Is a Liability Policy a First Party Policy?

Unambiguous Statute Must Be Interpreted as Written

Insurance parlance defines the first party as the person insured, the second party as the insurer and the third party as a person who claims injury as a result of actions of the first party. First party insurance causes the second party to pay indemnity to the person insured. Third party insurance pays to defend and indemnify its insured against claims of negligence causing injury to a third party who receives the payment. The state of Washington instituted a statute called the Insurance Fair Conduct Act (IFCA) which allows insured’s, harmed by the unfair conduct in a first party claim, to obtain punitive damages from their insurers.

In King County v. Travelers Indem. Co., Slip Copy, 2015 WL 1867098 (W.D.Wash., 4/23/15) the U.S. District Court for the Western District of Washington was asked to resolve a claim by King County for defense and indemnity coverage provided by insurer defendants and for violations of the IFCA. The defendants moved to dismiss only the IFCA claim.

BACKGROUND

Plaintiff King County claimed defense and indemnity coverage under third-party liability policies issued by multiple insurer Defendants for costs arising from Plaintiff’s defense associated with the cleanup of two superfund sites in the county. Plaintiff filed its original complaint on December 23, 2014; on February 5, 2015 (before any answers had been filed), Plaintiff amended its complaint to allege violations of the IFCA.

ANALYSIS

Defendants assert that, as a matter of law, Plaintiff cannot state a claim under IFCA arising from demands for insurance coverage under a third-party liability insurance policy. The District Court has twice addressed this issue (Cox v. Continental Casualty Co., C13–2288MJP, 2014 WL 2011238, 2014 WL 2560433; and Central Puget Sound Regional Trans. Authority v. Lexington Ins. Co., C14–778MJP, 2014 WL 5859321) and twice determined that “IFCA … applies only to first-party insurance.”

Plaintiff attempts a third bite at this apple, arguing that preceding proponents of its position have failed to present to the Court the legislative history of IFCA which the County alleges supports its position. Plaintiff asserts that this Court must follow Washington’s principles of statutory construction, and that those principles direct the Court to employ statutory construction to carry out the intent and purpose of the Legislature.

While Plaintiff urges the Court to consider IFCA’s legislative history in accord with Washington principles of statutory construction, it fails to place those principles in context. The Washington Supreme Court counseled that resort to the tools of statutory construction only under certain circumstances.

In determining the meaning of a statute, the court must apply the general principles of statutory construction. These principles begin with the premise that if a statute is plain and unambiguous, its meaning must be derived from the language of the statute itself. Ambiguity exists if the language of a statute is susceptible to more than one reasonable interpretation. If a statute is ambiguous, resort to the tools of statutory construction is appropriate. A finding of ambiguity must precede any inquiry into legislative intent.

A cause of action arises under IFCA when “[a]ny first party claimant to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.” [RCW 48.30.015] The statute defines “first party claimant” as “an individual, corporation, association, partnership or other legal entity asserting a right to payment as a covered person under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such a policy or contract.” (emphasis added) [RCW 48.30.015(4)]

The Court saw no ambiguity in the language of the statute or the statutory definition of who may assert an IFCA claim. The Washington Supreme Court has defined “first-party insurance” as any policy that pays specified benefits directly to the insured when a determinable contingency occurs, allowing an insured to make her own personal claim for payment against her insurer. The statute defines “first party claimant” narrowly, in a way that applies only to first-party insurance.

The County points to no ambiguity in the language of the statute and the Court found none. In the absence of any ambiguity, the meaning of IFCA must be derived from the language of the statute itself.

Neither will the Court adopt Plaintiff’s argument that public policy should be allowed to dictate the meaning of the statute. Punitive damages such as those levied under IFCA are, as a rule, contrary to public policy. Brown v. MHN Gov’t Serv., Inc., 178 Wn.2d 258, 277 (2013). Further, Washington adheres to the principle of statutory construction [that] statutes in derogation of the common law must be construed narrowly.

As it has previously, the Court declines to adopt the expansive reading of IFCA propounded by Plaintiff.

CONCLUSION

“First party claimant” as used in IFCA does not apply to an insured with a third-party insurance contract, and thus Plaintiff’s IFCA cause of action in its amended complaint must be DISMISSED as to all defendants. Because there is no further amendment possible which could remedy this defect, the dismissal of the IFCA claim will be with prejudice.

ZALMA OPINION

It is interesting that although the punitive damages are contrary to the public policy of the state of Washington it still enacted the IFCA. The court made clear that, as a result, the application of the IFCA must be narrowly construed to limit its application to first party policies and claims of the first party. Plaintiffs, after failing to stretch the statute by court rulings should give up and lobby the state Legislature to change the statute if it believes such a change is worthwhile.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Applicant has Duty to Tell The Truth

Lawyer Applying For Insurance Should Never Lie to the Insurer

The covenant of good faith and fair dealing implied in every contract of insurance requires that neither party should misrepresent or conceal material facts from the other to deprive the deceived party from receiving the benefits of the contract of insurance.

Chicago Insurance Company (Chicago), a professional liability insurer sued its insured, the law firm, Paulson & Nace, PLLC (Paulson), and their client, seeking declaratory judgment that it had no duty to defend or indemnify Paulson in an underlying legal malpractice lawsuit. The United States District Court for the District of Columbia entered summary judgment in Chicago’s favor, and defendants appealed to the DC Circuit in Chicago Ins. Co. v. Paulson & Nace, PLLC, — F.3d —-, 2015 WL 1782273 (C.A.D.C., 4/21/2015).

FACTS

Paulson was engaged to bring a medical malpractice action on behalf of a young woman who had become paralyzed after surgery. Roughly a year and a half after the engagement, shortly before the statute of limitations was about to run, the firm filed a complaint in Virginia state court. The original suit was dismissed without prejudice for failure to correctly caption a pleading. A second complaint was filed with the correct caption but was dismissed with prejudice for filing outside the statute of limitations.

THE DISPUTE

The insurance coverage dispute at the heart of this appeal turns on whether, at the time the law firm applied for its new policy, the firm was on notice that it had committed a breach of professional conduct, or otherwise should have foreseen that the dismissals could give rise to a legal malpractice claim.

On July 18, 2007, while the state court appeal was still pending, the firm’s sole member, Barry J. Nace, applied for a new insurance policy with Chicago Insurance Company. Nace was asked whether there were “any circumstances which may result in a claim being made against [his] firm.” Despite the recent dismissal of Gilbert’s claims, Nace responded “no.”
Chicago Insurance subsequently issued a “claims-made” liability insurance policy—that is, coverage for all claims made within the policy period, regardless of when the events giving rise to the claim occurred. But the policy also contained a standard known risk exclusion, meaning pre-policy conduct would not be covered if the firm had a reasonable basis “to believe that the [firm] had breached a professional duty” prior to the policy’s issuance or to otherwise foresee that pre-policy conduct might result in a claim against the firm.

Paulson eventually informed Chicago Insurance of the Gilbert incident, though it represented that the potential malpractice had occurred in 2008, not 2006. Shortly thereafter, Chicago Insurance provided Paulson with an attorney, who submitted relevant case files and other materials to Chicago Insurance throughout 2010 and 2011. In November 2011, the insurance company noticed that Paulson had made the caption error in 2006—prior to the policy period. On January 13, 2012, Chicago Insurance notified Paulson that it reserved its rights to deny coverage under the known risk exclusion if a malpractice suit arose.

