainfall. On December 22, 2010, the Strausses submitted a claim to the Chubb Defendants for the discovered damage. The Strausses filed suit in federal court on October 19, 2011, within one year of their discovery of the damage caused by the water infiltration.

DISCUSSION

The Seventh Circuit construed the Policy as it would be understood by a reasonable person in the Strausses’ position. It refused to interpret the Policy to provide coverage for risks the Chubb Defendants did not contemplate and for which they did not receive premiums. In Wisconsin, insurance policies are interpreted under the same rules that apply to contract construction. The primary objective in interpreting a contract is to ascertain and carry out the intentions of the parties.

COVERAGE

For an insurance policy to potentially provide coverage to an insured, a triggering event must occur during the policy’s period of enforcement. Because a triggering event is necessary to implicate coverage, the core issue in this case is how coverage is triggered under the Policy for the water infiltration damage to the home.

Wisconsin has described four different theories to determine whether a “triggering” event occurred during a relevant policy period: “The ‘exposure’ theory fixes the date of injury as the date on which the injury-producing agent first contacted the body or the date on which pollution began. The ‘manifestation’ theory holds that the compensable injury does not occur until it manifests itself in the form of a diagnosable disease or ascertainable property damage. The ‘continuous trigger’ theory, also known as the ‘triple trigger’ theory, provides that the injury occurs continuously from exposure until manifestation. Finally, the ‘injury-in-fact’ theory allows the finder of fact to place the injury at any point in time that the effects of exposure resulted in actual and compensable injury.”

The Chubb Defendants urged the court to impose the manifestation trigger theory, primarily arguing that the continuous trigger theory should be limited to third-party coverage cases and that the manifestation trigger is the only trigger suitable to analyzing first-party property insurance policies. They cite a variety of cases from jurisdictions across the country utilizing the manifestation trigger in this context; however, noticeably absent from this list is any decision from a Wisconsin court.

The Seventh Circuit noted that it sits as a court, not as a legislature, It is not its province as a federal appellate court to fashion for Wisconsin what the court was certain many would say was a wise and progressive social policy.

The Chubb Defendants’ argument fails not only because Wisconsin courts have never adopted a rule that applies the manifestation trigger independent of the language found in a policy in the first-party context nor exiled the continuous trigger theory to the third-party liability landscape, but also because Wisconsin has unequivocally held that the language of a policy guides the analysis and determines whether coverage exists.

Turning to the language of the Policy as mandated by Wisconsin case law, the Seventh Circuit found that the provisions found in the Policy require the application of the continuous trigger theory.  The Policy covers “all risk of physical loss to [the] house or other property covered under this part of [the Policy], unless stated otherwise or an exclusion applies.” The Policy applies “only to occurrences that take place while this policy is in effect.” (emphasis added)

“Occurrence” is a defined term, meaning “a loss or accident to which this insurance applies occurring within the policy period. Continuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence.”

These provisions are not ambiguous: given the Chubb Defendants’ definition of “occurrence,” which includes “continuous or repeated exposure,” the parties “contemplated a long-lasting occurrence” that could give rise to a loss “over an extended period of time.” According to the Policy’s plain language, coverage is triggered when a “loss” “occurrence” takes place during the Policy’s term.

The only reasonable interpretation of the Policy’s “covered loss” definition is that physical damage to the property triggers coverage; otherwise this provision would be superfluous. While there was only one ongoing occurrence as defined by the Policy, there was continual, recurring damage to the property with each successive rainfall.

Creating a bright-line rule at the Chubb Defendants’ request because, as the Seventh Circuit concluded, “they perhaps regret the language they drafted for the Policy” would be an inappropriate interference with the parties’ rights to contract.  The Chubb Defendants were in the best position to dictate how the Policy would be activated, its coverage, and its exclusions. Letting the Chubb Defendants off the hook now would reward their sloppy drafting.

Here, because the loss was ongoing and occurred with each rainfall and because the Policy itself states that “[c]ontinuous or repeated exposure to substantially the same general conditions unless excluded is considered to be one occurrence,” the loss, for purposes of the statute of limitations, occurred all the way up until the damage manifested in October 2010. The parties do not dispute that the Strausses filed suit within one year of manifestation of the water infiltration.

ZALMA OPINION

All that Chubb needed to do to avoid the decision of the Seventh Circuit was to eliminate the defined term “occurrence” from the first party portion of their policy and replace it with a word like “loss” or a phrase like “physical damage to property.” The “occurrence” definition is traditional and a broad definition for third party liability coverages but does not – as this case makes clear – work for a first party property policy and extended coverage well beyond the intent of the drafters of the policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Not All Relatives Are “Resident Relatives”

A Person Cannot Reside Primarily in Two Places

In the 21st Century more grown, emancipated children are living with their parents. Automobile liability insurance policies are written to protect the parents insurer from providing coverage to a resident relative who has his own coverage when operating a motor vehicle owned by the parent or other relative.

In State Farm Mut. Auto. Ins. Co. v. Schaefer, Slip Copy, 2014 WL 5844043 (W.D.Mo., 11/12/14) State Farm sought declaratory judgment from the District Court for the Western District of Missouri under a policy issued to Carl Winters. Defendant Kimberly Schaefer was injured in a motor vehicle accident involving Craig Winters, who was driving a car insured by a State Farm policy that was issued to his father, Carl Winters.

ISSUE

The sole issue before the Court is whether, under the terms of Carl Winters’ insurance policy, his son, Craig Winters, was a “resident relative” at time of the accident. The Parties agree that if Craig Winters was a “resident relative,” then Schaeffer is not entitled to the additional $100,000 under Carl Winters’ policy; if he was not a “resident relative,” then State Farm will pay the additional $100,000.

BACKGROUND

On August 1, 2013, Craig Winters was in a motor vehicle accident with Defendant Kimberly Schaefer in Missouri. At the time of the accident, Craig was driving a vehicle owned by his father, Carl Winters, which was insured in Carl’s name by State Farm. The policy provided liability coverage up to $100,000. Craig was separately insured by State Farm under an automobile policy which provided liability coverage up to $250,000, and under a personal liability umbrella policy which provided coverage up to $1,000,000.

Following the accident, State Farm made a settlement payment on behalf of Craig and Carl Winters to Schaefer in the amount of $1,250,000. As part of the settlement agreement, Schaefer agreed to dismiss the underlying lawsuit against Craig and Carl Winters, but reserved the right to pursue the additional $100,000 of coverage under Carl’s State Farm automobile policy through an action for declaratory judgment.

CARL WINTERS’ POLICY

The provision at issue states, in part:

If Other Liability Coverage Applies
“1. If Liability Coverage provided by this policy and one or more other Car Policies issued to you or any resident relative by one or more of the State Farm Companies apply to the same accident, then:
“a. the Liability Coverage limits of such policies will not be added together to determine the most that may be paid; and
“b. the maximum amount that may be paid from all policies combined is the single highest applicable limit provided by any one of the policies.”

The policy defines “resident relative” as “a person, other than you, who resides primarily with the first person shown as a named insured … and who is … related to that named insured … by blood.”

EVIDENCE RELATED TO CRAIG WINTERS’ PRIMARY RESIDENCE

At the time of the accident, Craig was approximately forty-nine years old. He was raised at his parents’ home in Gardner, Kansas, and left the family home approximately thirty years ago to attend dental school. After graduation, Craig returned to Gardner, Kansas, lived in his own home, and practiced dentistry until he retired approximately four years prior to the accident.

After retiring, Craig leased his home. For the next four years, Craig traveled “all over,” primarily in South and Central America. During that time and leading up to the accident in August 2013, he never had a long-term lease or rental agreement. Instead, he traveled and stayed with his wife’s family or in hostels. For approximately six months prior to the accident, Craig lived in Lima, Peru with his wife in her mother’s home. Craig testified that at the time of the accident, he had been living in South or Central America for four years.

While Craig traveled and lived in South or Central America, his mail, including bills, insurance policies, and tax returns, was delivered to his parents’ home. However, most of his mail was delivered via e-mail, and some mail was delivered to his private post office box. Some of his belongings were also stored in his parents’ home, including files, tax returns, clothes, some furniture, and artwork.

At the time of the accident, Craig had been staying with his parents for two to three days. His return flight to Peru was booked for the upcoming week. The day of the accident, Craig borrowed his father’s car.

A few days after the accident, Craig returned to Peru and stayed there for approximately two months until he returned to Kansas for matters related to the accident. He stayed with his parents for approximately one week, but after learning that he would need to be in Kansas for a prolonged stay, he rented an extended-stay hotel and then a loft in Kansas City, Missouri. He did so because he believed he was “too old to be living with [his] parents on a long-term basis.”

DISCUSSION

When interpreting an insurance policy, a court gives the language its plain meaning. The plain or ordinary meaning is the meaning that the average layperson would understand and is determined by consulting a standard dictionary.

The court gave the phrase “resides primarily” its plain or ordinary meaning.  To have a “primary” residence under this commonly accepted definition means that while a person may reside in two places for purposes of insurance coverage, a person cannot reside “primarily” in two places.

Whether Craig Winters Primarily Resided with Carl Winters

Plaintiff argues that Craig Winters was not a “resident relative” of Carl Winters because although Craig stayed with his parents from time to time, stored some of furniture and belongings at the house, and received his mail there, the home was not where he primarily resided. Craig moved out of his childhood home nearly three decades ago, went to school, and established a dental practice.  At the time of the accident, Craig had been staying with Carl for two to three days as part of a one-week visit. He testified that at the time of the accident, he had lived in Lima, Peru with his wife and her family for approximately six months. Prior to his six month stay in Peru, he traveled throughout South and Central America for approximately four years, sometimes staying in a particular location for two or three months.
State Farm argues that Craig was a “resident relative” of Carl because he had no intention of making other arrangements for a place to keep his belongings or to stay when he was in town.

Craig stored some of his personal items at his father’s home and forwarded most of his mail there, but he also testified that most of his information was set up through electronic billing and that his father’s address was used for “whatever still comes on paper.” There is no evidence in this case that after moving out of his father’s house thirty years earlier, Craig actually ever lived with his parents for longer than his typical one-week visits.

While Craig testified that he did not have a residence elsewhere, it is clear that under the meaning of the terms in Carl’s policy, at the time of the accident, Craig primarily resided in Peru, not in Carl’s home.

The evidence in this case was sufficient to support a finding that Craig was a “relative” under the policy provisions. However, it was insufficient to support a finding that he was a “resident relative” under the actual policy provisions in Carl’s policy. Accordingly, State Farm’s Motion for Summary Judgment is denied and Schaeffer’s Motion for Summary Judgment is granted and Ms. Schaeffer must receive an additional $100,000 from State Farm.

ZALMA OPINION

This was not a difficult case for the court. Craig, although he had slept in his parents home for three days before the accident, his history was clear, for more than thirty years he never spent more than a week at the home of his parents. State Farm had viable arguments that Craig may have maintained a domicile in his parents home, but the policy required he be a “resident relative” to be eliminated from coverage under his father’s policy.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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No Good Deed Goes Unpunished

Duty of Good Faith Is Mutual

Plaintiffs’ counsel have no problem suing insurers for breach of the covenant of good faith and fair dealing. Their clients see a legitimate insurance claim as an opportunity to profit from the claim by acting in a manner that will lead an insurer to deny the claim so that they could later claim the tort of bad faith.

As a justice of the California Supreme Court once said, “The problem is not so much the theory of the bad faith cases, as its application. It seems to me that attorneys who handle policy claims against insurance companies are no longer interested in collecting on those claims, but spend their wits and energies trying to maneuver the insurers into committing acts which the insureds can later trot out as evidence of bad faith.”  [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

In Shifrin v. Liberty Mut. Ins., — Fed.Appx. —-, 2014 WL 5840732 (C.A.7 (Ind.) 11/12/14) Brian and Melanie Shifrin appealed a trial court’s grant of summary judgment for Liberty Mutual Insurance in their diversity action asserting breach of contract and negligence with regard to their homeowners-insurance coverage.

FACTS

After a tornado damaged their barn and the roof of their house, the Shifrins filed an insurance claim. An adjuster from Liberty promptly inspected the damage, and a contractor hired by the insurer installed tarps over the house’s damaged roof. The adjuster determined that the cost to repair the damage to the barn likely exceeded the building’s coverage, so Liberty paid them $14,226 (the policy limit) for the barn’s damage. The adjuster also advised the Shifrins that they needed to replace their house’s roof immediately to protect the house from further damage.

About six weeks later, the adjuster re-inspected the property (at the Shifrins’ request) and saw new water damage. He again told the Shifrins that their policy required them to repair the roof to protect the house from further damage. He estimated the cost to repair the damage to the house at $22,713, though he acknowledged that there were “some open items” including “the remediation of the premises once the roof is replaced.” Liberty issued the Shifrins a check in the estimate’s amount.

The Shifrins disputed the amount of that payment because it did not include damage to their house’s foundation. In response to the Shifrins’ contention, Liberty had the property inspected by an engineer, who determined that the tornado had caused some cracks in the foundation—damage that was covered by the policy. Liberty agreed to pay to repair those cracks once the Shifrins selected a contractor to do the work, but the Shifrins disputed the engineer’s determination that only some of the cracks were caused by the tornado.

Liberty suggested that they hire their own engineer to evaluate the damage and advised them that under the terms of their policy, they were entitled to an appraisal if they disputed the report of Liberty’s engineer. Over the following months, the Shifrins and Liberty continued to disagree about the extent of the house’s tornado-related damage and the necessary repair costs, and the Shifrins learned that Liberty would not renew its policy after its expiration.
Eventually Liberty’s adjuster met with a contractor whom the Shifrins had selected, and both men agreed on the cost of the work to repair the damage to the roof and inside the house. The adjuster revised his estimate to $36,950.94, and Liberty issued the Shifrins a supplemental payment of $14,237.25 (the difference between the earlier estimate and the revision); Liberty reminded the Shifrins that “we will afford coverage for water remediation when the work has been performed” but that the work “can only take place once the roof has been replaced.” The parties continued to wrangle over the amount of loss. After the Shifrins insisted that there was additional damage to the roof, siding of the house, and the chimney, Liberty arranged for another engineering inspection. The Shifrins objected to the new report, and Liberty decided to initiate an appraisal process, as provided in the Shifrins’ policy; the Shifrins refused to participate. The roof still had not been repaired.

The Shifrins brought suit. The district court granted Liberty’s motion for summary judgment. The court agreed with the insurer that the Shifrins had breached the policy by failing to have the roof repaired. The court also concluded that Liberty properly invoked—and did not waive—its right to an appraisal, and that the Shifrins’ refusal to participate in the appraisal process was another instance in which they did not comply with their policy’s conditions.

The Shifrins appealed, essentially challenging the trial court’s conclusion that they breached their insurance contract by refusing to repair the roof. They assert that they were not obligated under the policy to repair the roof because Liberty had agreed to repair it and the repairs would have been too expensive relative to the house’s value.

DECISION

The appellate court concluded that the Shifrins breached their policy by not repairing their roof after the tornado. Under the policy, any loss required them to “protect the property from further damage” and, if repairs were required, to “make reasonable and necessary repairs to protect the property.”

A contract provision requiring the insured to complete certain duties after a loss is not optional, and non-compliance is a breach of the contract.

The Shifrins also challenge the district court’s denial of their motion for summary judgment and maintain that Liberty breached the contract and acted in bad faith by not repairing the roof or the interior water damage.

But as the district court stated, the Shifrins didn’t identify any part of the contract requiring Liberty to repair the roof; Liberty paid them $36,950.94 (the estimate of the cash value of the damage) before any repair or replacement was performed and agreed to pay for moisture remediation after the roof was repaired. Liberty also demanded appraisal and the Shifrins refused to participate, a second breach of the contract of insurance.

ZALMA OPINION

Insurance promises to indemnify an insured. It does not promise to repair it only promises to pay the money required to repair. Under full replacement cost provisions the insured is required to actually do the repair before the difference between actual cash value and replacement value.  In this case the insured attempted to create a bad faith case out of a simple wind loss. They failed because they intentionally refused to comply with material policy conditions even after the insurer bent over backwards to satisfy them, hired engineers and expanded their estimate to comport with the estimate created by the insured’s contractor, only to have the insured do nothing to repair their property and then sue the insurer for bad faith damages.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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The Fight Against Fraud Continues

Zalma’s Insurance Fraud Letter – November 15, 2014

In the 22st  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on November 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.     The Covenant of Good Faith & Fair Dealing & the Fraud Investigator
2.     New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.     Lawyer Loses License For Health Care Fraud
4.    Commit Fraud & Lose Your Assets
5.    Arson-Detection Dogs are Heros in Florida
6.    $3.2 Million Death Master File Settlement
7.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.
8.    Terrorism and Insurance Fraud

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Bad Faith “Set-Up” Fails – November 14, 2014
2.    Subrogation – November 14, 2014
3.    No Claim, No Settlement, No Coverage – November 13, 2014
4.    Location of Injury & Employment Controls – November 12, 2014
5.    Clear & Unambiguous Language Controls – November 11, 2014
6.    Collapse or Sewer Backup – November 11, 2014
7.    Insured May Reject or Limit UM Coverage – November 10, 2014
8.    Incorrectly Denying Claim Not Bad Faith – November 7, 2014
9.    Erroneous Denial Not Bad Faith – November 6, 2014
10.    Construction Defects an “Occurrence” in Texas – November 5, 2014
11.    You Can Beat the IRS – November 4, 2014
12.    Agent’s Duty – November 3, 2014
13.    Chutzpah & Fraud – October 31, 2014
14.    When Reserves Are Not Discoverable – October 30, 2014
15.    What is a Real Estate Manager? – October 29, 2014
16.    Waiver of Stacking – October 28, 2014
17.    Failure to Secure Insurance – October 27, 2014
18.    Intentional or Criminal Act Uninsurable – October 24, 2014
19.    Lawyers Should Keep Their Promises – October 23, 2014
20.    Construction Defects Coverage Guide – October 22, 2014

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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Bad Faith “Set-Up” Fails

Refusal of Policy Limit Demand Not Bad Faith

The potential for punitive damages against an insurer who fails to pay policy limits after receiving a reasonable offer of settlement tempts plaintiffs’ lawyers to make policy limits demands quickly, and with a very short time limit, hoping the insurer is unable or unwilling to meet the time limit. It is inappropriate conduct and often acts against the interests of the client plaintiff. Often the ploy works. Sometimes, like in Graciano v. Mercury General Corporation, Not Reported in Cal.Rptr.3d, 2014 WL 5298172 (Cal.App. 4 Dist.. 10/17/2014) it fails because the ploy is obvious and clearly unfair and prejudicial to the rights of the insurer.

FACTS

Plaintiff Sonia Graciano suffered severe injuries when she was struck by a car driven by Saul Ayala (Saul). Saul was insured by a policy issued by defendant California Automobile Insurance Company (CAIC), which had policy limits of $50,000. Less than three weeks after Graciano’s attorney first contacted CAIC alleging Graciano was injured by one of CAIC’s insureds, during which time Graciano misidentified both the name of the driver and the applicable insurance policy, CAIC completed its investigation of the accident, identified the correct insurance policy and driver, and tried to settle Graciano’s claim against Saul by delivering to Graciano’s attorney a “full policy limits offer.”

Graciano did not accept CAIC’s full policy limits offer and, in the present action, asserts CAIC and its parent and affiliated companies (together Defendants) acted in bad faith, based on an alleged “wrongful failure to settle.” Graciano argues CAIC could have and should have earlier discovered the facts, and should have made the full policy limits offer more quickly. The jury found in favor of Graciano and the insurer appealed. \

The Two CAIC Policies

Saul was a named insured on CAIC policy No. 040115180005897, in effect on the date of the accident (Saul’s policy) with a policy limit of $50,000. The Cadillac was a listed vehicle on Saul’s policy.

CAIC had also insured Jose Saul Ayala (Jose) under a separate policy (policy No. AP00401514, Jose’s policy), and the Cadillac was also a listed vehicle on Jose’s policy. Jose’s policy, which had policy limits of $15,000, had been canceled approximately six months before the accident.

The Two Reports of the Accident

Saul reported he fell asleep while driving and had struck a woman and injured her. Based on the preliminary information, CAIC believed the driver was 100 percent at fault. By October 30, 2007, CAIC’s adjuster believed it would likely be an “excess bodily injury claim,” meaning the amount for which Saul was liable would exceed the amount of coverage provided by CAIC’s policy. CAIC apparently did not know at that point the identity of the person injured by Saul.
Graciano’s Report

Three days after Saul’s report, Ms. DeDominicis contacted a CAIC call center in Texas to report her client (Graciano) had been injured by a driver insured by CAIC. DeDominicis reported Graciano was injured on October 21, 2007, gave the call center “AP00297623” as the driver’s policy number with CAIC, and told CAIC the driver’s name was “Saulay Ala.”

Graciano’s Demand Letter

On November 5, 2007, DeDominicis mailed a demand letter to Talley. The letter identified Jose as the “named insured,” the policy as “Policy # AP00401514,” the “Date of Loss [as] October 21, 2007,” and described Graciano’s extensive injuries. The offer to settle for verified policy limits was stated to expire within ten days of the date of the letter. That letter was not received by Talley until November 8.

The previous day, Talley first received the police report of the incident. The police report correctly reflected Saul was the driver but still listed Jose’s old policy (i.e., policy No. AP00297623) as the applicable insurance policy.

CAIC’s Response to the Demand for Jose’s Policy Limits

By Monday, November 12, CAIC’s investigation of Graciano’s report and claim had determined Saul, whom the newly obtained police report listed as the driver who struck Graciano, was a “non-listed driver” on Jose’s policy and, according to the police report, did not reside at Jose’s address.  That day, CAIC again tried, without success, to speak with DeDominicis about Graciano’s claim.

CAIC immediately prepared a letter offering $50,000, which it identified as the full policy limits on Saul’s policy, in full and final settlement of Graciano’s injury claim. Graciano did not accept CAIC’s offer to settle her claims against Saul. Instead, she pursued her action against Saul. Graciano obtained a judgment against Saul for over $2 million and obtained an alleged assignment of Saul’s rights against CAIC.

The court excluded evidence proffered by the defense to support its argument that DeDominicis’s offer to settle for the policy limits was not a genuine offer and that, once CAIC informed her that it appeared there was no coverage under Jose’s policy, its subsequent efforts to settle on behalf of Saul were hampered by DeDominicis’s machinations. For example, although DeDominicis knew (not later than November 7, 2007) that the driver’s name was Saul Ayala, Jr., her November 5 demand letter, as well as her November 7 letter enclosing Graciano’s medical bills and her November 8 letter reiterating the November 15 deadline for CAIC to respond, continued to refer solely to Jose and Jose’s policy number without any mention of Saul. Additionally, the court excluded evidence that CAIC tried to reach DeDominicis telephonically on the afternoon of November 15 to convey the offer to settle, but those calls went unanswered, and excluded evidence that CAIC’s efforts to fax the offer of policy limits during this same time frame were prevented because DeDominicis had (in a departure from ordinary procedures) turned her fax off.

APPLICABLE LEGAL STANDARDS

In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach. The standard of good faith and fairness examines the reasonableness of the insurer’s conduct, and mere errors by an insurer in discharging its obligations to its insured does not necessarily make the insurer liable in tort for violating the covenant of good faith and fair dealing; to be liable in tort, the insurer’s conduct must also have been unreasonable.   The law clearly states that erroneous denial of a claim does not alone support tort liability; instead, tort liability requires that the insurer be found to have withheld benefits unreasonably.

An insured’s claim for bad faith based on an alleged wrongful refusal to settle first requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits.

A claim for bad faith based on an alleged wrongful refusal to settle also requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance.

ANALYSIS

There Is No Substantial Evidence CAIC Unreasonably Rejected an Offer to Settle Saul’s Liability

Nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear, but instead requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. The court concluded that there was no evidence Graciano ever offered to settle her claims against Saul for an amount within Saul’s policy limits.

The only settlement “offer” CAIC could have accepted was DeDominicis’s November 5, 2007, letter. It identified Jose as the named insured, the relevant policy as Jose’s policy (e.g. “Policy # AP00401514”), and (after describing Graciano’s extensive injuries) stated DeDominicis had been retained to pursue Graciano’s remedies “arising out of an event in which your above-referenced insured and/or their vehicle struck [Graciano]”, and demanded that CAIC “immediately provide a copy of the declaration page and payment of the maximum bodily injury policy limits…. ”

Graciano cites no authority that an offer to release one potentially liable party (here, Jose) in exchange for that party’s policy limits, if rejected by the insurer, can serve as the basis for a “wrongful refusal to settle” claim by a different potentially liable party (here, Saul), and analogous authorities suggest a contrary rule. Graciano argues these cases do not support reversal because claimants are not required to begin settlement overtures with letter-perfect offers to which insurers need only respond “Yes” or “No.” An insurer’s duty of good faith would be trifling if it did not require an insurer to explore the details of a settlement offer that could prove extremely beneficial to its insured.

The only evidence in the record is that Graciano’s misidentification of the applicable policy did cause actual prejudice to CAIC because the insurer showed a substantial likelihood that, with timely notice, it would have attempted to settle the claim.  Once CAIC learned of the applicable policy, it did not decline coverage for the same reason (or for any reason) but instead proffered the full policy limits in an attempt to protect its insured. Because the undisputed evidence shows CAIC was actually prejudiced by the misidentification of the applicable policy, and also shows (notwithstanding the misidentification) CAIC undertook a continuing investigation there was no evidence to support judgment against CAIC.

A claim for “wrongful refusal to settle” requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. When a liability insurer does timely tender its “full policy limits” in an attempt to effectuate a reasonable settlement of its insured’s liability, the insurer has acted in good faith as a matter of law because by offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.

ZALMA OPINION

Counsel for the plaintiff attempted, by making a quick policy limits demand with a short – ten day – limit to respond believed that she had set up CAIC for a bad faith judgment and could collect the full $2 million verdict from the insurer with a $50,000 limit. By demanding settlement from the wrong person with the wrong policy, the attempt failed. Counsel, to protect the client, should have dealt in good faith with the insurer and accepted the $50,000 when it was pointed out to counsel that the delay in offering policy limits was due to the failure to properly report the name of CAIC’s insured and policy number. Since it appears Saul was judgment proof it would have been in plaintiffs’ best interest to accept the offer.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Subrogation

The Equitable Remedy to Reduce Insurer’s Net Loss

The following article is adapted from Insurance Claims: A Comprehensive Guide by Barry Zalma and available at the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary.

The equitable doctrine of subrogation places the subrogee in the precise position of the one whose rights are subrogated. Subrogation is the remedy called into existence for the purpose of enabling a party secondarily liable, but who has paid the debt, to reap the benefit of any securities which the creditor may hold against the principal debtor, and by the use of which the party paying may thus be made whole. Texas law recognizes three sources of subrogation rights: equitable, contractual, and statutory.

Every claim requires a thorough investigation of subrogation possibilities. The insurance claims person who ignores the possibility of subrogation is completing only half of a thorough investigation. The equitable remedy arises from tort, contract or equity.

In 1748, the House of Lords in England decided in Randall v. Cochran, where an insurer for an English ship that was taken by the Spanish, was permitted to bring suit in the name of its insured against the administrators of a public prize fund, compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor, quoted in an article by John J. O’Brien, said:

The plaintiffs had the plainest equity that could be. The person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer … the assured stands as trustee for the insurer, in proportion for what he paid. [John J. O’Brien, J.D., CLU, CPCU, “The Origins of Subrogation,” Property/Casualty Insurance, January/February 2005, see www.subrogation.net/Home.aspx.]

The earliest master of insurance law in England was Lord Mansfield, who addressed subrogation in a case called Mason v. Sainsbury in 1782. Rioters had ransacked Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district. The insurance company pursued a recovery action against the administrator in the name of its insured.

Traditionally, an insurer that pays its insured’s claim is entitled to recover the payment from the third party who caused the insured’s covered loss. This concept

is called subrogation, and can arise by contract, statute, or equitable principle. As early as 1888, the US Supreme Court found that equitable subrogation was a well-recognized doctrine. The Supreme Court stated the historical rule that:

The Equitable assignee of a chose in action has the right to go into a court of equity to have his interest therein established; and when so established he will have the right to complete relief in the same action by decree of specific performance of the contract. [Aetna Life Insurance Company v. Middleport, SCT.40059; 124 U.S. 534, 31 L.Ed. 537, 8 S.Ct. 625 (1888).]

Regardless the Supreme Court found that the insurer acted as a volunteer and ruled against its right of subrogation.

The US Supreme Court stated the basic rule of subrogation as follows:

 

Hence it has often been ruled that an insurer, who has paid a loss, may use the name of the assured in an action to obtain redress from the carrier whose failure of duty caused the loss. Hall & Long v. Railroad Companies,13 Wall. 367, 369 … But it is equally well settled that the right, by way of subrogation, of an insurer, upon paying for a total loss of the goods insured, to recover over against the carrier, is only that right which the assured has, and that accordingly when a bill of lading provides that the carrier, when liable for the loss, shall have the full benefit of any insurance that may have been effected upon the goods, this provision is valid, as between the carrier and the shipper; and that, therefore, such provision limits the right of subrogation of the insurer, upon paying the shipper the loss, to recover over against the carrier. Phoenix Ins. Co. v. Erie & Western Transportation Co.,117 U.S. 312; St. Louis, Iron Mountain; Railway v. Commercial Union Insurance Co., 139 U.S. 223. [Wager v. Providence Insurance Company v. Morse., 1893. SCT. 40365; 150 U.S. 99, 37 L. Ed. 1013, 14 S. Ct. 55 (1993).]

Generally, to protect its subrogation right, an insurer may seek intervention in the insured’s lawsuit against the legally responsible party or may wait to seek the funds from its insured. The purpose of subrogation is to prevent the insured from obtaining a double recovery (and thus being unjustly enriched) and to place the responsibility for paying the loss on the party who caused the loss.

The “made-whole” rule is a common law exception to an insurer’s subrogation right. As applied in California, the rule generally precludes an insurer from recovering any third party funds unless and until the insured has been made whole for the loss. The applicability of the doctrine generally depends on whether the insured has been completely compensated for all the elements of damages, not merely those for which the insurer has indemnified the insured.  In many jurisdictions, including California, courts hold that parties may avoid the made-whole exception by contract. California courts have recognized that the made-whole exception does not apply if the insurer participated in prosecuting the claim against the third party. A separate and independent limitation on the subrogation and reimbursement right provides that an insurer’s reimbursement from its insured is subject to the insurer bearing a pro rata portion of the insured’s attorney fees and costs incurred to obtain the recovery from the third party.

In several jurisdictions adopting the made-whole rule, the courts have stated or assumed that attorney fees and costs should be deducted from the total recovery in determining whether the insured was made whole. Several other jurisdictions have specifically held that attorney fees and costs to obtain the third party recovery should not be deducted from the insured’s total recovery for purposes of the made-whole rule calculation.

Because attorneys’ fees are not recoverable in a tort action, the fees paid by an insured have no effect on determining if he or she was made whole. It is well established in California and in most states that an insurer has the right to enforce a subrogation and reimbursement contractual provision to require an insured to repay the insurer in the event of a recovery for the covered loss from a third party. It is not the purpose of the made-whole exception to eliminate this right merely because it would appear fair to do so. Rather, the applicability of the made-whole rule depends on whether the insured has received an amount that is equivalent to all the damages to which he or she is entitled under California law. Where the insured reports that he or she has received that full recovery, there is no valid basis for precluding an insurer from reimbursement after the insured has twice recovered for the same loss.

ZALMA OPINION

For an insurer to be profitable it is important that it implement an aggressive subrogation effort. By taking on the rights of an insured who is entitled to immediate payment from the insurer the insurer can recover some or all of the monies paid from a tortfeasor or person obligated to pay for the loss by contract. By so doing the net claims payments made over a period of time can be reduced.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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


Posted in Zalma on Insurance | Leave a comment

No Claim, No Settlement, No Coverage

When Is an Insured “Legally Obligated to Pay?”

People without a great deal of knowledge about the danger of being exposed to mold are frightened when it appears in a residential property. When a condominium project with more than 190 units became infested with mold because of the use of impermeable wallpaper the management company instituted a remediation program that cost it more than $11 million. No lawsuit was filed by the property owner. No claims were presented by the property owners. They agreed to the remediation but were never asked to, nor did they, sign a release.

 

In Busch Properties, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Slip Copy, 2014 WL 5564580 (E.D.Mo., 10/31/2014), The District Court for the Eastern District of Missouri was asked to grant defendant’s motion for summary judgment because its insured was never “legally obligated to pay damages to anyone.

BACKGROUND

The coverage dispute between Busch Properties, Inc. (BPI) and National Union Fire Insurance Company of Pittsburgh, Pa. ( National Union) occurred as a result of BPI’s actions as the property manager for condominiums at the Kingsmill Resort (Kingsmill) in Williamsburg, Virginia, a gated residential golf community. National Union was the general liability insurance carrier for BPI from September 1, 1994 to July 1, 2004.

In 2003, BPI personnel became aware of a serious mold problem inside the condominium development at Kingsmill. According to BPI, the primary cause of the mold was determined to be the use of impermeable vinyl wallpaper which prevented moisture in the walls from escaping, thereby providing a fertile climate for mold to develop and spread inside the walls of the units. BPI, as the property manager, had selected and installed the vinyl wallpaper in the units at Kingsmill. As a result, BPI believed that it faced significant exposure from potential claims by unit owners and resort guests alleging property damage or bodily injury.

On December 1, 2003, BPI notified its insurers, including National Union, of the problem. BPI informed its insurers, including National Union, that its proposed strategy was to proactively remediate the problem. BPI alleges it paid remediation costs of approximately $11.3 million to address the damage caused by the mold problem.

BPI filed this lawsuit on December 17, 2012, nine years after giving notice to its insurers, alleging claims of breach of contract and vexatious refusal to pay. National Union admits that BPI provided notice regarding the alleged mold problem and its efforts to remediate the affected units. National Union contends, however, that it did not consent or otherwise agree to BPI’s remediation plan.

INTERPRETATION OF INSURANCE CONTRACTS

Under Missouri law, the interpretation of an insurance contract is generally a question of law, particularly in reference to the question of coverage.  Unless an ambiguity exists, the policy must be enforced as written. The plaintiff has the burden of showing that the loss and damages are covered by the policy; the defendant insurer has the burden of demonstrating the applicability of any exclusions on which it relies.

DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

The Consent agreement between BPI and the property owners provided that the abatement of mold would be done at no cost to the owners. Further, the Consent provided, among other things, that it did not obligate BPI to proceed with the remediation project, that BPI did not admit liability, and that the owners gave irrevocable and blanket consent to BPI to take whatever actions it deemed necessary to remediate the mold. The Consent did not provide for a general release of claims the owners might have against BPI.

BPI did not receive any claims from property owners, nor were any lawsuits filed against it, related to the mold issue.

National Union noted that National Union did not have evidence that BPI was legally obligated to pay damages or incurred liability imposed by law in connection with the Kingsmill mold remediation as would be required for the policies to provide coverage.

ANALYSIS

National Union raises five issues in its motion for summary judgment. National Union contended that BPI is not entitled to coverage for the costs to repair property damaged by mold because it cannot show, as required by the policies at issue, that it was “legally obligated to pay” for such damages. National Union argues that BPI is not entitled to coverage for costs to repair property damage based on its bare assertion that it was liable. Under Missouri law, a legal obligation to pay for insurance purposes requires at least a settled claim against the insured that gives rise to a legally enforceable obligation.

Missouri law recognizes a claim and a settlement agreement as sufficient to establish that an insured is legally obligated to pay damages. In other states, the Court notes divergent judicial views on what is required to establish that an insured is “legally obligated to pay damages.” The term “legally obligated to pay as damages” under a CGL policy requires a final judgment or a settlement as a result of a lawsuit. The court was reluctant to say that a written demand alone, without the coercive force of a lawsuit, can be considered a process that could result in the insured being “legally obligated to pay.”

The insured bears the initial burden to prove a prima facie case by producing evidence of the good faith and reasonableness of its settlement. Additionally, in cases of environmental pollution and its regulation by state and federal entities, the courts have been more willing to find sums paid to remediate damage done to specific property or to pay into a state cleanup fund to be the result of ‘legal obligation.

Requiring a settled claim, except in environmental cleanup cases where the legal obligation is mandated by statute,  serves the purpose of providing the insurer with an opportunity to investigate and weigh in on the claim and protect the insurer’s interest as established by the insurance policy.

In this case, BPI did not settle any potential or formal claims or lawsuits. It is undisputed that none of the property owners made any claims or filed any lawsuits against BPI related to the mold issue at Kingsmill. It is also undisputed that BPI did not enter into any settlement agreements with, or obtain any releases of claims from, the property owners with regard to the mold remediation undertaken by BPI at its own cost.

In essence, BPI proposes that this Court depart from existing case law and hold that “legally obligated to pay as damages” does not require a settled claim or a settlement or judgment arising from a lawsuit, but instead simply requires BPI to show potential legal liability and voluntary payment of alleged damages without a release or settlement agreement. This position is supported neither by existing Missouri law nor by any other states that have considered this issue. Further, it would be unreasonable for an insured to be able to unilaterally obligate an insurer to pay damages where there has been no protection of the insurer’s interest. Without a settled claim or a settlement or judgment arising from a lawsuit, BPI cannot show it was “legally obligated to pay by reason of liability imposed by law.” As a result, there is no coverage under the insurance policies.

ZALMA OPINION

This case poses a warning to people insured by a liability insurance policy to work closely with the insurer when working to remediate problems that expose the insured to damages far in excess of the sums required to remediate the exposure. Had BPI worked closely with National Union and made certain that each of the property owners made a claim or executed a settlement agreement that would have qualified as a legal obligation to pay. Bad wording of the Consent agreement and failure to close the remediation with a release would have saved BPI $11 million.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 2 Comments

Location of Injury & Employment Controls

Workers’ Compensation Applies in State of Injury

When a party believes a trial court has erred it can petition an appellate court for an order directing the trial court to correct the alleged error. The process is called seeking a writ of mandamus.

In Ex parte Dalton Logistics, — So.3d —-, 2014 WL 5785802 (Ala.Civ.App., 11/7/14), Dalton Logistics (“the employer”) petitioned the Alabama Court of Appeals for a writ of mandamus directing the Choctaw Circuit Court to grant the employer’s motion seeking a summary judgment in a civil action brought against it by Ernest Harold Presley (“the employee”) pursuant to the Alabama Workers’ Compensation Act, Ala.Code 1975, § 25–5–1 et seq. (“the Act”).

The employer asserts in that petition that the Act does not apply to the employee’s claim, which stems from an injury sustained by the employee at a work site in North Dakota, and that the trial court lacks subject-matter jurisdiction.

FACTS

The employee testified at his deposition that he contacted the secretary for the employer’s president, and the secretary sent “paperwork” to the employee’s Alabama residence via facsimile transmission for the employee to complete to finalize the employment arrangement. The employee testified that he completed the paperwork and had thereafter sent that paperwork via facsimile transmission to the secretary (who was in Texas. The secretary arranged for the employee to pick up a prepaid airplane ticket in Meridian, Mississippi, by which he would be able to fly to North Dakota to report to work.

The employee testified that was picked up at an airport in Minot, North Dakota by representatives of the employer and had been billeted in a “man camp” in that state consisting of a number of house trailers and a common dining area. From the “man camp,” the employee traveled to and from job sites between 20 and 150 miles away and performed work for the employer moving oil-drilling equipment among locations, typically working for 20 straight days in North Dakota and spending the following 10 days in Alabama after having flown home at the employer’s expense via commercial airlines.

According to the employee’s deposition testimony, it was in the vicinity of Ray, North Dakota, approximately 40 miles from the “man camp,” that he sustained an injury in August 2012 when his back struck a mud pump. It is that alleged injury that the employee claimed in his March 2013 complaint and that he claimed warranted an award of benefits under the Alabama Workers’ Compensation Act. In March 2014, the employer filed a motion for a summary judgment asserting that the Act did not provide a legal remedy to the employee; the employer relied upon the employee’s complaint and the transcript of his deposition.

The trial court entered an order on June 20, 2014, denying the employer’s summary-judgment motion, and the employer filed its mandamus petition within the presumptively reasonable time for seeking review of the trial court’s order.

DISCUSSION

The principal substantive question raised by the petition and answer is whether the Act applies to the employee’s claimed workplace injury. It is undisputed that the injury alleged by the employee occurred in North Dakota, not Alabama. However, although the employee’s injury occurred outside Alabama, that fact alone does not disqualify him from receiving benefits under the Act. Generally, under the Act, if an employee, while working outside Alabama, suffers an injury as to which that employee would have been entitled to workers’ compensation benefits under Alabama law had that injury occurred in Alabama, that employee will be entitled to benefits under the Act provided that one of several alternative conditions has been fulfilled. Benefits under the Act are payable if, at the time of the injury:

[1]     the employee’s employment was ‘principally localized’ in Alabama or

[2]     the employee was working under an employment contract entered into in Alabama as to three discrete types of employment:

(a)     employment that was not ‘principally localized’ in any state;

(b)     employment that was ‘principally localized’ in another state but was provided by an employer that was not subject to that state’s workers’ compensation law; and

(c)     employment outside the United States. See Ala.Code 1975, § 25–5–35(d)(1)–(4); see also 2 Moore, Alabama Workers’ Compensation, § 30:37; and Associated Gen. Contractors Workers Comp. Self Ins. Fund v. Williams, 982 So.2d 557, 559–60 (Ala.Civ.App.2007).

Given the importance of the issue to the extraterritorial application of the Act it is unsurprising that the parties disagree with respect to the location as to which the employee’s employment was “principally localized.” The employer claimed that the employment was “principally localized” in North Dakota and the employee alternatively claimed that the employment was “principally localized” in Alabama.

The Act itself provides the applicable test: “[E]mployment is ‘principally localized’ in a particular state—whether Alabama or another state—when the employer ‘has a place of business in this or such other state and [the employee] regularly works at or from such place of business’ or ‘if [the employee] is domiciled and spends a substantial part of [the employee’s] working time in the service of [the] employer in this or such other state.”’ (Ala.Code 1975, § 25–5–35(b)).

Viewing the undisputed evidence adduced by the parties through the lens of the applicable legal standard, the court found it agreed with the employer that the employment from which the employee’s alleged workplace injury stems was “principally localized” in North Dakota. In this case, the employee was afforded air transportation to North Dakota, was housed during his working periods in facilities located in North Dakota whose use by the employee had been arranged by the employer, and traveled each working day from those facilities to oil-rig locations in North Dakota where he performed the work for which he had been hired.

In contrast, although the employee was permitted to return to his home in Alabama for several days each month, and although the employer withheld Alabama income taxes from the employee’s wages for the employee’s benefit, it is undisputed that the employee was not expected to perform work for the employer while in Alabama and that he did no work for the employer in any state other than North Dakota.  The court concluded that the employee in this case suffered an alleged injury while engaged in employment that was principally localized in a single state other than Alabama.

As to the first condition, we may assume, because the employer does not seriously contend to the contrary, that the employment contract between the parties was formed in Alabama by the employee’s having accepted an offer of employment through his having completed and dispatched pertinent forms to the secretary for the employer’s president from his home in Alabama.

The parties differ as to the applicability of North Dakota’s workers’ compensation laws, with the employer citing authority to the effect that coverage is afforded under North Dakota law to nearly all employees in that state, while the employee asserts that North Dakota’s workers’ compensation laws do not apply to the parties’ employment relationship.

North Dakota, like every state, has a long-standing and strong public policy interest in making workmen’s compensation the exclusive remedy against an employer in the case of an injured employee.

After reviewing the facts and law of both states the Alabama Court of Appeal concluded that the employee has not demonstrated that North Dakota’s workers’ compensation laws do not apply to the employer in this case so as to support the trial court’s conclusion that it had jurisdiction under the Act to hear the employee’s workers’ compensation claim.

