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: 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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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.

Posted in Zalma on Insurance | Leave a comment

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.

Posted in Zalma on Insurance | Leave a comment

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.

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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.

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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.

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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.

Posted in Zalma on Insurance | Leave a comment

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.

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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.

Posted in Zalma on Insurance | Leave a comment

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

Posted in Zalma on Insurance | 1 Comment

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.

Posted in Zalma on Insurance | Leave a comment

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.

 

Posted in Zalma on Insurance | 1 Comment

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 with regard to the silicosis cases and one can only wonder at the quality of a lawyer who, with his record, would retain the services of Dr. Harron as an expert witness since defense counsel would destroy his credibility with reference to the silicosis cases and the record from that case.

One can only wonder what the U.S. Attorneys in Texas are thinking to allow Dr. Harron to continue to provide expert testimony about any medical diagnosis.

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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Lead Paint Only Pollutant When It Leave Wall

Lead Paint Injury Always Excluded by Pollution Exclusion

Insurers have no interest in insuring against the risk of loss or injury by pollutants. They have drafted all-inclusive exclusions sometimes know as the absolute pollution exclusion. Regardless, insureds faced with claims of pollution seek to convince courts that the exclusion does not apply.  In State Farm Fire & Casualty Company v. Dantzler, — N.W.2d —-, 289 Neb. 1, 2014 WL 4477236 (Neb., September 12, 2014)  the Nebraska Supreme Court was called upon to deal with whether lead paint poisoning was excluded by a liability insurance policy.

FACTS

State Farm Fire & Casualty Company (State Farm) brought an action for declaratory judgment, claiming its rental dwelling policy issued to Jerry Dantzler excluded coverage for personal injuries allegedly sustained by Dantzler’s tenant as a result of exposure to lead-based paint. In cross-motions for summary judgment, State Farm and Dantzler requested a determination whether a policy exclusion precluded coverage for the tenant’s personal injury claim. The district court sustained State Farm’s motion for summary judgment and concluded as a matter of law that the pollution exclusion barred coverage under State Farm’s policy.

In State Farm Fire & Cas. Co. v. Dantzler, & Cas. Co. 564, 842 N.W.2d 117 (2013) the Nebraska Court of Appeals reversed the entry of summary judgment, concluding that in the absence of proof how the tenant was allegedly exposed to lead-based paint, it could not determine as a matter of law whether the pollution exclusion barred coverage. It reasoned that whether the alleged exposure to lead-based paint occurred through a “discharge, dispersal, spill, release or escape,” as specified in the exclusion, was a factual determination that depended upon the manner of exposure.

THE POLICY

Dantzler owned a rental property in Omaha, Nebraska. He maintained insurance on the rental property with a rental dwelling policy issued by State Farm. The policy excluded: “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants: ¶ (1) at or from premises owned, rented or occupied by the named insured; ¶ …. As used in this exclusion: ¶ …. ‘[P]ollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

David Chuol (David) and his minor child, Chuol Geit (Geit), were tenants of Dantzler’s rental property. In March 2011, David and Geit sued Dantzler in the Douglas County District Court, alleging that Geit was exposed to high levels of lead poisoning due to lead paint contamination within the rental property. Dantzler tendered the claim to State Farm. It retained counsel to represent Dantzler but reserved its right to deny coverage.
State Farm filed an action for declaratory judgment against Dantzler, David, and Geit. It asked the district court to determine whether its policy excluded coverage for the lead-based paint claim being brought against Dantzler. State Farm and Dantzler filed cross-motions for summary judgment.

The Court of Appeals concluded that lead found in paint was a pollutant within the meaning of the pollution exclusion but that there was a genuine issue of material fact whether there was a “discharge, dispersal, spill, release or escape,” which therefore prevented the entry of summary judgment in favor of State Farm. It reversed the district court’s entry of summary judgment and remanded the cause for further proceedings.

ANALYSIS

The Supreme Court was presented with the question whether the manner in which Geit was allegedly exposed to lead-based paint is an issue of material fact that prevents summary judgment in favor of State Farm. If a genuine issue of fact exists, summary judgment may not properly be entered. However, not all issues of fact preclude summary judgment, but only those that are material.

The outcome of the case depends upon whether Geit’s alleged injuries were caused by a “discharge, dispersal, spill, release or escape” of lead-based paint such that the pollution exclusion bars coverage.

The Nebraska Supreme Court found persuasive the reasoning of other courts that the terms “discharge,” “dispersal,” “spill,” “release,” and “escape” encompass all possible movements by which harmful exposure to lead-based paint occurs. Accordingly, the manner of exposure to lead-based paint is not a material fact that prevents summary judgment, because the manner of exposure does not affect whether there was a “discharge, dispersal, spill, release or escape” for purposes of the pollution exclusion.

Among state and federal courts, there are two general approaches to the application of pollution exclusions. Some courts interpret pollution exclusions as barring coverage for only those injuries allegedly caused by traditional environmental pollution, as understood historically. Other courts interpret pollution exclusions as excluding coverage for all injuries allegedly caused by pollutants, because the exclusions are unambiguous as a matter of law. Adoption of a limited, environmental approach cannot be dismissed as inconsequential.

The Nebraska Supreme Court specifically considered and rejected the limited, environmental approach.  It focused on the language of the exclusion and found as a matter of law that it unambiguously supported a broader interpretation. The language of the policy does not specifically limit excluded claims to traditional environmental damage; nor does the pollution exclusion purport to limit materials that qualify as pollutants to those that cause traditional environmental damage. The definition of “pollutant” includes substances that are harmful or toxic to persons, property or the environment.  By including “the environment” as a separate entity that could suffer harm from a pollutant, the pollution exclusion does not limit its scope of application to environmental pollution.

The broad interpretation given pollution exclusions is not compatible with the limited, environmental approach employed by the Supreme Court.  The two approaches cannot be reconciled. Therefore, in light of Nebraska case law, the Court of Appeals erred.

ALL MANNERS OF EXPOSURE TO LEAD-BASED PAINT INVOLVE DISCHARGE, DISPERSAL, SPILL, RELEASE, OR ESCAPE

Lead paint starts out as a liquid and becomes a solid after it is applied and dries. Over time, lead paint may chip and flake becoming solid “waste.” When it begins to deteriorate, it may give off fumes. When it begins to disintegrate, it becomes dust–fine, dry particles of matter which, like smoke and soot, can float in the air affecting human respiration until it eventually settles on the ground.

Based on this understanding of the movement in lead paint poisoning, the court did not view lead-based paint as always being a contaminant, but, rather, as having the potential to contaminate air, water, and the human body when it disperses. Lead paint that never leaves a wall or ceiling does not cause harm. Lead-based paint is an inchoate contaminant before it breaks down (unless it is directly discharged, say, into water); it becomes both an irritant and a contaminant after it breaks down into chips, flakes, dust, or fumes.
Because “discharge,” “disperse,” and “escape” could be either transitive or intransitive verbs, the pollution exclusion encompassed movement that was either intentional and purposeful or accidental and involuntary. Lead-based paint is not toxic to a person until it breaks down into a form that can be taken into the body and absorbed.

The separation of lead-based paint from a painted surface is inherent in every manner of exposure to lead-based paint. The terms “discharge,” “dispersal,” “spill,” “release,” and “escape” unambiguously encompass the process by which lead-based paint moves from a painted surface into a form that can be absorbed by a person’s body and cause lead poisoning. Because the separation of lead based paint that is inherent in every case of lead paint poisoning the pollution exclusion is not ambiguous as applied to lead-based paint and a determination of the specific process of exposure in any particular case is not material to application of the exclusion. Regardless of how the lead-based paint is separated from the painted surface or what form it takes once it is separated, an individual’s exposure to and absorption of that lead-based paint results from the “discharge, dispersal, spill, release or escape” of a pollutant. Thus, it is not necessary to differentiate between the processes by which exposure occurs. It is not material to application of the pollution exclusion to determine the manner in which the injured party was allegedly exposed to lead-based paint.

State Farm was entitled to judgment as a matter of law that coverage of the lead-based-paint claim against Dantzler was barred by the pollution exclusion in the policy. Once State Farm demonstrated the existence of a claim that alleged injury from lead-based paint, it could be concluded as a matter of law that the claim for which Dantzler sought coverage was one that involved an “alleged … discharge, dispersal, spill, release or escape” of a pollutant. Lead-based paint cannot cause injury unless it has separated from the painted surface. Regardless of the specific manner of exposure, an allegation that exposure to lead-based paint has caused injury necessarily contains an implicit claim that the paint separated from the original surface.

The pollution exclusion in Dantzler’s policy barred coverage of injury arising from an “alleged … discharge, dispersal, spill, release or escape” of a pollutant, such as lead-based paint. Therefore, because there was no factual question as to the existence of a claim that alleged injury from lead-based paint, the district court did not err in concluding as a matter of law that the pollution exclusion barred coverage of that claim.

ZALMA OPINION

The court of appeal tried to find some way to provide coverage for Dantzler by concluding it needed to know the method by which the lead was ingested. The Supreme Court reversed because there is no manner in which the lead could be ingested without it first flaking off the wall in flakes, fine particles or a gas. All were either a “discharge, dispersal, spill, release or escape of a pollutant.” Ingestion of lead from lead paint is always excluded by the type of exclusion in the State Farm policy regardless of the means by which it was ingested.

 

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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Excluded Driver Eliminates Coverage

Negligent Entrustment Does Not Create Coverage

Some families have a mix of good and bad drivers. One may have no accidents and citations while the other has several accidents and citations. An insurer is entitled to charge premium based upon the risk of loss presented by the proposed insured. The poor driver will invariably be charged a higher premium than the good driver.

Auto insurance policies, can, with the agreement of the insured and the insurer, exclude specific persons from coverage to allow the named insured to obtain insurance at a lower premium than would have been charged had a high risk driver remained a covered person.

In Normand v. Grayson, — So.3d —-, 2014 WL 4537486 (La.App. 1 Cir. 9/15/14), an excluded driver caused an accident. The insurer refused coverage because the driver was an excluded driver. The Plaintiff sought coverage based on the allegation that the named insured had negligently entrusted the excluded driver with the vehicle and was, therefore, covered for the injuries caused.

FACTS

Plaintiff, Lacey L. Normand, filed a petition for damages for the injuries she sustained in an automobile accident that occurred on October 16, 2004, with a vehicle owned by defendant, Cheri Grayson, and driven by her husband, Stephen. The Grayson vehicle was insured by a vehicle insurance policy issued to Cheri by USAgencies Casualty Insurance Company, Inc., (USAgencies) but Stephen was an expressly excluded driver. The trial court denied a motion for summary judgment filed by USAgencies, reasoning that Cheri was potentially liable to Normand for her negligent entrustment of her vehicle to Stephen. USAgencies appealed.

USAgencies filed a motion for summary judgment, urging entitlement to dismissal from the lawsuit since Stephen, a specifically excluded driver under the policy it issued to Cheri, was operating the vehicle at the time of the accident. The trial court granted summary judgment on this basis but also concluded that Normand could pursue her claims against USAgencies as a result of Cheri having negligently entrusted her vehicle to Stephen.

In this review, USAgencies contends the named-driver exclusion precludes coverage to the named insured for negligently entrusting a covered vehicle to an explicitly excluded driver. Normand asserts that as a separate independent tort arising out of ownership of a vehicle, USAgencies cannot exclude negligent entrustment claims from coverage under.

STATUTORY SCHEME

The statutory scheme provided by the Louisiana Motor Vehicle Safety Responsibility is intended to attach financial protection to the vehicle rather than the operator. Accordingly, Louisiana’s automobile insurance law requires omnibus coverage in favor of any person using an insured vehicle with the permission or consent of the name insured. In 1992, the legislature created an exception to the general rule of omnibus coverage which permits a named insured to exclude from coverage a resident of his household.
The statute provides, in pertinent part: “[A]n insurer and an insured may by written agreement exclude form coverage the named insured and the spouse of the named insured. … It shall not be necessary for the person being excluded from coverage to execute or be a party to the written agreement.”

The statute grants the automobile insurer and the insured the statutory authority to contractually exclude a resident of the insured’s household from coverage under the automobile policy. The purpose of the statute is to allow the named insured the option of paying a reduced premium in exchange for obtaining an insurance policy that affords no coverage for an accident while a covered vehicle is being operated by an excluded driver.

In this case, the insurance policy provided coverage to Cheri from May 1, 2004 to October 31, 2004. It is undisputed that her husband Stephen was a resident of Cheri’s household and was an excluded operator under the policy. Additionally, the policy provides that “Excluded Persons” are classified as “persons that live in my household and I request in writing to exclude these persons from any benefit of this policy, (i.e. repair of listed vehicle, any investigation of an accident, or any lawsuit brought against me or the excluded person) USAgencies Casualty Insurance Company will not be responsible for any damage caused by an excluded person or non-listed household resident not found on this application.”

ANALYSIS

The statutory language at issue clearly allows the insured and insurer to exclude from coverage any person the parties specifically name in the exclusion and does not limit or restrict the ability of the parties to the contract to exclude coverage for a named person based on the age of the driver. The sole purpose of this type of exclusion is premium reduction.  Therefore, an excluded driver endorsement can enable an insured, who would otherwise have difficulty obtaining insurance coverage for a vehicle, to obtain insurance at a reasonable rate.

As such, where an excluded driver endorsement has been validly executed, refusing to recognize the validity of the exclusion results in the imposition on the insurer of a coverage obligation not commensurate with the premium paid and, thus, defeats the purpose of the omnibus coverage exception provided for in the statute. Allowing coverage under the theory of negligent entrustment would unjustly deprive the insurer of the benefit of its bargain by allowing an insured to purchase a vehicle liability policy with an excluded driver endorsement, permit the excluded driver to drive the insured vehicle, and reap the benefits of the policy. By enacting the statute the legislature permitted the exclusion of high-risk drivers from coverage in exchange for a reduced premium. Accordingly, the policy issued to Cheri Grayson does not afford coverage for negligent entrustment of her insured vehicle to her husband Stephen, an explicitly excluded driver.

The trial court’s denial of USAgencies’s motion for summary judgment on the issue of Cheri Grayson’s alleged negligent entrustment of her vehicle to her husband, Stephen, could not withstand appellate review. Judgment was,  therefore, rendered in favor of USAgencies Casualty Insurance Company, Inc., granting summary judgment based on a finding that the named-driver exclusion in a vehicle liability insurance policy has the effect of also precluding coverage to the named insured for any claims of negligent entrustment of the covered vehicle to an explicitly excluded driver.

ZALMA OPINION

Sometimes, even the absolutely obvious exclusion, fails before a trial court where the best intentions of the trier of fact is to protect the injured. In this case plaintiff’s counsel had a creative argument that he was not suing for the negligent driving of the operator of the vehicle but was suing his wife for negligently entrusting her husband – a less than perfect driver – with the vehicle. The argument, although it might gain a tort judgment against the spouse who entrusted the vehicle, cannot create insurance coverage where none existed and would defeat the purpose of such an exclusion.

 

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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Arson Fraud Fails

Zalma’s Insurance Fraud Letter — September 15, 2014

In the 18th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on September 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.    Aron & Insurance Fraud Fails
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.    Love Overcomes Murder Attempt but Defendant Still Gets 31 Years.
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.    TPA Is a Proper Bad Faith Defendant – September 10, 2014
2.    Agent Only Needs to Do What He Is Asked – September 9, 2014
3.    The Tiffany Kid – September 8, 2014
4.    Insurance Agent’s Duties to Insured – September 5, 2014
5.    Intentional Act Exclusion and Homicide – September 4, 2014
6.    Penny Wise, Dollar Foolish – September 3, 2014
7.    No Help – No Coverage –  September 2, 2014
8.    Fraud Proceeds Apace – September 1, 2014
9.    Policy Condition Rules – August 29, 2014
10.    Insurer’s Lose Right to Counsel in Washington – August 28, 2014
11.    False Imprisonment by Employer Excluded – August 27, 2014
12.    Policy Must Incorporate Statute Terms – August 26, 2014
13.    No Proof of Loss – No Coverage – August 25, 2014
14.    Not Disabled Enough – August 22, 2014
15.    UIM Limitation Acrues At Denial – August 21, 2014
16.    Good Intentions Abuse Basic Rights – August 20, 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.

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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The Mold Claims Coverage Guide

New from Barry Zalma

The Mold Claims Coverage Guide was written to help anyone faced with claims for property damage or bodily injury as a result of exposure to mold, fungi or bacterial infestations.

Although mold and fungi have received bad publicity of late—which brought about the publication of this book—molds and fungi are not all bad. In fact, most of them are healthy, delicious, and do no damage.

Articles abound concerning the types of organisms that fit under the common designation of mold and fungi. For example, one interesting article[1] explains how the organisms that are part of the fungal lineage include mushrooms, rusts, smuts, puffballs, truffles, morels, molds, and yeasts, as well as many less well-known organisms. Dr. Blackwell and her co-authors report that more than 70,000 species of fungi have been described.

The article also establishes that fungi “constitute an independent group equal in rank to that of plants and animals.” Since fungi are neither plant nor animal they are difficult to classify. Fungi share with animals and plants the ability to absorb various products for nutrition. Dr. Blackwell explains, however, that fungi, unlike plants and animals, live in their own food supply and simply grow into new food as they eat away the nutrients in their local environment.

Fungi move by extending filaments from the main body. When one of the filaments contacts a food supply, according to Dr. Blackwell “the entire colony mobilizes and reallocates resources to exploit the new food. Should all food become depleted the mold or fungi sends out spores. Although the fungal filaments and spores are microscopic, the colony can be very large with individuals of some species rivaling the mass of the largest animals or plants.”

Litigation seldom results from visible fungi like mushrooms. Rather, claims and litigation arise from fungal spores that are either actively or passively released for dispersal. In almost every square meter of the world, fungi or mold species are reproducing by dispersing spores through the air. Fungi that disperse their spores through the air do so in numbers that, if countable, would be in units numbering in billions. Some fungi, Dr. Blackwell teaches, are rain splash or flowing water dispersed.

Not all members of the family are harmful. Many molds and fungi are used as part of the human diet, notably in the processing and flavoring of foods (e.g., baker’s and brewer’s yeasts, Penicillia in cheese making) and in production of antibiotics and organic acids.

According to Dr. Blackwell’s article, the largest known “basidioma (mushroom or fruiting body) was that of a Rigidioporus Ulmarius hidden-away in a shady corner of the Royal Botanic Gardens, Kew, Richmond, Surrey, England. The weight of the fruiting body was estimated to be 284 kg (625 pounds). Unfortunately, it began to rot at the edges because the hyphal body of the fungus digested away its elm root substrate.” The fungi is the root of its own destruction if it digests its food supply. Many claims of property damage by fungi result when the structure collapses after the fungi digests all its food supply and destroys its structural integrity.

Molds are found wherever there is moisture, oxygen, and something to feed on. All molds require some form of moisture to grow, although the amount of moisture varies for different species. Molds also need an organic source of food. Although they appear to grow on glass, tile, stainless steel, cookware, etc., they are generally feeding off some organic source deposited on these surfaces (oils, film, dirt, skin cells, etc.).

Mold has made its way into people’s homes. The term “toxic mold” is misleading as it implies that certain molds are toxic. In fact, certain types of molds produce mycotoxins that can have an adverse effect on people whose immune systems are reduced due to illness or age.

One of the most effective means of eliminating an infestation of mold is to remove its source of moisture or the organic sources it uses for food. To destroy a mold infestation at least one of its three elements must be removed from the environment: moisture, oxygen, or something on which it can feed.

To buy the book note

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

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Insurance Claims – A Comprehensive Guide

An Excerpt from A New Book

In my newly released book, Insurance Claims: A Comprehensive Guide, I discuss in two volumes what I believe is everything you need to know about property and liability insurance policies. The following is an excerpt from the book:

Property

Insurance policies are contracts. An insurer and an insured agree that the insurer will provide indemnity to the insured as a result of a contingent or unknown event that causes loss to the insured. The language of insurance contracts comes in multiple formats with an almost infinite variety of terms and conditions. It is recognized that an insurance contract can be written to contain nearly any terms that the parties to it choose. In State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 313 (Ala. 1999), the court stated that “insurance companies and their insureds are free to agree to any terms in a contract so long as they do not offend some rule of law or contravene public policy.”

In almost identical language, the Wisconsin Supreme Court said that “parties are at liberty to enter into insurance contracts which specify the coverage afforded as long as the contract terms do not contravene state law or public policy.”

Property insurance does not insure property. It insures people who have an interest in real or personal property and who face the risk of losing that property to unknown or contingent perils. Most property insurance policies insure against the risk of loss by perils like fire, lightning, windstorm, hail, earthquake, or flood. The risk of loss is spread among the customers of the insurer so that the cost of insurance is affordable. It is “first party” insurance against risks faced by property in which the insured (the first party to the contract of insurance) has an interest and by the loss of which the insured would be damaged. First party property insurance is a contract of personal indemnity. It does not follow title to the land.

The Contract of Personal Indemnity

The insurance claims adjuster (the adjuster) must always ascertain that the owner of the property is the person insured and that the person insured has an interest in the property. Failure to do so could result in the insurer paying the wrong person. Proceeds of a policy upon the interest of an insured are not subject to the claims of others who have an interest in the property.

For example, Mrs. Jones is allowed to live rent free in a home owned by her children. Mrs. Jones purchases, in her name alone, a policy of homeowners insurance, insuring her against the risks of loss to the structure and its contents. If a fire destroys the house, Mrs. Jones can recover because her interest in the house is an “insurable interest.” This means she has an interest in the property sufficient that she will suffer a loss if the property is lost or damaged. Mrs. Jones’s children, the owners of the home, also have an insurable interest in the home, but are not insured under Mrs. Jones’s policy and may not recover any proceeds from it.

In California, as in most states, “[i]n common parlance, we speak of a house as being insured, but, strictly speaking, it is not the house but the interest of the owner therein that is insured, and, whether that interest is founded upon a legal title, an equitable title, a lien, or such other lawful interest therein as will produce a direct and certain pecuniary loss to the insured by its destruction, he has an insurable interest therein.”[3]

Only a person who is both an insured and who has an insurable interest may obtain indemnity from a policy of first party property insurance. In Russell v. Williams, 58 Cal. 2d 487, 374 P.2d 827, 24 Cal. Rptr. 859 (Cal. 10/04/1962), the California Supreme Court stated the rule:

It is a principle of long standing that a policy of fire insurance does not insure the property covered thereby, but is a personal contract indemnifying the insured against loss resulting from the destruction of or damage to his interest in that property.

As a contract of personal indemnity, the policy only insures the person named in the policy against certain risks of loss of property in which that person has an interest. A person who has an interest in the property but is not named as an insured cannot recover under the policy. Similarly, a person named on a policy who has no interest cannot recover.

Liability

Like property insurance, liability insurance is protection provided to the insured against the risks of loss faced in every day living. Unlike the risks taken by property insurers, the risks of loss taken by liability insurers are those that are the result of acts or omissions of the person insured that will cause him or her to be sued or pay damages to third persons. Liability insurance is purchased to help protect against the risk of financial ruin from accidents or contingent or unknown events. An accident is an event that is neither expected nor intended by the person to whom it happens.

Liability insurance is known as third party insurance. The first party is the insured; the second party is the insurer; and the third party is the person making a claim against an insured. Third party insurance is insurance against risks faced by the individual insured for damages he or she may be required to pay as a result of an accident caused by his or her act or omission to act.

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.

* * *

(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)

This legislation is a rather detailed summary of years of common law defining the purpose and types of liability insurance that have evolved since the 13th century.

The book is available from National Underwriter Company. The listing below is the information you need to order the book.

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

In addition I wrote two other books that combined with the Insurance Claims: A Comprehensive Guide, National Underwriter has published:

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

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New From Barry Zalma

I am proud to announce the publication by National Underwriter Company’s Summit Professional Networks publication of three of my books in what they have termed the Zalma Insurance Claims Library:

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

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TPA Is a Proper Bad Faith Defendant

Insurance Expert May only Testify to Industry Standards

A disability claim requires proof of the existence of the policy, that there is a disability as defined by the policy, and if improperly denied, evidence of bad conduct.

BACKGROUND

Lisa McClain (“McClain”) worked as a third grade teacher at Logansport Community School District (“Logansport”) for approximately 13 years. In 2006, she suffered a stroke and was able to return to work the following year. She worked until 2010, but then McClain claimed that she was unable to work due to disability. McClain alleges that she had a long term disability benefits policy (“Policy”) issued by Madison National Life Insurance Company (“Madison”) and administered by Disability Reinsurance Management Services, Inc. (“DRMS”), under which Madison agreed to pay long term disability benefits in the event McClain became disabled. In McClain v. Madison Nat. Life Ins. Co., Slip Copy, 2014 WL 4377458 (N.D.Ind., Sept. 4, 2014) the District Court resolved some of the issues.

THE POLICY

The Policy was issued with an effective date of January 1, 2010. McClain alleges that she became totally disabled on January 22, 2010, but Madison has refused to pay her claim.

The Policy under which McClain seeks long-term disability benefits was issued to LCS with an effective date of January 1, 2010.  The Policy’s insuring clause states: “If you become disabled while insured under the Group Policy, we will pay LTD Benefits according to the terms of your Employer’s coverage under the Group Policy, after we receive satisfactory Proof of Loss.”  According to Defendants, the Policy’s definition of Disability or Disabled can be found in Amendment 1 and is as follows: “1. during the Elimination Period and your Own Occupation Period you are, as a result of Physical Disease, Injury, Mental Disorder, Substance Abuse or Pregnancy, unable to perform one or more of the Material Duties of your Own Occupation ….; or ¶ 2. during the Elimination Period and the first 24 months you are Disabled with Work Earnings, your Work Earnings are less than 99% of your Predisability Earnings as a result of Physical Disease, Injury, Mental Disorder, Substance Abuse or Pregnancy, and you are incapable of earning 85% or more of your Predisability Earnings….”

The Policy defines “Own Occupation” as “the occupation you routinely perform for the Employer at the time Disability begins.” Further, the Policy provides that, “[w]e will look at your occupation as it is normally performed in the national economy, instead of how the work tasks are performed for a specific employer or at a specific location.”

McClain has sued Defendants Madison and DRMS asserting that Madison breached their contract and the covenant of good faith and fair dealing. McClain further alleges that both Madison and DRMS breached their fiduciary duties owed to McClain.

DISCUSSION

A party who bears the burden of proof on a particular issue may not rest on its pleading, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact which requires trial. Therefore, if a party fails to establish the existence of an essential element on which the party bears the burden of proof at trial, summary judgment will be appropriate.

FACTS

McClain’s Employment with Logansport School Corporation

Mrs. McClain had instructional time well organized and paced to sustain the interest of students. She kept the discussion moving by encouraging students to voice their thoughts and opinions and ask questions. Transitions were smooth and student behavior was monitored. Mrs. McClain maintained a very pleasant learning environment for students. Her classroom has a warm and inviting atmosphere.

In October of 2006, McClain suffered a cerebrovascular accident (“CVA”) or stroke that left her with permanent brain damage. As a result, McClain spent four weeks in rehabilitative therapy. In February and March of 2007, McClain received neuropsychological testing from Theresa Strout, HSPP Ph.D. (“Dr.Strout”) to assess her cognitive function. Dr. Strout opined that McClain’s intellectual ability, executive functions, and attention/memory functions were all within “normal”—that is, low-to-high average—ranges. Dr. Strout concluded that “there is no evidence of loss of intellectual functioning.”

By March 13, 2007, Bradley Vossberg, McClain’s physician, opined that she could return to work. McClain returned to work at LCS as a teacher for the 2007 summer school term. McClain testified that she was at this time experiencing the same symptoms, in the same severity, as in 2010 when she first claimed disability.

During the 2008–09 term, McClain received numerous written criticisms of her job performance. After multiple warnings complaining about poor performance LCS escalated McClain from a “School Improvement Plan” to an “Intensive Assistance Plan” or “IAP”, which McClain characterized as a “last chance.”   McClain claims that she failed to meet some of the requirements because she “didn’t understand” what to do and just “didn’t get it.”

The school district tried everything they could think of to help McClain between the fall of 2007 and January of 2010, “but it became undeniable that she could not meet the responsibilities of her job.”

McClain’s Disability Claim

McClain filed a claim for benefits with Madison.  She indicated that she ceased work on January 22, 2010, but that her claim was related to her stroke in October of 2006. She indicated that she was still recovering from the stroke and that her symptoms were poor memory and difficulty processing new information.  McClain claims that the symptoms that made her unable to work in 2010 were the “same sort of symptoms” she complained of shortly after returning to work in 2007.  She indicated that the symptoms were “the same” when she stopped working in January of 2010 as they were when she returned to work in 2007.
One of her doctor’s opined that “disability started when the stroke happened, before she even went back to work.”  Dr. Dutter opined that she was not capable of performing all of the material duties of her job as a teacher at any point after the stroke. Although McClain’s neuropsychological testing looked “pretty normal,” Dr. Dutter speculated that McClain had concentration issues that might not show up on examination.

Madison’s Consideration of McClain’s Claim for Benefits

Upon receipt of McClain’s claim in 2010, one of the very first actions Madison National took was to inquire whether McClain had been insured under the school corporation’s prior disability policy. The Claim File shows McClain’s effective date of coverage under the Madison’s Policy.  McClain’s claim was considered by Senior Claims Analyst Lisa Caflisch (“Caflisch”).

McClain’s expert testified that the case involved going out and getting information that Madison National was aware of. It made a conscious decision not to go out and get that information. When “Madison National learned from the employer in its telephone call with the employer that there had been performance issues, when it learned that the employer had tried to make accommodations with the insured because of those performance issues, and then despite that knowledge it chose not to get that information, and it proceeded to evaluate the case strictly from a standpoint of what changes have occurred in her medical condition at the time she became disabled, that is so far below the standard of care.”

McClain Has Provided Sufficient Proof of Disability to Overcome Summary Judgment.

In short, while Dr. Trexler found McClain’s cognitive ability to be normal, he also found that McClain suffered a variety of impairments, and those findings were not based on subjective complaints alone. McClain points to other evidence of disability, but because Dr. Trexler’s report creates a genuine issue of fact on this issue, the Court elects not to consider the other evidence that McClain points to in her response.

Expert Testimony Is Admissible in Part.

The expert is precluded from offering his opinion on whether or not Defendants engaged in bad faith (the ultimate conclusion), his testimony regarding industry standards provides some evidence of bad faith and is admissible.

Negligence Insufficient to Prove Bad Faith

A plaintiff can demonstrate bad faith by showing that the insurer had knowledge that there was no legitimate basis for denying liability. As a general proposition, a finding of bad faith requires evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or

Mere negligence is insufficient to support a claim of bad faith. But, an insurer which denies liability knowing that there is no rational, principled basis for doing so has breached its duty.

With regard to third-party administrators of insurance, a non-contractual fiduciary duty has been found to arise in the limited context of a third-party administrator who “actually made the decisions” to deny a claim.

ZALMA OPINION

The evidence considered by the court clearly established disability. The real question was whether the investigation conducted by the insurer and its TPA was performed in good faith and violated industry standards. The expert testimony at deposition went too far by reaching the ultimate issue. The expert was not totally limited but only was allowed to testify concerning industry standards. What is key in this opinion is that a TPA stands in the shoes of the insurer it represents and can be held liable for 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.

The 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 Only Needs to Do What He Is Asked

Even With Rescission Agent’s Duty Fulfilled

FACTS

In 2008, defendant Castlepoint Insurance Company issued a homeowner’s policy to plaintiffs Linda Dauria and Thomas Dauria based on an application prepared and submitted on their behalf by defendant broker Frank Campo. After a fire in 2010, Castlepoint rescinded the policy based on its determination that the premises contained a basement apartment, which rendered it a “three family” dwelling as opposed to the “two family” designation listed on the insurance application.

In 2011, plaintiffs commenced this action against Castlepoint for breach of contract, and against Campo for his alleged negligence and breach of contract in failing to procure the proper insurance policy and to properly process plaintiffs’ application for insurance. Campo moved to dismiss for failure to state a cause of action and based on documentary evidence, claiming that he was never advised or had reason to believe that the premises was a three-family dwelling. In opposition, Mr. Dauria stated that in a conversation with Campo after the fire, Campo admitted that he had “messed up,” and that in 2002 an investigator for Allstate, the prior insurer of the premises, had advised Campo that the house was a three-family home. Plaintiffs also cross-moved for summary judgment against Castlepoint and Castlepoint cross-moved for summary judgment against plaintiffs dismissing the complaint.

The motion court granted Campo’s and plaintiffs’ motions for summary judgment, and denied Castlepoint’s motion on the ground that Campo fulfilled his duties to plaintiffs, and Castlepoint failed to meet its prima facie burden of showing its entitlement to rescission as a matter of law. In so ruling, the court found that Castlepoint did not establish that plaintiffs had made a material misrepresentation in the insurance application because three-family dwellings were not listed as an “unacceptable exposure” in Castlepoint’s underwriting guidelines, and the policy did not exclude three-family dwellings from coverage.

Castlepoint appealed. The appellate court reversed and granted Castlepoint summary judgment (104 AD3d 406 [1st Dept 2013] ), holding that the motion court erred in finding that Castlepoint failed to establish the materiality of the misrepresentation that the premises was a two-family dwelling, as opposed to a three family dwelling that did not fit within the policy definition of a “residence premises.”

Plaintiffs did not appeal from the grant of summary judgment as to Campo. However, after the appellate court’s decision in the Castlepoint appeal was issued, plaintiffs moved below to renew Campo’s motion to dismiss. Finding that plaintiffs’ failed to present any new and additional facts not available at time of Campo’s original motion to dismiss the complaint, the motion court deemed the motion to be an untimely motion to reargue based on the appellate court’s decision in the Castlepoint appeal, which did not address the unappealed dismissal of the complaint against Campo. The court further stated that even assuming arguendo that it could consider the motion, plaintiffs’ arguments were without merit.

ANALYSIS

Although the grant of a dismissal to a codefendant at the appellate level may form the basis of a renewal motion (in the court below) by a nonappealing defendant on the ground of “law of the case” this is not a case where two codefendants are so similarly situated that this Court’s order with respect to one defendant directly impacts the other defendant.

The issue of Campo’s liability is not identical to the issue of Castlepoint’s liability, and plaintiffs have not shown that the factual or legal basis for the order dismissing the claims against Campo has been overturned.

An insurance broker can be held liable in negligence if he or she does not exercise due care in an insurance brokerage transaction. In the order dismissing the claims against Campo, the motion court found that Campo had shown that “no significant dispute exists regarding his lack of duty to [p]laintiffs under the circumstances of this matter”. The court reasoned that Campo procured the requested insurance for plaintiffs, within a reasonable time, and had no continuing duty to advise plaintiffs to procure additional insurance once this was achieved. Significantly, in the appellate court’s decision in the Castlepoint appeal the court did not find that Campo was in fact responsible for a material misrepresentation in the insurance policy application, and plaintiffs have not shown that the motion court’s exoneration of Campo was based on its now-overturned holding that there was no misrepresentation.