Ms. Gilbert eventually filed a legal malpractice action against the law firm in March 2012, and she was awarded $1,750,000 by a Virginia court in 2013. Chicago Insurance brought this declaratory judgment action premised on diversity jurisdiction, contending that Paulson should have known of the potential claim when it applied for the insurance policy and that the known risk exclusion therefore applied. The District Court granted summary judgment in favor of Chicago Insurance. Chicago Ins. Co. v. Paulson & Nace, PLLC, 37 F.Supp.3d 281 (D.D.C.2014). Paulson & Nace appeals.

ANALYSIS

The principal question in this case is whether a reasonable attorney in Paulson’s position would have been on notice by July 2007 of a possible breach of professional duty or a potential malpractice claim, such that there was an obligation to disclose the underlying incident to the insurer.  This question is appropriate for summary judgment only if a reasonable jury can draw but one inference and that inference points unerringly to the conclusion that the insured has not acted reasonably under the circumstances

The DC District agreed with the District Court that no reasonable jury could have found against Chicago Insurance on this question. It is undisputed that Paulson was aware that the first complaint was improperly captioned, as evidenced by its attempt to correct the error in October 2006 and by the dismissal of the complaint on the basis of the captioning error in February 2007. It also is undisputed that Paulson knew that its attempt to correct the error had failed at the trial level, and that Ms. Gilbert’s claims were going to be dismissed with prejudice.

Under such circumstances—that is, where an attorney is aware that he committed a procedural error that resulted in an unfavorable outcome—there is no triable question with respect to a lawyer’s duty to inform his insurer of the potential claim. The dismissal of a lawsuit because of attorney error would clearly put a lawyer on notice of the possibility of a malpractice claim.

Paulson claimed that expert testimony should have been required to determine what a reasonable attorney might have foreseen. It is true that expert testimony is routinely required in legal malpractice actions where lay jurors are ill-equipped to evaluate the merits of an attorney’s strategic decisions. But no expert testimony is required if an attorney’s lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.

The Virginia state court did all the expert legal work needed here in dismissing the cases based on Paulson’s procedural error prior to decision on the merits. Nothing more than this dismissal with prejudice—which can be explained to a jury through lay testimony and court records—was needed to establish that Gilbert’s legal malpractice claim was reasonably foreseeable.

In fact, Paulson initially informed Chicago Insurance that the alleged malpractice occurred within the policy period and it never expressly alerted the insurer to its error. Chicago Insurance was under no duty during the preliminary stages of the claim process to sift and verify the information provided by Paulson.  An insurer generally has the right to rely on statements made in an insurance application; the insurer need not conduct an independent investigation unless it has reason to doubt the statements.

For the foregoing reasons, Chicago Insurance was entitled to summary judgment in this case and the District Court’s decision awarding summary judgment in its favor was affirmed.

ZALMA OPINION

When Mr. Nace, after having a medical malpractice case dismissed because of a procedural error and a new complaint dismissed because it was filed after expiration of the statute of limitations on a suit he had a year and a half to file, answered “no” to the question about potential claims, was either intentionally deceptive or simply ignorant. The lie on the application will cost his law firm $1,750,000 plus interest without insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Unfair Trial Tactics Require Retrial

Can A Party Mention Insurance In a Tort Case?

Under any court system it is difficult to attain a true and just result even under the most favorable conditions because of the frailty of man and his subjectivity to various prejudices and other influences that may warp his judgment in attempting to attain the ultimate truth in a given factual situation. When either party to a cause, whether deliberately or inadvertently, of improper influence in a jury trial is a distinct disservice to the administration of justice. Lawyers, as officers of the courts, and the courts, on their own motion if need be, must be ever vigilant to see that no such influence creeps into the proceedings in even the slightest degree because it will subvert the noble purpose of the court system to provide justice under law.

In Kochalka v. Bourgeois, — So.3d —-, 2015 WL 1809568 (Fla.App. 2 Dist., 4/22/15) the Florida Court of Appeal was faced with a trial verdict based on the alleged subversion of justice.

FACTS

Bonnie Kochalka challenged the final judgment entered in favor of Appellee Lyndse Bourgeois in an automobile negligence action and the prevailing party cost judgment entered against her in the same case. Ms. Bourgeois sued Ms. Kochalka for injuries she claimed to have sustained when Ms. Kochalka rear-ended her car while it was stopped at an ice cream shop’s drive-through window. In the appeal from the final judgment, Ms. Kochalka asserts that the trial court erred in refusing to excuse a prospective juror for cause; that it improperly excluded opinion testimony of her only expert witness; and that Ms. Bourgeois improperly informed the jury about Ms. Kochalka’s liability insurance.

FAILURE TO EXCUSE A PROSPECTIVE JUROR FOR CAUSE

During jury selection, Ms. Kochalka’s counsel asked the prospective jury panel if anyone had any life experiences that they thought they could not put aside when considering this case. He offered the prospective jurors an analogy in which he stated that if someone feared snakes, it would be very difficult for them to put that fear aside and be forced to pick up two snakes. Prospective juror Bonfe immediately raised her hand and discussed a prior bad experience she had with the judicial system.

Counsel then moved on to discussions with other prospective jurors, and eventually asked her to explain that life experience, and she described how she no longer believes in the jury system at all.

The test for juror competency includes not only the question of whether the juror can lay aside any bias or prejudice toward the parties but also whether the juror can render a verdict based solely on the evidence presented and the instructions on the law given by the court. When assessing that issue, the trial court must excuse a prospective juror for cause if any reasonable doubt exists regarding his or her ability to render an impartial verdict.

Errors in jury selection are per se errors requiring a new trial.

EXCLUSION OF MS. KOCHALKA’S EXPERT’S OPINION

One of Ms. Bourgeois’ claimed injuries was a torn meniscus in her knee. She claimed that it happened when she struck her kneecap on the dashboard during the accident. Ms. Kochalka had an orthopedic surgeon who was prepared to testify that from an orthopedic standpoint that was not possible. In order for the meniscus to tear, there had to be a rotational or twisting injury, not a blunt force one.

Ms. Bourgeois successfully kept that testimony from the jury’s consideration by arguing that it was a biomechanical opinion—which as an orthopedic surgeon he was unqualified to provide—not a medical opinion. Ms. Kochalka correctly argued the doctor was doing nothing more than engaging in a differential diagnosis analysis and identifying—or in this case eliminating—a potential cause of the injury. The Court of Appeal agreed with Ms. Kochalka’s characterization of the doctor’s testimony. Therefore, it was error for the trial court to exclude the doctor’s opinion as improper biomechanical testimony.

REFERENCES TO INSURANCE

During voir dire, Ms. Bourgeois’ counsel asked the panel members about their prior involvement with accidents and lawsuits. When one potential juror stated that he had been in an auto accident, counsel discussed with him the fact that he hired an attorney, made a claim, and ultimately obtained a settlement. He then asked about the liability insurance.

At that point Ms. Kochalka’s counsel objected and moved to strike the panel, stating at a sidebar conference: “Why are we asking who the carrier was? The carrier is not involved in this case. That’s twice he’s done it. That’s trying to inject that there is insurance involved in this case.” The trial judge asked Ms. Borgeois’ counsel why he was asking that question, and he responded: “I was just trying to see if it was the same as the carrier in this one.” The judge sustained the objection and instructed counsel to stop referencing insurance but denied the motion to strike the panel.

During the evidentiary portion of the case, Ms. Bourgeois described the accident, and then referenced the fact that Ms. Kochalka did have insurance, stating: “She asked if we were okay. You know, she just wanted to-she apologized. She did apologize, and then we exchanged insurance information. We had called the police station, but because it was in a parking lot they don’t come to that scene. So after exchanging information we all left.”