Because none of the alternative requirements for extraterritorial applicability of the Act are present, the trial court acted outside of its discretion in denying the employer’s summary-judgment motion challenging that court’s power to adjudicate the employee’s claim. A writ of mandamus was, therefore, issued and the trial court was ordered to (a) vacate its order denying the employer’s summary-judgment motion and (b) enter a summary judgment in favor of the employer.

ZALMA OPINION

It is understandable why an Alabama resident would prefer to get benefits from his home state rather than the frozen plains of North Dakota. However, it is clear that he was employed in North Dakota, he was injured in North Dakota, and he gained the right to the benefits provided by the North Dakota Workers’ Compensation law.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Clear & Unambiguous Language Controls

Court Refuses to Change Policy Wording

Injured people who failed to purchase insurance to protect themselves will often seek to conflate the wording of an insurance policy issued to a relative to find coverage that did not exist. Sometimes, to avoid the expense of litigation, the tactic works. More often than not insurers determine to spend what ever is necessary to defend against spurious lawsuits rather than pay tribute.

The Massachusetts Court of Appeal was faced with an appeal of just such a case where the plaintiff asked that it reverse a judgment of the trial court that James N. Ellis, Sr. (Ellis Sr.) not an insured under a policy of automobile insurance issued by defendant Commerce Insurance Company.

Ellis Sr. contends that he is entitled to underinsured motorist coverage under the policy because on the coverage date in question he was a member of the same household as his son, James N. Ellis, Jr.

In the application for commercial insurance, coverage was sought for “Ellis & Ellis, Nicholas Ellis, [and] James N. Ellis, Jr. As Partners.” The application form contains a check mark next to the box labeled “Business Auto.” Successive business automobile policies were issued to “Ellis and Ellis[,] Nicholas and James Ellis.”

The underinsured motorist endorsement provides coverage to the household member of a business “[i]f the form of your business under Item One of the Declarations is shown as an individual.” At all relevant times, Item One of the Declarations listed the “form of business” as “Other Direct Billed Commercial.” The applicant also checked the “partnership” box, not the “individual” box, on the application. The application is incorporated into the policy.

The appellate court concluded in a brief and succinct opinion that a policy of automobile insurance which is clear and unambiguous will be enforced in accordance with its terms.  Since the policy language is clear and unambiguous, since the policy was not issued to a business for which coverage is provided to household members, the trial court was correct in issuing judgment in favor of the insurer.

ZALMA OPINION

I continue to be amazed that presumably competent lawyers bring actions where there is no potential for coverage under a clear and unambiguous insurance policy. A business auto policy is limited by its terms to the members of the commercial enterprise and not every member of the family of the individual employees of the business.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Collapse or Sewer Backup

The Court Cannot Create Ambiguity Where the Terms of the Contract Are Clear

Insurance policies, including those that are described as “all risk” or “direct risk of physical loss” policies, do not insure against all possible causes of damages. No insurer insures against all losses. Every first party property insurance policy contains some exclusions and all first party property policies require the loss to occur during the policy period.

Denise Hill (Plaintiff) sued Liberty Insurance Corporation (Defendant) for insurance coverage relating to property damage caused by water in the basement of her home. In Hill v. Liberty Ins. Corp., Slip Copy, 2014 WL 5800089 (E.D.Mich., 11/7/14) the District Court for the Eastern District of Michigan was asked to issue summary judgment in favor of Liberty and Hill opposed the motion.

BACKGROUND

On or about February 24, 2012, Defendant issued a HomeProtector Plus homeowner’s policy covering Plaintiff’s home and personal property. On February 24, 2013, Defendant renewed the policy for the period through February 24, 2014.

On February 28, 2013, Plaintiff submitted an insurance claim to Defendant for water damage sustained to her basement and its contents. Plaintiff admits that she cannot establish with certainty the precise day or time that the water entered the basement. Plaintiff states that there were four inches of standing water backup in her basement resulting from a blocked drain. After discovering the water Plaintiff hired a licensed plumber who snaked a drain. The plumber’s action allowed the water to flow freely out of the basement.

Defendant denied Plaintiff’s claim on the basis that there was no coverage under the policy, citing the Water Damage Exclusion.

THE POLICY

The policy provides, in part: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. * * * c. Water Damage, meaning: (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;
(2) Water which backs up through sewers or drains or which overflows from a sump; or (3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.”

Defendant argues that Plaintiff’s claim should be denied because the Water Damage Exclusion precludes coverage for the damages claimed.

ANALYSIS

Relying on the language of the policy, Defendant argued that Plaintiff’s claim must be denied because there is no question of material fact that the damage in the basement was caused by “water which backs up through sewers or drains,” “regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

Under Michigan law, the rules of insurance policy interpretation are the same as for any other written contract. An insurance policy must be enforced in accordance with its clear and unambiguous terms, and a court should not hold an insurance company liable for a risk it did not assume. Although ambiguities will be construed in favor of the insured, a court should not create ambiguity where the terms of the contract are clear. Furthermore clear and specific exclusions must be given effect.

Plaintiff conceded numerous times that the source of the water that damaged the contents of her basement originated at the basement drain. In a sworn deposition Plaintiff testified that the water came up from the drain and it was dirty because it was filled with household debris.

The public adjuster representing Plaintiff further testified that the standing water in the basement resulted from an accumulation of household debris, dirt, tree roots, and crock among other things-a blockage that prevented the water from exiting and caused it to pool and collect in the basement.

In response, Plaintiff argues that she is covered under other related provisions of the policy. Plaintiff says that the damage was caused by a collapse of the pipe carrying waste water that ran from her home, rather than from its backup. She maintains that the pipe which collapsed is part of the structure of her home, and that the collapse concerned the overflow of water within a plumbing system. She did not explain how a pipe that had “collapsed” could function properly after being snaked.

The District Court noted that Plaintiff’s arguments related to “collapse” fail for a number reasons:

Plaintiff did not introduce this theory of recovery until her response brief. In support of her argument, Plaintiff says that the public adjuster determined her claim to be based on the “Collapse” provisions of the homeowner’s policy.

However, there is no evidence in the record indicating any structural compromise of the drain or the drain pipe; nor does Plaintiff point to any statement by the public adjuster, whose deposition and declarations mention nothing about a collapse. Instead, the public adjuster stated that the backup was caused by an accumulation of “household debris, dirt, tree roots and crock among other things.”

Nor would the public adjuster’s interpretation of the homeowner’s policy be in any way dispositive.

In addition, Defendant points out that Plaintiff’s reading of the “Collapse” provisions is incomplete, because it ignores language which later states, “Loss to … underground pipe … is not included … unless the loss is a direct result of the collapse of a building.” Here, no building has collapsed.

As a last resort, Plaintiff argues that the policy provisions include ambiguous terms, which are “reasonably and fairly susceptible to multiple understandings and meanings,” and should therefore be construed against the Defendant. The District Court concluded that there is no ambiguity in the terms of the policy.

The Court cannot create ambiguity where the terms of the contract are clear.

ZALMA OPINION

The Plaintiff in this case is lucky that the court did not slap her with sanctions for bringing a frivolous suit. Even her own expert public insurance adjuster testified that there was no “collapse” and that the cause of the damage was the water backing up from the drain. Testimony was clear that there was no collapse and that the drain backed up when the plumber snaked the drain and the water flowed away as it should. Simple, clear, unambiguous language in an insurance policy must always be applied or there is no need for a contract of insurance.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | Leave a comment

Insured May Reject or Limit UM Coverage

Must Be Insured to Receive UM/UIM Coverage

Insurers have the unquestioned right to select whom it will insure and for what risks it is willing to take. Often, believing they will never really need the insurance, consumers opt for the least expensive insurance coverage rather than the most effective protection. Then, when a loss occurs that is not covered, litigation ensues to attempt to correct the error in the policy acquired to gain coverage they did not want to pay for but after a loss determined they needed to properly obtain indemnity.

In Nielson v. Shelter Mut. Ins. Co., — So.3d —-, 2014 WL 5793843 (La.App. 1 Cir., 11/07/25 the Louisiana Court of Appeal was asked to reverse a summary judgment in favor of an insurance company, holding that the insurance company’s policy did not provide uninsured/underinsured motorist (UM) coverage for an injured guest passenger, who did not fit the insurance policy’s definition of an insured since she was not “using” the vehicle that was involved in the traffic accident.

FACTS

On July 30, 2012, Mona Nielson was riding as a guest passenger in a car driven by Thelma Nolan in Denham Springs, Louisiana. Nielson was injured when Nolan’s car was involved in an accident caused by an underinsured driver. After settling with and recovering the liability policy limits from the other driver’s liability insurer, Nielson filed the instant suit against Nolan’s liability insurer, Shelter Mutual Insurance Company (Shelter), seeking damages under the UM provisions of Shelter’s policy. Shelter filed a motion for summary judgment requesting dismissal of Nielson’s UM claim, because Nielson was not an “insured” as defined by Shelter’s policy for purposes of UM coverage. After a hearing, the trial court granted Shelter’s motion, and signed a judgment dismissing Nielson’s claims against Shelter. Nielson now appeals.

ANALYSIS

Interpretation of an insurance policy usually involves a legal question that can be resolved properly in the framework of a motion for summary judgment. An insurance policy is a contract between the parties and should be construed using the general rules of interpretation of contracts set forth in the Louisiana Civil Code.  If the language in an insurance policy is clear and unambiguous, it must be enforced as written. However, if there is any doubt or ambiguity as to the meaning of a provision in an insurance policy, it must be construed in favor of the insured and against the insurer.

The Shelter policy, in part, provides: “(2) Insured means a person included in one of the following categories, but only to the extent stated for that category.¶ … Individuals who have permission or general consent to use the described auto are insureds for claims resulting from that use. … ¶ (2) Insured means: ¶ (a) You; (b) Relatives; (c) Individuals listed in the Declarations as an “additional listed insured” who do not own a motor vehicle, and whose spouse does not own a motor vehicle; and (d) Any individual using the described auto with permission.”

It is well-settled in Louisiana that a person who does not qualify as a liability insured under a policy of insurance is not entitled to UM coverage under the policy. As such, any determination of whether a person is entitled to UM benefits must follow a determination that the person is an insured for purposes of auto liability insurance coverage.

According to the plain language of the policy, Shelter owes uninsured damages only to individuals who are an “insured” for purposes of UM coverage. The policy clearly defines an insured for UM coverage as: “(1) the named insured; (2) relatives; (3) an additional listed insured, and (4) an individual “using” the described auto with permission.” It is undisputed that Nielson is not a named insured on Shelter’s policy, is not a relative of the named insured (Nolan), and is not an additional listed insured on the policy. Thus, under the plain language of the Shelter policy, the only possibility for Nielson to be considered an insured for UM purposes is if she were “using” Nolan’s vehicle with Nolan’s permission.

Shelter’s policy places the word “using” in bold, indicating that it is a defined term by the policy. The policy definition of “use” means: “physically controlling, or attempting to physically control, the movements of a vehicle. It includes any emergency repairs performed in the course of a trip, if those repairs are necessary to the continued use of the vehicle.” Therefore, if Nielson is to be considered an insured for liability or UM purposes under Shelter’s policy she must have been “using” the vehicle by physically controlling or attempting to physically control the movements of Nolan’s vehicle. It is undisputed, however, that Nielson was simply a passenger in Nolan’s vehicle and was not controlling or attempting to control its movement in any way.

Shelter’s policy further defines “passenger” as an “individual who is occupying one of the seats of a vehicle with permission but does not include the operator of a vehicle.” Additionally, “operator” is defined in Shelter’s policy as “an individual who is using a vehicle.” Thus, the Shelter policy very clearly and unambiguously makes a distinction between one who is a driver or an operator, such as Nolan in this case, and one who is merely a guest passenger who is occupying one of the seats of the vehicle, such as Nielson in this case.

Pursuant to Shelter’s policy language, merely being a guest passenger in the insured vehicle does not entitle the individual to UM coverage. The same analysis excludes Nielson as an insured under the general liability coverage of Shelter’s policy since Nielson was not “using” the vehicle as defined by the policy.

While there is strong public policy in favor of UM insurance coverage in Louisiana, an insured is free to reject or limit UM coverage in order to reduce premiums. The Shelter policy clearly limits who is covered for UM purposes, and the policy should be enforced as written.  The appellate court, therefore, concluded that the trial court correctly granted summary judgment in favor of Shelter and dismissed Nielson’s UM claims.

ZALMA OPINION

Nelson protected herself and others she might injured by purchasing liability and uninsured motorist/underinsured motorist coverage. To save money she accepted a policy from Shelter that did not provide UM/UIM coverage for passengers, thereby limiting the exposure faced by the insurer. Her argument that the exclusion was in violation of public policy did not succeed because the Louisiana statute allowed the insured to limit exposure to only insureds and operators of the vehicle. Nelson got what she ordered and Nielson was out of luck in getting UM/UIM coverage from Nelson’s insurer.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

 

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Incorrectly Denying Claim Not Bad Faith

Fraud Defense Requires Willful Intent

Often an insured is his or her own enemy when it comes to the presentation of a claim. They will attempt to increase the amount of their claim by scheduling items claimed destroyed in a fire that were not there. Sometimes they will innocently claim items stolen or destroyed that were not stolen or destroyed. Often they will delay claim processing and complain, when they did not fulfill the requirements of the policy, that they innocently erred.

In Willis v. Allstate Ins. Co., Slip Copy, 2014 WL 5514160 (S.D.Miss., 10/31/2014) the trial court in the Southern District of Mississippi was faced with multiple problems caused by the denial of a contents claim for misrepresentation of material facts in the claim presentation and failure to properly investigate a second claim.

Plaintiff’s house was destroyed by a fire on June 14, 2012. At the time of the fire, the house was insured under an insurance policy issued by Defendant. Plaintiff filed a claim for benefits. Defendant then conducted an investigation of the loss that lasted approximately eight months. On February 27, 2013, Defendant denied Plaintiff’s claim for the contents of the house, contending that she had misrepresented material facts related to the claim. On March 10, 2013, Defendant issued a check to Plaintiff for $75,100.00, the policy limit of coverage for the dwelling. On March 5, 2013, Plaintiff filed a lawsuit where she asserted claims of breach of contract, bad faith, negligence/gross negligence, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. After discovery, the parties filed cross-motions for summary judgment.

DISCUSSION

Breach of Contract—Contents

A plaintiff asserting a breach of contract must prove 1) the existence of a valid and binding contract, and 2) that the defendant has breached it. The policy provides: “We do not cover any loss or occurrence in which any insured person has concealed or misrepresented any material fact or circumstances.”

Knowing and Willful

In Mississippi, for an insurance company to defeat a policy on the basis of a concealment clause, it must establish that statements by the insured were (1) false and (2) material and (3) knowingly and willfully made. The Court found it only needed to address the third element—that a material misrepresentation was “knowingly” and “willfully” made.

Finding that it is undisputed that Plaintiff provided false information on her contents list; she included items that were not in the house, and she provided incorrect ages for items; admitted during her Examination Under Oath (EUO) and deposition that she had been investigated for and charged with insurance fraud related to the subject loss and claim;  that an inspector for the Hattiesburg Fire Department, told Defendant’s investigator that there were little to no contents inside the home; that an investigator from the State Fire Marshall’s office, told Defendant’s investigator that he was unable to locate any evidence of the items she included on her contents list, and that he intended to arrest Plaintiff for insurance fraud the court saw a reasonable ground for investigation and delay.

However, in her deposition Plaintiff testified that her children had taken some of the contents out of the house without her knowledge. After Plaintiff’s EUO she later corrected testimony from the EUO with an errata sheet, claiming that she had recently learned that her children took contents from the house before the fire.

As a result a genuine dispute of material fact exists as to whether Plaintiff’s misrepresentations were “knowing and willful” or honest mistakes.

Bad Faith Denial—Contents

Both parties seek summary judgment as to Plaintiff’s bad faith claim arising from Defendant’s denial of her contents claim. Defendant argues that it had an arguable basis for denial of the contents claim, and that Plaintiff has no evidence that it committed any acts or omissions that would rise to the level of intentional tort. Plaintiff contends that Defendant had no arguable basis for denial of the contents claim, and committed a variety of actions which rise to the level of intentional torts.

The insured has the burden of establishing a claim for bad faith denial of an insurance claim, and she must show that the insurer denied the claim (1) without an arguable or legitimate basis, either in fact or law, and (2) with malice or gross negligence in disregard of the insured’s rights.

Here, the Court need only address the first element—whether Defendant had an arguable or legitimate basis for denial. An insurer has no arguable basis for delaying or denying payment on a claim if nothing legal or factual would have arguably justified its position. Phrased differently, an arguable reason is one in support of which there is some credible evidence. Therefore, a plaintiff bears a heavy burden in demonstrating to the trial court that there was no reasonably arguable basis for denying the claim.

Defendant denied Plaintiff’s contents claim because it believes that she knowingly and willfully made material misrepresentations of fact regarding the contents of her home. The record contains a variety of evidence supporting this reason for denial.  An arguable reason is one in support of which there is some credible evidence. The evidence above—most of which is contained in Plaintiff’s own exhibits—demonstrates that Defendant had an arguable reason to deny Plaintiff’s contents claim for material misrepresentations.

The existence of a genuine factual dispute as to whether Plaintiff’s misrepresentations were knowing and willful is relevant insofar as the existence of a viable dispute means that both sides had arguable reasons to litigate the issue. The fact that an insurer’s decision to deny benefits may ultimately turn out to be incorrect does not in and of itself warrant an award of punitive damages if the decision was reached in good faith.

For all of these reasons, the Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the denial of her contents claim, and it denied Plaintiff’s motion for summary judgment as to the same.

Considering the facts outlined above—derived largely from Plaintiff’s own exhibits—the Court concluded that at all relevant times prior to payment of Plaintiff’s dwelling claim, Defendant was engaged in active investigation of the claim and did not delay payment in bad faith.

Because Mississippi places a duty on insurers to properly investigate the claims asserted by their insured, conducting a prompt and adequate investigation provides a legitimate basis for a payment delay. Mississippi courts have held that an insurer’s conduct does not amount to gross negligence or an intentional tort as long as the insurer is actively investigating a claim.  As demonstrated above, there was ample reason to investigate Plaintiff’s dwelling loss from the very beginning of the claim process.

Defendant had an arguable and legitimate reason to delay payment of Plaintiff’s dwelling claim to complete its investigation of the dwelling loss. Therefore, the Court granted Defendant’s motion for summary judgment as to Plaintiff’s claim for bad faith delay of payment on her dwelling claim, but it denies Plaintiff’s motion for summary judgment as to the same.

Specifically:

The Court denies the parties’ motions for summary judgment as to Plaintiff’s claim for breach of contract related to Defendant’s denial of her contents claim.

The Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the denial of her contents claim and denied Plaintiff’s motion for summary judgment as to the same.

The Court granted Defendant’s motion for summary judgment as to Plaintiff’s bad faith claim arising from the delay of payment on her dwelling claim and it denied Plaintiff’s motion for summary judgment as to the same.

The Court denied Defendant’s motion for summary judgment as to Plaintiff’s claim for breach of the implied duty of good faith and fair dealing.

The Court granted in part and denied in part Defendant’s motion for summary judgment as to Plaintiff’s claims of negligence and gross negligence.

The Court denies the parties’ motions for summary judgment as to Plaintiff’s claims for punitive and extra-contractual damages.

ZALMA OPINION

This case teaches that it is difficult, even when there is substantial evidence that a fraud has occurred, to prove a willful and intentional misrepresentation. The case also teaches that it is imprudent to rely on the representations of police investigators whose interest is only to get a conviction not to respond quickly to protect an insurer. Before denying a claim for willful and intentional misrepresentation – fraud – it is necessary to have evidence that establishes the fraud. When an insured corrects the testimony relied upon it will take the efforts of a jury to determine which of the insureds statements were true. The insurer, by its motions, has limited its exposure to the contract benefits. It’s investigation and discovery should be extended to see if it can prove that there was a willful misrepresentation and breach of the policy condition.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

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Erroneous Denial Not Bad Faith

Destruction of Property by Fired Employee

Criminal acts exclusions result in litigation between insurers and their insureds. In Easy Corner, Inc. v. State Nat. Ins. Co., Inc., — F.Supp.3d —-, 2014 WL 5510319 (E.D.Pa., 11/3/14) the District Court for the Eastern District of Pennsylvania, was called upon to resolve disputes over such an exclusion and claims of bad faith.

Easy Corner, Inc. (“Plaintiff”) filed a Complaint in the Court of Common Pleas for Philadelphia County against State National Insurance Company (“Defendant”). The Complaint contains two counts: breach of contract and bad faith in violation of 42 Pa. Cons.Stat. Ann. § 8371. Defendant removed the case to federal court.

BACKGROUND

For more than ten years, Plaintiff—a corporation owned by Ezra Reuven, who also owns an apartment building and an auto repair shop—operated Easy Corner Bar at 537 North 35th Street in Philadelphia. In the meantime, Reuven decided to get a new manager for the bar (his wife managed it previously) and met Darius Mason, who offered to run the bar for Reuven. On May 10, 2012, Reuven and Mason executed an “Agreement regarding Management of ‘Eazy Corner Inc.’”

After the end of the agreement, Mason just kept running the place against Reuven’s wishes. Reuven retained a lawyer to evict Mason who refused to be fired.

At some point during the beginning of August 2013, Reuven approached Mason again about leaving the bar, and Mason asked to “have the last weekend” before leaving—the “weekend” being Saturday, according to Reuven. Mason then threw a party for his final Saturday night at the bar. The following day Reuven and his wife passed by the bar and saw Mason and four other people “destroy the place” and “[b]reak everything.” Reuven called the police, and Mason and his companions were arrested.

The bar sustained extensive damage as a result of Mason’s actions—Young Adjustment Company estimated that the total loss was $42,950.14. That amount included damage to the apartment above the bar, where Mason was a tenant and which he also wrecked.

The insurer, after investigation, concluded Mason was a manager of the bar. They declined to pay based on Plaintiff’s insurance policy exclusion that reads in relevant part: “2. We will not pay for loss or damage caused by or resulting from any of the following: ¶ ….  h. Dishonest or criminal act (including theft) by you, any of your partners, members, officers, managers, employees (including temporary employees and leased workers), directors, trustees or authorized representatives, whether acting alone or in collusion with each other or with any other party; or theft by any person to whom you entrust the property for any purpose, whether acting alone or in collusion with any other party.”

DISCUSSION

Breach of Contract

Ordinarily in insurance coverage disputes an insured bears the initial burden to make a prima facie showing that a claim falls within the policy’s grant of coverage, but if the insured meets that burden, the insurer then bears the burden of demonstrating that a policy exclusion excuses the insurer from providing coverage if the insurer contends that it does.

The judge concluded that the most reasonable reading of the exclusion provision reveals that it has two portions. The first covers “dishonest or criminal act[s] (including theft),” and applies to the insured and any of the insured’s “partners, members, officers, managers, employees (including temporary employees and leased workers), directors, trustees or authorized representatives.” The second covers theft alone and applies to “any person to whom you entrust the property for any purpose.”

Because the entrustment clause contemplates only theft and not other forms of loss, whether a loss-causing individual was entrusted with the property is the end of the inquiry only if theft is the sole basis for coverage.

If the entrustment clause was meant to apply to the entire provision, such that it covered any “dishonest or criminal act” by “any person to whom you entrust the property for any purpose,” there would be no need to specify that theft is included in “dishonest or criminal act” and then list it again in connection with the entrustment clause.

Clause One: “Dishonest or Criminal Act”

The first clause prohibits coverage for any “[d]ishonest or criminal acts (including theft) by you, … managers, employees …, directors, trustees or authorized representatives, whether acting alone or in collusion with each other or with any other party.” Under the facts as presented for summary judgment, this is the case of a former manager returning for retaliation. Since none of the other categories seem to apply to Mason, at least not as of August 18, the day after his management role terminated, the exclusion’s first clause therefore does not apply and does not form a basis for denying coverage. The parties will have to present evidence at trial to resolve this issue.

Clause Two: Theft by Entrustment

That leaves the question of whether Mason was still entrusted with the property on August 18, such that any theft he committed that day is excluded from coverage. The exclusion provides that “theft by any person to whom you entrust the property for any purpose, whether acting alone or in collusion with any other party” is not covered by the insurance policy. This entrustment clause, which considers theft alone, is far more narrow in its scope than the “dishonest or criminal act” clause.

The purpose of an entrustment exclusion is to exclude from the risk undertaken by the insurer those losses that arise from the ‘misplaced confidence’ of the insured in those to whom it entrusts its property. Here, the insured and the individual causing the losses had come to an agreement about the end of the individual’s right to be on the property, and the losses occurred after his right had terminated.

Nothing in the language of the entrustment exclusion requires that the wrongful act and the entrustment of property be contemporaneous. The district court construed this language to require nothing more than a causal connection between the act of entrustment and the resulting loss, even if the loss occurs after the entrustment has terminated. The entrustment exclusions apply even after the temporal termination of an entrustment, provided that there is a causal connection between the act of entrustment and the resulting loss. Here, the loss is causally connected to the act of entrustment: because of his prior management of the bar, Mason had a key and was able to access the building easily. Therefore, any theft committed by Mason or those in collusion with him is explicitly excluded from coverage by the insurance policy, and under the circumstances the court granted Defendant’s motion for summary judgment as to any claims of theft.

Bad Faith

To recover on a statutory bad faith claim under 42 Pa. Cons.Stat. Ann. § 8371, the insured must prove by clear and convincing evidence that: (1) “the insurer did not have a reasonable basis for denying benefits under the policy”; and (2) “the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim. The insurer’s conduct need not have been fraudulent, but “mere negligence or bad judgment is not bad faith.”

Plaintiff has not met the burden of showing clear and convincing evidence of bad faith here. Plaintiff’s argument is essentially that Defendant was in the wrong in denying coverage, and must have or should have known as much, and therefore Defendant must have acted in bad faith. But Plaintiff has pointed to no facts of record showing that Defendant’s denial of coverage rose above “mere negligence or bad judgment” or that Defendant acted out of self-interest or ill will. Rather, under Plaintiff’s reasoning, virtually every incorrect denial of insurance coverage would constitute bad faith merely by virtue of being incorrect.

CONCLUSION

For the foregoing reasons, the Court granted Defendant’s motion for summary judgment in part and denied it in part.

Because Mason does not fall into one of the enumerated categories of individuals in the “dishonest or criminal act” clause, but was entrusted with the property, the Court denied the motion for summary judgment as to any breach of contract claims for destruction of property. The court granted the motion for summary judgment as to any claims of theft. Because there were no facts under which a reasonable jury could find by clear and convincing evidence that Defendant engaged in bad faith with respect to its refusal to cover Plaintiff’s loss, the Court granted the motion for summary judgment as to Plaintiff’s bad faith claim. An appropriate order follows.

ZALMA OPINION

This case teaches two lessons, one to the insurer and one to the plaintiffs bar:

First, if you want to exclude something from coverage write your policy carefully so that there is no question of the meaning of the exclusion. Had the damage to property exclusion had similar wording to the theft exclusion, the denial would have been affirmed.

Second, a plaintiff cannot hold an insurer for bad faith just because it made a wrong decision concerning coverage. Rather a jury must be able to find by clear and convincing evidence that there was wrongful and bad faith conduct.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Construction Defects an “Occurrence” in Texas

Contractual Liability Exclusion Trumped by Breach of General Duty

Insurers have not been happy paying construction defect claims. They have rewritten their policies in an attempt to avoid paying for damages caused by an insured contractor who constructed a defective building causing damage to the property owners.

Doug and Karen Crownover contracted with Arrow Development, Inc. (“Arrow”) to construct a house for them in Texas. Arrow performed defective work and then failed promptly to correct the work. The Crownovers spent a significant amount of money paying to correct the work themselves. An arbitrator found Arrow liable to the Crownovers for breaching its express warranty to repair non-conforming work and awarded them damages. Because Arrow filed for bankruptcy, however, the Crownovers were limited to recovering what they could from Arrow’s insurance policies. They sued Mid–Continent Casualty Co. (“Mid–Continent”), Arrow’s insurer, in federal court for the damages owed to them by Arrow, and both sides moved for summary judgment. Mid-Continent convinced the trial court that its “contractual liability exclusion” deprived Arrow of coverage and granted it summary judgment against the Crownovers.

In Crownover v. Mid-Continent Cas. Co., — F.3d —-, 2014 WL 5473084 (C.A.5 (Tex.) 10/29/2014) the Fifth Circuit Court of Appeal was presented a principal question to determine whether a contractual provision in the construction contract between the Crownovers and Arrow, which obligated Arrow to repair its work where that work failed to conform to the requirements of the construction contract, was an “assumption of liability” that exceeded Arrow’s liability under general Texas law, thereby triggering a “contractual-liability exclusion” in Arrow’s insurance contract with Mid–Continent. If the contractual-liability exclusion does not apply, the question becomes whether any other exclusion from coverage applies.

BACKGROUND

In October 2001, the Crownovers entered into a construction contract with Arrow to construct a home on their land in Sunnyvale, Texas. The contract also contained a warranty-to-repair clause, which in paragraph 23.1 provided that Arrow would “promptly correct work … failing to conform to the requirements of the Contract Documents.” The Crownovers attempted to have Arrow correct the problems and eventually sought legal relief. Their demand letters were forwarded to Mid–Continent, but to no avail.

The Crownovers initiated an arbitration proceeding against Arrow. The arbitrator found that the HVAC system “was not installed properly, did not perform as required, and exhibited numerous deficiencies as identified by the various consultants and contractors who evaluated the system,” and determined that “Arrow is responsible for the costs associated with replacement of the HVAC system, less betterment.” The arbitrator also found that the foundation failed and that Arrow was responsible for the costs of repairing the foundation. Accordingly, the arbitrator concluded that the Crownovers had a meritorious claim for breach of the express warranty to repair contained in paragraph 23.1 of their contract with Arrow, which was not barred by the statute of limitations.

Because the arbitrator awarded damages to the Crownovers on that ground, she declined to decide whether the Crownovers’ other claims were barred by a statute of limitations.
Arrow later filed for bankruptcy.

The Crownovers then sued Mid–Continent for breach of contract.

POLICY

Several exclusions apply to this general coverage provision. The district court concluded that one of them, the contractual-liability exclusion, applied in the instant case, such that Mid–Continent was not obligated to indemnify Arrow for the damages it owed the Crownovers. This exclusion states that “[t]his insurance does not apply to[ ] ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” There is, however, an exception to this exclusion for “liability … [t]hat the insured would have in the absence of the contract or agreement.” The district court noted that the arbitration award to the Crownovers was based only on Arrow’s breach of the express warranty to repair contained in paragraph 23.1 (the arbitrator explicitly declined to decide whether Arrow was liable to the Crownovers on any other ground). Thus, the district court held that because Arrow “became legally obligated to pay the arbitration damages on the basis of [its] contractually assumed liability,” the contractual-liability exclusion applied with no applicable exception to the exclusion. The district court did not rule on Mid–Continent’s other alleged exclusions from coverage.

DISCUSSION

Under Texas law, the insured has the [initial] burden of establishing coverage under the terms of the policy. If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion.  If the insurer proves that an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage. Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 193 (Tex.Ct.App.2003)).

Independent of its contractual obligations, the contractor owes a duty to comply with law and to conduct its operations with ordinary care so as not to damage the property. Following oral argument in this case, a panel of this court certified two questions to the Texas Supreme Court that are germane to the Crownovers’ dispute with Mid–Continent:

  • Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.
  • If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Texas Supreme Court answered the first question “no” and did not answer the second question.

The arbitrator in this case found in favor of the Crownovers, concluding that Arrow had breached the express warranty to repair.  The Insuring Agreement requires Mid–Continent to “pay those sums that [Arrow] becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies.

Here, the defective installation of the HVAC system caused the system to be deficient and eventually required the stressed mechanical units to be replaced. There can be no doubt that the HVAC units were themselves “tangible property,” and therefore the loss of their use amounted to property damage.   Therefore, Arrow’s defective work was an “occurrence” that caused the HVAC system and the foundation to require repairs, which amounted to “property damage.” The Crownovers thus met their initial burden of establishing coverage under the insurance policy.

The general law creates a duty to perform under the terms of a contract with reasonable care. Implicit in every contract is a common-law duty to perform the terms of the contract with care, skill and reasonable experience. Mid–Continent failed to prove that the express duty to repair non-confirming work expanded Arrow’s obligations, they have proven the converse.

Under the facts as determined by the arbitrator, there can be little doubt that Arrow’s adjudicated liability was no greater than that called for by general law. The arbitrator found that both the foundation and HVAC system began showing signs of problems shortly after the Crownovers moved in; the HVAC system was not installed properly, did not perform as required, exhibited numerous deficiencies and failures, and the units eventually had to be replaced; the foundation failed and Arrow did not repair it; and Arrow was responsible for the associated costs of repairing or replacing both the foundation and the HVAC system. Mid–Continent failed to proffer evidence creating a dispute of fact as to whether the arbitrator’s award was based on liability greater than that dictated by general law. Therefore, the contractual-liability exclusion from coverage does not apply.

ZALMA OPINION

Since the damages found by the arbitrator created an occurrence as defined by the policy coverage applied and Mid-Continent owed indemnity to Arrow. It should have defended Arrow in the arbitration and should have avoided this law suit. Reliance on the exclusion, although sufficient to convince the trial court judge, failed because of the need to interpret the contract as a whole. Arrow was clearly negligent in performing its duties and was driven out of business because of its negligence. This case also teaches that a policy and exclusion must be read as a whole. If Mid-Continent wanted its exclusion to apply to all events it should have eliminated the exception to the exclusion that it does not apply to damages that would have resulted had there been no contract damages.

 ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

You Can Beat the IRS

Taxes and Insurance

The Internal Revenue Service is not filled with insurance professionals. It might be said that no one at the IRS can define the term “insurance.” In Securitas Holdings, Inc. v. C.I.R., T.C. Memo. 2014-225, 2014 WL 5470747 (U.S.Tax Ct., Oct. 29, 2014) the IRS (Respondent) issued a notice of deficiency determining deficiencies of $13,801,906 for 2003 and $16,496,539 for 2004. The deficiencies largely stem from respondent’s partial disallowance of deductions for interest expenses and deductions for insurance expenses related to a captive insurance arrangement. The sole issue presented to the tax court was whether petitioner is entitled to deduct premiums paid through the captive insurance arrangement established by its parent corporation.

FINDINGS OF FACT

Parent–Subsidiary Structure

Securitas AB is a public Swedish company. In 1999 SHI acquired Pinkerton’s, Inc. (Pinkerton’s), a Delaware corporation, and its subsidiaries. According to Securitas AB’s 2003 annual report, Securitas AB and its subsidiaries (Securitas AB Group) accounted for 8% of the total world market for security services. During 2003 and 2004 the Securitas AB Group employed over 200,000 people in 20 countries, mostly in North America and Europe.

Services

In 2003 and 2004 the Securitas AB Group and the SHI Group provided guarding services, alarm systems services, and cash handling services.

Protectors

Protectors Insurance Co. of Vermont (Protectors) was incorporated in Vermont in 1986 as a licensed captive insurance company. As a result of various acquisitions, the SHI Group acquired Protectors in early 2000, and Protectors became a direct, wholly owned subsidiary of SHI in January 2003. Throughout 2003 and 2004 none of the U.S. operating subsidiaries of SHI or the non-U.S. operating subsidiaries of Securitas AB owned any interest in Protectors, and it was managed by a company that was unrelated by ownership to SHI.

During 2003 and 2004 Protectors was subject to regulation as a captive insurance company in the State of Vermont and paid premium taxes to the State of Vermont. In early 2004 the Vermont regulators allowed the SHI Group to avoid contributing additional capital to Protectors as a result of Protectors’ issuing an insurance policy for 2004 to Loomis. The Vermont regulators also waived the premium taxes with respect to the policy.

Securitas Group Reinsurance Limited

In late 2002 Securitas AB informed the Irish Department of Enterprise, Trade, and Employment that it intended to establish a new captive reinsurance company in Ireland called Securitas Group Reinsurance Ltd. (SGRL) and that it intended SGRL to be fully operational before the end of 2002. The Irish authorities responded that they had no objection, and SGRL was incorporated under the laws of Ireland.

Beginning in December 2002 and continuing through 2004, SGRL operated as a wholly owned subsidiary of Securitas AB, and it was subject to regulation as a reinsurance company in Ireland

Implementation of the Captive Insurance Program

After wages, the cost of risk is the second largest cost for the Securitas AB Group. The operating subsidiaries of the SHI Group had exposure to various insurable risks, including: workers’ compensation, automobile, employment practices, general, and fidelity liabilities.

A captive insurance program was attractive to the Securitas AB Group for a variety of reasons, including that the cost of adopting the program was less than the cost of reducing deductibles and purchasing insurance from third parties. The captive program also allowed Securitas AB to centralize risks. Further, it allowed the subsidiaries to know their cost of risk in advance. In the years since its implementation, the captive insurance program has provided more cost-effective insurance coverage than would have otherwise been available.

Insurance Coverages for U.S. Subsidiaries

In December 2002 Protectors issued a loss portfolio transfer policy to SHI to cover the unresolved or unreported losses for the insurable risks of most of the SHI Group’s operating subsidiaries up to the deductibles or self-insured retentions of the third-party policies. Protectors also issued a similar policy to Loomis in December 2003.  For 2003 Protectors issued prospective insurance policies to cover the insurable risks of most of the SHI Group’s operating subsidiaries up to the deductible or self-insured retentions of the third-party policies.

Reinsurance

All of the insurable risks covered under the two loss protection policies and the prospective insurance policies were reinsured with SGRL. Like the policies that Protectors issued, the reinsurance policies identified the insured, contained an effective period, specified the covered risks, identified a premium amount, and were signed by an authorized representative.

During the years in issue outside actuaries reviewed the premiums and determined they were reasonable. Respondent does not challenge the reasonableness of the premiums.
On July 1, 2010, the IRS issued notices that resulted in tax increases of $13,801,906 for 2003 and $16,496,539 for 2004.

OPINION

Insurance Premium Deduction

Section 162(a) permits a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Insurance premiums may be deductible business expenses. Although insurance premiums may be deductible, amounts placed in reserve as self-insurance are not. Such amounts can be deducted only at the time that the loss for which the reserve was established is actually incurred.

Neither the Code nor the regulations define “insurance”. However, the Supreme Court has stated that historically and commonly insurance involves risk-shifting and risk-distributing. Over time, courts have looked primarily to four criteria in deciding whether an arrangement constitutes insurance for Federal income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risks among its policyholders; and (4) the arrangement must be insurance in the commonly accepted sense.

In order for an arrangement to be considered insurance, it must shift risk of loss from the insured to the insurer.

Because Protectors reinsured 100% of its risks through SGRL, Protectors’ net premium-to-surplus ratio was 0 to 1, which falls below the industry standard. SGRL was adequately capitalized. Considering the insurance and reinsurance contracts together, the court found that Protectors was adequately capitalized for its role as a primary insurer that reinsured all of its risks with SGRL and that the arrangement adequately shifted risk. The balance sheet and net worth analysis indicates that the captive insurance arrangement has shifted any economic consequence of a risk from the SHI Group subsidiaries to Protectors and then to SGRL.

Risk Distribution

The insurer achieves risk distribution when it pools a large enough collection of unrelated risks, those that are not generally affected by the same circumstance or event. Distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as a premium because by assuming numerous relatively small, independent risks that occur randomly over time, the insurer smoothes out losses to match more closely its receipt of premiums. Risk distribution incorporates the law of large numbers which has been described as the size of the pool increases, the chance that the loss per policy during any given period will deviate from the expected loss by a given amount or proportion declines.

Insurance in the Commonly Accepted Sense

Protectors and SGRL were both organized, operated, and regulated as insurance companies. Protectors was subject to regulation under the laws of Vermont, kept its own books and records, maintained separate bank accounts, prepared financial statements, and held meetings of its board of directors. Similarly, SGRL was regulated under the laws of Ireland and also kept its own books and records, maintained separate bank accounts, prepared financial statements, and held meetings of its board of directors.

The insurance and reinsurance policies issued by Protectors and SGRL were valid and binding. Each insurance policy identified the insured, contained an effective period for the policy, specified what was covered by the policy, stated the premium amount, and was signed by an authorized representative of the company.

The premiums set by Protectors and SGRL were reasonable. Finally, the premiums were paid, and the losses were satisfied. Considering all the facts and circumstances, the court found that the captive arrangement constituted insurance in the commonly accepted sense.

Conclusion

The Tax Court concluded that the captive arrangement is insurance for Federal tax purposes. The captive arrangement shifted risk from the SHI Group to Protectors and ultimately to SGRL. Further, the captive arrangement distributed risk by insuring a large pool of differing risks. Lastly, the captive arrangement constitutes insurance in the commonly accepted sense. Accordingly, the premiums paid by the SHI Group are deductible under section 162 as insurance expenses.

ZALMA OPINION

Although taxes, like death, are certain in every life and business, taxes must be fair and applied intelligently. The IRS concluded that premiums paid to a captive insurance company were not legitimate and deductible business expenses because the insurer was owned by the parent of its various insureds. The tax court, after a review of extensive facts and the law of insurance, concluded that a captive insurer, as a risk transfer device, was insurance and that the payments made in premium were deductible and required that the IRS return the $13,801,906 disallowed for 2003 and $16,496,539 disallowed for 2004. Yes, Virginia, you can fight the IRS and win.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Agent’s Duty

Low Premium Is Not Always Best

When business is bad, when cash flow is inadequate, the first avenue cutting corners, is by reducing or not paying insurance premiums. The procedure works fine when there is no loss but causes extreme pain, suffering and litigation when there is a loss. In Cox v. Mayerstein-Burnell Co., Inc., — N.E.3d —-, 2014 WL 5493348 (Ind.App.,10/31/14) Eric Cox and Pea Cocks Corp. d/b/a Cox’s Pub (“Cox’s Pub” or “the Pub”) appealed the trial court’s grant of summary judgment in favor of Jeff Clute and Mayerstein–Burnell Co., Inc. d/b/a MBAH Insurance (“MBAH”).

FACTS AND PROCEDURAL HISTORY

Cox became the president of Cox’s Pub in May 2003 when his father, who had purchased the Pub in 1996, died. Julie Burton, a longtime employee of the Pub, managed the routine operations of the business. Among other things, Burton was responsible for the procurement and maintenance of business insurance, an obligation that afforded her the attendant authority to make necessary representations on behalf of the Pub.

Until May 2010, Cox’s Pub maintained a business insurance policy through Society Insurance (“Society”) that had policy limits of $383,000 for losses to the Pub’s building.

Between August 2008 and May 2010, Cox’s Pub settled a wrongful death lawsuit, which resulted in higher premiums under the Society policy. Cox’s Pub could not afford these premiums, and, in May 2010, Burton let the Society policy lapse for failure to pay premiums. Later, in August 2010, Burton contacted Clute, told him about the Society policy’s premiums, and informed him that Cox’s Pub was currently uninsured. She stated that the Pub needed insurance but, due to financial difficulties, desired to keep its premiums as low as possible.

During their meeting, Burton provided Clute with a copy of the Society policy’s declarations page and requested the same coverage under a new policy. Burton also provided Clute with other information necessary for Clute to obtain a quote. Clute later summarized this information, which Clute submitted this information, via the Acord application, to Illinois Casualty Company, which used it to prepare a commercial building valuation report (“Valuation”). The Valuation estimated a replacement cost value for the Pub building at $265,049. Nonetheless, following Burton’s instructions to provide a quote in line with the Society policy, Clute presented Burton with a quote from Illinois Casualty with building coverage limits of $354,000 and a yearly premium of $4,032. The following day, after a conversation with Burton, Clute presented Burton with a second quote, also from Illinois Casualty, based on the Valuation. It had building coverage limits of $265,000 and a yearly premium of $3,880. Throughout the process, Burton made clear to Clute that Cox’s Pub was struggling financially, needed to save money, and wanted to keep the Pub’s premiums as low as possible.