ZALMA OPINION

The majority, and the motion court, according to the dissent, failed to explain how Campo could have fulfilled his duty as a matter of law if, in fact, he did not obtain the requested coverage. The dissent argued, incorrectly, that the issue of Campo’s liability is dependent upon whether or not plaintiffs are covered by the CastlePoint policy and whether Campo, as the broker, obtained coverage for them. The dissent claimed that if the CastlePoint policy covered the loss, then Campo unquestionably fulfilled his duty.  What the dissent failed to recognize was that the broker’s obligation is to acquire the policy the insured ordered and was not required to, nor could an agent be required, to get a policy that covers every loss presented. That the insured lied on the application sufficient to support a rescission was not due to the negligence of the agent who only provided the coverage ordered.

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.

The 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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The Tiffany Kid

This is fiction and one of the stories to be found in my e-book, “Heads I Win, Tails You Lose” available at http://www.zalma.com/zalmabooks.ht.

The insured grew up with his wealthy parents on the shores of San Francisco Bay in Marin County. He wanted for nothing that money could buy. He was tall, blond, blue-eyed and handsome. Debutantes pulled their sister’s hair for the chance to dance with him. Life was good, but dull.

The insured tried drugs. The results disappointed him. He was brilliant, so college was no challenge. He felt he would die from the boredom. Nothing challenged his intelligence.

He found the cure for his boredom one summer vacation from college. On a dare he surreptitiously entered the home of a neighbor. He removed a single, solid brass and stained-glass dragonfly lamp made by Louis Comfort Tiffany in the 1920’s. From this single event he found more excitement, a greater “high” than he had ever had with drugs. The flow of adrenalin as he entered, his neighbor’s dwelling was delicious. He had found the excitement he wanted. He had finally found a way to relieve the boredom and lack of challenge in his life. He did not steal for profit. He stole for excitement. He did not need the lamp. He could have bought many similar lamps with the money in his trust fund.

Like all addictions, burglary on a small scale continued. His burglaries occurred in Marin County and in the small college town where he went to school. He specialized in burglary limited to Tiffany lamps and objects of art. By careful, professional acts of burglary over three years the insured amassed a collection of considerable value.
Burglary, stopped being a challenge. It was too easy. The excitement of burglary had lost its glow. He needed a new challenge. He needed interaction. He needed to defeat another human being. Burglary, by definition, is a solitary activity.

The solution to his boredom was insurance fraud. He would obtain a policy of insurance protecting him against the loss of the Tiffany lamps his burglary efforts had gained him. To obtain the policy he first retained a fine arts appraiser to appraise the collection of Tiffany lamps he had gathered over the last five years of burglary. The results of the appraisal shocked him. He found the lamps had a retail value of over $500,000. With the appraisal in hand he acquired a personal articles floater (PAF) policy of insurance from a major surplus line insurer valuing each item as it was appraised. He waited until the policy was “ripe,” seven months from the date it was acquired before reporting the theft of his collection.

With his considerable expertise in burglary the insured staged a burglary at his residence. He made claim to his insurer for the loss of all of the scheduled Tiffany lamps he claimed were stolen.

When visited by the adjuster the insured found the challenge that he had sought when burglary became a bore. Sitting in his living room across from an experienced investigator, the insured reveled in what he believed to be a battle of wits.
Because of the amount involved, the insurer had retained the services of an independent adjuster and private investigator with more than thirty years experience. The insured knew he would not have a simple task in front of him. He had expected the insurer to send their usual twenty-two-year-old novice adjuster who had come to adjust an honest fender-bender claim two years before.

The insured made certain that he was in absolute emotional control when the silver haired adjuster placed his recorder between them and started taking a recorded statement about the loss. Since this was the first time for the insured, he did not know what to expect. He answered the questions posed to him glibly and with certainty, always looking the investigator directly in the eye. He kept complete physical control of his body. Neither his gestures nor physical appearance showed outward signs of the nervousness and flow of adrenalin that the interview caused him. His only difficulty came when the investigator asked for the ownership history of the Tiffany lamps.

Obviously, the insured could not tell him that he had gained possession of the lamps by burglary. Rather, he advised the adjuster that he had received the lamps as a gift from his grandparents shortly before they died in a tragic automobile accident. There was no record of the transfer. There was no one alive who could verify the means by which he acquired the lamps. The adjuster could not verify the insured’s acquisition of the lamps.

The insured had read Dostoevsky’s Crime and Punishment. He knew that the way to commit a perfect crime was to admit everything about his actions during the time of the commission of the crime, except the crime itself. If there are no witnesses, neither the investigating police officers nor the investigating insurer have leads. Disproving the statements made became impossible.

The insured showed the investigator the point of entry where he had broken out a small glass window in the rear door of the premises. It revealed easy entry to the house. He showed the adjuster where the lamps had been. He explained how they had been carefully removed from the premises. He speculated that the thief was a collector or working for a collector. Nothing else was stolen.

He admitted that this was his first PAF that scheduled the Tiffany lamps. He had a homeowner’s policy but never considered the lamps to be exceedingly valuable. The insured said that he had been reading an article in the New Yorker Magazine in his dentist’s office that said that stained glass bronze lamps made by Louis Comfort Tiffany had become the latest collector’s craze. The article caused him to believe that the values of his Tiffany lamps were appreciating with considerable speed. He explained to the adjuster that because of the article he retained the services of a fine arts appraiser. He needed to know the value of the gift made by his grandparents. He expressed shock and fear on learning their true value. Therefore, immediately after receiving the appraisal, the insured went to his local insurance agent and acquired a policy listing each lamp individually and purchased a burglar alarm system to protect the house.

He told the investigator that he had no idea who might wish to burglarize him. He was basically a loner with few friends. None of his friends knew of the value of his collection of lamps. He was totally distraught by their loss since they were the only ties to his dear departed grandparents. Near the end of the statement the insured’s eyes welled up with tears and he had to ask for a short break to get control of himself.
The investigator left the insured’s premises with a feeling engendered by his thirty years of experience that there was something wrong with the claim. He was certain that the insured had not told him the truth. The facts of the acquisition of the lamps, the method by which the insured decided to buy a personal articles floater and the tears all raised his suspicions. He did everything he could to find some facts to prove his suspicions. He checked public records and found that the insured had no criminal record. The insured was never a party in a civil lawsuit. He owned his home and his own business. No motive for insurance fraud existed. The insured was wealthy.  The investigator contacted a few friends that the insured advised him may have seen the Tiffany lamps. Each verified that the lamps were in the house. They had no information how the insured acquired the lamps. They reported that the insured had considerable wealth and would have no trouble in making such a purchase.

The investigator, faced with no leads and nothing but a “gut feeling” there was something wrong with the claim, informed the insurer of his conclusion. The investigator recommended that the insurer issue a proof of loss for the amount of the policy and pay the claim. The insurer followed his advice. The claim was paid in full. The insured successfully completed the fraud.

The insured found new meaning in his life. He thoroughly enjoyed the challenge of the interaction with an experienced investigator. The insured used the money he stole from the insurer to add to his collection of Tiffany lamps. Over the next fifteen years, since his first attempt, the insured perpetrated the same fraud on different insurers, waiting three years between each claimed loss. The delay, of course, so he could honestly report to the insurer, when he applied for the new policy that he had incurred no losses within the last three years.

Unlike the other stories in this book, this one, (like most insurance fraud) successfully separated an insurer from its money illegally. The insured received $500,000 for a burglary that did not occur. The insurer, faced with nothing more than “gut feeling” was forced to pay what it knew to be a fraudulent claim. If it did not pay the insurer knew it would find itself sued for the breach of the covenant of good faith and fair dealing. It might be required to pay punitive and exemplary damages.

The insurer, after the policy was issued had no chance to defeat this fraud. Its chance came, and went, at the time it accepted the insured’s application without first investigating the insured. The insurer failed to protect itself by accepting the insurance without requiring that the insured establish his ownership and legitimate possession of the lamps. It also did not protect itself by requiring the insured to warrant, before the issuance of the policy, facts concerning the insured, the acquisition of the lamps, their ownership and value. The insurer failed to require the maintenance of appropriate security systems that would have made the faking of a burglary more difficult. A monitored central station alarm with contacts on all doors and windows, and infrared detectors to detect motion throughout the dwelling connected to a computer that would record every entry and exit from the premises, would have made the fraud more difficult.

Warranties and security requirements do not always stop an attempt to defraud. By not having the security requirements, the insurer made the crime easy for the insured. It almost deprived the insured of the challenge he wanted. Perhaps, the ease of collection on the policy, is the reason why the insured continues to make claim for the loss of the same Tiffany lamps.

Insurers, if they wish to keep frauds like that described here must stop making the crime easy. Underwriters must understand that insured’s do not always treat their insurers with utmost good faith. Risks must be looked at with skepticism. If fraud is to be defeated insurers must make the crime more of a challenge. It is too easy. Honest insureds are tempted to commit fraud because it is too easy.

Twenty years after his first successful fraud the insured presented an identical claim to an insurer’s whose adjuster knew the adjuster on the first claim as a person who had worked for Lloyd’s of London in the past. The call asked who at Lloyd’s the new adjuster could call about a loss of Tiffany lamps. The response was to ask if the loss was incurred by the Insured by name. Records were pulled from storage and presented to the insured’s lawyer who convinced the insured to immediately withdraw the claim. His last attempt was a failure and he is due to try again shortly.

Regardless of the number of times the insured made claim for the loss of the same Tiffany lamps he has never been arrested or criminally investigated for insurance fraud.

 

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.

The 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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Insurance Agent’s Duties to Insured

Special Relationship Required to Hold Agent Liable for Inadequate Limits

When insureds find, after a loss, that the insurance available to them is inadequate to fully replace the property they often sue their insurance agent for not forcing them to buy higher limits of liability. In Schweitzer v. American Family Mut. Ins. Co., — N.E.3d —-, 2014 WL 4210874 (Ind.App., Aug. 26, 2014) the Indiana Court of Appeal was called upon, among other things, to determine whether an insurance agent had the necessary special relationship required to hold the agent responsible.

FACTS

Daryl and Lynn Schweitzer appeal the trial court’s order granting summary judgment in favor of American Family Mutual Insurance Company (“American Family”) and Jennifer Gholson Insurance Agency (“Gholson”).

At some point prior to January 2008, the Schweitzers became interested in insuring their home, automobiles, and rental properties using one insurance company. Following conversations with Gholson, the Schweitzers purchased a homeowners insurance policy from American Family. The policy provided that it was effective from January 18, 2008, to January 18, 2009, and that the amount of the coverage limit for the dwelling was $261,000.

On December 19, 2008, a fire destroyed the Schweitzers’ house. The Schweitzers reported the loss to Gholson, and a representative for American Family visited the location of the house and discussed with the Schweitzers the coverage limits of their policy. The Schweitzers submitted various claims, and American Family made several payments to them totaling $326,040, which American Family indicated was the limit of its policy for the dwelling.

The Schweitzers sued the insurer and the agent.  As to Gholson, the Schweitzers asserted they totally relied upon the professional services and advice of Gholson and believed they had full and complete insurance coverage in the event of a total loss of their residence.

On August 6, 2012, Gholson filed a motion for summary judgment. On March 28, 2013, the court entered an order granting summary judgment in favor of Gholson and against the Schweitzers.

DISCUSSION

The Schweitzers assert that Gholson had a duty to exercise reasonable care, skill, and diligence in obtaining insurance for them, and that they did not identify the desired coverage, but relied solely on Gholson’s expertise to obtain insurance which would protect them in case of loss. The Schweitzers also claim that Gholson is a “captive” agent of American Family and as such had a duty to comply with a directive by American Family to provide full replacement cost to American Family’s insured.

Gholson maintains that insurance agents owe their customers a general duty of care and that, if a special relationship exists between the agent and the insured, the agent has a duty to advise. The Schwitzers countered that Gholson, as a captive agent of American Family, owed a duty to insure to full replacement cost. Gholson argued that Gholson obtained the insurance requested by the Schweitzers and that Gholson was an independent contractor, not an agent of American Family. Gholson also argued that  Schweitzers were aware of the limits from the declarations page of the policy, and that the mortgagee was also aware of the limits, having asked American Family to increase the amount of coverage in April of 2008.

Insurance agents potentially have both a general duty of care and a duty to advise their clients. Which duty governs in a particular case is a matter of law. The law in Indiana is settled: an insured must demonstrate some type of special relationship for a duty to advise to exist. An insurance agent’s duty does not extend to providing advice to the insured unless the insured can establish the existence of an intimate, long-term relationship with the agent or some other special circumstance. In other words, something more than the standard insurer-insured relationship is required to create a special relationship obligating the agent to advise the insured about coverage. The court of appeal noted that “Factors demonstrating the existence of a special relationship between the agent and insured include whether the agent: 1) exercised broad discretion in servicing the insured’s needs; 2) counseled the insured concerning specialized insurance coverage; 3) held himself out as a highly-skilled insurance expert; or 4) received compensation for the expert advice provided above the customary premium paid.” It also concluded that the burden of establishing an intimate long-term relationship or other special circumstance is on the insured.

Since the undisputed evidence demonstrated that no intimate, long-term relationship or other special relationship existed between the insured and the agent the court concluded that no special circumstances were present that justified imposing a duty on the insurer or agent to provide the advice as to the amount of homeowners insurance coverage that was needed.   The policy came after the first meeting between the Schweitzers and Gholson. The Schweitzers did not know anything about Gholson or her qualifications or experience.

Gholson obtained an insurance policy from American Family with an effective date of January 18, 2008, and the declarations page of the policy set forth the coverage limit for the dwelling as well as the fact the policy included certain supplemental coverage. The designated evidence shows that the Schweitzers received an appraisal in 2003 in connection with the refinancing of their home mortgage and were told at the time that “the house, the land, and all the buildings were $350,000,” and thus the Schweitzers were aware of the approximate value of the house. The Schweitzers did not object or raise any concern regarding the limits of the policies and did not request to increase the amount of coverage. Daryl believed the dwelling limit of the policy from American Family was about $267,000, did not know if this amount was higher or lower than his previous policy’s limit, and did not know whether the amount was enough to replace the house.

While Gholson assisted the Schweitzers with obtaining a homeowners policy from American Family, there is no evidence that Gholson exercised broad discretion in servicing the Schweitzers insurance needs, that the Schweitzers relied on Gholson for expert advice as to insurance coverage or that she counseled them concerning specialized coverage, that Gholson held herself out as a highly-skilled insurance expert, or that she received any compensation above that associated with the customary premium paid.  Based upon the record, we find the circumstances do not constitute a special relationship between Gholson and the Schweitzers and no special circumstances exist which would give rise to a duty to advise.

Gholson, therefore, was under no duty to advise the Schweitzers about the adequacy of the coverage or any alternative coverage which may have been available, and Gholson did not breach her general duty. Further, Gholson was under no duty to provide a replacement cost estimate, and an expectation of full replacement coverage does not in itself impose a duty on an agent to provide advice to an insured regarding the amount of coverage that should be purchased. The trial court did not err in granting summary judgment in favor of Gholson.

ZALMA OPINION

The Schweitzers could only hold their agent, Gholson, liable for not advising them to purchase higher limits if they could have proved a special relationship. Rather, they just ordered insurance which their lender found to be inadequate and requested an increase in the limits to those in effect at the time of the fire. They did not ask the agent if the limits were adequate even though they had an appraisal showing the market value of their property and did nothing to obtain proper coverage nor did they ask for further advice when the policy limit was increased. Gholson, and all insurance agents and brokers, should always document their files to show their communications with the prospective insured and whether a special relationship was requested or not and, as in this case, no special relationship existed and no advice was sought or given as to the amount of insurance required.

 

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.

The 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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Intentional Act Exclusion and Homicide

When 5 Bullets In Chest May Not Be Intentional

Insurance, by definition, only provides coverage for injury caused by a contingent or unknown event. When one person fatally shoots his brother five times in the chest it is presumed to be an intentional act that is not covered by any liability insurance policy. The presumption, however, is rebuttable. In RAM Mut. Ins. Co. v. EMC Property & Cas. Co., Not Reported in N.W.2d, 2014 WL 4176131 (Minn.App., Aug. 25, 2014) the Minnesota Court of Appeal was called upon to determine whether there was sufficient evidence to support a motion for summary judgment based on the intentional act exclusion of a policy.

FACTS

On June 28, 2011, Rolland Fred Kruckow (Rolland) shot and killed his brother, C.K.  John Shriver, trustee for the next of kin of C.K., sued Kruckow for wrongful death. At the time of the shooting, Kruckow had a homeowner’s insurance policy with EMC Property & Casualty Company (EMC) and a farm-insurance policy with respondent RAM Mutual Insurance Company (RAM). Kruckow requested defense and indemnity from EMC and RAM. EMC denied Kruckow’s request, relying on an intentional-act exclusion in its policy.

RAM commenced a declaratory-judgment action seeking a declaration that it had no duty to defend or indemnify Kruckow, and that EMC is obligated to defend and indemnify Kruckow in the wrongful-death action and to contribute to any expenses that RAM incurred in defending and indemnifying Kruckow.  Kruckow filed a cross-claim against EMC seeking a determination that EMC is required to provide coverage under its insurance policy. Shriver filed a counterclaim against EMC seeking a declaration that EMC has a duty to defend and indemnify Kruckow in the wrongful-death action.

The parties engaged in discovery, which included Kruckow’s deposition. At the deposition, Kruckow asserted his Fifth Amendment privilege against self-incrimination and refused to answer any questions regarding his competency or the facts and circumstances surrounding C.K.’s death.

All parties moved for summary judgment.

As to Kruckow’s mental health, the district court received expert affidavits from two physicians who opined that, due to mental illness, Kruckow did not know the nature of the wrongfulness of his act when he shot C.K. and that at the time of the shooting, Kruckow was mentally ill and therefore unable to control his conduct, regardless of any moral understanding of the nature of the wrongfulness of his conduct.

The district court denied EMC’s motion for summary judgment and granted respondents’ motions, concluding that “Rolland Kruckow did not possess the intent necessary for the intentional act exclusion to apply.”

DECISION

We first review the district court’s denial of EMC’s request for summary judgment. EMC argues that the district court erred in concluding that Rolland Kruckow’s refusal to testify at his deposition should not result in dismissal of his claim.

When a plaintiff commences a suit and submits to the jurisdiction of the court the plaintiff is subjected to and must comply with the Rules of Civil Procedure. A court should not permit a plaintiff to use the judicial forum to make allegations only to later insulate himself by invoking the Fifth Amendment as a shield from cross-examination but that invocation of the Fifth Amendment by a civil defendant requires a different response because of the involuntary nature of a defendant’s participation in a lawsuit, and the appearance of compulsion.

A motion for summary judgment is not a proper method of challenging Kruckow’s refusal to answer questions at his deposition. Here, Kruckow is a defendant in the underlying declaratory-judgment action. Although he filed a cross-claim against EMC with his answer, he is unlike a plaintiff who voluntary became a plaintiff in the action and filed a cross-claim as a defensive maneuver.  The appellate court found that the district court did not abuse its discretion by refusing to dismiss Kruckow’s cross-claim against EMC.

RAM and Kruckow sought a “declaration of rights” under a “contract,” specifically, whether EMC was required to defend and indemnify Kruckow under the language of its policy. That issue was appropriately raised in a declaratory-judgment action. As to Shriver, when declaratory relief is sought, all persons shall be made parties who have or claim any interest which would be affected by the declaration, and no declaration shall prejudice the rights of persons not parties to the proceeding. As trustee for C.K.’s next of kin and the party who initiated the wrongful-death suit, Shriver has an interest in the district court’s determination of EMC’s duties under the policy because its determination could affect Shriver’s recovery in the wrongful-death action.

The interpretation of an insurance policy, including whether an insurer has a legal duty to defend or indemnify its insured, is a question of law, which a court of appeal reviews as if it were the trial court. Where there is no coverage by reason of an exclusionary clause, there is no obligation to defend. Of course, the insurer generally bears the burden of proving that policy exclusions apply to bar coverage.

The intentional-act exclusion in EMC’s policy states that there is no coverage for bodily injury which is expected or intended by an insured. The law in Minnesota is well-settled that an intentional act exclusion applies only where the insured acts with the specific intent to cause bodily injury. Such an intention to inflict injury can be inferred as a matter of law. The inference arises when the nature and circumstances of the insured’s act were such that harm was substantially certain to result. Where there is no intent to injure, the intentional-act exclusion does not apply, even if the conduct itself was intentional.

In Minnesota, for the purposes of applying an intentional act exclusion contained in a liability insurance policy an insured’s acts are deemed unintentional where, because of mental illness or defect, the insured does not know the nature or wrongfulness of an act, or where, because of mental illness or defect, the insured is deprived of the ability to control his conduct regardless of any understanding of the nature of the act or its wrongfulness. Intent becomes a question for the trier of fact when the evidence suggests that the insured was not the master of his own will.

Where there is a genuine issue of material fact as to whether the insured’s acts were “unintentional” because of mental illness and therefore outside the scope of an insurance policy’s intentional act exclusion, the trial court must submit the issue to the jury and is not, as a matter of law, to infer the insured’s intent to cause injury.

The law presumes sanity. The appellate court, therefore, began with the presumption that Kruckow was sane when he shot C.K. It could be inferred that Kruckow intended to harm C.K. when he fired five bullets into C.K.’s chest. The general rule is that intent is inferred as a matter of law when the nature and circumstances of the insured’s act are such that harm is substantially certain to result. If Kruckow intended to harm C.K., the intentional-act exclusion would bar coverage under EMC’s policy.

However, the respondents submitted expert affidavits tending to rebut the presumption.  Respondents’ evidence creates genuine issues of material fact regarding Kruckow’s intent.

Determining whether the moving party has rebutted the presumption requires the weighing of available evidence against the presumption, which is not appropriately undertaken in summary-judgment proceedings. In this case, the law establishes a rebuttable presumption that Kruckow was sane when he shot C.K. Respondents’ affidavits in support of summary judgment create a genuine issue of material fact regarding whether the presumption can be overcome. Summary judgment is therefore inappropriate, and the district court erred by concluding that “Rolland Kruckow did not possess the intent necessary for the intentional act exclusion to apply.”

In sum, because there are genuine issues of material fact regarding whether Kruckow’s conduct was intentional and, therefore, whether the intentional-act exclusion in EMC’s policy applies, the district court erred by granting respondents summary judgment.

ZALMA OPINION

Even when the facts seem obvious – fatally shooting a person five times in the chest – was an intentional act rather than an accidental or contingent event, insurers must conduct a thorough investigation before making a decision to deny a claim. Since Kruckow is a defendant the insurers cannot compel him to testify in violation of his privilege against self-incrimination. Since the parties to this action presented expert evidence that Kruckow was not sane at the time he shot his brother to death. If the jury agrees with the experts opinions coverage will apply, if they do not, the exclusion will prevent defense and indemnity.

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.

The 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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Penny Wise, Dollar Foolish

Good Claims Handling Avoids Unnecessary Litigation

Sometimes an attempt to take a position on the law is more expensive than the issue deserves. Even if the issue is important and one of first impression, good faith claims handling requires resolution of a minor claim by settlement rather than take a chance on compelling a court of appeal to make a legal interpretation that is against the best interest of the insurer or the policyholder.

In order to avoid a judgment of less than $4,000 in compensatory damages two insurers and an injured plaintiff went through a suit and appeal to the Georgia Court of Appeals. In Castellanos v. Travelers Home & Marine Ins. Co., 760 S.E.2d 226 (GA App, 7/2014) after a trial by jury a judgment was entered in for $3,731 in compensatory damages, $3,269 in punitive damages, and $135.50 in court costs. When the tortfeasor failed to appear for trial his insurer refused to pay the judgment for breach if the cooperation clause in its automobile policy.

FACTS

Luis Castellanos sued Travelers Home & Marine Insurance Company to recover uninsured motorist (UM) insurance benefits, statutory penalties for Travelers’ alleged bad faith in refusing to pay benefits, and attorney fees. The trial court granted Travelers’ motion for summary judgment and denied Castellanos’ motion. He appealed both rulings.

On September 22, 2009, Castellanos was injured in a wreck caused by the negligence of another driver, Jose Santiago. At the time of the wreck, Castellanos was a named insured under a UM policy Travelers issued to Lucrecia Arias, and he was driving a covered automobile.

Castellanos filed suit against Santiago for his injuries. Santiago’s liability insurance carrier, United Automobile Insurance Company, provided a defense. Castellanos also served the summons and complaint on Travelers as his UM carrier, and Travelers’ counsel participated in the suit through the end of the trial. After a trial which Santiago did not attend, a jury returned a verdict in favor of Castellanos, and, on February 1, 2012, the trial court entered judgment against Santiago for $3,731 in compensatory damages, $3,269 in punitive damages, and $135.50 in court costs.

Castellanos demanded payment of the judgment from United as Santiago’s liability carrier. After some communication between counsel, United formally denied any coverage, based on Santiago’s “lack of cooperation in the defense of [Castellanos'] lawsuit and [his] failure to attend the resulting trial.” Castellanos then demanded that Travelers pay the compensatory damages under Arias’ UM policy. Travelers failed to pay UM benefits within 60 days of Castellanos’ demand.

THE LITIGATION

Castellanos  alleged that Travelers’ refusal to pay UM benefits was made in bad faith. Castellanos filed a motion for summary judgment, and Travelers filed a cross-motion. Travelers argued that there was no evidence that United’s denial of coverage on the basis that Santiago failed to cooperate in the defense was a legal denial of coverage and, therefore, that Santiago was not an uninsured motorist as defined in Arias’ UM policy.

After a hearing, the trial court granted Travelers’ motion for summary judgment and denied Castellanos’ motion, finding that there was “no evidence that United reasonably requested Santiago’s cooperation, that Santiago willfully and intentionally failed to cooperate, that his failure to cooperate was prejudicial to United, and that [his] justification for failing to respond was insufficient.” Based on this determination, the trial court concluded that Castellanos “failed to present evidence that there was a ‘legal denial’ of coverage by United.”

Castellanos contended that the trial court’s ruling improperly shifted to him the burden of coming forward with evidence that supported United’s denial of coverage and that the trial court erred in granting Travelers’ motion for summary judgment.

ANALYSIS

One essential element of Castellanos’ action against Travelers was that Santiago was the owner or operator of an uninsured motor vehicle, as defined by Arias’ UM policy and Georgia law.

Under the applicable contractual and statutory definitions of an uninsured motor vehicle, an insured motor vehicle, such as the one Santiago was driving, could effectively become uninsured, retroactively to the date of an accident, when a driver’s liability carrier denies coverage, provided that such denial is, under applicable law, legally sustainable. When, on the other hand, a driver’s liability carrier denies coverage and such denial is not legally sustainable, the injured driver’s UM coverage generally will not apply, because the tortfeasor is not, technically, uninsured.

It is undisputed that Santiago’s liability policy required him to cooperate with United’s defense against Castellanos’ tort action and authorized United to withdraw coverage if Santiago failed to cooperate in the defense. Such cooperation clauses are enforceable under Georgia law. Under applicable law the tortfeasor’s failure to cooperate can, under certain circumstances, form the legally sustainable basis for his liability carrier’s denial of coverage.”  In addition, it is undisputed that Santiago failed to appear for trial in Castellanos’ tort action and that, after judgment, United denied coverage on the basis that Santiago breached that contractual duty to cooperate in the defense, in part by failing to attend the trial.

Travelers contends that it was nonetheless justified in failing to pay UM benefits, and the trial court agreed, finding that Castellanos failed to come forward with evidence that United’s denial of coverage was a legal denial. In casting upon Castellanos the burden of coming forward with evidence that United reasonably requested Santiago’s cooperation, that Santiago willfully and unjustifiably failed to cooperate, and that his failure to cooperate was prejudicial to United, the trial court required Castellanos to discharge a burden that United would have borne as a defendant in a suit.

Given the evidence that United denied coverage under Santiago’s liability policy based on his alleged failure to cooperate with the defense, a legal basis that falls squarely within the terms of the policy and is authorized under Georgia law, this is not a case where the court is asked to presume Santiago’s status as an uninsured motorist.

Because the undisputed evidence does not establish that Santiago’s absence from the trial was involuntary or excused or that his failure to cooperate with United did not prejudice the defense, the trial court erred in finding that Travelers is entitled to judgment as a matter of law.

The trial court’s order was reversed, in part, to the extent it entered summary judgment in Travelers’ favor.

ZALMA OPINION

The two insurers and the plaintiff in this case created a classic mountain out of a mole hill. For less than $4,000 [since punitive damages are not insurable] they went through two law suits. Had they resolved the suit before trial or worked together after the trial verdict this appeal, and its lengthy dissent, would not have been necessary. Both insurers, if they knew the defendant Santiago would not appear for trial, knew they would lose the suit and considering the amount of the verdict, could have easily settled before trial. Making a major case out of a minor case is not professional claims handling but two insurers taking a stand on a legal issue that should have been clear when the amount involved did not warrant the work.

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.

The 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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No Help – No Coverage

Insured’s Failure to Appear At Trial Prejudicial

It is common, if not universal, for automobile insurance policies to contain clauses that require an insured who is involved in an accident to cooperate with the company in the investigation and resolution of any claim made against the insured.  State Farm Insurance Company had insured Latricia Kirby, required Ms. Kirby, among other things, to “cooperate with us and, when asked, assist us in: a. making settlements; b. securing and giving evidence; [and] c. attending and getting witnesses to attend hearings and trials.”

Kirby was involved in an automobile accident and, eventually, two claims were made against her. Although she initially cooperated with the insurer, her cooperation was short-lived. As a direct consequence of her subsequent lack of cooperation, State Farm was precluded from defending the claims, and a judgment in the amount of $150,000 was entered against Kirby. Maryland Code, § 19-110 of the Insurance Article permits an insurer to disclaim coverage on the ground that the insured has breached the policy by failing to cooperate with the insurer only if the insurer establishes that the lack of cooperation has resulted in actual prejudice to the insurer. The Circuit Court for Prince George’s County found that State Farm was actually prejudiced, but only to the extent of half of the judgment, and that it could therefore disclaim only to that extent. The Court of Special Appeals concluded that, on the record in this case, State Farm was excused from paying the entire judgment. State Farm v. Gregorie, 131 Md.App. 317, 748 A.2d 1089 (2000). The parties appealed to the Maryland Supreme Court who resolved the dispute in Allstate Ins. Co. v. State Farm Mut. Auto. Ins. Co., 363 Md. 106, 767 A.2d 831.

BACKGROUND

The accident at issue occurred shortly after midnight. There was a dispute as to the precise condition of the Beltway. In a statement given to State Farm four days after the accident, Kirby said that she was traveling about 50-55 miles per hour and was “worried about the ice that was on the road,” when she was hit from the rear. The car that struck her was being driven by Mark Winston. Corazon Gregorie, the owner of that car, was in the front passenger seat. Because she did not like to drive in the snow, Gregorie had asked Winston, her boyfriend, to drive. Kirby said that she was watching the road and did not see the Gregorie vehicle prior to the collision. She assumed that Mr. Winston was going too fast.
Some of what Kirby said in her report was disputed by other witnesses, who were not in complete agreement with one another.

Winston, sued by his passenger, then sued Kirby. In his third-party complaint, he denied all allegations of wrongdoing and asserted that the accident was caused by the “sole and/or contributory negligence” on the part of Kirby. State Farm retained Richard McBurrows, Esq., to represent her as a defendant. McBurrows filed an answer on her behalf to the amended complaint and to Winston’s counterclaim, sent her a letter of representation.  After suit was filed Kirby got married, moved to Decatur, Georgia, and washed her hands entirely of the matter. State Farm and counsel sent multiple letters to Kirby explaining she could be found responsible for a judgment if she did not cooperate. She ignored State Farm and the lawyer retained to defend her.

When a disclaimer is based on a failure of the insured to appear for trial, at least the potential scope of the loss is ascertainable; it is the insured’s live testimony-the ability of the jury to hear the insured’s side of the story from his or her own lips.

Most courts, at least in recent times, have rejected a per se rule that mere absence from trial, even if willful and even if the insurer has done what it reasonably could do to produce the insured, suffices on its own to establish, or to create a presumption of, prejudice.

The Prejudice In This Case

The prejudice goes beyond merely the loss of Kirby’s testimony. By reason of her willful failure to cooperate in providing discovery-her refusal to attend her twice-scheduled deposition or cooperate in a further rescheduling of it, her refusal to assist in responding to properly filed interrogatories and demands for documents-and her refusal to attend trial, State Farm was precluded from offering any evidence in defense of the claim. It is not a question, then, of whether, with or without her intransigent conduct, State Farm may have been able to develop some other helpful evidence; even if it had been able to do so, State Farm would have been unable to present it.

The evidence lost to State Farm as a result of the preclusion order was (1) Kirby’s testimony that she was driving at a normal speed but was concerned about ice on the road, (2) Weiner’s testimony that she was able to see the Kirby car, that it had hazard lights on, and that she was able to avoid a collision, (3) a weather report indicating the cold temperature, which, in light of other evidence that the roadway was wet or damp, may have supported Kirby’s testimony that there was ice, and (4) photographs of the damage to the Kirby vehicle.

Kirby’s testimony, though contradicted in some important respects by that of the plaintiffs and Weiner, would have created a genuine issue with respect to how fast she was traveling. There is nothing in the record to suggest that her statement, though disputed, was inherently unreliable. If the jury had heard and credited that testimony, and heard and credited as well Weiner’s testimony that the Kirby car was visible and had on hazard lights, it could reasonably have found no negligence at all on Kirby’s part.

The prejudice lies in the fact that there was a credible defense to be presented and that Kirby’s non-cooperation precluded State Farm from even presenting that defense.

ZALMA OPINION

Insurance is, and has always been, a contract of the utmost good faith. Both the insured and insurer must treat each other in a way so as to not prevent them to lose the benefits of the contract. Modern policies include, as part of the covenant of good faith and fair dealing, a condition that the insured cooperate in the investigation and defense of any action brought against the insured. In this case State Farm and her counsel literally begged Kirby to cooperate and offered to pay all of her expenses to come to trial and testify. They were cruelly rebuffed. Because of her refusal sanctions were imposed and her counsel was unable to present any evidence on her behalf.  The Maryland court ruled based upon its common law and statutory law which confirmed that Kirby blatantly, willfully and intentionally breached the implied covenant of good faith and fair dealing. When faced with such refusal insurers should emulate State Farm and more often than not will not be faced with this type of litigation or a trial judge attempting to emulate Solomon by splitting the judgment.

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.