Ms. Kochalka once again objected and moved for a mistrial. The judge reserved ruling at that time but ultimately denied relief on that issue post-trial. For the purposes of remand, we remind the parties and the trial court that in a negligence case the potential existence or amount of a defendant’s insurance coverage has no bearing on the issues and should not be revealed to the jury. See, e.g., Beta Eta House Corp. of Tallahassee v. Gregory, 237 So.2d 163, 165 (Fla.1970) (“The existence or amount of insurance coverage has no bearing on the issues of liability and damages, and such evidence should not be considered by the jury.”). The injection of any insurance issues into the case, whether deliberate or inadvertent, is improper and creates grounds for a mistrial.

ZALMA OPINION

Insurance is an important risk avoidance tool that is purchased to protect the person insured against liability for his or her negligence. However, when a jury learns that a party defendant is insured and may not need to pay a judgment out of the defendant’s pocket, they will be more generous to the plaintiff. Since the existence of insurance has nothing to do with the liability or damages issues it should never be mentioned.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How To Determine Who’s On First

Primary v. Excess Determined by Contract

Construction contracts are, among other things, risk transfer devices. The owner transfers its risk of lost to the general contractor and the sub-contractors, the contractors and sub-contractors transfer the risk to their sub-contractors and all try to transfer the risk to their various insurers by forcing each contractor and sub-contractor to make the owner and contractors into additional insureds. As a result, the parties often dispute, which insurer is primary and which is excess.

In Liberty Ins. Corp. v. Admiral Ins. Co., Slip Copy, 2015 WL 1757136 (N.D.N.Y., 4/17/15) multiple parties and multiple insurers asked a New York Appellate court to determine who was on first.

BACKGROUND

A. The Underlying Actions

On or about October 21, 2013, Kevin Harrington (“Harrington”) commenced an action entitled Kevin Harrington v. State University Construction Fund, Christa Construction, LLC, and Schenectady Steel Co. Inc. Harrington commenced a separate action in the New York Court of Claims, entitled Kevin Harrington v. The State of New York and State University of New York College at Oneonta. Admiral and Liberty seek a declaratory judgment determining whether Liberty has a co-primary duty to defend and indemnify Christa Construction LLC (“Christa”), the State University of New York Construction Fund (“the Fund”), the State of New York (“the State”), and the State University of New York College at Oneonta (“SUNY Oneonta”) in Harrington’s State Court and Court of Claims actions (“the underlying actions”), by virtue of an endorsement in Liberty’s Commercial General Liability (“CGL”) policy.

DISCUSSION

The only issue before the Court was whether Liberty has a co-primary duty to defend Christa, the Fund, the State, and SUNY Oneonta in the underlying actions.

Under New York law, an insurance policy which contemplates contribution with other policies or does not by the language used negate that possibility must contribute ratably with a similar policy, but must be exhausted before a policy which clearly states in its conditions that it is intended to be excess over other excess policies.

The general rule of ratable contribution is inapplicable if it would effectively deny and clearly distort the plain meaning of the terms of the policies.  The purpose of the exception to the general rule, requires New York courts to construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.

Item 11 in the Liberty Endorsement (“Item 11”) includes an other insurance provision that states that the Liberty Policy: “shall be excess over any other insurance available to the additional insured, whether such insurance is on an excess, contingent or primary basis, unless the written agreement with you requires that the insurance provided for the additional insured be primary concurrent or primary non-contributory, in comparison to the additional insured’s own policy or policies.” This provision thus provides that the Liberty Policy is excess as to the additional insureds unless an exception is triggered by a written agreement as described.

The language “the written agreement with you” in the Liberty Policy refers to a written agreement by Schenectady to procure additional insurance coverage.  The Schenectady contract, where Schenectady agreed to obtain coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds, triggered the exception in the other insurance provision of Item 11, because Exhibit C of the Schenectady contract specifies that Schenectady’s coverage for the additional insureds will be on a primary and non-contributing basis.

Liberty asserted that the phrase “in comparison to the additional insured’s own policy or policies” (“the ‘in comparison’ clause”), means that when the exception is triggered, the Liberty Policy would only be primary to the additional insureds’ own policies. Liberty defines “own policies” as policies where the additional insureds under the Liberty Policy are named insureds. Under Liberty’s interpretation, Liberty could be a primary insurer as to “the Fund’s, C[h]rista’s, the State’s, or SUNY’s own policies[,]” but not as to Capital’s policy with Admiral, where Christa, the Fund, the State, and SUNY Oneonta are all additional insureds.

When a court is called upon to resolve a dispute over insurance coverage, it must first look to the language of the policy. The court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect. The Court found that Admiral’s interpretation of the Item 11 other insurance provision would render the “in comparison” clause superfluous, because Liberty would have a primary duty to defend and indemnify in any instance where a written agreement required that the policy holder’s insurance would be primary non-contributory as to the additional insureds’ own policy.

If Liberty’s policy was primary as to all policies available to the additional insured when the exception applied, then the “in comparison” clause would serve no purpose.

On the other hand, Liberty’s interpretation does not disregard or “fail[ ] to give effect to that portion of the Liberty Policy Other Insurance provision stating ‘unless the written agreement with you requires that the insurance provided for the additional insured[s] be primary concurrent or primary non-contributory” (“the ‘unless’ clause”), as Admiral argues. If the Liberty Policy additional insureds were named insureds under the Admiral Policy, Liberty would be a co-primary insurer with Admiral, and the “unless” clause would give Liberty a duty to defend and indemnify the named insured. However, as Christa, the Fund, the State, and SUNY Oneonta are all additional insureds on the Admiral Policy, the “in comparison” clause functions as a limitation on the “unless” clause, leaving Liberty as the excess insurer, and Admiral as the sole primary insurer.

As a result the appellate court concluded that when a dispute arises involving the terms of an insurance contract, New York insurance law provides that ‘an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract.

Admiral’s “PRIMARY/NON–CONTRIBUTING INSURANCE ENDORSEMENT” is evidence of Admiral’s intent to provide the sole primary insurance coverage for Christa, the Fund, the State, and SUNY Oneonta as additional insureds. In contrast, the Liberty Endorsement is evidence that establishes that Liberty and Schenectady’s intent was that Liberty be an excess insurer as to the additional insureds, except in comparison to their own policies. Further, the Capital Subcontract establishes Schenectady’s and Capital’s intent to make Admiral’s policy primary “on a noncontributory basis before any other insurance.”

If the Court declared Admiral and Liberty co-primary insurers for these additional insureds, it would negate the bargained-for contractual expectation that the endorsements signified. It refused to change the agreed upon contract terms.

ZALMA OPINION

People involved in complex construction agreements must carefully write the construction contract terms to effectively transfer risk and the insurers involved in insuring those risks must carefully write their contracts of insurance, and additional insured provisions, to limit their exposure before there is a loss. It is improper and usually ineffective to attempt to change the wording of the policy by litigation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Can an Insurer Limit Coverage as It Pleases?

Insurer Has Unquestioned Right to Set Terms of Insurance Contract

Insurers have the unquestioned right to select whom it will insure and the risks it is willing to take as long as the contract is clear, unambiguous and not in violation of public policy. In Byoung Suk An v. Victoria Fire & Cas. Co., — A.3d —-, 2015 WL 1743163 (Pa.Super. 4/28/26) 2015 PA Super 84 a policy that limited coverage to the “named driver only” was upheld by the trial court and Appellant, Byoung Suk An, appealed.

FACTS

Suk An sued Matthew Gilmore (“Gilmore”) and Walker. In the underlying complaint, Suk An alleged he was injured in a motor vehicle accident on March 20, 2011, which involved a vehicle owned by Walker and operated by Gilmore. At the time of the alleged accident, the motor vehicle owned by Walker was insured under a Pennsylvania Personal Automobile Policy (“Policy”) underwritten by Victoria Fire and Casualty Company (“Victoria”). The Policy did not provide liability coverage for any person not listed as a named driver on the Policy. Walker was the sole driver listed on the Policy.