The final decision regarding the Pub’s coverage belonged to Burton, and Clute did not personally offer an opinion about the value of the Pub building. Less than one month later, on September 8, a fire destroyed Cox’s Pub.

Cox’s Pub submitted a claim to Illinois Casualty, and, subsequently, Cox, individually, and the Pub jointly filed a complaint against Clute and MBAH. The complaint included negligence and breach of contract claims, which were based on Cox and the Pub’s allegations that the insurance proceeds were insufficient to cover the replacement cost of the building. Cox and the Pub alleged that the true replacement cost exceeded $500,000, which left them unable to rebuild and continue the business. Clute and MBAH moved for summary judgment, which the trial court granted following a hearing.

DISCUSSION AND DECISION

Cox’s Pub contends that the trial court erred when it entered summary judgment for MBAH and Clute.

Summary judgment is a “high bar” for the moving party to clear in Indiana. Unlike federal practice, which permits the moving party to merely show that the party carrying the burden of proof at trial lacks evidence on a necessary element, Indiana imposes a more onerous burden: to affirmatively negate an opponent’s claim. For the trial court to properly grant summary judgment, the movants must have made a prima facie showing that their designated evidence negated an element of the nonmovants’ claims, and, in response, the nonmovants must have failed to designate evidence to establish a genuine issue of material fact.

Whether a Special Relationship Existed

Cox and Cox’s Pub contend that, by obtaining the Valuation, Clute counseled the Pub regarding specialized insurance coverage and, thereby, held a special relationship with the Pub.  In Indiana an insurance agent who undertakes to procure insurance for another is an agent of the insured and owes the insured a general duty to exercise reasonable care, skill, and good faith diligence in obtaining insurance. However, the agent’s duty may extend to the provision of advice only upon a showing of an intimate long-term relationship between the parties or some other special circumstance. Something more than the standard insured-insurer relationship is required to create a special relationship obligating the insurer to advise the insured about coverage. It is the nature of the relationship, not its length, that invokes the duty to advise. To establish a special relationship there must be evidence that:

  1. the agent exercises broad discretion to service the insured’s needs;
  2. counseling the insured concerning specialized insurance coverage;
  3. holding oneself out as a highly-skilled expert, coupled with the insured’s reliance upon the expertise; and
  4. receiving compensation, above the customary premium paid, for the expert advice provided.

This existence of a duty is a question of law for this court which depends, in part, on the relationship of the parties. Whether an insurance agent owes the insured a duty to advise is likewise a question of law for the court. However, whether the parties’ relationship gives rise to such a duty may involve factual questions. Clute and MBAH’s designated evidence shows that Clute and Cox’s Pub began their insurer-insured relationship approximately one month before the fire but “had never done business … prior to the disputed transaction.

The evidence is unambiguous and affirmatively negates the claim that Clute counseled Cox’s Pub. It shows that Clute and MBAH obtained from Illinois Casualty two different quotes for standard business policies, one with limits of $354,000 and one with limits of $265,000. The policy with the $265,000 limits was based on the Valuation. Clute provided Burton with Illinois Casualty’s quotes and did not personally give an opinion regarding either the value of the Pub’s structure or which policy Cox and the Pub should purchase. Burton ultimately selected the policy with the $265,000 limits and the lower premium.

It is undisputed that, when faced with competing quotes, Cox’s Pub, not Clute, made the final determination about what coverage it needed. It was in the best position to assess its needs for coverage in light of its personal assets and ability to pay. The Pub’s mere expectation of full replacement cost coverage is not enough to impose a duty on Clute to provide advice to an insured regarding the amount of coverage that should be purchased. Therefore, the appellate court concluded that, as a matter of law, Clute did not counsel the Pub regarding specialized insurance needs. Instead, Clute merely offered two quotes for standard property and casualty insurance, which is not specialized insurance. Cox’s Pub then made its own determination of adequate coverage.

Whether Clute Assumed a Duty to Advise

A duty to exercise care and skill may be imposed on one who, by affirmative conduct, assumes to act, even gratuitously, for another. The actor must specifically undertake to perform the task he is charged with having performed negligently, for without actual assumption of the undertaking there can be no correlative legal duty to perform the undertaking carefully.

With respect to the Valuation, the  evidence shows that Clute was not an “actor” in the same sense that the gratuitous assumption of duty cases contemplate because he did not specifically undertake the task that Cox’s Pub now ascribes to him. Indeed, it is not disputed that Clute merely submitted the information that Burton had provided to him to Illinois Casualty via the Acord application. Clute acted only as an intermediary between the Pub and Illinois Casualty.

If we accept Cox and the Pub’s argument, then insureds become free riders, paying lower premiums, perhaps for many years, and then retaining the ability to claim the benefit of higher coverage if a loss is incurred. This would contravene the public policy that places the risk of loss on he who is best able to avoid that loss—the insured,.

The trial court properly granted summary judgment in favor of Clute and MBAH and against Cox and the Pub on all claims. As a matter of law, Clute, as MBAH’s agent, did not have a special relationship with Cox and the Pub such that a duty to advise arose. Moreover, as a matter of law, Clute did not assume a duty to advise.

ZALMA OPINION

The agents motions for summary judgment were successful because they were able to show that all they did was provide two possible standard policies for the insured to buy and the insured bought the cheapest. As a result the insurance was inadequate and the agents did nothing to set up a special relationship. Good record keeping saved the agents.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

 

 

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Chutzpah & Fraud

Zalma’s Insurance Fraud Letter  November 1, 2014

In the 21st  issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on November 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.        Chutzpah! A convicted Fraud Perpetrator Sues Lawyers Who proved it.
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.        Non-Layers Sue Lawyers for Referral Fees.
4.    Do Insurers Get Their Money’s Worth Fighting Fraud?
5.    Only in the U.K. – Private Prosecution of Insurance Fraud.
6.    Insurance
5.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.      When Reserves Are Not Discoverable – October 30, 2014
2.      What is a Real Estate Manager – October 29, 2014
3.      Waiver of Stacking – October 28, 2014
4.      Failure to Secure Insurance – October 27, 2014
5.      Intentional or Criminal Act Uninsurable – October 24, 2014
6.      Lawyers Should Keep Their Promises – October 23, 2014
7.      Construction Defects Coverage Guide – October 22, 2014
8.      The Implied Covenant of Good Faith and Fair Dealing – October 21, 2014
9.      Making Insured Whole Not Enough – October 20, 2014
10.    Restitution Limited to Real Damages – October 17, 2014
11.    Agent Owes No Duty to Public At Large – October 16, 2014
12.    Zalma’s Insurance Fraud Letter — October 15, 2014 – October 15, 2014
13.    Failure to Promptly Appeal Denial of Claim Expensive – October 14, 2014
14.    Certificate Must Be Honored – October 13, 2014
15.    Fraud By Insurance Agent Requires Jail – October 10, 2014
16.    Policy Needs Void For Fraud Language – October 9, 2014
17.    Insurers Have The Right To Chose Who and What It Will Insure – October 8, 2014
18.    Three Shots at Head Not an Occurrence – October 7, 2014
19.    Duty to Defend – October 6, 2014
20.    Underinsured Motorist Coverage Is to Assure Insurance Coverage – October 3, 2014

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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When Reserves Are Not Discoverable

Loss Reserves Are Estimates

Whenever a plaintiff sues an insurer the plaintiff wants to know what the insurer estimated to be the amount of loss hoping to show a difference between the amount reserved and the amount offered to show bad conduct by the insurer. In most cases reserve amounts are not discoverable, especially after suit is filed, and the reserves are based on information gained in litigation and based upon the advice or analysis of defense counsel

The U.S. District Court for the Northern District of Indiana was faced with a discovery dispute over the ability of a party suing an insurance company to compel production of reserves and changes in made in the reserves as discovery in litigation proceeded. In G & S Metal Consultants, Inc. v. Continental Cas. Co., Slip Copy, 2014 WL 5431223 (N.D.Ind., Oct. 24, 2014.)

G & S Metal Consultants, Inc. (G&S) moved to Compel Continental Casualty Company to Disclose Information on Loss Reserves.

An insurance reserve, also known as a “loss reserve,” is the reserve for outstanding losses at least equal to the aggregate estimated amounts due or to become due on account of all losses or claims of which the company has received notice.

G & S asks the Court for an order permitting it to question Continental’s Rule 30(b)(6) representative about loss reserves. Continental opposes the request, arguing that loss reserves are irrelevant at this stage of the litigation when discovery on G & S’s Complaint has long been closed. Continental also argues that information about loss reserves since the onset of litigation is protected as the mental impressions and litigation strategies of Continental’s lawyers.

BACKGROUND

G & S, the insured, filed this first party lawsuit against Continental, its insurer alleging breach of contract and bad faith related to property damage and business interruption losses that allegedly went unreimbursed by Continental after a steam explosion at G & S’s Georgia facility.

The Court granted Continental’s Motion to Compel and G & S disclosed approximately 300,000 documents dating back to 2003 that had not been previously provided to Continental. Based on those documents, Continental sought leave to file an amended answer to assert additional affirmative defenses and a counterclaim based on alleged misconduct by G & S during the claim adjustment process. The Court granted the motion. Continental filed the Amended Answer, pleading four additional affirmative defenses and a Counterclaim. The Court reopened discovery to allow G & S to defend against the Counterclaim.

G & S then served on Continental a Notice of Rule 30(b)(6) Deposition and Subpoena Duces Tecum. Deposition Topic 13 requested testimony as to “[w]hether Continental currently has a reserve or loss reserve with regard to the Claim, the amount of each reserve, when such reserve was established, whether there was a change in the reserve related to the filing of the Counterclaim or other reasons for the change in reserve, and the identity of all persons with knowledge of the facts relating to the establishment of the reserves.”

ANALYSIS

Federal Rule of Civil Procedure 26(b)(1) provides that “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to the party’s claim or defense” and that “relevant information need not be admissible” but only “reasonably calculated to lead to the discovery of admissible evidence.”

The relevance standard allows discovery of information that reasonably could lead to other matters that could bear on, any issue that is or may be in the case. Unlike in most cases, in which the insured wants information on loss reserves to learn how the insurer valued the claim, G & S seeks the information in this case to determine if the discovery that it provided to Continental in 2012 was really new to Continental such that the discovery could have formed the basis of Continental’s subsequently filed Counterclaim for fraud.

Continental’s Counterclaim alleged that G & S fraudulently concealed and misrepresented information that it failed to disclose during the original claim submission process by producing the information for the first time in 2012 during this litigation.  Based on Mr. Barrick’s prior testimony that reserves set for G & S’s claim change as new information is received by Continental, G & S reasons that “what the reserves were and are, when they changed, and by how much” may “establish a time line” of when Continental received information. G & S suggests that if the information was not “new” to Continental in 2012, this would be evidence that Continental’s Counterclaim sounding in fraud is without merit.

Continental responds that Rule 30(b)(6) testimony on how its loss reserves may have changed after this litigation was filed is irrelevant and reflects nothing more than the mental impressions and litigation strategies of Continental’s lawyers, protected by the attorney-client privilege and the work product doctrine.  Since the advice, analysis, and recommendations of the attorneys are discussed by Continental management, who take into account the confidential attorney-client communications in considering whether and how to increase or decrease loss reserves it is protected by both the attorney client privilege and the work product protection.

The Court concluded that any change in the loss reserves since the lawsuit was filed, and, more specifically since G & S produced additional discovery in 2012, would not provide an identifiable correlation between Continental’s knowledge.

Multiple factors affect the adjustment of loss reserves during the course of litigation in addition to information obtained during discovery, such as litigation strategy, the potential for settlement, developments in the litigation, and the possibility of a favorable or unfavorable judgment.

Moreover, G & S already has the information it needs for an analysis of what Continental knew during the claim adjustment process and then later during this litigation and in 2012. Over the course of several discovery motions since the discovery deadline was extended in relation to Continental’s Counterclaim, the Court has granted G & S wide latitude to conduct discovery regarding the information and documents that Continental received during the initial claims process even though discovery on G & S’s Complaint for bad faith had closed. Continental has responded to G & S’s requests for production of documents, producing all nonprivileged documents contained in its claim file.  The topic of “what Continental knew and when” can be further explored in the continuation of Mr. Barrick’s deposition.

Thus, because testimony about the loss reserves since the filing of the lawsuit does not appear reasonably calculated to lead to the discovery of admissible evidence, the loss reserves are not relevant and, as a result, are not discoverable.

Once litigation is anticipated, loss reserves are protected by the work product doctrine when there is evidence that the loss reserves were established or adjusted in consultation with counsel in anticipation of or during litigation. Because the Court found that loss reserves established or adjusted during this litigation are not relevant, there is no basis at this stage in the litigation to compel Continental to disclose pre-litigation loss reserves in the context of discovery related to the Counterclaim.

ZALMA OPINION

Bad faith law suits cause – because the exposure to an adverse judgment can be severe – are hard fought and involve multiple motions and disputes over discovery. In this case discovery gave the insurer defendant a reason to amend its answer and file a counterclaim alleging that the insured attempted fraud. The insured, similarly, seeks to get through discovery, reserve information to show that the claim of fraud was not newly discovered by the insurer and was not appropriate. The court found that the reserves were irrelevant to its defense of the counterclaim and refused to allow that discovery. Once litigation is anticipated, loss reserves are protected by the work product doctrine since they are based upon the litigation analysis of defense counsel.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

 

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What is a Real Estate Manager

Tenant Is Just a Tenant

An unwritten rule of law is that an appellate brief or an appellate opinion should never truly be brief. The 11th Circuit Court of Appeal in Georgia broke the rule in dealing with Moon v. Cincinnati Ins. Co., — Fed.Appx. —-, 2014 WL 5410298 (C.A.11 (Ga.) Oct. 24, 2014) and resolved an insurance coverage issue succinctly and in language that any person can understand.

FACTS

Shawn Moon and Tanya Moon brought this action again The Cincinnati Insurance Company (“Cincinnati”) asserting both common law and contractual claims arising out of their insurance coverage dispute. The district court granted summary judgment to Cincinnati on all the Moons’ claims against it. The Moons brought this appeal.

The suit arose after the drowning death of a two-year-old child in a swimming pool at a home occupied by Shawn and Tanya Moon. At the time of the accident, Tanya Moon was babysitting the child.

The property was owned and insured by Shawn Moon’s father, Terry Moon. In addition to Terry Moon, the insurance policy extended coverage to “[a]ny person … while acting as [Terry Moon’s] real estate manager.”

The decedent’s parents and estate brought suit against Shawn and Tanya Moon and obtained a judgment in excess of ten million dollars. After initially defending Shawn and Tanya Moon under a signed reservation of rights, Cincinnati subsequently denied coverage and withdrew its defense of the Moons. The stated reason for the denial of coverage was that the policy did not cover Shawn and Tanya Moon through their relationship with Terry Moon, the homeowner and policyholder.

The Moons brought this action in state court asserting breach of contract and both common law and statutory bad faith failure to settle claims. They also sought punitive damages and attorneys’ fees. Cincinnati removed the action to the district court. The parties filed cross motions for summary judgment. The district court granted Cincinnati’s motion, holding that it had no duty to defend the Moons in the wrongful death action against them as they were neither the insured under the policy nor acting as real estate managers at the time of the accident.

The crux of the Moon’s argument was that, since the term “real estate manager” is undefined in the policy, it is ambiguous and its meaning must be strictly construed and resolved in favor of coverage. They asserted that a “real estate manager” is “one who simply takes care of an owners’ (sic) needs with regard to a piece of real estate.” They argued that, because they took care of the home they leased from Shawn Moon’s father, Terry, they were real estate managers as well as lessees.

The district court held that the term real estate manager has an accepted meaning in the industry and is not ambiguous. The industry term “real estate manager” implicates real estate transactions rather than routine occupancy of a dwelling.

ANALYSIS

The Eleventh Circuit concluded that to extend the definition of real estate manager to include a tenant who performs routine maintenance on the home he is leasing would render meaningless the policy’s lack of coverage for tenants of the property. Indeed, it would transform every tenant, family member or friend living in another’s home, who cuts the yard or paints a wall, into a covered real estate manager. Nothing that the assertion is not a reasonable interpretation of real estate manager the Eleventh Circuit concluded that no reasonable insured would equate his tenants with real estate managers.

Furthermore, to be covered, a real estate manager must be acting as a real estate manager at the time of the event for which coverage is sought. At the time of this accident, Tanya Moon was babysitting and Shawn Moon was not at home. There were no allegations in the complaint that the Moons were acting as real estate managers at the time of the accident.

Finally, the deposition testimony of the actual insured, Terry Moon, clearly revealed that he did not consider his son and daughter-in-law to be real estate managers of his property. He was allowing them to live there to help them out (he purchased the home from them to avoid foreclosure).

Because the Moons were neither the insureds nor real estate managers, all of their other claims—which depended upon their being covered by the policy—were appropriately denied by the trial court.

ZALMA OPINION

The Moons, and the parents of child for whom Tanya Moon was babysitting, would have been protected if the Moons had acquired a tenant’s homeowners policy or a commercial liability policy to cover her babysitting business. They did not but relied on her father, Terry, who bought the house from his daughter and her husband because they were going to lose it it foreclosure.  The real estate manager argument, although creative, had no basis in fact or in the common meaning of the term. I am amazed that this case was not thrown out as frivolous and can understand why the Eleventh Circuit found little need to write an extensive opinion affirming the decision of the trial court.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Waiver of Stacking

Action Of Named Insured Binds All Insureds

Insureds work diligently to reduce the premium they pay. Since none believe they will ever have a loss and claim, insureds are willing to waive coverages like the right to stack coverages, uninsured motorist or underinsured motorist coverage to limit the premium they pay for their auto insurance. When a loss occurs the insured then claims that the waiver did not apply to them or that it violated state statutes.

SUPREME COURT ASKED TO ANSWER QUESTIONS OF GREAT PUBLIC IMPORTANCE

Insured, who was injured while riding as passenger in vehicle owned by her father and was being driven by permissive user, brought action against insurer, seeking uninsured-motorist (UM) benefits.

The Florida Supreme Court was asked to answer questions certified by an appellate court to be of great public importance:

        1. WHETHER THE FAMILY VEHICLE EXCLUSION FOR UNINSURED MOTORIST BENEFITS CONFLICTS WITH SECTION 627.727(3), FLORIDA STATUTES, WHEN THE EXCLUSION IS APPLIED TO A CLASS I INSURED WHO SEEKS SUCH BENEFITS IN CONNECTION WITH A SINGLE–VEHICLE ACCIDENT WHERE THE VEHICLE WAS BEING DRIVEN BY A CLASS II PERMISSIVE USER, AND WHERE THE DRIVER IS UNDERINSURED AND LIABILITY PAYMENTS FROM THE DRIVER’S INSURER, WHEN COMBINED WITH LIABILITY PAYMENTS UNDER THE CLASS I INSURED’S POLICY, DO NOT FULLY COVER THE CLASS I INSURED’S MEDICAL COSTS.

        2. WHETHER UNINSURED MOTORIST BENEFITS ARE STACKABLE UNDER SECTION 627.727(9), FLORIDA STATUTES, WHERE SUCH BENEFITS ARE CLAIMED BY AN INSURED POLICYHOLDER, AND WHERE A NON–STACKING ELECTION WAS MADE BY THE PURCHASER OF THE POLICY, BUT WHERE THE INSURED CLAIMANT DID NOT ELECT NON–STACKING BENEFITS.

BACKGROUND

On October 29, 2009, Crystal Harrington was injured in a single-car accident, while riding as a passenger in a car owned by her father, but driven with permission by a non-family member, Joey Williams. The vehicle was insured by Travelers Commercial Insurance Company (“Travelers”). Harrington’s mother was the named insured and the purchaser of the policy on the vehicle. The policy insured three vehicles and provided liability and non-stacked uninsured motorist coverage for Harrington, her mother, and her father. Specifically, the Harrington’s policy provided for bodily injury liability coverage of $100,000 per person and $300,000 per accident, and non-stacked UM coverage of $100,000 per person and $300,000 per accident.

After she was injured, Nationwide paid Harrington the $50,000 limit of Williams’ liability policy. This payment did not fully cover Harrington’s medical expenses, and Travelers also tendered its liability limit of $100,000. However, Harrington’s damages still exceeded the combined liability payments, and she subsequently sought UM benefits from Travelers. Travelers denied the claim on the ground that the vehicle was not an “uninsured motor vehicle” as defined in the policy.

Specifically, the policy’s definition of an “uninsured motor vehicle” included an “underinsured” vehicle, that is a vehicle to which a liability policy applies at the time of the accident but the amount paid under the policy is not enough to pay the full amount of the insured’s damages. However, the policy also contained a “family vehicle exclusion” which expressly provided that an uninsured vehicle does not include any vehicle owned by or furnished or available for the regular use of you or a “family member” unless it is a “your covered auto.”

ANALYSIS

Whether the Family Vehicle Exclusion Conflicts With Section 627.727(3), Florida Statutes
Under Florida law, insurers are required to provide UM coverage for all vehicles insured for liability purposes, unless the insured expressly rejects UM coverage. Harrington argues, and the Court of Appeals concluded, that the family vehicle exclusion in the Travelers policy is void because it conflicts with section 627.727(3)(b), which provides that underinsured vehicles shall be considered uninsured for purposes of UM coverage, and that Harrington is entitled to both liability and UM benefits under the Travelers policy.
The terms and conditions of the insurance policy expressly and unambiguously excluded the vehicle in question from the definition of an “uninsured motor vehicle. Thus, the family vehicle exclusion does not conflict with section 627.727(3)(b) because the statute clearly states that the term “uninsured motor vehicle” is subject to the terms and conditions of the policy.

A vehicle cannot be transformed from an insured vehicle into an uninsured vehicle simply because liability coverage was barred due to a valid enforceable household exclusion in the same policy.

Whether the Exclusion Conflicts With Statute

The family vehicle exclusion does not conflict with the statute because the liability policy does not exclude coverage for non-family members. Rather, the Harrington’s liability policy, consistent with the purposes of the statute, covers any person who drives, with permission, any of the vehicles insured under the policy, and also provides that an insured vehicle is considered uninsured for purposes of UM coverage if the liability policy excludes coverage for non-family members whose operation of the vehicle cause injury to the named insured or the named insured’s family.

The Supreme Court concluded that the family vehicle exclusion does not conflict with the and answered the first certified question in the negative.

Stacking of UM Benefits

While stacking of UM coverage is presumptive under Florida law, section 627.727(9) provides that an insurer may offer non-stacking coverage provided that the insurer informs the insured of the limitations of such coverage and the insured executes an approved form expressly electing non-stacking coverage. Harrington’s mother, the named insured, executed a coverage election form expressly electing non-stacking UM coverage and, as a result of this election, paid a corresponding lower insurance premium. The plaintiff argued that she did not agree to non-stacking coverage nor did any of the insureds other than the named insured and that, therefore, the non-stacking provision should not apply to her.

The Supreme Court noted that automobile insurers have never provided individualized UM coverage.  UM coverage premiums are calculated based on the coverage selected for the policy as whole.  The Court of Appeal’s interpretation creates the potential predicament that individuals under the same policy will elect both stacked and non-stacked UM benefits, making the calculation of a single UM premium impractical, as well as virtually impossible.

The Supreme Court, therefore, concluded that a waiver executed by the named insured electing non-stacking UM coverage is binding on all insureds under the policy and it, therefore answered the second certified question in the negative.

ZALMA OPINION

Insurance is a risk transfer device. Risks of loss – like from an uninsured motorist or an underinsured motorist – is transferred from the insured to the insurer. Insureds and insurers can, before there is a loss, enter into any contract terms that are not in conflict with public policy. In this case the statutes of the state of Florida allow insureds to waive the right to insurance coverage stacking of limits of multiple policies to a single loss. The named insured waived that right and the Supreme Court, as much as it was concerned for the lack of indemnity for the injured person, applied the terms and conditions of the policy and applied the family exclusion and the contract term that prevented stacking.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Failure to Secure Insurance

Accrual of Statute of Limitations for Agent’s Error

Insurance agents, like everyone else, will make a mistake. In Michigan, an insurance agent can be held liable in negligence for failing to acquire the insurance ordered by the insured. The agent cannot, in Michigan, be considered sufficiently professional to be sued for malpractice.

In Stephens v. Worden Ins. Agency, L.L.C., — N.W.2d —-, 2014 WL 5285457 (Mich.App., Oct. 16, 2014)  the Michigan Court of Appeal was asked to determine which statute of limitations applied to a failure to acquire proper insurance claim since a statute of limitations defense eliminated the need to prove that the agent acted wrongfully.

BACKGROUND

In 1998, Jack Fritz first approached agent David Shamaly at the Worden Insurance Agency to secure workers’ compensation and general liability insurance for his construction company. Fritz informed Shamaly that his company operated in several states, not just Michigan, and that he required multistate coverage. From 1998 through 2008, Fritz operated under workers’ compensation and general liability insurance policies issued by Hastings Mutual Insurance Company, the latest taking effect on April 21, 2008. And Fritz apparently experienced no loss outside of Michigan leading to a claim against the workers’ compensation policy.

On June 7, 2008, Fritz’s company was engaged in a construction project in Florida. Fritz’s employee, Charles Becker, fell from a ladder and was killed. Fritz contacted Shamaly to report the accident, and Shamaly directed him to contact Hastings directly. When Fritz did so, he learned that the accident would not be covered under the workers’ compensation policy because it applied only to accidents occurring in Michigan.

On December 2, 2008, Becker’s widow and the personal representative of his estate, Jennifer Stephens, filed suit against Fritz in a Florida circuit court. On September 22, 2010, Fritz and Stephens reached a settlement, under which Fritz was liable for $5,000,000 to Stephens. Stephens, gambling that it would be more probable to collect from the agents or insurers, promised not to pursue collection against Fritz in exchange for assignment of Fritz’s right to pursue indemnification against Worden, Hastings, and any other appropriate entity or person liable in the coverage dispute.

As a result of the settlement agreement, Stephens filed the current action against Worden Insurance Agency and its agent, Shamaly, in the St. Clair Circuit Court on May 31, 2011. Following defendants’ first and unsuccessful motion for summary disposition on statute of limitations grounds, the court permitted Stephens to file a three-count amended complaint. Stephens’s second count is entitled “special relationship.” Stephens contended that a special relationship arose because Shamaly and Worden “negligently misrepresented the nature and extent of the insurance coverage in Florida.”

The third count in the amended complaint alleged that Worden Insurance Agency was vicariously liable for Shamaly’s acts. Shamaly was acting within the scope of his employment and had implied actual authority to act on Worden’s behalf, rendering his employer liable.

Reviewing the manner in which Stephens fashioned her claims, the court determined that they sounded in malpractice. Specifically, Stephens cited the standards of care for an insurance agent and named expert witnesses to testify to that standard. As her claims were filed beyond the two-year statute of limitations, the court found them untimely.

STATUTES OF LIMITATION

The resolution of this case hinges on the proper characterization of Stephens’s claims. It is well established under Michigan jurisprudence that a court is not bound by the label a party assigns to its claims. Rather, we must consider “the gravamen” of the suit based on a reading of the complaint as a whole.  In this manner, we prevent a party from avoiding an applicable statute of limitations through “artful drafting.”

The appellate court rejected Stephens’s argument that her claims could be characterized as sounding in breach of contract.  Rather, this Court has characterized an insurance agent’s failure to procure requested insurance as a tort.

Stephens’s contention that her complaint sounded in fraud is equally without merit. Fraud claims must be pleaded with particularity, addressing each element of the tort.  Stephens did allege that defendants made a material representation that ultimately proved false: that the workers’ compensation policy secured for Fritz would cover occurrences in Florida. She also alleged that defendants intended Fritz to rely upon this representation in purchasing insurance, which he did. Stephens implies recklessness in her complaint by asserting that defendants failed to contact Hastings Mutual and make proper inquiries when they discovered that Fritz’s certificates of insurance did not mention Florida coverage.

The question remaining is whether Stephens’s claims sound in ordinary negligence or malpractice. Absent a statutory definition, the Michigan Supreme Court has repeatedly held that “malpractice” must be given its common-law meaning.

Declining to extend malpractice liability is also consistent with the role of insurance agents. To qualify for an insurance agent license, a person must complete either 20 or 40 hours of instruction through an accredited home study course, an insurance trade association program, an authorized insurer, or an educational institution. At the conclusion of that instruction, the applicant must pass a licensing exam. Such limited educational and licensing requirements are not commensurate with the “professions” generally deemed subject to professional negligence liability, i.e., malpractice.
Absent a common-law basis for subjecting insurance agents to professional malpractice liability, the circuit court erred in applying the malpractice statute of limitations in this case. Rather, Stephens raised an ordinary negligence claim. And the statute of limitations for ordinary negligence claims is three years.

TIMELINESS OF STEPHENS’ CLAIMS

A tort claim accrues when all the elements of the claim have occurred and can be alleged in a proper complaint. Damages may recur after a claim accrues. But there must be an initial injury for a claim to exist and it is that injury that triggers the running of the limitations period. The accrual of a negligent procurement or advice claim is an issue of first impression in Michigan. After reviewing different decisions from other jurisdictions the appellate court held that a negligent procurement or advice claim accrues when the insurer denies the insured’s claim. On that date any speculative injury becomes certain, and the elements of the negligence action are complete.

As the underlying event is not the trigger for the cause of action, Becker’s death cannot be the accrual date for Stephens’s claims. Similarly, the date on which defendants advised Fritz or procured the insurance policy, or on which the policy took effect cannot be deemed the accrual date because any injury or damage was merely speculative at that point.

The record does not reveal the exact date when Fritz filed his claim with Hastings Mutual or when Hastings Mutual denied coverage. The record instructs that Becker died on June 7, 2008, however, and the claim must have been filed and denied on or after that date. Fritz therefore would have had until at least June 7, 2011, to file a negligent procurement and advice suit against defendants. Stephens, as Fritz’s assignee, filed her complaint on May 31, 2011, a full week before the earliest possible expiration of the statutory limitations period.

VICARIOUS LIABILITY

Worden argues in the alternative that the circuit court could have dismissed Stephens’s vicarious liability claims against it.

Here, Shamaly was acting in the interest of his employer, Worden. Although his sale of insurance resulted in a commission for Shamaly, it also resulted in profit for Worden. It was Shamaly’s job to secure commercial insurance policies for Worden’s customers. Shamaly acted within the parameters of his job description when he procured the Hastings Mutual policy for Fritz, even if his job performance was negligent or not in conformance with his employer’s instructions.

ZALMA OPINION

This case establishes, for Michigan only, that an insurance agent or broker is not a profession subject to malpractice because of the limited training required for a license. It also, for the first time, finds that the statute of limitations for negligent procurement of insurance only begins to run when the insurer denies an insured’s claim because the insurance the insured thought was covered was denied by the insurer. As a result, the plaintiffs gamble has paid off, and if she can prove that the agent negligently failed to procure the insurance it may be able to recover its $5 million judgment. This decision is limited to the statute of limitations. It does not deal with the fact that the insured apparently failed to read the policy and its multiple renewals, knew or should have known, that the workers’ compensation coverage was limited to the state of Michigan.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Intentional or Criminal Act Uninsurable

Insurance Agent Can’t Buy Insurance For Criminal or Intentional Act

People engaged in criminal conduct or conduct intended to cause damage to another seek insurance coverage in case they are caught in their wrongful conduct. When they do they run afoul of the definition of insurance that it only protects against events that are contingent or unknown at the time the policy is acquired.

A Mississippi farmer named Scruggs schemed to profit from a special seed developed by Monsanto and deprive Monsanto of its right to control and profit from the sale of its special seed. In Scruggs v. Bost, — So.3d —-, 2014 WL 5375946 (Miss., Oct. 23, 2014). When sued by Monsanto in federal court Scruggs asked its insurer to defend. The insurer refused because the acts were intentional. The Mississippi Supreme Court agreed with the insurer so Scruggs sued his insurance agents for not getting him coverage for his acts. He lost in the trial court and appealed his claim to the Mississippi Supreme Court.

Farmland Mutual Insurance Company succeed in its denial. Scruggs sued Greg Bost (the insurance agent), and Nowell Insurance Agency in state court. Scruggs appeal asked the Supreme Court, arguing, among other things, that Bost and Nowell negligently failed to advise him that he needed to purchase patent infringement insurance

FACTS

The Underlying Federal Action

Monsanto Company develops, manufactures, licenses, and sells agricultural chemicals, agricultural biotechnology and other agricultural products.  Monsanto Company v. Scruggs, 249 F.Supp.2d 746, 749 (N.D.Miss.2001). After much research, Monsanto developed genetically modified seeds that had several favorable traits, such as resistance to herbicides and certain insects/pests.

Monsanto structured its marketing strategy for its genetically modified seeds carefully. Seed companies and farmers who wished to use Monsanto’s patented seeds were required to enter into a licensing agreement with Monsanto, which limited use of its seeds to one growing season. In other words, farmers could not resell or supply the seeds to any other person, and they could not save any seed to replant the next year. These restrictions were publicized in trade journals and through public meetings with farmers, and they also appeared on the product label.

Monsanto determined that Scruggs had replanted its seeds, and it filed suit against him in the United States District Court for the Northern District of Mississippi on September 7, 2000. Monsanto alleged that Scruggs “knowingly, intentionally and willfully planted unlicensed seed without authorization from Monsanto and used such seed in violation of Monsanto’s patent rights.” Scruggs denied Monsanto’s allegations and brought numerous counterclaims against it. After extensive litigation and trial, the jury found that Scruggs had willfully infringed Monsanto’s patents and awarded it $8 .9 million in compensatory damages.

The State Action Against Farmland

Bost presented several coverage options to Scruggs via a written insurance proposal, and Scruggs purchased some options and declined others.

Scruggs purchased a general liability policy and an umbrella policy, and the policies first went into effect on April 1, 1999. Scruggs subsequently renewed his coverage in 2000. Scruggs testified in his deposition in the state action that he did not mention patent infringement to Bost or ask him about patent-infringement coverage prior to the issuance of the policy in 1999, nor did he mention it before the renewal in 2000.

Interestingly, Scruggs testified in his deposition that he renewed his policy with Farmland for a second time in April 2001, even after Monsanto had sued him and after Farmland had denied coverage. He also testified that he renewed his coverage despite Bost reminding him that Farmland had determined that no patent-infringement coverage existed. Bost testified to this conversation as well.

Despite the technological complexity of the underlying facts, the court only needed to address one basic legal issue to resolve this matter: does the Scrugges’ insurance policy cover the torts complained of in Monsanto’s lawsuit?The State Action Against Bost and Nowell

Farmland and Scruggs litigated the action initially, as the pressing issue was Farmland’s duty to defend. Scruggs focused on his claims against Farmland until this Court reversed and rendered in Farmland’s favor. After the federal jury awarded Monsanto $8.9 million in compensatory damages in September 2010, Scruggs pursued his claims against Bost and Nowell, which had remained virtually dormant since 2001.

Following the Mississippi Supreme Court’s decision in Farmland, Scruggs amended his Complaint against Bost and Nowell twice.

As for Scruggs’s allegations regarding Bost’s and Nowell’s failure to advise, the circuit judge found that no duty arose, “because neither Defendants nor Plaintif even mentioned patent infringement coverage.” Finally, the circuit judge found that Bost and Nowell could not be held liable for not realizing the potential for the patent-infringement suit, because “the Mississippi Supreme court has held that request for ‘full coverage’ does not require an insurance agent to provide coverage for all conceivable risks or perils.” The circuit judge dismissed all of Scruggs’s claims with prejudice.

ANALYSIS

The Supreme Court found that Scruggs’s actions were both intentional and illegal, and therefore uninsurable as a matter of law. As a result, Bost and Nowell simply cannot be liable for any form of negligence. In other words, it would not matter what negligent misrepresentations or omissions Bost and Nowell might have committed if Scruggs’s actions are uninsurable as a matter of law.

In general, it is against public policy for an insurance contract to provide coverage for the intentional or willful misconduct of an insured. People should not be allowed to insure themselves against acts prohibited by law. From the face of Monsanto’s complaint, only intentional torts are alleged. In addition, the Scruggses’ pattern of conduct has been one of intentional acts. Indeed, it took a preliminary injunction by a federal court to stop the Scruggses from using or selling the seeds.

In sum, the Supreme Court found that Scruggs’s actions were intentional and illegal and therefore uninsurable under Mississippi law. Therefore, Bost and Nowell cannot be held liable under any negligence theory, as Scruggs’ actions simply were not insurable.

In other words, even if Bost and Nowell did have some duty to recognize Scruggs’s need for patent-infringement insurance and failed to inform him that he needed it, they cannot be liable for that omission, as insurance coverage for Scruggs’s intentional actions simply cannot exist in Mississippi as a matter of law. Thus, the circuit court’s grant of summary judgment in Bost and Nowell’s favor was correct.

CONCLUSION

Mississippi caselaw is clear that one’s intentional, illegal actions cannot be insured as a matter of law. Because his actions are uninsurable as a matter of law, Bost and Nowell cannot be liable for any alleged negligent misrepresentations or omissions.

ZALMA OPINION

Insurance is not a panacea for every possible wrong conducted by an insured. It must only provide defense and indemnity to an insured for events that are fortuitous, accidental, contingent and unknown at the time the policy is acquired. In addition, an insured who has acted improperly is obligated to inform the insurer of facts material to its decision to insure or not insure. In this case the Scruggses were involved in a criminal scheme to steal Monsanto’s proprietary seeds and did so with an intent to profit from the work of Monsanto. In so doing it could have no claim against the agents for not obtaining appropriate insurance for them since there is no insurance policy that could be legally sold in Mississippi that would cover their criminal and intentional acts. They must pay, from their own pockets, the more than $8 million verdict.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Lawyers Should Keep Their Promises

Anti-SLAPP Statue Limited

Lawyers often make agreements with other lawyers and insurers when cases settle. Often funds are paid into the lawyer’s trust account to be distributed after certain conditions are met. If the conditions are not met and the lawyer, regardless, distributes the funds, the lawyer will probably be sued by the other party. In Old Republic Construction Program Group v. Boccardo Law Firm, Inc., — Cal.Rptr.3d —-, 2014 WL 5341803 (Cal.App. 6 Dist., October 21, 2014) the California Court of Appeal dealt with such a case.

Defendants Boccardo Law Firm (Boccardo) and one of its partners, John C. Stein, bring this appeal from an order denying their motion under the anti-SLAPP law to strike three causes of action asserted against them by plaintiff Old Republic Construction Program Group (Old Republic). The question presented is whether the statute applies to claims alleging that defendants wrongfully withdrew settlement funds derived from a now-defunct lawsuit, which they had deposited in their trust account pursuant to a stipulation requiring Old Republic’s consent to any withdrawal.

BACKGROUND

Defendants Boccardo and Stein filed an action for damages in San Joaquin Superior Court on behalf of Albert Carabello, alleging that he had been injured when his pickup collided with a vehicle operated by Beverly Casby, the defendant in that action. Casby was insured under a policy of automobile insurance with liability coverage of $100,000.

It is apparently undisputed that at the time of the collision, Carabello was acting in the course and scope of his employment. Plaintiff Old Republic was the workers’ compensation insurer for Carabello’s employer. It provided benefits which it claims exceeded $100,000. It filed a complaint in intervention in the San Joaquin action, asserting a right to reimbursement of these expenditures.

In answer to both Carabello’s and Old Republic’s complaints, Casby raised the affirmative defense of Witt v. Jackson (1961) 57 Cal.2d 57, 17 Cal.Rptr. 369, 366 P.2d 641, which limits the ability of an employer, or its insurer, to obtain reimbursement out of an injured worker’s recovery against a third party where the employer’s own negligence contributed to the worker’s injuries.

Carabello and Casby agreed to settle the case for her $100,000 policy limits. Old Republic’s claim to reimbursement, however, remained unresolved. Accordingly, Casby’s insurer made the settlement check payable to Carabello, Boccardo, and Old Republic. Stein and counsel for Old Republic signed a written stipulation stating “that the $100,000.00 settlement money … will be deposited into an interest bearing account” and that “[s]ignatures of both parties will be required to withdraw any money.” It was apparently understood that the funds would be placed in defendants’ client trust account. The settlement check was duly endorsed and deposited.

On July 9, 2010, Stein wrote to counsel for Old Republic indicating that he intended to distribute the deposited funds. He again asserted that by dismissing its complaint Old Republic had given up the right to seek reimbursement.

The Workers’ Compensation Board Petition

On September 14, 2010, Old Republic petitioned the WCAB to order disbursement of the settlement proceeds. A workers’ compensation judge denied Old Republic’s petition for disbursement. He found that the settlement funds had already been “disbursed by applicant’s counsel.” He also concluded that the WCAB lacked jurisdiction to grant the relief sought by Old Republic.

The Present Action

Old Republic filed the complaint and named only Boccardo and Stein as defendants, it alleges that the stipulation of December 14, 2009, was a binding contract “between plaintiff, Albert Carrabello [sic ], and The Boccardo Law Firm.” Defendants demurred to all causes of action. The court sustained the demurrer with leave to amend as to the third cause of action (conversion) and fourth cause of action (breach of fiduciary duty) on grounds of failure to state facts sufficient to constitute a cause of action. The demurrer was otherwise overruled. Old Republic did not amend the complaint.

On November 8, 2011, defendants filed a motion to dismiss the remaining causes of action under the anti-SLAPP law. The court granted the motion to strike as to the second cause of action (fraud), but denied it with respect the first (contract), fifth (negligence), and sixth (declaratory relief) causes of action.

DISCUSSION

The anti-SLAPP law authorizes a defendant to bring a “Special Motion to Strike” any cause of action arising from any act of the defendant in furtherance of the defendant’s right of petition or free speech in connection with a public issue. The statute goes on to enumerate four classes of conduct that come within its protection. Any cause of action arising from protected conduct shall be stricken on the defendant’s motion, unless the plaintiff establishes a probability that he or she will prevail on the claim.

The court considered only three of Old Republic’s six original causes of action: breach of contract, negligence, and declaratory relief. The question whether these causes of action arise from protected activity involves two subsidiary inquiries: (1) From what acts or omissions do these causes of action arise, for purposes of applying this statute; and (2) do those acts or omissions come within the statute’s definition of protected conduct?

Negotiation and execution of a Release involved statements or writings made in connection with an issue under consideration or review by a judicial body as protected under the statute. However, this only establishes that any cause of action arising from the stipulation would be protected by the statute. It leaves unanswered the question whether the three causes of action before us arose from the stipulation.

It is not enough that the complaint refers to protected activity. When the allegations referring to arguably protected activity are only incidental to a cause of action based essentially on nonprotected activity, collateral allusions to protected activity should not subject the cause of action to the anti-SLAPP statute.

A cause of action arises from protected conduct if the wrongful, injurious act(s) alleged by the plaintiff constitute protected conduct. A cause of action can only be said to arise from protected conduct if it alleges at least one wrongful act—conduct allegedly breaching a duty and thereby injuring the plaintiff —that falls within the act’s definition of protected conduct.

The causes of action at issue here refer to, and may depend on, defendants’ having entered into the stipulation, which was itself protected conduct; but they do not assert that there was anything wrongful about that conduct. The underlying wrongful conduct was defendants’ alleged entry into the stipulation without the intention to be bound by it, thereby inducing Old Republic to do likewise and depriving it of control over the settlement funds. With respect to the remaining three claims, however, there was nothing wrongful about the stipulation itself; entry into it is not the injurious conduct alleged.

Rather, under those three causes of action Old Republic’s injury arose from defendants’ withdrawal of the funds that were the subject matter of the stipulation. That is the conduct by which defendants allegedly breached the contract between the parties, violated a duty of care, and injured Old Republic.

To hold otherwise would produce consequences the Legislature cannot have intended. If the protected status of an underlying agreement furnished sufficient ground to invoke the anti-SLAPP statute against a claim for breach of that agreement, it would follow that every suit to enforce a settlement agreement would be subject at the threshold to a SLAPP motion. Such a regime would significantly diminish the utility of such agreements, reduce the incentive for parties to enter into them, and thereby magnify the workload on courts, with attendant delay and expense for those who must resort to them.