The 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 Proceeds Apace

In the 17th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on September 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Workers’ Compensation Fraud Conviction Affirmed
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 Disbarred for Insurance Fraud.
4.    Fraud in the U.K.
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:

•    Policy Condition Rules – August 29, 2014
•    Insurer’s Lose Right to Counsel in Washington – August 28, 2014
•    New From Barry Zalma – August 27, 2014
•    False Imprisonment by Employer Excluded – August 27, 2014
•    Policy Must Incorporate Statute Terms – August 26, 2014
•    No Proof of Loss – No Coverage – August 25, 2014
•    Not Disabled Enough – August 22, 2014
•    UIM Limitation Acrues At Denial – August 21, 2014
•    Good Intentions Abuse Basic Rights – August 20, 2014
•    No Good Deed Goes Unpunished – August 19, 2014
•    Contract Must Require Additional Insured – August 18, 2014
•    The Federal Government Is Not a “State.” – August 15, 2014
•    It’s Hard to Fight Fraud – August 15, 2014
•    Settlement Must Be In Writing –  August 14, 2014
•    Suit Against Tenant Not Subrogation – August 13, 2014
•    Ambiguity Saves Claim – August 12, 2014
•    IRS Exceeded Authority When It Tried to Change Statute – August 10, 2014
•    Privilege Weakened – August 8, 2014
•    Barry Zalma on WRIN.tv – August 7, 2014
•    Crime by Lawyer Does Not Pay – August 7, 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 full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can 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.

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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Policy Condition Rules

It’s Not Nice to Lie To Your Insurance Company

Insurance companies that suspect a claim is fraudulent have the right to conduct a thorough investigation including a sworn examination under oath [EUO]. This has been the case in the United States since the U.S. Supreme Court ruled in Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 97 [28 L.Ed. 76, 82, 3 S.Ct. 507] (1884).  When an insured refuses to appear for an EUO he or she finds that the failure is fatal to a claim.

In Seaworthy, Ins. Co. v. Velaj, Not Reported in F.Supp.2d, 2014 WL 4205107 (D.Conn., August 25, 2014.) the insured refused to appear for EUO and threatened to sue. Rather than wait for the suit plaintiff Seaworthy Insurance Company (“Seaworthy”) instituted an action against him. The suit sought a judgment declaring that Seaworthy is not required to provide insurance coverage for damages to a vessel owned by Velaj and that Velaj is barred from taking legal action against Seaworthy, because he failed to comply with the terms of his insurance policy (the “Policy”) and failed to timely bring a suit within one year of the date of loss or damage.  Velaj neither appeared nor took any action in this case. Seaworthy then filed a motion for judgment.

STANDARD OF REVIEW

A party’s default is deemed to constitute a concession of all well pleaded allegations of liability. Thus, in ruling on a motion for default judgment, a district court must take all factual allegations in the complaint as true and draw all reasonable inferences in favor of the prevailing party.

FACTUAL BACKGROUND

Seaworthy, a marine insurance company, insured Velaj against the risk of loss to a twenty-nine foot Chris Craft motor boat (the “Vessel”) that was owned, operated and controlled by Velaj.  On or about October 29, 2012 the Vessel submerged in its slip at Seaview House Marina, a marina located in Stamford, Connecticut.

In the event of a loss, the Policy required Velaj to assume no obligation, admit no liability and incur no expense for which the insured or the Company may be liable without Seaworthy’s written permission, other than reasonable expenses to protect the property from further damage. Additionally, the Policy obligated Velaj to “cooperate with [Seaworthy] in the investigation, defense, or settlement of any loss,” and to “agree to be examined under oath if [Seaworthy] so request[ed].”

On November 4, 2012, Velaj notified Seaworthy that he was seeking reimbursement from Seaworthy in the amount of $8,881.00. This represented the alleged cost of having the Vessel towed to a boat ramp, pulled out of the water by two tow-trucks, and drained. Seaworthy was not invited to attend the recovery operation, which had occurred five days earlier, on October 31, 2012.

Velaj’s claim appeared “unreasonably high” to Seaworthy, in light of the work reportedly performed.  Moreover, there were “inconsistencies” in Velaj’s account with respect to both the time and equipment involved in the recovery. As a result, Seaworthy initiated an investigation into the legitimacy of Velaj’s claim.

In the course of the investigation, Seaworthy obtained photographs taken by an impartial witness, which showed only one tow truck hauling the Vessel out of the water, not two trucks as Velaj claimed. The investigation also revealed that the towing company Velaj used, Westport Auto Repair, was owned by Velaj’s cousin and was not in the marine-salvage business. Furthermore, the investigation uncovered information that led Seaworthy to conclude that Velaj had made material misrepresentations on his initial insurance application. Specifically, Velaj’s application grossly overstated the Vessel’s purchase price and omitted previous motor vehicle violations he was required to disclose. Finally, as part of the investigation, Seaworthy asked Velaj to substantiate his claim for reimbursement, but he refused or was unable to provide proof of payment or other documentation, such as a canceled check, credit card statement or bank statement.

Velaj initially told Seaworthy this was because he had paid his bill “in cash,” but could not confirm this.  He later stated, through counsel, that he had “incurred costs” in recovering the vessel.

Based on the above information, Seaworthy suspected Velaj’s claim was fraudulent, in violation of the Policy’s Fraud & Concealment clause.  By mutual agreement, the examination was supposed to occur on January 31, 2013, but Velaj’s attorney moved the date four times and then cancelled it altogether on April 4, 2013, an hour and a half before Velaj was scheduled to testify. On that date, Velaj’s attorney informed Seaworthy that Velaj refused to be examined under oath and would not appear at any future examination.
Thereafter Seaworthy issued a letter to Velaj explaining that it had denied coverage.

Seaworthy explained that Velaj’s refusal to participate in the examination was a breach of his duty under the Policy to cooperate with the investigation, and that Seaworthy’s investigation had revealed that Velaj had violated the Policy’s Fraud & Concealment clause.

On or about March 17, 2014, Seaworthy was contacted by a new attorney representing Velaj, who informed Seaworthy that Velaj planned to file suit against Seaworthy and that legal action against Seaworthy was imminent. A clause in the Policy provides: “No legal action may be brought against [Seaworthy] unless there has been full compliance with all terms of this policy.”  Additionally, the policy requires an action related to any claim or loss to the insured property, to be brought within one year of the date of loss or damage.

DISCUSSION

The Declaratory Judgment Act empowers district courts, in the case of an actual controversy within [their] jurisdiction, to declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.  Taking the well-pleaded allegations of the Complaint as true and drawing all reasonable inferences from those allegations, it was clear to the court that Seaworthy is entitled to the declaratory relief it seeks.

The Policy’s Fraud and Concealment Clause bars coverage where the insured has “omitted, concealed, misrepresented, sworn falsely, or attempted fraud in reference to any matter relating to this insurance, before or after any loss.”  The investigation uncovered inconsistences in Velaj’s claim—e.g., the photographic evidence indicated that only one tow truck was involved in the recovery of the Vessel, not two as Velaj claimed.

By the express terms of the Policy, in the event of a loss Velaj was required to cooperate with Seaworthy in the resulting investigation and submit to an examination under oath. Due to the suspected fraudulent claim and the apparent misrepresentations in Velaj’s insurance application, Seaworthy requested that Velaj submit to an examination under oath. By refusing to submit to the examination, Velaj breached his obligations under the Policy. As a result Seaworthy is not required to provide coverage.

Velaj is also barred from instituting an action against Seaworthy. The Policy prohibits the insured from taking legal action against Seaworthy with respect to the damaged Vessel unless: (1) the insured fully complied with all terms of the Policy; and (2) the action is commenced within one year of the date of loss or damage. Velaj met neither condition. Velaj has not complied with the terms of the Policy. Additionally, the Vessel was damaged on October 29, 2012, nearly two years ago. Therefore, by the terms of the Policy, Velaj cannot institute an action against Seaworthy now.

For the foregoing reasons, the Plaintiff’s Motion for Default Judgment was granted and a declaratory judgment was entered in favor of Seaworthy Insurance Company against Kenneth Velaj.

ZALMA OPINION

The EUO is a material condition of almost every insurance policy insuring against the risk of loss of property. Applying the clear and unambiguous condition that has been recognized as essential to any right to recover under an insurance policy since, at least 1884.  It is obvious why Velaj did not answer the Seaworthy complaint and allowed a default judgment to be entered. Active work to defeat the complaint could expose Velaj to criminal prosecution. If, as Seaworthy alleged, fraud was attempted, Mr. Velaj should have been arrested and charged with insurance fraud.

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.

The 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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Insurer’s Lose Right to Counsel in Washington

Lawyer Just a Claims Handler In Washington State

In 1967 I became a claims adjuster and served in that capacity until 1972 when I started a 40 year career representing insurers as their lawyer in first party claims presented in the state of California. I have never practiced law in the state of Washington and never will. I understand the difference between an insurance adjuster and a lawyer, not the least being a license to practice law. Lawyers are not, in my opinion adjusters, and adjusters are not lawyers. Their duties and work product are different.

Insurers retain the services of a first party claims coverage counsel to assist them in the legal issues that arise as a result of a complex claim or a potentially fraudulent claim. They seek advice and counsel from the lawyer concerning the coverage issues, investigation required, and often take examinations under oath (EUO) of the insured to gather facts that will assist the lawyer in presenting advice to the insurer. Of course an adjuster can take an EUO but will not do so with the legal training and knowledge of an experienced lawyer.

In Anderson v. Country Mut. Ins. Co., Slip Copy, 2014 WL 4187205 (W.D.Wash., Aug. 25, 2014) the U.S. District Court for the Western District of Washington was called upon to apply Washington state law to a dispute over production of documents the insurer claimed were protected by the attorney client privilege and the insurer’s lawyer claim that his work product was protected by the work product protection.

Plaintiff Christopher Anderson argue that Country Mutual should be required to produce the documents pursuant to the Washington State Supreme Court’s decision in Cedell v. Farmers Insurance Co. of Washington, 295 P.3d 239 (Wash.2013).

BACKGROUND

Mr. Anderson owned a rental property in Seattle’s Seward Park neighborhood, and on December 26, 2012, the property caught fire.  The fire caused extensive damage, so Mr. Anderson made a claim on his insurance policy with Country Mutual.  Shortly thereafter, Country Mutual discovered evidence that there had been a marijuana grow operation located on the property. Consequently, Country Mutual undertook an extensive investigation of Mr. Anderson’s claim. Country Mutual retained outside counsel—the Thenell Law Group, P.C.—to assist with its investigation and coverage determination. Country Mutual eventually denied Mr. Anderson’s claim on October 14, 2013.

Country Mutual filed a motion for protective order. In the motion, Country Mutual asserted that certain documents that Mr. Anderson had requested in discovery were protected by the attorney-client privilege. Country Mutual requested that the court conduct an in camera review pursuant to the Washington State Supreme Court’s decision in Cedell.  Mr. Anderson opposed the motion.  The court reviewed Country Mutual’s amended privilege log and concluded that in camera review was necessary to determine which documents were privileged and which were not. Country Mutual submitted the documents that remain in dispute, and the court reviewed those documents before it ruled on the motion.

ANALYSIS

Standard on a Motion for Protective Order

District courts have broad authority to issue protective orders where appropriate.  The party seeking a protective order bears the burden, for each particular document it seeks to protect, of showing that specific prejudice or harm will result if no protective order is

Attorney–Client Privilege

The attorney-client privilege is a long standing doctrine established to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. When it applies, the privilege protects communications made in confidence by clients to their lawyers for the purpose of obtaining legal advice.

In Washington, the attorney-client privilege applies differently in certain insurance cases. In a first-party insurance bad faith action, the attorney-client privilege is presumptively inapplicable. The Washington State Supreme Court recently explained this in its opinion in Cedell. Cedell significantly altered application of the attorney-client privilege in the context of first-party bad faith claims. Most significantly, in such cases, Cedell creates a “presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client … privilege[ is] generally not relevant.”  Nonetheless, an insurer may overcome Cedell’s new “presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigation and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own liability: for example, whether or not coverage exists under the law.”

Where an attorney is acting as a de facto claims handler, the attorney’s communications likely will not be privileged. For example, in Cedell, the insurer’s attorney examined witnesses under oath. He also communicated directly with the insured, authored and signed the insurer’s denial letter, and initiated settlement negotiations with the insured. When an attorney became primary point of contact with insured regarding insured’s claim while, on the other hand, where the attorney is clearly acting as coverage counsel and advising the insurer of its potential for liability, the communications likely will be privileged.

In addition, even a showing that the privilege applies can be overcome. Even if an insurer demonstrates that an attorney was not serving in a quasi-fiduciary role, under Cedell, an insured may still be able to pierce the insurer’s assertion of attorney-client privilege. If the insured asserts that the insurer has engaged in an act of bad faith tantamount to civil fraud and makes a showing that a reasonable person would have a reasonable belief that an act of bad faith has occurred or that an insurer has engaged in a bad faith in attempt to defeat a meritorious claim, then the insurer will be deemed to have waived the privilege.

Something more than an honest disagreement between the insurer and the insured about coverage under the policy must be at play.

Documents Protected by Attorney–Client Privilege

For some documents, Country Mutual has not met its burden of overcoming Cedell’ s presumption that the attorney-client privilege does not apply. For each of these documents, the court’s review has revealed that either (1) the attorneys involved were engaged in the quasi-fiduciary process of investigating, evaluating, or processing the claim or (2) the attorney-client privilege is otherwise inapplicable. For most of these documents, the communications concern de facto claims handling. The communications involve, for example, conducting an examination under oath, making factual assessments and determinations, or being the direct point of contact with the insured.

For some documents, Country Mutual demonstrated that the attorney client privilege applies. In other words, Country Mutual has met its burden of overcoming the Cedell presumption, and there is no countervailing showing that there is bad faith tantamount to civil fraud. For these documents, the court’s review revealed that the attorney-client privilege applies and the attorneys involved were not engaged in the quasi-fiduciary process of investigating, evaluating, or processing the claim, but rather in providing coverage advice, or other legal advice, to Country Mutual. These documents do not need to be produced.

Work Product Doctrine

Federal law governs the court’s inquiry into whether the work product doctrine applies.

Trial Preparation: Materials.

The work product doctrine is not an evidentiary privilege, but rather a qualified immunity protecting from discovery documents and tangible things prepared by a party or his representative in anticipation of litigation. The primary purpose of the work product rule is to prevent exploitation of a party’s efforts in preparation for litigation. Thus, the party asserting the privilege must demonstrate the threat of litigation was impending.

The Ninth Circuit has stated that “a document should be deemed prepared in anticipation of litigation and thus eligible for work product protection under Rule 26(b)(3) if in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation.

Documents Protected by Work Product Doctrine

Country Mutual makes two assertions that the work product doctrine applies. The vast majority of the e-mail do not involve anything that could be remotely construed as having been produced in anticipation of litigation. Instead, they involve mostly routine claims-handling matters with no indication that anything outside the ordinary is being done in anticipation of litigation. In other words, these documents would have been produced in substantially similar form in the ordinary course of business

ZALMA OPINION

The courts of Washington state have created a situation where, like in George Orwell’s Animal Farm that litigants in Washington state are all equal but some are more equal than others. They have converted the work of a lawyer into the work of an insurance adjuster even though the work conducted by the lawyer is necessary to his or her duty to provide legal advice and counsel to the insurer. Insurer’s lawyers, in Washington, are different from every other lawyer and its privileged communications with clients are presumed to be claims handling and not privileged.  Interestingly, lawyers for policyholders are not presumed to be claims handlers and their communications appear to be privileged. As a result, insurers in Washington have no choice but to use adjusters to do what could be done better by a lawyer, like taking an EUO, and then presenting that information to the lawyer for advice. The Supreme Court of Washington, and this District Court following Washington law, have made lawyers who represent insurers less a lawyer than those who represent policyholders or any other person in any pre-litigation distpute. The Legislature of Washington should cure this problem or face the withdrawal of insurers from the state.

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.

The 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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New From Barry Zalma

The National Underwriter Company to Publish The Zalma Insurance Claims Library

Erlanger, KY, September 1, 2014 –National Underwriter today announced that it will be publishing the popular series of insurance resources known as the Zalma Insurance Claims Library.

As a result of changes in strategic focus at the previous publisher, Specialty Technical Publishers (STP), as well as the increasingly greater need for expert, analytic content within the community of claims professionals, National Underwriter is honored to now be publishing the complete Zalma Insurance Claims Library, which includes Insurance Claims: A Comprehensive Guide, Construction Defects Coverage Guide, and Mold Claims Coverage Guide.

“Not only are these three of the most respected titles in their respective areas, we now have the opportunity to leverage synergies with our other resources, expand the library, add online components, all with the goal of better serving the needs of professionals who rely on these expert resources,” says Kelly Maheu, Managing Director of Professional Publishing for National Underwriter.

The three titles in the Zalma Insurance Claims Library are written by nationally renowned expert Barry Zalma, Esq., CFE, an insurance coverage attorney, consultant, expert witness and popular blogger with a large following within the insurance industry.

“The Zalma Insurance Claims Library was created over my more than 47 years in the insurance business as a claims person and claims lawyer,” Mr. Zalma, said. “It began as a resource to help me in my practice and expanded over the years into a resource for working claims people, claims lawyers, and any person presenting a claim to an insurer. I am excited to join with National Underwriter.”

“Barry’s expertise fits perfectly with our own approach. The Zalma Insurance Claims Library is a natural addition to our current offerings,” says Kelly Maheu, Managing Director of Professional Publishing. “We are excited to be able to bring these resources to our customers.”

National Underwriter also announced that purchasers of any of the three titles will also receive, at no extra cost, a subscription to Mr. Zalma’s Monday Claims Report, a weekly e-newsletter featuring coverage and analysis of top insurance law court decisions from across the country (a $395 value on its own).

Anyone interested can review the titles in the Zalma Library risk-free for 30 days, with a 100% guarantee of complete satisfaction.

About National Underwriter

For over 110 years, National Underwriter has been the first in line with the targeted tax, insurance, and financial planning information you need to make critical business decisions.  With respected resources available in print, online, and in eBook formats, National Underwriter remains at the forefront of the evolving insurance industry, delivering the thorough and easy-to-use resources you rely on for success.

National Underwriter is a Summit Professional Network.

About Summit Professional Networks

Summit Professional Networks supports the growth and vitality of the insurance, financial services and legal communities by providing professionals with the knowledge and education they need to succeed at every stage of their careers. We provide face-to-face and digital events, websites, mobile sites and apps, online information services, and magazines giving professionals multi-platform access to our critical resources, including Professional Development; Education & Certification; Prospecting & Data Tools; Industry News & Analysis; Reference Tools and Services; and Community Networking Opportunities.

Using all of our resources across each community we serve, we deliver measurable ROI for our sponsors through a range of turnkey services, including Research, Content Development, Integrated Media, Creative & Design, and Lead Generation.

The National Underwriter Company
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ERLANGER KY 41018
800-543-0874

For more information, go to http://www.SummitProfessionalNetworks.com.

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False Imprisonment by Employer Excluded

Policy Wording Concerning Employment Related Actions are Clear & Unambiguous

The insurance market makes available to businesses Employment Practices Liability Insurance (EPLI) to protect the employer against claims by employees for tortious conduct in the course of employment. Most Commercial General Liability Policies excluded employment practices liability unless the EPLI coverage is purchased. Failure to purchase EPLI coverage can be very expensive and must be borne by the employer for both the cost of defense and the payment of any judgment.

In Jon Davler, Inc. v. Arch Insurance Company, Not Reported in Cal.Rptr.3d, 2014 WL 4185860 (Cal.App. 2 Dist., 8/25/2014) a group of employees brought an action against their employer, Jon Davler, Inc., for various employment claims, including sexual harassment, invasion of privacy, and false imprisonment. Jon Davler tendered the action to its insurer, Arch Insurance Company, which denied coverage based on an employment-related practices exclusion. After Jon Davler filed this insurance coverage action against Arch, the trial court sustained Arch’s demurrer to the complaint without leave to amend.

FACTUAL BACKGROUND

Three female employees of Jon Davler, a cosmetics company, sued their employer, individually and on behalf of all similarly situated employees, for sexual harassment, intentional infliction of emotional distress, and false imprisonment. The employees also named as a defendant Christina Yang, an owner, manager, or supervisor of Jon Davler.

The employees were “shocked and in a state of disbelief” at Yang’s instructions to remove their clothing so that the employer could ascertain that they were not menstruating. When they asked about the consequences of refusing to participate in the inspection, Yang said that anyone who refused would be fired. Yang then lined up the employees outside the bathroom. While a male supervisor waited with Yang outside the bathroom door, the designated female employee went into the bathroom with each employee, “stood a foot or two away” while the employees “had to pull down their pants and their panties, exposing their vaginal area, so that [the employee] could see if they were wearing a sanitary napkin and therefore on their period.”

The Policy

Arch issued Jon Davler a commercial general liability policy that, among other coverage, provided coverage for “those sums [Jon Davler] becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.” The policy defined “personal and advertising injury” as “injury, including consequential ‘bodily injury,’ arising out of” seven categories of offenses, one of which was “[f]alse arrest, detention or imprisonment….”

The policy contained an “Employment–Related Practices Exclusion,” which the parties refer to as an ERP exclusion. This exclusion stated that the coverage for personal and advertising injury did not apply to an injury arising out of any refusal to employ a person, termination of a person’s employment, or “[e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or malicious prosecution directed at that person….”

Jon Davler filed this action against Arch for breach of contract, breach of the covenant of good faith and fair dealing, and conversion.  Jon Davler alleged that Arch’s refusal to provide indemnity or a defense breached the terms of the policy and “was unreasonable and in bad faith.”

Arch demurred, arguing that all of the claims in the underlying action alleged “injury to persons ‘arising out of’ ‘[e]mployment-related practices, policies, acts or omissions,’” and that therefore the employment-related practices exclusion applied.

The trial court sustained Arch’s demurrer without leave to amend. The court noted that because all of the causes of action other than false imprisonment were “clearly the types of actions” covered by the employment-related practices exclusion, it was “really the false imprisonment that we are concentrating on here, and [Jon Davler] is alleging ambiguity as applied in this situation.” The court ruled that all of the claims in the underlying action “fall within [the] exclusion, and, therefore, the demurrer is sustained without leave to amend.” The trial court entered an order of dismissal. Jon Davler appealed.

DISCUSSION

In California, an insurer must defend its insured against claims that create a potential for indemnity under the policy. The duty also exists where extrinsic facts known to the insurer suggest that the claim may be covered. This includes all facts, both disputed and undisputed, that the insurer knows or “becomes aware of” from any source if not at the inception of the third party lawsuit, then at the time of tender.

While the duty to defend is broad, it is not unlimited. The duty is measured by the nature and kinds of risks covered by the policy. In an action seeking declaratory relief concerning a duty to defend, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.

In determining intent, the rules governing policy interpretation require an appellate court to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. The court must consider the clear and explicit meaning of these provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage.

The Employment–Related Practices Exclusion Applies To The Underlying Claims

Jon Davler argues that the trial court erred in sustaining Arch’s demurrer without leave to amend because the employment-related practices exclusion is ambiguous. Jon Davler contends there is ambiguity in the exclusion’s use of the phrases “such as” and “arising out of,” and ambiguity created by the presence of “false imprisonment” in the coverage provision and its absence in the exclusion. The Court of Appeal found  no such ambiguities.

False imprisonment is similar with several of the matters specifically listed in the employment-related practices exclusion, such as coercion, discipline, and harassment. False imprisonment is the unlawful violation of the personal liberty of another, where the restraint required may be effectuated by means of physical force, threat of force, confinement by physical barriers, or by means of any other form of unreasonable duress. False imprisonment involves coercion, by force, threat, or otherwise. Even under Jon Davler’s theory, the exclusion applies to false imprisonment claims. The employment-related practices exclusion in Jon Davler’s policy is similarly unambiguous, even though it does not list false imprisonment as one of the examples of an employment-related practice, policy, act or omission.

The Employment–Related Practices Exclusion Is Plain and Clear

The employment-related exclusion is sufficiently plain and clear. An average layperson would understand that the exclusion applies a category of claims: those arising in the employment setting. An average person knows what employment is. Unlike technical legal or medical terms, “employment-related” and “arising out of employment” are not terms or phrases that average persons cannot understand.

ZALMA OPINION

This case is a failure of an employer to acquire insurance that protects it against the risk of being sued by employees for alleged wrongful acts. The conduct of Jon Davler’s management, if the allegations made by the employees is true, was an egregious abuse of the employment relationship. Forcing employees to go into the bathroom and expose themselves to management was beyond the pale. Had Jon Davler purchased EPLI coverage there would have been coverage for both defense and indemnity to the allegations of the employees. Since it did not purchase the coverage it was bound by the language of the exclusion that is basically the opposite of the EPLI coverage. To save the extra premium, Jon Davler must defend itself and resolve the claims of the employees.

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.

The 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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Policy Must Incorporate Statute Terms

Statutory Language Trumps Policy Wording

Insurance is usually nothing more than a contract. If the policy’s terms and conditions are clear and unambiguous, those terms will be applied. However, legislatures have the power to, and in fact do, enact laws that effect how a policy of insurance is interpreted. Therefore, even when an insurer and its insured agree upon policy terms and conditions that are less than those required by law, they must still abide by the law.

Florida has a unique problem where, because much of the bedrock in Florida is limestone that can be washed away by water, it suffers from sinkholes. As a result Florida enacted statutes requiring that insurers writing insurance in the state must insure against the risk of loss by sinkhole collapse. The Eleventh Circuit Court of Appeal was called upon, in Shelton v. Liberty Mut. Fire Ins. Co., — Fed.Appx. —-, 2014 WL 4100426 (C.A.11 (Fla.), Aug. 21, 2014.) to resolve a dispute concerning damage allegedly caused by a sinkhole.

BACKGROUND

Insurance Coverage for Sinkhole Losses under Florida Law

Since 1981, Florida law requires property insurers to make sinkhole coverage available. From 1981 to 2004, Florida law defined the term “sinkhole loss” as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property only when such settlement or collapse results from subterranean voids created by the action of water on a limestone or similar rock formation.

In 2005, the Florida legislature redefined “sinkhole loss” as “structural damage to the building, including the foundation, caused by sinkhole activity.” 2005 Fla. Sess. Law. Serv. Ch.2005–111, § 17 (West). Although it limited the definition of “sinkhole loss” to cases where there was “structural damage” to a covered property, the 2005 amendment did not define the term “structural damage.” In May 2011, the Florida legislature amended § 627.706 again to supply a definition for the phrase “structural damage” “as used in connection with any policy providing coverage … for sinkhole losses.” Fla. Stat. § 627.706(2)(k) (2011) (emphasis added by the court). The legislature provided a technical, five-part definition: “Structural damage” occurs only when “a covered building … has experienced” one of the five events enumerated and defined in the statute.

The five events are:

  1. Interior floor displacement or deflection in excess of acceptable variances as defined in ACI 117–90 or the Florida Building Code, which results in settlement-related damage to the interior such that the interior building structure or members become unfit for service or represents a safety hazard as defined within the Florida Building Code;
  2. Foundation displacement or deflection in excess of acceptable variances as defined in ACI 318–95 or the Florida Building Code, which results in settlement-related damage to the primary structural members or primary structural systems that prevents those members or systems from supporting the loads and forces they were designed to support to the extent that stresses in those primary structural members or primary structural systems exceeds one and one-third the nominal strength allowed under the Florida Building Code for new buildings of similar structure, purpose, or location;
  3. Damage that results in listing, leaning, or buckling of the exterior load-bearing walls or other vertical primary structural members to such an extent that a plumb line passing through the center of gravity does not fall inside the middle one-third of the base as defined within the Florida Building Code;
  4. Damage that results in the building, or any portion of the building containing primary structural members or primary structural systems, being significantly likely to imminently collapse because of the movement or instability of the ground within the influence zone of the supporting ground within the sheer plane necessary for the purpose of supporting such building as defined within the Florida Building Code; or
  5. Damage occurring on or after October 15, 2005, that qualifies as “substantial structural damage” as defined in the Florida Building Code. [Fla. Stat. § 627.706(2)(k).]

Liberty Mutual’s Policy and the Sheltons’ Claim

After the May 2011 legislative change, Liberty Mutual issued a renewal homeowners insurance policy for the Sheltons’ property, effective from July 18, 2011 to July 18, 2012. In January 2012, the Sheltons made a claim under the policy for a “sinkhole loss” to their property. Liberty Mutual’s policy provides that “[s]inkhole loss means structural damage to the building, including the foundation, caused by sinkhole activity.” The policy does not define the key phrase “structural damage to the building.” The policy also does not reference any statutory or external definitions of this phrase.In response to the Sheltons’ January 2012 claim, Liberty Mutual sent an expert to examine the damage to the Sheltons’ property. Liberty Mutual’s expert found cosmetic damage to the Sheltons’ home but no “structural damage” within the meaning of § 627.706(2)(k). In other words, the damage to the Sheltons’ home did not fall within the five-part definition of “structural damage” outlined in the applicable statute regulating polices for sinkhole losses.

Based on this expert opinion, Liberty Mutual declined coverage for the Sheltons’ claim. Liberty Mutual maintained that its policy did not provide coverage for the Sheltons’ claim because (1) a “sinkhole loss” is defined to require “structural damage to the building,” (2) the applicable Florida statute, § 627.706(2)(k), defines what constitutes “structural damage,” and (3) the Sheltons’ home did not experience “structural damage” within that statutory definition.

The Sheltons’ Lawsuit

Unhappy with Liberty Mutual’s decision, the Sheltons brought suit alleging that Liberty Mutual’s denial of coverage breached the terms of the insurance policy. Liberty Mutual moved for summary judgment.  The district court disagreed, holding that the statutory definition of “structural damage” was inapplicable because the insurance policy did not reference the statute or incorporate the statutory language. The district court concluded that the phrase “structural damage to the building” in the policy should be given its plain meaning, which—according to the district court—is “damage to the structure.” The district court effectively read “structural damage to the building” to mean “any damage to the structure.”

A few months later, the Sheltons moved for summary judgment. In response, Liberty Mutual renewed its argument that the statutory definition of “structural damage” in § 627.706(2)(k) applies to the Sheltons’ policy. Liberty Mutual also proffered its expert’s finding that the damage to the Sheltons’ home does not meet the statutory definition of “structural damage.”

Granting the Sheltons’ motion, the district court reiterated its prior conclusion that the phrase “structural damage to the building” in the policy means “damage to the structure,” instead of the more restrictive statutory definition of “structural damage.”

DISCUSSION

The pivotal question brought to the Eleventh Circuit was whether the statutory definition of “structural damage” contained in § 627 .706(2)(k) applies to the phrase “structural damage” in the Sheltons’ policy.

A statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that statute.  It is well settled in Florida that the statute in effect at the time the insurance contract is executed governs any issues arising under that contract.

Applying Florida law the Eleventh Circuit concluded that the statutory definition of “structural damage” contained in § 627.706(2)(k) governs the construction of the phrase “structural damage” in the Sheltons’ policy. The Florida legislature expressly stated that the statutory definition applies when the term “structural damage” is used in connection with any policy providing coverage for sinkhole losses. As a result, under Florida law, the statutory definition of “structural damage” is a part of the Sheltons’ policy.

Under Florida law, the statutory definition must be read into the Sheltons’ policy just as if an express provision to that effect were inserted into the policy. [Northbrook Prop. & Cas. Ins. Co., 765 So.2d at 839.]

Under Florida law, the absence of an alternative definition means that the statutory definition fills the gap. There is no indication in the policy that the parties intended to depart from the statutory definition.

CONCLUSION

Given the conclusion that the statutory definition applies to the term “structural damage” in the Sheltons’ policy, the Eleventh Circuit reversed the district court’s grant of summary judgment in favor of the Sheltons and vacate the final judgment. Since Liberty Mutual did not appeal the denial of its motion for summary judgment the case was returned to the trial court to resolve the dispute with direction provided by the opinion of the Eleventh Circuit.

ZALMA OPINION

In Florida, and other states that enact statutes requiring insurers to include coverage in their policy that they don’t want to, or just fail to, include must be cautioned to not limit their coverage decisions to the wording of the policy. They must also research the applicable statutes to make sure the meaning of the policy was not changed by statute or that a normal definition of a term was not modified by 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.

The 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 Proof of Loss – No Coverage

Decomposing Body Not an “Explosion”

Most homeowners policies provide all risk of direct physical loss for structure and only named peril coverages for personal property. If not excluded a cause of loss is covered for the structure. Personal property coverage requires a named risk of loss like fire, lightning, windstorm, and explosion, among others. The Florida Court of Appeal, in Rodrigo v. State Farm Florida Ins. Co.— So.3d —-, 2014 WL 4083324 (Fla.App. 4 Dist., Aug. 20, 2014) [See previous blog post at http://zalma.com/blog/leaking-corpse-not-named-peril/] was faced with a simple coverage issue presented by the insurer and a very creative issue presented by the insured.

FACTS

The insured’s next door neighbor died. A great deal of  time passed before the body was discovered. During that time, the decomposed body leaked bodily fluids, which infiltrated the walls and the insured’s apartment causing damage. The fluids leaking from the dead body was the event that gave rise to the insured’s claim.

The insurance policy required the insured to file a sworn proof of loss within 60 days of the date of loss. While the insured sent invoices and lists of damages, no one disputes that she failed to file a sworn proof of loss.

The policy further provided: “Loss Payment. We will adjust all losses with you…. Loss will be payable 60 days after we receive your proof of loss and: ¶  a. reach agreement with you; ¶ b. there is an entry of a final judgment; or ¶ c. there is a filing of an appraisal award with us.”

None of these events occurred. However, the insurer’s adjuster contacted a contractor, who inspected the unit and signed an appraisal award. The insurer then tendered payment to the insured for that amount, but denied liability for personal property damage. The insured did not accept the payment.

The insured filed a two-count complaint against the insurer. The first count alleged that the appraisal was invalid, and requested the court to modify or vacate the award, or appoint new appraisers and a neutral umpire for a second appraisal. In the second count, the insured alleged that the insurer breached its contract by failing to pay the owner the amount necessary to repair and remediate her unit, to compensate her for damage to her personal property, and for living expenses.

In its amended answer, the insurer pled that the insured had : “(1) materially breached her duty to satisfy conditions precedent; …. (5) failed to satisfy all policy provisions before bringing legal action; and (6) otherwise failed to comply with her contractual obligations.”

The insurer moved for partial summary judgment on the issue of coverage for personal property damage. While acknowledging that the insured made a claim for personal property damage, the insurer argued the policy covered personal property damage only for named perils, and a decomposing body was not one of them. The insured responded that the claim resulted from an “explosion,” a named peril under the policy. She supplied an affidavit of a licensed physician, who attested that the deceased’s body “underwent advanced decomposition” and “the internal contents of her body explosively expanded and leaked.”