Suk An sued Victoria for declaratory judgment seeking a declaration by the court that Victoria had a duty to defend and provide insurance coverage to Walker and Gilmore for all claims arising out of the alleged motor vehicle accident.

The trial court entered an order denying Suk An’s motion for summary judgment, and a separate order granting Victoria’s motion for summary judgment, thereby dismissing Suk An’s action for declaratory judgment. Suk An timely appealed.

THE APPEAL

Suk An argued that the trial court committed an error of law when the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to the “named driver exclusion” of the Pennsylvania Motor Vehicle Financial Responsibility Law, 75 Pa.C.S. § 1718(c)(2), and is therefore invalid. He also claimed that the “named driver only” coverage exclusion contained in the subject automobile insurance policy issued by Victoria Fire & Casualty Company conflicts with and is contrary to public policy in Pennsylvania, and is therefore invalid?

ANALYSIS

A reviewing court may disturb the order of the trial court only where it is established that the court committed an error of law or abused its discretion. The rule governing summary judgment in Pennsylvania, like all other jurisdictions, states that where there is no genuine issue of material fact and the moving party is entitled to relief as a matter of law, summary judgment may be entered.

The trial court concluded that section 1718(c) refers to “named driver exclusion” policies which exclude a particular driver, as opposed to the situation presented in the Policy currently at issue, where only the named driver is provided coverage. Suk An contends that Victoria’s “named driver only” coverage impermissibly expands the legislature’s exclusion outlined in section 1718(c) to include “any person not listed as an insured on your policy” without requiring that the first named insured request that the person be excluded from coverage, or a determination as to whether the excluded person is insured on another policy of motor vehicle liability insurance.

The interpretation of an insurance policy is a question of law for the court. In interpreting the language of an insurance policy, the goal is “to ascertain the intent of the parties as manifested by the language of the written instrument.”  When analyzing a policy, words of common usage are to be construed in their natural, plain, and ordinary sense. When the language of the insurance contract is clear and unambiguous, a court is required to give effect to that language.  A “named driver exclusion” prohibits coverage for a person named in the policy while the Victoria policy excluded coverage for any driver not listed on the policy.

That Application Walker signed when he obtained the policy, included the following statement:

APPLICANT’S STATEMENT—READ BEFORE SIGNING WARNING

“PLEASE NOTE: In order for us to offer you this low cost Lite product, your policy contains a number of coverage restrictions. This policy will not provide coverage when the driver of your auto is not listed on the policy. This policy will not provide coverage when you are driving a vehicle other than those listed on the Declaration page. Automatic coverage for a newly acquired auto is also restricted to 72 hours after the purchase or lease of that auto.” (Emphasis added)

Walker was the only driver identified on the Application. Based on the Application, Victoria issued the Policy to Walker. The Policy,  emphasizing the statement in the application, included the following statement: “PLEASE NOTE: IN ORDER FOR U.S. TO OFFER YOU THIS LOW–COST EXPRESS PRODUCT, YOUR POLICY CONTAINS A NUMBER OF COVERAGE RESTRICTIONS. THIS POLICY WILL NOT PROVIDE COVERAGE WHEN THE DRIVER OF YOUR AUTO IS NOT LISTED ON THE POLICY.”

Clearly, Victoria advised Walker that the coverage only applied when he was driving the vehicle identified in the policy. The appellate court concluded, therefore, that the Policy at issue does not conflict with, nor is it contrary to, section 1718(c), as alleged by Suk An. Rather, section 1718(c) is inapplicable to the Policy in this case since it did not deal with a “driver only” policy.

If the court accepted Suk An’s argument to its logical end, pursuant to ection 1718(c)(2), an insurer would not be liable for damages caused by any (and every) driver only if any (and every) driver was 1) specifically excluded by the named insured and 2) was insured under another policy. The court concluded that such a requirement is absurd.  The court concluded that section 1718(c) is inapplicable to the Policy at issue in this case and the policy language is clear and unambiguous in limiting coverage only to the named driver.

Suk An next argues that the “named driver only” Policy at issue in this case conflicts with, and is contrary to, public policy in Pennsylvania, and is therefore invalid.

Public policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interest. As the term “public policy” is vague, there must be found definite indications in the law of the sovereignty to justify the invalidation of a contract as contrary to that policy. In the absence of a plain indication of that policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy.

Our Supreme Court had the opportunity to address public policy concerns arising from the interpretation of automobile insurance policies in Progressive Northern Ins. Co. v. Schneck, 813 A.2d 828 (Pa.2002). The insured in Schneck had named her husband as an excluded driver pursuant to section 1718(c)(2) because he had a suspended driver’s license. In recognizing the exclusion as being consistent with public policy, the Court stated that: “The overarching public policy of the Motor Vehicle Financial Responsibility Law (MVFRL) is concern over the increasing cost of insurance premiums … [t]his public policy is exemplified by 75 Pa.C.S. § 1718(c), which permits named driver exclusions. These exclusions are designed by insurers to avoid covering someone with a bad driving record or in a high-risk category … since the premium for such coverage would be exceedingly high.”

The provision of low-cost, affordable policies in return for motor vehicle liability coverage of only the named driver, and the concomitant risk reduction, does not violate public policy. Any determination that such a cost saving policy is against public policy must be left to the legislature. In the absence of a plain indication of dominant public policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts contrary to public policy and should be content to await legislative action.

ZALMA OPINION

Although empathy rests with the injured person he is not without a remedy. He can make claim on his uninsured motorist coverage or can continue with his suit against the tortfeasors and execute on their assets. No matter how sad or severe Suk An’s injuries his injuries are not a basis for changing the terms and conditions of a limited contract of insurance created properly.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

ISO Files Most Important Homeowners Change in 40 Years

When is Your Home Not Where You Reside?

I thank my friend, Bill Wilson, CPCU, ARM, Associate Vice President, the Big I, who kidly gave me permission to reprint his article from the Big “I” Virtual University Newsletter. Unlike everything else in this blog, I did not write the following article, it was written by Bill Wilson and is posted here because it is so important to those of us involved in insurance and homeowners insurance.

Abstract

In 2001, we learned of a potentially catastrophic coverage gap in most homeowners policies. For the past 14 years, we have written about this and discussed it in seminars and webinars across the country. For the past 10 years, we have worked with ISO through our national Technical Affairs Committee in negotiating a resolution to this problem that all affected parties can live with. This effort has culminated in the recently filed ISO changes addressed in this article.

Background

Fourteen years ago, in the March 16, 2001 edition of our (The Big I) Virtual University VUpoint newsletter (Vol. 2, No. 6), we published what I believe was our first article on what would later become known as the “Where You Reside” homeowners insurance issue. That article was followed by several more related articles emphasizing the importance of a potentially catastrophic coverage gap in most homeowners policies we reviewed. In order to bring the issue to focus, in October 2009 we combined all of the articles into a white paper and presented a countrywide webinar on December 3, 2009. Both the white paper and webinar are linked from the Where You Reside page in the “Featured Resources” area of the VU.

In the meantime, in 2005, our national Technical Affairs Committee presented this issue to ISO in our annual meeting with them. For 10 years, we pursued a remedy for ISO HO forms in this forum and at the Mid-America Insurance Conference via a series of points and counterpoints until, in November 2014, we were able to reach a negotiated agreement on changes to ISO’s Homeowners program that we all could live with. Neither viewpoint “won” but we believe the resolution is workable and a starting point for further evolution and tempering of this homeowners issue.