It follows that merely citing a settlement agreement as the basis for a duty allegedly breached by the defendant is not enough, by itself, to bring a cause of action for the breach within the statute. The trial court correctly concluded that these three causes of action did not arise from the parties’ stipulation for purposes of the SLAPP act. It was the withdrawal of funds that was the wrongful conduct constituting the gravamen of these causes of action.

Given the foregoing conclusion, the question becomes whether the withdrawal of funds was itself protected by the statute. Defendants’ arguments to the contrary overlook the core purpose of the anti-SLAPP law, which is not to pose new impediments to all lawsuits arising from speech and petitioning activity but to remedy a very specific pattern by which contestants in the arena of public affairs were using meritless litigation as a device to silence and punish their adversaries.

The trial court properly denied defendants’ motion to summarily dismiss the first, fifth, and sixth causes of action under the anti-SLAPP statute.

ZALMA OPINION

The court made no decision on the substance of Old Republic’s charges. It only decided that the Anti-SLAPP statute did not apply to the causes of action asserted and the case must go to trial on the allegations of breach of contract, negligence and declaratory relief. So, later, we will learn if Old Republic is entitled to some of the money and if the lawyers wrongfully distributed it. The case teaches that such a settlement should have allowed for an independent trustee to hold the money rather than a law firm that represented one of the parties claiming an interest in the funds.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Construction Defects Coverage Guide

Litigation Over Construction Defects

Construction defect suits are now flooding the courts of North America in greater numbers every year. The Construction Defects Coverage Guide is designed to help the property owner, builder, construction professional, insurer, insurance professional, construction defect plaintiffs’ lawyer, construction defect defense lawyer, and those who support them faced with construction defect issues to effectively avoid or resolve claims of such defects. It covers identification of construction defects, and explains how to insure, investigate, prosecute, or defend litigation that results from claims of construction defect.

Construction Defects Coverage Guide addresses a wide audience about this escalating, expensive and excessive problem that makes it hazardous to build any structure without sufficient and broad insurance protection. The attorney representing a defendant or plaintiff in a construction defect suit will find this book a useful resource to help counsel understand the claims of multiple parties, insurers, and experts involved. The party against whom a claim is being made will find this book valuable in efforts to use the insurance protection for which the party paid. The uninsured or underinsured will also find this manual a resource that will help the party and his/her or its attorneys assert appropriate defenses that may avoid a major money judgment. If the property has construction defects this manual will serve as a practical tool to help evaluate the facts and determine whether counsel is required to protect the rights of the owner, occupier, lessor or lessee of the property.

The majority of construction defect suits and appellate decisions arise in a few litigious jurisdictions but are spreading across the country like Kudzu. The courts of Texas, Florida, New York, Colorado, and California have generated a great deal of the law on the subject that is then applied or adopted by other states whose courts have not seen the same volume of construction defects litigation.

What Is Involved?

All buildings have an expected life span. None, except the Egyptian Pyramids, were designed to last eons. Yet, even the pyramids in Egypt will erode to a mound of sand given enough time, wind, water and the movement of tectonic plates. Their demise will be an expected result of age and erosion rather than a construction defect. Venerable, well constructed, structures seldom fail because of their advanced age. Usually, they are torn down and replaced with new structures before they have time to waste away.

Regardless of the methods or materials used, all structures can fail before the end of their useful life. Such a failure can cause damage to people or property. The failure of a component part of a structure that causes damage to a person or property can be considered a construction defect. If the component was not installed correctly, was not appropriate for the structure, or was defectively constructed, the manufacturer, seller, and/or installer of the component may be held responsible for the damages caused.

When structures fail, the damages can include, among other things:

  • a total collapse of the structure and injury to its occupants;
  • an inability to keep rain water out of the structure;
  • cracking, settling, or subsidence of concrete flatwork;
  • cracking, settling, or tilting of walls;
  • doors that do not fit;
  • windows that do not operate;
  • walls out of plumb;
  • walls, doors, and windows that leak;
  • foundations that settle, crack, or subside as a result of subsidence or hydroconsolidation of the soils on which the foundation is placed;
  • mold growth on floors, walls, and ceilings;
  • acidic emissions from Chinese-manufactured drywall; or
  • damage to person or property of third parties.

 Who is Involved?

Construction defect claims and suits are proliferating. Courts across North America are overflowing with multi-party lawsuits brought by condominium associations, Canadian Strata Organizations, owners of tract homes, and commercial property owners. As construction defect claims proliferate it has become not unlikely that most people will either pursue or defend a construction defect claim at some point in their lifetime.

The dollars involved in construction defect litigation have grown exponentially. If a problem exists in a multiple unit condominium association or a housing tract, minor repairs of the defects multiply over the various units to millions of dollars. In addition, the complexity of a construction defect suit usually results in hundreds of hours of work for attorneys, and the need for separate counsel for each party defendant like the owner, architect, general contractor and each subcontractor. The attorneys fees generated in cases with multiple parties are high and settlements and judgments are often extremely large.

The targets of construction defect litigation are many and varied. Construction defect claims can be presented to any of the following:

  • property owners,
  • builders and contractors,
  • buyers,
  • sellers,
  • part manufacturers,
  • suppliers of materials used in original construction or repairs,
  • designers,
  • property managers,
  • architects,
  • engineers,
  • geotechnical engineers and geologists,
  • surveyors,
  • subcontractors,
  • real estate inspectors,
  • real estate brokers and sales people, or
  • real estate investors or developers.

Property Owners

The property owner who is faced with construction defects has several avenues of recourse based upon legal remedies available in the U.S. The remedies available to a person who has been damaged by a construction defect are described by the legal concepts including negligence, products liability, malpractice, etc.

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

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

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

When a defective structure causes harm to its occupant or property, litigation will likely occur. Structural failures can impose a danger to life, health, or property. A construction defect can be defined as:

  1. the failure of the design, construction, or repair of a home, an alteration of or a repair, addition, or improvement to an existing home, or an appurtenance to a home to meet the applicable warranty and building and performance standards during the applicable warranty period; and
  2. any physical damage to the home, an appurtenance to the home, or real property on which the home or appurtenance is affixed that is proximately caused by that failure.

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

ZALMA OPINION

The article above is an excerpt from my book “Construction Defect Coverage Guide” which is now available from the National Underwriter Company at www.nationalunderwriter.com/ConstructionDefects.  It explains the importance of the ability to recognize and deal with damages caused by construction defects. It is written for the property owner, the construction professional, their insurers and their lawyers. Construction Defects appear to be the most popular litigation facing the courts of North America.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

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

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

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

 

Posted in Zalma on Insurance | Leave a comment

The Implied Covenant of Good Faith and Fair Dealing

The Essence of Insurance

The principle mantra in the insurance world is “Conduct business in the utmost good faith (uberrima fides).” The first reported decision acknowledging the need for utmost good faith in insurance was stated in the British House of Lords by Lord Mansfield in 1766. He made clear that the duty of good faith is not unilateral but rests upon both the insured and the insurer. [Carter v. Boehm, 3 Burr 1905 (1766)]. This is still the law followed in England; it was adopted by United States appellate courts that recognize the covenant of good faith. The duty to deal with one another in good faith in all insurance transactions exists during every moment of the insurance transaction, from the negotiation for the contract, throughout its term, to its conclusion.

A breach of the implied covenant of good faith originally resulted only in the imposition of contract damages. Tort damages were not available since breach of the covenant was considered the same as a run-of-the-mill breach of contract. [Cases where individual states have accepted a form of the tort of bad faith include Noble v. National American Life Insurance Co. 624 P. 2d 866 (Ariz. 1981); Escambia Treating Co. v. Aetna Cas. & Sur. Co. 421 F. Supp. 1367 (N.D. Fla. 1976) (applying Florida law); Grand Sheet Metal Products Co. v. Protection Mutual Insurance Co., 375 A. 2d 428 (Conn. Super. 1977); Ledingham v. Blue Cross Plan for Hospital Care of Hospital Service Corp., 330 N.E. 2d 540 (Illinois 1976) (reversed on other grounds) 356 N.E. 2d 7 (Illinois 1976); Vernon Fire & Casualty Insurance Co. v. Sharp, 349 N.E. 2d 173 (Indiana 1976); Amsden v. Grinnell Mutual Reinsurance Co,. 203 N.W. 2d 252 (Iowa 1972); Robertsen v. State Farm Mutual Auto Insurance Co., 464 F. Supp. 876 [applying South Carolina law] (D.S.C. 1979); Farmers Insurance Exchange v. Schropp, 567 P. 2d 1359 (Kansas 1977); Phillips v. Aetna Life Insurance Co., 473 F. Supp. 984 (applying Vermont law) (D. Vt. 1979); Arnold v. National County Mutual Fire Insurance Co., 725 S.W. 2d 165 (Texas 1987), and others in Kansas, Mississippi, Montana, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Wisconsin, and Connecticut.]

However, the courts of many states have now created what they call the “tort of bad faith.”  Although the notion of bad faith is grounded in contract principles, in this context it is treated as a tort for the purpose of assessing damages. To understand the tort remedies available for bad faith conduct, the adjuster must understand a fundamental principle of contract law: that “every contract imposes on each party a duty of good faith and fair dealing in its performance and its enforcement.” [Restatement (Second), Contracts, § 205; Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 818 (1979); Seaman’s Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal. 3d 752, 768 (1984).] The duty imposed by the contract is defined as follows:

In every insurance contract there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Gruenberg v. Aetna Insurance Co., 9 Cal. 3d. 566, 108 Cal. Rptr. 480 (1973).

The covenant is mutual and the principles of good faith and fair dealing impose an affirmative obligation on the insured to cooperate.

This is a duty imposed by law, not one arising from the terms of the contract itself. The duty to deal fairly and in good faith is nonconsensual in origin rather than consensual, and is an essential part of every insurance contract. It is imposed to fulfill the spirit, as well as the letter, of the insurance relationship.

The prerequisites for a bad faith claim against an insurer for delay in payment of first party coverage are that:

  • the claimant was entitled to coverage under the insurance policy at issue;
  • the insurer had no reasonable basis for delaying payment;
  • the insurer did not deal fairly and in good faith with the claimant; and
  • the insurer’s violation of its duty of good faith and fair dealing was the direct cause of the claimant’s injury.

The absence of any one of these elements defeats a bad faith claim. If there is a legitimate dispute concerning coverage or no conclusive precedential legal authority requiring coverage, withholding or delaying payment is not unreasonable or in bad faith.

No standard policy of insurance mentions the insurance adjuster. No insurer is required to have an insurance adjuster on staff.

But insurance is a service business. Insurers quickly learned that most people who suffer a loss find it traumatic and have difficulty complying with the conditions of their policy. To assist insureds in complying with policy requirements, insurance companies created the position of insurance adjuster.

The adjuster provides the assistance the insured needs to comply with the policy conditions. The adjuster is the living embodiment of the insurance company, and provides the insured the service promised by the insurance company. He or she is the person the insured meets when he or she faces a loss and needs help. It is the adjuster, and the help he or she gives the insured, that is the essence of the promise made by the insurer when the policy is issued. Without this service insurers would be unable to treat each insured with good faith and fair dealing.

The adjuster is the foundation upon which an insurer is built. If the adjuster is not professional, and does not provide the service promised by the insurer, the promise made by the policy is broken and the insurer will first lose customers and ultimately fail. Every insurer is aware that claims that are owed must be paid promptly and with good grace. To do otherwise would be to ignore the purpose for which insurance exists: to provide service, protection, and security to the insured.

ZALMA OPINION

The article above is an excerpt from my book “Insurance Claims: A Comprehensive Guide” which is now available from the National Underwriter Company at www.nationalunderwriter.com/InsuranceClaims.  It explains the importance of insurance and the insurance adjuster to the operation of the economy of the United States and why the covenant of good faith and fair dealing became a tort and how to limit insurance claims to the terms of the contract.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

 

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Making Insured Whole Not Enough

Consumer Protection Statute Claim Survives Belated Payment of Claim

It is axiomatic in bad faith claims that there can be no bad faith if the insurer did not breach the contract. However, many states have enacted consumer protection statutes trying to eliminate unfair business practices. In Auto Flat Car Crushers, Inc. v. Hanover Ins. Co., — N.E.3d —-, 2014 WL 5149647 (Mass., Oct. 15, 2014) the Supreme Judicial Court of Massachusetts was faced with whether an improper refusal to defend could support a unfair business practice claim after the insured was made whole.

BACKGROUND

The Insured brought a declaratory judgment action against its liability insurer to recover for breach of duties to defend and indemnify insured in connection with claim by Department of Environmental Protection (DEP). During the course of decisions on motions for partial summary judgment, the insurer fully reimbursed the insured with interest, and the insured amended its complaint to add a consumer protection claim because the denial of defense was an unfair or deceptive practice.

The insurer argued there was no case after the insured’s acceptance of the insurer’s payments in full reimbursement for expenses resulting from breach of the duty to defend removes the foundation of a potential breach of contract suit and necessitates the dismissal of a suit already commenced.

The plaintiff’s insurer refused to defend or to indemnify the plaintiff in connection with an environmental dispute involving the Department of Environmental Protection (DEP). Several years later, the plaintiff, having by then funded both its own defense and the environmental remediation ordered, brought suit against the insurer, alleging breach of contract and seeking declaratory relief; on a motion for partial summary judgment, the plaintiff obtained declaratory relief establishing the insurer’s duty to defend. The plaintiff then amended its complaint to assert a claim under a Massachusetts statute arising out of the insurer’s failure to defend; the insurer did not avail itself of the statutory mechanism permitting a defendant to limit its liability to single damages by tendering with its answer a written offer of settlement.

Thereafter, and while reserving its rights as to its pending claims, the plaintiff accepted reimbursement from the insurer, with interest, for its expenses in litigating and resolving the DEP matter.

The question before the Supreme Judicial Court of Massachusetts was whether the plaintiff, having been thus compensated for its losses, may nonetheless continue to press its pending claims. The insurer maintains that, because the plaintiff has no uncompensated losses, its contract claims must fail as a matter of law as must its statutory claim.

In August, 2008, having incurred considerable legal expenses and remediation costs in connection with the then-concluded DEP matter, Auto Flat again contacted Hanover, asserting its “conclusion that Hanover improperly denied both defense and indemnity coverage.” After Hanover reaffirmed its denial of coverage, citing the reasons given in its first letter of denial, Auto Flat commenced its action in the Superior Court.

PARTIAL SUMMARY JUDGMENT ON DUTY TO DEFEND (COUNT 1) AND SUBSEQUENT CORRESPONDENCE BETWEEN PARTIES.

In December, 2009, a Superior Court judge allowed Auto Flat’s motion for partial summary judgment on count 1, the duty to defend, ruling that the policy provided Auto Flat with coverage for a defense against the DEP allegations. In March, 2010, Auto Flat amended its complaint to add a fifth count alleging that Hanover’s denial of such defense constituted a violation of statute. A few days after receiving an accounting from Auto Flat, and approximately six years after Auto Flat first made a claim for insurance coverage, Hanover agreed to reimburse Auto Flat for all of its expenses. Hanover enclosed a check for $449,924.47 with its letter; the check included both $314,170.70 for payment of expenses incurred and $135,753.77 in interest. Hanover stated that it would “consider making additional reimbursement upon the receipt of additional documentation.”

PARTIAL SUMMARY JUDGMENT ON COUNTS 2 THROUGH 5.

In April, 2011, Hanover moved for partial summary judgment on counts 2 through 4 of Auto Flat’s complaint, which sought contract damages for breach of the already-adjudicated duty to defend, a declaration that Hanover had a duty to indemnify Auto Flat, and contract damages for breach of the duty to indemnify.

Hanover argued that, even if Auto Flat could establish a breach of contract as to either duty, Auto Flat already had been made whole by Hanover’s reimbursement of all expenses incurred in the DEP matter, plus twelve per cent interest per annum. Accordingly, Hanover maintained, Auto Flat could not demonstrate that it continued to suffer damages, and its breach of contract claims therefore failed as a matter of law. Hanover asserted also that Auto Flat was not entitled to a declaration regarding Hanover’s duty to indemnify because “there [was] simply nothing to indemnify.”

DISCUSSION

The central dispute on appeal concerns Auto Flat’s ability to pursue a claim under the statute after accepting Hanover’s payments in reimbursement for expenses incurred in connection with the DEP matter.

Whether Auto Flat’s acceptance of Hanover’s payments eliminated its actual damages, such that it could not proceed on its statutory unfair business practices claim, presents a question of law appropriate for resolution in a motion for summary judgment. To be successful, a plaintiff bringing a claim under the statute must establish (1) that the defendant engaged in an unfair method of competition or committed an unfair or deceptive act or practice (2) a loss of money or property suffered as a result;  and (3) a causal connection between the loss suffered and the defendant’s unfair or deceptive method, act, or practice.

Even if the amount tendered represents the full amount recoverable as actual damages under the statute as Auto Flat concedes is the case here, that alone does not preclude a claim under the statute. The particular provision governing actions between businesses, serves the important public policy of encouraging the fair and efficient resolution of business disputes. It is intended to deter misconduct while providing a remedy for those who have suffered a specific harm as a result of a defendant’s prohibited conduct.

Therefore, under the plain language of the statute if any person invades a plaintiff’s legally protected interests, and if that invasion causes the plaintiff a loss of money or property the plaintiff is entitled to redress under the consumer protection statute.  Insofar as Auto Flat can establish a loss of money or property as a result of Hanover’s breach of the duty to defend, and to the extent that failure to defend in the circumstances constitutes a violation of the statute, Auto Flat may maintain its claim notwithstanding its acceptance of Hanover’s compensatory payments.

CONCLUSION

Unlike common law bad faith suits the Massachusetts statute does not require a plaintiff to demonstrate uncompensated loss or to obtain a judgment on an underlying claim in order to proceed. Neither the plaintiff’s acceptance of full reimbursement of its expenses nor the absence of a judgment establishing contract damages precludes the plaintiff from pursuing a claim under the statute. However, in the circumstances of the claim the plaintiff may not press its remaining contract and declaratory judgment claims because it was fully compensated under the insurance contract.

ZALMA OPINION

Insurance bad faith requires an insurance contract, the breach of that contract by the insurer, and the breach was done willfully or in conscious disregard for the rights of the insured. Unfair business practices statutes, on the other hand, have no relationship to the tort of bad faith. They are a creature of the legislature and, as in this case, do not require breach of contract. Therefore, the interestingly named Auto Flat may flatten the assets of the Hannover by allowing extra-contractual damages and penalties allowed by the statute.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Restitution Limited to Real Damages

Actual – Not Billed – Medical Charges Only Assessed

Retail medical billing bears little resemblance to reality. Where a two cent dose of aspirin can be billed at $50 insurance companies and government based medical programs have established contracts with medical providers to pay doctor and hospital billings at amounts closer to reality. I once worked on a case with more than $2 million in hospital billing where the hospital accepted as full payment less than $300,000. The plaintiff wanted the jury to consider the $2 million for pain and suffering benefits instead of the actual billing thereby confusing the jury about the extent of the injury. The California Supreme Court, in Howell v. Hamilton Meats & Provisions, Inc. (2011) 52 Cal.4th 541, 566 (Howell ) limited the presentation of evidence to monies actually spent – whether by the individual or an

In In re Oscar F., Not Reported in Cal.Rptr.3d, 2014 WL 5282472 (Cal.App. 3 Dist., 10/16/2014),  Oscar F., appeals the juvenile court’s order of restitution. The court imposed a 15 percent administrative fee, or approximately $20,000, in addition to $135,032.12 in direct victim restitution. Oscar F. contends the 15 percent administrative fee is unauthorized by statute and must be stricken. Oscar F. also argues insufficient evidence supports the $135,032.12 victim restitution award.

FACTS AND PROCEEDINGS

A detailed recitation of the facts underlying Oscar F.’s offense is unnecessary to resolve this appeal. Briefly summarized, Oscar F. and another individual assaulted Adam M. with a metal bar in Lassen County, California. Adam M. sustained major injuries, including facial lacerations, fractures, and a bleed in his brain. Although initially treated in Susanville, due to the extent of his injuries, Adam M. was transferred to medical facilities in Reno, Nevada, for treatment.

Oscar F. had previously been declared a ward of the court pursuant to Welfare and Institutions Code section 602. Oscar F. admitted the allegations of the 602 petition concerning the assault on Adam M. At the dispositional hearing, the juvenile court continued Oscar F. as a ward of the court, ordered him to serve a variable commitment of between nine and 18 months and to complete the program at the Bar–O–Boys Ranch, and ordered Oscar F. to perform 200 hours of community service. The court reserved jurisdiction over the issue of victim restitution.

DISCUSSION

Oscar F.’s challenge to the restitution order is two-fold. He first claims that the court lacked statutory authority to award the 15 percent administrative fee altogether. Oscar F. therefore raises a purely legal issue of statutory interpretation that is resolved by de novo review. Oscar F.’s second contention—that the record lacks substantial evidentiary support for the $135,032.12 victim restitution award—challenges the amount of victim restitution, which may only be set aside if the trial court abused its discretion in making the award.

The 15 Percent Administrative Fee on the Victim Restitution Amount

At the outset, we must determine which statute governs Oscar F.’s restitution obligations in this case. Oscar F. is a minor who was declared a ward of the court. Because he is a minor the statute relied on by the trial court did not apply to Oscar F. since it was stated only to apply to adult criminals.

A juvenile court may order a minor to pay restitution to a victim who incurs any economic loss as a result of the minor’s conduct. The statute is silent regarding the imposition of fees to cover costs related to victim restitution.

The Legislature’s omission of an administrative fee for victim restitution was anything but a deliberate choice. Had the Legislature intended for a restitution collection fee, it would have expressly so stated.

Because the juvenile statute does not expressly authorize a juvenile court to impose a 15 percent administrative fee on direct victim restitution awards against juvenile offenders the Legislature’s deliberate omission and concluded the court below erred in ordering Oscar F. to pay a 15 percent administrative fee on the $135,032.12 restitution award.

Sufficiency of the Evidence to Support the Restitution Award

According to Oscar F., the court erred by awarding Adam M. restitution in the amount of the billed medical expenses rather than a purported lesser amount that Medi–Cal or other private insurance paid for the services rendered.

We agree that a victim, like Adam M. here, whose medical expenses are paid through Medi–Cal or some other form of private insurance, may recover as restitution no more than the actual amount paid for the medical services provided even if that amount is less than the amount originally billed by the medical provider. (See Howell [“an injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial”].)

The concept of reimbursement for medical expenses generally does not support inclusion of amounts of medical bills in excess of those amounts accepted by medical providers as payment in full.  Since the bill from Banner Lassen Medical Center had not been submitted to Medi–Cal when the juvenile court entered the restitution order, there was no way to know the final payment amount.

The Legislature provided for that possibility in the statute which states that “[i]f the amount of loss cannot be ascertained at the time of sentencing, the restitution order shall include a provision that the amount shall be determined at the direction of the court at any time during the term of the commitment or probation.”

The court, therefore, remanded the matter for further proceedings to determine the total amount paid by the victim, Medi–Cal, or private insurance for the medical services Adam M. received.

ZALMA OPINION

Howell was the California Supreme Court’s attempt to protect against orders of restitution, tort damages, or just plain people faced with medical bills. Since there is no set system of medical billing various insurers and state or federal medical providers enter into agreements to pay different amounts for the services provided rather than that billed. Howell recognized that medical billing is often fictitious or just a wish list rather than what the physician or hospital is willing to accept as full payment.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Agent Owes No Duty to Public At Large

Negligent Procurement Suit Requires Duty to Plaintiff

Insurance agents owe a duty to their customers to obtain the insurance the customer asks that be obtained. When an insurance agent obtains the insurance limits requested by the insured may a third party, injured by the insured, sue the agent because there was not sufficient insurance to pay for the damages incurred.

When a criminally negligent dump truck driver caused an auto accident in which a woman was killed and her son injured the estate sued . As claims were pursued, it soon became apparent that the driver’s employer, the dump truck company, maintained inadequate commercial carrier insurance coverage under federal and state regulations. In Emahiser v. Complete Coverage Ins., LLP, Slip Copy, 2014 WL 5037993 (N.D.Ohio, Oct. 8, 2014), the District Court for the Northern District of Ohio, was asked to decide whether the estate of the deceased woman may sue the insurance agency which procured the company’s insurance coverage.

FACTUAL BACKGROUND

In August 2011, a dump truck driver ran a stop sign in Wood County, Ohio and struck a car operated by Lisa Emahiser. Lisa died as a result of the accident, and her son, a passenger in the vehicle, was injured. Rickey Paving owned the dump truck and employed its driver, Parrish Quarterman. At the time of the accident, Rickey Paving was insured by Progressive Insurance through United Financial Casualty Company with a policy that capped coverage at $50,000 per person and $100,000 per accident (the “Policy”). Defendant served as the insurance agent, procuring insurance from United Financial on behalf of Rickey Paving.

Under applicable federal and Ohio law, Rickey Paving, as an interstate commercial operator, was required to maintain a minimum of $750,000 coverage. Plaintiff alleged Defendant knew or should have known Rickey Paving was an interstate commercial carrier and was, therefore, obligated to obtain a minimum of $750,000 coverage. Rickey Paving has a USDOT number and was registered as an interstate motor carrier in Indiana with the Federal Motor Carrier Safety Administration;  and the Policy also covered a trailer used for hauling.

DISCUSSION

Ohio law recognizes a tort claim against insurance agents for negligent procurement. An agent will be held liable if, as a result of his or her negligent failure to perform that obligation to procure insurance, the other party to the insurance contract suffers a loss because of a want of insurance coverage contemplated by the agent’s undertaking.

If an insurance agent’s negligence results in coverage less than that desired by an insured, the agent will be liable for the amount the insured would have received had the correct coverage been in place.

The case before the Court is not about the relationship between Rickey Paving and Defendant or what Richard Rickey told the Defendant’s agent when soliciting insurance. And Rickey Paving has not assigned its rights to a potential negligence claim to Plaintiff.

Clearly the insured has standing to sue an agent for negligent procurement. But does the third party public, the intended beneficiary of higher policy limits required by law?

To assert a negligent procurement claim in Ohio a plaintiff must establish that the insurance agency owed a duty to obtain the coverage its insured requests.

There is a basic premise of negligence law—foreseeable victims. Duty is extended to a third party who is a member of a limited class whose reliance on the professional’s representation is specifically foreseen. The third parties’ reliance on the professional’s misrepresentation must be specifically foreseen by the professional.

Courts in other jurisdictions, considering the question of whether a third party injured by a tortfeasor has standing to bring a negligent procurement claim against the tortfeasor’s insurance agent, have reached differing results.

Synthesizing Ohio cases discussing third-party standing to bring negligent procurement claims, the District Court found that while it is possible for a third party to bring a negligent procurement claim against an insurance agent or broker, the plaintiff must put forward allegations that he or she was a “direct, intended, and specifically identifiable” beneficiary to the policy. This approach accounts for the general concept that under Ohio law insurance agents generally owe no duty to third parties.

Plaintiff urged the Court to find that the driving public at large is a sufficiently specific intended beneficiary. After all that is why legislative and regulatory bodies pass laws and regulations requiring minimum amounts of insurance—to protect the public.

However, imposing such a far-reaching duty on insurance agents would impose on agents a duty to a vast number of non-clients—literally all who reside in or travel in this state. Plaintiff does not allege that Defendant violated laws and regulations; an insurance agent is not the person upon whom the statutes and regulations impose specific duties, they fall on the trucker.

Further supporting this conclusion, the harm perpetrated against the driving public by an insurance agent who fails to procure insurance of a sufficient level does not sound in tort. Rather, Defendant’s alleged negligence created for Plaintiff a risk of economic loss only—i.e., a risk that Plaintiff would be unable to collect on a judgment entered against Rickey Paving. It did not create a tort action held by the driving public.

Plaintiff and his family undoubtedly suffered a tragic loss with the death of a wife and mother. However, Plaintiff is not without a remedy at law. Plaintiff can continue to pursue Rickey Paving and the driver of the vehicle. And, should the collectability of those individuals be in question, Plaintiff can also pursue claims against any UM/UIM coverage held by Lisa or the owner of the vehicle she was driving.

Regardless, the negligence claim against the tortfeasor’s insurance agent is too far attenuated under the facts. Because Plaintiff does not have standing to pursue a negligent procurement claim against Defendant, Defendant’s Motion is granted, and the Amended Complaint is dismissed with prejudice.

ZALMA OPINION

Insurance agent’s owe a duty of professional care to his or her clients. The court correctly found that the agent does not owe a duty to the public at large who might be damaged by the actions of the insured.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Zalma’s Insurance Fraud Letter — October 15, 2014

Agent Takes Premium from Clients to Fund Campaign for Congress

In the 20th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on October 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.        Insurance Agent Used Diverted Premium to Fund Successful Campaign for Congress
2.        New From Barry Zalma
a.    National Underwriter Publishes:
i.     “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
b.    Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.        Conviction for Staging $1.6 Million in Fraudulent Accidents Affirmed.
4.        Commit Fraud – Forfeit Assets
5.        Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

Zalma’s Insurance Fraud Letter

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

THE “ZALMA ON INSURANCE” BLOG

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

1.      Failure to Promptly Appeal Denial of Claim Expensive – October 14, 2014
2.      Certificate Must Be Honored – October 13, 2014
3.      Fraud By Insurance Agent Requires Jail – October 10, 2014
4.      Policy Needs Void For Fraud Language – October 9, 2014
5.      Insurers Have The Right To Chose Who and What It Will Insure – October 8, 2014
6.      Three Shots at Head Not an Occurrence – October 7, 2014
7.      Duty to Defend – October 6, 2014
8.      Underinsured Motorist Coverage Is to Assure Insurance Coverage – October 3, 2014
9.      No Punitive Damages Under Jones Act – October 2, 2014
10.    Full Credit Bid Defeats Claim – October 1, 2014
11.    35 Years and Counting – October 1, 2014
12.    Never Put a Thief In Charge of Buying Your Insurance – September 30, 2014
13.    Excusive Remedy Applies – September 29, 2014
14.    Clear & Unambiguous Exclusion Must be Enforced – September 26, 2014
15.    Mortgagee Has Separate Contract With Insurer – September 25, 2014
16.    Massive International Fraud Fails – September 24, 2014
17.    Absent Purposeful Misconduct Adjuster Not Liable – September 24, 2014
18.    Liar, Liar, Pants on Fire – September 23, 2014
19.    Liars Never Prosper – September 22, 2014
20.    Insured Contract & Indemnity – September 19, 2014

New From the ABA:

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

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

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

New from National Underwriter

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

Posted in Zalma on Insurance | 1 Comment

Failure to Promptly Appeal Denial of Claim Expensive

Statute of Limitations Defeats Disability Claim

Disability policies seem arcane and difficult to understand by most people who acquire disability insurance. Most such policies allow an administrative review of a denial. Failure to seek the administrative review or file suit promptly runs afoul of the statute of limitations.

In Sigal v. General American Life Ins. Co., Slip Copy, 2014 WL 4978380 (W.D.Pa., Oct. 6, 2014) Plaintiff filed an Amended Complaint on February 28, 2013 alleging wrongful denial of claims made under disability insurance policies issued by Paul Revere Insurance Company (“Paul Revere”), Paul Revere’s wholly owned subsidiary, Unum Group (“Unum”), and General American Life Insurance Company (“General American”) (collectively “Defendants” or “the insurers”) and set forth various claims against Defendants including breach of contract claims against Paul Revere and General American, respectively, based on the 2010 denial of benefits allegedly due under relevant disability insurance policies.

FACTS

Plaintiff, a medical ophthalmologist purchased two disability insurance policies from Paul Revere in 1989. In 1990, Plaintiff secured a third policy from General American. At the time he purchased the policies, Plaintiff practiced as a “surgical” ophthalmologist. Each policy contained the following pertinent language as set forth below.

Paul Revere Policies include a “Total Disability in Your Occupation Benefit Rider” which defines “Total Disability” as follows: “Total Disability” means that because of Injury or Sickness: ¶ 1. You are unable to perform the important duties of Your regular occupation; and ¶ 2. You are under the regular and personal care of a Physician.”

The “Total Disability in Your Occupation Benefit Rider” also provides that: “All definitions in Your Policy apply to this rider. All provisions of Your Policy remain the same except where We change them by this rider.” The policy further defines “Your Occupation” as follows:

“’Your Occupation’ means the occupation in which You are regularly engaged at the time You become Disabled.”

The policy further defines “Disability” or “Disabled” as referring to a continuing period of Total and/or Residual Disability. Successive periods will be deemed to be continuing if: “a. Due to the same or related causes; and  b. Separated by no more than 6 months; Otherwise such periods will be deemed to be new and separate Disabilities.

Plaintiff’s 2004 Disability Claim

In 2001, Plaintiff’s cardiologist, Dr. Edmundowicz, diagnosed Plaintiff with asymptomatic coronary artery disease.  Dr. Edmundowicz advised Plaintiff to take regular medication, eat a proper diet, exercise, get adequate sleep, and to avoid stress. Plaintiff identified that performing intraocular surgery in connection with his occupation as a surgical ophthalmologist as his most significant source of stress and was advised by Dr. Edmundowicz that removing this stressor would slow the progression of his medical condition. Following Dr. Edmundowicz’s recommendations, Plaintiff eliminated intraocular eye surgery from his practice as of July 1, 2004. Plaintiff continued to work, and performed other types of ophthalmologic services.

Three months later, Plaintiff filed claims under each of the three disability insurance policies, stating that ceasing intraocular eye surgery in order to reduce the risk of progression of his coronary artery disease rendered him disabled under the policy and caused a significant decrease to his income (the “2004 Claim”). Paul Revere denied Plaintiff disability benefits under the policy. General American likewise sent Plaintiff notice that his claim under that policy was denied for these same reasons because he was still working as an Opthamologist. Plaintiff was informed in both letters his right to contest the findings and conclusion by submitting a written appeal within 180 days of the denial of benefits. Plaintiff did not file a timely appeal to the denial of benefits, and the Court dismissed any claims arising from the 2004 Claim as barred by the applicable statute of limitations..

Plaintiff’s 2010 Disability Claim

As a result of the progression of his coronary heart disease, Plaintiff was hospitalized on April 5, 2010 and underwent coronary bypass surgery on April 7, 2010. In May 2010, Plaintiff resumed performing certain ophthalmologic services. In June 2010, Plaintiff submitted disability claims under all of the policies (the “2010 Claim”).

Paul Revere reasoned that because Plaintiff’s occupational duties did not change before and after his bypass surgery, he was not “Totally Disabled” as that term was defined in the policy. While Paul Revere concluded that Plaintiff was disabled from performing intraocular surgery after April 5, 2010, it specifically concluded that he was not disabled from his occupation based upon his occupational duties before and after April 5, 2010.

Generally, Plaintiff’s practice before 2004 involved both surgical and non-surgical duties. Plaintiff’s occupational duties involved medical, non-surgical ophthalmologic services, intraocular surgeries, including cataract and glaucoma surgeries, and non-intraocular corrective laser surgery.

DISCUSSION

Breach of Contract

Plaintiff claims that Defendants breached the policies by failing to find that he was under either a Total or Residual Disability since July 1, 2004 and paying him benefits for that period. Plaintiff cannot, for purposes of his remaining breach of contract claim for the 2010 denial of benefits, argue that he was disabled in 2004 to support a finding that he was disabled in 2010, where he never challenged the Defendant’s original finding that he was not disabled and that claim is barred by the applicable statute of limitations.

Interpretation of Insurance Policies Under Pennsylvania Law

The language of an insurance policy is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense. Like the policy itself, answers contained in an insurance application must be construed in the plain and unambiguous words used, and in the light of all the attendant circumstances and according to their natural meaning. A court must consider the insurance policy in total, giving each term its plain meaning and giving effect to all of the provisions, and must not view any one provision or word in isolation.

First, Plaintiff’s argument that his insurance applications in which he indicated his occupation as “surgical ophthalmologist” conflicts with and therefore supersedes the policies’ terms is an illogical reading of the documents. Plaintiff unilaterally completed the applications, and while the applications were integrated into the policies, the occupation set forth by Plaintiff in the applications do not serve as a conclusive definition or explanation of benefits, nor do they conflict with the policy provisions to render the provisions ambiguous. The policies contemplate that a person’s occupational duties and/or occupation may change after the insurance policy is issued. Therefore, the insured’s occupation is considered what his duties are at the onset of the insured’s alleged disability.

Plaintiff never renounced his employment as a surgical ophthalmologist. He, in fact, performed some surgical procedures, such as laser eye surgery, after the onset of his medical condition 2004. The only difference in his occupational duties was that he stopped performing a specific type of surgery—intraocular eye surgery—that was most stressful to him because of his medical condition. The fact remains that Plaintiff did not challenge the denial of benefits in 2004 until after the statute of limitations ran. Therefore the Court cannot determine that he was disabled in 2004 for purposes of his 2010 denial because Plaintiff failed to timely challenge that finding.

Because of the time elapsed between his first and second disability claim made it proper for Defendants to reevaluate Plaintiff’s occupation at the time of his second claim and consider it a new disability under the terms of the policy. Under the policy it only matters what occupational duties Plaintiff was performing before and after the onset of his disability as to whether he was entitled to disability benefits.

The Court concluded, therefore, that it was proper for Defendant under the unambiguous terms of the insurance policy to compare, evaluate and base their denial of benefits on the occupational duties before and after Plaintiff’s bypass surgery in 2010 without taking his 2004 claim into account. Since he performed the same duties after his bypass surgery that he did immediately before the surgery, he was not “disabled” as the term is defined in the policy.

CONCLUSION

For the aforementioned reasons, Defendants’, The General American Life Insurance Company, The Paul Revere Life Insurance Company and Unum Group’s Motion for Partial Summary Judgment was granted.

ZALMA OPINION

Dr. Sigal probably had a good disability claim in 2004. Rather than appeal the decision of his insurer, he accepted the denial and did nothing until six years later when he had by-pass surgery. Because he sat on his rights for six years the statute of limitations prevented his ability to pursue the 2004 claim and could not make it relate back when his surgery gave him a reason to make a new claim that was also denied. Since his work before the surgery and after the surgery was the same the court agreed with the insurers that he was not disabled as the term was defined by the policy. The lesson he learned was it is hazardous to ignore the right to appeal a claim decision.

 

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Certificate Must Be Honored

Cancellation Without Proper Notice Ineffective

Insurance policies are nothing more than a set of promises made by an insurer to an insured and insured to an insurer. Certificates of insurance are also promises made by an insurer or its agent that insurance exists.

In Hoff v. Industrial Claim Appeals Office, — P.3d —-, 2014 WL 5034507 (Colo.App., October 9, 2014), 2014 COA 137, a workers’ compensation insurance coverage dispute, petitioner, Norma Patricia Hoff, seeks review of a final order of the Industrial Claim Appeals Office (Panel) affirming the order of an administrative law judge (ALJ). The ALJ’s order awarded claimant, Hernan Hernandez, medical and disability benefits, and held Hoff (a statutory employer), MDR Roofing, Inc. (MDR) (claimant’s direct employer), and the general contractor, Alliance Construction (Alliance), jointly liable for claimant’s benefits. The Panel held that Hoff lacked standing to challenge the ALJ’s ruling that MDR was not covered by an insurance policy issued by Pinnacol Assurance (Pinnacol) to MDR when claimant sustained serious work-related injuries.

Background

Hoff owns a house that she uses as a rental property. After sustaining hail damage to the roof, Hoff and her husband contracted with Alliance to repair the roof. Without the Hoffs’ knowledge, Alliance verbally subcontracted the roofing job to MDR. Claimant was employed by MDR as a roofer.

While working on the Hoff roof in March 2011, claimant fell approximately twenty-five feet to the ground from the top of a ladder, sustaining serious injuries.

Claimant sought medical and temporary total disability (TTD) benefits for his work-related injuries. However, Pinnacol, MDR’s insurer, denied the claim because MDR’s policy had lapsed for failure to pay the premiums. Neither Alliance nor Hoff carried workers’ compensation insurance.

In October 2010, before starting the roofing job on the Hoff property, Alliance obtained a certificate of insurance (certificate) from Pinnacol’s agent, Bradley Insurance Agency (Bradley), which verified that MDR had worker’s compensation insurance through Pinnacol.

MDR did not pay the outstanding premium after notice was given that cancellation was pending. The policy was therefore cancelled effective March 3, 2011. Pinnacol sent letters to MDR and Bradley advising of the policy’s cancellation, but not to Alliance.

After conducting a hearing on the matter, the ALJ determined that the owner’s failure to disclose claimant’s injuries when he signed the no-loss letter to reinstate the policy was a material misrepresentation. He further found that the reinstated policy was void because of MDR’s misrepresentation. Finding claimant was temporarily and totally disabled and concluding that no workers’ compensation insurance policy was in effect insuring any of them, the ALJ held MDR, Alliance, and Hoff jointly liable for claimant’s medical and TTD benefits. The Panel agreed and affirmed.

Hoff contends that Pinnacol is estopped from denying benefits to claimant because:

•     Bradley, acting as Pinnacol’s agent, issued the certificate to Alliance;
•     the issuance of the certificate obligated Pinnacol or Bradley to notify Alliance that MDR’s policy was being cancelled; and,
•     she and Alliance relied on the certificate; and
•     neither Bradley nor Pinnacol sent notice of cancellation to Alliance.

Pinnacol contends that we need not reach this issue because Hoff has no standing to challenge the cancellation of MDR’s policy.

Standing

In order for a court to have jurisdiction over a dispute, the plaintiff must have standing to bring the case. Standing is a threshold issue that must be satisfied in order to decide a case on the merits.. If Hoff lacks standing to challenge Pinnacol’s cancellation procedures then her “case must be dismissed. To establish standing, a plaintiff must demonstrate (1) that she has sustained an injury in fact, and (2) that the injury is to a legally protected interest.

The first prong of the standing test is met in this case. The liability imposed on Hoff by the ALJ and the Panel exceeds $300,000.

The second prong of the standing test asks whether the plaintiff’s alleged injury is to a legally protected interest. Because the legislature intended that the Act not only protect and compensate workers but also protect remote employers, Hoff falls within the scope of persons or entities the Act covers.

Promissory Estoppel

First, whether the elements of promissory estoppel have been proved generally presents a question of fact for the fact finder to resolve. Here, the ALJ made no findings whatsoever concerning estoppel, although the Panel concluded that Hoff had properly raised that issue.

Whether Pinnacol or Bradley (as Pinnacol’s agent) should have reasonably expected any promises set forth in the certificate to induce action or forbearance could relate to either Alliance or Hoff. In fact, Hoff does not need to demonstrate that the certificate was issued to her or that she personally relied on it.

The court concluded that, as a matter of law the certificate required notice to Alliance.

Alliance indisputably sought and obtained a certificate from Pinnacol’s agent to protect itself and its customer, Hoff, from precisely the type of liability that has been assessed against Hoff by the Panel.  The legal meaning of the certificate, like any other legal writing, is a question of law. The certificate, on its face, states that it was issued to Alliance. Directly adjacent to the portion of the certificate in which Alliance’s name is affixed, there is a provision that addresses notification of any attempted cancellation of the policy. That provision reads as follows: “SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION THEREOF, NOTICE WILL BE DELIVERED IN ACCORDANCE WITH THE POLICY PROVISIONS.”

The cancellation provision does not specify to whom notice of cancellation must be given by Pinnacol. But the language of the provision and its physical location on the certificate strongly suggest that Pinnacol or the agent that issued the certificate was required to give notice to Alliance of any termination of the policy.

Pinnacol, however, asked the court to construe the cancellation provision to provide that the notice that Pinnacol undertakes to give is only notice to the policy holder, MDR, not the certificate holder. The court refused to do so.