The insurer also moved for summary judgment on whether the insured failed to comply with a condition precedent—submitting a sworn proof of loss—constituting a material breach of the insurance policy. Because the insurer and insured never reached an agreement, no final judgment was entered, and no valid appraisal award existed, there was no coverage for the claims. The insured responded, in part, that the insurer had waived the “sworn proof of loss” requirement by tendering payment to the insured, and that other genuine issues of material fact precluded entry of a summary judgment.

The trial court entered a single final summary judgment for the insurer, finding that the insurer did not waive the condition precedent of a sworn proof of loss, there was no coverage, and the damage caused by the decomposing body did not constitute an “explosion” as a named peril. From this summary judgment, the insured now appeals.

ANALYSIS

The insured argues that the trial court erred by entering summary judgment because the insurer did not show that it was prejudiced by the insured’s failure to submit a sworn proof of loss.

In Florida “[A]n insurer need not show prejudice when the insured breaches a condition precedent to suit.” Goldman v. State Farm Fire Gen. Ins. Co., 660 So.2d 300, 303 (Fla. 4th DCA 1995). Proof of loss is a condition precedent to an insured’s suit against an insurer. Soronson v. State Farm Fla. Ins. Co., 96 So.3d 949, 952 (Fla. 4th DCA 2012); Kramer v. State Farm Fla. Ins. Co., 95 So.3d 303, 306 (Fla. 4th DCA 2012).

While the insured argued that she provided the insurer with bills, estimates, invoices, and other documents to prove her damages, she failed to file a sworn proof of loss. Therefore, the insured materially breached a condition precedent, and the insurer was not obligated to pay.

The trial court also correctly found that the insurer did not waive the sworn proof of loss requirement by tendering payment because “[i]nvestigating any loss or claim under any policy or engaging in negotiations looking toward a possible settlement of any such loss or claim” does not constitute a waiver of a “sworn proof of loss” requirement. § 627.426(1)(c), Fla. Stat. (2007) (emphasis added).

The wording of the policy places an affirmative duty on the insured to provide the sworn proof of loss with which affirmative duty the insured failed to fulfill.

The insured next argues that the trial court erred by entering partial summary judgment on the personal property claim because there was an issue of material fact as to whether there was an explosion under the policy’s terms.

The policy provided personal property coverage for named perils. Among those named perils was an “explosion.” That term was not defined. It was the insured’s burden to prove that the term “explosion” included the explosive expansion of a decomposing body.

Rather than stretching common sense, the trial court correctly gave the term “explosion” its “plain and unambiguous meaning as understood by the ‘man-on-the-street. The plain meaning of the term “explosion” does not include a decomposing body’s cells explosively expanding, causing leakage of bodily fluids. In short, although novel in her attempt to do so, the insured could not establish that the decomposing body was tantamount to an explosion.

ZALMA OPINION

Although the facts of this case are macabre the key to the opinion is not whether the insured’s neighbor’s body exploded but the fact that the insured failed to submit a sworn statement in proof of loss within the time required by the policy or at all. The requirement for a sworn proof of loss has been in every first party property policy of insurance since the 19th Century by statute enacted in the various states. The fact that failure to submit a timely proof of loss is fatal to a claim, even a legitimate and normally covered claim, has been the law of the various states for more than a century. Florida law on proof of loss agrees with that of various states although many require that the insurer prove it was prejudiced by the failure to submit a proof of loss. [See http://zalma.com/blog/no-sworn-proof-of-loss-insured-loses/; and http://zalma.com/blog/notice-prejudice-rule-applied-to-proof-of-loss-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.

The 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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Not Disabled Enough

Able to Earn More than Benefits Defeats Claim

Disability claims are almost always contentious. It is much more comfortable to receive tax free benefits from an insurer when you are hurting than go to work and make more than the benefits when hurting.

In Deboard v. Liberty Life Assur. Co. of Boston, Slip Copy, 2014 WL 4064249 (E.D.Mich.) plaintiff Mae–Lyn DeBoard sued Liberty Life seeking judicial review of Defendant Liberty Life Assurance Company of Boston’s denial of longterm benefits under an employer-sponsored group disability insurance policy. T

STATEMENT OF FACTS

Plaintiff Mae–Lynn DeBoard began working for Comcast as an Event/Upgrade SFU—Direct Sales Representative on approximately August 10, 2009. In accordance with her employment benefits, DeBoard received disability insurance coverage through a group insurance policy (“the Plan”) provided by Defendant Liberty Life Insurance Company of Boston (“Liberty”).

In January 2010, Liberty received notice of a claim by DeBoard for Short Term Disability (“STD”) benefits under the Plan after falling at home and breaking her right elbow. Liberty sent a letter to DeBoard advising her that she had been approved for STD benefits under the Plan. The letter also advised that per the Comcast STD Plan, in order to receive ongoing benefits, DeBoard must provide proof of a disability within a required timeframe.

Over the early months of 2010, Liberty received various medical documents. Liberty began investigating the potential for DeBoard to receive Long Term Disability (“LTD”) under the Plan. In furtherance of its investigation, Liberty requested an occupational analysis from Cascade Management, a vocational rehabilitation consulting company. Cascade conducted and produced a report on August 11, 2010.  Cascade concluded that DeBoard “would not be precluded from this occupation as she would be able to complete this occupation as an inside sales representative”.

Under the Plan, “Disability” or “Disabled” with respect to Long Term Disability means: “1. For persons other than pilots, co-pilots, and crewmembers of an aircraft: ¶ a. if the Covered Person is eligible for the Maximum any Occupation benefit, “Disability” or “Disabled” means during the Elimination Period and until the Covered Person reaches the end of the Maximum Benefit Period, as a result of an Injury or Sickness, he is unable to perform the Material and Substantial Duties of Any Occupation.¶ b. (i) if the Covered Person is eligible for the 12 Month Own Occupation benefit, “Disability” or “Disabled” means that during the Elimination Period and the next 12 months of Disability the Covered Person, as a result of Injury or Sickness, is unable to perform the Material and Substantial Duties of his Own Occupation; and ¶ (ii) thereafter, the Covered Person is unable to perform, with reasonable continuity, the Material and Substantial Duties of Any Occupation.”

Further, “Own Occupation” under the Plan means: “the Covered Person’s occupation that he was performing when his Disability or Partial Disability began. If the Covered person is unable to earn 80% of his pre-disability earnings, he will be considered unable to perform his Own Occupation. For the purposes of determining Disability under this policy, Liberty will consider the Covered Person’s occupation as it is normally performed in the national economy.”

In January 2012, Liberty issued a letter to DeBoard indicating its decision to discontinue her benefits under LTD.  DeBoard’s counsel responded with the intent to appeal this decision.

On March 22, 2012, DeBoard underwent a procedure at Troy Hospital for “right sacroiliac joint injection.” Shortly after this procedure, on March 27, 2012, DeBoard was involved in an automobile accident.  As a result of this accident, she complained of neck pain, in addition to her history of back surgeries.  Although Liberty received noticed from DeBoard’s counsel of this accident, Liberty still issued their letter on April 6, 2012, indicating that they were upholding their previous decision of discontinuing DeBoard’s benefits.

ANALYSIS

Liberty Life’s administrative review procedure determined DeBoard was capable of returning to work full time in a sedentary work capacity.

DeBoard argues Liberty Life acted improperly by not conducting an independent medical examination of DeBoard. However, while the failure to conduct an in-person examination is a factor a reviewing court may take into account, there is nothing inherently objectionable about a file review by a qualified physician in the context of a benefits determination. Liberty Life’s review procescomports with similar Sixth Circuit cases.

A finding of disability by the Social Security Administration does not “automatically entitle[ ] [a claimant] to benefits under an ERISA plan, since the plan’s disability criteria may differ from the Social Security Administration’s.”   DeBoard’s argument that the Social Security Benefits award should have been a factor in her favor is unpersuasive.

Moreover, the SSA’s finding of disability predates Liberty Life’s final determination by nearly two years, in which DeBoard’s diagnosis shifted from the initial elbow injury to back ailments and procedures.

DeBoard argues the sedentary employment opportunities suggested by Liberty Life’s Occupational Analysis are unreasonable based on her education and experience. However, DeBoard failed to raise this argument during her administrative appeal. The Sixth Circuit requires that in an ERISA benefits action, a reviewing court should not consider arguments raised by plaintiff in litigation which were not made during the administrative review process.

DeBoard’s monthly gross benefit under the policy was $3,265.99 and almost all of the alternative occupations identified by the vocational report provide earnings higher than DeBoard’s gross benefit. Thus, based on Liberty’s Occupational Analysis and the protections built into the Plan, the alternative positions recommended by Liberty Life are consistent with DeBoard’s ability and physical restrictions.

ZALMA OPINION

Disability insurance is not designed to provide wealth to the insured. Rather, it is designed to carry the injured or partially disabled person funds to carry her over until she is able to work again – even if in a limited capacity – as long as the funds earned exceed the amounts that are payable under the policy. The District Court found DeBoard had the ability to earn more than the disability payments even if working in a limited capacity since, as a salesperson, there was no need to lift heavy objects.

She was not entitled, however, to receive the benefits of the policy and work nor was she able to avoid work she was capable of earning just because there was a disability policy available.

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.

The 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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UIM Limitation Acrues At Denial

Private Limitation Unenforceable

Underinsured Motorist Insurance (UIM) is different than most since it acts as if the insurer insured the underinsured motorist and is required to indemnify its insured as if the insured was seeking tort damages from a different insured. However, in fact, UIM coverage is not a policy indemnifying an insured against torts committed to a third party but is a contract action controlled by the terms and conditions of the policy rather than tort law.

In Hensley v. State Farm Mut. Auto. Ins. Co., — S.W.3d —-, 2014 WL 3973115 (Ky.App.) the Kentucky Court of Appeal, in a matter of first impression, was asked to determine when the statute of limitations or private limitation of action provision a UIM claim accrues and the limitation period begins to run.

In starting its analysis the court recognized that an insurer can shorten the limitations period by contract.

FACTUAL BACKGROUND

Amberee N. Hensley was involved in a motor vehicle accident with Awet Beyene. It is undisputed that Beyene negligently caused the accident. Beyene had liability coverage up to $50,000.00 with Nationwide Insurance (“Nationwide”). The automobile Hensley was driving was owned by Louisville Metro Government and did not have UIM coverage on it. However, Hensley had Under Insured Motorist (UIM) coverage through two policies of insurance she maintained with State Farm.

In February 2010, Nationwide accepted liability and offered to tender the $50,000.00 policy limits to Hensley in exchange for a settlement agreement releasing Beyene from any further liability. Thereafter, Hensley began negotiating with State Farm for UIM coverage under her policies. She made a formal demand for UIM benefits on November 4, 2011, which State Farm denied. On January 24, 2012, Hensley filed a breach of contract action against State Farm in Jefferson Circuit Court seeking UIM benefits under her policies.

After a period of discovery, State Farm moved for summary judgment based on the limitations provisions in its policies with Hensley. The policies provides a limitation that stated “under uninsured motorist vehicle coverage and underinsured motor vehicle coverage unless such action is commenced not later than two (2) years after the injury ….”

Relying on these provisions, State Farm maintained that because the accident occurred on August 7, 2009 Hensley was barred from pursuing any “right of action” against it after August 7, 2011. Since Hensley’s claim was not filed until January 24, 2012, State Farm argued that it was time-barred.

On December 18, 2012, the circuit court granted State Farm’s motion and entered summary judgment in its favor. The circuit court reasoned that the policy at issue provided Hensley with a “reasonable amount of time after the accident to establish that the tortfeasor was an underinsured [motorist] and subsequently file suit against State Farm.”

ANALYSIS

Interpretation and Construction of Insurance Contracts

Generally speaking, two parties of equal bargaining power are free to contract to any terms and conditions they negotiate with one another; with few exceptions, our courts will not endeavor to rewrite such contracts for the benefit of one party or the other. The Kentucky Supreme Court has recognized that insurance contracts with general consumers are “standard-form contracts without the option of arms’ length negotiations with the insureds.” Employers Ins. of Wausau v. Martinez, 54 S.W.3d 142, 145 (Ky.2001).

Kentucky has adopted four basic principles of insurance policy construction:

1) all exclusions are to be narrowly interpreted and all questions resolved in favor of the insured;

2) exceptions and exclusions are to be strictly construed so as to render the insurance effective;

3) any doubt as to the terms of the policy should be resolved in favor of the insured; and,

4) because the policy is drafted in all details by the insurance company, it must be held strictly accountable for the language employed.

While courts recognize that insurance carriers have the right to impose reasonable conditions and limitations on their insurance coverage even where coverage is required by law, nevertheless the question then becomes the reasonableness of the condition as a limitation on public policy as opposed to one of strict contract considerations between private parties where no public interest is involved.

Statute of Limitations for UIM Claims

A UIM suit sounds in contract, not tort. A UIM action is based in contract, any payment by a UIM insurer is necessarily made in performance of a contractual obligation and cannot be characterized as payment of legal damages pursuant to tort liability. Based on the rationale that UIM claims sound in contract, not tort, Kentucky courts apply the limitations period set forth in statute for written contracts when an insured is seeking recovery of UIM benefits from her insurer.

Nevertheless, our courts have been clear that insurance provisions may shorten this period so long as the shortened period is reasonable and not in violation of public policy. Hensley makes the additional argument that a UIM claim is contract-based and, therefore, does not accrue until there has been a breach of the contract of insurance. This contention is not only important it is fundamental to the court’s analysis.

Hensley is not asserting that a two-year limitations period is an unreasonable amount of time in which to pursue a UIM claim. Her argument is that the reasonableness of the period must be measured, not from the date of the accident, but rather, from the breach of the contract because this is the date of accrual. She argues that in her case the breach occurred on November 4, 2011, when State Farm denied her claim.

Accrual of UIM Claims

The court found three potential arguments for the accrual of a UIM breach of contract action:

(1) the date that the insurance company allegedly breaches the insurance contract by denying the insured’s UIM claim;

(2) the date of the accident; or

(3) the date that the insured settles with or obtains judgment against the tortfeasor, thereby exhausting the limits of the tortfeasor’s liability coverage.

The overwhelming majority of jurisdictions that have confronted this issue have concluded that a UIM claim accrues when the insurer breaches the insurance contract by denying the insured’s claim for benefits. The reasoning behind this theory is that because a claim for UIM benefits is a first-party claim, based in contract instead of tort, the limitations period begins to run on the date that the insurance contract is breached. Generally, these courts have determined that the insurer breaches the contract when it denies the insured’s claim for UIM benefits. After reviewing the decisions from other states, the court of appeal concluded that the majority approach is most consistent with Kentucky’s historical treatment of UIM claims as contract claims. Kentucky has consistently regarded UIM claims as distinct claims that are separate and apart from tort claims.

The court of appeal concluded that the defining event in a UIM claim is the date the UIM carrier denies the insured’s claim for benefits. This is the date upon which the insured’s breach of contract claim against its own insurer accrues.

It is a cardinal principle in the construction of statutes of limitation, which has been recognized from the beginning, that the statute does not begin to run against the plaintiff until his cause of action accrues. Until such time as the insured demands payment of UIM benefits under the policy and the insurer denies such demand, there has been no breach of the insurance contract by the insurer. Accordingly, under Kentucky law the statute of limitations for a UIM claim accrues on the date the insurer denies UIM coverage and communicates that denial to the insured.

The law is well-settled that a cause of action only accrued when each element giving rise to the cause of action had come to fruition. A cause of action accrues when a party has the right and capacity to sue. It would fundamentally distort the common law definition of “accrues” and the legislative intent behind the statutes to allow the insurer to define the accrual date for a UIM breach of contract claim to run from the date of the accident or injury.

ZALMA OPINION

Kentucky, by this case, follows the majority rule and adopts as the accrual date for a suit against an UIM insurer is when the contract is breached by the denial of the claim. To rule otherwise would be illogical considering the fact that it often takes a great deal of time to determine whether the tortfeasor is uninsured or underinsured.

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.

The 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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Good Intentions Abuse Basic Rights

Government May Not Prevent the “Free Exercise” of Religion

It has been said that the road to Hell is paved with good intentions. There is no question that the Patient Protection and Affordable Care Act of 2010, 124 Stat. 119 (“ACA” or “the Act”) was passed with good intentions to help the people of the United States obtain inexpensive health insurance. In the guise of Obamacare the ACA did not limit its purpose but gave unfettered discretion to the Internal Revenue Service and the Department of Health and Human Services to write regulations to enforce the ACA. The Regulations, as I pointed out earlier when discussing the Hobby Lobby case, exceeded the good intentions.

Attempting to protect their right to freely exercise their religion many have sued the government seeking judicial protection from what is believed to be overreach and a violation of federal law.. In Louisiana College v. Sebelius, Slip Copy, 2014 WL 3970038 (W.D.La., Aug. 13, 2014) the U.S. District Court for the Western District of Louisiana resolved the dispute in favor of the free exercise of religion.

BACKGROUND

Under the ACA non-exempt employment-based group health plans are required to provide cost-free coverage for all contraceptive methods approved by the Food and Drug Administration (“FDA”), four of which may prevent a fertilized egg from attaching to the uterine wall (“contraceptive mandate” or “mandate”). However, recently-promulgated regulations provide a mechanism for certain religious nonprofits to avoid providing coverage for contraceptive services they find religiously offensive by executing a required self-certification form (“challenged regulations”). This mechanism—known as the “accommodation”—requires an insurance issuer, upon receipt of the self-certification, to exclude contraceptive coverage from the employer’s plan and to provide plan participants with separate payments for contraceptives without imposing any cost-sharing requirements on the employer, its insurance plan, or the plan beneficiaries.

Plaintiff, Louisiana College (“LC”), is a nonprofit university affiliated with the Southern Baptist Convention (“SBC”). Plaintiff believes as a matter of faith that human life begins at the moment of conception, or when an egg becomes fertilized. It is therefore against Plaintiff’s religious beliefs to participate in or facilitate access to abortion or “abortifacient” drugs, which Plaintiff believes can end human life and are therefore sinful. Consistent with these beliefs, Plaintiff provides health care benefits to its employees through a group health plan sponsored by GuideStone Financial Resources (“GuideStone Plan”), and has excluded from coverage “contraceptive drugs or devices considered to be abortifacients.”

Plaintiff also maintains that choosing to follow the commands of its faith, and thereby failing to comply with the challenged regulations, would result in crippling financial penalties, which is a quintessential substantial burden on the free exercise of religion.

The Affordable Care Act

Specifically, if a covered employer offers group health insurance coverage, but its plan fails to comply with the ACA’s requirements for group health plans, the employer may be required to pay a regulatory tax of $100 per day for “each individual to whom such failure relates” (“regulatory tax”).  Likewise, if the employer fails to provide group health insurance coverage altogether, and at least one of its full-time employees enrolls in a health plan and qualifies for a subsidy on one of the government-facilitated exchanges, the employer must pay an annual assessable payment of $2000 per full-time employee, minus 30 (“assessable payment”).

The parties agree that Plaintiff is not eligible for the religious-employer exemption, and that Plaintiff’s employee health plan does not possess grandfathered status. The parties also agree that Plaintiff would qualify as an “eligible organization” entitled to the accommodation, provided that it fulfills the self-certification requirement.

According to Plaintiff, the challenged regulations substantially burden its religious exercise by forcing it to choose among the following options:

(1)  maintaining its current health insurance plan, which does not provide coverage for or facilitate access to the objectionable drugs and services;

(2)   dropping employee health insurance altogether to avoid facilitating access to emergency contraceptives; or

(3)   complying with the mandate, and thereby facilitating access to drugs and services that (according to Plaintiff) can destroy human life.

Plaintiff contends that the ACA makes the first and second options untenable because they result in crippling financial penalties, leaving Plaintiff without the option of fulfilling its religious convictions by providing health insurance coverage that does not facilitate access to emergency contraceptives.

Recent Free–Exercise Challenges to the Challenged Regulations

A number of courts have addressed similar free exercise claims by religious nonprofits that are eligible for the accommodation, but with varying results. While the Fifth Circuit has yet to weigh in on the issue definitively, at least three district courts in this circuit have considered whether to grant injunctive relief on such claims, and all three have ruled in favor of the nonprofit plaintiffs. On these facts, we join with the reasoning of our sister courts and concur in concluding that the challenged regulations offend RFRA by placing a substantial burden on Plaintiff to act in ways that (as Plaintiff sees it) involve it in the provision of emergency contraceptives, and thereby require Plaintiff to violate its sincerely-held religious beliefs. Therefore, we find the challenged regulations—26 C.F.R. § 54.9815–2713(a)(1)(iv); 26 C.F.R. § 54.9815–2713A(a); 29 C.F.R. § 2590.715–2713(a)(1)(iv); 29 C.F.R. § 2590.715–2713A(a); 45 C.F.R. § 147.130(a)(1)(iv); and 45 C.F.R. § 147.131(b)—cannot stand.

LAW & ANALYSIS

Religious Freedom Restoration Act

In Employment Division, Department of Human Services of Oregon v. Smith, 494 U.S. 872 (1990), the Supreme Court held that the First Amendment Free Exercise Clause does not prohibit the government from burdening the exercise of religion through facially neutral laws of general applicability. Congress responded by enacting the Religious Freedom Restoration Act of 1993, 42 U.S.C. § 2000bb, et seq. RFRA provides that the “[g]overnment shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability” unless it can show “that application of the burden to the person—(1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.”

The impact of the compulsory law on the practice of religion is not only severe, but inescapable. When the law affirmatively compels them, under threat of criminal sanction, to perform acts undeniably at odds with fundamental tenets of their religious beliefs, such laws carry with them precisely the kind of objective danger to the free exercise of religion that the First Amendment was designed to prevent. The plaintiffs must either abandon belief and be assimilated into society at large, or be forced to leave the United States to some other and more tolerant region.

In the Fifth Circuit a challenged law substantially burdens religious exercise if it truly pressures the adherent to significantly modify his religious behavior and significantly violate his religious beliefs. The effect on religion is substantial when, for example, a law influences the adherent to act in a way that violates his religious beliefs or forces the adherent to choose between, on the one hand, enjoying some generally available, non-trivial benefit, and, on the other hand, following his religious beliefs.

As the Supreme Court noted in Hobby Lobby, the phrase “exercise of religion,” as it appears in RFRA. It necessarily follows that the “exercise of religion” under RFRA must be given broad meaning with courts concluding that a substantial burden on religious exercise if the challenged law: (1) compels the adherent to do something his religion forbids; (2) forbids the adherent from doing something his religion requires; or (3) indirectly pressures, but does not directly compel, the adherent to act in a manner forbidden by his religion, or to refrain from acting in a manner required by his religion. The contraception requirement is just as offensive as requiring a Muslim to fund a pig farm to feed its employees, require a Mormon to company to offer a weekly pint of whiskey to its employees, require a Seventh Day Adventists company to provide meat to its employees, or require a Jewish owned firm to keep its business open on Saturday.

The question here is not whether the government is directly compelling or putting substantial pressure on Plaintiff to act in a manner it finds inconsistent with the commands of its faith. Plaintiff believes this “Hobson’s choice” is a quintessential substantial burden under RFRA.

Even accepting that the government has succeeded in preventing any payment by the religious organization for the religiously offensive devices, there is a causal link between the acts the plaintiffs must do under the accommodation and the provision of contraceptive devices and products to employees on a no-cost-sharing basis.

Because both failing to comply with the mandate and failing to provide group health insurance coverage altogether will result in onerous financial penalties, the only option available to Plaintiff is to violate its religious beliefs, either by providing coverage for emergency contraceptive services via its own affiliated GuideStone Plan, or by facilitating free access to such services through a self-certification form. Accordingly, there is no genuine dispute of material fact that the challenged regulations substantially burden Plaintiff’s free exercise of religion under RFRA.

ZALMA OPINION

Obamacare’s good intentions when the ACA was passed has metastasized into a governmental imposition of one portion of the union’s beliefs upon others and attempts to deprive the people who follow the same religious beliefs as Louisiana College, to violate their religious beliefs in clear violation of the RFRA and the free exercise clause of the First Amendment. If Louisiana College can be compelled to pay for and support the use of “abortifacient” drugs Mormon’s can be compelled to buy liquor, Jews will have to open their stores on Saturday, Muslims can be compelled to buy pork for its employees and Seventh Day Adventists can be required to feed meat to their employees, all with the good intention of keeping the country helpful. This court, and others that have found the same offense, are protecting us from the good intentions. To paraphrase Ronald Reagan the most frightening words in the English Language are “I’m from the government and I’m here to help you.” Please, don’t help. It is better to do nothing than to do something with good intentions that deprives an American of his or her rights.

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.

The 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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No Good Deed Goes Unpunished

Negligence of Adjuster Not Basis for Bad Faith

Insurance adjusters are people knowledgeable in insurance retained by an insurer for the purpose of assisting the insured in proving a loss to the insurer. A person who expresses to the insured the fidelity and good faith of the insurer. The adjuster is not expected nor required to be perfect. In Murphy v. Patriot Ins. Co. — A.3d —-, 2014 WL 3965639 (Vt.), 2014 VT 96 (Supreme Court of Vermont, 8/14/14), the Supreme Court was asked to hold an insurer and its adjuster liable for bad faith tort damages because the adjuster failed to recognize all the losses incurred. The trial court entered judgment in favor of Patriot Insurance Company (Patriot), her homeowner’s insurer.

FACTS

In late July 2007, plaintiff reported to Patriot that a recent storm had caused damage to the flashing on her roof, allowing water to enter the house. Patriot engaged a claims adjuster to investigate the claim, who went to the property four days after the report. Plaintiff and the adjuster walked around the house inspecting the damage. The adjuster observed damage to the garage and ceiling of an enclosed porch and dampness in the finished portion of the basement. He went up on the roof, but observed “no exterior damage due to wind,” and no damage to the flashing on the roof around the rear chimney or holes in the roof.  In his claims report, the adjuster acknowledged that the insured showed him certain damage from the storm, including heavy rain that had purportedly “flooded the driveway and infiltrated the foundation causing water damage to [the] contents … of the basement.”  The real cause of plaintiff’s water infiltration is long-term deterioration around both the rear and front chimney, and the adjuster closely looked only at the rear chimney at the time of his original inspection.  There is no indication that the adjuster intentionally ignored plaintiff’s identification of her problem by looking at only the rear chimney.

After the initial claim payment Patriot, at the request of the insured, sent the adjuster back to deal with additional damages and agreed to pay more, including the $10,000 limit for damages due to mold. Even though the adjuster noted more than one incident that required an additional deductible the insurer refunded the $500 deductible to the insured.

An inspectors later report concluded that the cause of the damage was failed flashing near the chimneys that had allowed water to enter and produce structural damage, rot, and mold. The inspector also concluded that the water penetration was a long term problem that pre-existed the July 2007 storm. The inspector recommended demolition of a portion of the roof to determine the extent of structural damage and the possible replacement of the front chimney. Plaintiff provided a copy of the report to Patriot’s claims adjuster, who had planned—in response—to have an engineer inspect the front chimney, but plaintiff had it removed before the inspection could occur.

Patriot paid plaintiff for a subsequent claim and continued to negotiate with plaintiff over a repair estimate in excess of $56,000 which plaintiff maintained was necessary to remediate the substantial remaining rot and mold in the home. As part of the negotiation Patriot paid plaintiff an additional $15,865.44, for a total—the court found—of $32,653.40 in payments, including cashed and uncashed checks.

While the parties remained in discussion, plaintiff – adding insult to injury – filed a complaint for breach of contract. Patriot moved for partial summary judgment on the scope of coverage for remediation of the mold and rot and replacement of the chimney. In a November 2009 decision, the trial court ruled that the homeowner’s policy clearly and unambiguously limited damages relating to the fungi or rot to $10,000.

Plaintiff subsequently filed an amended complaint adding claims against Patriot for negligence “in inspecting and processing [the] claim and in retaining adjusters to investigate her claim,” and “bad faith” in denying the claims with “no reasonable basis.”  The trial court later issued a written decision granting Patriot’s motion. The court agreed that plaintiff had failed to “present[ ] a basis upon [which] to establish that [Patriot] owed a clear, non-contractual duty to her,” and further found on the facts alleged that Patriot “had a reasonable, if debatable, basis to deny [p]laintiff’s claims under the policy.” Accordingly, the court granted summary judgment for Patriot on both claims.

ANALYSIS

As agent for the insurer, the adjuster’s conduct is imputed to the insurer, which is subject to liability for the adjuster’s mishandling of claims in actions alleging breach of contract or bad faith. Therefore, subjecting adjusters to additional and potentially open-ended tort liability would be contrary to the law of agency, and disproportionate to their ability to control their potential risks.

The Supreme Court of Vermont’s rejection of an independent tort duty on the part of the insurer’s adjuster was predicated in part on a recognition that the relationship between insurer and insured is fundamentally contractual, defined and governed by the coverage provisions in the insurance policy and the covenant of good faith and fair dealing implied in every insurance policy. Recognizing that it had in the past held on numerous occasions that a negligence claim can exist only if there is a duty independent of any contractual obligations the Supreme Court concluded that Vermont case law prohibits a claimant from seeking damages for contractual losses through tort law. Indeed, it recognized the existence of a first-party bad faith action against an insurer in part because no alternative independent remedy was available.

Issuing a statement that should be obvious but that is often not honored, the Supreme Court stated that “the bad faith remedy would generally be superfluous if mere negligence in handling a claim would be sufficient for liability.”

Noting that most other courts have limited actions by insureds against their insurers to breach of contract or the implied covenant of good faith and fair dealing and have disallowed actions for negligence based upon an independent duty of care citing to cases from Alabama Arizona, California, Florida, and Texas. The insurance policy and the implied covenant of good faith and fair dealing defined plaintiff’s expectations for coverage and recovery in the event that benefits were wrongfully denied. Plaintiff did not advance, nor could the Supreme Court find, any compelling policy or other basis for imposition of an independent, extra-contractual negligence duty.

The question remains whether the court was also correct in dismissing plaintiff’s claim for “bad faith,” the general shorthand for breach of the covenant of good faith and fair dealing which the law implies in every insurance policy. To establish bad faith, the plaintiff must show that:

  1. the insurance company had no reasonable basis to deny benefits of the policy, and
  2. the company knew or recklessly disregarded the fact that no reasonable basis existed for denying the claim.

Where a claim is “fairly debatable,” the insurer is not guilty of bad faith even if it is ultimately determined to have been mistaken. The mistaken or erroneous withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability does not expose the insurer to bad faith.

Measured against the state’s bad faith standard the Supreme Court could find no basis to disturb the trial court’s ruling. At best, plaintiff might claim that the adjuster’s failure to find that the true cause of the water infiltration was through the front chimney. Such a claim would fall well short of the knowing or reckless conduct required for a finding of bad faith. Sloppy or negligent claims handling does not rise to the level of bad faith. In a first-party bad faith claim, an imperfect investigation, standing alone, is not sufficient cause for recovery if the insurer in fact has an objectively reasonable basis for denying the claim.

ZALMA OPINION

Patriot bent over backwards to resolve the claim with the insured. It paid the claim it observed as reported by the insured. When it was explained that there was further damage it paid more. Even though the loss was long term and maintenance related predating the loss notice, it continued to pay and even paid the full limit of its mold and fungi cover and continued to negotiate with the insured in an attempt to resolve the claim only to be sued, proving that the insurer’s good faith claims handling was not enough to avoid a suit for bad faith.

The Supreme Court of Vermont, faced with such unfair conduct by the insured, and the attempt to make the alleged negligence of the adjuster into a tort, was wrongful. The tort of bad faith was created to provide a remedy where none existed and was designed to be available only for limited purposes, not every disagreement between an insured and insured. It also made clear that if an adjuster acts in bad faith he or she is not personally responsible but only the insurer. To hold the adjuster liable he or she must commit an independent tort outside the obligation to investigate and adjust the claim.

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.

The 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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Contract Must Require Additional Insured

Failure of Risk Management

New York appellate courts, as readers of Zalma on Insurance, are well aware are brilliant at writing opinions ins succinct and straightforward manner. General Motors, LLC v. B.J. Muirhead Co., Inc. — N.Y.S.2d —-, 2014 WL 3882573 (N.Y.A.D. 4 Dept.), 2014 N.Y. Slip Op. 05720 is a perfect example of an appellate decision that is clear and without surplusage.

FACTS

Plaintiff General Motors LLC (GM) and defendant entered into an agreement, as set forth in a purchase order, whereby defendant would provide certain maintenance services at a plant owned and operated by plaintiff. The agreement provided that defendant “shall maintain insurance coverage with carriers acceptable to [GM] and in the amounts set forth in the Special Terms,” which in turn required, that defendant obtain insurance for “liability arising from premises.” The parties agree that defendant obtained insurance protecting it from the specified risks. The contract did not, however, require that the defendant cause its insurer to name GM as an additional insured nor was it made an additional insured by the terms and conditions of the policy.

One of defendant’s employees commenced an action against GM alleging that he was injured by a dangerous condition on the premises. Defendant’s insurer declined to defend plaintiff on the ground that plaintiff was not a named insured or otherwise covered by the policy that the insurer issued to defendant.

GM commenced this breach of contract action, contending that defendant failed to comply with the contractual requirement that it obtain insurance protecting plaintiff. It contended that the agreement is reasonably susceptible of an interpretation requiring that defendant obtain insurance covering GM.

GM’s motion for summary judgment was granted and defendant appealed.

ANALYSIS

It is well settled that a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Furthermore, in determining whether an agreement is ambiguous, the court first must determine whether the agreement on its face is reasonably susceptible of more than one interpretation.  The appellate court noted that a provision in a construction contract cannot be interpreted as requiring the procurement of additional insured coverage unless such a requirement is expressly and specifically stated in the contract. In addition, contract language that merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.

Contrary to plaintiff’s contention, although the insurance rider in this case required defendant to obtain insurance on the premises, there was no requirement that plaintiff be named as an additional insured on the policy and, as a result, the defendant did not obtain additional insured coverage on behalf of General Motors.

In addition, contract language that, as here, merely requires the purchase of insurance will not be read as also requiring that a contracting party be named as an additional insured.

As a result the insurer was correct in refusing to defend General Motors and the defendant did not breach its contract with General Motors because it did not promise to make it an additional insured.

ZALMA OPINION

This case is a clear failure of risk management. If GM wanted to be an additional insured of Muirhead all it needed to do was put that clause in the construction contract. It did not do so, Muirhead fulfilled the terms of the contract, and GM had no reason to bring the suit. When a company with the buying power of a major auto manufacturer fails to properly protect its rights by not requiring, as part of the contract, that it be made an additional insured of Muirhead’s policy.

Rather than file this suit GM, if it expected additional insured coverage, should have fired the person who made the contract for failing to do his or her duty. It should not have attempted to bludgeon a contractor into providing coverage it was not asked to provide.

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.

The 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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The Federal Government Is Not a “State.”