The countrywide ISO filings effecting this change have been made with an effective date in most states of October 1, 2015. The forms changes include a new mandatory endorsement, an optional broadening endorsement, and a nonfiled notice/questionnaire form. The purpose of this article is to provide an overview of the issue and the purpose of the ISO filings. We will also identify several caveats and preview several initiatives we plan to undertake this year.

Loss Examples

Consider the following scenarios:

A homeowner is confined to a nursing home and then learns she will never be able to return home. Her home remains fully furnished, but she no longer lives there and will not be able to return. According to one interpretation by a number of adjusters and courts, at the instant she learns that she will not be able to return to her home, her residency ends and so does the coverage on her dwelling. If it is destroyed overnight by a covered peril, she has no coverage for the damage to her home, the largest asset she owns and one she would probably need to sell in order to afford the costs of long term nursing home care.

  •  You sell your existing home and buy or build another home. Your new home is ready and the purchasers of your old home have qualified for a loan that will be closed in 5 days. In the meantime, you move to your new residence which you have insured on a new HO policy and you allow the purchasers to begin painting, replacing carpeting, etc. in your old home. Your existing HO policy remains in force on your old house until the closing. Unfortunately, a tornado strikes the day before the closing and the adjuster denies the claim because you no longer reside in the home.
  •  You purchase a “fixer-upper” and place homeowners coverage effective on the date of closing. You plan to move into the home in 28 days after your contractor son completes some renovations (hardwood floors, new kitchen countertops and appliances, bathroom remodeling, etc.). Three days after the closing, a fire breaks out overnight causing $186,000 in damage to the dwelling. When the adjuster learns that you have not yet moved into the home, he denies the claim based on a lack of residency, citing three court cases in your state upholding such claim denials.

These are not hypothetical situations. In our original white paper on this issue, we identify over a dozen scenarios where residency may end during the policy term. We also cite a similar number of court cases that have considered this coverage scenario. Some courts overruled the claim denials, but a slight majority of decisions that we have identified have agreed with the interpretation that the end of residency ends the coverage on the dwelling. In addition, based on real-life claims submitted through the VU “Ask an Expert” service or directly by member agents, we are aware of at least a dozen claim denials:

  •  Total loss while insured was in a nursing home (KY)
  • $100,000+ condo rental claim (FL)
  • 5-figure loss while home was being remodeled (AZ)
  • $186,000 renovation claim (GA)
  • $150,000 ten-month house rental (FL)
  • $135,000 four-year house rental (FL)
  • $123,000 two-year house rental (FL)
  • $300,000 “nonclaim” with daughter occupancy (NY)
  • $229,000 total loss with niece occupancy (MN)
  • Small fire loss (NC)
  • Fire loss with daughter’s temporary occupancy (PA)
  • Fire loss while house was undergoing renovation (RI)

The Problem: Three Little Words

  •  Using the ISO HO-3 policy as a model form, this is the language being cited in the claim denials we’ve heard about and most of those in the court cases we’ve reviewed:

HO Insuring Agreement:
“We cover…The dwelling on the residence premises shown in the Declarations….”

HO Definitions:
“’Residence premises’ means…The one family dwelling where ‘you’ reside….”

The basis for these denials is the premise that the insured (“you”) must reside in the dwelling in order for coverage to apply. According to this interpretation of the “residence premises” policy definition, if a “you” (named insured or resident spouse) doesn’t reside in the dwelling at the time of loss, the dwelling is not a “residence premises” and, if it’s not a “residence premises,” then the insurer does not cover, under the insuring agreement, the dwelling because it’s not on the “residence premises.”

The “where you reside” language was not in ISO’s 1976 HO policies, nor was its addition to the 1984 edition mentioned in that filing. The language has been in subsequent ISO HO forms in 1991, 2000, and 2011. Our research also indicates that this language is common in most non-ISO HO forms in the marketplace, though not all policies.

For the record, OUR interpretation does not agree with that of a number of adjusters and courts. Numerous courts have held that, to be enforceable, an “exclusion” must be “clear and conspicuous.” We believe that coverage for the primary asset owned by a family should not hinge on three words in a definition referenced from an insuring agreement. There is nothing “clear and conspicuous” about this language that would lead an insured to believe that an interruption of residency would suspend coverage on the dwelling. From the standpoint of public policy, it makes little sense that, if the insured is operating a meth lab and blows up his home, there is coverage under his HO policy, while there is no coverage for a tornado destroying her home the Friday evening an 80-year-old homeowner learns that she will be confined to a nursing home henceforth.

Courts that have found FOR coverage have generally interpreted the “where you reside” language to be “words of description,” not a warranty of occupancy or a condition for coverage. Additional rationales for our continued position on this are outlined in our original white paper. And, for what it’s worth, in a past Property Loss Research Bureau publication, PLRB also took the position that this language does not preclude coverage for damage to a dwelling.

IIABA/ISO Negotiations

The Big “I” national Technical Affairs Committee meets annually with ISO to discuss changes in, or additions to, ISO policy form portfolios that we believe are beneficial to consumers and businesses. Our agendas are typically 150-200 pages. Some of our recommended changes are accepted fairly quickly by ISO, others are declined, and many others are discussed over a period of years before being accepted by ISO or dropped by our committee. In the case of the “where you reside” issue, we considered a number of options over a ten-year period before we reached a compromise with ISO for changes in their HO forms.

The preference of our committee would be the complete elimination of the “where you reside” language, but that was not a resolution ISO could accept. So, unlike Congress, we compromised on a mandatory conditional “grace period” endorsement and an optional endorsement that does eliminate the “where you reside” language. While, from our perspective, this is not a perfect nor ideal solution, it is one that is workable if certain caveats are followed by all parties, as discussed later in this article. In the meantime, let’s examine the changes being made in two new ISO filings – forms and rules – that have a proposed effective date in most states of October 1, 2015, along with a nonfiled notice/questionnaire form.

ISO Filings

ISO has made two countrywide filings:

Forms Filing HO-2015-ORPFR

  • Homeowners Residence Premises Definition Revised; Optional Endorsements Introduced

Rules Filing HO-2015-RRPRU

  • Homeowners Manual Rules Revised

Forms Filing HO-2015-ORPFR

The forms filing includes the following new endorsements:

Mandatory endorsements

  • HO 06 48 10 15 – Residence Premises Definition Endorsement
  • HO 17 48 10 15 – Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 26 10 15 – Residence Premises Definition Endorsement – Mobilehom

Optional endorsements

  • HO 06 49 10 15 – Broadened Residence Premises Definition Endorsement
  • HO 17 47 10 15 – Broadened Residence Premises Definition Endorsement – Unit-Owners
  • MH 04 27 10 15 – Broadened Residence Premises Definition Endorsement – Mobilehome

The three “Residence Premises Definition Endorsements” are mandatory forms…the HO 17 48 is used with the HO 00 06 condo form while the HO 06 48 is used with all other HO forms. The three “Broadened” endorsements are optional forms…the HO 17 47 is used with the HO 00 06 condo form while the HO 06 49 is used with all other HO forms. There are two complementary Mobilehome program endorsements. You can review the endorsements by clicking on the links above.

Mandatory Endorsements

Using an excerpt from the above forms, the mandatory endorsements redefine “residence premises” to mean the “dwelling where you reside…on the inception date of the policy period shown in the Declarations and which is shown as the ‘residence premises’ in the Declarations.” The highlighted language is new and is explained by ISO in the filing as follows [emphasis added]:

These endorsements introduce revised language to more explicitly describe that the residency requirement, when determining coverage applicability, will be satisfied as long as the insured resides at the residence premises on the inception date of the policy period. Currently, depending on insurer claims practices, a policyholder may or may not have coverage when they cease to reside at the residence premises mid-term or at renewal. These revisions will provide coverage through the end of the policy period despite mid-term changes in residency while allowing an insurer the opportunity to confirm residency as part of the renewal underwriting process.