Under long-established principles, any ambiguity in the policy language of an insurance contract is construed against the drafter and in favor of the insured.  Because the certificate at issue here plays the same role as an insurance contract – to protect the holder against liability – to the extent that there is any ambiguity in the cancellation provision, the court concluded that the provision required that notice of cancellation be given to Alliance, the holder of the certificate.

Of course, it is axiomatic, that a contractual provision is void if the interest in enforcing the provision is clearly outweighed by a contrary public policy. In that regard, the General Assembly has specifically recognized the role that certificates of insurance play in the workers’ compensation scheme. The Act expressly contemplates that a person or entity in the chain of contract or work on a construction contract may obtain a certificate of workers’ compensation insurance to protect itself from the types of liabilities at issue here. By legislative mandate, certificates of insurance play a critical role in the workers’ compensation system – a critical role that would be wholly undermined if, as Pinnacol argues, either (1) notices of termination need not be provided to certificate holders or (2) various disclaimers and exculpatory language like that found in the certificate could immunize insurers from any liability arising from the issuance of the certificate.

Colorado’s public policy, as described in the Act, requires that courts give effect to the reasonable meaning and purpose of certificates of insurance. The court, therefore, must (1) construe the certificate as requiring notice to the certificate holder of termination of coverage, and (2) disregard any language and disclaimers that would impede the certificate from fulfilling its statutorily-prescribed purpose.

Alliance (and thus Hoff indirectly) was entitled to rely on the substance of the certificate, free of the disclaimers and exculpatory language in the policy. Thus, Pinnacol was required to notify Alliance of the cancellation of MDR’s policy. It is undisputed that neither Pinnacol nor its agent, Bradley, did so.

As a result the order was set aside in part, and the case remanded to the Panel to resolve all remaining factual issues relating to Hoff’s promissory estoppel claim–specifically, whether (1) Alliance or Hoff relied upon the promises contained in the certificate; and (2) whether circumstances exist such that injustice can be avoided only by enforcement of the promises contained in the certificate. In his discretion, the ALJ may conduct an additional hearing and allow submission of additional evidence.

ZALMA OPINION

The insurer, according to the court, made a promise in a certificate of insurance that notice would be given in the event of cancellation. Since there was no notice the cancellation, on its face, is inadequate. The lesson taught by this case is that insurers must keep the promises they make when they provide a certificate of insurance that promises coverage is in effect and that if a policy is cancelled notice will be give to those who relied upon the certificate.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Fraud By Insurance Agent Requires Jail

Insurance Agent Used Diverted Premium to Fund Campaign for Congress

The Ninth Circuit Court of Appeal made clear that although Congressmen may write the law they are not above the law. Former Arizona Congressman Richard Renzi learned this lesson the hard way when he was convicted by a jury on charges of conspiracy, honest-services fraud, extortion, money laundering, making false statements to insurance regulators, and racketeering. In U.S. v. Renzi, — F.3d —-, 2014 WL 5032356 (C.A.9 (Ariz., Oct. 9, 2014)) the Ninth Circuit was asked to reverse his convictions that included conviction for blatant insurance fraud by using clients funds held in trust to fund Renzi’s successful campaign for Congress.

FACTUAL BACKGROUND

The evidence showed that Renzi, who owned and operated an insurance agency, misappropriated clients’ insurance premiums to fund his congressional campaign, and lied to insurance regulators and clients to cover his tracks. Finally, the evidence established that Renzi used his insurance business as an enterprise to conduct a pattern of racketeering activity by diverting clients’ insurance premiums for his personal use, facilitating an extortionate land transfer, and laundering its proceeds.

Renzi owned and operated Renzi & Company (R & C), an insurance agency specializing in obtaining insurance coverage for non-profit organizations and crisis pregnancy centers.  R & C obtained group insurance coverage for its clients through brokers who worked on behalf of insurance carriers. R & C collected yearly premiums from its clients and, after keeping a small percentage as a profit, remitted those premiums to the broker. After taking their commission, the broker remitted the remainder of the premium to the insurer—either Safeco, United States Liability, or Royal Surplus.

On December 10, 2001, Renzi publicly announced his candidacy for a seat in the United States House of Representatives serving Arizona’s First Congressional District. The very next day, Renzi began diverting cash from R & C to fund his congressional campaign. Between December 2001 and March 2002, Renzi transferred over $400,000 from R & C to his “Rick Renzi for Congress” account. To avoid campaign disclosure regulations, Renzi claimed the money as a personal loan to the Renzi campaign. But most of the diverted funds were directly traceable to insurance premiums R & C had collected from clients.

R & C had collected insurance premiums from its clients but had funneled those premiums to Renzi’s congressional campaign. Because R & C no longer had the money, Renzi did not  pay  the broker to fund the insurance for his clients.  Two months later, Safeco – showing amazing patience – warned R & C that it planned to cancel R & C’s policies for nonpayment.

A month later Safeco began sending cancellation notices to R & C’s clients. With cancellation notices in hand, worried clients began calling R & C.  To respond to client concerns, Renzi dictated a letter sent to clients later that month. The letter stated that, because “spiritual counseling was no longer covered” under Safeco’s policy, R & C had “replaced” Safeco with “the Jimcor Insurance Company.” The letter promised that clients would experience “no lapse in coverage.” Attached to each letter was a new certificate of liability insurance ostensibly from “Jimcor Insurance Company.” The certificate listed a policy number, policy limits, and effective policy dates.

Jimcor was not an insurance company. The new certificates were entirely fabricated.  Renzi caused at least 74 letters and phony insurance certificates to be delivered, but only to clients who had called R & C to voice concern.

On November 5, 2002, Renzi was elected to the United States House of Representatives. A few weeks later, Renzi received a $230,000 gift from his father. That same day, R & C paid the full amount due to North Island: $236,655.90. After receiving full payment, Safeco decided to retroactively reinstate all of R & C’s policies.

R & C began receiving inquiries from insurance regulations. Renzi caused R & C to falsely claim that the fake insurance policies were due to a clerical error.  Testimony at trial established that there was no “inadvertent computer slip.” Rather, Renzi had instructed an employee to create the fake certificates, insert the false coverage information, and send the certificates to complaining clients.

After an extensive investigation, two federal grand juries returned indictments against Renzi. The second superseding indictment against Renzi and his codefendants was returned on September 22, 2009. In June 2013, following a 24–day jury trial with 45 witnesses, Renzi was convicted on 17 of 32 counts of public corruption, insurance fraud, and racketeering. Granting a substantial downward variance, the district court sentenced Renzi to only 36 months of imprisonment.

For over ten years, Renzi served as the owner and operator of R & C, an insurance agency that marketed and sold insurance policies, approved applicants for insurance, issued certificates of insurance, and collected premiums on behalf of insurance carriers. Now, Renzi contends that his insurance fraud conviction cannot stand because R & C was not “engaged in the business of insurance” as required by the statute. The statute defines the term “business of insurance” broadly to mean the writing of insurance or reinsuring of risks “by an insurer, including all acts necessary or incidental to such writing or reinsuring and the activities of persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons [.]” 18 U .S.C. § 1033(f)(1).

The evidence introduced at trial was sufficient for a rational juror to find that R & C was “engaged in the business of insurance” because Aly Gamble, R & C’s Senior Underwriter, testified that R & C was authorized to act on behalf of insurer Royal Surplus Lines Insurance Company. R & C conducted acts necessary or incidental to the writing of insurance or reinsuring of risks.  R & C even went so far as to issue fake insurance certificates to clients, which listed Renzi as Jimcor Insurance Company’s “authorized representative.” And during the period of time when clients were not covered by any policy, R & C paid clients directly after purportedly adjusting any outstanding claims.

The Ninth Circuit concluded that if it looks like an insurance agency and acts like an insurance agency, it’s probably engaged in the business of insurance. A rational juror could have found that R & C, which went so far as to issue fraudulent insurance policies to dupe unwitting clients into believing they were fully insured, was engaged in the “business of insurance” as the term is broadly defined in § 1033(f)(1).

Had the letters been composed truthfully, they would have revealed that Renzi had redirected clients’ insurance premiums into his congressional campaign, and that clients’ insurance coverage with Safeco had lapsed for a few months based on nonpayment.

Renzi also challenged his conviction for engaging in a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c) (“RICO”).

The Constitution and our citizenry entrust Congressmen with immense power. Former Congressman Renzi abused the trust of this Nation, and for doing so, he was convicted by a jury of his peers. After careful consideration of the evidence and legal arguments, the Ninth Circuit affirmed the conviction and sentence imposed on Renzi.

ZALMA OPINION

Insurance is a business of the utmost good faith. Members of Congress must be honorable and serve their constituents not their personal gain. The jury found that Mr. Renzi used the business of insurance with utmost bad faith, stole funds entrusted to him by his clients to fund his run for Congress, lied to his clients when their policies were cancelled for non-payment of premium that had been stolen by Renzi, created false and fraudulent insurance policies to stop complaints from his customers, and then lied to the regulators investigating his acts.  The insurance conduct proved against Mr. Renzi – ignoring the other charges for the purpose of this article – is the ultimate expression of bad faith. His punishment – only three years in prison – was merciful. His appeal was contumacious.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

Policy Needs Void For Fraud Language

Fake Doctor & Innocent Co-Insureds

Medical malpractice insurance is designed to protect doctors who accidentally cause injury to their patients. The insurance policy is issued based upon the truth of facts reported in applications for insurance. In Evanston Ins. Co. v. Watts, Slip Copy, 2014 WL 4954689 (D.S.C., Oct. 2, 2014) an insured doctor was discovered to be an imposter who was not who he said he was nor was he a licensed physician. The insurer sought to void coverage for the fake doctor and the group of physicians of which he was a part for suits alleging malpractice against the fake doctor and his group.

Plaintiff, Evanston Insurance Company, (“Evanston”) and Defendants Agape Senior Primary Care (“ASPC”), Floyd Cribbs, Kezia Nixon, and Scott Middleton (“collectively Agape Defendants”), move the district court for summary judgment.

BACKGROUND FACTS

Agape is a business that employs and deploys physicians and nurse practitioners to nursing homes, rehabilitation centers, freestanding offices, and assisted living facilities.  Earnest Addo (“Addo”) assumed the identity of Dr. Arthur Kennedy (“Kennedy”), obtained employment with Agape, and sought insurance coverage with Evanston under ASPC’s existing policy.  In February of 2012, Addo filled out an application representing that he was Arthur Kennedy, a South Carolina licensed medical physician.  Evanston’s added Arthur Kennedy, M.D. to the policy. In August of 2012, Addo’s true identity was discovered by the Lexington County Sheriff’s Department, and Addo was later indicted on federal charges of identity theft.

In the wake of Addo’s true identity coming to light, several lawsuits were filed against Agape and other Named Insureds. Some former patients also alerted Agape to their intention to file suit. These suits and potential claims assert causes of action for medical malpractice and various negligence-based claims.

During the pendency of this case, the parties stipulated to several facts:

1. Earnest Osei Addo (“Addo”) is not listed as a Named Insured under the Policy.
2. Addo assumed the identity of and posed as Arthur Kobina Kennedy, M.D. (“Dr.Kennedy”).
3. Addo posed as a medical doctor, even though he was not a licensed South Carolina physician.
4. Neither the Hanna Action nor any of the claims by patients or residents of Agape stemming from Addo’s impersonation of Dr. Kennedy allege any wrongful conduct by Dr. Kennedy.

DISCUSSION

The policy issued to ASPC by Evanston is a claims-made policy providing professional liability coverage. The policy has two types of coverage: Coverage A and Coverage B. The policy provides in pertinent part:  Coverage A Individual Professional Liability: “because of Malpractice or Personal Injury, sustained by a patient and committed by the Coverage A Named Insured, or by any person for whose Malpractice or Personal Injury the Coverage A Named Insured is legally responsible.”

Coverage B Association, Corporation or Partnership Liability: “because of Malpractice or Personal Injury, sustained by a patient and committed by any person for whom the Coverage B Named Insured is legally responsible, arising out of the practice of medicine.”

Addo’s Material Misrepresentations and Whether the Policy is Viod Ab Initio

The insurer bears the burden, in South Carolina, of establishing by clear and convincing evidence that an insured has made a material misrepresentation, such that the insurance policy should be voided and coverage denied. In order to void a policy on the ground of fraudulent misrepresentation, it is necessary that the insurer show not only the falsity of the statement challenged, but also that the falsity was known to the applicant, was material to the risk, made with the intent to defraud the insurer, and relied upon by the insurer in issuing the policy.

In policies involving co-insureds, South Carolina has held that where an insurance policy creates several, individual obligations among co-insureds, criminal acts by one co-insured does not bar the innocent co-insureds from recovering under the policy.

Evanston argues that Addo made serious misrepresentations when he assumed the identity of Kennedy and posed as a licensed medical doctor in his application for insurance coverage. Agape Defendants also acknowledge that Addo’s representations to Evanston were fraudulent.  Accordingly, there is no factual dispute that Addo’s representations in his application to Evanston regarding his credentials as a physician were false. The false representations were known to Addo at the time he made them, and Addo intended for Evanston to rely on the representations.

Therefore, Evanston has satisfied the elements of material misrepresentation with regard to Addo’s application for insurance and the Court concluded that such misrepresentations clearly allow Evanston to void coverage as to Addo/”Kennedy.”

Policy Void as to Addo But is It Void As to Other Insureds?

In light of Addo’s conduct, the major dispute between the parties appears to be whether Addo’s misrepresentations can be imputed onto the Agape Defendants, such that the entire policy of insurance is void under a theory of material misrepresentation.

Evanston asserts Addo’s misrepresentations in his application not only void his coverage, but also void the entire policy of insurance for all named-insureds. In order to prevail under South Carolina law and void the policy based on a material misrepresentation.

The application requires the applicant, Addo, to warrant that “the information contained herein is true, and that it shall be the basis of the policy and deemed incorporated therein, should the Company evidence its acceptance of this application by issuance of a policy.”

Notably, Evanston does not present any evidence to the contrary. Furthermore, in its own brief, Evanston states, “Addo, not agape [sic] is the applicant.”

The Policy Has Multiple Named Co–Insureds

Evanston’s ability to void the entire insurance policy based on Addo’s misrepresentations is also hindered if the policy is one that affords coverage to multiple co-insureds. Evanston argues it may rescind the policy based on Addo’s misrepresentations, thus barring other insureds from retaining coverage. Agape Defendants insist the policy contains several and independent obligations to each named insured.

In determining whether the policy, as written, provides coverage for co-insureds, the court must attempt to interpret the policy in accordance with the parties’ intention. Each individual doctor submitted his or her own application to Evanston for insurance coverage. ASPC also submitted its own application for coverage under the policy. The Endorsement refers to “each” insured and lists different effective dates and expiration dates of coverage for each named insured.

In South Carolina if the policy contains a fraud provision courts are unwilling to apply the innocent co-insured doctrine. In such circumstances, the policy has made clear that recovery is barred for all insureds if any insured makes a misrepresentation or acts fraudulently in procuring a loss under the policy. Here, in Evanston’s contract, there is no specific fraud provision contained in the insurance policy.

Accordingly, based on the contract itself, the Court agreed with Agape and finds that the other named co-insureds should not be barred from obtaining coverage under the policy.

Policy Exclusions

The policy contains several exclusions that Evanston argues void coverage for certain claims. The two applicable exclusions related to Coverage A which are raised by Evanston are:

Exclusion A-bars coverage for any Malpractice or Personal Injury committed in violation of the any law or ordinance; to any Claim based upon or arising out of any dishonest, fraudulent, criminal, malicious, knowingly, wrongful, deliberate, or intentional acts, errors or omissions committed by or at the direction of the Insured.

Exclusion B-bars coverage for any Malpractice or Personal injury that happens while the Insured’s license or certificate to practice the Insured’s profession is suspended, surrendered, revoked, expired, terminated, or otherwise not in effect.

Addo/”Kennedy” is not entitled to Coverage A under the policy. However, all other Coverage A Named Insureds are entitled to coverage, to the extent a claim exists that would trigger their coverage under the policy.Coverage B

Under the policy, Coverage B provides the “Association, Corporation or Partnership” liability coverage for claims due to “Malpractice or Personal Injury, sustained by a patient and committed by any person for whom the Coverage B Named Insured is legally responsible, arising out of the practice of medicine.”  All named insureds, except Addo are entitled to coverage.

ZALMA OPINION

The insurer failed to void coverage for an obvious and admitted fraud because of a failure of underwriting and a failure to effectively write policy wording that protected the insurer from fraud. Had the insurer simply added a clause to the policy that stated that: “This entire policy shall be void if, whether before or after a loss, any insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto…” the court would have found that the entire policy, not just as to Addo, was void. In addition, it could have avoided the problem by making the policy a single policy for ASPC with each of the doctors only acting as additional insureds of the ASPC policy and require that ASPC sign for all as well as individual applications for each doctor.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Insurers Have The Right To Chose Who and What It Will Insure

ACA May Prevent the Right to Negotiate Insurance

It is axiomatic in insurance law that an insurer has the unquestioned right to determine who, and against what risks, it is willing to insure. The Patient Protection and Affordable Care Act (ACA), 42 U.S.C. § 300gg–13(a)(4), and the Regulations written to implement the ACA limits the rights of the insurer and the proposed insured to negotiate the terms of a contract of insurance.

In Annex Medical, Inc. v. Burwell, — F.3d —-, 2014 WL 4959142 (C.A.8 (Minn., Oct. 24, 2013) the Eighth Circuit Court of Appeal was asked to allow an insured, under the Religious Freedom Restoration Act (RFRA) case challenging the U.S. Department of Health and Human Services (HHS) contraceptive mandate under 42 U.S.C. § 2000bb–1(a), to enjoin preliminarily the government from enforcing the mandate. The District Court refused to do so and the parties appealed.

ISSUE

Pursuant to the ACA HHS promulgated regulations requiring “group health plan[s]” and “health insurance issuer[s] offering group or individual health insurance coverage” to cover, without “any cost-sharing requirements,” “[w]ith respect to women, … evidence-informed preventive care and screenings provided for in binding comprehensive health plan coverage guidelines supported by the Health Resources and Services Administration.” 45 C.F.R. § 147.130(a)(1)(iv) (2013). At the recommendation of the Institute of Medicine, HHS adopted guidelines providing that nonexempt employers generally must provide “coverage, without cost sharing, for all Food and Drug Administration (FDA) approved contraceptive methods, sterilization procedures, and patient education and counseling.” 77 Fed.Reg. 8725, 8726 (Feb. 15, 2012) (internal marks and quotations omitted).

BACKGROUND

Annex is a for-profit Minnesota corporation and at the time of filing had sixteen full-time employees and two part-time employees. When Annex filed this lawsuit, one of the ways Annex compensated its employees was by paying for a Blue Cross and Blue Shield of Minnesota (Blue Cross) group health insurance plan. This health plan covered contraceptives and had included such coverage for years.

Lind is the controlling shareholder of Annex. On religious grounds, Lind opposes both abortion and the use of contraceptives. Lind asserts he did not know the plans Annex purchased for its employees historically offered coverage for contraceptives. After Lind learned the Blue Cross plan contained this coverage, Annex continued to pay for its employees’ participation in the plan until Annex cancelled the policy as of January 31, 2013. At some point before canceling the policy, Lind asked Blue Cross “to exclude coverage for contraception, sterilization, abortifacient drugs and related education and counseling.”

Although the Blue Cross plan was “not currently subject to” the regulation, Blue Cross itself refused to eliminate such coverage. Lind contacted three other Minnesota insurers, none of whom would sell Annex a plan without contraceptive coverage. According to Lind, no insurer would offer Annex such coverage even after this court issued a temporary injunction pending appeal.

DISCUSSION

According to the pleadings, Annex has fewer than fifty full-time employees, which means Annex has no government-imposed obligation to offer health insurance of any kind-let alone the contraceptive coverage to which Lind objects. Only if Annex voluntarily chooses to offer insurance without the mandated contraceptive coverage, and this lack of contraceptive coverage is not solely because of the health insurance coverage offered by such issuer.

The standing problem is the pleadings and record contain no indication any Minnesota health insurer is willing, but for the mandate, to sell a plan allowing a small employer such as Annex to prohibit coverage for a handful of healthcare products and services. What few indications appear on the record are to the contrary. Lind informs us “the injunction has not enabled him to purchase” a plan conforming with his religious beliefs. According to Annex and Lind, Group plan providers are unwilling to exclude some or any of the mandated coverage from their plans or do not currently offer a plan that excludes these items and are unwilling to submit such a plan to the Minnesota Department of Commerce for approval.

RFRA does not allow the federal government substantially to burden Lind’s religious beliefs, as exercised through his closely-held corporation. [Hobby Lobby, 573 U.S. at ––––, ––––, 134 S.Ct. at 2779, 2785.] But in protecting Lind’s exercise of religion, RFRA cannot injure the rights of other private parties.

Whether for political, moral, religious, administrative, or purely profit-driven reasons, health insurance issuers are free under RFRA to decline Annex’s business. Ultimately, it is unclear whether Annex’s alleged injury is caused by the government defendants and redressable by the federal courts. Article III requires Annex to prove an actual injury traceable to the defendant and likely to be redressed by a favorable judicial decision.

Based on the pleadings and sparse record before us, the Eighth Circuit could only speculate whether Annex’s difficulties obtaining contraceptive-free insurance are (1) caused by the government defendants as opposed to the independent decisions of third-party insurers, and (2) redressable by the remedy available to Annex: a permanent version of the preliminary injunction Annex already received and which failed to redress Annex’s alleged injury.

Rather than resort to such speculation, the Eighth Circuit decided it was best to vacate the district court’s denial and remand the case for additional analysis. This will allow the district court to use its superior fact-finding abilities to determine, in the first instance, whether subject matter jurisdiction exists.

CONCLUSION

As to Annex and Lind, the Eighth Circuit vacated the district court’s order and remand for further proceedings, beginning with the parties’ Article III standing.  On July 1, 2014, Annex and Lind filed a citation letter with this court, pursuant to Rule 28(j) of the Federal Rules of Appellate Procedure, identifying and quoting the Supreme Court’s decision in Hobby Lobby. Because we remand this case on standing grounds, we need not, and do not, express an opinion on the impact of Hobby Lobby on the current case.

ZALMA OPINION

Since the facts alleged at this stage, must be assumed to be true, Annex Medical’s allegations that its inability to procure the desired group health insurance plan is “a result of” the HHS mandate, and that the mandate “strips Annex Medical of any choice” to select its preferred plan. I agree with the dissent that the majority’s speculation that every insurance company—despite the cost-neutrality of the requested accommodation—might refuse to issue a policy to Annex Medical for “political, moral, religious, administrative, or purely profit-driven reasons” is contrary to the allegations in the complaint and cannot defeat Annex Medical’s standing to challenge the HHS mandate. The dissent and I argue that the district court’s order denying a preliminary injunction should be vacated in light of Hobby Lobby. The United States should not issue Regulations that put such fear in to an insurer that it is not willing to negotiate terms and conditions of an insurance policy. When it does, the HHS Regulations deprive an employer of the right to negotiate an insurance policy on the terms desired and doing so is a clear violation of the RFRA.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

 

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Three Shots at Head Not an Occurrence

Killing Two Is Not an Accident

After State Farm intervened in a wrongful death action the trial court granted an insurer summary judgment and found State Farm owed neither defense nor indemnity to a person who was convicted of negligently killing two people by firing three shots at a man’s head, Nathan Leinweber and John Doe (collectively referred to as Leinweber) and Andrew Wirth appealed. In Leinweber v. Wirth, Slip Copy, 2014 WL 4920837 (Wis.App., Oct. 2, 2014) the Wisconsin Court of Appeal was called upon to resolve the dispute.

BACKGROUND

Wirth was convicted after a jury trial of two counts of homicide by negligent handling of a dangerous weapon, relating to the deaths of Jennifer Luick and Gregory Peters during an altercation with Wirth at a bar.

Soon after arriving at a bar, [Jennifer] Luick approached Wirth from behind and, according to Wirth, “grabbed his ass” and pushed her finger “towards the crack of [his] butt.” Wirth became upset and irritated and told Luick, “[D]on’t fucking touch me.” Wirth claimed that Luick seemed very upset by his strong reaction to her “grabbing” action. Shortly after, Luick’s boyfriend, [Gregory] Peters, approached Wirth, tapped him on the shoulder, and asked him to go outside. Not obtaining a demanded apology Peters lifted his left arm as if to touch Wirth and, according to Wirth, reached behind his back.  Thinking he was about to be stabbed Wirth grabbed Peters by the throat with his left hand, pulled out his loaded gun with his right hand and pointed the gun at Peters’ head. Wirth discharged three rounds from his gun: one round struck Peters’ chest, resulting in his death; one round grazed Peters’ neck and struck Luick’s chest, resulting in her death.

At trial, the parties did not dispute that Wirth discharged the gun three times or that Peters and Luick died as a result of Wirth’s firing the gun.

Leinweber commenced the underlying wrongful death suit against Wirth. State Farm subsequently filed a motion to intervene and to bifurcate and stay proceedings, and the circuit court granted the motion. At the time of the events that led to Wirth’s criminal conviction, State Farm insured Wirth under a Renter’s Insurance policy.  The policy excluded coverage for bodily injury or property damage that was “expected or intended” by the insured.

The circuit court reasoned that the jury in the criminal case reached its verdict beyond a reasonable doubt, so if the jury failed to reach a verdict beyond a reasonable doubt on a criminal conduct that involved both intent and intentional conduct, it doesn’t mean by a preponderance of the evidence that wouldn’t happen in the present case.

The circuit court held that Wirth’s conduct was not accidental and, therefore, that there was no occurrence and no coverage under the State Farm policy. The court granted State Farm’s motion for declaratory judgment, relieving State Farm of the duty to defend and indemnify Wirth.

DISCUSSION

As noted above, Leinweber and Wirth argue that the circuit court erred in granting State Farm’s motion for declaratory judgment for several reasons.

Applicability of Issue Preclusion (Collateral Estoppel)

In Leinweber’s view, if Wirth caused injury and death by a merely negligent act, then there was a covered “occurrence.” Consequently, Leinweber attempted to persuade the circuit court that, under issue preclusion, the jury’s finding that Wirth acted with criminal negligence in the prior criminal prosecution should be binding in this case.

The doctrine of issue preclusion, formerly known as collateral estoppel, is designed to limit the relitigation of issues that have been actually litigated in a previous action. First, the court must determine if the issue was actually litigated and determined in the prior proceeding. Second, the court must determine whether the application of the doctrine under the particular circumstances of the case is consistent with fundamental fairness.

Here Leinweber has sued Wirth, a person who was a party in the prior criminal proceeding. However, Leinweber does appear to argue that applying issue preclusion comports with principles of fundamental fairness.

If a jury in a criminal case, beyond a reasonable doubt, felt that there was a negligence aspect to what someone was doing, that may not and does not fit within the definition of the tests that a court must apply when interpreting an insurance policy. Because the burden of proof for proving Wirth’s criminal conduct was greater in the criminal case, the circuit court concluded there is a possibility that a new jury applying a lower burden of proof could find Wirth’s conduct was intentional, rather than merely negligent.

The United States Supreme Court, similarly considering issue preclusion in a civil proceeding following a criminal proceeding, stated: “[T]he difference in the burden of proof in criminal and civil cases precludes the application of the doctrine of collateral estoppel. The acquittal of the criminal charges may have only represented ‘an adjudication that the proof was not sufficient to overcome all reasonable doubt of the guilt of the accused. As to the issues raised, it does not constitute an adjudication on the preponderance-of-the-evidence burden applicable in civil proceedings.” [One Lot Emerald Cut Stones v. United States, 409 U.S. 232, 235 (1972) (citations omitted)]. The circuit court’s reasoning in the present case is similar to that of the United States Supreme Court in One Lot Emerald Cut Stones.

Wirth was found not guilty of an intentional crime, but guilty of criminal negligence, under the beyond-a-reasonable-doubt burden of proof. But that is all that the jury found. Wirth’s conduct was not adjudicated under the preponderance-of-the-evidence burden of proof that applies in the present civil case.

Whether Wirth’s Conduct Was an “Accident” Triggering Coverage

Leinweber and Wirth both argue that the circuit court erred in granting declaratory judgment in favor of State Farm because there are disputes of material fact “as to what happened between Wirth and Peters” after Wirth put the gun to Peters’ head. The circuit court found, as a matter of fact, that the causal event was “producing a loaded firearm in conjunction with a dispute with another individual and placing one’s finger on the trigger of the firearm and discharging it in close proximity to other human being[s].” The circuit court held, as a matter of law, that such causal event was “not accidental” under the policy. The court concluded that, because the cause was not accidental, there was no occurrence and, therefore, no coverage under the State Farm policy.

Insurance Policy Analysis

Insurance policies are construed as they would be understood by a reasonable person in the position of the insured. However, we do not interpret insurance policies to provide coverage for risks that the insurer did not contemplate or underwrite and for which it has not received a premium.

Here, Leinweber alleged in the complaint and the amended complaint that, “Wirth intentionally fired his weapon and ultimately shot Luick causing her death.” (Emphasis added.)  One cannot “accidentally” intentionally cause bodily harm. the allegation that Wirth intentionally fired his weapon shows a degree of volition inconsistent with the term “accident.”

CONCLUSION

The parties do not dispute the underlying facts on which the circuit court relied upon:

(1)     Wirth pulled the trigger on the semi-automatic handgun that was pointed in the direction of, and in close proximity to, Peters and Luick;

(2)     Wirth overcame a safety mechanism to discharge the first shot; and

(3)     Wirth then discharged two additional shots.

These are not acts by Wirth which occurred by chance or arose from unknown or remote causes. It was not a fortuitous act and, therefore, not insurable.

The means or cause of the injury must be accidental – meaning non-volitional, unknown – in order for there to be an accidental occurrence. The circuit court found on undisputed facts that the cause of Luick’s death was Wirth producing the gun in the midst of a dispute, placing his finger on the gun’s trigger, and discharging the gun while in close proximity to other human beings. Under these facts, the cause of Luick’s death was volitional, known, and not remote.

The appellate court concluded that the volitional acts caused Luick’s death and were not accidental as a matter of law.

ZALMA OPINION

The criminal act was not a fortuitous or accidental event. To shoot and kill two people Wirth had to pull the loaded weapon out of his pocket, release the safety, and pull the trigger three times withing two feet of a human being. Insurance is designed to protect against fortuitous events and will never insure against intentional, volitional acts that cause injury. The insurer did not take a premium to insure against intentional shootings when it issued a renter’s policy to Wirth. Counsel tried to make the criminal trial finding of criminally negligently killing a person into a contingent, unknown or fortuitous event.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

 

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Duty to Defend

Potential for Coverage

In every property and casualty insurance policy an unwritten exclusion applies and requires that every loss must be fortuitous. That is, insurance, by definition can only insure against a contingent or unknown risk of loss and that that contingent or unknown event must occur within the dates the insurer agrees to insure. Some insurers have attempted to make the unwritten fortuity requirement by writing fortuity requirement language into their policies. How effective that language is depends on the facts presented to the court as it is applied to the policy wording.

In Assurance Co. of America v. Ironshore Specialty Ins. Co., Slip Copy, 2014 WL 4829709 (D.Nev., Sept. 30, 2014) the U.S. District Court, District of Nevada was asked to resolve a dispute in response to a Motion for Partial Summary Judgment filed by Plaintiff American Guarantee and Liability Insurance Company (“American Guarantee”). Defendant Ironshore Specialty Insurance Company (“Ironshore”) filed a Response, and American Guarantee filed a Reply.

BACKGROUND

This case arises from a dispute over insurance coverage for various underlying suits in Nevada state court. The underlying action at issue, Garcia v. Centex Homes, involves a class action suit between owners of individual residences (the “Owners”) and the developers, contractors, and sellers of the individual residences. In their complaint (the “Garcia Complaint”), the Owners allege “damages stemming from, among other items, defectively built roofs, leaking windows, dirt coming through windows, drywall cracking, stucco cracking, stucco staining, water and insect intrusion through foundation slabs, and other poor workmanship.”  In response to the Garcia Complaint, Centex Homes filed a Third Party Complaint, which alleged that subcontractors were responsible and liable for the claims asserted against it and named Champion Masonry (“Champion”) as a Third Party Defendant.

American Guarantee is an insurance company that issued a commercial general liability policy to Champion. Pursuant to that policy, American Guarantee provided a defense to Champion in the underlying state court construction defect action.

Ironshore is also an insurance company and issued a commercial general liability policy to Champion. The Ironshore Policy provides “that a defense is owed in any suit in which allegations were made of damages because of ‘property damage’ potentially caused by an ‘occurrence,’ occurring during the policy period and not otherwise excluded.”

Based on the Ironshore Policy, American Guarantee asserts three causes of action: (1) a declaratory judgment from the Court that Ironshore had a duty to defend Champion in the underlying action and the sum Ironshore must reimburse Plaintiffs; (2) contribution; and (3) indemnity.  In the instant motion, American Guarantee only seeks summary judgment as to a declaratory judgment from the Court that Ironshore had a duty to defend Champion in the underlying action.

DISCUSSION

Under Nevada law, like every other state, the duty to defend is broader than the duty to indemnify. However there is no duty to defend where there is no potential for coverage. If there is any doubt as to whether the duty to defend arises, this doubt must be resolved in favor of the insured, and once the duty to defend arises, it continues throughout the course of the litigation. The purpose behind construing the duty to defend so broadly is to prevent an insurer from evading its obligation to provide a defense for an insured without at least investigating the facts behind a complaint. Determining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy.

American Guarantee argues that Ironshore’s duty to defend was triggered because the claims asserted in the Garcia Complaint were potentially covered and the Continuous or Progressive Injury or Damage exclusion under the Ironshore policy did not preclude all possible or arguable coverage. However, Ironshore contends that the Continuous or Progressive Injury or Damage exclusion applied and the exclusion’s “sudden and accidental” exception was not implicated.

The Continuous or Progressive Injury or Damage exclusion precludes coverage of property damage “which first existed, or is alleged to have first existed, prior to the inception of this policy.” Ironshore argues that this exclusion applied because undisputed and incontrovertible proof exists that all work on the residences in the Garcia action, including work performed by Champion, was completed many years before the Ironshore Policy inception date of May 31, 2009. Furthermore, Ironshore argues that the “sudden and accidental” exception to the exclusion is not implicated by the alleged property damage.
The Garcia Complaint alleged that “[w]ithin the last year, Plaintiffs have discovered that the subject property has and is experiencing additional defective conditions, in particular, there are damages stemming from, among other items, defectively built roofs, leaking windows, dirt coming through windows, drywall cracking, stucco cracking, stucco staining, water and insect intrusion through foundation slabs, and other poor workmanship.”

DECISION

The Court found that the Garcia Complaint to be vague as to the temporal implications of the alleged damages, and therefore, it is not clear on the face of the Garcia Complaint whether the alleged damages were or were not sudden and accidental. Accordingly, this exclusion alone did not preclude all possible or arguable coverage.

In conclusion, the exclusion asserted by Ironshore did not preclude all arguable or possible coverage under the Ironshore Policy. Additionally, upon an independent comparison of the allegations in the Garcia Complaint with the terms of the Ironshore Policy, the Court found that the Garcia Complaint alleged property damage potentially caused by an occurrence that took place within the policy period that could have led to possible or arguable coverage under the Ironshore Policy. Accordingly, the Court declares that Ironshore had a duty to defend Champion in the underlying action.

ZALMA OPINION

The Nevada court’s decision is another case making clear how broad the duty to defend is over the duty to indemnify. Since the complaint alleged property damage that occurred during the policy period, even though most of the damage occurred before issuance of the policy, a duty to defend existed because there was a potential for coverage based upon the vague and ambiguous pleading of the suit.

The decision did not consider, however, the fact that there was an ongoing loss at the time the Ironshore policy was acquired because the issue was not presented to the court.

It seems improbable that Ironshore would have agreed to insure an insured against the risks of a loss that was in progress and growing day by day. If the insured failed to advise Ironshore of the existence of the ongoing litigation and damage Ironshore should be able to declare the policy void because of the concealment of a material fact. If it answered a specific question in the application about prior and ongoing losses Ironshore might be able to declare the policy void because of a misrepresentation of material fact.

It might also be able to rescind the policy from its inception since, if Ironshore had not been told about the ongoing litigation and multi-faceted claim before the policy was issued it would not have been issued at all, at the same price or, if issued, it would have been issued to specifically exclude any defense or indemnity relating to the facts alleged in the Garcia complaint.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

 

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Underinsured Motorist Coverage Is to Assure Insurance Coverage

Underinsured Motorist Not Effected by Governmental Liability Cap

This case arises from a collision between a vehicle driven by Barry Hunt and a snow plow owned by Dane County. Wisconsin and operated by a county employee. Barry Hunt and his wife, Ashley Hunt, had a motor vehicle liability policy with State Farm Mutual Insurance Co. at the time of the collision. The damages recoverable from the county and its employee are capped by statute at $250,000 and the Hunts claimed damages greater than that amount. In State Farm Mut. Auto. Ins. Co. v. Hunt, Slip Copy, 2014 WL 4920588 (Wis.App., Oct. 2, 2014) the appellate court was asked to determine whether the Hunts can rely on their policy, as affected by the underinsured motorist coverage provisions in Wisconsin statutes to recover their damages arising out of this collision in excess of $250,000 and up to the limits of the underinsured motorist coverage required by statute.

The trial court granted summary judgment to State Farm, concluding that the Hunts could not recover damages in excess of $250,000 under their policy as affected by the underinsured motorist coverage law for two reasons: (1) the Hunts are not “legally entitled to recover” damages, within the meaning of the statute beyond the $250,000 statutory liability cap applicable to a claim against a municipality for negligent operation of a vehicle; and (2) government owned vehicles are excluded from the definition of an underinsured motor vehicle under the terms of the Hunts’ policy.

BACKGROUND

Barry Hunt sustained serious injuries as a result of a collision between his vehicle and a Dane County snow plow in January 2012. These injuries were caused by a county employee’s negligence. The Hunts filed a notice to the county claiming $5,850,000 in damages against the county and its employee. By statute the damages recoverable from the county and its employee are capped at $250,000.

At the time of the collision, the Hunts had a motor vehicle liability insurance policy with State Farm that included coverage for injuries caused by an uninsured or underinsured motorist. The coverage was mandated by statute and defined an underinsured motor vehicle as a motor vehicle as pertinent to the issues raised in the appeal: “2. At the time of the accident, a bodily injury liability insurance policy applies to the motor vehicle[,] or the owner or operator of the motor vehicle has furnished proof of financial responsibility … or is a self-insurer…. 3. The limits under the bodily injury liability insurance policy or with respect to the proof of financial responsibility or self-insurance are less than the amount needed to fully compensate the insured for his or her damages.”

Pursuant to the statute the Hunts’ State Farm policy provided underinsured motorist coverage in the amount of $100,000 per person or $300,000 per accident. The basic language of the Hunts’ policy exempted vehicles “owned by or rented to any government” from its definition of an underinsured motor vehicle. However, an endorsement to the policy redefined an underinsured motor vehicle and, in doing so, did not include any language regarding an exclusion for government vehicles.

The Hunts sought recovery pursuant to their underinsured motorist coverage. State Farm argued that the only damages the Hunts are “legally entitled to recover” from the county and its employee are capped by statute at $250,000, and that there is no dispute that damages up to that amount are otherwise fully covered. State Farm also argued that the snow plow was not an underinsured motor vehicle because it was owned by a governmental unit.

DISCUSSION

The Hunts argue that the circuit court erred in granting summary judgment in favor of State Farm for two reasons. First, the Hunts argue that the phrase “legally entitled to recover” in the statute means that the Hunts’ underinsured motorist coverage applies whenever the insured demonstrates a valid tort claim for damages against the operator of an underinsured motor vehicle. Second, the Hunts argue that the endorsement to their State Farm policy did not exclude government vehicles from the definition of an underinsured motor vehicle and, even if it did, that this exclusion is invalid.

The parties agree that State Farm was required to provide underinsured motorist coverage to the Hunts as mandated by Wisconsin statutes and that the policy could not provide less coverage than required by statute

Statutory language is given its common, ordinary, and accepted meaning, except that technical or specially-defined words or phrases are given their technical or special definitions. The scope, context, and purpose of a statute are relevant to a plain meaning interpretation as long as they are ascertainable from the text and structure of the statute itself. If the language of the statute is unambiguous, there is no need to consult extrinsic sources of interpretation, such as legislative history.

The purpose of the staute is to assure insurance coverage to accident victims. Thus, it must be broadly construed so as to increase rather than limit coverage.

Neither party argues that the phrase “legally entitled to recover” is ambiguous but, rather, each party argues that a plain meaning interpretation of that phrase supports its position.

The Hunts contend that the meaning of this phrase is that the insured seeking underinsured motorist coverage must demonstrate a valid tort claim for damages against the underinsured motorist, but need not show that all alleged damages sustained by the insured are recoverable from the tortfeasor. State Farm argues, to the contrary, that the meaning of “legally entitled to recover” is that the insured has coverage only “up to the amount for which the tortfeasor is liable under applicable tort law,” an amount that, here, is limited by the statutory cap. Therefore, State Farm argues, because the Hunts cannot recover damages in excess of $250,000 from the county or its employee due to the statutory limit on governmental liability, their underinsured motorist coverage does not apply here.

The statute defines an underinsured motor vehicle as a vehicle with policy limits that are less than the amount needed to fully compensate the insured for his or her damages. This language addresses the amount needed to compensate the insured, and does not address the tortfeasor’s situation.

In fact, in 2010, the legislature specifically rejected a provision excluding motor vehicles owned by governmental units from the definition of underinsured motor vehicles. In so doing, the legislature demonstrated its intent to retain underinsured motorist coverage up to the policy limits in instances where the underinsured motor vehicle is a government vehicle and the damages recoverable against the driver are capped by statute.

In the case of governmental liability caps, the purpose of such caps supports our application of the phrase “legally entitled to recover.” The purpose behind governmental immunity statutes is plainly to protect the public purse, and not to reduce payouts by insurers to those injured through the negligence of government employees.

The purpose of the cap bears no relation to an insured’s underinsured motorist coverage. Thus, in the context of a case involving the statutory municipal liability cap, the appellate court concluded that an insured is “legally entitled to recover” damages where he or she can demonstrate a claim for damages against a tortfeasor for which the insured is not fully compensated, despite the fact that all of these damages are not recoverable due to the statutory cap.

ZALMA OPINION

The snow plow was permissively self-insured. The governmental entity and the public’s purse was protected by the statute capping liability. The cap worked just like a small limit of liability on an insurance policy insuring a judgment proof defendant. State Farm must pay its insured the $100,000 limit of its policy if the insured’s injuries are really worth more than $5 million as alleged and walk from this case. State Farm had a viable argument since it convinced the trial court so it can avoid claims of bad faith. Considering the extent of injury this was probably not a wise case to take up on appeal since the costs may exceed the amount of indemnity capped by its policy limits.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

No Punitive Damages Under Jones Act

Federal Statutes Trump Common Law Rights of Injured Seamen

The Fifth Circuit Court of Appeal was asked to decide whether the seaman plaintiffs in this case, both the injured seamen and the personal representative of the deceased seaman, can recover punitive damages under either the Jones Act or the general maritime law and whether the U.S. Supreme Court decision in Miles v. Apex Marine Corp.,498 U.S. 19, 111 S.Ct. 317, 112 L.Ed.2d 275 (1990) controls the decision. In McBride v. Estis Well Service, L.L.C., — F.3d —-, 2014 WL 4783683 (C.A.5 (La.), 9/25/14) the Fifth Circuit, sitting en banc, resolved the dispute.

FACTS

The litigation arose out of an accident aboard Estis Rig 23, a barge supporting a truck-mounted drilling rig operating in Bayou Sorrell, a navigable waterway in the State of Louisiana. The truck right toppled over, and one crew member, Skye Sonnier, was fatally pinned between the derrick and mud tank, and three others, Saul Touchet, Brian Suire, and Joshua Bourque, have alleged injuries. At the time of the incident, Estis Well Service, L.L.C. (“Estis”) owned and operated Rig 23, and employed Sonnier, Touchet, Suire, and Bourque (collectively, the “crew members”).