Because The US Government Created an Exchange for the State It is a “State Exchange”

In my summary of Halbig v. Burwell — F.3d —, 2014 WL 3579745 I tried to explain why  the Patient Protection and Affordable Care Act (ACA)  was not insurance. Because the ACA clearly and unambiguously held that only policies issued through state exchanges are eligible for tax credits and assistance paying premium. The Fourth Circuit, in King v. Burwell — F.3d —-, 2014 WL 3582800 (C.A.4 (Va.)), disagreed by finding the statute ambiguous and therefore found itself required to give deference to the IRS.

THE DISPUTE

Virginia residents who did not want to purchase comprehensive health insurance brought action challenging Internal Revenue Service (IRS) final rule, which implemented premium tax credit provision of Patient Protection and Affordable Care Act (ACA) by authorizing tax credits to individuals who purchased health insurance on both state-run and federally-facilitated insurance “Exchanges”. The final rule interprets the ACA as authorizing the IRS to grant tax credits to individuals who purchase health insurance on both state-run insurance “Exchanges” and federally-facilitated “Exchanges” created and operated by the Department of Health and Human Services (“HHS”).

The plaintiffs contended that the IRS’s interpretation is contrary to the language of the statute, which, they assert, authorizes tax credits only for individuals who purchase insurance on state-run Exchanges.

In March of 2010, Congress passed the ACA to “increase the number of Americans covered by health insurance and decrease the cost of health care. To increase the availability of affordable insurance plans, the Act provides for the establishment of “Exchanges,” through which individuals can purchase competitively-priced health care coverage. Critically, the Act provides a federal tax credit to millions of low- and middle-income Americans to offset the cost of insurance policies purchased on the Exchanges. The Exchanges facilitate this process by advancing an individual’s eligible tax credit dollars directly to health insurance providers as a means of reducing the upfront cost of plans to consumers. Of course, perhaps because no one in Congress who voted for the ACA read it, they did not realize that what they were enacting required insurers to issue contract that were not “insurance” because it required the insurers to agree to indemnify people for injuries and illnesses that were neither contingent nor unknown but were, in fact, known and ongoing.

In addition to the tax credits, the Act requires most Americans to obtain “minimum essential” coverage or pay a tax penalty imposed by the IRS. However, the Act includes an unaffordability exemption that excuses low-income individuals for whom the annual cost of health coverage exceeds eight percent of their projected household income.

THE REGULATIONS

The IRS promulgated regulations making the premium tax credits available to qualifying individuals who purchase health insurance on both state-run and federally-facilitated Exchanges.  The IRS Rule provides that the credits shall be available to anyone “enrolled in one or more qualified health plans through an Exchange,” and then adopts by cross-reference an HHS definition of “Exchange” that includes any Exchange, “regardless of whether the Exchange is established and operated by a State … or by HHS.” 26 C.F.R. § 1.36B–2; 45 C.F.R. § 155.20. The IRS issued a response to claims they violated the statute, as follows: “The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”

The plaintiffs’ complaint alleges that the IRS Rule exceeds the agency’s statutory authority, is arbitrary and capricious. The district court granted the defendants’ motion to dismiss, and the plaintiffs timely appealed.

ANALYSIS

When a court interprets a statute it must give effect to the unambiguously expressed intent of Congress. A statute is ambiguous only if the disputed language is “reasonably susceptible of different interpretations.”

In construing a statute’s meaning, the court begins, as always, with the language of the statute. The plaintiffs assert that the plain language of both relevant subsections in § 36B is determinative. They contend that in defining the terms “coverage months” and “premium assistance amount” by reference to Exchanges that are established by the State under § 1311.  Congress limited the availability of tax credits to individuals purchasing insurance on state Exchanges. Under the plaintiffs’ construction, the premium credit amount for individuals purchasing insurance through a federal Exchange would always be zero.

The plaintiffs’ primary rationale for their interpretation is that the language says what it says, and that it clearly mentions state-run Exchanges under § 1311. If Congress meant to include federally-run Exchanges, it would not have specifically chosen the word “state” or referenced § 1311. The federal government is not a “State.”

The Fourth Circuit noted that: “There can be no question that there is a certain sense to the plaintiffs’ position. If Congress did in fact intend to make the tax credits available to consumers on both state and federal Exchanges, it would have been easy to write in broader language, as it did in other places in the statute.” Not willing to rule based on the obvious sense of plaintiffs’ position, the Fourth Circuit continued its analysis and found that, regardless, when conducting statutory analysis, a reviewing court should not confine itself to examining a particular statutory provision in isolation. Rather, it found, the meaning—or ambiguity—of certain words or phrases may only become evident when placed in context.

Section 1311 provides that “[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”)[.]” It goes on to say that “[a]n Exchange shall be a governmental agency or nonprofit entity that is established by a State,” apparently narrowing the definition of “Exchange” to encompass only state-created Exchanges.

Section 1311’s directive that each State establish an Exchange cannot be understood literally in light of § 1321, which provides that a state may “elect” to do so. Section 1321(c) provides that if a state fails to establish an Exchange by January 1, 2014, the Secretary “shall … establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”  The defendants’ position is that the term “such Exchange” refers to a state Exchange that is set up and operated by HHS.  In the absence of state action, the federal government is required to step in and create, by definition, an American Health Benefit Exchange established under § 1311” on behalf of the state.

The Fourth Circuit concluded that the defendants have “the stronger position, although only slightly.” The court could not ignore the common-sense appeal of the plaintiffs’ argument; a literal reading of the statute undoubtedly accords more closely with their position. As such, based solely on the language and context of the most relevant statutory provisions, the court cannot say that Congress’s intent is so clear and unambiguous that it forecloses any other interpretation.

Noting that the Act’s legislative history is not particularly illuminating on the issue of tax credits. Congress, perhaps because they did not study and some did not read the ACA before it was enacted, did not expect the states to turn down federal funds and fail to create and run their own Exchanges.

Having examined the plain language and context of the most relevant statutory sections, the context and structure of related provisions, and the legislative history of the Act, the Fourth Circuit was unable to say definitively that Congress limited the premium tax credits to individuals living in states with state-run Exchanges.

Simply put, the statute is ambiguous and subject to at least two different interpretations. As a result, the court was unable to resolve the case in either party’s favor at the first step of the analysis.

The court could not discern whether Congress intended one way or another to make the tax credits available on HHS-facilitated Exchanges. The relevant statutory sections appear to conflict with one another, yielding different possible interpretations. In light of this uncertainty, it concluded that is dispute is a suitable case in which to apply the principles of deference.

When an agency interprets ambiguities in its organic statute, it is entirely appropriate for that agency to consider policy arguments that are rationally related to the statute’s goals. As long as the agency stays within Congress’ delegation, it is free to make policy choices in interpreting the statute, and such interpretations are entitled to deference.

Congress understood that one way to avoid such price increases was to require near-universal participation in the insurance marketplace via the individual mandate. In combination with the individual mandate, Congress authorized broad incentives—totaling hundreds of billions of dollars—to further increase market participation among low- and middle-income individuals. Insurers in States with federally-run Exchanges would still be required to comply with guaranteed-issue and community-rating rules, but, without premium tax subsidies to encourage broad participation, insurers would be deprived of the broad policy-holder base required to make those reforms viable. The statute provides that the Secretary “shall prescribe such regulations as may be necessary to carry out the provisions of this section”.

This clear delegation of authority to the IRS relieved the court, the Fourth Circuit concluded, of any possible doubt regarding the propriety of relying on one agency’s interpretation of a single piece of a jointly-administered statute.

The Fourth Circuit stated it was satisfied that the IRS Rule is a permissible construction of the statutory language and the trial court judgment was affirmed.

ZALMA OPINION

I felt it necessary to show both sides of this argument. Essentially the DC Circuit found that it was the clear and unambiguous language of the statute – enacted so that we can see what was in it – allowed for tax credits only to those persons who bought insurance through a state created exchange. The Fourth Circuit found that the IRS was to interpret the statute and regardless of the clear and unambiguous language of the statute; regardless of the Fourth Circuit’s conclusion that the policy is ambiguous it found there was no intent shown by Congress to give people who buy insurance from federal exchanges any tax credits to assist them to buy insurance; and found that what the Congress said in the law was not what Congress meant.

Contrary to the statement of the court and the Congress when it enacted the statute and the ACA itself has nothing to do with insurance. Insurance is, by definition, a contract where an insurer agrees to indemnify an insured, for payment of premium, against certain described risks of contingent or unknown causes of loss. The ACA requires contracts that pay for known and existing causes of injury, illness or loss. The ACA is an entitlement taking taxpayers money and giving it to the poor and middle class who claim they cannot afford to buy health insurance.

Hopefully, when the decision of the Fourth Circuit and the decision of the DC Circuit goes to the U.S. Supreme Court that the Supreme Court will opine that the ACA means what it says and concur with the finding of both courts of appeal that the federal government is not a “State.”

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.

The 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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It’s Hard to Fight Fraud

Zalma’s Insurance Fraud Letter

August 15, 2014

In the 16th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on August 15, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.    Fraud Obvious but Summary Judgment Fails.
2.    New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the ABA.
3.    137 Years In Prison for Insurance Fraud.
4.    Lawyer in Trouble for Fraud
5.    Barry Zalma is On World Risk and Insurance News

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

•    Settlement Must Be In Writing – August 14, 2014
•    Suit Against Tenant Not Subrogation – August 13, 2014
•    Ambiguity Saves Claim – August 12, 2014
•    IRS Exceeded Authority When It Tried to Change Statute – August 10, 2014
•    Privilege Weakened – August 8, 2014
•    Barry Zalma on WRIN.tv – August 7, 2014
•    Crime by Lawyer Does Not Pay – August 7, 2014
•    Personal Injury Offenses Must Be Alleged – August 6, 2014
•    No Right to Contribution in Florida – August 5, 2014
•    Can’t Make a Purse from a Sow’s Ear – August 3, 2014
•    Fraud Alerts – August 1, 2014
•    Claim Collapses Because of Lack of Maintenance – July 31, 2014
•    Fortuity and Standing – July 30, 2014
•    Just for Fun – July 29, 2014
•    False Swearing – A Defense to Fraudulent Claims – July 28, 2014
•    How Coinsurance Works – July 25, 2014
•    Courts Should Never Rewrite Insurance Policies – July 24, 2014
•    The Limits on An Insurance Agent’s Duty – July 23, 2014
•    Corporation and Sole Owner are Separate Entities – July 22, 2014
•    Judges Cannot Make Law – July 21, 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 full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can 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.

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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Settlement Must Be In Writing

Meeting of Minds Required to Enforce Settlement

Litigants understand that the best resolution of a lawsuit is a settlement. Most are entered into with the assistance of mediators and multiple contacts with counsel. Sometimes one party thinks there is a settlement and the other does not agree. In just such a situation, Akers v. Minnesota Life Ins. Co., Slip Copy, 2014 WL 3824189 (S.D.W.Va., 8/4/2014), a U.S. District Court was asked to determine if there was an enforceable settlement.

Background

Walter Akers, now deceased, worked for defendant Alpha Natural Resources, LLC (“Alpha”) before his death on January 25, 2011 at the age of 63. He died after being hospitalized almost continuously following an accident at home that occurred in late May of 2010.

At issue in this case is whether Judy Akers (“Akers” or “Ms. Akers”), Walter’s wife, is entitled to collect certain insurance benefits outlined in Alpha’s Welfare Benefit Plan (the “Plan” or the “Alpha Plan”). The Plan offered both Life and Accidental Death & Dismemberment (“AD & D”) insurance. Mr. Akers was enrolled in both basic (that is, employer-paid) and supplemental (employee-paid) forms of life insurance, and he was also enrolled for Basic AD & D insurance. According to Akers, she was and is entitled to collect $274,000 for each of the available coverages as a result of her husband’s death, but this has not been paid to her by Minnesota Life.

The dispute arises because Mr. Akers died after the the Policy terminated on December 31, 2010. Alpha chose to cancel the Minnesota Life Policy and go with a different insurance carrier. The employees had the right to convert the policy to an individual policy.

Mr. Akers was not employed by Alpha for five years prior to his death, but did die within 31 days of the cancellation of the policy. Ms. Akers and Alpha assert that Ms. Akers was entitled to collect the benefits under the conversion privilege.

Before the suit began, by letter dated August 10, 2011, Alpha agreed to pay Ms. Akers $548,000 for the Basic Life insurance benefit and the Basic AD & D benefit. Alpha did so “upon condition that it shall have the right to recover all sums paid to you [ (Akers) ] from the insurance carrier [ (Minnesota Life) ] under the Plan.” Their agreement also noted that the Plan Sponsor, Alpha, is pursuing payment of these benefits from the group insurance carrier under the Plan.

Akers’ original complaint in state court only named Minnesota Life as a defendant. Akers amended the complaint in this court to name Alpha as a defendant as well, seeking the Supplemental Life benefits from it. Alpha has filed a crossclaim against Minnesota Life to recover the $548,000 it paid Akers.

Akers also asserted that due to Defendant Minnesota Life Insurance Company’s unwarranted refusal to pay policy benefits to the Plaintiff. Plaintiff alleged she suffered damages in an amount equal to the Basic Life Coverage, AD & D Coverage and Employee Paid Basic Life coverage which is believed to be eight hundred and twenty two dollars [sic] ($822,000). Plaintiff has assigned her rights to Defendant Alpha.

The dispute is this: Minnesota Life believes the agreement was to settle and dismiss all of Akers’ claims in the Third Amended Complaint, while Akers believes the agreement was to settle and dismiss only the Supplemental Life claim in the Third Amended Complaint, or, that no agreement was ever reached.

Findings of Fact

In late 2012, several months before the filing of the Third Amended Complaint, Akers and Minnesota Life engaged in settlement discussions. Those discussions, and a succeeding mediation, were not fruitful and the parties did not settle. If the court accepts the plaintiff’s attorneys’ recollection of the call, Tiffey assented to a representation that the settlement was for the Supplemental Life claim only and that Alpha’s rights were not affected. But even if the court adopts Tiffey’s view—that he remained silent—the court nevertheless found that his silence was an expression of assent to Preston’s representation that the settlement was for the Supplemental Life claims only and it was not to affect Alpha. Through the entire pendency of this case, Akers never told Preston that he was permitted to settle any claim other than the Supplemental Life claim.

Conclusions of Law

A settlement agreement is considered to be a contract. Resolution of a motion to enforce a settlement agreement draws on standard contract principles, although it may be accomplished within the context of the underlying litigation without the need for a new complaint.

Authority to Settle

Minnesota Life argues that whether or not Preston had actual authority to settle all three coverages under the Policy, it was apparent when the settlement was allegedly reached on April 11 that Preston had that authority, and that the settlement agreement is enforceable because Minnesota Life is entitled to rely on Preston’s apparent authority. As a preliminary note, the court found that Preston did not have actual authority to settle the Basic Life and Basic AD & D claims.

It is generally accepted that when a client retains an attorney to represent him in litigation, absent an express agreement to the contrary, the attorney has implied authority to conduct the litigation and to negotiate its resolution. But the substantive decisions of whether to bring suit, to dismiss suit, or to settle are not by implication ones that the attorney is authorized to make. Apparent authority results from a principal’s manifestation of an agent’s authority to a third party, regardless of the actual understanding between the principal and agent Indeed, apparent authority is “entirely distinct” from—and sometimes conflicts with—both express and implied authority.

The authority to negotiate is far different from the authority to agree to a specific settlement. Our review of the record uncovered no manifestation by the plaintiff to the defendant or its attorneys from which the defendant could reasonably conclude that the plaintiff had authorized his attorney to consummate a settlement.

In this case, Minnesota Life has put forth no evidence that Akers herself—the principal—ever indicated to Tiffey-the third party—that Preston had the authority to settle the Basic Life and AD & D claims, nor does Tiffey identify any representation (or lack thereof) that he relied upon to form a belief that Preston had the authority to settle either of those claims. Indeed, Tiffey never indicated that he received any communication from Akers at all.

Mutual Assent

Minnesota Life argues that a meeting of the minds occurred on April 11, 2014, when Preston replied to Tiffey’s e-mail containing some terms with the statement

Akers and Minnesota Life did not form an agreement. All of the terms of the agreement were plainly not agreed upon. This was established by the parties’ near-constant negotiations over the wording of the release and their addition of extra terms after April 11.

The court concluded, therefore, that an agreement was not formed. Although Preston responded to Tiffey’s April 11 e-mail by stating that he agreed with Tiffey’s “summary of the settlement,” both knew that still other terms were meant to be included in a final writing and that Preston did not intend to be bound by the “summary” alone.

Accordingly, the preliminary agreement of April 11 is not binding as a matter of federal law.

The settlement needed a formal writing for complete expression. Tiffey indicated as much in the e-mail when he stated that a release would be forthcoming. The amount involved is large, at $274,000. The contract is unusual, inasmuch as Akers, as well as Alpha, believed that a writing that purported to settle claims that Akers did not own may adversely affect Alpha, the requirements of which may adversely affect Akers as well. The proposed settlements were very detailed. Numerous written drafts were proposed after the April 11, 2014 e-mail exchange. The court concluded that the parties intended to be bound by a final written agreement. However, they were eventually unable to agree upon the terms of the settlement agreement. Thus, there is no enforceable settlement under West Virginia law.

ZALMA OPINION

This case is clearly a failure of basic lawyering. If a suit or claim is to be settled there must be a meeting of minds of the parties and that meeting of the minds must be reduced to writing agreed to all parties. The parties were unable to create such a document. To try to enforce an oral settlement contract based on conflicting correspondence and emails is just not enough. The court did a careful and detailed analysis of the issue that should never have been brought.

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.

The 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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Suit Against Tenant Not Subrogation

Owner May Sue Negligent Tenant for Uninsured Loss

Almost every commercial lease of multi-unit structures contain waivers of subrogation or an agreement that the building owner’s fire insurance is purchased for the benefit of both the owner and the tenants. Since it is improper for an insurer to sue its own insured courts across the country have decisions that prevent subrogation or indemnity if subrogation is waived or if the insurance is purchased for the mutual benefit of the owner and tenant.

In SFI Ltd. Partnership 8 v. Carroll — N.W.2d —-, 288 Neb. 698, 2014 WL 3766366 (Neb., 8/1/2014) the Nebraska Supreme Court was asked to deal with a claim that the antisubrogation rule adopted in Nebraska applied when the owner’s insurance was not involved in payment for fire damage allegedly caused by the tenant because of a large deductible.

In previous cases, the Nebraska Supreme Court has applied an antisubrogation rule to prohibit a landlord’s insurer from seeking reimbursement from the tenant of fire losses paid by insurance.

BACKGROUND

SFI Ltd. Partnership 8(SFI) owns an apartment complex containing approximately 200 apartments. Through its agent, SFI leased an apartment to Michelle Carroll. SFI’s agent and Carroll signed a residential lease agreement including various addenda. The lease employed a standard form used for all units in the complex. Tenants were not allowed to change any of the provisions of the lease or addenda.

The lease included provisions requiring Carroll to pay for repairs caused by her use of the unit and to maintain renter’s insurance including “a personal liability coverage to a minimum of $100,000.00.”

A fire occurred in the apartment rented to Carroll. Both the apartment and the surrounding building were damaged. SFI had $10 million of total insurance coverage on the apartment complex. The policy provided for a deductible of $250,000 per occurrence unless a specific deductible applied.

The parties stipulated that SFI sustained damages in excess of $100,000 resulting from the fire, which damages were not covered by its insurance policy. But neither the total amount of damages nor the amount of any insurance recovery by SFI was included in the evidence.

Carroll had renter’s insurance in place at that time, and she submitted a claim to her insurer. Carroll’s insurer paid her $1,500, representing only her damages under “Loss of Use Coverage.”

LAWSUIT

SFI sued Carroll and attached a copy of the lease to the complaint. SFI alleged that Carroll breached several provisions of the lease. SFI further alleged that Carroll was negligent in failing to properly dispose of cigarettes being smoked in the apartment and that this negligence proximately caused the damage to the apartment and surrounding building. Carroll filed an answer. She alleged that the fire was caused by someone else; that SFI’s claims were barred because she and SFI were considered coinsureds under SFI’s fire insurance policy, that several paragraphs of the lease were unconscionable and void as against public policy; and that SFI failed to mitigate any damages.

Carroll moved for summary judgment. SFI then moved for partial summary judgment on Carroll’s claim that several paragraphs of the lease were unconscionable and void as against public policy. The parties stipulated that SFI brought the claim in its own behalf. They also stipulated that it was not a subrogation claim.

DISTRICT COURT’S DECISION

Following a hearing, the district court granted Carroll’s motion for summary judgment, denied SFI’s motion for partial summary judgment, and dismissed the complaint. The court stated that the crux of the case revolved around paragraph 17 of the lease, which stated: “Resident’s personal property is not insured or covered by Landlord for loss of any kind, including without limitation, loss due to theft, fire, smoke, wind, rain, lightening [sic], seismic occurrence or water damage.”

SFI filed a timely appeal.

ANALYSIS

Carroll admits that “this is not a true subrogation claim, [but] is a claim by a landlord against a tenant for the uninsured portion that public policy still bars as a gross economic waste.”

Under the antisubrogation rule, no right of subrogation can arise in favor of an insurer against its own insured or coinsured for a risk covered by the policy, even if the insured is a negligent wrongdoer. The antisubrogation rule has been extended to “implied coinsureds.” To allow subrogation under such circumstances would permit an insurer, in effect, to avoid the very coverage which its insured purchased. In addition, the insurer should not be in a situation where there exists a potential conflict of interest which could affect the insurer’s incentive to provide its insured with the indemnity promised.

The antisubrogation rule in Nebraska comports with the reasonable expectations of tenants and accounts for modern commercial realities by preventing the economic waste that will undoubtedly occur if each tenant in a multiunit dwelling or multiunit rental complex is required to insure the entire building against his or her own negligence.

Carroll’s allegations regarding the conscionability of the lease provisions placed SFI on fair notice that the lease provisions imposing liability on Carroll for damages resulting from fire were being challenged.

The interpretation of a lease, the unconscionability of a contract provision, and the determination of whether a contract violates public policy are questions of law.

SFI argues that the antisubrogation rule is inapplicable to the instant case. SFI brought this action against Carroll to recover damages which were not covered by its insurance policy. This is not a subrogation action brought by SFI’s insurer to recover sums the insurer paid to SFI. Because this is not a subrogation action, the antisubrogation rule does not apply. Accordingly, the district court erred when it applied the rule. Carroll concedes that this is not a true subrogation claim. She argues, however, that the principles of the antisubrogation rule should be extended to the landlord’s uninsured loss.

The Nebraska Supreme Court cautioned that courts should be cautious in holding contracts void on the ground that the contract is contrary to public policy; to be void as against public policy, the contract should be quite clearly repugnant to the public conscience. The Supreme Court could find no such repugnancy. Further, the term “unconscionable” means manifestly unfair or inequitable. Nothing in paragraph 17 of the lease is manifestly unfair or inequitable.

The Uniform Residential Landlord and Tenant Act contemplates that a court may determine a lease provision to be unconscionable, but expressly upholds tenants’ liability for negligent fire damage. Where a court finds that a rental agreement or any provision thereof was unconscionable when made, the court may refuse to enforce the agreement, enforce the remainder of the agreement without the unconscionable provision, or limit the application of any unconscionable provision to avoid an unconscionable result. But the act treats fire damage caused by a tenant’s negligence differently. The statute provides that: “Notwithstanding the provisions of this section, the tenant is responsible for damage caused by his [or her] negligence.”

Because it concluded that the lease’s paragraph 17 is not void as against public policy or unconscionable, the district court erred in entering summary judgment for Carroll upon that basis. The summary judgment must be reversed, and the cause remanded for further proceedings consistent with this opinion.

ZALMA OPINION

The antisubrogation rule is still alive and well in Nebraska, as it is in most states. No insurer should be allowed to recover in subrogation for amounts it paid to one insured from another insured. What this case stands for is that you can’t apply the antisubrogation rule if there is no insurance payment and no right of an insurer to recover part of the tort damages sought by the owner of the multiunit building.

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.

The 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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Ambiguity Saves Claim

 When Insurer and Insured Err Insured Wins

Malpractice policies contain language requiring notice of a claim within the policy period and that the tort must happen within the effective dates of the policy. States, like Maryland, by statute impose a prejudice requirement on late reports of a loss.

In Catlin Specialty Ins. Co. v. Aron, Not Reported in F.Supp.2d, 2014 WL 3889075 (D.Md.) Only the Westlaw citation is currently available the insurer brought a declaratory judgment action to U.S. District Court in the District of Maryland. The action dealt with a medical malpractice insurance coverage dispute.

Defendant Dr. Barry I. Aron (“Dr.Aron”) is an obstetrician/gynecologist who had purchased an insurance policy from Plaintiff Catlin Specialty Insurance Co. (“Catlin”). After becoming aware of a claim by Defendant Sherry Marie Pfenninger (“Ms.Pfenninger”) against Dr. Aron arising out of a 2010 surgery, Catlin filed this declaratory judgment action to determine the scope of its duty to defend and indemnify Dr. Aron and Barry I. Aron, M.D., P.C. (Dr. Aron’s professional corporation). Both parties filed motions for summary judgment.

BACKGROUND

The Insurance Policies

Dr. Aron purchased one-year insurance policies from Catlin Specialty Insurance Co. over the course of several years. The 2012 Policy ran from January 1, 2012 to January 1, 2013, while the 2013 Policy ran from January 1, 2013 to January 1, 2014. Both policies named Dr. Aron as the “named insured” and included Barry I. Aron, M.D., P.C.-Dr. Aron’s professional corporation-as an “additional named insured.”

The 2012 Policy required that a claim must “first made in writing during the policy period and reported to the Company in writing during the policy period or any applicable extended reporting period.”

Additionally, one of the conditions of the Policy was that the insured—i.e., Dr. Aron—had to provide Catlin Specialty Insurance with written notice of a claim by the expiration of the applicable policy.

The 2012 Policy also explains how the timing of the claim and the reporting of the claim are to be calculated. A claim is considered reported “on the date when [Catlin Specialty Insurance Co.] first receives written notice from a Named Insured, Additional Insured or Additional Named Insured that a claim has been made against an Insured as a result of an alleged loss event to which this Policy applies.”

Finally, the Policy identifies several coverage exclusions. Of particular import in this case is Exclusion 11(ii), which expressly excludes coverage for “claims, incidents or loss events which were first brought to the attention of the Insured or reported to another insurer prior to the inception date.”

Surgery on Ms. Pfenninger

Defendant Dr. Barry Aron (“Dr.Aron”) is an obstetrician/gynecologist practicing in Charles County, Maryland. This suit arises out of a surgery that Dr. Aron performed on Defendant Sherry Marie Pfenninger (“Ms.Pfenninger”) on December 30, 2010. The surgery—known as a pelvic laparotomy—required Dr. Aron to make an incision in the abdominal wall. Dr. Aron removed a cystic mass in the right pelvic area and tied off a number of vessels. Subsequently, a pathological examination revealed that Dr. Aron had removed a small segment of Ms. Pfenninger’s right ureter, which is a tubular structure that allows urine to drain from the kidney to the bladder. The pathologist who conducted the examination informed Dr. Aron of the issue on January 3, 2011.  Dr. Aron contacted Ms. Pfenninger—who had already been discharged—and informed her that she needed to return to the hospital so that a catheter could be inserted directly into her kidney and allow urine to drain into an external bag until her ureter could be surgically repaired.

Events Following the Surgery

As noted above, Dr. Aron renewed his policy with Catlin Specialty Insurance for the 2012 calendar year. The renewal application contained the following question: “Has any claim or suit for alleged malpractice ever been brought against you, or are you aware of circumstances that might reasonably lead to such a claim or suit?”  Dr. Aron responded to that question in the affirmative in his November 11, 2011, renewal application.

Dr. Aron did not include a “claims supplement” with respect to Ms. Pfenninger’s claim as the application directed. Regardless, Catlin Specialty Insurance renewed Dr. Aron’s policy, without demanding the claims supplement.

On November 26, 2012, Ms. Pfenninger’s counsel mailed Dr. Aron a demand letter which stated that Ms. Pfenninger intended to file a medical negligence claim against Dr. Aron and made a settlement demand of $725,000. Dr. Aron contacted Catlin Specialty Insurance Co. on January 7, 2013 and notified it of Ms. Pfenninger’s claim. On February 1, 2013, Catlin Specialty Insurance denied Dr. Aron’s claim. The denial notice stated that “[b]ecause you waited to report this claim past the expiration date of the applicable policy [i.e., December 31, 2012], Catlin has no obligation to defend or indemnify you in connection with this claim.”

ANALYSIS

The Aron Defendants contend that § 19–110 of the Insurance Article of the Maryland Code applies to the Policy in this case and, therefore, requires Plaintiff Catlin Specialty Insurance to demonstrate that Dr. Aron’s late reporting of Ms. Pfenninger’s claim somehow prejudiced Catlin. Section 19–110 provides: “An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.” (emphasis added)

The claim for which Dr. Aron seeks coverage was first made while the 2012 Policy was in effect. Thus, in this case, the operative fact is not the timing of the claim itself but the timing of the reporting of that claim. Essentially, Catlin argues that, while the first factor of coverage is present, the second is not, and therefore, there is no coverage. Notably, however, this second element for coverage is merely a notice requirement. Failure to provide timely notice constitutes a breach of the Policy, and a policy breach triggers the applicability of § 19–110. As such, Catlin Specialty Insurance’s denial of coverage was improper absent a showing of prejudice.

EFFECT OF EXCLUSION 11(ii)

The next issue is whether Exclusion 11(ii) of the 2012 Policy relieves Catlin Specialty Insurance of its duty to defend and indemnify Dr. Aron. Exclusion 11(ii) of the 2012 Policy states that “[t]his insurance does not provide coverage for or apply to … any liability of an Insured for all … claims, incidents or loss events which were first brought to the attention of the Insured or reported to another insurer prior to the inception date.” It is undisputed that the inception date of the 2012 Policy was January 1, 2012.

What is disputed, however, is whether there was an “incident” that would trigger the applicability of Exclusion 11(ii). The term “incident” is not expressly defined by the Policy. Maryland applies the general rule that if the policy language is ambiguous, then the language will be construed liberally in favor of the insured and against the insurer as drafter of the instrument.

In determining the meaning of the term “incident,” the Court must consider the contract as a whole. The Court construed the term in a claims-related fashion. This reading is buttressed by the fact that the Policy expressly defines “injury” in a way that significantly overlaps the suggested meaning of the undefined term “incident.”

Under this reading of the term, there was no “incident” triggering the coverage exclusion. Specifically, Dr. Aron’s receipt of the pathology report indicating that he had removed part of Ms. Pfenninger’s ureter was merely an “injury” under the terms of the Policy. It was not the type of “incident” indicating an impending claim against Dr. Aron that was necessary to trigger Exclusion 11(ii). Accordingly, Catlin has failed to show that coverage for Ms. Pfenninger’s claim is excluded, and therefore Catlin Motion for Summary Judgment will be denied and Dr. Aron’s Motion for Partial Summary Judgment will be granted.

ZALMA OPINION

Insurance policies, to be enforced, need clear and unambiguous language. Although Catlin believed its policy wording was not ambiguous it failed to convince the judge who saw a severely injured person and a doctor who hurt his patient and, if there was no insurance, might not be able to pay damages. Clearly Dr. Aron knew that he had injured Ms. Pfenninger before he signed the renewal application. That is why he answered the question in the affirmative. Catlin’s underwriter should have seen the affirmative answer and demanded the claim description form. That failure put the claim into the renewal policy that might not have been issued had Catlin known of the prior claim.

Of course Dr. Aron could have saved this litigation by reporting the loss and claim before the policy renewed.

Both the insurer and the insured made serious errors. When both err the court will usually rule in favor 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.

The 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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IRS Exceeded Authority When It Tried to Change Statute

Congress, Not Courts, Must Cure Statute Problems

The DC Circuit Court of Appeals was asked, in  Halbig v. Burwell — F.3d —, 2014 WL 3579745 (C.A.D.C., July 22, 2014), to interpret a provision of the Patient Protection and Affordable Care Act (ACA) aka Obamacare. Suit was brought challenging the Internal Revenue Service (IRS) rule authorizing tax credits for insurance purchased on both state-run and federally-facilitated exchanges.

The United States District Court for the District of Columbia, Paul L. Friedman, J., — F.Supp.2d —, 2014 WL 129023, entered summary judgment in government’s favor, and the plaintiffs appealed.

Section 36B of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act (ACA or the Act), makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces — known as “American Health Benefit Exchanges,” or “Exchanges” for short — that are “established by the State under section 1311” of the Act. 26 U.S.C. § 36B(c)(2)(A)(i). On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under section 1321 of the Act.

Appellants are a group of individuals and employers residing in states that did not establish Exchanges. For reasons we explain more fully below, the IRS’s interpretation of section 36B makes them subject to certain penalties under the ACA that they would rather not face.

Congress enacted the ACA in 2010 “to increase the number of Americans covered by health insurance and decrease the cost of health care.” The ACA pursues these goals through a complex network of interconnected policies focused primarily on helping individuals who do not receive coverage through an employer or government program to purchase affordable insurance directly. Central to this effort are the Exchanges. Exchanges are governmental agencies or nonprofit entities that serve as both gatekeepers and gateways to health insurance coverage. Among their many functions as gatekeepers, Exchanges determine which health plans satisfy federal and state standards, and they operate websites that allow individuals and employers to enroll in those that do.

However, because Congress cannot require states to implement federal laws, [Printz v. United States, 521 U.S. 898, 904–05, 935, 117 S.Ct. 2365, 138 L.Ed.2d 914 (1997)] if a state refuses or is unable to set up an Exchange, section 1321 provides that the federal government, through the Secretary of Health and Human Services (HHS), “shall … establish and operate such Exchange within the State.” [42 U.S.C. § 18041(c)(1).] Only fourteen states and the District of Columbia have established Exchanges. The federal government has established Exchanges in the remaining thirty-six states, in some cases with state assistance but in most cases not. The “premium assistance amount” is based on the cost of a “qualified health plan … enrolled in through an Exchange established by the State under [section] 1311 of the [ACA].”  Likewise, a “coverage month” is a month for which, “as of the first day of such month the taxpayer … is covered by a qualified health plan … that was enrolled in through an Exchange established by the State under section 1311 of the [ACA].” 26 U.S.C. § 36B(c)(2)(A)(i).

The language of the statute, in other words, establishes that the tax credit is available only to subsidize the purchase of insurance on an “Exchange established by the State under section 1311 of the [ACA].”