In other words, if the insured resides in the dwelling at the inception of the (new or renewal) policy period, coverage remains in force even if the insured should discontinue residency later in the policy period. This “grace” period lasts throughout the policy term but should be reaffirmed by the carrier on each renewal.

Optional Endorsements

The optional endorsements completely remove the “where you reside” language from the “residence premises” definition for a specified period of time indicated on the endorsement. As we read these new endorsements, they can be used in two ways.

First, the inception and termination dates on the endorsement can be identical to the policy’s inception and termination dates. This is the solution IIABA sought from the beginning. Our position has always been that residency is an eligibility issue, not a coverage issue, and should be dealt with as an underwriting consideration, as it was in the pre-1984 HO forms.

Second, these endorsements can be used to temporarily remove the “where you reside” language during a specified portion of the entire policy term. The best example of this use is when a policy if first issued on a newly built or purchased home. Residency in the home may not take place for several days or a week or more following the closing of a loan. Or, as presented as a scenario at the beginning of this article, the homeowner may wish to spend a month or longer renovating the home…this endorsement could serve to clarify that there is no residency until the renovations are complete.

Rules Filing HO-2015-ORPFR

The rules filing primarily addresses the use of the Broadened endorsements on a “temporary” nonresidency basis, though there’s nothing that appears to preclude that period encompassing the entire policy period if the carrier’s eligibility and underwriting guidelines permit. This filing indicates that the Broadened endorsements, under ISO rules, are premium bearing so that the Base Premium can be increased, for example, by up to 12% (2% per month) for a six-month nonresidency period.

Nonfiled Notice/Questionnaire Form

ISO has also developed the following nonfiled form:

  •  HO N 009 10 15 – Residence Premises Questionnaire

 

This form can be used by carriers on new and renewal business to provide notice to insureds of the importance of residency and, based on the insured’s responses, identify whether the Broadened endorsement is appropriate. We suspect that carriers might prefer a “stronger” notice of the importance of residency and notification of the insurer when residency is discontinued. We plan to work with ACORD in the coming months to draft an ACORD notice/questionnaire form and to determine what changes might be indicated in other ACORD forms such as the ACORD 80 Homeowner Application.

Caveats

As indicated earlier, this resolution is not perfect or exactly what we believe is in the best interest of consumers, agents, and the industry at large. However, it is a reasonable compromise that we believe can serve as a starting point for a more complete market-based solution in the coming year. Still, there are caveats to this change that must be acknowledged.

First, even with a mandatory endorsement, there is still a potential for a coverage gap at policy inception for carriers who interpret the “where you reside” language to be a residency requirement for coverage. For example, on new business it is customary to provide a policy (or, more likely, a binder) effective on the date of the loan closing. However, as is often the case, the insured may not move into the home and begin residency on the date of closing. As a result, for carriers with a restrictive interpretation of “where you reside,” a Broadened endorsement should likely be used at policy inception and the insured made to understand the importance of revising the termination date on the form if move-in takes longer than expected.

Second, since renewals are usually processed a month or two in advance, even with a notice form, it’s possible that an insured might unexpectedly discontinue residency (e.g., medical conditions, unanticipated work relocation, military deployment, etc.) between completing the renewal paperwork and renewal policy inception. Again, it is critical when placing or renewing insureds with carriers that hold to a restrictive interpretation of “where you reside” that the insured fully understand the importance of providing notice of nonresidency. In such instances, then Broadened endorsement may be used until (and if), the account needs to move from a Homeowners to a Dwelling Fire policy.

Third, when we originally presented this issue to ISO for consideration, one of the points we made was our belief that this is an eligibility, not a coverage, issue. We illustrated that with ISO’s own eligibility rules that permit the use of an HO policy on a home under construction. Obviously, no one can reside in a home under construction, so our argument is that a literal reading of the “where you reside” language couldn’t preclude coverage because every unoccupied home under construction would have illusory coverage, something courts have uniformly found to be prohibitive. But, for insurers who hold the restrictive interpretation of “where you reside,” the Broadened endorsement should be attached at inception for the duration of construction.

Next Steps

In the months prior to October 1, we will be approaching ACORD about the need to amend any existing ACORD forms and develop an industry-standard residency “notice” form.

We will be issuing a news release on this change in the near future and making contact with various industry and consumer media. We recommend that agents do the same in their local communities and communicate this change to their customers.

We plan to initiate a dialog with independent agency carriers about adopting the Broadened language that eliminates the “where you reside” language. We continue to believe that the restrictive interpretation of this language is detrimental to consumers and to the image of the insurance industry, and we believe that residency has always been, and should continue to be, an eligibility and underwriting consideration for new and renewal business, not an unclear and inconspicuous “exclusion.”

In order to provide greater detail about this change and to enable Q&A from agencies and carrier staff, we will be holding a FREE live countrywide webinar on July 8, 2015:

“Biggest Homeowners Change in 40 Years Explained”

FREE nationwide webinar

July 8, 2015 – 3:00 – 4:00 p.m. EDT

Click here to register

We are limited to 1,000 internet connections for this broadcast. When we announced the webinar on April 9, three months in advance, we had 50 registrations within two hours. So, we encourage you to register immediately. However, if you are unable to attend or we reach capacity, we do plan on recording the webcast and will publish a link to the archived recording shortly after the live broadcast. In addition, we plan to maintain, if warranted, a Q&A document in our “Where You Reside” web area.

How to learn more…

If this issue is new to you, you can download our original white paper and review our original webinar on the Where You Reside page in the “Featured Resources” area of the VU.

How can you stay abreast of emerging issues and announcements regard this change? Subscribe to our free, biweekly Virtual University newsletter, The VUpoint. This award-winning newsletter is the primary communications vehicle we use to bring emerging, relevant, and urgent insurance coverage issues and developments to your attention. Each issue usually features a personal lines coverage article, a commercial lines coverage article, and a rotating third article on agency management, sales, customer service, or technology. You do not have to be a member agency to subscribe…many of our 10,000 subscribers in 70 countries are company underwriters, adjusters, regulators, risk managers, and defense attorneys.

Bill Wilson, CPCU, ARM is the Assoc. VP of Education & Research for the Independent Insurance Agents & Brokers of America and director of their Virtual University.

Copyright 2015 by the Independent Insurance Agents & Brokers of America. All rights reserved.

Republished with permission.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

When Has Litigation Gone Too Long?

More on the Dam Case

Some litigation seems to continue forever. When a dam was destroyed by flood in 1997 litigation began between the owners of the dam and their insurer. The litigation has gone through trial, appeal, back to the trial court, trial again, and now motions for reconsideration and clarification. The issue should have been simple:

  1. whether the insured can elect to take only the ACV of the dam; or
  2. full replacement cost if the dam is rebuilt if the insured elects to rebuild;
  3. how long the insured has to complete the rebuild; and
  4. whether the insured is entitled to pre-judgment interest.

FACTUAL BACKGROUND

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

Following a three-day bench trial on April 8 to 10, 2008, as well as written briefing and written closing arguments by the parties, the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. [See report at http://zalma.com/blog/a-dam-case/]

On December 5, 2014, the Court affirmed that the ACV of the Dam when it was destroyed was $12,216,600 and awarded prejudgment interest to Sierra Pacific on this amount less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. On December 31, 2014, Defendants filed a Motion to Reconsider, and Sierra Pacific filed a Motion to Clarify. On February 5, 2015, the Court reaffirmed its ruling that prejudgment interest is appropriate in this case. The Court clarified its prior ruling to state that any prejudgment interest should begin to run starting on April 3, 2001, and that Sierra Pacific was at a maximum entitled to prejudgment interest based on the estimated replacement cost of the Dam in 2001, $16,205,303, less reductions described in that Order. The Court held further that its orders on the parties’ motions to amend did not disturb the September 30, 2008, Findings of Fact and Conclusions of Law that the applicable insurance policies “provide Sierra with full replacement cost coverage subject to the sublimit liability for flumes and waterways of $29,000,000 and the sublimit of liability for California locations of $62,000,000.”