Haleigh McBride, individually, on behalf of Sonnier’s minor child, and as administratrix of Sonnier’s estate, filed suit against Estis, stating causes of action for unseaworthiness under general maritime law and negligence under the Jones Act and seeking compensatory as well as punitive damages under both claims. The other crew members filed separate actions against Estis alleging the same causes of action and also requesting compensatory and punitive damages. Upon the crew members’ motion, the cases were consolidated into a single action. Estis moved to dismiss the claims for punitive damages, arguing that punitive damages are not an available remedy as a matter of law where liability is based on unseaworthiness or Jones Act negligence. The trial court granted the motion and entered judgment dismissing all claims for punitive damages.

DISCUSSION

Background

The injured workers arguments are founded primarily on their claim under general maritime law. The Fifth Circuit, en banc (the entire court not a three judge panel) started from the bedrock premise that the judicial power, in all cases of admiralty and maritime jurisdiction, is delegated by the Constitution to the Federal Government in general terms, reflecting the adoption by all commercial nations of the general maritime law as the basis and groundwork of all their maritime regulations. Once general maritime law was embedded in federal law, however, the question arose as to which branch of government had the authority to modify the maritime law. Over 160 years ago, the Supreme Court declared that the maritime law was subject to regulation by Congress.

The Jones Act and FELA

In 1920, Congress enacted the Jones Act,46 U.S.C. § 30104, and extended to seamen the same negligence remedy for damages afforded to railroad workers under the Federal Employers’ Liability Act (“FELA”). This provided a remedy to seamen and their survivors to sue for compensation for personal injury and wrongful death based on the negligence of the seamen’s employer.

The Fifth Circuit noted that the facts in Miles are on all fours with Ms. McBride’s wrongful death action. In both cases, the personal representative of a deceased seaman sued the employer for wrongful death under the Jones Act and general maritime law. No maintenance and cure action was presented in either case. In both cases the seaman met his death in the service of his ship in state waters. The Supreme Court held after extended discussion and analysis, the survivors in Miles were limited to recovery of their “pecuniary losses” and denied recovery for damages for loss of society.

When Congress passed the Jones Act and the hoary tradition behind it was well established. Because Congress Incorporated the FELA unaltered into the Jones Act, the Fifth Circuit concluded that Congress must have intended to incorporate the pecuniary limitation on damages as well. The Supreme Court,therefore, squarely held that the recovery of the deceased seaman’s survivors under the Jones Act is limited to pecuniary losses. An appellate court may not,  in the constitutional scheme of separation of powers, be permitted to sanction more expansive remedies in a judicially created cause of action in which liability is without fault than Congress has allowed in cases of death resulting from negligence. Therefore, it concluded that there is no recovery for loss of society in a general maritime action for the wrongful death of a Jones Act seamen.

The Miles court established a uniform rule applicable to all actions for the wrongful death of a seaman, whether under DOHSA, the Jones Act or the general maritime law. Miles decided in a wrongful death case completely indistinguishable from Ms. McBride’s case that Congress, by incorporating FELA as the predicate for liability and damages in the Jones Act to seamen and their survivors is limited by Congress. It has limited survivors to recovery of their pecuniary losses.

The Jones Act applies to both injured seamen and those killed through the negligence of their employer. It follows from Miles that the same result flows when a general maritime law personal injury claim is joined with a Jones Act claim. So Miles’s conclusion that regardless of opposing policy arguments, “Congress has struck the balance for us” in determining the scope of damages, applies to the personal injury actions as well as Ms. McBride’s wrongful death action.

Although Congress and the courts both have a lawmaking role in maritime cases, Congress has paramount power to fix and determine the maritime law which shall prevail throughout the country. Even if a general maritime law remedy for wrongful death had been available to seamen in 1920, when Congress enacted the Jones Act, the Supreme Court’s interpretation of the Jones Act in Miles must control, and it resolves the question presented in this appeal.

Pecuniary Losses

The injured seamen argued that even if their recovery on their general maritime law action is limited to pecuniary loss, punitive damages should be characterized as pecuniary losses. The message that pecuniary loss is designed to compensate the plaintiff for an actual loss suffered comes through loud and clear. The statement in Miles itself describing the covered losses stated that in “[i]ncorporating FELA unaltered into the Jones Act, Congress must have intended to incorporate the pecuniary limitation on damages as well.”
The Jones Act precludes punitive damages because they are non-pecuniary in nature. The seaman may not use a general maritime law claim to recover damages that would be unavailable under the Jones Act; thus punitive damages are properly denied in such seamen’s cases. Punitive damages simply do not fit under the case law as a subset of pecuniary losses.

Conclusion

Based on Miles and other Supreme Court and circuit authority, pecuniary losses are designed to compensate an injured person or his survivors. Punitive damages, which are designed to punish the wrongdoer rather than compensate the victim, by definition are not pecuniary losses.

ZALMA OPINION

The decision was not unanimous. There were at least two vigorous dissents filed with this case. Regardless of the feelings and analysis of the dissenting justices, Congress set a limitation on recovery under the Jones Act and any maritime claim, to pecuniary damages. Punitive damages are a special type of civil damages designed to punish the tortfeasor not to compensate the injured parties. Since the Congress limited recovery to pecuniary damages, the injured seamen and the administratrix of the deceased seaman are entitled only to recover pecuniary damages. The court cannot change the law. If Congress thinks it is unfair to limit injured seamen to pecuniary damages they can amend the law.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | 2 Comments

Full Credit Bid Defeats Claim

Mortgagee Hoist On Its Own Petard

Mortgage holders seldom understand or consider insurance and potential insurance claims when the mortgagor fails to pay on the mortgage as promised. They should. Failure to understand insurance and the effect of making a full credit bid at a foreclosure sale can be very expensive and destroy the right to recover from an insurance policy or a responsible party. Professional mortgagees, when there is damage that is covered under a first party property insurance policy, will subtract the cost of the repairs from the amount of the debt to avoid eliminating the right to the benefits of an insurance policy.

In Najah v. Scottsdale Insurance Company, — Cal.Rptr.3d —-, 2014 WL 4827882 (Cal.App. 2 Dist., September 30, 2014) appellants Jamshid Najah and Mark Akhavain sold a commercial property, taking back as partial payment a promissory note secured by a second deed of trust. When the borrower fell into default and the holder of the first deed of trust commenced foreclosure proceedings, appellants purchased from the senior lender the promissory note secured by the first deed of trust and took assignment of that trust deed. Appellants then instituted foreclosure proceedings on the second trust deed and reacquired the property by making a bid equal to the unpaid debt securing the second, including interest, costs, fees, and other expenses of foreclosure.

The primary issue on appeal is whether appellants can pursue a claim for pre-foreclosure damage to the property deliberately caused by the purchaser under an insurance policy issued by respondent Scottsdale Insurance Company (Scottsdale) containing a mortgagee coverage provision.

BACKGROUND FACTS

In 2006, appellants sold a Riverside, California property to Orange Crest Realty Corporation (Orange Crest), whose principal was Ronald Shade. Orange Crest borrowed $2.021 million from the Lantzman Family Trust (Lantzman Trust), in return for a promissory note secured by a first deed of trust on the property. Appellants took back a promissory note and a second deed of trust for an additional $2.55 million.

There was a structure located on the property at the time of the sale. Although Shade’s professed intention was to demolish the building and develop the property for other uses, the $2.55 million promissory note payable to appellants stated, “[Orange Crest] will do no remodeling or construction on the property secured by this Note until the [Lantzman Trust] loan and this Note are paid in full.” The second deed of trust securing the $2.55 million note similarly required Orange Crest to “keep [the] property in good condition and repair, not to remove or demolish any building thereon; [and] to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon.”

THE INSURANCE

The $2.55 million note payable to appellants provided that Orange Crest would “furnish full all risk insurance with replacement cost guarantee insuring [appellants].” Orange Crest obtained a policy from Scottsdale, listing the Lantzman Trust and appellants as mortgageholders.

The policy included a provision describing Scottsdale’s obligation to appellants and the Lantzman Trust as the mortgageholders. The policy remained in effect until July 16, 2008, although Orange Crest stopped paying premiums in February 2008. The premiums needed to keep the policy in effect through July 16 were paid by the agent who obtained the policy for Orange Crest. Scottsdale did not request payment of insurance premiums from appellants.

THE DEFAULT, ASSIGNMENT AND FORECLOSURE

In or about January 2008, Orange Crest ceased making payments on the loans. Shortly thereafter, the Lantzman Trust began the process of foreclosure under its first deed of trust. To stop the foreclosure, in March 2008, appellants purchased the Lantzman Trust’s interest in the property for the balance due on the Lantzman Trust note, approximately $1.749 million, and the Lantzman Trust assigned its first trust deed to appellants.

In November 2008, appellants foreclosed on the second deed of trust. At the foreclosure sale, appellants acquired the property by bidding $2,878,060.25, the amount of the unpaid debt on the second promissory note, including interest, fees, and the costs of foreclosure.

THE INSURANCE CLAIM

In February 2008, appellant Akhavain visited the property for the first time since the 2006 sale to Orange Crest. He observed severe damage to the building and debris everywhere. Among other things, they observed electrical wires hanging from the ceiling; broken mirrors, furniture and bathroom fixtures; damaged walls, ceilings and carpets; and interior doors removed and left lying on the floor. Shade was deposed and admitted having removed the missing items. He recalled two incidents of vandalism caused by unknown parties: one involving a broken window and the other involving water damage from a broken copper pipe.

In May 2008, appellants submitted a claim to Scottsdale.

THE COMPLAINT

In May 2009, six months after reacquiring the property at the foreclosure sale, appellants brought suit against Scottsdale for breach of its insurance contract and tortious breach of the implied covenant of good faith and fair dealing.

SCOTTSDALE’S MOTIONS FOR SUMMARY JUDGMENT AND SUMMARY ADJUDICATION

Scottsdale moved for summary judgment, contending (a) that appellants had extinguished the debt and any claim to insurance proceeds by acquiring the property at the foreclosure sale with a full credit bid, and (b) that the damage was not covered by the policy. The court denied the motion. Scottsdale subsequently moved for summary adjudication on the issue of punitive damages. The court granted the motion, finding appellants had presented no evidence raising a triable issue of fact to support that Scottsdale had acted with malice, fraud or oppression.

At a foreclosure sale under a deed of trust, anyone may bid on the property—including, of course, the mortgageholder, who may choose to bid more or less than the amount of the debt. If the mortgageholder bids “an amount equal to the unpaid principal and interest of the mortgage debt, together with the costs, fees and other expenses of the foreclosure,” it is said to have made a “full credit bid.” (Cornelison v. Kornbluth, (1975) 15 Cal.3d 590.

After hearing evidence, the court issued a written statement of decision. The court found in favor of Scottsdale on the issues of insurable interest and coverage. In addition, the court found that any claim appellants had to insurance proceeds as mortgagees under the second deed of trust was extinguished by their full credit bid at the foreclosure sale.  Judgment was entered in favor of Scottsdale.

DISCUSSION

Appellants’ Right to Recover Insurance Benefits Under the Mortgagee Insurance Provided by Scottsdale Was Foreclosed by Their Full Credit Bid at the Foreclosure Sale

Under the full credit bid rule, when the lienholder obtains a property at a foreclosure sale by making a full credit bid—bidding an amount equal to the unpaid debt, including interest, costs, fees, and other expenses of foreclosure—it is precluded for purposes of collecting its debt from later claiming that the property was actually worth less than the bid. After acquiring the property in this manner, the beneficiary is generally unable to pursue any other remedy regardless of the actual value of the property on the date of the sale. (Passanisi v. Merit–McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1503, quoting Miller & Starr, Current Law of Cal. Real Estate (rev. ed., 1986 supp.) Deeds of Trust and Mortgages, § 3:126, p. 354, italics omitted.) This is because the lender’s only interest in the property is the repayment of the debt. The lender’s interest having been satisfied, any other payment would result in a double recovery.  Under the full credit bid rule, a foreclosing lender that has purchased the real property security for such a bid is precluded from pursuing further claims to recoup its debt, because the bid has established that the foreclosed security is equal in value to the debt, which therefore has been satisfied. Thus, the lender is not entitled to insurance proceeds payable for pre-purchase damage to the property, pre-purchase net rent proceeds, or damages for waste, because the lender’s only interest in the property, the repayment of its debt, has been satisfied, and any further payment would result in a double recovery.

Apart from preventing double recovery, the full credit bid rule serves to protect the integrity of the foreclosure auction. In discussing the full credit bid rule, the California Supreme Court has said, “‘[t]he purpose of the trustee’s sale is to resolve the question of value … through competitive bidding….’” (Cornelison v. Kornbluth, supra, 15 Cal.3d at p. 607)

The standard mortgage clause creates two contracts of insurance within the policy—one with the lienholder and the insurer and the other with the insured and the insurer. Where a standard mortgage clause is at issue, the policy is not avoided as to the mortgagee by the misconduct of the mortgagor, as in destroying an insured building by burning it, or by otherwise intentionally destroying an insured property

The amount payable to the mortgagee under the policy is limited to the amount necessary to satisfy the debt, even if it is less than would be required to repair the physical damage to the property, and once the debt is satisfied, the lienholder has no further claim on any insurance proceeds.  Because a mortgage debt is extinguished by a full credit bid, it is well established that a mortgagee who purchases an encumbered property at a foreclosure sale by making a full credit bid is not entitled to insurance proceeds payable for pre-foreclosure damage to the property.

This rule holds true whether the party making the claim for insurance proceeds is the holder of the first trust deed or a more junior creditor. Appellants do not dispute that their full credit bid at the foreclosure sale on the second trust deed extinguished that debt. However, they contend their position is different from the creditors in the cases cited above because they were the holders of two deeds of trust securing two separate debts. This position was rejected by the court in Romo v. Stewart Title of California (1995) 35 Cal.App.4th 1609 (Romo ), where the holder of two deeds of trust—a second securing an $18,470 loan and a third securing a $12,300 loan—foreclosed under the third deed of trust, making a bid equal to the indebtedness owed on that trust deed.  The court explained that a lienholder who purchases a foreclosure property by entering a full credit bid obtains an asset which the law presumes to be valued at the amount of the debt plus expenses.

The rule shields not only insurers, but also borrowers and third parties involved in the loan transaction, from pursuit by a lender who, despite having achieved title to the property through a full credit bid at a nonjudicial foreclosure sale, seeks additional compensation. Appellants’ full credit bid established that at the time of the foreclosure sale, the property was equivalent to the value of the total debt they held.

ZALMA OPINON

It is amazing to me that any lender, with damage to the property, makes a full credit bid at foreclosure. Since 1975 when Cronelison v. Kornbluth was decided the law in California and many states has been clear. A full credit bid extinguishes the debt as if it had truly been paid in full and, therefore, the mortgagee, whose only right against the policy is the amount of its security, can make no claim since the debt has been satisfied.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

35 Years and Counting

Zalma’s Insurance Fraud Letter

October 1, 2014

Thirty five years ago today I left my last employer and started my own law firm. On October 1, 1979,  Alan Worboys of a syndicate at Lloyd’s, London, called me at 8:10 in the morning from London and assigned the first case. I am forever thankful to Alan and all the clients that followed him for honoring me with their trust to serve them as their lawyer, consultant and expert witness.

In the 19th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on October 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    Lies on Application for Life Insurance Void Coverage
2.    Survey: Anti-Fraud Tech Plays Growing Role and Offers ROI, More Insurers Say.
3.    New From Barry Zalma
a.     National Underwriter Publishes:
i.    “Insurance Claims: A Comprehensive Guide;
ii.    “Construction Defects Coverage Guide; and
iii.    “Mold Claims Coverage Guide”
iv.    All are part of the Zalma Insurance Claims Library.
b.    The ABA Tort & Insurance Practice Section publishes:
i.    “The Insurance Fraud Deskbook”
3.    Guilty of Insurance Fraud – Attempt to Avoid by Claiming Inadequate Lawyers Fails
4.    Barry Zalma is on WRIN.tv talking about “Who Got Caught”.

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

Zalma’s Insurance Fraud Letter

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Never Put a Thief In Charge of Buying Your Insurance – September 30, 2014
2.    Excusive Remedy Applies – September 29, 2014
3.    Clear & Unambiguous Exclusion Must be Enforced – September 26, 2014
4.    Mortgagee Has Separate Contract With Insurer – September 25, 2014
5.    Massive International Fraud Fails – September 24, 2014
6.    Absent Purposeful Misconduct Adjuster Not Liable – September 24, 2014
7.    Liar, Liar, Pants on Fire – September 23, 2014
8.    Liars Never Prosper – September 22, 2014
9.    Insured Contract & Indemnity – September 19, 2014
10.    Chutzpah Redefined – September 18, 2014
11.    Lead Paint Only Pollutant When It Leaves Wall – September 17, 2014
12.    Excluded Driver Eliminates Coverage – September 16, 2014
13.    Arson Fraud Fails – September 15, 2014
14.    The Mold Claims Coverage Guide – September 12, 2014
15.    Insurance Claims – A Comprehensive Guide – September 11, 2014
16.    New From Barry Zalma – September 10, 2014
17.    TPA Is a Proper Bad Faith Defendant – September 10, 2014
18.    Agent Only Needs to Do What He Is Asked – September 9, 2014
19.    The Tiffany Kid – September 8, 2014
20.    Insurance Agent’s Duties to Insured – September 5, 2014

New From the ABA:

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

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

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can help the prudent fraud investigator, insurance adjuster, insurance attorney, insurance Special Investigation Unit and insurance company management to attain the information needed to deal with state investigators and prosecutor.

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

Also, from National Underwriter Company buy “Mold”, “Construction Defects” and “Insurance Claims” at the Book Store at http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty.html.

Barry Zalma

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

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

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

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Never Put a Thief In Charge of Buying Your Insurance

Misrepresentation On Application Voids Coverage

Business people trust their employees. They give employees responsibility and – except in major corporations – have no checks and balances on the employees who handle the company’s money. As a result, the temptation to steal is great and the risks of discovery is often small. When the person in charge of dealing with the money also does everything to purchase insurance for the company against employee theft can make the possibility that the policy will be voided because the employee finds it necessary to lie to protect against discovery of the crime.

In Scottsdale Indem. Co. v. Martinez, Inc., Slip Copy, 2014 WL 4792986 (N.D.Ala.)  the District Court for the Northern District of Alabama was asked to resolve an insurance coverage dispute as a result of an employee and corporate officer’s dishonesty that resulted in a loss of over $2 million.

FACTS

On June 12, 2012, Plaintiff Scottsdale filed this lawsuit for a declaratory judgment that no coverage exists for Defendant MBS’s losses under the policy in question.

MBS is a maintenance company servicing commercial properties, and, since the company’s inception, Greg Martinez has served as its President. From August 27, 2004 until her discharge in August of 2011, MBS employed Brenda Walters in a position with changing titles, from controller to CFO to CFO/CEO. Regardless of the title of her position, she had the same essential duties: handling the company’s financial accounting, office management, and day-to-day operations.

Between 2006 and August of 2011, MBS retained CPA Ben Bowen to prepare its income tax returns. After MBS hired Walters in 2004, MBS never engaged Bowen to perform audits or prepare audit reports—and he did not actually do so—and Bowen never examined the books nor MBS’s petty cash account.

On June 16, 2009 and then again on May 28, 2010, on behalf of MB S, Walters signed a “RENEWAL Application for Business and Management (BAM) Indemnity Insurance” for insurance with Scottsdale. Explaining his involvement with MBS’s insurance matters, Greg Martinez testified that he discussed insurance expenses with Walters but he was not himself involved in the effort of applying for and obtaining the insurance; he entrusted those application and procurement details to Walters. No evidence exists that Greg Martinez communicated with Scottsdale or Scottsdale’s agent concerning the insurance Policy in question or the application for the Policy.

On the 2010 application, Walters provided in both the 2009 and 2010 applications the following under “Crime Coverage Section Information,” checking “yes” to questions relating to annual audit performed by an independent CPA and that bank accounts are reconciled by someone not authorized to deposit or withdraw from those accounts.

Above the signature, the application also includes statements that the information provided is true, that the application would become incorporated into the Policy, and that, in the event any misstatement exists in the application, the Insurer has “the right to exclude from coverage any claim based upon, arising out of or in connection with such misstatement or untruth.”  Scottsdale accepted the 2009 and 2010 applications, and provided the insurance requested, including the increase to $1,000,000 in coverage for the Policy Period of September 15, 2010 to September 15, 2011.

Paul Tomasi, testified that the answers to questions 3 and 4 of the Crime Coverage Section were extremely important in assessing the crime risk to be assumed by the insurer because many, if not most, employee theft losses involve employees who handle money and who have access to the insured’s receipts, checkbook or deposits. Tomasi explained that the rating formula followed by Scottsdale’s underwriting policies, based on the rates filed with the Alabama Department of Insurance, assigns a higher rating factor (and higher total premium) to a policy where an insured responds “no” to Questions 3 and/or 4.

On or around August 15, 2011 Greg Martinez learned that Walters had placed Walters’s boyfriend and daughter on MBS’s business phone plan. MBS immediately commenced an investigation of Walters’s activities, which revealed that Walters had embezzled funds from MBS. Of the $2,201,070.04 loss that MBS claimed as a result of Walters’s allegedly wrongful activities, over $1.3 million involved checks that Walters had signed made payable either to cash, to herself, or to various MBS employees. As a result of the revelations from the investigation, MBS terminated Walters on August 29, 2011.

By letter dated June 12, 2012, Scottsdale notified MBS that the loss was not covered because (a) Walters had made material misrepresentations in the application; and (b) Walters had known of her own fraudulent actions prior to the 2010–2011 policy’s inception.

DISCUSSION

Lack of Coverage—Misrepresentations in the Application

Most of Scottsdale’s arguments asserting lack of coverage focus on imputing knowledge of its officer’s misconduct to MBS as the principal and contracting party. MBS is a corporation, and, thus, must do business through agents and must receive notice of wrongdoing through agents. Here, the question of Walters’s agency for her principal, MBS, becomes complicated because Walters not only is the agent committing fraud against her principal, but also is the agent procuring insurance on behalf of her principal to protect it from fraud. Scottsdale argues Walters’s knowledge that she had committed fraud and that she was submitting incorrect answers to the insurance application questions is imputed to MBS, her principal, and Scottsdale is not liable to MBS under the resulting insurance contract.

Under the policy’s “GENERAL TERMS AND CONDITIONS,” section D.2., the Policy states specifically when misrepresentations in the application bar coverage; not all misrepresentations will affect coverage for a particular claim. The relevant language specifies the circumstances under which it may bar coverage based on misrepresentations in the application: it will not cover claims brought under a policy (1) when misrepresentations occur in the application for that policy; (2) that either (a) are made with intent to deceive or (b) are material to the acceptance of the risk; and (3) that are “in any way involving” the claim made under the policy; and (4) that are brought by certain categories of Insureds.

Misrepresentations in the Application

The court found that Walters made at least two misrepresentations on the 2010 application for the 2010–2011 Policy made the basis of this suit.

There is no dispute that Walters answers to the two application questions was false. There was no audit and no independent account reconciliations by someone with the ability to make deposits and withdrawals.

Intent to Deceive/Materiality

The question of intent is commonly one for the jury, where it does not follow as a clear deduction from undisputed facts. Conversely, when intent follows as a clear deduction from undisputed facts, then the issue is appropriately decided by the court as a question of law.

Walters was fully aware of what services the CPA was asked to perform and what he actually performed.  MBS was a small company and Walters knew that Bowen did not perform the services as she represented on the 2010 application. She knew at the time she signed the application that the answers to the material questions were false.

No dispute exists that Walters was stealing from the company before she filled out the 2010 application, so Walters had a motive to conceal the correct answers: the desire to obtain insurance and to avoid the insurance company’s inquiries into safeguards that would expose her theft.

Given these facts and the logical deductions from them, no reasonable jury could find that Walters did not have an intent to deceive when she provided incorrect answers to questions 3 and 4; the court, therefore, found that the evidence established as a matter of law that Walters provided those answers with an intent to deceive.

Materiality

The same provision includes an alternative clause to the “intent to deceive” phrasing; it also cuts off coverage in certain circumstances where the application “contains any misrepresentation or omission which materially affects either the acceptance of the risk or the hazard assumed by Insurer under this Policy ….” A fact is material if it increases the risk of loss to the insurer and would have induced a rational underwriter to either reject the application or accept it only at an increased premium.

Based on the insurance contract itself and the evidence submitted, the court also found that the misrepresentations in the answers to questions 3 and 4 were material to the acceptance of the risk or the hazard assumed by Scottsdale. Indeed, if MBS had in place a complete independent audit and bank reconciliation independent of Walters, her scheme would not have been successful for as long as it was.

Requisite Relationship between the Misrepresentation and the Claim

Finding that Walters acted as MBS’s sole representative regarding application for and the procurement of the 2010–2011 insurance policy the court granted Scottsdale’s motion for summary judgment.

MBS is not covered for the claims in this lawsuit because the claims fall within the provisions of the relevant Policy’s General Terms and Conditions, Section D, Warranty, subsection 2.c.; no coverage exists for those claims because of MBS’s material, false statements in the Policy application made by Walters with intent to deceive knowing the facts misrepresented; the claims alleged by MBS under the Policy fall within the language “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving” the facts misrepresented in the Policy application; and Scottsdale is entitled to a judgment in its favor and against MBS on that issue.

ZALMA OPINION

The District Court had no choice but to grant the motion for summary judgment in favor of Scottsdale. The policy was acquired based on a parade of lies by the person in charge of, and in the course of stealing, funds from the company. As is often stated against insurers, insurance is a business of the utmost good faith. When an insured gives authority to a thief to purchase insurance, when that thief does not want to be discovered and lies on the application for insurance, the policy is void by its terms and regardless of the innocence of the remainder of management, there is no available coverage under the policy that is void because it was  obtained by fraud, misrepresentation or concealment of material fact.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Excusive Remedy Applies

Workers’ Compensation Exclusivity & Contractor Controlled Insurance Program

Construction workers filed a negligence action against a crane owner and crane operator for injuries sustained when a crane collapsed. The 58th District Court, Jefferson County, granted workers’ no evidence motion for summary judgment and refused to apply the exclusivity of the Workers’ Compensation law.

In Becon Const. Co., Inc. v. Alonso, — S.W.3d —-, 2014 WL 4746417 (Tex.App.-Beaumont,  9/25/2014) the Texas Court of Appeal was asked to decide whether the exclusive remedy defense provided by the Texas Workers’ Compensation Act applies on a worksite that was subject to a contractor-controlled insurance program.

Background

In January 2011, Jose Alonso, Miguel Betancourt, Jose Rodriguez, Luis Guajardo, Alejandro Salinas, and Ricardo Salinas Jr. (the employees and appellees) were on a scaffold working at a refinery on a project that involved work that other contractors and subcontractors were performing when a crane collapsed. .

When the crane collapsed, A & L Industrial and Empire Scaffold were subcontractors on Motiva’s project. Both were subcontractors to Performance Contractors, Inc., and Performance was working on the project under a contract with Motiva. The Motiva/Performance contract obligated Performance to provide labor and equipment on the project and required Performance to take directions on the project from the Bechtel–Jacobs Joint Venture. The various contracts in evidence reflect that the Bechtel–Jacobs Joint Venture was the contractor placed in charge of managing the overall project.

The various contracts on the project also included clauses requiring the various contractors and subcontractors to have various types of insurance for the project, including a workers’ compensation policy that covered their respective employees while they worked on the project.
The parties do not dispute that when the collapse occurred, Becon Construction and Bechtel Equipment (the subcontractors) were providing either construction equipment or services for the project under their respective subcontracts. Under their respective subcontracts the subcontractors were indirectly required to take direction from the Bechtel–Jacobs Joint Venture, as Performance’s contract with Motiva required that Performance take direction on its work from the Bechtel–Jacobs Joint Venture.

There is also no dispute that Becon Construction and Bechtel Equipment were named as insureds on the workers’ compensation policy obtained for the project by the Bechtel–Jacobs Joint Venture.

The Parties’ Arguments

Arguing that the Act’s exclusive remedy provision limited the employees to their compensation benefits and precluded them from bringing their common law damage claims, Becon Construction and Bechtel Equipment moved for summary judgment on all of the claims of the employees that sued them.

Analysis

The exclusive remedies provision of the Act states: “Recovery of workers’ compensation benefits is the exclusive remedy of an employee covered by workers’ compensation insurance coverage …”

In Texas, a general workplace insurance plan that binds a general contractor to provide workers’ compensation insurance for its subcontractors and its subcontractors’ employees achieves the Legislature’s objective with respect to worksites where multitiered relationships exist. Interpreting the Act in a way that favors blanket coverage to all workers on a site aligns more closely with the Legislature’s “decided bias” for coverage.

With respect to the various contractual insurance provisions that are at issue, the contracts are not ambiguous. Collectively, the contracts contain an unambiguous expression that makes it clear that Motiva, the Bechtel–Jacobs Joint Venture, Becon Construction, Bechtel Equipment, Performance, Empire Scaffold, and A & L Industrial intended to create a general workplace insurance plan providing a single workers’ compensation insurance policy covering all of their respective employees.
The prime contract between the Bechtel–Jacobs Joint Venture and Motiva required Bechtel–Jacobs to establish a contractor-controlled insurance program, creating a general workplace insurance plan for the project. Motiva’s contract with Performance required that Performance and its subcontractors enroll in the general workplace insurance plan created by the Bechtel–Jacobs Joint Venture.

In this case, it was undisputed that Empire Scaffold’s and A & L Industrial’s employees were enrolled in the general workplace plan created for the project.

While the respective master service agreements required that Empire Scaffold and A & L Industrial purchase workers’ compensation coverage covering their work, the summary-judgment evidence conclusively established that Empire Scaffold and A & L Industrial adjusted their contract prices for the Motiva project to account for the fact that the insurance on Motiva’s project was to be provided through a general workplace insurance plan. By adjusting the prices they charged for their work they were being hired to perform, Empire Scaffold and A & L Industrial effectively purchased the coverage for their work on Motiva’s project under the terms of the master service agreements they had with Performance.

With respect to the work the employees were doing at the time the crane collapsed, the court of appeal concluded that the summary-judgment evidence conclusively established that A & L Industrial and Empire Scaffold were enrolled in the general workplace insurance plan established on the Motiva project and that the summary-judgment evidence conclusively establishes that the employees collected workers’ compensation benefits through the general workplace insurance plan.

In a case that involved a worksite arrangement similar but not identical to the one at issue here, the First Court of Appeals explained that where general workplace insurance plans exist, “the purposes of the Act are best served by deeming immune from suit all subcontractors and lower tier subcontractors who are collectively covered by workers’ compensation insurance.” Etie v. Walsh & Albert Co., Ltd., 135 S.W.3d 764, 768 (Tex.App.-Houston [1st Dist.] 2004, pet. denied). In Etie, the First Court concluded that the deemed employment relationship extends throughout all tiers of subcontractors. Id. Similarly, the San Antonio Court of Appeals has stated that for sites governed by general workplace insurance plans, all of the employees covered by the compensation plan for the site are treated as “‘fellow employees’” for the purposes of the Act. See Garza v. Zachry Constr. Corp., 373 S.W.3d 715, 721 (Tex.App.-San Antonio 2012, pet. denied).

The various contracts effectively made Becon Construction and Bechtel Equipment agents of the Bechtel–Jacobs Joint Venture for purposes of compensation coverage; consequently, both Becon Construction and Bechtel Equipment were entitled to rely on the exclusive remedy defense against the claims of the employees who sued them. Because they were participating subcontractors on a site utilizing a general workplace insurance plan authorized by the Act.

Given the Legislature’s decided bias in favor of employers electing to provide coverage through a policy that encourages the provision of workers’ compensation coverage to all workers on a given work site, the Act should not be interpreted in the manner the employees argue. The employees’ interpretation would discourage contractors from becoming involved in worksites governed by general workplace insurance plans and might prevent some employees who would otherwise be covered by insurance from being covered under these types of policies due to the violation of regulations, as it does not appear that the Legislature intended for these types of violations to strip employers of defenses or to cause employees to lose the benefits of their coverage.

Regardless of what might or might not happen in the future, evaluating whether a general workplace insurance plan provides a defendant with an exclusive remedy defense requires that courts look at what did happen, not what might happen. In this case, conclusive summary judgment evidence shows that the employees collected compensation benefits under coverage put in place based on the general workplace insurance plan established by the Bechtel–Jacobs Joint Venture for Motiva’s project.

Conclusion

The summary-judgment evidence conclusively establishes that the exclusive remedy defense of the Act applied to all of the claims made by the employees who sued. The trial court erred by granting the employees’ no-evidence motion for summary judgment and by denying Becon Construction’s and Bechtel Equipment’s joint motion for summary judgment. Exercising its power the appellate court reversed the trial court and entered summary judgment in favor of the employers and found that workers’ compensation is the exclusive remedy available to the injured workers.

ZALMA OPINION

Employees strike a bargain with the state. When their employer maintains workers’ compensation insurance the employee will receive benefits governed by the state’s workers’ compensation statutes in exchange for agreeing that the law is the exclusive remedy available to the employee injured on the work site without a need to prove liability, negligence or any other tort. In this case it is also clear that when many contractors and subcontractors enter into a joint agreement to all use the same insurance all become, by reason of their contracts, joint employers of each and every employee for the purposes of workers’ compensation.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

Clear & Unambiguous Exclusion Must be Enforced

Insurance Company May Limit Coverage In Any Manner Not Illegal or Against Public Policy

One of the major risks of loss faced by insurers who insure bars and nightclubs is injuries that result from assault, battery, and the basic barroom fight. As a result insurers who insure such venues write policies that contain exclusions for injuries or damage resulting from an assault or battery.

In Thomas v. Miller, — So.3d —-, 2014 WL 4723863 (La.App. 5 Cir.), 14-115 (La.App. 5 Cir. 9/24/14) the Louisiana Court of Appeal was called upon to deal with a claim that an assault and battery exclusion did not apply to a case where a patron was shot to death in a nightclub by an employee of the nightclub.

FACTS

On January 12, 2002, Steve Thomas, a patron at the Platinum Club, LLC located in Harvey, Louisiana, was shot and killed by Corey Miller, an entertainer performing at the club that evening. Miller was subsequently convicted of second degree murder and sentenced to life imprisonment.

On March 4, 2002, the parents of Steve Thomas, George and Dolores Thomas, filed a petition for damages arising out of the death of their son against several defendants, including Corey Miller and the Platinum Club. In their petition, plaintiffs alleged that the death of their son was directly and proximately caused by the following acts and omissions of the Platinum Club: (1) allowing Thomas, who was 16 years old at the time, to enter and remain in the club; (2) permitting Miller to bring a firearm into the club and discharge it; (3) failing to provide a safe environment for patrons by failing to monitor and prevent the introduction into, and use of firearms in the club; and (4) other acts and omissions which will be shown at trial.

On April 30, 2003, plaintiffs supplemented their petition to add as an additional defendant the commercial general liability insurer of Platinum Club, Alea London, Ltd. The trial court issued a judgment granting Alea’s motion for summary judgment, finding that plaintiffs’ claims were excluded under the assault and battery exclusion contained in Alea’s insurance policy.

LAW AND DISCUSSION

In their sole assignment of error, plaintiffs contend that the trial court erred in finding that there were no genuine issues of material fact that preclude summary judgment in favor of Alea. Specifically, plaintiffs allege that summary judgment was inappropriate in this case because the assault and battery exclusion is vague and ambiguous.

Summary judgment declaring a lack of coverage under an insurance policy may not be rendered unless there is no reasonable interpretation of the policy, when applied to the undisputed material facts shown by the evidence supporting the motion, under which coverage could be afforded.

An insurance policy is an agreement between the parties and should be interpreted by using ordinary contract principles. The extent of coverage is determined by the parties’ intent, as reflected by the words of the policy. Unless the words of the policy have acquired a technical meaning, the words used in the policy will be construed using their plain, ordinary and generally prevailing meaning. The agreement must be enforced as written if the policy wording at issue is clear and expresses the intent of the parties.

An insurance company may limit coverage in any manner, as long as the limitations do not conflict with statutory provisions or public policy. The exclusionary provisions of an insurance contract are strictly construed against the insurer, and any ambiguity in the exclusion is construed in favor of the insured.

Plaintiffs contend that the trial court erred in granting summary judgment because the exclusion at issue is ambiguous in that it does not specifically exclude an assault and battery committed by a patron. In support of this argument, plaintiffs emphasize that the cases relied upon by Alea involve assault and battery exclusions which include the word “patrons” within the exclusionary language.

The assault and battery exclusion of the Alea policy provides as follows: “Notwithstanding anything contained to the contrary, it is understood and agreed that this policy excludes claims arising out of: ¶ 1) Assault and battery, whether caused by or at the instruction of, or at the direction of, or negligence of the insured, or his employees; and ¶ 2) Allegations that the insured’s negligent acts, errors or omissions in connection with the hiring, retention, supervision or control of employees, agents or representatives caused, contributed to, related to or accounted for the assault and battery.”  (Emphasis added by the court).

The proper inquiry in a question involving insurance coverage is whether, assuming the truth of plaintiff’s allegations, coverage is excluded under the assault and battery exclusion. Here, plaintiffs have alleged that the Platinum Club caused the death of their son (1) by allowing their 16 year old son to enter and remain in the club; (2) by permitting Miller to bring a firearm into the club and discharge it; and (3) by failing to provide a safe environment for patrons by failing to monitor and prevent the introduction into, and use of firearms in the club.

A battery is a harmful or offensive contact with a person, resulting from an act intended to cause the plaintiff to suffer such contact. Assuming that the allegations of plaintiffs’ petition are true, the court found that the act of Miller shooting and killing Thomas with a firearm constitutes a battery.

A plain reading of the assault and battery exclusion in the Alea policy clearly excludes plaintiffs’ claims asserted against the Platinum Club, as they are all claims that arise out of the battery inflicted upon their son.

Moreover, the assault and battery exclusion specifically excludes claims arising out of an assault and battery caused by “the negligence of the insured.” Plaintiffs have clearly alleged that the battery inflicted upon their son was caused by the negligence of Alea’s insured, the Platinum Club, based upon the Platinum Club’s alleged negligent acts of admitting their minor son into the club, permitting Miller to bring a firearm into the club, and failing to monitor and prevent a firearm from being used in the club. All of these claims not only sound in negligence, but they also arise out of the battery inflicted upon Thomas, and therefore, are excluded from coverage under the first paragraph of the Alea policy, which clearly provides that coverage for all claims arising out of an assault and battery are excluded.

The fact that the exclusion goes one step further to list various examples of negligence, does nothing to alter the fact that all claims arising out of assaults and batteries are excluded under the policy. Therefore, whether the battery in this case was committed by a patron, employee, or any other individual, is of no consequence under the terms of the assault and battery exclusion contained in the Alea policy. The exclusion clearly denies coverage for any claims arising out of all assaults and batteries, irrespective of who made or allowed the harmful or offensive contact. A clear and unambiguous provision in the insurance contract limiting liability must be given effect.

The second paragraph of the assault and battery exclusion contained in the Alea policy provides that it excludes “claims arising out of allegations that the insured’s acts, errors or omissions in connection with the hiring, retention, supervision, or control of employees … caused, contributed to or related to or accounted for the assault and battery.”  In their petition, plaintiffs alleged that the Platinum Club failed to properly monitor and supervise its establishment such that Miller was permitted to enter the club while carrying a firearm, which he subsequently used to kill Thomas while inside the club. Such claims are clearly excluded under the second paragraph of the assault and battery exclusion, as they are claims alleging that the insured’s negligent supervision and control of its employees caused or contributed to the battery inflicted upon their son.

The trial court properly granted summary judgment in favor of Alea, as there are no genuine issues of material fact as to whether the assault and battery exclusion contained in the Alea policy excludes coverage for plaintiffs’ claims against Alea.

ZALMA OPINION

The plaintiffs in this case are not without a remedy. Their suit against the Platinum Club continues. What they have lost is the deep pocket of an insurance company to pay damages which may be more difficult if they get a judgment against the Platinum Club. Perhaps, by enforcing the assault and battery exclusion, bars and nightclubs like the Platinum Club will increase security and protect their patrons since failure to do so cannot be covered by insurance and any losses will come directly from the wallets and checkbooks of the bar owners.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

Mortgagee Has Separate Contract With Insurer

Neglect of Insured Does Not Prevent Mortgagee’s Recovery

When an insurer finds no coverage is available to a named insured because of vandalism damage to property when it is left vacant for more than sixty days, its work is not finished if there is a mortgage on the property. The insurer must recognize that the mortgagee’s contract with the insurer is separate and distinct from that between the insurer and the owner.

In Commerce Bank v. West Bend Mut. Ins. Co., — N.W.2d —-, 2014 WL 4672384 (Minn.App., 09/18/2014) the trial court granted summary judgment in favor of an  insurer, which denied coverage to the bank, the mortgagee and an additional insured, based on an exclusion from coverage for vandalism damage if the insured property remained vacant for more than 60 days. On appeal, the bank argued that the district court erred by not applying Minnesota law, which establishes that a mortgagee cannot be denied payment based on the mortgagor’s acts or neglect under a standard mortgage clause.

FACTS

This insurance-coverage dispute arises from Commerce Bank’s claim against respondent West Bend Mutual Insurance Company for insurance coverage of damage to real property located at 12345 Portland Avenue South in Burnsville, Minnesota.

In 2008, Commerce loaned $3.2 million to 12345 Portland Buildings, LLC, the owner of the property. Under the loan agreement, Commerce secured a mortgage on the property.  ”

The policy also limited coverage in cases of vacancy, in part: “If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs: ¶ (1) We will not pay for any loss or damage caused by any of the following even if they are Covered Causes of Loss: ¶ (a) Vandalism; …”

The owner had difficulty making loan payments to Commerce, and, by the fall of 2010, the loan was in default. West Bend, which succeeded The Hartford as the insurance carrier, listed Commerce as the mortgagee and an additional insured under the policy, effective February 21, 2011. While Commerce did not have control of the property, it had access to enter the property and contracted with a third party to manage issues such as winterization, electricity, security, insurance claims, lawn care, snow removal, and the building’s condition. In September 2011, the property was again vandalized and incurred significant damage, resulting in the loss at issue in this case.

In January 2012, Commerce received title to the property by accepting a deed in lieu of foreclosure from the owner. In December 2012, Commerce submitted an insurance claim to West Bend for the September 2011 loss. West Bend denied the claim on the basis that the loss was excluded from coverage because the building had been vacant since at least 2010, more than 60 days prior to the loss, and there was no evidence that the building was under construction or renovation prior to the loss.

Suit was filed and both parties moved for summary judgment. The trial court granted the insurer’s motion concluding the exclusion applied regardless of the neglect of the named insured.

ISSUE

May property insurance that covers a mortgagee be invalidated by the mortgagor’s acts or neglect?

ANALYSIS

Effect of Standard Mortgage Clause on Vacancy Provision

“There are generally two types of insurance clauses between an insurer and a mortgagee,” a “standard” mortgage clause and an “open form” mortgage clause. Here, it is undisputed that the policy contains a standard mortgage clause, providing that “[i]f we deny [owner’s] claim because of [owner’s] acts or because [owner] ha[s] failed to comply with the terms of this policy, the mortgageholder will still have the right to receive loss payment….”

A standard mortgage clause specifies that “the insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s acts or neglect.” As a result, the effect of a standard mortgage clause is to make a new and separate contract between the mortgagee and the insurance company, and to effect a separate insurance of the interest of the mortgagee, dependent for its validity solely upon the course of action of the insurance company and the mortgagee, and unaffected by any act or neglect of the mortgagor, of which the mortgagee is ignorant, whether such act or neglect was done or permitted prior or subsequent to the issue of the mortgage clause.