In a regulation promulgated on May 23, 2012, the IRS interpreted section 36B to allow credits for insurance purchased on either a state- or federally-established Exchange. Specifically, the regulation provided that a taxpayer may receive a tax credit if he “is enrolled in one or more qualified health plans through an Exchange,” [26 C.F.R. § 1.36B–2(a)(l)], which the IRS defined as “an Exchange serving the individual market for qualified individuals …, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS. ” [45 C.F.R. § 155.20]

The IRS, when it created the rule, acknowledged that commentators disagreed on whether the language in section 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges. Regardless, the IRS asserted, without elaboration, that the statutory language of section 36B and other provisions of the ACA, supported its view. [Health Insurance Premium Tax Credit, 77 Fed.Reg. 30,377, 30,378 (May 23, 2012)].

This broader interpretation has major ramifications. By making credits more widely available, the IRS Rule gives the individual and employer mandates — key provisions of the ACA — broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed eight percent of their projected household income. By some estimates, credits will determine on which side of the eight-percent threshold millions of individuals fall. Thus, by making tax credits available in the 36 states with federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.

The IRS Rule affects the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers — defined as those with at least 50 employees — to provide their full-time employees with health insurance. Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees enrolls in a qualified health plan with respect to which an applicable tax credit is allowed or paid with respect to the employee. Even more than with the individual mandate, the employer mandate’s penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage. The IRS Rule has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.

THE ISSUE

The court was asked to determine whether the ACA permits the IRS to provide tax credits for insurance purchased through federal Exchanges.

A federal Exchange is not an “Exchange established by the State,” and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges. The DC Circuit Court of Appeal concluded that the statute plainly distinguishes Exchanges established by states from those established by the federal government.

A state is not required to establish an Exchange; the ACA merely encourages it to do so. The problem confronting the IRS Rule is that subsidies also turn on a third attribute of Exchanges: who established them.

ANALYSIS

The government argues that the DC Circuit should not adopt the plain meaning of section 36B, however, because doing so would render several other provisions of the ACA absurd. Our obligation to avoid adopting statutory constructions with absurd results is well-established.

The Constitution assigns the legislative power to Congress, and Congress alone and legislating often entails compromises that courts must respect. A provision thus “may seem odd” without being “absurd,” and in such instances it is up to Congress rather than the courts to fix it, even if it may have been an unintentional drafting gap.  A court’s role is not to “correct” the text so that it better serves the statute’s purposes. A court should not, and the DC Circuit refused to, ratify an interpretation that abrogates the enacted statutory text absent an extraordinarily convincing justification.

The DC Circuit concluded that the government’s arguments was tilting at windmills like old Don Quixote. The government assumed that when section 1312(a) states that “[a] qualified individual may enroll in any qualified health plan available to such individual and for which such individual is eligible,” [42 U.S.C. § 18032(a)(1)], means that only a qualified individual may enroll in such a plan. The obvious flaw in this interpretation is that the word “only” does not appear in the provision. The court repeatedly emphasized that it is not its role to engage in a statutory rewrite by inserting the word “only” here and there.

Giving the phrase “established by the State” its plain meaning creates no difficulty, let alone absurdity. Federal Exchanges might not have qualified individuals, but they would still have customers — namely, individuals who are not “qualified individuals.”

The government urged the DC Circuit to, in effect, to strike from section 36B the phrase “established by the State,” on the ground that giving force to its plain meaning renders other provisions of the Act absurd. But the court found that the government has failed to make the extraordinary showing required for such judicial rewriting of an act of Congress. Nothing in harmony with the rest of the ACA requires interpreting “established by the State” to mean anything other than what it plainly says.

As the Supreme Court explained an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate. And neither may the DC Circuit. The role of the court is to apply the statute as it is written — even if we think some other approach might accord with good policy.

The DC Circuit reported that it reached its conclusion with reluctance. At least until states that wish to can set up Exchanges, it understood that its ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides the court is higher still.

Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that the court’s duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges.

Thus, although the decision has major consequences, the court’s role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA. Having concluded it is not, the decision of the district court was reversed.

ZALMA OPINION

When Congress and governmental agencies get involved in matters dealing with insurance chaos often reigns. That is because they do not understand insurance or how it is to work. Although the intent of Congress was to increase the number of Americans covered by health insurance and decrease the cost of health care, it did so by means that had nothing to do with insurance. Instead of creating a statute that would allow insurers to compete for the business of the public to make insurance more affordable and tailored to the needs of the insureds the Congress set up a system to require specific types of coverage and make it affordable by giving each person who purchased through a state exchange a tax credit not reducing the cost of the insurance but, rather, the amount paid.

Because the statute was lengthy and not studied before it was enacted it included strange and odd provisions that did not fulfill the silent intent of its authors. The DC Circuit recognized that problem and resolved it by reading the statute as it was written and refused the request of the government to rewrite it. Another federal court of appeal ruled exactly opposite of the ruling made by the DC Circuit.  It will be up to the U.S. Supreme Court, that has already ruled, neither an agency, nor a court, may rewrite clear statutory terms to suit its own sense of how the statute should operate.

Insurance, unlike the mandate of the ACA, is a contract whereby the insurer promises to indemnify the insured against certain described risks of contingent or unknown losses. The ACA in attempting to make what it described as “health insurance” created a statute that was sufficiently odd that the IRS, the agency ordered to make it function, tried to rewrite the statute without involving Congress. In so doing the DC Circuit found it exceeded its authority.

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.

The 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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Privilege Weakened

Insurance Lawyers’ Opinions Not Privileged Before Claim Denied

When an attorney states his or her opinion to a client it is privileged. When an attorney does work that includes his or her thought processes, it is protected from disclosure to others. In New York state, now, that privilege does not necessarily apply.

I have represented insurers in claims situations for more than 40 years. In all that time I acted as a lawyer for the insurer not a claims person. I provided advice and counsel to claims people so they could make a decision. That advice and counsel was, and should always be, privileged and protected from the probing eyes of those adverse to a lawyer’s client. In New York, that may no longer be true, and lawyers must carefully write everything to their insurer clients in a manner that they expect it to be read to a jury.

The Supreme Court, Appellate Division, First Department, New York, in one of its typical brief opinions, have shaken the meaning of the attorney client privilege for insurers who retain lawyers to advice them about claims and coverage issues before the insurer is sued.

In National Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. TransCanada Energy USA, Inc. — N.Y.S.2d —, 2014 WL 3744446 (N.Y.A.D. 1 Dept., July 31, 2014), the Appellate Division dealt with the order of the Supreme Court, New York County (Barbara Jaffe, J.), entered August 19, 2013, which, inter alia, upon cross motions to confirm and to reject the special referee’s finding that any documents that pre-date the rejection by National Union Fire Insurance Company of Pittsburgh, Pennsylvania, ACE INA Insurance, Arch Insurance Company (the market insurers), and Factory Mutual Insurance Company (with the market insurers, the insurance companies) of TransCanada Energy USA, Inc., TC Ravenswood Services Corp., and TC Ravenswood, LLC’s (TransCanada) claims are not protected from disclosure, and a motion for a protective order, ordered the insurance companies to produce to TransCanada all the documents except certain specified ones, unanimously affirmed, with costs.

The motion court properly found that the majority of the documents sought to be withheld are not protected by the attorney-client privilege or the work product doctrine or as materials prepared in anticipation of litigation. Following an in camera review, the court determined that certain documents were privileged because they contained legal advice.

As for the remaining documents, the court found that the insurance companies had not met their burden of demonstrating privilege. The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. Further, the record shows that counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company.

Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so “‘merely because [the] investigation was conducted by an attorney’” (see Brooklyn Union Gas Co. v. American Home Assur. Co., 23 AD3d 190, 191 [1st Dept 2005] ).

We need not reach the question of whether the common interest exception to the attorney client privilege applies, because the documents at issue are not privileged.

The insurers’ argument that they actually denied TransCanada’s claims before the date identified in the motion court’s order, and that therefore any documents prepared after that date are protected attorney work product, is a factual argument improperly raised for the first time on appeal.

ZALMA  OPINION

I do not have access to the documents that the court reviewed in camera. I can only hope they are truly not privileged. The court found – and based its ruling upon – its conclusion that “counsel were primarily engaged in claims handling—an ordinary business activity for an insurance company.”

In my opinion and experience insurance company lawyers retained to provide advice and counsel upon a claims situation are not “primarily engaged in claims handling” but are engaged in providing advice and counsel – the stock in trade of a lawyer – to claims handlers to allow the claims handlers to make a decision. If, in this case, the lawyers acted as claims handlers and not lawyers advising claims handlers then this decision has a very limited effect.

Regardless, from the first day I worked as a coverage lawyer for insurers, every opinion I wrote were written in a manner that I would be proud if they were read to a jury.

Contrary to what was published in the insurance trade journals, this case is not a major limitation on the attorney client privilege and the attorney work product protection, it is a lesson to insurance coverage counsel to limit their work to providing the advice and counsel that people and insurers retain lawyers to provide.

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.

The 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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Barry Zalma on WRIN.tv

Personal Assistance Programs are the biggest health insurance fraud problem in the U.S. Medicaid system.

Barry Zalma returns to World Risk and Insurance News with another series of “Who Got Caught? programs looking at healthcare fraud. Here, the noted fraud and claims expert reviews a scam associated with a ‘personal assistance program’, the biggest fraud problem in the United States Medicaid system.

According to Mr. Zalma, these programs are vulnerable to fraud because they allow the Medicaid recipient to control the selection and payment of personal care attendants.  In a typical fraud scenario, explains Mr. Zalma, “the scam payments made by the state … are split between the Medicaid recipient and the ghost employee.”    The government is prosecuting these frauds in the hopes of deterring others   from defrauding the Medicaid system.

If you’d like more information on fraudulent insurance claims, consider Barry Zalma’s “Insurance Fraud Deskbook,” available through the American Bar Association, or at www.Zalma.com. And for more of Barry Zalma’s commentary on insurance fraud, visit our On Demand Library. the WRIN.tvOn Demand Library.

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Crime by Lawyer Does Not Pay

Lawyer Who Steals From Client Must Be Disbarred

When a lawyer does a criminal act he or she puts the license to practice law in jeopardy. The public believes that such a criminal act is sufficient to jail the lawyer and cause the lawyer to lose his or her license. The fact is that the Supreme Courts of the various states are loathe to totally disbar a lawyer, even after a felony conviction. However, when, as in In re Disciplinary Action against Brost — N.W.2d —-, 2014 WL 3610854 (Minn., July 23, 2014) the lawyer’s misconduct is egregious the court will overcome its reluctance and take the lawyer out of the stream of commerce and pull the license.

FACTS

On December 16, 2013, the Director of the Office of Lawyers Professional Responsibility (OLPR) filed a petition for disciplinary action against Linda A. Brost. The petition alleged that Brost engaged in professional misconduct when she committed theft by swindle and identity theft, stealing approximately $43,000 from a client. The petition also alleged that Brost failed to cooperate in the Director’s disciplinary investigation. Brost did not respond to the petition. By order filed on February 5, 2014, the Supreme Court of Minnesota deemed all allegations in the petition for disciplinary action admitted.

Respondent, Linda A. Brost, was admitted to practice law in Minnesota on October 12, 1987. Brost was indefinitely suspended on March 31, 2009, for using the expired notary stamp of a deceased notary to fraudulently notarize her own signature on a certificate of trust prepared for a client, submitting the fraudulent document to a bank, and failing to cooperate with the Director’s investigation, in violation of law. [In re Brost, 763 N.W.2d 637, 638 (Minn.2009). Brost remains suspended. The Director now seeks disbarment for Brost’s theft of $43,000, Brost’s identity theft, and Brost’s non-cooperation with the Director’s investigation.

ANALYSIS

Theft by Swindle and Identity Theft

Brost’s theft arose from her representation of A.F., which dates back to 1993 when Brost drafted a will for A.F. Two friends of A.F. were each to receive gifts of $10,000 upon A.F.’s death and A.F.’s remaining assets were to be evenly distributed to the Church of St. Francis De Sales of St. Paul and Shriners Hospital, Twin Cities Unit. A.F. died in September 2005.

When A.F. passed away, he owned two annuity policies he had purchased from Jackson National Life Insurance in 1997. His two friends were beneficiaries of one policy and his estate was the beneficiary of the other policy. Brost knowingly and intentionally devised a scheme to avoid reporting A.F.’s two annuities to A.F.’s estate during probate. Between March 31, 2011, and March 31, 2012, Brost cashed or collected monthly annuity payments from A.F.’s annuities. In early 2012, Brost, pretending to be A.F., surrendered one of the two annuities for a cash payment of $28,641.60. Brost stole a total of approximately $43,000.

Based on this conduct, Brost was charged with six felonies, including theft by swindle, identity theft, aggravated forgery, and insurance fraud. Brost pleaded guilty and was later convicted of one count of theft and one count of identity theft both felonies.

Non–Cooperation with the Director’s Investigation

After Brost pleaded guilty to the theft of A.F.’s annuity payments the Director continued his efforts only to find that Brost failed to respond.  Brost was personally served with the petition for disciplinary action on December 6, 2013. Brost failed to respond to the petition.

The purpose of discipline for professional misconduct is not to punish the attorney but rather to protect the public, to protect the judicial system, and to deter future misconduct by the disciplined attorney as well as by other attorneys. The four factors that guide this court’s imposition of discipline are:

(1)     the nature of the misconduct;
(2)     the cumulative weight of the disciplinary violations;
(3)     the harm to the public; and
(4)     the harm to the legal profession.

Aggravating and mitigating circumstances are also considered.

Nature of the Misconduct

An attorney’s felony conviction for theft, fraud, or embezzlement has long been treated as serious professional misconduct that warrants disbarment, particularly where the criminal conduct occurs within the practice of law. However, much to the surprise of the public, felony convictions do not result in automatic disbarment.

Brost’s theft of $43,000 through the collection of A.F.’s annuity payments was serious misconduct, and it occurred within the practice of law.  Her misconduct directly stemmed from her relationship with her former client, A.F. The presumptive discipline for misappropriation of client funds is disbarment, unless there are substantial mitigating circumstances. Minnesota has disbarred attorneys for misappropriating far less than $40,000 of client funds. Brost has not offered any mitigating factors.

Brost also failed to cooperate with the disciplinary investigation. The noncooperation with the disciplinary process, by itself, may warrant indefinite suspension and, when it exists in connection with other misconduct, noncooperation increases the severity of the disciplinary sanction.

Cumulative Weight of the Violations

The severity and cumulative weight of multiple disciplinary rule violations may compel severe discipline even when a single act standing alone would not have warranted such discipline. Misconduct that includes multiple rule violations and persists over time is more serious than single isolated incidents or brief lapses in judgment. In this case, Brost engaged in multiple acts of misconduct that individually warrant discipline and add cumulative weight to the misconduct. Brost’s theft shows serious misconduct that was repeated over time as she collected A.F.’s annuity payments over the course of an entire year.

Harm to the Public and the Legal Profession

The court must also consider the harm the attorney’s misconduct caused to the public and to the legal profession when determining the proper discipline to impose. This includes consideration of the number of clients harmed and the extent of the clients’ injuries. Although Brost stole from only one client, she defrauded the estate of her client and her client’s rightful heirs out of $43,000. Brost’s felony convictions for stealing from her client caused harm to the public’s regard for the legal profession and undermined the public’s confidence in the ability of attorneys to abide by the rule of law. Furthermore, the misuse of funds is a breach of trust that reflects poorly on the entire legal profession and erodes the public’s confidence in lawyers.

Aggravating and Mitigating Circumstances

Felony convictions reflect serious misconduct. Attorneys who have not been disbarred for convictions for theft, fraud, or embezzlement have presented substantial mitigating factors. In addition to the absence of mitigating factors, there are aggravating factors present with regard to Brost’s misconduct. For example permanently misappropriating client funds for personal use should aggravate the misconduct. Brost clearly demonstrated a selfish and dishonest motive because she had no intention of returning any of the stolen funds and meant to permanently deprive A.F.’s estate and heirs of the proceeds from the annuities.

Brost’s disciplinary history is also an aggravating factor. Brost is currently indefinitely suspended for similar serious misconduct. The rules Brost previously violated are similar to the rules that Brost violated in this matter, and both sets of violations involve dishonest and fraudulent misconduct.  Brost committed the current acts of misconduct while suspended. It is clear that Brost’s suspension for similar misconduct did not serve as a deterrent to Brost. In short, Brost’s misconduct is aggravated by several factors, and there is no evidence of mitigating circumstances in the record.

Based on the substantial amount of money stolen, the fact that Brost stole the identity of a client, the failure to cooperate with the disciplinary investigation, and aggravating factors including Brost’s selfish and dishonest motive and Brost’s disciplinary history, the Supreme Court concluded that disbarment is the appropriate discipline in this case.

ZALMA OPINION

Lawyers are expected to be honorable and honest, especially when dealing with clients. Lawyer Brost committed multiple felonies acting as a lawyer while suspended from the practice of law. What causes me concern over this decision is the fact that the Supreme Court appeared reluctant to disbar this admittedly criminal lawyer who had no concern for her clients, the state bar, the public or the Supreme Court. This decision should have been a single sentence: “The lawyer stole from her client, a felony, and is for that reason disbarred.”

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.

The 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

Personal Injury Offenses Must Be Alleged

No Coverage — No Duty to Defend

Business relationships are often contentious. When a contract to sell a product devolves into a dispute by selling the product under a slightly different name. Suits are filed. Insurance is designed to protect the party insured against certain enumerated causes or risks of loss. However, no policy provides coverage for EVERY potential risk of loss.

In Crum & Forster Specialty Ins. Co. v. Willowood USA, LLC, Slip Copy, 2014 WL 3797673 (D.Or., Aug. 1, 2014) the U.S. District Court for the District of Oregon was faced with a dispute by plaintiff, Crum & Forster Specialty Insurance Company (Crum), along with defendant insurance providers Allied World Assurance Company (Allied) and Colony Insurance Company (Colony), sought a legal declaration against defendant Willowood USA, LLC (Willowood) that they have no duty to defend Willowood in a companion case before this Court, Repar Corporation v. Willowood USA, LLC et al., Civ. No. 6:13–cv–01043–MC (underlying action).

FACTUAL BACKGROUND

This action arises out of an insurance coverage dispute. Because this action relies on the factual allegations in the underlying action, the District Court first looked to the First Amended Complaint (FAC).

Repar, a corporation in the business of distributing agricultural pesticides, began distributing an agricultural pesticide containing tebuconazole under the trade names TEBUCON 45 DF and TEBUCON 3.6F in 2008.

Willowood, also a corporation in the business of distributing agricultural pesticides, was formed in December 2009.  Willowood agreed to “maintain the confidentiality of any confidential or proprietary information,” to not use “the name TEBUCON except for sales authorized under the EPA Form 8570–5 agreement,” and to allow Repar to “be the exclusive supplier of technical grade tebuconazole for both products.”  As a result, Repar granted Willowood a “license to distribute and sell products in connection with the TEBUCON mark as an EPA subregistrant of Repar for the TEBUCON 45 DF and 3.6F products and subject to Repar’s quality control.”

After gaining chemistry information Willowood successfully refiled its EPA registration applications using product chemistry data from another supplier.  In its refiled EPA registration applications, Willowood identified its products as WILLOWOOD TEBUCON 45DF and WILLOWOOD TEBUCON 3.6 SC. Id. “Willowood subsequently began using Repar’s TEBUCON mark in connection with the sale and distribution of its own tebuconazole products.”

Repar sought damages and injunctive relief under theories of implied-in-fact contract, quasi-contract/unjust enrichment, Federal Trademark Infringement (15 U.S.C. § 1114), and Federal Unfair Competition (15 U.S.C. § 1125(a)).

The insurance providers contend that the claims and allegations in the underlying action are not covered under the respective policies and, to the extent that the claims and allegations are covered, the claims and allegations are excluded.

DISCUSSION

Policy Coverage

Willowood contends that all three insurance providers must defend because the allegations in the underlying action “fall squarely within the coverage for ‘personal and advertising injury’ provided by each of the policies.”

Oregon determines the intent of the parties to an insurance contract by looking first to the plain meaning of any disputed terms and then to the structure and context of the policy as a whole. If the parties’ intent cannot be determined by doing so, the policy is construed against the insurer, because any reasonable doubt as to the intended meaning of an ambiguous term will be resolved against the insurance company and in favor of extending coverage to the insured.

The Policies

Colony’s policy extends the “duty to defend the insured against any ‘suit’ seeking ‘damages’” for covered “personal and advertising injur [ies].” “[I]njury, including consequential ‘bodily injury’, arising out of one or more of the following offenses: ¶ … d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; ¶ … f. The use of another’s advertising idea in your “advertisement”; or g. Infringing upon another’s copyright, trade dress or slogan in your ‘advertisement’.”

Willowood argued, in reliance upon the definition of “personal and advertising injury” that Repar, in the underlying action, alleges “disparagement” under subsection “d” and “use of another’s advertising idea in your ‘advertisement’ “ under subsection “f.” Because the policies do not define either “disparagement” or “use of another’s advertising idea in your ‘advertisement,’ “ the Court first considered whether the phrases in question have a plain meaning, ie., whether they are susceptible to only one plausible interpretation.

“Disparagement”

As long as the complaint contains allegations that, without amendment, state a basis for a claim covered by the policy, the duty to defend arises. That question can be answered only by examining Repar’s complaint.

In assessing Repar’s allegations, the court should not be concerned with potential factual determinations.  Rather, the court looks to those torts identified by the parties, including: (1) trade libel, (2) defamation, and (3) quasi-contract/unjust enrichment.

To prevail on a state law trade libel claim, it must be established that the defendant published false allegations about the plaintiff with malice, and that the plaintiff suffered special damages or pecuniary harm as a result of the publication.

The elements of a claim for defamation are: (1) the making of a defamatory statement; (2) publication of the defamatory material; and (3) a resulting special harm, unless the statement is defamatory per se and therefore gives rise to presumptive special harm.

The factual allegations of Repar’s FAC do not state a claim for defamation or trade libel.

The term implied contract has also been used to refer to contracts that are implied-in-law or quasi-contracts.Unlike true contracts, quasi-contracts are not based on the apparent intention of the parties to undertake the performances in question, nor are they promises. They are obligations created by law for reason of justice. To establish a quasi-contract, a plaintiff must prove all three of the following: (1) a benefit was conferred; (2) the recipient was aware that a benefit was received and; (3) under the circumstances, it would be unjust to allow retention of the benefit without requiring the recipient to pay for it.

Repar does not allege that Willowood belittled or discredited Repar’s goods or products. Rather, Repar merely seeks to utilize a remedial device to prevent unjust enrichment. Accordingly, Repar’s claim for breach of a quasi-contract/unjust enrichment is not covered as “disparagement” under the policies.

The policies also define “personal and advertising injury” as “[t]he use of another’s advertising idea in your ‘advertisement.’ Repar’s use of the TEBUCON mark in lieu of the chemical name, tebuconazole, represents a thought or conception (“idea”). This “idea” also represents an “advertising idea” under the broad definition identified above, ie., a conception intended to attract public attention to a product. For example, Repar alleges that the TEBUCON mark immediately and inherently signified the quality, reputation, and source of these products. This allegation, in tandem with the paragraphs identified by Willowood, plausibly indicate that Repar used the TEBUCON mark to distinguish its product from the competition, ie., to attract public attention to the advantages of its own product vis-à-vis its competition. However, to extend coverage to the insured, this “advertising idea” must also be used in an “advertisement.”

To the extent that Willowood’s interpretation is plausible, ie., the TEBUCON mark communicates information about goods or products to the general public, the District Court declined to find it reasonable. The mere sale of a product bearing another’s mark does not constitute an advertisement.

Exclusion

The insurer has the burden of proof that a claim or action is excluded. Also, any ambiguity in an exclusionary clause is strictly construed against the insurer. Repar, in the underlying action, seeks “damages” under claims asserting: breach of implied-in-fact contract; quasi-contract/unjust enrichment; Federal Trademark Infringement (15 U.S.C. § 1114); and Federal Unfair Competition (15 U.S.C. § 1125(a)).

Breach of Contract Exclusion

The exception precludes exclusion if “personal and advertising injury” arises out of “an implied contract to use another’s advertising idea in your ‘advertisement.’ The District Court was unable to reasonably interpret the allegations to meet the definition of “advertisement.” Accordingly, the breach of contract exclusion applies to Repar’s claim for breach of implied-in-fact contract.

Trademark Exclusion

To prevail on a claim of trademark infringement under 15 U.S.C. § 1114, a party must prove that it has a protectable ownership interest in the mark; and that the defendant’s use of the mark is likely to cause consumer confusion.

Federal Unfair Competition

Repar also alleges a claim for Federal Unfair Competition under 15 U.S.C. § 1125(a). The elements of infringement and unfair competition claims are essentially the same; the rulings stand or fall together. As in Repar’s trademark infringement claim, the gravamen of Repar’s unfair competition claim is that Willowood used a “confusingly similar imitation” of Repar’s mark. Accordingly, this claim arises out of “trademark” and is excluded.

ZALMA OPINION

Litigants in Oregon who want the defendant’s insurance to protect them against the allegations of a claim for trade libel, defamation, or other personal injury coverages must draft their complaints to allege facts that bring the case within coverage. In this case they either failed to properly allege the causes of action or decided to punish the defendant by seeking liability for torts not covered by insurance. The failed in the former and succeeded in the latter.

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.

The 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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No Right to Contribution in Florida

Who’s On First Matters

When more than one liability insurer insures against the same risk there is always a dispute over which insurer should take the lead in the defense of the insured; whether the insurers should share in the costs of defense; and how that defense should be paid for and in what proportion. Sometimes only one of multiple available insurers will step up and provide the defense and seek contribution or subrogation from the other insurers. Courts in various jurisdictions deal with the issue differently.

In Amerisure Mut. Ins. Co. v. Crum & Forster Specialty Ins. Co., Slip Copy, 2014 WL 3809113 (United States District Court, M.D.Fla.,8/1/14) the United States District Court was called upon to resolve insurance coverage disputes for a lawsuit stemming from the development and construction of a condominium complex known as the Legends at St. John (the Complex).

Plaintiffs Amerisure Mutual Insurance Company and Amerisure Insurance Company (Plaintiffs or Amerisure) have filed a six-count First Amended Complaint against Defendants Crum & Forster Specialty Insurance Company (C & F) and Evanston Insurance Company (Evanston) seeking declaratory and equitable relief for Defendants’ alleged failure to defend the lawsuit as required by contract.

FACTS

Legends at SJ, LLC (Legends) served as the developer of the Complex and hired Hardaway Construction Corp. (Hardaway) and ContraVest Construction Group Inc. (ContraVest) as general contractors.  Construction began in 2003 and was completed in 2007. Legends and ContraVest obtained liability insurance to cover the construction period. Plaintiff Amerisure insured Legends and Defendants C & F and Evanston insured ContraVest. Following completion of construction, control of the Complex passed to the Legends at St. Johns Condominium Association (the Condo Association).

In 2009, the Condo Association filed suit against Legends, Hardaway, ContraVest, and others for damages related to the alleged defective construction of the Complex. On May 20, 2010, Legends notified Amerisure about the lawsuit and requested that Amerisure defend the suit pursuant to the parties’ insurance policies. Amerisure expressed certain reservations, but ultimately accepted the defense of Legends.

Legends also tendered defense requests to C & F and Evanston pursuant to their insurance policies with ContraVest.  Legends asserted that it was an “additional insured” under ContraVest’s insurance policies and, therefore, C & F and Evanston were obligated to defend Legends in the lawsuit as well. However, C & F and Evanston refused.

The underlying lawsuit was settled in 2011, but neither C & F nor Evanston defended Legends and neither contributed any money toward the settlement. Amerisure incurred in excess of $562,820 in defense costs and contributed $300,000 in indemnity payments—amounts which Amerisure argues should have been paid, in whole or in part, by C & F and Evanston. Accordingly, Amerisure brought the instant suit against C & F and Evanston seeking declaratory and equitable relief.

ANALYSIS

Declaratory Judgment – Count I

In Court I, Amerisure seeks a declaratory judgment that Legends qualified as an additional insured under the C & F policies and that C & F had an independent contractual obligation to defend Legends in the Condo Association lawsuit. Federal jurisdiction in this case is premised upon diversity of citizenship. Each claim must nonetheless be justiciable in order for a federal court to have jurisdiction over it. The U. S. Supreme Court has summarized the requirements for an actual controversy as follows: “Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, Inc. v. Genetech, Inc.,  549 U.S. 118, 126 (2007).

Plaintiffs allege that prior to the filing of this lawsuit C & F “acknowledged Legends as an additional insured under the C & F Policy” in a December 1, 2010 letter. C & F confirms the December 1, 2010 letter and its contents, agreeing that it “acknowledged that Legends was an additional insured under an endorsement to Crum & Forster Specialty’s policy.”  The same December 1, 2010 letter confirms that C & F has an independent contractual duty to provide a complete defense. Therefore, the court concluded that there is no actual controversy over the only two matters on which a declaratory judgment is sought.

C & F has not admitted that, at the time Legends first tendered their claim to C & F, Legends had already satisfied the insurance policies’ self-insured retention (SIR) obligations. Amerisure insists that this is a key point of contention because C & F was not obligated to defend Legends until Legends satisfied the SIR. Amerisure argues that there still exists a case or controversy as to Court I because the Court must determine precisely when C & F’s obligations began—that is, when the SIR was satisfied. The declaratory relief sought in Count I does not request a determination that the SIR was met at any specific point in time. Therefore, Count I was dismissed without prejudice.

Equitable Contribution – Count II

Amerisure sought equitable contribution from C & F for half of the costs Amerisure incurred in its defense of Legends. Amerisure argues that equitable contribution is necessary because, despite the fact that Amerisure and C & F were both co-insurers of Legends, C & F shirked its responsibilities by refusing to participate in Legends’s defense.

While Florida law recognizes causes of actions for equitable contribution generally, Florida courts have explicitly refused to extend this rule to co-insurers. To the contrary, Florida courts have held that to do so would be contrary to public policy.

It is well settled Florida law that there is no right to contribution between insurance companies as to legal fees and costs. This is the case even where, as here, there are allegations that a co-insurer shirked its duty to defend. Accordingly, Amerisure cannot maintain a cause of action for equitable contribution against C & F on the theory that the parties were co-insurers. Florida law is clear that Amerisure does not have a claim for equitable contribution.

ZALMA OPINION

Amerisure, being the first to the plate, providing a defense to the insured ran afoul of Florida Public policy that there is no right to contribution between insurance companies as to legal fees and costs. Florida is an outlier in so holding but the Federal court must follow local law when interpreting the rights between insurers.

When multiple insurers are obligated to defend and indemnify an insured it is incumbent on all the parties and insurers to work together to protect the insured. Because the other insurers were not on to the defense first and refused to defend their insured they walk free subject to a state court subrogation action for breach of contract not declaratory relief. If Amerisure has an assignment of the insured’s rights it can then pursue the other insurers, who admitted they had available coverage, subject to an SIR, they may succeed in getting some of their money back.

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.

The 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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Can’t Make a Purse from a Sow’s Ear

Claims Handling Cannot Create Coverage Where None Existed

Under state law contractors whose work is defective are given the opportunity to cure their error before litigation by repairing and replacing the defective work. When a contractor exercises the option before being sued may find that there is not coverage available for the monies spent to avoid litigation and cure the defects while, had the contractor done nothing and been sued, it could assert an obligation on the part of an insurer to defend or indemnify the contractor.

In Mike Rovner Construction, Inc. v. Liberty Surplus Insurance Corporation; Not Reported in Cal.Rptr.3d, 2014 WL 3752106 (Cal.App. 2 Dist., 7/31/14) Only the Westlaw citation is currently available, Mike Rovner Construction, Inc., (Rovner) appeald from a summary judgment entered in favor of Liberty Surplus Insurance Company (Liberty). The trial court, faced with summary judgment motions from both parties, found (1) that Liberty had no obligation to indemnify or defend because a complaint had not been filed against Rovner by the owner of an apartment complex where Rovner’s subcontractors had improperly installed defective shower stalls; (2) the property damage produced by this occurrence began prior to the policy period in question and was specifically excluded; and (3) there is no stand alone cause of action for an alleged violation of the Fair Claims Settlement Practices Regulations.

FACTS

The Insuring Agreement

Liberty issued a policy of comprehensive general liability insurance that promised to pay sums Rovner “becomes legally obligated to pay as damages because of … property damage to which this insurance applies.” “Property damage” was defined as “physical injury to tangible property” and “loss of use of tangible property that is not physically injured.” Property damage was covered only if it occurred “during the policy period” from November 13, 2009 to November 13, 2010. An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Liberty agreed “to defend [Rovner] against any ‘suit’ seeking those damages.” A “suit” was defined as a civil proceeding alleging damages or an arbitration proceeding or other alternative dispute resolution proceeding in which damages are claimed.

Liberty explicitly excluded “Known Injury or Loss” because a claim or loss must be fortuitous to be insurable, the policy excluded property damage that “began prior to the inception date of this policy, and [that] is alleged to continue into the policy period.”

The Loss

Rovner was employed by LA Lakes at South Coast, L.P. to provide the labor and materials necessary to renovate the interior of apartments in Costa Mesa. Rovner in turn employed two subcontractors to provide and install shower enclosures in the individual apartments.

The shower enclosures were installed between October 2007 and March 2009. The shower units were defective and were improperly installed. They failed and began damaging the apartment units when they were first used before the inception date of the Liberty policy.
Complaints about the shower enclosures began in 2008 and continued through October 2009. Between April 2010 and April 2011, the owner of the apartment buildings spent $26,965 repairing 21 of the units. Rovner repaired the rest between August 2011 and December 2011 at a cost of $553,800. Insurers other than Liberty paid Rovner $367,533.34 to resolve its claims against them, perhaps because the policies they issued were not as detailed as the Liberty policy or they lacked the gumption to fight the claim.

Trial Court Proceedings

The owner of the apartments never filed a lawsuit, never commenced an arbitration proceeding and never initiated an alternative dispute resolution process to establish Rovner’s legal obligation to pay for property damage that resulted from the improper installation of the defective shower enclosures.

Rovner sued its insurers even before it began making repairs to the units. He alleged that Liberty breached the implied covenant of good faith and fair dealing in its contract, and breached the terms of its insurance contract. Rovner sought declaratory relief to confirm coverage for the unpaid balance of the repairs voluntarily made by Rovner and also sued on the common counts.

After both parties filed motions for summary judgment the trial court’s issued a detailed, eight-page ruling, that denied Rovner’s motion and granted Liberty’s motion and dismissed the suit in its entirety. In explaining its reasons for granting the motion for summary judgment, the trial court observed that the insurance contract states Liberty “ha[s] no duty to defend or indemnify it unless a lawsuit was filed.” The court concluded that since the owner of the property did not file “suit” or commence arbitration or alternative dispute resolution proceedings against Rovner, Liberty had no obligation either to indemnify or to defend the company. As an alternative ground for granting Liberty’s motion, the trial court concluded the property damage asserted by Rovner was uninsured because the loss was a “Known Injury or Loss” that began prior to the inception date of the policy.