On March 5, 2015, Sierra Pacific “reluctantly” filed the present Motion for Further Clarification, asking the Court to confirm that if Sierra Pacific rebuilds or replaces the Dam, it could recover “the actual expenditures incurred by Sierra, up to the policy limits of $29,000,000 (TIV Dams), $62,000,000 (California locations) and an additional $10,000,000 of coverage for Demolition and Increased Costs of Construction (DICC).”

Sierra Pacific also asked the Court to clarify that the time for calculating or computing the actual expenditures incurred is “three years after the conclusion of all litigation, including all appeals.” In its own Motion to Reconsider, Defendants again request that the Court reconsider its ruling granting prejudgment interest to Sierra Pacific, this time arguing that the Court exceeded the scope of the Ninth Circuit’s remand when it granted prejudgment interest on December 5, 2014.

DISCUSSION

The Court found that the law of the case doctrine does not preclude Sierra Pacific from recovering more than $19,800,000 if it decides to rebuild the Dam and costs in good faith exceed that figure.

First, neither this Court nor the Ninth Circuit explicitly decided that the $19,800,000 replacement cost figure constituted an absolute maximum such that Sierra Pacific could not recover if replacement costs exceeded that figure. Second, the Court’s original Findings of Fact and Conclusions of Law found that the estimated replacement cost of the Dam was $19,800,000, but that the insurance policy’s limits were $29,000,000 for flumes and waterways, $62,000,000 for California locations, and $10,000,000 for demolition and increased costs of construction. The Ninth Circuit upheld the $19,800,000 replacement cost figure, and did not disturb the Court’s holding regarding sublimits of liability. Accordingly, the law of the case doctrine does not limit Sierra Pacific’s recovery for rebuilding the Dam to $19,800,000, and the Court reaffirms its finding that the sublimit of liability for flumes and waterways is $29,000,000, the sublimit for California locations is $62,000,000, and the policy provides for a limit of $10,000,000 in demolition and increased costs of construction.
Tolling of Three–Year Period for Rebuilding the Dam

Sierra Pacific requests that the Court clarify that the “period of time for determining the limitation on replacement costs … shall continue for a three-year period after the conclusion of all litigation, including all appeals.” The Court found in the September 30, 2012, Findings of Fact and Conclusions of Law that it was “equitable to extend the two-year time period laid out in the policy to replace Farad for an additional three-year period.” The Ninth Circuit affirmed the finding “that the time limit to rebuild the dam should be three years rather than two years.”  The court added that “the three-year period granted for rebuilding Farad Dam should be tolled until the conclusion of the litigation, including during the pendency of any appeal.” The court also ordered that Sierra Pacific was required to decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.

The Court reaffirmed its decision that if Sierra Pacific elects to rebuild the Dam, it shall have three years to do so after all appeals are resolved, and Sierra Pacific shall inform Defendants whether it will rebuild the Dam or recover its ACV within ninety (90) days of the completion of all appeals.

Defendants’ Motion to Reconsider

Defendants argue for the second time that the Court erred in granting prejudgment interest on amounts to which Sierra Pacific was entitled beginning April 3,
The Ninth Circuit did not decide, explicitly or by necessary implication, whether Sierra Pacific was entitled to prejudgment interest. In addition to requesting recovery under the policy and attorney fees, Sierra Pacific’s original Complaint requests “such other and further relief as this Court deems just and proper.” Thus, the fact that Sierra Pacific did not explicitly request prejudgment interest in its Complaint does not preclude an award of prejudgment interest.

Despite their opportunity to raise this argument twice before, Defendants attempts a third bite at the apple by raising an entirely new argument in this second Motion to Reconsider. The Court denied Defendants’ attempt to reargue the prejudgment interest, noting that motions cannot be used merely to reargue an issue that has already been decided.

Defendants have a complete right of appeal if they believe that the Court’s Order awarding prejudgment interest was in error, but it is improper to repeatedly reargue an issue in motions to reconsider in lieu of a timely appeal.

ZALMA OPINION

When large amounts of money are involved – and this dam case involves many millions – the parties appear to forget the purpose of insurance is to indemnify an insured against damages resulting from certain identified risks of loss for either the ACV of the property destroyed or its full replacement cost as specified in the policy. The parties in this case appear to prefer to litigate than resolve the dispute. Since the court ended its opinion with an invitation to appeal the order it seems this case will continue to keep the lawyers for the parties busy for a long time when they should be working to resolve the dispute.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Does Extended Reporting Period Extend Claims Made?

Claims Made & Reported Policy Limits Exposure to Loss to a Specific Time

Insurers institute a claims made and reported liability policy to limit their exposure to loss to a specific period of time so that they have no concern for late made or reported claims like those faced by insurers who expose themselves to long tails with an occurrence policy. It allows lower premiums because of the limitation on the period of time the insurer is exposed to potential liability.

Continental Casualty Company (“Continental”) sough summary judgment in Schleusner v. Continental Cas. Co.. Not Reported in F.Supp.3d, 2015 WL 1609202 (D.Mont.), arguing to a district court in Montana that it is not obligated to provide insurance coverage in an underlying state case because notice was not timely given by the insured.

BACKGROUND

The Policy

Continental issued a claims-made-and-reported Real Estate Professional Errors and Omissions Policy (the “Policy”) to RE/MAX Realty Consultants, LLC (“Re/Max”) for the period September 6, 2007, to September 6, 2008. The Policy’s insuring agreement stated that “[a] claim must be first made during the policy period and must be promptly reported to [Continental] in accordance with Section VI, Conditions, paragraph B .”   The Policy defines “claim” as “an oral or written demand received by the Insured for money or services, including a demand alleging personal injury, arising out of an act or omission in the rendering of professional real estate services. The service of suit or the institution of an arbitration proceeding against the Insured will be considered a demand.”

Regarding notice of claims to the insurer, the relevant portion of the Policy states: “[t]he Insured, as a condition precedent to our obligations, must promptly give written notice to us during the policy period or any renewal policy period: ¶ a. of any claim made against the Insured during the policy period; ¶ b. of any notice, advice or threat, whether written or verbal, that any person or organization intends to hold the Insured responsible for any alleged breach of duty or other act or omission. ¶  This condition will not be a barrier to coverage for those Insureds who do not have personal knowledge of a claim or potential claim. However all Insureds must promptly comply with this condition upon obtaining such knowledge.”

FACTUAL BACKGROUND

On June 27, 2008, Re/Max was advised that the Policy was set to expire on September 6. On August 28, 2008, Re/Max received a renewal invoice informing it that coverage under the Policy would terminate on September 6 if Re/Max did not renew it. Re/Max did not renew the Policy. The non-renewal automatically triggered the Policy’s extended reporting period. The automatic extended reporting period will terminate after sixty (60) days.  It also made clear that the “extended reporting period” shall not be construed to be a new Policy and any claim submitted during such period shall otherwise be governed by the terms of the policy.

The Underlying Lawsuit

On April 18, 2008, the Schleusners filed a state court action against Re/Max and one of its real estate agents, alleging damage as a result of Re/Max’s conduct while acting as their real estate agents. The Schleusners’ counsel mailed written notice of the action and a copy of the complaint to Re/Max on November 4, 2008, and Re/Max received this notice on November 5. According to the Schleusners, Judith Wahlberg, the former owner of Re/Max, reviewed the letter and complaint and sent the claim to Continental on November 5, 2008, the same day she received it.