The words “any acts” as used in a standard mortgage clause do not refer merely to acts prohibited by the contract or to failure to comply with the terms thereof, but literally embrace any act of the mortgagor.  A standard mortgage clause is an independent contract of insurance not invalidated by act, neglect, omission or default of mortgagor.
Commerce argues that the owner’s act of, or failure to comply with the policy terms by leaving the property vacant for more than 60 days has no bearing on Commerce’s independent entitlement to coverage under the standard mortgage clause. West Bend responds, and the district court agreed, that the vacancy hazards excluded under the policy, such as vandalism, water damage, and theft, are not policy provisions to be obeyed, but risks that were never assumed.

The insurer argued that noncoverage exists by the terms of the vacancy provision and not by any breach or violation by the property owner. Vacancy is not prohibited by the policy. Quite the opposite: the vacancy provision specifically accounts for the possibility that the buildings might become vacant, but excludes loss or damage caused by various perils, including water damage, vandalism and theft, if the vacancy continues for more than sixty days. As defined in the policy, a building is vacant when less than thirty-one percent of the total space is rented and used. The denial of coverage was based, the insurer argued, on the condition of the building, and not because of any breach or violation of a policy obligation or prohibition by the property owner.

While no Minnesota court has addressed the interplay between a standard mortgage clause and a vacancy clause in an insurance contract, the district court’s decision directly contravenes the law in Minnesota. Under a standard mortgage clause, the insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s acts or neglect. This principle applies not only when the mortgagor’s acts are prohibited by the contract or because of the mortgagor’s failure to comply with the terms thereof, but literally embraces any act of the mortgagor.

West Bend’s argument that allowing Commerce to recover would render the vacancy provision meaningless is without merit. It was the owner’s failure to occupy the property or secure a tenant that comprised the acts or negligence causing the property to remain vacant for more than 60 days. While the owner had no coverage under the policy for its violations, under Commerce’s separate and independent policy with West Bend, the vacancy provision applies to the bank only when Commerce is guilty of breaching it.  Commerce did not have the ability to, let alone was responsible for, the vacancy of the property.

Under controlling law in Minnesota, the insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s acts or neglect. Accordingly, because Commerce did not breach it, the policy’s vacancy provision does not apply to Commerce. The district court erred when it granted summary judgment to West Bend.

Under a standard mortgage clause, the mortgagee’s insurance with respect to the mortgagee shall not be invalidated by the mortgagor’s acts or neglect. The exclusion did not apply to the mortgagee and the trial court judgment was reversed.

ZALMA OPINION

Every first party property claim where a mortgagee’s interest is insured requires the insurer to investigate the rights of both the insured and the mortgagee. When there is a standard mortgage clause rather than a loss payable provision the mortgagee has separate rights against the insurer that are broader than the rights of the named insured. Therefore, if there is a ground to deny the claim of the named insured – like the vacancy clause in this case, or in cases involving fraud or other acts that increase the risk of loss – the insurer must then deal directly with the mortgagee.

After the claim is denied to the named insured the insurer must advise the mortgagee of its right to make a separate claim, obtain a separate sworn proof of loss from the mortgagee and if the mortgagee’s claim is paid, the insurer may take an assignment of the mortgagee debt to recover what they pay. It should not deny the claim out of hand but should remember that there are two insurance policies with different terms and conditions.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Massive International Fraud Fails

Dow and Dole Prove Fraud

BANANA

I usually summarize cases. However, this one is so important, that I have listed below an almost complete copy of the decision of the California Courtof Appeal, who thought it was not important enough to make it a published decision. It shows how an attempt to create a toxic tort case against deep pockets failed because the major corporations did everything possible to destroy the plaintiffs’ case which it believed were fraudulent.

Laguna v. Dole Food Company, Inc., Not Reported in Cal.Rptr.3d, 2014 WL 891268 (Cal.App. 2 Dist., 3/7/2014)

This appeal is from an order granting petitions for writ of error coram vobis vacating the judgment and d

ismissing with prejudice Tellez v. Dole Food Company, Inc., Los Angeles Superior Court case No. BC312852 (Tellez ).

BACKGROUND

The Parties and Their Counsel

The instant case is one of three related cases—Tellez, Mejia, and Rivera—filed in the Los Angeles County Superior Court. The plaintiffs in all three cases alleged that between 1970 and 1980 they were employed on Dole-contracted Nicaraguan banana farms on which the pesticide dibromochloropropane (DBCP) was applied; that the DBCP was manufactured and sold to defendant Dole Food Company, Inc. (Dole) by defendant The Dow Chemical Company (Dow), and that plaintiffs were rendered sterile as a result of exposure to DBCP.

Counsel of record for the respective plaintiffs in all three cases were Juan J. Dominguez (Dominguez) and attorneys at Miller, Axline & Sawyer (Miller Axline). Dominguez also worked with Nicaraguan attorney Antonio Hernandez Ordeñana (Ordeñana), who operated the Oficinas Legales Para Los Bananeros in Nicaragua. Miller Axline represented the plaintiffs in the instant Tellez case until June 12, 2009, and the Mejia and Rivera plaintiffs until June 17, 2009, when its motions to withdraw as counsel were granted. Since approximately July 2009, plaintiffs in the instant Tellez case have been represented by Steve Condie (Condie).

Tellez Trial and Posttrial Motions

The parties and the trial court agreed to try the Tellez case first, to be followed by Mejia and Rivera, which were stayed pending the Tellez trial. Miller Axline served as plaintiffs’ trial counsel in the Tellez case. On November 5, 2007, the jury returned a verdict of approximately $3.3 million in compensatory damages in favor of 6 of the 12 Tellez plaintiffs. Those six plaintiffs are the appellants in this case.

In November 2007, shortly after the jury returned its verdict, a Nicaraguan resident referred to as “Witness X” approached Dole and said he had evidence that two of the recovering Tellez plaintiffs had never worked on a banana farm and had submitted false testimony and documentary evidence. Dole filed a notice of intent to move for a new trial as to those two plaintiffs, and sought a protective order for Witness X, who was concerned that his life would be in danger if his identity became known.

The Tellez Protective Order

The trial court issued a protective order on January 17, 2008, limiting Ordeñana’s, but not Dominguez’s access to Witness X. The Tellez protective order prohibited the unauthorized disclosure of Witness X’s name, physical description, employment information, or any other information that would enable another person to identify Witness X; Witness X’s deposition or declaration, and any transcript, videotape, memorandum, summary, pleading, or other writing or communication that summarized the substance of Witness X’s testimony, and all documents concerning Witness X produced to plaintiffs.

Judgment Entered in Tellez

Even with the Tellez protective order in place, Witness X refused to testify because he feared for his safety and that of his family. Dole nevertheless filed a motion for a new trial and supported the motion with declarations and memoranda of interviews by investigators and attorneys summarizing what Witness X had reported to them about the fraud. The trial court ruled that the supporting evidence was inadmissible hearsay, found Dole had no admissible evidence of fraud, and denied the motion for a new trial.

Judgment was entered on October 6, 2008, rendering Dole liable to four plaintiffs—Julio Cesar Calero Gonzalez, Matilde Jose Lopez Mercado, Carlos Enrique Diaz Artiaga, and Jose Uriel Mendoza Gutierrez. The judgment rendered Dow liable to the same four plaintiffs and to Jose Anastacio Rojas Laguna and Claudio Gonzalez. Dole was found not liable to Gonzalez and was granted a new trial as to Laguna. The judgment was appealed by all parties.

Evidence of Fraud in Mejia and Rivera

As discovery proceeded in the Mejia and Rivera cases, Dole uncovered further indications of fraud. For example, during the first day of his deposition, former Mejia plaintiff Pablo Emilio Peralta was presented with evidence that he had impregnated several women after he claimed to have become sterile as the result of working on a banana farm. Peralta could not explain this evidence and did not return for the second day of his deposition. His claim was subsequently voluntarily dismissed. Mejia plaintiff Francisco Donald Quiñonez testified that to prepare for his deposition he had to “study” from a notebook containing detailed information about his alleged employment at a banana farm, and that during this preparation another person dictated certain information to him that he then wrote down and memorized “like a parrot.”

On September 30, 2008, Dole filed an ex parte application to depose three witnesses in Nicaragua who would allegedly verify that certain Mejia plaintiffs had never been employed as DBCP applicators on banana farms, that these plaintiffs’ documentary evidence was falsified, and that Dominguez and Ordeñana were knowingly and actively involved in the fraud. Dole also sought a protective order to prevent disclosure of the identities of the witnesses and their testimony from Ordeñana, Dominguez, and anyone in Nicaragua.

The Mejia Protective Order

On October 6, 2008, the trial court authorized the depositions of three witnesses in Mejia and issued a protective order precluding Dominguez and Ordeñana from learning the identities of the witnesses covered by the protective order (referred to collectively as John Doe witnesses) and excluding them from the depositions. The protective order allowed the Mejia plaintiffs’ other counsel, Miller Axline, access to witness statements, memoranda of interviews from Dole’s investigators, and interview notes from Dole’s attorneys and allowed Miller Axline to cross-examine the witnesses during deposition.

The Mejia protective order allowed Dole to serve deposition notices that withheld the name, address, and telephone number of the deponent and to serve such notices only on attorneys at Miller Axline. The protective order prohibited Miller Axline from forwarding the deposition notices to or discussing them with Dominguez, Ordeñana, or any of the Mejia plaintiffs’ Nicaraguan counsel or their agents or associates. The protective order further prohibited the unauthorized disclosure of the names of the John Doe witnesses or of any information that would allow another person to identify the John Doe witnesses, any transcript, videotape, memorandum, summary, pleading or other writing that described or identified the John Doe witnesses or their testimony or anticipated testimony, and any documents concerning the John Doe witnesses produced to the Mejia plaintiffs.

The trial court reviewed videotaped depositions of the first three John Doe witnesses and found their testimony supported Dole’s claims that the Mejia plaintiffs, their Nicaraguan counsel Ordeñana, and Ordeñana’s agents and employees in Nicaragua had engaged in and were continuing to engage in fraud on the court. In their respective depositions, John Does 1 through 3 testified that the work certificates purporting to verify the Mejia plaintiffs’ employment on Dole-contracted banana farms were fraudulent. Many of the certificates were signed in blank by persons who had never worked on a Dole-contracted farm and were issued to individuals who had never worked on banana farms. John Does 2 and 3 had both worked as irrigation captains on two different Dole-contracted banana farms and recalled numerous details about the work crews assigned to apply DBCP at the farms. Both John Doe 2 and John Doe 3 testified that they would recognize their former co-workers at the farms but said they did not recognize the Mejia plaintiffs.

The trial court further found the testimony of the three John Doe witnesses provided support for Dole’s concern that the witnesses would be subjected to annoyance and oppression if their identities were revealed to anyone in Nicaragua. Certain of the John Doe witnesses testified they were concerned about their safety if Dominguez or Ordeñana were to find out about their testimony.

The trial court amended the Mejia protective order to allow Dole to take additional John Doe depositions. Dole ultimately took the depositions of 17 John Doe witnesses and pursuant to an agreement with Miller Axline, obtained declarations from 10 additional witnesses. Miller Axline participated in the depositions and cross-examined all of the witnesses except the 10 witnesses from whom sworn declarations were obtained. The trial court gave Miller Axline the opportunity to cross-examine those 10 witnesses by deposition, but Miller Axline declined because deteriorating conditions in Nicaragua raised concerns about the attorneys’ own safety as well as that of the witnesses. The parties stipulated that the declarations of the 10 John Doe witnesses would be admissible in light of escalating threats to witness safety.

While the John Doe witnesses were being deposed, the trial court became aware of escalating efforts by Dominguez, Ordeñana, and their agents and employees in Nicaragua to prevent witnesses from cooperating with Dole’s investigation. These efforts included instructions in person and by radio broadcast by Ordeñana and Dominguez not to cooperate with or speak to Dole’s investigators; threats of violence and other forms of intimidation against anyone who cooperated with Dole, spoke to Dole’s investigators or attorneys, or agreed to testify; instructions to the Mejia plaintiffs and to the public to commit violence against Dole’s investigators and any witnesses who came forward with evidence of fraud; allegations that Dole’s attorneys had personally attempted to bribe a witness; and the offer of a $20,000 bounty to anyone who could produce a list identifying the John Doe witnesses.

In the fall of 2008, the trial court on its own motion severed issues in the Mejia case and ordered that a Phase I trial be held to determine whether the Mejia plaintiffs had worked on banana farms. Soon thereafter, escalating threats of violence against witnesses and investigators caused the trial court to issue, on March 11, 2009, an order to show cause (OSC) as to why Mejia and Rivera should not be dismissed with prejudice because of fraud, witness tampering, and abuse of process.

Dismissal of Mejia and Rivera

During the Mejia OSC proceedings, Dole presented the testimony of additional John Doe witnesses confirming the existence and extent of fraud by the Mejia plaintiffs, Dominguez, and Ordeñana. These witnesses testified that Ordeñana paid former supervisors who had worked on Dole-contracted farms to sign thousands of work certificates in blank that could subsequently be filled in. Some John Doe witnesses testified that they received direction from Ordeñana and Dominguez to recruit potential plaintiffs, whether or not they had worked on banana farms. Potential plaintiffs were then sold training manuals and videotapes containing farm-specific information they could study in order to prepare for subsequent depositions.

Other John Doe witnesses testified about fraudulent laboratory test results, explaining that plaintiffs were instructed to alter their semen samples, and that laboratory technicians were paid to alter test results. The witnesses further testified that potential plaintiffs were instructed to lie about the existence of children born after their alleged DBCP exposure occurred.

Multiple John Doe witnesses also testified about a 2003 meeting in the Montserrat neighborhood of Chinandega, Nicaragua, attended by Nicaraguan and American plaintiffs’ attorneys, a Nicaraguan judge, laboratory staff, and others connected with the DBCP litigation in Nicaragua. Among the topics discussed at the meeting were specific instructions to falsify laboratory test results that would verify the purported sterility of the DBCP plaintiffs.

At the conclusion of the Mejia OSC hearing, the trial court found “clear and convincing evidence that [the Mejia ] plaintiffs and their U.S. counsel, Juan J. Dominguez, their Nicaraguan counsel, Antonio Hernandez Ordeñana … [had] committed fraud on this Court and on the Defendants.” The trial court further found that Dominguez and Ordeñana and their Nicaraguan associates “conspired and colluded with (1) other DBCP plaintiffs’ lawyers, … (2) Nicaraguan laboratories, and (3) corrupt Nicaraguan judges … to manufacture evidence and improperly influence the outcome of DBCP cases pending in Nicaragua and the United States to obtain millions of dollars in judgments that would then be enforced in the U.S. and elsewhere.” The trial court further found this fraud “contaminated each and every one of the plaintiffs in the Tellez matter.” The court issued terminating sanctions and dismissed the plaintiffs’ claims in the Mejia and Rivera cases. Final judgment was entered in those cases on June 26, 2009. Neither the Mejia nor the Rivera judgments were appealed.

The Instant Coram Vobis Proceedings

Defendants filed their coram vobis petitions in this court on May 19, 2009, relying on evidence from Mejia and Rivera to show that the fraud affecting those cases also affected the instant Tellez case and requesting that the Tellez judgment be vacated and the case dismissed with prejudice. In the alternative, defendants asked for dismissal pursuant to the court’s inherent powers.

On July 7, 2009, this court ruled that defendants had “made a prima facie showing of entitlement to an order to show cause with respect to their claims that the underlying judgment in [Tellez ] was procured in part by means of fraud.” This court further ruled that because the trial court had already conducted an evidentiary hearing in Mejia regarding defendant’s allegations, it need not conduct a new evidentiary hearing in Tellez but could rule on the merits of the petitions upon the filling of a return. We then ordered plaintiffs to “show cause in a return before the superior court why the relief prayed for in the petitions should not be granted.”

On August 4, 2009, Chief Justice Ronald George of the California Supreme Court assigned Justice Victoria G. Chaney, who had presided over the Tellez trial and the Mejia and Rivera proceedings as a Los Angeles Superior Court judge, but who had since been elevated to the Court of Appeal, “to sit as a Los Angeles Superior Court judge for the limited purpose of handling the pending Order to Show Cause.”

After issuance of the OSC, plaintiffs’ counsel, Condie, filed a return challenging the factual and legal findings from Mejia. The trial court held a status conference to establish a procedure to provide Condie with access to protected information and then amended the Tellez protective order granting Condie access to protected information in Mejia as well as information sealed under the protective order issued in Tellez.

Although our order to show cause did not require a new evidentiary hearing, the trial court presided over a year-long evidentiary process, including at least 17 in person and telephonic hearings to address multiple issues, including plaintiffs’ demurrer, discovery requests, requests for continuance and issuance of a protective order, and the parties’ objections to evidence, as well as a six-day evidentiary hearing on the OSC during which the parties submitted documentary evidence, deposition testimony of John Doe witnesses, and testimony from two percipient witnesses.

During the evidentiary process, plaintiffs requested and obtained discovery of documents Dole possessed in connection with its fraud investigation, including attorney work product memoranda. Plaintiffs also deposed Dole investigator Francisco Valadez, who had interviewed many of the John Doe witnesses in Nicaragua. They did not seek to depose any other Dole investigator. Dole’s expert witness was also deposed and offered an expert opinion that the number of pending Nicaraguan DBCP claims exceeded the number of legitimate DBCP claimants. Plaintiffs also sought to redepose John Doe witnesses 17 and 18. The trial court initially denied that request, but then granted it following the first set of OSC hearings in May 2010. The depositions ultimately did not occur because of threats to witness safety.

During the OSC hearings, Dole presented evidence that the Tellez plaintiffs were part of the same fraudulent scheme that had resulted in the Mejia and Rivera dismissals. Of the six Tellez plaintiffs whose claims were tried, two confirmed they had been recruited by Dominguez’s office, four submitted work certificates signed by individuals who had not worked on Dole-contracted farms or who were paid to sign certificates in blank, and five produced sperm test reports from Nicaraguan laboratories implicated in the Mejia fraud.

At the conclusion of the OSC hearings, the trial court issued an oral ruling, and a subsequent 51–page statement of decision setting forth detailed factual findings that the Tellez plaintiffs and their counsel had perpetrated fraud on the court by recruiting persons who had never worked on banana farms as would be plaintiffs, coaching plaintiffs to lie about their work on banana farms, submitting false work certificates, falsifying sterility by submitting fraudulent laboratory reports and concealing children fathered by plaintiffs, and interfering with witnesses and investigators by threats, intimidation, and tampering. The trial court specifically found that the John Doe witnesses were credible, that Dole had not bribed witnesses, and that Dole was diligent in coming forward with evidence of fraud.

The trial court then concluded that defendants met all of the requirements necessary for coram vobis relief and granted their petitions, vacating the judgment and dismissing the case with prejudice. The trial court denied defendants’ request for alternative relief to vacate the judgment pursuant to the court’s inherent power to protect the judicial process.

This appeal followed.

DISCUSSION

I. Applicable law and standard of review

When evidence of extrinsic fraud is discovered during the pendency of an appeal, an appellate court can issue a writ of error coram vobis directing the trial court to reconsider its decision in light of the newly discovered evidence. (Betz v. Pankow (1993) 16 Cal.App.4th 931, 941.) The purpose of the writ “ ‘is to secure relief, where no other remedy exists, from a judgment rendered while there existed some fact which would have prevented its rendition if the trial court had known it and which, through no negligence or fault of the defendant, was not then known to the court’ [citation].” (People v. Kim (2009) 45 Cal.4th 1078, 1091.) The effect of the writ is to remand the case to the trial court for the purpose of reopening the judgment to consider the new evidence. (In re Rachel M. (2003) 113 Cal.App.4th 1289, 1295–1296 (Rachel M.).)

“The common law writ of error coram nobis is used to secure relief, in the same court in which a judgment was entered, from an error of fact alleged to have occurred at trial…. Technically, when the petition is addressed to the trial court it is coram nobis, and when addressed to an appellate court it is coram vobis. [Citations.]” (Betz v. Pankow, supra, 16 Cal.App.4th at p. 941, fn. 5.)

A writ of error coram vobis is a “drastic remedy” that will be issued only if the following requirements are satisfied: (1) no other remedy is available to consider the new evidence; (2) the new evidence would compel or make probable a different result in the trial court; (3) the petitioner acted diligently, but through no fault of its own, did not have the evidence at the time of trial; (4) the evidence concerns an issue not adjudicated at trial; and (5) the evidence was not presented earlier because of extrinsic fraud. (Rachel M., supra, 113 Cal.App.4th at p. 1296.)

A trial court’s factual findings in a coram vobis proceeding are reviewed under the substantial evidence standard. (See People v. Savin (1940) 37 Cal.App.2d 105, 108 [appellate court cannot reverse trial court’s order in coram nobis proceeding “if there is substantial evidence or a reasonable inference to be drawn from it which supports the order”].) A trial court’s ruling on a petition for writ of error coram vobis is reviewed for abuse of discretion. (See People v. Kim, supra, 45 Cal.4th at pp. 1095–1096.)

II. Propriety of the protective orders issued in Mejia and in the instant Tellez case
Plaintiffs contend the protective orders issued by the trial court in Mejia and in the instant case were an abuse of discretion because those orders allowed defendants to submit false claims and false testimony by John Doe witnesses that then became the basis for erroneous factual findings by the trial court. Plaintiffs further contend the protective orders violated their due process right to a fair trial by precluding their counsel from investigating and challenging the veracity of Witness X and of the John Doe witnesses.

We do not address plaintiffs’ challenge to the protective order issued in Mejia, a case in which they were not parties, in which final judgment was entered, and from which no appeal was taken. Our review is limited to the protective order issued in the instant Tellez case.

A. Allegedly erroneous factual findings

1. Discrepancies Between Mejia and Tellez Findings

Plaintiffs cite selected oral and written findings made by the trial court in Mejia that were not included in the Tellez statement of decision as support for their argument that the evidentiary process employed by the trial court allowed the court to make factual findings that were not only erroneous but false. For example, plaintiffs compare the trial court’s finding in the Mejia statement of decision that “[t]he total number of plaintiffs claiming to have been injured while working on a Nicaraguan banana farm formerly associated with Dole is many times the total number of people who worked on the farms” and the trial court’s oral finding in the instant Tellez case that “[i]t is not reasonable to conclude that 14,000 claimants in the several lawsuits were made sterile by DBCP” with the Tellez statement of decision, which does not include the oral finding.

Plaintiffs cannot rely on alleged factual discrepancies between Mejia and Tellez as a basis for challenging the Tellez protective order or the findings set forth in the Tellez statement of decision. Factual findings made by the trial court in Mejiamay not be challenged in this appeal. Plaintiffs raise no sufficiency of the evidence challenge with regard to the relevant findings in this case that they too committed a fraud on the court by submitting false testimony, fraudulent declarations and work certificates, and fraudulent laboratory reports as part of a fraudulent scheme orchestrated by their attorneys Dominguez and Ordeñana and are deemed to have waived such challenge. (Arechiga v. Dolores Press, Inc. (2011) 192 Cal.App.4th 567, 571–572.)

Alleged discrepancies between the trial court’s oral pronouncements at the OSC hearing in the instant case and its written statement of decision are not a valid basis for challenging the trial court’s factual findings or legal conclusions. “ ‘[T]he reasons of a trial court … do not in a strict sense constitute a part of the record on appeal….’ [Citation.] There are instances where a court’s comments may be ‘valuable in illustrating the trial judge’s theory but … they may never be used to impeach the order or judgment. [Citation.]’ [Citation.]” (In re Marriage of Ditto (1988) 206 Cal.App.3d 643, 646.) “Neither an oral expression nor a written opinion can restrict the power of the judge to declare his [or her] final conclusion in his [or her] findings of fact and conclusions of law. [Citation.] The findings and conclusions constitute the final decision of the court and an oral or written opinion cannot be resorted to for the purpose of impeaching or gain-saying the findings and judgment. [Citation.]” (Buckhantz v. R.G. Hamilton & Co. (1945) 71 Cal.App.2d 777, 781.) “Nor can the statement of decision be impeached by the court’s oral comments from the bench. [Citations.]” (Hirshfield v. Schwartz (2001) 91 Cal.App.4th 749, 767.) Plaintiffs may not rely on the trial court’s comments at the hearing on defendants’ petition, or on the court’s comments and findings in the Mejia case, as the basis for challenging the factual findings in the statement of decision.

2. Credibility of John Doe witnesses

Plaintiffs also challenge the trial court’s determination that the testimony of the John Doe witnesses was credible. A reviewing court does not reweigh the evidence or reconsider credibility determinations. (Katsura v. City of San Buenaventura (2007) 155 Cal.App.4th 104, 107.) It was within the exclusive province of the trial court, as the trier of fact, to determine credibility. (Sabbah v. Sabbah (2007) 151 Cal.App.4th 818, 823.) “[T]he testimony of a witness whom the trier of fact believes, whether contradicted or uncontradicted, is substantial evidence, and we must defer to the trial court’s determination that these witnesses were credible. [Citations.]” (Estate of Odian (2006) 145 Cal.App.4th 152, 168.)Plaintiffs’ attempts to reargue selected portions of the evidence in an effort to induce this court to make different findings is not a valid ground for overturning the trial court’s order. On substantial evidence the trial court found that plaintiffs and their counsel committed a fraud on the court by presenting false evidence and testimony. A reviewing court is powerless to modify such findings. (Sketchley v. Lipkin (1950) 99 Cal.App.2d 849, 855.) “It is the function of the trial court not only to determine the weight and credibility of evidence [citation] but where there is a conflict in the evidence the trial court’s finding is final. [Citation.]” (Ibid.)

B. Alleged due process violations
1. Nondisclosure of witness identities

Plaintiffs claim the protective order prohibiting disclosure of the John Doe witness identities violated their due process rights by preventing investigation into the witnesses’ potential motivations to distort or fabricate evidence and by preventing any effective attempt to verify the substance of the witnesses’ testimony and that there were no safeguards to prevent the taint of unsubstantiated allegations of fraud to permeate the entire proceedings. These same arguments were rejected by the California Supreme Court in People v. Valdez (2012) 55 Cal.4th 82 (Valdez ), which involved a protective order very similar to the one at issue here.

The protective order in Valdez precluded defense counsel from learning the names of several witnesses until shortly before trial; prohibited defense counsel from disclosing the witnesses’ identities to the defendant without first obtaining a court order; and barred defense counsel and the defendant from ever knowing the addresses or telephone numbers of the witnesses. (Valdez, supra, 55 Cal.4th at pp. 102, 107–108.) The defendant argued that the protective order “violated his constitutional rights to due process, to a fair trial, to confront witnesses and to a reliable determination of death judgment.” ( Id. at p. 105.) Specifically, the defendant argued that allowing the prosecution to withhold the witnesses’ identities until their testimony at trial denied him “ ‘an adequate opportunity to investigate and prepare his defense,’ ” “prevented him from determining whether [the witnesses] harbored bias or prejudice against him or other defendants, [and] whether they had reason to testify falsely” and prevented him “from adequately investigating grounds for impeachment, i.e., ‘ “their reputation[s] for truthfulness or dishonesty … and other motives to fabricate, such as revenge or reduction of their own charges.” ’ ” (Id. at p. 108.)
The California Supreme Court rejected these arguments, concluding that “[a]s a legal matter, governing precedent does not support defendant’s constitutional claim.” The court then cited Weatherford v. Bursey (1977) 429 U.S. 545, in which the United States Supreme Court “rejected the argument that the lack of advance disclosure deprived the defendant ‘of the opportunity to investigate [the witness] in preparation for possible impeachment on cross-examination.’ ” ( Valdez, supra, 55 Cal.4th at p. 110, quoting Weatherford, supra, at p. 561.) Other cases are in accord. (See Johnson v. Superior Court (2000) 80 Cal.App.4th 1050, 1072 [recognizing that protective order “could be fashioned which would allow John Doe’s deposition to proceed and documents produced on matters relevant to the issues in the litigation but in a manner that maintains the confidentiality of John Doe’s identity and that of his family”]; People v. Lopez (1963) 60 Cal.2d 223, 246–247 [protective order authorizing prosecution to withhold identities of witnesses until 24 hours before they testified did not deprive defendant of a fair trial]; Morgan v. Bennett (2d Cir.2000) 204 F.3d 360, 368 [“valid concerns for the safety of witnesses and their families and for the integrity of the judicial process may justify a limited restriction on a defendant’s access to information known to his attorney”] United States v. Ramos–Cruz (4th Cir.2012) 667 F.3d 487, 500–501 [trial court order allowing witnesses to testify without revealing their names, home and work addresses, and places of birth did not violate Sixth Amendment right to confrontation].) A protective order allowing disclosure of witness information to an attorney, but prohibiting the attorney from revealing that information to others, including the client, does not necessarily impinge on the due process right to a fair trial.

The Supreme Court in Valdez went on to find several reasons why the challenged protective order did not violate the defendant’s constitutional rights. The court first found that the trial court had accorded defense counsel pretrial access to information about the witnesses, such as their prior convictions. The trial court had also emphasized that the order was “ ‘a work in progress as this case progresses’ ” and had invited defense counsel to seek amendment of the protective order as necessary. ( Valdez, supra, 55 Cal.4th at p. 110.) Despite this offer, defense counsel never offered a viable alternative. Finally, the Supreme Court found that the protective order “did not in fact ‘significantly impair’ defendant’s ‘ability to investigate or effectively cross-examine’ the witnesses,” as defense counsel had engaged in “lengthy cross-examination” of witnesses during the trial. ( Id. at pp. 111–112.)

All of the above reasons apply equally in the instant case. As in Valdez, the trial court in this case took steps to mitigate the impact of restricting information concerning the identities of the protected witnesses by ordering Dole to disclose its work product notes of witness interviews and by allowing plaintiffs’ counsel the opportunity to prepare for and conduct cross-examination of those witnesses. The Miller Axline attorneys thus not only knew the identity of the John Doe witnesses before their depositions, they also had, in advance of each deposition, Dole’s work product investigator and attorney reports from interviews of the deponent and all exhibits Dole planned to use during the depositions. Here, as in Valdez, the trial court extended multiple invitations to Miller Axline and to plaintiffs’ current counsel, Condie, to raise any problems, concerns, or issues they were encountering or any proposed modifications of the protective order. Counsel never raised any problems, issues, or concerns, nor did they suggest any specific modifications to the protective order. Finally, Miller Axline, like the defendant’s counsel in Valdez, had ample opportunity to, and did in fact cross-examine at length the John Doe witnesses who appeared for deposition. All of these measures functioned as an adequate and appropriate safeguard to the integrity of the proceedings. For the same reasons stated by the California Supreme Court in Valdez, the protective orders issued by the trial court in the instant case did not violate plaintiffs’ due process right to a fair trial.

2. Limiting disclosure and cross-examination of witnesses

The trial court’s order limiting disclosure of John Doe witness information and limiting cross-examination of those witnesses to the non-Spanish-speaking attorneys at Miller Axline did not deprive plaintiffs of their due process right to investigate the fraud allegations.All of plaintiffs’ attorneys, including Dominguez and Ordeñana, were able to investigate the fraud allegations without restriction for a substantial period of time. Plaintiffs and their attorneys were made aware of the fraud allegations and the substance of Witness X’s testimony when Dole filed its motion for a new trial in Tellez in January 2008. The Mejia protective order was not issued until October 6, 2008. During the nearly nine-month period between the Tellez new trial motion and issuance of the Mejia protective order, all of plaintiffs’ attorneys—Miller Axline, Dominguez, and Ordeñana—were able to jointly investigate the fraud allegations without restriction.
After entry of the Mejia protective order, the trial court suggested to the Miller Axline attorneys that they consider hiring an independent Spanish-speaking investigator. Miller Axline eventually did so, and the trial court ruled that upon signing the protective order, the investigator “will be allowed access to all protected information.” Plaintiffs’ attorneys at Miller Axline, along with their Spanish-speaking investigator, had full access to the protected witness information.

In addition to information concerning the identities of the John Doe witnesses, attorneys at Miller Axline were also provided with Dole’s attorney work product notes, reports, and memoranda of witness interviews, as well as advance copies of all exhibits Dole intended to use during the John Doe witness depositions. There is nothing in the record to indicate that the Miller Axline attorneys, who had successfully tried the Tellez case and obtained a jury verdict in plaintiffs’ favor, were incapable of preparing for the John Doe depositions or cross-examining the John Doe witnesses without assistance from Dominguez or Ordeñana. The order prohibiting disclosure of witness information to Dominguez and Ordeñana and limiting disclosure and cross-examination of witnesses to Miller Axline was not an abuse of discretion.

3. Admission of Mejia John Doe testimony

Plaintiffs challenge the trial court’s admission of the John Doe depositions taken in Mejia on the ground that they were denied the opportunity to effectively cross-examine those witnesses because of the restrictions imposed by the Mejia protective order.Former testimony of a witness who is unavailable is admissible under Evidence Code section 1292 if “the party to the action or proceeding in which the former testimony was given had the right and opportunity to cross-examine the declarant with an interest or motive similar to that which the party against whom the testimony is offered has at the hearing.” (Evid.Code, § 1292, subd. (a).) “Where a witness is unavailable to testify, the defendant’s due process rights are sufficiently protected by the use of the witness’s testimony from a former action or proceeding, provided the defendant had the right and opportunity to cross-examine the witness in that proceeding with an interest and motive similar to that which he has in the present proceeding. [Citations.] Indeed, ‘[i]f the [defendant] had an adequate opportunity for cross-examination in an earlier proceeding, the confrontation clause may be satisfied even absent physical confrontation at time of trial’ even where there has been no showing that the witness is unavailable. [Citations.]” ( In re Elizabeth T. (1992) 9 Cal.App.4th 636, 640–641.) A trial court’s ruling under Evidence Code section 1292 is reviewed for abuse of discretion. (Aguayo v. Crompton & Knowles Corp. (1986) 183 Cal.App.3d 1032, 1038.)

The record discloses no abuse of discretion by the trial court. Miller Axline was present during the depositions of John Doe witnesses 1 through 19 and had the opportunity to cross-examine those witnesses at length. Dole also offered to make John Doe witnesses 20 through 27 available for deposition, but Miller Axline declined to do so because of increasing concerns about witness safety, as well as the safety of their own attorneys. These concerns caused the parties to stipulate that sworn declarations by John Does 20 through 27 would be admissible without cross-examination, as reflected in the reporter’s transcript for the March 6, 2009 hearing at which these issues were discussed:
“[Mr. Axline]: “I share the Court’s concerns with safety, and it does seem to me that if Dole wants to get additional testimony, that declarations might be the safest way to do it…. I do think that I have now seen the escalation down there, and with specific death threats being apparently to John Doe witnesses that really is a concern on our side as well.”
“[The trial court]: “Declarations are fine…. I just want to make sure that there is due process on all sides here, and if there’s discovery that Mr. Axline believes should be taken regarding these people, then we need to work that out.”

Plaintiffs did not seek to depose John Doe witnesses 20 through 27, nor were they precluded from doing so.

We do not address plaintiffs’ arguments that John Doe witnesses 9, 13, 17, and 18 committed perjury, and that the trial court’s credibility determinations were flawed. Under the standard applicable to our review of the trial court’s factual findings, we do not reweigh the evidence or attempt to evaluate the credibility of witnesses; those are functions delegated to the trial court. (Escamilla v. Department of Corrections & Rehabilitation (2006) 141 Cal.App.4th 498, 514–515.)

4. Deposing John Doe witnesses 17 and 18

Plaintiffs contend the trial court erred by denying their request to depose John Doe witnesses 17 and 18 FN5—both of whom had previously been deposed by Dole and cross-examined by Miller Axline in Mejia. Although the trial court initially denied plaintiffs’ request to redepose John Does 17 and 18, it subsequently reconsidered that ruling and ordered those depositions to proceed. The court countermanded its order only after evidence of escalating threats against those witnesses came to light.

Plaintiffs also claim the trial court erred by denying a purported request to depose John Doe 1. The record, however, contains no motion by plaintiffs to depose John Doe 1 (who was previously deposed in Mejia as John Doe 2) and no order denying such motion.

The same is true with respect to plaintiffs’ claim that the trial court precluded them from contacting attorney Thomas Girardi, whom John Doe witness 17 identified during deposition as a participant in the Montserrat meeting. Plaintiffs never made any formal motion to interview Girardi or to share protected information with him, nor is there any order preventing plaintiffs from contacting or interviewing Girardi.

Dole presented evidence that Ordeñana had publicly identified certain John Doe witnesses by name, including John Doe witnesses 17 and 18, and berated and threatened them in the Nicaraguan media. In a public radio broadcast, Ordeñana described the witnesses as “rats” and cautioned them to “be careful” because the situation was “dangerous.” The trial court found Ordeñana’s actions to be evidence of “serious witness tampering by plaintiffs’ agents” that “precludes further discovery from taking place.” The court accorded plaintiffs the opportunity to challenge the evidence and the factual underpinnings of her order denying their request for further discovery: “If plaintiffs wish to respond to [the] new evidence [of threats] they may do so in the context of further supporting their motion for discovery.” The court directed plaintiffs to address “[e]ither the foundation or what the documents say, the radio broadcasts, or that you think that somehow this doesn’t apply to and doesn’t suggest an increased threat of harm to the witnesses.” Plaintiffs did not do so, and the trial court denied their request to depose John Does 17 and 18 because of concerns for witness safety. That denial was not an abuse of discretion.

5. Production of Mejia email communications

Plaintiffs contend they were prejudiced by the trial court’s refusal to grant their motions to compel Dole to produce email communications in Mejia between the parties and the court. The record discloses no abuse of discretion.When plaintiffs first raised the issue, the trial court stated that it saw no basis for compelling production of email communications that were not part of the Tellez record but that pertained to another action in which final judgment had been entered and from which no appeal had been taken. The trial court further stated, based on its own familiarity with the Mejia litigation, that the emails were “not relevant” to the instant case and that any substantive emails were summarized in the Mejia notices of rulings: “I personally checked all notices of ruling that arose from those email communications. And the notices of ruling adequately and accurately reflected what was communicated during the emails.” The trial court’s denial of plaintiffs’ request to produce the Mejia emails was not an abuse of discretion.

6. Investigating alleged bribery by Dole

Plaintiffs claim the trial court precluded them from investigating bribes allegedly paid by Dole to John Doe witnesses 17 and 18, who were relocated to Costa Rica with the trial court’s approval and agreement from Miller Axline after both witnesses were threatened with physical harm. Plaintiffs contend the court abused its discretion by excusing Dole “from the responsibility to produce concrete evidence” and from disclosing financial records of an account that had been used to pay relocation expenses for those witnesses. The record discloses no abuse of discretion.The trial court found that the relocation of John Does 17 and 18 to Costa Rica was necessary after John Doe 17 received a written death threat at his home in Nicaragua and John Doe 18 was jailed and released in Nicaragua without explanation. Plaintiffs’ attorneys at Miller Axline consented to the relocation of these witnesses at Dole’s expense and agreed on the record that “[t]his effort on behalf of Dole is to protect the witnesses and will not be construed at a later point as some sort of bribe.”

In the ensuing weeks, additional threats were made against Dole’s investigators and against John Does 17 and 18 when they returned to Nicaragua for a short stay. Plaintiffs’ counsel Axline at this time also expressed concerns about the conditions in Nicaragua, stating, “I for example, would not feel safe at this point traveling to Nicaragua to meet with [my] clients.” Because of the deteriorating situation in Nicaragua, the trial court approved an extension of the temporary relocation of John Does 17 and 18 and ultimately approved a permanent relocation of both witnesses, including offers of employment and housing provided by Dole.

Dole provided spreadsheets showing the relocation expenses it incurred, as well as receipts for those expenses, in two separate submissions. On June 29, 2009, Dole submitted spreadsheets for expenses incurred though May 2009 during Mejia, and on April 20, 2010, it submitted spreadsheets for expenses incurred in the instant Tellez case through March 2010. The trial court found that the amounts Dole paid were within parameters approved by the court and that Dole had accounted for all of the relocation expenses.
When Dole explained in April 2010 that it had detected and corrected an accounting error in the June 2009 submission (three $1,500 per month stipends to the two witnesses for food and personal expenses had been omitted from that submission), plaintiffs filed a motion seeking leave of court to investigate the monthly stipend paid by Dole. In response, Dole submitted five declarations explaining how the oversight had occurred and how it was detected and corrected. The trial court also ordered Dole to respond to written discovery from plaintiffs and to provide more evidence concerning the relocation and employment of John Doe witnesses 17 and 18. Pursuant to that order, Dole produced hundreds of pages of documents, responded to 12 interrogatories and 17 document requests, and submitted nine declarations explaining its accounting of the relocation expenses. Plaintiffs requested additional discovery, including depositions of John Does 17 and 18, and business records and expense reports from third party investigators Dole had retained to assist in the relocation effort. The trial court denied this request based on a number of factors, including the escalating threat of violence against the witnesses, and declarations by Dole that it had attempted, unsuccessfully, to obtain the requested business records from the third party investigators. The trial court found that Dole provided sufficient evidence to account for all relocation expenses and that the relocation efforts to protect and to subsequently employ John Does 17 and 18 did not constitute bribery. Substantial evidence supports the trial court’s findings, and its denial of plaintiffs’ discovery requests was not an abuse of discretion.

III. The trial court’s ruling on the petitions was not an abuse of discretion

Plaintiffs challenge the trial court’s findings on only two of the five requirements for coram vobis relief—whether the new evidence would have made probable or compelled a different result at trial, and whether the petitioners acted diligently.FN6. As discussed, a writ of error coram vobis may issue when five factors are present: (1) no other remedy is available to consider the new evidence; (2) the new evidence would compel or make probable a different result in the trial court; (3) the petitioner acted diligently, but through no fault of its own, did not have the evidence at the time of trial; (4) the evidence concerns an issue not adjudicated at trial; and (5) the evidence was not presented earlier because of extrinsic fraud. (Rachel M., supra, 113 Cal.App.4th at p. 1296.)

A. Dole’s diligence

Substantial evidence supports the trial court’s finding that Dole acted diligently to uncover the fraud. To do so, Dole had to contend with claimants who had no documentary evidence of employment at any Dole-contracted banana farm, hostility toward its investigators, and witness intimidation and tampering by Ordeñana and others. Dole’s investigators, Francisco Valadez and Luis Madrigal, both of whom the trial court found to be credible, testified that most witnesses were afraid to come forward with information about the plaintiffs in this case and in Mejia. Valadez and Madrigal further testified that the threatening and intimidating atmosphere in Nicaragua dating back to 2004 significantly interfered with their ability to conduct discovery in preparation for Dole’s defense.

Notwithstanding these difficulties, Dole’s investigators conducted 273 interviews of 239 witnesses potentially relevant to this case and sought to interview numerous other witnesses who were unavailable or who refused to be interviewed.B. Different result
The same bench officer conducted the coram vobis proceedings that are the subject of the instant appeal and also presided over the Tellez trial in 2007. She was thus uniquely qualified to determine whether the fraud evidence presented in the coram vobis proceedings would have made probable or compelled a different result at trial. Justice Chaney expressly found that the evidence of fraud would have “compel[led] the trial court to grant a new trial or dismiss the lawsuit on the ground of misconduct” because “[b]efore trial in Tellez and continuing on beyond the Mejia proceedings, plaintiffs’ counsel and agents caused witnesses and potential witnesses to fear for their safety if they cooperated with defendants’ investigative efforts.” Justice Chaney further found that “[t]he misconduct has been so widespread and pervasive that it is now impossible to determine, in accordance with the fair application of law, what the truth is and who should prevail on the merits in this controversy.” Plaintiffs ignore these findings and argue that the inquiry should be limited to two factual issues: Did plaintiffs work on a Dole banana farm, and did they suffer from azoospermia or oligospermia? Even limiting the fraud evidence to these two narrow factual issues, there was ample evidence to support the trial court’s finding that the evidence of fraud would have compelled a different result. Plaintiffs’ claims were themselves found to be fraudulent. The trial court found that each of the Tellez plaintiffs was involved in the fraud, and there is substantial evidence in the record to support those findings.