The trial court granted summary judgment on Rovner’s First Cause of Action based upon its conclusion that the Fair Claims Settlement Practices Regulations do not create or even address insurance coverage. The regulations simply deal with how insurance claims are to be managed. The court concluded that while section 2695.7 of the regulations requires an insurer to respond to a claim within 40 days, non-compliance does not create a cause of action for money damages.

DISCUSSION

Lack of Suit

The duty of Liberty to defend and to indemnify Rovner is expressly linked to damages sought in a “suit,” a term the policy explicitly states is limited to a complaint filed in court or an arbitration proceeding or an ADR process approved by Liberty. In the absence of a process designed to produce a determination of the damages Rovner is legally obligated to pay, Liberty was not obligated either to defend or to indemnify Rovner.

The Known Injury or Loss Exclusion

Even if Liberty were obligated to indemnify Rovner for the cost of repairing the substandard work of its subcontractors, the policy specifically excludes property damage that began before November 13, 2009 and continued into the policy period. It is undisputed that the defective installations damaged the apartments beginning with their first use after installation and that this too occurred before the inception date of the Liberty policy. Predictably, over time the defects continued to cause additional and progressive damage throughout the apartment project that was reported at different times by tenants.

The damage was such that Rovner determined it was obligated to make repairs to every one of the units to salvage a valuable business relationship with the owner. This is precisely the risk that Liberty sought to exclude and that Rovner accepted when the policy was issued. Progressive property damage that starts before the insurers’ policy period but that continues into the policy period does not trigger coverage.

Liability Based Upon a Claims Practices Regulation

If coverage exists for property damage that occurred within the policy period, then denying an insured a defense and indemnity may give the insured the right to settle with a claimant and expose the insurer to liability for the amount of the settlement. In this case Liberty had no duty to defend Rovner and no obligation to indemnify the company from the cost of the settlement it entered into with the owner of the apartment project.

Liberty’s failure to respond within 40 days to Rovner’s notice it was making a claim for the cost of repairing the shower enclosures does not create coverage where none existed before. The violation of any of the Regulations cannot expose Liberty to a claim for damages in an amount equal to the cost of its repairs to the apartment units or any claim at all. Violating section 2695.7, or any one of the Fair Claims Settlement Practices Regulations, does not create a cause of action for damages.

The judgment was affirmed.

ZALMA OPINION

Rovener was very lucky that he convinced some of his insurers to pay part of the cost to cure the defective construction. Since there was no suit, and since almost every CGL requires a suit before a duty to defend or indemnify arises, failure of a suit prevents coverage.

More importantly, however, to insurers is the fact that the Court of Appeal made it clear that there is no cause of action for violation of section 2695.7 or any one of the Fair Claims Settlement Practices Regulations.

Liberty had multiple defenses to this lawsuit and was granted its costs. The suit really had no chance and it might have been an abuse of the right to litigate to file a suit with such a small potential for success.

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.

The 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 Alerts

Anti-Fraud Efforts Expand

In the 15th issue of its 18th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on August 1, 2014, continues the effort to reduce the effect of insurance fraud around the world. This months issue indicates that the efforts must be increased.

The current issue of ZIFL reports on:

1.     Fraud Alert from the U.S. Department of Health and Human Services Office of Inspector General.
2.        New Book from Barry Zalma, “The Insurance Fraud Deskbook” available from the American Bar Association at 800-285-2221.
3.        Claimants and Counsel Must Repay BP for Fraudulent Claims.
4.       Report from NICB on New Anti-Fraud Legislation.

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:

•    Claim Collapses Because of Lack of Maintenance – July 31, 2014
•    Fortuity and Standing –  July 30, 2014
•    Just for Fun – July 29, 2014
•    False Swearing – A Defense to Fraudulent Claims – July 28, 2014
•    How Coinsurance Works – July 25, 2014
•    Courts Should Never Rewrite Insurance Policies – July 24, 2014
•    The Limits on An Insurance Agent’s Duty –  July 23, 2014
•    Corporation and Sole Owner are Separate Entities – July 22, 2014
•    Judges Cannot Make Law – July 21, 2014
•    Limits of Claim Made & Reported Policy – July 18, 2014
•    When Is a House “Wholly Destroyed?” – July 17, 2014
•    Resolve Disputes Informally & Avoid Litigation – July 16, 2014
•    Fraudsters Find Fraud Expensive – July 15, 2014
•    Contract Language Controls – July 14, 2014
•    Is Insurance an Asset of the Insured? – July 11, 2014
•    Must Insured First Prove Prima Facie Case? – July 10, 2014
•    Other Insurance Clause Raises Actual Controversy – July 9, 2014
•    Insurers Must Avoid the Gastonette – July 8, 2014
•    Facts Rule Coverage – July 7, 2014
•    The Insurance Fraud Deskbook – July 5, 2014

NEW! From the ABA:

The Insurance Fraud Deskbook
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 full text of decisions from courts of appeal and supreme courts across the country are provided so the reader can understand what happens after the investigation is completed and can apply that information to undertake their own thorough investigations. It allow claims personnel and their lawyers to understand what errors would cause a defect or a not-guilty verdict.

The effort to reduce insurance fraud requires the assistance of both civil and criminal courts. The Insurance Fraud Deskbook can 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.

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.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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Claim Collapses Because of Lack of Maintenance

Ignore Warnings at Your Expense

When people fail to take care of their property, ignore advice from governmental authorities that the property is dangerous and use insurance money for work not included a loss to allow the property to deteriorate further, they have a difficult time explaining why a claim for collapse of the structure is a covered loss. In White v. Metropolitan Direct Property and Cas. Ins. Co., Slip Copy, 2014 WL 3732135 (E.D.Pa., 7/29/2014) the District Court for the Eastern District of Pennsylvania was asked to force an insurer to pay a loss it believed it did not owe. At the request of the parties it entered summary judgment based on the facts and the policy.

FACTUAL HISTORY

On or about March 5, 2011, Annette White and Charles Williams (“Plaintiffs”)’s residence, located at 1715 North 59th Street in Philadelphia, Pennsylvania, sustained “severe damage” due to what Plaintiffs initially claimed was “a sudden collapse that was the result of excessive rainfall.” Plaintiffs notified Defendant of the damage on March 8, 2011 and Defendant pursued an investigation of the claim. Plaintiffs “expended monies to repair the subject premises, [and incurred] other costs as a result of being unable to live in the subject premises after the collapse.”

The Policy

Defendant issued a Homeowner’s Policy to Plaintiffs that includes various exclusions including exclusions dealing with weather and defective construction.

The March 2011 Loss

On March 4, 2011, the day after the Policy took effect, the City of Philadelphia Licenses and Inspections issued a Violation Notice to Plaintiffs, designating the premises as “unsafe,” and stating that “[t]he indicated wall of the subject structure has loose and/or missing brickwork and is in danger of collapse.” On March 5, 2011, an exterior brick wall located at the rear of Plaintiffs’ home collapsed, which Plaintiffs originally alleged was “a sudden collapse that was the result of excessive rainfall.” On March 6, 2011, the City of Philadelphia Licenses and Inspections issued a second Violation Notice to Plaintiffs, again designating the premises as “unsafe.”

The Prior Loss in March 2010

In March 2010, Plaintiffs’ home sustained a water loss to the kitchen located in the rear of their home. Plaintiffs were insured under a homeowners’ policy of insurance issued by Liberty Mutual Insurance Company, and the claim was for “water from roof,” which caused “Structure Damage” to the “kitchen one wall molding around door and ceiling.”  Liberty Mutual paid Plaintiffs $1,944.90 for the loss.

Plaintiff Annette White testified at her deposition that “we ended up not fixing the water damage that was over the back door because we needed to fix—bring the door up. So he ended up fixing the front porch.”

The Exterior Rear Wall

Plaintiff testified that in the approximately thirty years prior to the wall collapse in March 2011, no maintenance or repairs were made to the rear wall other than repainting garage doors, repainting a steel I-beam that served as a header for the garage doors, and applying new tar to the roof, which was done approximately thirteen years ago. She testified further that missing mortar and spaces between bricks in the rear wall that collapsed, as well as a side wall that did not collapse, were visible.

Defendant’s Engineering Report

Mary K. McElroy, P.E., of Hudson International Consultants and Engineers, issued her expert report that concluded that within a reasonable degree of engineering certainty the loss was due to: “(1) Long-term and on-going water infiltration via deteriorated mortar joints, cracks in the brick work, roof leaks, and poorly maintained roof drainage controls. (2) Repeated exposure to freeze-thaw cycles resulting in additional cracking in the brick work and increased potential for further water infiltration. (3) Formation of additional, large cracks in the brick work due to the corrosion of the steel I-beam header and resultant physical forces exerted on the brick work due to the expansion of that material. (4) Overall poor maintenance of the steel header, brick work, mortar joints and roof covering and drainage.”

Her report noted that “[t]he failure was progressive in nature and did not result from the single storm event on March 6th [sic], 2011 but from long-term and on-going infiltration resulting from deferred or poor maintenance to the elements of the structure.”

Defendant’s Claims Handling and Denial

On March 10, 2011, Defendant issued a Reservation of Rights letter to Plaintiffs, notifying them of “a potential coverage problem,” specifically referencing Exclusion 3.A for “wear and tear, marring, scratching, aging, deterioration, corrosion, rust, mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage or destroy its [elf].” On May 2, 2011, Defendant denied coverage for Plaintiffs’ claim, stating in the denial letter that their claim is not a covered collapse. Defendant specifically denied coverage due to a non-sudden and accidental collapse.

Plaintiffs’ Engineering Report

Plaintiffs also submitted an engineering report, completed by John J. Hare. Mr. Hare concluded within a reasonable degree of engineering certainty that the collapse was because of this historical type of construction. The salmon bricks are not uniform in strength. The proximate cause of the collapse was the sudden and complete crushing of the salmon bricks supporting the floor joists and wood beam as the kitchen, which pushed the wall outward and brought it down.

DISCUSSION

Defendant moved for summary judgment on Plaintiffs’ claims for breach of contract and statutory bad faith, as well as for summary judgment on its counterclaim for a declaratory judgment. Defendant argued that Plaintiffs are not entitled to coverage under the Policy because (1) collapse and loss caused by weather are not covered under the Policy; (2) the collapse was not caused by a single rain event but rather by long-term, ongoing water infiltration behind the rear wall, a conclusion supported both by an engineer Defendant retained and by an estimate of repair that an independent contractor prepared for Plaintiffs; and (3) even without assessing exclusions of the Policy, Plaintiffs cannot overcome their burden of proving the loss was “sudden and accidental,” as required by the Policy.

Under Pennsylvania law, which governs interpretation of the present Insurance Policy, several well-established principles control. As a threshold matter, the task of interpreting a contract is generally performed by a court, rather than by a jury. The goal of that task is, of course, to ascertain the intent of the parties as manifested by the language of the written instrument. Where an insurance policy provision is ambiguous—such as where the questionable language is reasonably susceptible of different constructions and capable of being understood in more than one sense—it is to be construed against the insurer and in favor of the insured. Where the insurance policy language is clear and unambiguous, however, the court must enforce that language. A court must refrain from torturing the language of a policy to create ambiguities where none exist.

The Weather Conditions Exclusion

Put simply, the relevant provisions of the Policy dealing with the “weather conditions exclusion” state that sudden and accidental direct physical loss or damage to the property is not covered in the event of collapse where weather conditions contributed in any way with a collapse, which is an excluded event. The court found there is no ambiguity in the Policy regarding a collapse being excluded from coverage where the collapse was caused, or caused in part, by weather conditions. Accordingly if the collapse had been caused by excessive rainfall as Plaintiffs originally claimed, it would not have been covered under the language of the Policy and Defendant did not breach its contract with Plaintiffs by denying coverage for the March 2011 loss on that basis.

The Construction Defects Exclusion

Plaintiffs subsequently argued, relying on an expert report by Mr. Hare, that the collapse of the rear wall of their home occurred because of the historical construction practice of using salmon bricks, which are weak and can lead to collapse.

The District Court noted that physical damage to the property is not covered by the Policy in the event of a collapse where defective, faulty, or unsound design, specifications, workmanship, or construction contributed to the collapse. There is no ambiguity in the Policy regarding a collapse.  A collapse which occurs due to faulty or defective construction or design is not covered. Therefore Defendant did not breach its contract with Plaintiffs by denying coverage for the March 2011 loss based on the construction defects exclusion.

The Deterioration Exclusion and the Hidden Decay Exception

Defendants assert that the collapse was caused by decay and deterioration which was not hidden, and denied coverage on that basis.  As the decay was not hidden, the loss resulting from the collapse is not covered under the hidden decay exception to the collapse exclusions under the Policy.

Bad Faith

The current bad faith claim before the Court cannot get past the initial element: lack of a reasonable basis for denying benefits. Defendant’s denial of benefits was not only reasonable, but correct under the Policy language. Absent a showing of an unreasonable denial, Plaintiffs are not entitled to recover on their bad faith claim. Thus, the Court enters summary judgment in favor of Defendant on Count Two of the Complaint.

ZALMA OPINION

It is encouraging to see a trial judge who reads a policy of insurance as written and enforces the language of the policy. The Plaintiffs knew of the problem with their brick wall, were cited by the local authorities who found it unsafe, and did nothing. The wall fell because of old age, lack of maintenance and the sloth of the insureds. Suing for bad faith on such facts is an expression of unmitigated gall.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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Fortuity and Standing

Allegations Trump Facts When Defense Sought

Insurance, by definition, only applies to a loss that is contingent or unknown at the time the policy is issued. However, in states like Connecticut, the determination of coverage is based upon the allegations of the underlying lawsuit. In Travelers Cas. and Sur. Co. of America v. Netherlands Ins. Co. — A.3d —-, 2014 WL 3720354 (Conn., 8/5/2014) the Connecticut Supreme Court was faced with a dispute between insurers as to who should pay for the defense of an insured faced with a major property damage claim.

FACTS

The plaintiffs, Travelers Casualty and Surety Company of America and Travelers Indemnity Company (collectively, Travelers), brought a declaratory judgment action against the defendants, who include The Netherlands Insurance Company (Netherlands) and Lombardo Brothers Mason Contractors, Inc. (Lombardo). Travelers sought and received a judgment from the trial court declaring that Netherlands was obligated to defend Lombardo, and pay to Travelers its pro rata share of the costs incurred in defending Lombardo in the civil action arising from Lombardo’s role in the construction of the leak prone library at the University of Connecticut School of Law (law library), chronicled in our recent decision in State v. Lombardo Bros. Mason Contractors, Inc., 307 Conn. 412, 420–21, 54 A.3d 1005 (2012) (underlying action). Netherlands appealed and raises a plethora of appellate issues.

In 1994, the state of Connecticut (state) contracted with Lombardo to perform masonry for the construction of the [law library], which was completed in 1996. In the underlying complaint, the state alleges that in the months and years following the completion of the project, the state began to experience problems with water intrusion in the [law] library. Over the years, the alleged water intrusion proved to be continuing and progressive, to the point where the state retained forensic engineers to investigate the full extent and likely cause of the problem. On February 14, 2008, the state initiated a lawsuit against Lombardo and other entities seeking to recover approximately $18 million that it alleged was necessary to repair defects in the law library. From 1994 to 2008, the following insurance carriers assumed Lombardo’s risk: September 30,1994 to August 31, 1998, Travelers, [CGL] Policies; August 31, 1998 to August 31, 2000, Lumbermens [Insurance Company (Lumbermens) ], [CGL] Policies; August 31, 2000 to June 30, 2006, Netherlands, [CGL] Policies and Peerless [Insurance Company (Peerless) ], umbrella general liability policies.

In late 2005, Lombardo notified its insurance carriers of the state’s potential claim against it and Travelers agreed to participate in the investigation and related defense. Lumbermens … and Netherlands refused, however, to participate in the investigation and defense. Prior to trial, Travelers spent over $482,855 defending

ALLEGATIONS

Netherlands pleaded that it had no obligation to reimburse defense costs because Lombardo had been on notice of problems with the law library on or before January, 2000, and, therefore, prior to the issuance of the first Netherlands CGL policy in August, 2000, meaning that the exclusion for prior known occurrences or claims applies and no coverage is available for Lombardo.

TRIAL COURT JUDGMENT

The matter proceeded to a one day court trial before the court. At trial, Travelers withdrew the second count of its complaint claiming a right to equitable subrogation. Shortly thereafter, Netherlands moved to dismiss this case for lack of subject matter jurisdiction, claiming that Travelers, which was not a party to Lombardo’s insurance contracts, now lacked standing to assert the remaining declaratory judgment claim in the complaint. The trial court denied that motion to dismiss, concluding that Travelers had standing to bring this declaratory judgment action.

The trial court then issued a memorandum of decision rendering judgment for Travelers, declaring that: “Netherlands had a duty to defend based on the underlying complaint.” In reaching this conclusion, the trial court first determined that the factual allegations in the underlying complaint “state that the damage potentially falls within the dates of Netherlands’ coverage.” The trial court held that the “occurrence which triggered the duty to defend was the water intrusion into the law library,” and rejected Netherlands’ reliance on the known injury or damage clause, noting that “the underlying complaint does not state with certainty when Lombardo was aware of the actual damage.”

ANALYSIS

A declaratory judgment action may be maintained if all of the following conditions have been met:

(1) The party seeking the declaratory judgment has an interest, legal or equitable, by reason of danger of loss or of uncertainty as to the party’s rights or other jural relations;

(2) There is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement between the parties; and

(3) In the event that there is another form of proceeding that can provide the party seeking the declaratory judgment immediate redress, the court is of the opinion that such party should be allowed to proceed with the claim for declaratory judgment despite the existence of such alternate procedure.

The purpose of a declaratory judgment action, as authorized by statute is to secure an adjudication of rights when there is a substantial question in dispute or a substantial uncertainty of legal relations between the parties.  The declaratory judgment statute provides a valuable tool by which litigants may resolve uncertainty of legal obligations.
The declaratory judgment procedure may not be utilized merely to secure advice on the law. It may, however, be employed in a justiciable controversy where the interests are adverse, where there is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement, and where all persons having an interest in the subject matter of the complaint are parties to the action or have reasonable notice thereof. One type of controversy to which the declaratory judgment statute often has been applied is a dispute over rights and liabilities under an insurance policy.

The Supreme Court concluded that the controversy is real and ongoing, with Travelers’ claim of injury more than colorable, given the nature of this coverage dispute and its averment that it is bearing more than its fair share of Lombardo’s defense because of Netherlands’ refusal to contribute to Lombardo’s defense.

Where more than one insurer has issued policies covering the same risk, a court of equity will exercise jurisdiction over the entire controversy to resolve the rights of all the interested parties, particularly where the issues between the insurers and the insured are similar.

KNOWN INJURY OR DAMAGE

Since the state alleges it gave Lombardo notice of the water intrusion and damage within months of January 31, 1996, it is clear that Lombardo knew about the property damage to the law library, at least in part, before Netherlands’ coverage began on August 31, 2000.  Netherlands argues that the trial court improperly relied on the common-law known loss doctrine, which is distinct from the express policy language.

By way of background, the court noted that the known loss doctrine is a common-law rule that derives from the implicit requirement read into every liability insurance policy that coverage will be provided only for fortuitous losses.  By definition, insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur. The known loss doctrine states that one may not insure against loss of a building after the building has burned down.

This appeal did not require the court to consider the contours of the common-law known loss doctrine in Connecticut because, as Netherlands points out, the “known injury or damage” exclusion in its CGL policy stands in distinction to that common-law principle; the contractual provision, when it exists, governs independently of the common-law rule, although they may have overlapping effects in certain cases.

The Supreme Court found that although the trial court’s analysis improperly conflated the common-law known loss doctrine with the Netherlands policies’ known injury or damage exclusion, nevertheless, it concluded that the trial court properly determined that the exclusion does not relieve Netherlands of its duty to defend in this case.

Although the allegations in the underlying complaint arguably permit a reasonable inference that Lombardo knew of the property damage in the law library prior to the inception of its policies with Netherlands, unlike in other cases with more detailed factual records, they do not compel that conclusion as a matter of law, especially given the well established maxim that, if an allegation of the complaint falls even possibly within the coverage, then the insurance company must defend the insured.

ZALMA OPINION

Netherlands had two methods by which it could have avoided paying a portion of Lombardo’s defense costs:

(1) It could claim that Lombardo concealed the ongoing claim about the law library which allowed it to rescind or declare the policy void; or

(2)  It could have presented sufficient evidence to establish that the loss occurred and was ongoing for years before its policy came into effect.

Rather, it concentrated on legalistic defenses and lost since the underlying complaint raised a potential for coverage under its policy.

No insurer should be obligated to pay for defense or indemnity of a loss that occurred before the inception of the policy. Although it was probable that the loss was not fortuitous as it relates to Netherlands the allegations of the complaint cost them.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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Just for Fun

I Did It!

Recently, one of my investigators met with the property manager of an Insured to start the investigation of a fire claim believed to be arson. Since he was just starting his investigation with a walk through the burned out shell the investigator was making conversation with the property manager.

“Steve, how long have you managed this property?”

“About six months.”

“It seems the fire started here on the service porch where the damage is most severe; do you know how it started?”

“Sure,” the manager replied with confidence and no sign of concern “I pulled a mattress off one of the beds, stacked up against the wall by the service porch and lit it with Bic lighter. Once it was burning well, I left and drove four blocks away and came back in time to see the flames coming from the building. I heard sirens so I just drove home.”

“Why did you do that?” the investigator asked, trying to stay calm.

“The owner asked me to burn the building and said he would pay me 10% of whatever he got from the insurance company. When are you going to pay him? I sure could use the money.”

The investigator then asked for permission to record a statement. As the property manager repeated his story on the tape the investigator held his breath and tried not to look shocked. He had the statement transcribed and the next day the property manager, trying to be helpful, returned to the investigator’s office, read and signed, under penalty of perjury, the transcribed statement.

The most dangerous statement a fraud investigator will ever hear from an insured is: “I did it.” The professional fraud investigator knows that it is improbable that anyone would ever admit to a crime. When faced with such an unlikely occurrence, the prudent investigator will remain skeptical.

Insurance fraud is a stealthy crime. It is most often committed by intelligent people who plan their crime well. They know that the best means of hiding a fraudulent claim is to admit everything surrounding the claim except the fraud itself.

I worked as a fraud investigator and lawyer for 25 years before I obtained my first, unsolicited confession. That confession caused me to work doubly hard to verify the statement and determine that it was truthful.

An insurer, bound by the covenant of good faith and fair dealing, cannot safely use a confession of a person who reports he conspired with the insured to commit a fraudulent claim without first obtaining independent corroboration. Corroboration must take the form of statements of independent witnesses who lend credibility to the confession.

There are usually only four reasons why a person will confess to a crime:

1.    Guilt, and a need to cleanse one’s soul.

2.    Knowledge that the crime has been solved and a confession might result in a more lenient sentence.

3.    Spite. The confession is a method to cause harm (either financial or criminal prosecution) to a perceived enemy.

4.    Stupidity.

The investigator of the arson case was experienced. He knew better than to accept a confession, even one given under oath. The sworn statement was only usable to defeat the claim if it could be corroborated. Without corroboration it was useless. He explained the need for corroboration to Steve.

“Talk to Manny McGee” Steve replied, “he was with me when I started the fire and drove the car I used to leave the scene.”

When questioned, Manny McGee confirmed Steve’s story.

“Yes, I was there when Steve set the fire. I though he had gone nuts. He knew I was on parole and couldn’t get involved in any kind of crime. I was so upset with him I almost made him walk.”

“Did Steve tell you why he was setting the fire?”

“Yeah, he said the owner had promised to let him repair the house. He knew he could make more money if the house was damaged in a fire.”

“Did Steve tell you anything about the owner?”

“I know the owner. He’s a cheap son of a gun. That’s why I believed Steve when he told me the owner wanted him to rebuild. He knew Steve wasn’t a licensed contractor and would do the job a lot cheaper than a licensed contractor would.”

“Have any of the owner’s other buildings caught fire.”

“I don’t know of any. The owner is cheap, but he doesn’t seem to be dishonest.”

The investigator, after meeting with Manny was becoming more confident. He had certainly established, with an independent witness that the Insured’s property manager, Steve, committed the crime of arson. He had not established, however, that Steve set the fire at the request of the insured.

The investigator contacted the insurer and advised it of the obligation to report the confession to the fire department, the Bureau of Alcohol, Tobacco and Firearms (BATF), and the Fraud Division of the Department of Insurance. He requested permission to do further investigation and to retain counsel to examine the insured under oath. The insurer granted him permission and authorized him to cooperate fully with the fire department and the BATF.

The investigator was concerned that he only had the statement of an admitted arsonist and his co-conspirator, a convicted felon on parole. He needed hard evidence to either establish that a fraud had been attempted or that the insured had been falsely accused.
The first investigative technique used was to search, via computer, for information concerning the insured. A state wide real property search revealed that the insured owned over 40 pieces of real property in the state, all but one income producing single and multi-family dwellings. He had no criminal record and his civil litigation record was minimal for a person involved in business. He also owned and operated a chain of 14 drycleaning shops. He did not seem to have a motive to set fire to a small, single family dwelling.

It was time, therefore, to confront the insured with the information that was available to the investigator to give him the opportunity to refute Steve’s accusations. The insured, a busy professional, made the time for the investigator. In the living room of the insured’s luxurious 5,000 square foot house in the hills north of Upland, California the insured answered all questions posed to him honestly. He provided the investigator with all of his business records, copies of his tax returns, and his entire file concerning the involvement of Steve as a property manager for five small houses in Riverside County.

The Insured explained that he had recently been forced to fire Steve because his work was shoddy and some of the rent Steve collected never came to the Insured. Steve had threatened to cause harm to the insured and had almost succeeded.

The insured’s claim was paid in full. Steve, whose attempt to harm his ex-employer was blatantly stupid, faces two felony charges: (1) Arson; and/or ( 2 ) perjury. His case is presently being evaluated for possible prosecution. The insurer has also authorized counsel to sue Steve to recover the money it paid to the Insured or, if he is prosecuted and convicted, to seek the money as restitution as a condition of probation.

ZALMA OPINION

Many people believe that they must exaggerate their claim to receive what they are truly owed. That belief is unfounded and dangerous. As the Eighth Circuit explained in Young even submitting a list of damaged or destroyed personal property with minor exaggerations, regardless of the explanation, submitting a false claim under oath is grounds for the insurer to declare the policy void.

ZALMA-INS-CONSULT© 2014 – Barry Zalma

This story is one of more than 80 in my e-book, “Heads I Win, Tails You Lose,” stories of why even when it catches a fraudster, the insurer loses.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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False Swearing – A Defense to Fraudulent Claims

Swear Falsely & Policy Void

In common language the “false swearing” provision of an insurance policy merely relates to a lie under oath.

In Texas and Oklahoma, false swearing is explained this way: “Where an insured knowingly and willfully overestimates the value of property destroyed or damaged, the policy is voided and the insured’s right to recover is defeated.”[Summit Machine Tool Manufacturing Corp. v. Great Northern Insurance Co., 997 S.W.2d 840 (Tex. App. Dist. 3, 1999)].

The Mississippi Supreme Court explained the reason for the “false swearing” defense that “[i]t would be unjust to allow a claimant to misrepresent facts which might lead to a valid defense and then to allow him to escape the consequences of the falsehood simply because he had succeeded so well that the company was unable to establish the defense,” Edmiston v. Schellenger, 343 So. 2d 465, 467 (Miss. 1977), cited with approval in Duke v. Hartford Fire Insurance Co., 617 F.2d 509, 510 (8th Cir. 1980) (per curiam) (applying Arkansas law).

The Eighth Circuit upheld a “false swearing” defense when it stated:

The Willises also argue that State Farm made no showing that it had actually relied on Mr. Willis’s misstatements, or that it would have done anything different had Mr. Willis told the truth. The jury was not instructed, however, that a showing of reliance was necessary, and the Willises did not object to the jury instruction. We think, moreover, that the instruction was correct: Although reliance must be shown in a claim for fraud in the inducement, & An exception to this general rule exists, of course, if a statutory provision specifically makes a party’s reliance an element of the defense of fraud or false swearing, see, e.g., McCullough v. State Farm Fire and Casualty Co., 80 F.3d 269, 272 (8th Cir. 1996) (applying a Nebraska statute), but no such statutory provision currently exists in Arkansas. [Willis v. State Farm Fire and Casualty Company, 219 F.3d 715, 219 F.3d 715 (8th Cir. 08/14/2000)]

The New Jersey Legislature defined false swearing as existing when a person:

makes a false statement under oath or equivalent affirmation, or swears or affirms the truth of such a statement previously made, when he does not believe the statement to be true. [New Jersey Statute, NJSA 2C:28-2.]

In North Carolina, the Court of Appeal recognized that:

It is a basic principle of insurance law that the insurer may avoid his obligation under the insurance contract by a showing that the insured made representations in his application that were material and false. Pittman v. First Protection Life Insurance Co., 72 N.C. App. 428, 433, 325 S.E. 2d 287, 291 (1985).

Misrepresentations on an insurance application are material if the knowledge or ignorance of it would naturally influence the judgment of the insurer in making the contract and accepting the risk. Bryant v. Nationwide Mut. Fire Ins. Co., 67 N.C. App. 616, 621, 313 S.E.2d 803, 807 (1984), revd on other grounds, 313 N.C. 362, 329 S.E.2d 333 (1985).  In order to void the policy pursuant to G.S. 58-44-15, defendant must show that the insured made statements that were: (1) false; (2) knowingly and willfully made; and (3) material.  Bryant v. Nationwide Mut. Fire Ins. Co., 313 N.C. 362, 370, 329 S.E. 2d 333, 338 (1985). Bell v. Nationwide Insurance Co., No. COA00-1464 (N.C. App., 11/06/2001).

False swearing is a crime in all states if it amounts to perjury. If it does not amount to perjury it is still a defense to a false claim.  In Harmon v. Star Valley Medical Center— P.3d —-, 2014 WL 3508016 (Wyo.), 2014 WY 90  the Supreme Court of Wyoming held that the legislature required a claim to be executed under penalty of false swearing rather than under penalty of perjury for good reason. There is a legitimate question as to whether signing and presenting a false claim would constitute perjury.  On the other hand, the false swearing statute imposes criminal liability for making a false statement under oath or under penalty of false swearing “in a matter where an oath is authorized by law.” To establish that an insured intended to deceive an insurer under Missouri law, the insurer must show that the insured: (1) knew the representation was false, or did not know whether the representation was true or false, and (2) intended that the insurer rely on the representation.

In Young v. Allstate Ins. Co.— F.3d —-, 2014 WL 3445896 (C.A.8 (Mo.)) the Eighth Circuit, concluded that during an examination under oath, the Youngs admitted that the initial inventory listed many items that were not damaged or destroyed in the fire. They gave various explanations for the discrepancies. The Youngs both denied that they had intentionally overstated the claim to Allstate. The district court granted summary judgment for Allstate on the ground that the Youngs, by signing the initial inventory, were deemed to have knowledge of its contents, and that “no reasonable juror could conclude that [the Youngs] did not materially misrepresent their property claim.” The Eighth Circuit affirmed.

An insurer can assert false swearing as an affirmative defense to an action brought by an insured. To constitute such a defense, the false statement must have been made under oath with the knowledge that it is false and with the intent that the person to whom the statement is made will rely on it. Actual reliance is not necessary.

Almost every policy that insures against the risk of loss of property requires the insured to submit a sworn proof of loss. The proof of loss must provide complete details regarding the property insured, the origin of the loss, and the value of the property claimed destroyed. A policy usually also requires the insured to give the insurer access to books and records to prove the claim. Where fraud is suspected, the insurer may demand that the insured be examined under oath. Significant deviations between the sworn proof of loss and the facts developed at an examination under oath can be the basis of a defense of fraud or false swearing. If false swearing is found to exist, it will normally constitute a complete defense to any claim under a property insurance policy.

A false statement made under oath in an examination under oath or proof of loss must be knowingly false. The difference between fraud and false swearing is that since false swearing involves a false statement made under oath, it is more difficult for the person speaking to back off from it when confronted.

This is well illustrated by the case Parasco v. Pacific Indemnity, 920 F. Supp. 647 (D.D. Pa., 1996), where the insurer suspected arson and denied the insureds’ fire loss claim. Although the insurer could not prove arson by the insureds, there was a legitimate question as to whether the fire was incendiary in nature. The insurer also had clear proof of misrepresentations made by the insureds under oath regarding, among other things, their active attempt to sell the property at the time of the fire. The court held that the materiality of false statements is to be determined at the time of investigation. The court further held that the insurer’s investigation into the insureds possible motive to commit arson was entirely reasonable and prudent, and inquiries into the insureds financial condition were, therefore, material to the issue of motive.

The absence of a criminal conviction for arson, fraud, or false swearing does not deprive the insurer of the false swearing defense. The burdens of proof are different. The crime requires proof beyond a reasonable doubt: the defense only requires proof by a preponderance, i.e., 50 percent + 1.

As both the proof of loss and the testimony at examination under oath are sworn to by the insured, any material falsehood is sufficient to establish the defense of false swearing. The same is true of any difference between the facts testified to during the examination under oath or stated in the proof of loss, and the facts developed from an audit of the insureds books and records or an insurer’s investigation.

The U.S. Supreme Court stated the rule, as follows:

A false answer as to any matter of fact material to the inquiry, knowingly and willfully made, with an intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if failed, it would be a fraud attempted. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed; their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them and to whom they are addressed. Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 3 S. Ct. 507, 28 L. Ed. 76 (1884).

The standard fire policy language voids coverage as follows:

Concealment, fraud

This entire policy shall be void if, whether before or after a loss, the 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 language is not only clear and unambiguous it is mandated by statute. If the insured swears falsely the “entire policy shall be void.”  Insurers should not avoid the use of this important tool when they establish that an insured has sworn falsely.

ZALMA OPINION

Many people believe that they must exaggerate their claim to receive what they are truly owed. That belief is unfounded and dangerous. As the Eighth Circuit explained in Young even submitting a list of damaged or destroyed personal property with minor exaggerations, regardless of the explanation, submitting a false claim under oath is grounds for the insurer to declare the policy void.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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How Coinsurance Works

COINSURANCE

Coinsurance is an often misunderstood term and one that causes frequent dissatisfaction with insureds over claim settlements.

Most losses are partial losses.  It is rare that the entire building or amount of Covered Property is totally destroyed.  Knowing this, many individuals when insuring their business property seek limits for only part of its value.  The insured reasons, if one is more likely to have a partial loss than a total loss, why spend premium on complete insurance?

This reasoning by insureds, of course, defeats the concept that insurance is the sharing of risk.  The insured that does not insure total values is not sharing risk equally with other insureds.  If most insureds chose to insure only part of the value of their property, the insurance industry would still have approximately the same number of claims to pay; however, the premiums that it collected to pay those claims would be vastly reduced.  In order to have enough money to pay the losses, insurers would charge more for the lower values that insureds chose to insure.  Those insureds who chose to insure the full value of their property would pay even more than they now pay for the same amount of coverage.  Encouraging insureds to carry full insurance on their property allows premium levels to be fair.

The authors of the coverage forms were aware that expecting individuals and businesses to carry 100% of the value of their property is unrealistic.  They allowed the choice (and the corresponding premium level) of a percentage of the value of the property.

The percentage that they choose is called the “Coinsurance Percentage”.  The insured and the insurance company are co-insuring the property because the percentage that the insured chooses not to insure represents the amount of coverage that the insured is insuring himself.

In order to encourage insureds to insure a reasonably high percentage of their property’s value, the coverage form provides the incentive of the Coverage Extensions to those insureds who choose at least an 80% coinsurance Percentage.

The first Additional Condition explains how coinsurance works:

    1.    Coinsurance
    If a coinsurance percentage is shown, in the Declarations, the following condition applies.
        a.    We will not pay the full amount of any loss if the value of covered property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property.

The limit of insurance has to satisfy the coinsurance percentage in order for the full amount of any covered loss to be paid.

As an example consider the insured who chose an 80% coinsurance percentage and a coverage limit of $220,000.  After a loss the company adjuster determined that the full ACV of the property was $250,000.  Did the insured meet the coinsurance requirement?

ANSWER:  Yes.

80% of $250,000 is $200,000.  The insured’s limit was $220,000.

If the insured carried only $100,000 coverage would he have met his coinsurance requirement?

ANSWER:  No.

Obviously, $100,000 is less than $200,000.

The first paragraph of the Additional Condition on Coinsurance told us that unless the insured complied with the chosen coinsurance requirement, a loss will not be fully paid.  The second paragraph of the Coinsurance Condition tells us how much of such a loss will be paid.  It provides the formula in 4 steps:

The insurer determines the most it will pay using the following steps:

(1)    Multiply the value of covered property at the time of loss by the Coinsurance percentage:   $250,000 x 80% = $200,000.

(2)    Divide the Limit of Insurance of the property by the figure determined in step (1) $100,000/200,000 = .50

(3)    Multiply the total amount of the covered loss, before the application of any deductible, by the figure determined in step (2); and

If the covered loss amounted to $40,000, then step (3) would be: $40,000 x .50 = $20,000.

(4)    Subtract the deductible from the figure determined in step (3). If the insured’s deductible was $250.00, then step (4) would be: $20,000 – $250 = $19,750.

The amount determined in step (4) is the most the insurer will pay.  For the remainder, the insured will either have to rely on other insurance or absorb the loss himself/herself/itself.

The authors of the ISO form wanted to make the coinsurance methodology very clear so they put in the form three coinsurance examples.  I just used the first one.  The examples in the coverage form also follow:

Notice that the deductible is subtracted from the adjusted loss.  The deductible subtraction is the last step in the Coinsurance process.  This is somewhat different from forms that were in use earlier.  The new methodology is less advantageous to the insured and so is more reason to make sure that the coverage limit satisfies the Coinsurance requirement.

When an insured, usually with the assistance of an insurance agent or broker, determines the coverage limit of a policy they are almost always thinking in terms of current values.  A building that has an actual cash value today of $500,000 must be insured to $450,000 in order to meet a 90% coinsurance requirement and have losses fully covered (minus the deductible, of course).  If a covered loss occurs in the latter part of the coverage term, it is possible that the ACV of the building may have risen.  It might be $550,000 by then.  Similarly, the value may have reduced.  Regardless, the coinsurance clause is applied at the “time of loss”.

The insured will not profit nor will the insured obtain a reduced premium if his building’s value is reduced.  He will, however, recover more his full loss.

The coinsurance clause does not always cause a penalty.  in a situation where the loss is severe, or total, the insured may recover the full policy limit even after application of the policy limit.  Consider the following example:

For example:

When:
    The value of the property is                           $250,000
    The Coinsurance percentage for it is            80%
    The Limit of Insurance for it is                    $100,000
    The deductible is                                            $      250
    The amount of loss is                                    $250,000

Step (1):    $250,000 x 80% = $200,000 (the minimum amount of insurance to meet your Coinsurance requirements)
    Step (2):    $100,000 / $200,000 = .50
    Step (3):    $250,000 x. .50 = $125,000.
    Step (4):    $125,000 – $250 = $124,750.

The insurer will pay the $100,000 limit of liability of the policy. Regardless of the application of the coinsurance clause the amount recoverable is still more than the policy limit and the insured collects the limit. The insured, however, must make up the difference between the limit and the amount of loss.

Note, not only does the insured recover the entire policy limit but also is not required to pay the deductible because the adjusted loss less the deductible still exceeds the policy limit.

ZALMA OPINION

Coinsurance clauses have two purposes. They give the insured an incentive to insure property up to its true value by causing the insured to self-insure a part of the risk if proper limits are not acquired. It protects insurers against insureds who attempt to avoid appropriate premium. Insurance is a business of utmost good faith. The self insurance created by a coinsurance clause is not a penalty it is a way of enforcing the promise made by the insured at the time the policy was acquired that insurance equal to the true value of the policy was acquired.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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

Courts Should Never Rewrite Insurance Policies

Tort Claim Is Against Defendant Not Defendant’s Insurer

Insurers and insureds, when a loss occurs, try to increase or limit the coverages available to their benefit when the policy’s wording does not support their position. When a permissive user, insured, injures the named insured it would seem logical that the named insured should not be able to collect under the policy. However, if the policy does not say the insured may not recover, a court should be loathe to rewrite the policy.

In Blasing v. Zurich American Ins. Co. — N.W.2d —-, 2014 WL 3512861 (Wis., 7/17/2014), 2014 WI 73 the Wisconsin Supreme Court was faced with just such a situation and, in a lengthy decision resolved the dispute.

This is a review of a published decision of the court of appeals reversing an order of the circuit court for Jefferson County, William F. Hue, Judge, and remanding the cause for further proceedings [Blasing v. Zurich Am. Ins. Co., 2013 WI App 27, 346 Wis.2d 30, 827 N.W.2d 909]. The circuit court granted American Family Insurance Company’s motion for summary judgment, ruling that American Family had no duty to defend or indemnify under its automobile liability insurance policy. The court of appeals reversed the order of the circuit court, holding against American Family.

FACTS

Vicki Blasing, the plaintiff, was injured when lumber that was being loaded into her pickup truck by an employee of Menard, Inc. fell on her foot. Vicki Blasing is the named insured in the American Family policy.

The facts surrounding the alleged incident and injuries are undisputed. On September 16, 2008, the named insured-plaintiff, Vicki Blasing, visited a store owned and operated by Menard, Inc. in the Village of Johnson Creek, Jefferson County, Wisconsin, to pick up lumber she had purchased at Menard. She drove her 1990 Chevrolet pickup truck to the store and parked it in a lumberyard area.

An employee of Menard used a forklift to place the purchased lumber into the plaintiff’s pickup truck, which was insured by the American Family policy. The plaintiff stood near the rear passenger side of her truck. While the employee was attempting to place the lumber into the pickup truck, some of the lumber fell and hit the plaintiff’s foot.

The plaintiff, a named insured, brought a tort action for personal injury damages against Menard and Zurich American Insurance Company. The plaintiff did not sue the Menard employee. Menard’s potential liability is vicarious liability for the torts of its employee. Menard claims its employee is an insured under the American Family policy, as a permissive user of the plaintiff’s pickup truck. Menard is insured under a separate general liability insurance policy issued by Zurich Insurance to Menard.

ISSUES

The ultimate question before the court is whether American Family has a duty to defend and indemnify Menard when the injury was to the named insured under the American Family policy and the alleged tortfeasor (a Menard employee) was a permissive user of the vehicle insured under the American Family policy.

The issue presented in the present case, simply stated, is whether American Family is obliged under the policy it sold to the named insured-plaintiff in the present case to defend and indemnify an alleged tortfeasor when the tortfeasor is a permissive user of the insured vehicle and the plaintiff-injured victim is the named insured.

The court of appeals answered the first two questions in the affirmative and answered the third question by stating, “[P]ermissive user coverage is required in this case by the omnibus statute.”

The policy promises to cover any insured for liability for damages to any person. It does not exclude recovery by an injured victim who happens to be the named insured or who happens to be another insured under the policy.

ANALYSIS

Wisconsin case law has followed what appears to be the majority rule recognizing that the named insured under an automobile liability insurance policy may recover from the insurer when injured by another insured under the policy. In the greater number of cases, the courts have sustained the right of the named insured to recover under an automobile liability policy for an injury to such insured.

This case required the Supreme Court to interpret and apply an insurance policy and a statute to undisputed facts. The interpretation of a statute and insurance policy and their application to undisputed facts ordinarily present questions of law that an appellate court decides independently of the analysis of trial courts or other courts of appeal.

Is Loading a Pick-Up a “Use” of the Pick-Up?

The Supreme Court first sought to determine whether the tortfeasor’s actions constituted a “use” of the pickup truck under the American Family automobile liability insurance policy.

The policy defines “insured person” or “insured persons” to mean the named insured (i.e., the policyholder), the named insured’s relatives, or persons using the insured car with the named insured’s permission, as follows:

The policy defines “use” to mean “ownership, maintenance, or use” and provides that American Family will indemnify and defend an insured person for “bodily injury and property damage due to the use of a car or utility trailer.”  Use of a vehicle is not limited to the driving of the vehicle.

Wisconsin courts have interpreted “use” of a vehicle to include a wide range of non-driving activities, including: unloading a rifle from the vehicle, loading and unloading a vehicle; gesturing to a child to assist her in crossing a road; shooting game from the insured vehicle; and loading a scrapped dump truck tailgate into a pickup truck under uninsured motorist coverage.

Loading an insured pickup truck with lumber is reasonably contemplated by the insured and insurer because it is consistent with the ordinary transportation of persons and goods inherent in the purpose of the pickup truck. Therefore, the Wisconsin Supreme Court concluded that under the American Family policy, the Menard employee was a permissive user and as such was an insured under the American Family policy.

Does American Family’s policy require American Family to defend and indemnify a permissive user tortfeasor when the injured victim is a named insured under the policy?

American Family relies solely on the argument that if the court requires American Family to defend and indemnify Menard, the result would be absurd, thus violating a cardinal rule of interpretation: A court’s interpretation should avoid absurd or unreasonable results.

In this case the named insured plaintiff is not making a claim against American Family for her injuries. The plaintiff is suing Menard and Zurich Insurance for her injuries as a third-party victim of Menard’s tort, not as an insured under the American Family policy.

The plaintiff’s claim against Menard depends on Menard’s liability to her as the third-party victim of Menard’s tort. American Family is defending its insured, the Menard employee, against liability for injury to a person who for purposes of this lawsuit is a third party to the policy, not a named insured.

The American Family policy treats all insureds alike, including a named insured and the permissive user, covering all of them for liability for injury to another, regardless of whether the victim is also an insured. Several Wisconsin cases have held that the named insured under an automobile liability insurance policy is not precluded from recovering on the policy when an additional insured inflicts injury upon the named insured while using the vehicle within the terms of the policy.

In several cases, an automobile liability insurance company has been required to defend and indemnify a permissive user tortfeasor who injured an insured while loading or unloading a covered vehicle. The fact pattern is similar in a number of cases. Coverage is not based on the identity of the victim absent language in the policy stating otherwise.

American Family asked the Supreme Court to reverse the court of appeals and hold that the American Family policy does not cover the liability of a permissive user tortfeasor who injures a named insured. Wisconsin case law makes no distinction between injured parties who are named insureds and other insureds. Accordingly the decision of the court of appeals was affirmed.

ZALMA OPINION

Automobile policies, to prevent fraud and collusion, exclude injuries to members of the insured’s family. They do not exclude injuries to a named insured by a permissive user not a member of the family. The argument that the result is “absurd” did not fly because if the insurer wanted to avoid what it called an absurd result it could simply have expanded the family exclusion to cover any injury to any insured while any other insured operates the vehicle.

Courts are required to interpret insurance policies not to rewrite them to avoid what one party may consider an absurd result. If the result was absurd it was so because of the manner in which the policy was written.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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 Limits on An Insurance Agent’s Duty

Broker’s or Agent’s Duty Not Unlimited

When a person demands a particular amount of insurance coverage, when the agent obtains the coverage demanded, and then there is a loss where coverage is inadequate buyer’s remorse sets in and litigation is commenced. In Duffy v. Certain Underwriters at Lloyd’s of London Subscribing to Policy Number 09ASC185004, Not Reported in A.3d, 2014 WL 3557861 (N.J.Super.A.D. 2014) a New Jersey appellate court was faced with a need to resolve a dispute between a dissapointed insured and her broker.

FACTS

Plaintiff owned three residential dwellings: her primary home in Trenton; a small beach bungalow in Seaside Park; and a three-story Victorian home in Ocean Grove. The Ocean Grove property suffered an electrical fire and is the subject of the litigation (the property). Plaintiff procured a homeowner’s policy issued by Lloyd’s of London (the policy), insuring the home against property and casualty losses. The amount of coverage available through the policy was $150,000. The amount of fire damage exceeded the policy limits. Plaintiff filed her complaint alleging defendant’s procurement of inadequate insurance coverage constituted professional negligence and caused her loss.

Defendant began as plaintiff’s insurance broker in 1996, when it acquired another insurance agency that had been servicing plaintiff’s needs. In 2002, plaintiff received a notice from Newark Insurance Company (Newark) that her homeowner’s insurance would not be renewed effective March 10, 2003. Plaintiff contacted defendant and spoke to Patricia Browne, a licensed insurance producer and defendant’s Eatontown office manager, who ultimately placed plaintiff’s new coverage.

During her deposition, Browne testified the policy with Lloyd’s, that she never met plaintiff, but spoke to her approximately three or four times regarding the property and the desired coverage.

Plaintiff expressed she “wanted those homes to remain covered under the amount that was on the policy at that time [,]” that is, under the Newark policy, because they were second homes and unencumbered by mortgages.

Regarding the property, Browne testified she asked plaintiff for the total square footage of the dwelling, the age of the property, the number of rooms, its distance from a fire hydrant and from a fire department. Browne stated plaintiff told her the property totaled 900 square feet (it was actually closer to 1900 square feet) and advised the home was built in 1955 (when it was constructed in approximately 1875). Brown used a calculator provided by another insurer to determine that $150,000 was adequate for a 900 square foot dwelling.

Browne sent plaintiff the drafted homeowner’s application and requested she correct any errors. Plaintiff signed and returned her application for insurance. Browne advised the company may ask plaintiff to confirm the adequacy of the coverage each year.

The policy with Lloyd’s included: (1) dwelling in the amount of $150,000; (2) other structures in the amount of $15,000; (3) personal property in the amount of $25,000; and (4) loss of use in the amount of $30,000. The annual premium was $833.27. The policy was renewed each year thereafter, utilizing the same coverage limits and was in place when the fire loss occurred.

After the fire plaintiff obtained an estimate, which reported the property’s repair and restoration cost at approximately $460,000. Plaintiff filed her professional negligence action against Lloyd’s and defendant. Ultimately, Lloyd’s tendered the policy limits, with accrued interest, in satisfaction of plaintiff’s claim. The action proceeded against defendant.

TRIAL COURT DECISION

Plaintiff alleged defendant breached its fiduciary duty to protect her interests. Plaintiff believed Browne confused the square footage of the beach bungalow, which is 936 square feet, and suggested this error resulted in the inadequate protection for the property. Defendant moved for summary judgment. Focusing on whether defendant had a duty that was breached and proximately cause plaintiff’s loss, the judge concluded that although an insurance broker has a duty to act with reasonable skill and diligence, the duty is not unlimited, and did not include an obligation “to advise an insured to consider higher amounts of homeowner’s insurance.”

ANALYSIS

In this matter, plaintiff identifies the defense expert’s deposition as the only discovery not completed. The expert’s opinion as to the duty defendant owed plaintiff had already been articulated in his written report, which offered no independent information related to the facts surrounding the amount of homeowner’s insurance sought by plaintiff. The motion judge properly found plaintiff could not identify any facts expected to be obtained during the expert’s deposition that would obviate consideration of summary judgment.

It is well-settled that to render a person liable on the theory of negligence there must be some breach of duty, by action or inaction, on the part of the defendant to the individual complaining, the observance of which duty would have averted or avoided the injury. Determination of whether a duty exists turns on questions of fairness and policy. A court must weigh the relationship of the parties, the nature of the risk, and the public interest in the proposed solutions. The existence of a duty to exercise reasonable care to avoid a risk of harm to another is always a question of law left to the court not one of fact.

Insurance intermediaries in this State must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies. An insurance producer acts in a fiduciary capacity in the conduct of his or her insurance business. The fiduciary relationship gives rise to a duty owed by the broker to the client to exercise good faith and reasonable skill in advising insureds.

One who holds himself or herself out to the public as an insurance broker is required to have the degree of skill and knowledge requisite to the calling. When engaged by a member of the public to obtain insurance, the law holds him or her to the exercise of good faith and reasonable skill, care and diligence in the execution of the commission. He or she is expected to possess reasonable knowledge of the types of policies, their different terms, and the coverage available in the area in which his or her principal seeks to be protected. If he or she neglects to procure the insurance or if the policy is void or materially deficient or does not provide the coverage he or she undertook to supply, because of his or her failure to exercise the requisite skill or diligence, he or she becomes liable to his or her principal for the loss sustained thereby.

The scope of an insurance broker’s obligations to a prospective insured, is to procure the insurance; secure a policy that is neither void nor materially deficient; and provide the coverage he or she undertook to supply. However, the duty of a broker or agent is not unlimited.

The claim asserted is based on the broker’s negligent failure to procure the appropriate coverage. However, there is no evidence presented by the plaintiff showing plaintiff requested a replacement policy. In fact, there is no evidence at odds with Browne’s testimony plaintiff sought coverage similar to her Newark policy; advised the $150,000 coverage was adequate because the home was unencumbered; or expressed a concern to avoid possible modifications in coverage because of the concomitant increase in premiums. In addition, when plaintiff received the policy, which stated the total coverage, she did not object when it was first issued or at the time of subsequent renewals. The amount of coverage is clearly and prominently stated and easily understood. If plaintiff was dissatisfied with the extent of coverage, she failed to exercise the opportunity to raise such concerns with each annual renewal.

Absent a special relationship, there is no common law duty of a carrier or its agents to advise an insured concerning the possible need for higher policy limits upon renewal.

The appellate court refused to enlarge the scope of duty requested by the plaintiff.  A broker’s liability is not unbounded and in the area of homeowner’s insurance the Legislature should construct the parameters of responsibility, not the courts.  Agents and brokers are not required to inform clients their present coverage is inadequate or calculate the replacement value of the home in circumstances where the insured does not request or desire such service.

ZALMA OPINION

Insurance agents and brokers are not clairvoyant.  They have no duty to place insurance that may be needed in the future without a request or information from the insured. In this case the insured insisted on only $150,000 coverage for the dwelling to avoid an increase in premium. It was only after the fire and receipt of a repair estimate that the plaintiff decided she needed more coverage. Buyer’s remorse is not sufficient to hold an agent responsible for the error of the insured who blatantly lied to the insurer about the age of the dwelling and its size.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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

Corporation and Sole Owner are Separate Entities

A Court May Not Draft a Better Insurance Policy Than The One Purchased

As the U.S. Supreme Court has recently affirmed in Burwell v. Hobby Lobby Stores, Inc., — S.Ct. —-, 2014 WL 2921709 (U.S.), 123 Fair Empl.Prac.Cas. (BNA) 621, a corporation is a “person” standing alone and separate from its individual owners. Insurance issued to a corporation insures the corporation and not the individual owners of the corporation for their individual torts.

In Harleysville Ins. Co. of New Jersey v. Burnett, Not Reported in A.3d, 2014 WL 3557692 (N.J.Super.A.D., 7-2014) a New Jersey appellate court was asked to rule that a corporate policy provided insurance for a risk the policy did not take. Plaintiff Harleysville Insurance Company of New Jersey (Harleysville) appealed from the trial court order denying its motion for summary judgment and granting the cross-motions of defendants Penn National Mutual Casualty Insurance Company (Penn) and Rochdale Insurance Company (Rochdale), dismissing its complaint with prejudice.

FACTS

Harleysville provided homeowners’ insurance to defendants William and Anita Burnett for their residential property located in Monmouth Junction. William also operated a truck rental and asphalt paving business, WR Burnett, Inc. (WR Burnett) on the property. William was the sole owner of this business. The Burnetts entered into a lease agreement with WR Burnett for its use of a portion of their property, but that lease agreement did not become effective until January 1, 2010.

On June 24, 2009, defendant Jeffrey Casey, an employee of WR Burnett, sustained injuries when a tree fell on him as he was taking a cigarette break. At the time the tree fell on Jeffrey, William and his cousin, Philip Jackson, who was not a WR Burnett employee, were cutting down dead trees on the property to allow for additional space to store trucks.
Jeffrey and his wife, Sarah, commenced a personal injury action against the Burnetts asserting that their negligence caused the resulting injuries they each sustained. The complaint did not name the corporation, WR Burnett. In October 2009 Harleysville offered to defend the Burnetts in this action, but reserved its right to deny coverage under the business pursuits exclusion.

In December 2010, while this action was pending, Jeffrey filed a worker’s compensation petition with WR Burnett’s employer’s liability insurer, Rochdale. Under that policy, Rochdale agreed that it would pay damages to its insured “because of bodily injury to your employee that arises out of and in the course of employment, claimed against you in a capacity other than as employer.” Rochdale answered the petition, admitting that “a compensable accident took place” but denied that Jeffrey suffered permanent disability and put him to his proofs.

On January 20, 2011, Harleysville filed a motion for summary judgment in the Caseys’ personal injury action, arguing that the cause of action was barred by the exclusivity provisions of the Worker’s Compensation Act. Judge John J. Coyle, Jr. denied the motion, finding an issue of fact existed as to whether William removed the trees in his capacity as a business owner or a landowner. That factual dispute, however, was never resolved because the Caseys and the Burnetts entered into a settlement agreement on May 24, 2011. The agreement did not preclude Jeffrey from continuing to pursue his worker’s compensation claim. In addition, the agreement did not preclude Harleysville from continuing to pursue its declaratory judgment action it instituted against Rochdale and Penn in January 2011. The Burnetts, under the agreement, assigned to Harleysville all of their rights and claims, “whether contractual, contribution, indemnity, or in tort, that the Burnetts had, currently have, or will have, against any current or future parties to the Coverage Action, including but not limited to [Rochdale] and [Penn]….”

Harleysville subsequently filed a summary judgment motion. Penn and Rochdale filed cross-motions for summary judgment. Rochdale argued the insured under its policy was WR Burnett, not the Burnetts, who were sued in their individual capacities in the underlying action; consequently, it had no obligation to defend them. Penn argued it was entitled to summary judgment because Jeffrey contended he was acting within the scope of his employment at the time he sustained his injuries and its policy expressly excluded coverage for bodily injuries sustained during the course of employment.

The trial judge explained that the parties framed the issue before the court as whether William, when removing trees on his property, was acting as a homeowner or business owner. The judge concluded this question was irrelevant because Harleysville was not entitled to recover in either instance. If William had been acting within his capacity as a landowner, Harleysville would not be entitled to summary judgment and would be responsible for bearing the defense costs the Burnetts incurred, as their homeowner’s insurer. Also the Caseys sued William individually and not in his corporate capacity; however, even if William were acting in his corporate capacity, Rochdale would have a complete defense in the form of the worker’s compensation statute’s exclusivity bar.

ANALYSIS

An ambiguous insurance policy is ordinarily resolved as a question of law, in favor of the insured. The policy is interpreted liberally to afford coverage to the “fullest extent that fair interpretation will allow.” When the language of an insurance policy is clear, we must enforce its terms as written. A court may not draft a better insurance policy than the one purchased, regardless of concern for the inured parties.

Where a corporation is the named insured in an insurance policy, New Jersey courts have found that the individual owners of the corporation are not implicitly insured. A professional corporation and its sole owner are separate entities and the immunity of the workers’ compensation laws that shields the corporation from tort liability to employees does not extend to the owner of the corporation. A corporation is an entity which is also separate from its stockholders and in the absence of fraud or injustice, courts generally will not pierce the corporate veil to impose liability on the corporate principals.

In reviewing and interpreting the plain language of the Rochdale policy, the terms of the policy are not ambiguous. The named insured is WR Burnett. Although Burnett is the sole owner of WR Burnett, the corporation is an entity separate and distinct from William, who Jeffrey sued in his individual capacity.  No reading of the Rochdale policy could lead to the conclusion that its terms were intended to apply to principals, shareholders, and employees of WR Burnett.

The appellate court found no merit in Harleysville’s contention the trial court erred in failing to give credence to its business risk exclusion, which precludes coverage for the benefit of its insured for personal injuries sustained which arise out of  “or in connection with a ‘business’ engaged in by an ‘insured.’ This exclusion applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the ‘business[.]’”

The Rochdale policy insured the corporation, not William. In short, Rochdale was under no obligation to defend and indemnify the Burnetts. In light of this conclusion, the trial court properly determined Rochdale was under no duty to reimburse Harleysville for legal fees and costs it incurred in defending the Burnetts in the underlying action.

ZALMA OPINION

The injured person and his counsel were intelligent and prudent. Since he was injured by a falling tree cut down by the individual defendant who was the sole owner of the corporation for which he worked, he sued the individual and separately demanded benefits from his employer’s workers’ compensation insurer. He recognized, as the insurers did not, that he was dealing with two different entities. His employer was a corporation and he was injured in the course and scope of his employment. The individuals, cutting down the tree, were negligent and he sued them in their individual capacity.

The insurers imprudently sought to change the wording of the insurance policies to obtain indemnity from another insurer that did not insure the risks claimed. The court, recognizing the difference between an individual and a corporation, produced justice and made the insurers pay for the risks they agreed to pay and nothing more.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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Judges Cannot Make Law

Failure to Submit Proof of Loss

Fatal to Claim

Since the beginning of first party property insurance insureds were required to submit to their insurer a sworn statement in proof of loss before they had any entitlement to the benefits of the insurance. The standard fire insurance policy, over a century old and adopted in almost every state, requires the insured to submit a sworn proof of loss no later than 60 days after the fire. When the federal government established the national flood insurance program it adopted language similar to that provided by the standard fire policy.

Many states, after finding the proof of loss requirement to be draconian, have by statute and court decision, provided excuses for the failure to submit a proof of loss within the 60 day limit. Those cases require that the failure prejudice the rights of the insurer. Further, insurers, seeking to make it easier for an insured to present a claim, have modified their insurance policies to only require the proof of loss within 60 days after the insurer requires the submission of a proof of loss.

The Eighth Circuit Court of Appeal was called upon to deal with a flood insurance claim where the insured, whose home of more than 50 years, was destroyed by flood. In Stoner v. Southern Farm Bureau Cas. Ins. Co. — F.3d —-, 2014 WL 3398377 (C.A.8 (Ark.)) Mrs. Stone suffered serious damage to her home but she did not submit the one-page proof of loss form required by the federal standard flood insurance policy. See 44 C.F.R. pt. 61, app. A(1), art. VII(J)(4); Federal Emergency Management Agency (FEMA), Proof of Loss, Form No. 086–0–9 (Oct.2010).  [See the Flood Handbook here.] The handbook provides, in part:

Your official claim for damages is called a Proof of Loss.This must be fully completed and signed and in the hands of your insurance company within 60 days after the loss occurs. The Proof of Loss includes a detailed estimate to replace or repair the damaged property. In most cases, the adjuster, as a courtesy, will provide you with a suggested Proof of Loss. However, you are responsible for making sure that it is complete, accurate and filed in a timely manner.

When people seek benefits from a taxpayer-funded program, it is fair to require them to fill out the correct form. As Judge Richard S. Arnold said in his elegantly straightforward way, judges cannot “make law because we think a certain rule of law is a good thing.” Richard S. Arnold, Address at the Eighth Circuit Judicial Conference: The Art of Judging (Aug. 8, 2002).

Despite the court’s sympathy for Mrs. Jennie Stoner’s loss, whose home of 50 years suffered significant damage from flooding of the White River in Phillips County, Arkansas, we must follow the law.

In accordance with explicit federal law governing the National Flood Insurance Program, the Eighth Circuit reversed and remanded the case for entry of judgment in favor of Farm Bureau. Exercising the discretion provided to the court under Federal Rule of Appellate Procedure 39(a), it declined to tax Farm Bureau’s costs against Mrs. Stoner.

ZALMA OPINION

Because judges are lawyers they often tend to write lengthy opinions that confuse more than elucidate. Chief Judge William J. Riley, sitting in Omaha, Nebraska, who wrote this opinion, said everything that was needed in this case in a few paragraphs.

Judges interpret, they do not make, law. The National Flood Insurance Program requires an insured to produce a sworn statement in proof of loss within 60 days of damage by flood. Mrs. Stoner failed to submit the required form. As a result she gets nothing.

It is important for every person with flood insurance, every lawyer and public adjuster who represents an insured with a flood loss, to comply with the requirements of the policy or face an unhappy insured who can never recover for the loss. If Mrs. Stoner was represented by a lawyer or public adjuster who failed to help her submit her proof of loss, she is not without a remedy. She can sue her lawyer or public adjuster. If not she is out of luck. She will recover nothing and has no remedy other than free money from FEMA as a victim of a flood. She should have read the conditions of her flood insurance policy and would have avoided this problem.

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.

The 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 recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on California Claims Regulations – 2013″; “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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Limits of Claim Made & Reported Policy

Failure to Report Claim Promptly Fatal

It does not take a brain surgeon to understand that when a policy requires a claim to be made against the insured and reported to the insurer within the policy period waiting years to report the claim will defeat coverage.

FACTS

In LeCuyer v. West Bend Mut. Ins. Co., Not Reported in N.W.2d, 2014 WL 3396491 (Minn.App, July 14, 2014),  Samantha LeCuyer obtained a money judgment against her former employer for sexual-harassment retaliation but did not collect. She informed the employer’s former insurer, West Bend Mutual Insurance Company, of the judgment nearly two years after the employer’s policy expired, and she sought a declaratory judgment that would require West Bend to pay her the judgment amount. The district court granted summary judgment in favor of West Bend.

Samantha LeCuyer worked as a security guard for Wolf Protective Services beginning in August 2008. LeCuyer felt that two of her coworkers sexually harassed her. She complained to supervisors in September and October, and the company terminated her employment in December. LeCuyer sent a letter to the company on January 13, 2009, outlining her claims. Wolf’s counsel responded by letter stating that Wolf would review its insurance policies and consider whether to submit a claim to its insurer. Wolf never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims. LeCuyer sued in April, alleging the company violated the Minnesota Human Rights Act. Wolf retained new counsel but still never informed LeCuyer whether it had an insurance policy that covered sexual-harassment claims.

Wolf filed an answer to LeCuyer’s suit. Wolf’s new counsel withdrew soon afterward, and Wolf did not retain another attorney. The district court conducted a bench trial in 2010. Wolf did not appear. The district court entered a default judgment against Wolf for $520,693.

LeCuyer eventually discovered that an affiliate of West Bend Mutual Insurance had issued Wolf an insurance policy covering employment practices. The policy commenced on July 25, 2008 and ended on July 25, 2009. She wrote to West Bend on June 2, 2011, informing it of the default judgment against Wolf and requesting a copy of the policy. West Bend responded that it had received no previous notice of the claim or the judgment and that it had cancelled Wolf’s policy in October 2008 because Wolf had stopped paying premiums. It informed LeCuyer that Wolf’s policy had been a claims-made policy, which covered only claims made during the coverage period.

DECISION

LeCuyer argues that she satisfied the notice provision of the insurance policy, making insurance coverage available to pay the damages ascribed to Wolf, because she reported the claim of harassment to Wolf. The parties agree that Wolf’s insurance policy with West Bend controls the primary question in this appeal. The policy disclaims any obligation to provide coverage beyond its specific terms. It promises to “pay on behalf of the insured for ‘damages’ … arising out of any ‘employment practices’ to which this insurance applies,” but it states that West Bend will cover an employee’s damages claim against Wolf “only if … [a] ‘claim’ is both … made against any insured, in accordance with paragraph 3 below, during the policy period … and [r]eported to us … during the policy period or within thirty … days thereafter.” (Emphasis added).

The policy explains that a claim is made “[w]hen notice of such ‘claim’ is received and recorded by [Wolf] or by [West Bend], whichever comes first.” West Bend is therefore liable to pay the judgment against Wolf only if West Bend received notice of LeCuyer’s claim according to the policy’s preconditions.

LeCuyer must carry the burden. She must convince the court after it reads the policy as a whole while giving effect to the plain and ordinary meaning of its terms, that coverage applies. To do so, LeCuyer, as the party asserting coverage, must establish a prima facie case that the policy applies. The Minnesota court concluded that LeCuyer did not meet this burden. It noted that the policy was written to be effective for one year beginning July 25, 2008. West Bend asserts that it cancelled Wolf’s policy October 16, 2008, for nonpayment of premiums. LeCuyer did not report her sexual harassment claim to West Bend until her June 2011 letter. The claim was therefore not “reported to” West Bend until almost two years after the policy ended on its own terms. Because the policy covers only claims made and reported to West Bend “during the policy period or within thirty … days thereafter,” the June 2011 notice was too little and too late to trigger coverage.

The policy requires both a claim and a report to the insurer before coverage can apply. The policy clearly does not cover any claims not reported to West Bend within the policy period. Because neither Wolf nor LeCuyer reported the claim to West Bend within the period mandated under the policy, the policy unambiguously provides no coverage.

LeCuyer’s, grasping at straws, presented as a final argument that Minnesota law requires West Bend to cover the judgment against Wolf because Wolf is bankrupt, insolvent, or dissolved. She bases this argument solely on Minnesota Statutes section 60A.08, subdivision 6 (2012), which specifies that all Minnesota insurance policies: “shall, notwithstanding anything in the policy to the contrary, be deemed to contain the following condition: ¶ The bankruptcy, insolvency, or dissolution of the insured shall not relieve the insurer of any of its obligations under this policy, and in case an execution against the insured on a final judgment is returned unsatisfied, then such judgment creditor shall have a right of action on this policy against the company to the same extent that the insured would have, had the insured paid the final judgment.”

LeCuyer urges that this statute embodies a public policy of guaranteeing insurance coverage to individuals with claims against insolvent entities. West Bend’s insurance contract contains a provision substantially similar to the statutory clause. Wolf’s insurance policy adheres to Minnesota law. Neither the policy nor the statute require coverage. The statute and Wolf’s insurance policy provide only that bankruptcy or insolvency will not relieve West