The trial court found that plaintiffs Jose Anastacio Rojas Laguna and Claudio Gonzalez were never banana workers and were not exposed to DBCP. During their respective depositions, neither Laguna nor Gonzalez could answer questions about basic information concerning the banana farm at which they purportedly worked, such as the size of the farm or the existence or location of buildings. Both men testified that they had been recruited by a “captain” working for Dominguez to serve as plaintiffs in Tellez, and both produced a forged work certificate signed by an individual who had never worked on a banana farm.

The trial court found that the claims of plaintiffs Jose Uriel Mendoza Gutierrez, Matilde Jose Lopez Mercado, and Julio Cesar Calero Gonzalez were the product of a fraudulent scheme. John Doe witnesses testified that the signatories on the work certificates produced by Gonzalez and Gutierrez were paid to sign them in blank. Mercado testified that one of his lab reports was “false.” Gonzalez testified the he had never seen his sworn interrogatory responses and did not recall using his fingerprint to verify them. The trial court further found that all three of these plaintiffs gave testimony that bore indicia of having been coached.

Substantial evidence supports the trial court’s finding that the Tellez plaintiffs were complicit in a fraud on the court. The trial court’s order granting the petitions for coram vobis relief accordingly was not an abuse of discretion.

IV. Plaintiffs’ judicial bias claim

Plaintiffs’ brief is peppered with invective and disparaging remarks directed at the trial court in an apparent effort to persuade this court to set aside the judgment on the ground of judicial bias. Plaintiffs failed to raise any objection premised on judicial bias in the proceedings below and cannot do so for the first time in this appeal. (Tri Counties Bank v. Superior Court (2008) 167 Cal.App.4th 1332, 1338; Roth v. Parker (1997) 57 Cal.App.4th 542, 547–548.)

DISPOSITION

The order granting the petitions for coram vobis relief, vacating the judgment, and dismissing this case with prejudice is affirmed. Defendants are awarded their costs on appeal. Because we affirm the order granting the petitions for writ of error coram vobis, we need not address defendants’ argument that the Tellez judgment could also have been vacated, as an alternative to coram vobis relief, based on the inherent power of the court to set aside a judgment obtained through a fraud upon the court.

ZALMA OPINION

It took the defendants many years and hundreds of thousands of dollars to defeat the fraudulent claims presented by the plaintiffs from Nicaragua and their lawyers. The defendants and their insurance companies should be commended for their exceptional work investigating and defending this fraud. It should stand as an example for all insurers and all defendants who are faced with a claim, small or large, that they are certain are fraudulent to spend the time and money needed to defeat the fraud.

Because it was such an important example for all involved in the effort to defeat fraud I have not summarized the decision but placed the full text here less some footnotes. I also added italics where I felt important facts should be considered by the reader.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

Mr. Zalma e-book, “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulation

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Absent Purposeful Misconduct Adjuster Not Liable

Adjuster’s Conduct of Claims Investigation Is Privileged

An independent insurance adjuster is a person who, at the request of an insurer, investigates a loss and claim and makes a report to the insurer who then decides to either pay or not pay a claim based on the facts developed by the adjuster and the wording of the policy. When the insured is dissatisfied with the findings of the adjuster and the decision made by the insurer, the insured will often sue everyone in sight, including the adjuster.

In Steven J., Inc. v. Landmark American Ins. Co., Slip Copy, 2014 WL 4672498 (M.D.Pa.) a suit was filed against an insurer and its independent adjuster. The suit claimed that the adjuster’s reporting constituted a tortious interference with the contractual relationship between the insured and the insurer. The adjuster moved to dismiss the complaint as it related to the adjuster.

INTRODUCTION

Statement of Facts and of the Case

The plaintiff was a lessee who held an option to purchase a property in Monroe County, Pennsylvania. This real estate was insured through the defendant, Landmark American Insurance Company. The policy listed the plaintiff, Steven J., Inc., as a lienholder on this insurance policy.

According to Steven J., in October 2012, the property was heavily damaged in a storm. Steven J., submitted a loss claim on the property to Landmark, and Landmark engaged Engle Martin & Associates to review this claim. Steven J., then alleges that the claim was wrongfully denied by Landmark on the basis of an report by Engle Martin, the claims adjuster, which incorrectly concluded that the claim on the insured property involved pre-existing damage that had not been caused by the storm. Alleging that the claims adjuster’s report was wrongfully withheld from the plaintiff, and reached an outrageously erroneous conclusion, Steven J., filed this lawsuit leveling two claims and causes of action.

As to Engle Martin, the claims adjuster, the suit claimed it tortiously interfered with the insurance contract by investigating the claim and submitting its report to Landmark, stating that the investigation indicated that the claim entailed pre-exiting damage to the insured premises, a finding that Steven J., alleged was outrageous.

Discussion

A motion to dismiss is designed to test the legal sufficiency of a complaint. The facts alleged must be sufficient to raise a right to relief above the speculative level. A complaint which pleads facts merely consistent with a defendant’s liability stops short of the line between possibility and plausibility of entitlement of relief.

This Tortious Interference With Contract Claim Fails as a Matter of Law
Under Pennsylvania law, the elements of a cause of action for intentional interference with an existing contractual relation are as follows:

(1)     the existence of a contractual, or prospective contractual relation between the complainant and a third party;

(2)     purposeful action on the part of the defendant, specifically intended to harm the existing relation, or to prevent a prospective relation from occurring;

(3)    the absence of privilege or justification on the part of the defendant; and

(4)     the occasioning of actual legal damage as a result of the defendant’s conduct.

Engle Martin argued that the well-pleaded facts alleged by Steven J., Inc., in its amended complaint fail to state a claim of tortious interference with a contractual relationship on at least two scores. First, the defendant contends that this tort claim requires purposeful action on the part of the defendant, specifically intended to harm the existing relation, or to prevent a prospective relation from occurring. Fairly construed Engle Martin argues that this amended complaint alleges a dispute regarding the correctness of the adjuster’s resolution of this claim, but describes a dispute which falls short of the intentional, purposeful, harmful conduct required by Pennsylvania law.

In addition, Engle Martin insists that this tortious interference claim runs afoul of another requirement prescribed by Pennsylvania law for such claims: a showing of the absence of privilege or justification on the part of the defendant.

Engle Martin contend that the well-pleaded facts in this amended complaint, which alleges that Engle Martin was retained by Landmark to evaluate this claim, and did just that—it evaluated the claim and found it to be wanting—described a relationship between Landmark and Engle Martin in which Engle Martin’s actions were privileged and justified since they were required by its contractual engagement with Landmark to review this claim.

In this setting, where Engle Martin has contractually agreed to review an insurance claim as an insurance adjuster, the defendant argues that it cannot be said that Engle Martin acted without justification, even if Steven J., may strongly contest the ultimate findings which it made regarding that insurance claim.

The District Court, in a report to the judge by a Magistrate Judge, found merit to Engle Martin’s argument that the simple act of a claims adjuster investigating and opining upon an insurance claim at the request of an insurance company cannot, without further well-pleaded facts, will not rise to the level of tortious interference with a contract since this conduct does not entail purposeful action on the part of the defendant, specifically intended to harm the existing relation, undertaken in the absence of privilege or justification.

Other federal courts, construing the elements of similar tort claims made by insureds against claims adjusters have frequently rejected such tortious interference claims as a matter of law, noting that this conduct is not tortious since the adjuster’s job was to investigate and report to the insurance company on the cause of loss.

The task, which the adjuster is itself contractually obliged to undertake, may on occasion lead to results which the insured believes are misguided, uninformed and wrong. In such instances, the insured may pursue relief through litigation under the policy itself.

However, in the absence of further, significant well-pleaded facts detailing some other purposeful misconduct by the adjuster which falls outside its privileged contractual relationship with the insurance company, the actions of the adjuster recommending denial of a claim, standing alone, does not constitute the tort of intentional interference with a contractual relationship.

Since Steven J., Inc.’s amended complaint does not contain such well-pleaded allegations of facts which would establish purposeful misconduct which is not privileged or otherwise justified in an insurance claims adjustment context, the amended complaint fails as a matter of law and this intentional interference with contract claim set forth in Count II of the amended complaint should be dismissed.

The District Court adopted the Magistrate Judge’s report and dismissed the suit as it related to the adjuster.

ZALMA OPINION

Independent insurance adjusters, like Engle Martin, are retained to serve the insurer and report fairly and competently its findings to the insurer. Independent insurance adjusters are not employees of the insurer nor are they insurers. They, like old Joe Friday of the “Dragnet” t.v. show in the 60’s, report only the facts. Decisions are made by the insurer. The disgruntled insured only has a cause of action against the insurer. An adjuster that does his or her duty and does not do an act that can be shown to be purposeful misconduct that is outside the basic duty to investigate and report, cannot be held for tortious interference with the contract between the insured and the  insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Liar, Liar, Pants on Fire

Lies on Application for Life Insurance Void Coverage

Life insurance agents know well the importance of truthfully reporting facts concerning the health and medical history of a potential insured. They also know that policies have a two-year non-contestability clause that prevents claims of fraudulently obtained policies if not discovered within two years of the issuance of the policy.

In Laschkewitsch v. Lincoln Life and Annuity Distributors, Inc., Slip Copy, 2014 WL 4636965 (E.D.N.C.), the U.S. District Court for the Eastern District of North Carolina was asked to deal with a claim brought by an insurance agent who purchased insurance for his own brother who he knew, at the time the insurance was acquired, was suffering from a terminal illness.

BACKGROUND

This case arises from an insurance dispute involving multiple insurance companies, including defendant-counterclaimant, The Lincoln National Life Insurance Company (“Lincoln”). The dispute here is over a life insurance policy issued by Lincoln covering the life of Ben Laschkewitsch, plaintiff-counterdefendant’s brother.

The undisputed facts before this Court on the motions for summary judgment reveal Laschkewitsch’s scheme to profit off of the illness and death of his brother, for his sole personal gain, to the tune of $3.9 million. The facts reveal that Laschkewitsch contrived to acquire $3.9 million in potential life insurance payouts on the life of his brother who was terminally ill with Amyotrophic Lateral Sclerosis (“ALS”). It is clear that defendant was aware that his brother was suffering from ALS at the time he helped his brother to apply for life insurance and that he went to great lengths to falsify the information provided to various life insurance companies, including Lincoln.

In the Lincoln application, Mr. Laschkewitsch lied about his brother’s family medical history as well as his brother’s medical condition and healthcare providers; he grossly misstated the amount of “in force” insurance on his brother’s life; he misstated the status of pending life insurance applications; he lied to Lincoln in emails about withdrawing his pending applications; and he provided false information about his brother’s employment and contact information. Further, Mr. Laschkewitsch submitted fraudulently altered medical records in which his brother’s family history of ALS was carefully erased and replaced with an innocuous medical condition.

Based on Mr. Laschkewitsch’s fraud, Lincoln issued an $800,000 life insurance policy on the life of his brother (the “Insured”). Within the two-year contestability period, the Insured died. John Laschkewitsch, as policy owner, agent, and beneficiary, made a claim for benefits.

MOTIONS FOR SUMMARY JUDGMENT.

Defendant seeks summary judgment in its favor on all claims in this case including its counterclaims for fraud, violations of N.C. Gen.Stat. Chapter 75, misrepresentation, and breach of the producer agreement, and plaintiff’s claims for breach of contract and for unfair settlement practices. Defendant also seeks treble damages and attorney’s fees.

Plaintiff’s fraud is beyond dispute in this case. The evidence before the Court demonstrates that plaintiff knew about his brother’s ALS, knew that he was unemployed, and knew that he already had millions of dollars in life insurance coverage, with millions more pending, but intentionally failed to disclose, and affirmatively misrepresented, each of these material facts to Lincoln in his application for $800,000 more in coverage on his terminally ill brother. Plaintiff admits that the Lincoln application was “wrong,” that he made several “honest mistakes” in it, and that “someone” committed insurance fraud when plaintiff submitted altered medical records as a part of Insured’s application.
Plaintiff’s own admissions defeat his claims against Lincoln.

Here, no reasonable jury could view the evidence of plaintiff’s widespread fraud and find it to be just a big “honest mistake.”

PLAINTIFF IS LIABLE FOR FRAUD

In North Carolina, civil fraud consists of (1) False representation or concealment of a material fact, (2) reasonably calculated to deceive, (3) made with intent to deceive, (4) which does in fact deceive, (5) resulting in damage to the injured party. Additionally any reliance on the allegedly false representations must be reasonable.

Here it is undisputed that plaintiff’s application contained numerous material misrepresentations and omissions.

Lincoln was clearly deceived by plaintiff’s fraud and reasonably relied on plaintiff’s affirmative explanations in the application, his cover letters, and his subsequent e-mails explaining away the issues that may otherwise have caused concern. Lincoln suffered damages as a direct result, including the payment of commissions on the policy.

Plaintiff Is Liable for Unfair and Deceptive Practices

In order to establish a prima facie claim for unfair trade practices, a plaintiff must show: (1) defendant committed an unfair or deceptive act or practice, (2) the action in question was in or affecting commerce, and (3) the act proximately caused injury to the plaintiff. A practice is unfair if it is unethical or unscrupulous, and it is deceptive if it has a tendency to deceive. The determination as to whether an act is unfair or deceptive is a question of law for the court. Proof of fraud would necessarily constitute a violation of the prohibition against unfair and deceptive acts. The Court has already found that Lincoln is entitled to summary judgment on its claim for fraud, and therefore it is established that plaintiff’s actions constitute an unfair or deceptive act or practice. Therefore Lincoln is entitled to summary judgment on its Chapter 75 claim.

Plaintiff Is Liable for Misrepresentation

In North Carolina, the tort of negligent misrepresentation occurs when (1) a party justifiably relies, (2) to his detriment, (3) on information prepared without reasonable care, (4) by one who owed the relying party a duty of care. A life insurance company relies on its independent agents’ “knowledge of the facts” material to the application. As an independent life insurance agent for Lincoln, plaintiff owed Lincoln a duty of uberrimae fidei, or “utmost good faith,” in preparing the application.

Here, plaintiff repeatedly submitted information prepared without reasonable care to Lincoln during the application process, as he has admitted. Therefore, plaintiff is liable for misrepresentation in his submission of the application to Lincoln.

Plaintiff Is Liable for Breaching His Producer Agreement

Here, it is not disputed that plaintiff and Lincoln entered into the “Producer Agreement” on or about February 22, 2010, which is governed by Indiana law and defined the scope of plaintiff’s actions as an independent agent for Lincoln. The Producer Agreement makes plaintiff liable for damages and attorney’s fees resulting from “any negligent, fraudulent or unauthorized acts or omissions by” plaintiff.

Plaintiff engaged in numerous negligent and fraudulent acts in preparing and pursuing the Lincoln application, many of which he has admitted. By the time the policy was issued, plaintiff knew that the Insured had been diagnosed with ALS again. By delivering the policy to Insured, when plaintiff knew that the application underlying the policy contained no mention of Insured’s ALS, plaintiff breached the Producer Agreement.

Plaintiff’s Death Benefits Claim

Plaintiff’s complaint contains a single cause of action—for death benefits—couched as a breach of contract claim. However, material misrepresentations in an application for an insurance policy prevents recovery on the policy.

Answers made in response to questions in the application as to prior illness, consultation with physicians and applications for other insurance, where the applicant, as here, declares that they are true and offers them as an inducement to the issuance of the policy, are deemed material as a matter of law.  The other misrepresentation, especially those related to the other coverage already in force and applications pending, are material because Lincoln would not have issued the policy, in the amount issued, if it had known of the other coverage and applications.

Lincoln Is Entitled to Treble Damages and Attorney’s Fees

North Carolina satutes provide for an automatic trebling of damages upon the finding of a violation of the statute and a finding of an unfair or deceptive trade or practice.

ZALMA OPINION

Laschkewitsch, by filing suit for breach of contract, after being caught in an obvious and deliberate fraud, showed he is a person with unmitigated gall. The insurer was not satisfied with just the rescission of the policy. It was proactive and counter sued the Laschkewitsch for damages resulting from its fraud. Other insurers, victims of fraud, should take the hint from Lincoln and not just passively defend against fraud but proactively obtain damages from the fraud perpetrator.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

Posted in Zalma on Insurance | Leave a comment

Liars Never Prosper

SEC Slaps Defendant for Falsely Claiming Insurance With Lloyd’s

Lloyd’s Underwriters who write insurance through the marketplace in London at 1 Lime Street are a well respected insurance marketplace whose products are considered the ultimate security for any person seeking insurance. Because of the reputation of the Lloyd’s market and the misnomer, Lloyd’s of London, are relied upon by consumers world wide. As a result it is a great temptation to claim insurance with Lloyd’s when none, in fact exists.

The Securities and Exchange Commission (“SEC”) filed charges against Jilapuhn, Inc. (“Jilapuhn”), doing business as Her Majesty’s Credit Union (“HMCU”) and its principal, Stanley McDuffie (“McDuffie”) (collectively, “Defendants”). The SEC moved for summary judgment on all claims alleged against HMCU and McDuffie in this matter’s Complaint, the gist of which alleges that the Defendants misled investors, sold unregistered certificates of deposit (CDs) and misappropriated over $500,000 worth of investors’ funds. In Securities and Exchange Commission v. McDuffie, Not Reported in F.Supp.3d, 2014 WL 4548723 (D.Colo.), the U.S. District Court for the District of Colorado was called upon to determine if the SEC should be granted summary judgment punishing the defendants for lying to investors of, among other things, insurance with Lloyd’s, London.

SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate if the moving party can show that there is no genuine dispute as to any material fact and the [SEC] is entitled to judgment as a matter of

FACTS

In 1997, Mr. McDuffie obtained a corporate charter for Jilapuhn, Inc., in Georgia, and later incorporated in Colorado in 2004 and the U.S. Virgin Islands in 2005. Mr. McDuffie operated Jilapuhn as two separate credit unions in Georgia and the U.S. Virgin Islands between 2005 and 2011.

Jilapuhn Employees Federal Credit Union

On January 25, 2005, Mr. McDuffie opened Jilapuhn Employees Federal Credit Union (“JEFCU”) in Atlanta, Georgia, after receiving a charter from the National Credit Union Administration (“NCUA”).

Examples of Investor Reliance on Misleading Statements

Eighty-four-year-old California resident Edward Jung has been investing in legitimate, insured credit unions since 1995. After finding HMCU’s website on the Internet, Mr. Jung spoke with Mr. McDuffie about investing in HMCU’s CDs.

Seventy-two-year-old Florida resident Ahmed Abouelazm also found HMCU’s website offering CDs for sale online. He had multiple conversations with Mr. McDuffie about his investments, and he received a letter and an account statement from the Defendants confirming that his funds were insured by Lloyd’s up to $100,000.

Defendants Misrepresented That the Funds Were Insured.

• HMCU’s website stated: “your deposits are insured up to $100,000 through Lloyds of London.”

• CD investor letters stated “your funds are insured up to $100,000 per account through Lloyd’s of London.”

• Mr. McDuffie told Mr. Jung and Mr. Aboulelazm that their funds were insured by Lloyd’s of London or the government of the USVI.

• HMCU issued CD certificates that stated “Lloyd’s.”

• Investors’ membership account disclosure agreements stated: “Insurance coverage: This institution is privately insured through Lloyd’s of London Share Insurance, which allows us to insure each of your accounts up to $100,000.

• Defendants failed to inform investors that there was no insurance when they admit they knew there was no insurance.

Mr. McDuffie admited that he knew definitively that the CDs were not properly insured at least by the time he spoke with John McDonald, a member of the Division of Banking and Insurance. He kept this knowledge to himself, however, and purposely declined to update HMCU’s CD purchasers about the lack of insurance. For example, Mr. McDuffie admits that Mr. Jung’s email correspondence always asked about insurance. Mr. McDuffie and Mr. Jung also spoke on the phone about insurance. Although Mr. McDuffie and Mr. Jung communicated about insurance after Mr. McDuffie admits to knowing that there was no insurance, Mr. McDuffie admits he did not tell Mr. Jung that the CDs were currently uninsured. It was at minimum reckless for Mr. McDuffie not to bring Mr. Jung into the loop when he knew from Mr. Jung’s repeated inquiries regarding insurance that insurance was an important factor to his investment decision making process.

DISCUSSION

The SEC requests a judgment finding that the Defendants sold fraudulent and unregistered securities to investors, made misleading statements and omissions and profited from these misrepresentations.  The SEC sought permanent injunctions against the Defendants enjoining them from further violations of the securities laws, disgorgement of ill-gotten gains plus prejudgment interest thereon, and third-tier civil penalties.

As an initial matter the CDs must be a security. In analyzing whether the CDs are a security, the overarching presumption, rooted in statutory law, is that a “security” includes “virtually any instrument that might be sold as an investment,” “in whatever form they are made and by whatever name they are called.” SEC v. Edwards, 540 U.S. 389, 391 (2004).  A bank CD is simply a promissory note from the bank to the depositor. A note’s presumed status as a security is confirmed when the parties are motivated by an investment purpose, the note is sold to a broad segment of the public, a reasonable investor would consider the note to be an investment, and alternative regulatory schemes do not significantly reduce the risk of the instrument.

Here, the CDs are securities since they meet the four factor required. First, the parties were motivated to make an investment. McDuffie and HMCU offered an investment with a fixed rate of return and the investors desired the same. Second, the CDs were advertised over the internet and ads were placed on eBay. Thus, the CDs were offered and sold to a broad segment of the public. Notably, HMCU did not limit the sale of the CDs to “members” of the credit union, anyone who found the advertisement on the internet could buy a CD. Third, the objective expectations of the investing public were such that they believed the CDs were securities. The CDs were advertised as investments paying high interest. Finally, there were no risk-reducing factors; the CDs were not insured and were uncollateralized.  The CDs were also investment contracts under the requirements established in SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946). The Supreme Court defined an investment contract as: (1) the investment of money; (2) in a common enterprise; (3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party.

CONCLUSION

The court concluded that the defendants Violated the Antifraud Provisions of the Securities Act and the Exchange Act.

Defendants’ violated Section 10(b) of the Exchange Act and Rule 10b–5 thereunder and Section 17(a)(2) of the Securities Act by Making Material Misrepresentations with Scienter.

Because the facts establish that Mr. McDuffie had the scienter to defraud, those facts are also sufficient to establish scienter to defraud on behalf of HMCU itself.

REMEDIES

The SEC sought a permanent injunction against Mr. McDuffie and HMCU, disgorgement of the $532,591.97 and prejudgment interest thereon and third tier civil penalties. The court concluded that the remedies available should be assessed against the defendants and based on the facts and lies that:

1. Mr. McDuffie and HMCU shall be permanently enjoined.
2. The SEC is entitled to disgorgement and prejudgment interest.
3. Third tier penalties are proper against Mr. McDuffie and HMCU.

In reviewing the facts giving rise to a third tier penalty, the court looked at the circumstances and facts of the case. He considered (1) the egregiousness of the violations at issue; (2) the degree of the defendant’s scienter; (3) whether the violations were isolated or recurrent; (4) defendants’ failure to admit wrongdoing; (5) whether the defendants’ conduct created substantial losses or the risk of substantial losses to investors; (6) defendants’ lack of cooperation and honesty with authorities; and (7) whether an otherwise appropriate penalty should be reduced due to the defendants’ demonstrated current and future financial condition. Upon review of these factors, for substantially the same reasons as set forth in the SEC’s motion, the court concluded that a third tier penalty against each of the Defendants is proper. For both Mr. McDuffie and HMCU, he assess the “gross amount of pecuniary gain” or $532,591.97.

ZALMA OPINION

This is not an insurance case. It is an example of how some people take advantage of the strength and fame of an insurer to fraudulently profit. In this case the liars were caught and punished. Hopefully the SEC will continue to vigorously defeat investment products that falsely claim protection by a major insurer.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

 

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Insured Contract & Indemnity

Difference Between Direct & Vicarious Liability

Indemnity agreements between commercial entities often result in litigation because they are not loved by courts, parties and legislatures. Most CGL’s agree to pay for damages resulting from an indemnity agreement in a contract that meets the definition of insured contract.

In Mid-Continent Cas. Co. v. True Oil Co., — F.3d —-, 2014 WL 4637956 (C.A.10 (Wyo.) Sept. 18, 2014), Mid–Continent Casualty Company (Mid–Continent) brought a declaratory judgment action to ascertain the applicability to True Oil Company (True Oil) of Mid–Continent’s commercial general liability (CGL) policy issued to Pennant Service Company (Pennant). The district court granted summary judgment to True Oil, determining Mid–Continent breached its duty to defend and indemnify True Oil in the underlying action against it by Pennant’s employee. As damages, the court awarded True Oil the amount it paid to settle the underlying suit and the attorney fees and costs incurred in defending itself. Mid–Continent appeals from the district court’s judgment.

THE INDEMNITY AGREEMENT

In 2001, True Oil, an owner and operator of oil and gas wells, entered into a master service contract (MSC) with Pennant for work on a well in Wyoming. The MSC included a provision whereby Pennant agreed to indemnify True Oil “from and against all claims, damages, losses, … causes of action, suits, judgments, penalties, fines and expenses, including attorney fees, of any nature, kind or description whatsoever” resulting from either Pennant or True Oil’s negligence.

THE POLICY

Pennant has a CGL policy with Mid–Continent. Under the policy, MidContinent agreed to insure Pennant against damages because of bodily injury “[a]ssumed in a contract or agreement that is an ‘insured contract,’ “ including “reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured” as long as “(a) [l]iability to such party for, or for the cost of, that party’s defense has also been assumed in the same ‘insured contract’; and (b) [s]uch attorney fees and litigation expenses are for defense of that party against a civil … proceeding in which damages to which this insurance applies are alleged.”

According to the policy, an “insured contract” includes: “[t]hat part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

FACTS

In July 2001, Christopher Van Norman, an employee of Pennant, was injured in an accident at True Oil’s well. On October 26, 2001, Mr. Van Norman filed a negligence suit against True Oil in Wyoming state court. In accordance with the MSC’s indemnity provision, counsel for True Oil wrote to Pennant on November 20, requesting indemnification for its defense costs, attorney fees, and any award that Van Norman might recover against it. MidContinent refused to defend or indemnify True Oil based on Wyoming’s AntiIndemnity Statute, Wyo. Stat. Ann. § 30–1–131, which invalidates agreements related to oil or gas wells that “indemnify the indemnitee against loss or liability for damages for … bodily injury to persons.”

In May 2002, True Oil brought a federal action against Mid–Continent for declaratory relief, breach of contract (CGL policy), and other related claims. In February 2005, the district court granted Mid–Continent summary judgment, determining that the MSC’s indemnity provision, when invoked with respect to claims of the indemnitee’s own negligence, violated § 30–1–131 and was thus unenforceable as a matter of public policy.

The court held that Mid–Continent was not required to defend or indemnify True Oil in the underlying suit as it then existed because “where an indemnification provision in a MSC is void and unenforceable, the insurer never actually assumed any of the indemnitee’s liabilities under the policy.”

Subsequently, on March 16, 2005, Mr. Van Norman amended his original state court complaint to include an allegation of vicarious liability against True Oil for negligence of Pennant that had caused injury to Mr. Van Norman. True Oil then filed a third-party complaint against Pennant for indemnification.

In September 2005, Mid–Continent agreed to provide True Oil a conditional defense to the vicarious liability claim in the state court action, under a reservation of rights. In November, unable to agree upon the terms of the defense, True Oil refused Mid–Continent’s offer to defend. The following month, just prior to the December scheduled trial date, True Oil settled with Mr. Van Norman for $500,000 for the claims alleged in the amended complaint. While Pennant did not participate in the negotiations, it did stipulate to the reasonableness of the settlement.

The court held that where a claim of vicarious liability exists, the Wyoming Anti–Indemnity Statute, § 30–1–131, does not render the agreement void or unenforceable with respect to that claim.  The court affirmed the breach of contract finding and the $500,000 damages award, and it also extended True Oil’s entitlement to attorney fees from the date Mr. Van Norman filed his original complaint.

In light of and consistent with the resolution of the state proceeding, the federal district court awarded True Oil $500,000, attorney fees from October 2001 to December 7, 2005, and pre- and postjudgment interest on both amounts. MidContinent appeals.

Res Judicata

In Wyoming, a final judgment on the merits in a prior action is conclusive and bars all subsequent action between the same parties, or their privies, as to all matters which were or might have been litigated in the prior action.  Wyoming also follows the general rule prohibiting splitting a cause of action. Wyoming courts view res judicata and the rule against claim splitting as closely related.

In the first case, True Oil sought a defense and indemnity for its alleged negligence, the only claim pending against it, whereas in the present litigation, it seeks a defense and indemnity for its alleged vicarious liability for the negligence of Pennant, the new claim brought by Mr. Van Norman. These causes of action contain different factual circumstances giving rise to distinct rights to maintain an action.

Indemnification for Vicarious Liability

Under its CGL policy, Mid–Continent agreed to cover Pennant’s liability for damages “[a]ssumed in a contract or agreement that is an ‘insured contract.’ Thus, although the CGL policy generally excluded contractual liability from coverage, it excepted damages assumed in an insured contract.

Mid–Continent contends the intervening state court decision in Pennant only resolved a contractual question, “whether … Pennant was liable to True contractually,” rather than a coverage question. It argues its policy does not provide coverage for breach of contract damages, and also contends True Oil voluntarily settled without being either legally liable or an insured.

When an intervening decision of a state’s highest court has resolved an issue of state law directly contrary to this circuit’s prediction of how the state would resolve the same issue, a federal court of appeal is bound by the later state ruling, not by our prior panel’s interpretation of state law.

First, we cannot follow Mid–Continent’s semantic gymnastics, which characterizes the settlement payment as breach of contract damages rather than indemnification damages in order to deny coverage. To the contrary, the Wyoming Supreme Court found that True Oil’s $500,000 settlement payment to Mr. Van Norman was indemnification damages for bodily injuries.

Where an indemnitor is given notice of settlement discussions and chooses not to participate, an indemnitee is only required to prove potential liability to the original plaintiff in order to support a claim against the indemnitor. Potential liability exists unless an indemnitee faced “no exposure to legal liability.

Finally, we are bound by the Wyoming Supreme Court’s holding that the indemnity agreement is a “valid and enforceable part of the MSC” to the extent that it indemnifies True Oil for its vicarious liability. As such, it is an “insured contract” under Mid–Continent’s CGL policy, and the damages assumed therein are covered by the policy.

While the Wyoming Supreme Court did not interpret Mid–Continent’s insurance policy per se, it interpreted what damages were assumed in the “insured contract” for which Mid–Continent provided coverage. Significantly, it held “Pennant was well aware of True Oil’s vicarious liability risk … and agreed … to indemnify True Oil for any damages resulting therefrom. The court held that Pennant assumed liability for the attorneys fees True Oil paid to defend itself against claims for which, as it turned out, Pennant was 100% responsible.

True Oil’s 2001–2005 attorney fees are covered by the MSC, which necessarily triggers Mid–Continent’s coverage for “damages” that it agreed to cover in its CGL policy and the court affirmed the district court’s determination that True Oil is entitled to recover its settlement payment, attorney fees from 2001 to 2005, and pre- and postjudgment interest.

ZALMA OPINION

Insurance companies that agree to take on the indemnity agreements of its insureds must review the wording of their policy, the language of the indemnity contract, and the facts of the case to determine its obligation to its insured. The insurer in this case failed to accept the fact that their was a potential or actual claim of vicarious liability that would call their policy into effect. By failing to do so they were bound by the settlement reached by the indemnitee when it could have achieved a different result had it agreed to defend and indemnify.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

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

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

Look to National Underwriter Company for Mr. Zalma’s new books: the Mold Claims Coverage Guide; Construction Defects Coverage Guide; and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221 which is presently available.

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

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

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Chutzpah Redefined

Dr. Harron Loses Mississippi License

“Chutzpah” is a Yiddish word meaning unmitigated gall. It is often defined by example of a person who murdered his parents and at sentencing asked the court for mercy because he is an orphan.

Our readers will remember some of the work concerning fraudulent silicosis cases that I have written about here, here and in Zalma’s Insurance Fraud Letter.

In Mississippi State Bd. of Medical Licensure v. Harron, — So.3d —-, 2014 WL 4550162 (Miss.App., 9/16/2014) the Mississippi Court of Appeal was called upon to affirm or reverse the decision of the the Mississippi State Board of Medical Licensure (the Board) who had disciplined Dr. Ray A. Harron for his involvement in silicosis litigation in Texas, by ordering that he never attempt to renew his lapsed medical license. As part of the discipline, the Board notified a national physician’s data bank that Dr. Harron’s actions had the potential to harm patients.

Although Dr. Harron agreed to the discipline, he disagreed that his actions as an expert witness had the potential to harm patients. He therefore appealed the Board’s action to the Hinds County Chancery Court. The chancery court reversed the Board’s action, ruling that it had no jurisdiction, that its ruling lacked substantial evidence, and that its notification to the physician’s data bank was arbitrary and capricious. Dr. Harron redifined “chutzpah” by claiming that he could testify as an expert after being found to have wrongfully diagnosed people with silicosis and asbestosis without even looking at the x-rays. He gave up his license in Texas and wished to keep his license in Mississippi.

FACTS

The facts are egregious. Dr. Harron was issued a medical license in Mississippi in 1995. It lapsed in 2007. Dr. Harron stopped seeing patients in 1995, and started working for Netherland & Mason (N & M), a Mississippi company that screened potential plaintiffs for asbestosis and silicosis-related diseases. In 2001, Dr. Harron shifted focus to screening persons for potential silicosis claims.

The filing of silicosis cases involving thousands of claimants led to the creation of a multi-district litigation (MDL) proceeding in Texas, styled In re Silica Products Liability Litigation, 398 F.Supp.2d 563 (S.D.Tex.2005). This case, presided over by United States District Judge Janis Graham Jack, involved 111 cases totaling over 10,000 individual plaintiffs. A Daubert v. Merrell Dow Pharm. Inc., 509 U.S. 579 (1993) hearing was held in February 2005, at which Dr. Harron, and other witnesses, testified.

Dr. Harron was involved in performing “B-reads” or producing diagnosing reports on 6,700 of the claimants in the Texas litigation. He was listed as the diagnosing physician on 2,600 of these claims. Dr. Harron testified about his practices of letting medically untrained secretaries and typists interpret his reports, insert a diagnosis, stamp his signature on the reports, and send them out with no review by him. He testified that he “might” have given a copy of his signature stamp to N & M when he “got behind on typing.” He testified that “anybody” could have stamped his signature to reports. While being questioned about how he could diagnose a specific claimant with asbestosis and later diagnose the same claimant with silicosis based on reading the same x-ray, he asked for a lawyer to represent him, and all questioning of him was halted by the judge. Judge Jack noted during Dr. Harron’s testimony that N & M had a stack of blank reports pre-signed by Dr. Harron.

At the conclusion of the hearing, the court ruled that Dr. Harron’s proposed expert testimony (and that of some other doctors) was unreliable and excluded it. Specifically, the court found that Dr. Harron relied on medical histories performed by lawyers and nonmedical personnel, which were “so deficient as to not even merit the label. The court further found that Dr. Harron’s (and other doctors’) review of x-rays lacked quality-control measures, and produced results that were described by other experts as “staggering,” “implausibl[e],” “unsound,” and “stunning and not scientifically plausible.  Judge Jack found that Dr. Harron relied upon occupational/exposure histories and medical histories which fail to even merit the title, “history,” let alone meet the generally-accepted scientific methodology for diagnosing silicosis.

Perhaps even more stunning Dr. Harron did not read, review or even see any of the 99 diagnosing reports bearing his name. This “distressing” and “disgraceful” procedure does not remotely resemble reasonable medical practice.

In early 2007, the Texas Medical Board instituted disciplinary proceedings against Dr. Harron based upon his activities in relation to the silicosis litigation. As a result of those proceedings, Dr. Harron entered into an agreed order dated April 13, 2007, in which he surrendered his Texas medical license, and agreed not to seek its renewal.

In July 2007, the Board also instituted disciplinary proceedings against Dr. Harron. During these proceedings, Dr. Harron entered into an agreed order, approved by the Board in November 2007, in which he agreed to never seek renewal of his Mississippi medical license and to pay all costs of the investigation and disciplinary hearings up to $5,000. The agreed order expressly stated that the results of the proceeding would be reported to the National Practitioners Data Bank (NPDB), a data bank that monitors disciplinary actions involving doctors.

The Board submitted an Adverse Action Report to the NPDB. In the report a question was asked: “Is the Adverse Action Specified in This Report Based on the Subject’s Professional Competence or Conduct, Which Adversely Affected, or Could Have Adversely Affected, the Health or Welfare of the Patient?” The Board answered “Yes” to this question. Dr. Harron filed a written dispute with the NPDB, claiming that he acted only as an expert witness and not in a doctor-patient relationship, and that as a result, his actions could not have harmed a patient. Dr. Harron then refused to pay the $5,000 in costs.

In 2009, the Board held a hearing after which it concluded that Dr. Harron had violated Mississippi Code Annotated section 73–25–29(8)(d) and (13) (Rev.2012), as well as Mississippi Code Annotated section 73–25–83 (Rev.2012), and reaffirmed its report to the NPDB. Dr. Harron was again ordered to pay the $5,000 in costs.

At the hearing conducted in January 2012, Dr. Harron admitted his prior testimony at the Daubert hearing but defended his actions as not being the practice of medicine. He admitted that he had pleaded the Fifth Amendment in testifying before congressional hearings on the silicosis mass-tort litigation, and he volunteered that he was the target of an ongoing criminal grand-jury investigation in New York involving asbestosis.

At the conclusion of the hearing, the Board found Dr. Harron guilty of:
Count three—unprofessional conduct likely to deceive, defraud or harm the public, including but not limited to, pre-signing blank ILO forms and allowing them to be filled out at a later date (without further review):

Count four—unprofessional conduct likely to deceive, defraud or harm the public, including but not limited to, allowing or otherwise instructing non-medically trained, non-allied health care personnel to interpret medical records and render medical diagnosis under his signature or signature stamp;

Counts five and six—having restrictions imposed on his license to practice medicine in another state or jurisdiction while under disciplinary investigation by a state licensure board in response to allegations related to conduct in silica litigation.

By order dated January 19, 2012, the Board permanently barred Dr. Harron from renewing his medical license and ordered him to pay the costs of the investigation, up to $10,000. The Board’s order stated that its previous answer on the NPDB form that Dr. Harron’s actions could have adversely affected the health or welfare of the patient would remain unchanged.

The issues the appellate court considered on appeal are: (1) whether the Board had jurisdiction to discipline Dr. Harron for his activities as an expert witness in Texas, and whether its decision was based on substantial evidence, and (2) whether the Board’s findings were arbitrary and capricious.

DISCUSSION

Contrary to the chancellor’s ruling, the Board’s jurisdiction to discipline doctors is not limited to situations where the doctor is actually practicing medicine on a particular patient. For example, in Montalvo v. Mississippi State Board of Medical Licensure, 671 So.2d 53, 57–58 (Miss.1996), the Board’s action in refusing to reinstate the license of a physician who had been convicted in federal court of money laundering was upheld.

The relevant question is whether Dr. Harron’s activities in the Texas litigation were “likely to deceive, defraud or harm the public.” Although the statute is not limited to the “Mississippi public,” it bears noting that a great many of the patients targeted for Dr. Harron’s unprofessional diagnoses were from Mississippi. Section 73–25–29(8)(d) authorizes the Board to regulate any Mississippi-licensed physician whose conduct (medical, ethical, or otherwise) poses a threat of harm to the public.

The chancellor noted that “[t]he charges against Dr. Harron involve his work as an expert witness and not as a treating physician to any specific patient.” This ignores that Dr. Harron’s testimony was as a physician. He was the actual diagnosing physician on a great many of the claims. Even though Dr. Harron testified: “[I]t’s a legal standard and not a real diagnosis,” he was presented as the diagnosing physician on 2,600 claims. He specifically testified at the Daubert hearing that each diagnosis was based upon: “I feel within a reasonable degree of medical certainty that this individual has [the particular disease].”

He testified that he stood by his diagnoses. Under direct questioning from the district judge, referring to his reports claiming each person had silicosis, Dr. Harron was asked: “Is this the diagnosis to be relied upon by other medical people and the patient?” Dr. Harron answered: “Yes.” His participation in the Texas litigation included his diagnosing patients.

Although the Board has authority to discipline a doctor for his actions outside the actual practice of medicine, Dr. Harron was, in fact, providing medical services to 2,600 patients. He was not simply testifying as an outside consultant with no connection to a patient, as when a doctor testifies as an expert on the standard of care. He was testifying as the diagnosing physician for thousands of patients. He issued reports claiming that each patient whose x-rays he reviewed was suffering from silicosis.

The Board had jurisdiction to discipline Dr. Harron for his actions in diagnosing thousands of patients with silicosis.

The Board’s actions were based on substantial evidence. Dr. Harron admitted to the conduct the Board found to violate counts three and four of the charging affidavit. Although Dr. Harron attempts to distinguish a “legal” opinion from a “medical” opinion, he was not offered as a legal expert; he was offered as a medical expert. His medical license gave him the privilege of offering that opinion. That license comes with a responsibility to his profession and the public at large, which the Board is empowered to oversee.

Counts five and six involved discipline imposed by the Texas Medical Board. Dr. Harron did not deny counts five and six (having surrendered his license and having been disciplined by the Texas licensing authority). The chancellor acknowledged this. Concerning these counts, the chancellor stated: “This Court does not ignore the undisputed facts that Dr. Harron’s license was restricted in another state.” This alone gives the Board the power to discipline Dr. Harron.

ARBITRARY AND CAPRICIOUS FINDINGS

There can be no real dispute that misdiagnosing someone with having a deadly disease such as silicosis has the potential to harm that person. As Judge Jack noted: “Then there is the toll taken on the misdiagnosed Plaintiffs. If these Plaintiffs truly have abnormal x-rays, then the radiographic findings may be caused by a number of conditions other than silicosis. And when the diagnosing doctors fail to exclude these other conditions, it leaves the Plaintiffs at risk of having treatable conditions go undiagnosed and untreated. ¶ In the case of the Plaintiffs who are healthy, at least some of them can be expected to have taken their diagnoses seriously. They can be expected to have reported the diagnoses when applying for health insurance and life insurance—potentially resulting in higher premiums or even the denial of coverage altogether. They can be expected to report the diagnoses to their employers and to the Social Security Administration. And they can be expected to report the diagnoses of this incurable disease to their families and friends. ¶  These people have been told that they have a life-threatening condition…. When dealing with this MDL and its 10,000 Plaintiffs, it is easy to forget that ‘statistics are human beings with the tears wiped off.’ … But it should not be forgotten that a misdiagnosis potentially imposes an emotional cost on the Plaintiff and the Plaintiff’s family that no court can calculate.”

It is possible that some of the patients that Dr. Harron diagnosed with silicosis may actually have that disease. That does not excuse his unprofessional conduct in cranking out thousands of reports diagnosing the disease with no real attempt to differentiate those who actually have the disease from those with some remote possibility of having the disease. His actions attacked the integrity of the legal system, had at least the potential to harm his claimant/patients, and were a discredit to his profession, and to his Mississippi medical license.

The court of appeal found that the Chancery court erred in ruling that the Board lacked jurisdiction and further erred in ruling that the Board lacked substantial evidence to discipline Dr. Harron and that its ruling was arbitrary and capricious. Accordingly, the order was reversed and Dr. Harron’s license was permanently removed.

ZALMA OPINION

Dr. Harron participated in a massive fraud finding impossibilities like a single patient suffering from silicosis and asbestosis, after admitting to the fraud in a deposition before Judge Jack in Texas, decided he needed a lawyer; voluntarily gave up his license in Texas as a result, and then tried to keep his license in Mississippi. When that effort failed he continued to act as an expert witness – claiming with utmost chutzpah – that the testimony was not medical but was legal even though he was testifying to a diagnosis of a disease.

Litigation continues