The Schleusners settled their claims against the Re/Max real estate agent in October 2013 and against Re/Max in April 2014. According to the settlement agreements, both Re/Max and its agent confessed to entry of judgment against them in the amount of $2,191,828.90 and assigned their claims for coverage from any insurer to the Schleusners. Judgment was entered accordingly and, on July 31, 2014, the Schleusners sued the insurer.

ANALYSIS

The interpretation of an insurance policy is a question of law. Courts will not rewrite clear and explicit language in an insurance contract. The primary issue before the Court was one of notice. Under Montana law, “a notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company.”

Under claims-made policies, “coverage is determined by claims made within the policy period, regardless of when the events that caused the claim to materialize first occurred. Claims-made policies are further classified as either claims-made or claims-made-and-reported policies. Claims-made policies contain no requirement that the claim be reported by a set date, but in the case of claims-made-and-reported policies, notice is the event that actually triggers coverage and is generally required within the policy period or extended reporting period.

On its face, the Policy  is a claims-made-and-reported policy, conditioning indemnity and defense coverage on claims made during the policy period and reported prior to the expiration of the extended reporting period. Whether the claim was timely made turns on the question of whether the initiation of the lawsuit against Re/Max on April 18, 2008, constituted making a claim or whether a claim was initially made on November 5, 2008, when Re/Max first was made aware of the claim. Continental asserts a “claim” requires that a demand for money or services be received by the insured and it must be received when the Policy is in effect. Pursuant to the plain language of the Policy a claim was made on November 5, 2008, the day Re/Max received notice of the underlying lawsuit.

Next the court found it needed to decide whether a claim made during an extended reporting period, and not during the policy period, is timely.

The Policy defines an extended reporting period as “the period of time after the end of the policy period for reporting claims by reason of an act or omission, which occurred prior to the end of the policy period and is otherwise covered by this Policy.” Additionally, the Policy states, “[a] claim must be first made during the policy period.”

The clear language of these provisions reveal that to trigger coverage, a claim, as defined by the Policy, must be made on the insured within the policy period itself and not during an extended reporting period. The claim was, therefore,  made beyond the policy term.

Because the condition precedent of a timely claim was not met, Continental had no duty to defend or to indemnify in the underlying case because  notice requirement in an insurance policy is a condition precedent, and failure to comply therewith will bar a recovery under the policy, unless the condition is waived by the company and the summary judgment was granted in favor of the insurer.

ZALMA OPINION

This is another case where greed and the hope of punitive damages from an insurer trumped good sense. ReMax, unless it was bankrupt or judgment proof, had assets to pay some or all of the judgment.  The reason for a claims made and reported policy is to give the insurer confidence that its exposure to loss is limited in time. There is no long tail. There is no tail at all as there is in an “occurrence” based policy. The insurer in this case was generous and gave the insured an additional sixty days to report a loss that occurred during the policy period. The extended reporting period was just that, it was not an extra sixty days of coverage.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Not Nice To Sue Your Spouse

Defense Required for Cross-Claim In Suit For Injuries to Spouse

Sue Kim (hereinafter Sue) allegedly was injured in a two-car accident that occurred in Pennsylvania disputes arose over insurance coverage. When she was injured Sue was a passenger in an automobile driven by her husband, the defendant Young S. Kim (hereinafter Young). The other vehicle involved in the accident was operated by the defendant Elmer Glick. Sue commenced an action in Pennsylvania against Young, Glick, and Amos R. Beiler, who owned the property at the intersection where the accident occurred.

Glick asserted a cross claim against Young, who is insured by the plaintiff Metropolitan Group Property and Casualty and Insurance Company (hereinafter Metropolitan).
The trial court granted Metropolitan’s motion for summary judgment because of the policy provision and the law that prevented coverage for suits between members of the same family. The trial court denied Glick’s cross motion, and declared that Metropolitan is not obligated to defend and indemnify Young with respect to Sue’s complaint or Glick’s cross claim in the underlying action.

THE STATUTE

Pursuant to Insurance Law § 3420(g), “[i]n the absence of an express provision in an insured’s policy, a carrier is not required to provide insurance coverage for injuries sustained by an insured’s spouse” (State Farm Mut. Auto. Ins. Co. v. Harkins, 30 AD3d 502, 502–503. Insurance Law § 3420(g) “was enacted to prevent the possible fraud and collusion that might arise in actions wherein an injured spouse seeks to recover for injuries resulting from the negligence of an insured spouse” (Matter of General Acc. Ins. Co. v. Elbaum, 236 A.D.2d 472, 473).

In Metropolitan Group Property v. Kim, — N.Y.S.3d —-, 2015 WL 1652319 (N.Y.A.D. 2 Dept.), 2015 N.Y. Slip Op. 03138 the appellate court noted that the chance of fraud and collusion, however, is slight where a passenger-spouse is suing a third-party who brings a claim for relative contribution against a driver-spouse as the recovery of the injured spouse is not dependent upon proving the liability of the driver-spouse.

ANALYSIS

Therefore,the  appellate court concluded that Insurance Law § 3420(g) does not preclude liability insurance coverage on a third-party claim for contribution against an insured (joint tortfeasor) spouse of an injured person.

Here, although Insurance Law § 3420(g) precludes liability insurance coverage of Young vis-vis Sue’s complaint against him in the underlying action, the statute does not preclude coverage of Young with respect to Glick’s cross claim. The language of Metropolitan’s policy endorsement providing coverage for third-party claims should be broadly construed to apply to Glick’s cross claim. Therefore, contrary to Metropolitan’s contention, Metropolitan is required to defend and indemnify Young with respect to Glick’s cross claim in the underlying action.

Accordingly, the appellate court concluded that the trial court should have granted Glick’s cross motion, in effect, for summary judgment declaring that Metropolitan is obligated to defend and indemnify Young with respect to Glick’s cross claim in the underlying action, and denied that branch of Metropolitan’s motion which was, in effect, for summary judgment declaring that it is not so obligated.

ZALMA OPINION

In another brief and to the point decision from the New York appellate courts the decision makes clear that laws that prevent suits between members of the same family to avoid collusion, apply to direct actions, but do not apply to claims for contribution from a third party who is alleged to have injured a spouse. Mr. Kim gets no coverage for the suit by the wife for her injuries but gets coverage for the claim for contribution by one of Mrs. Kim’s suit for her injuries claiming that Mr. Kim contributed to her injury.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

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Zalma’s Insurance Fraud Letter – April 15, 2015

What Is Insurance Fraud?

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

The current issue of ZIFL reports on:

1.    Insurance Fraud – Adapted From “The Insurance Fraud Deskbook
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    Intent to Commit Insurance Fraud Not a Defense to Burglary.
4.    Kentucky Adds Anti-Fraud Law to Its Statutes
5.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

1.    Why the “Bad Faith” Expert Couldn’t Testify – April 14, 2015
2.    May Insured Lie To Insurer When Applying? – April 13, 2015
3.    May Regulator Exceed Power to Protect Public? – April 10, 2015
4.    A Fictionalized Story of Real Insurance Fraud – April 9, 2015
5.    Broker Need Only Acquire Insurance Requested – April 8, 2015
6.    When Is an Intentionally Set Fire Not Vandalism? – April 7, 2015
7.    What the Heck is an Honorable Engagement Agreement? – April 6, 2015
8.    Emotion Should Never Be Basis of Judgment – April 3, 2015
9.    Is Entrustment Exclusion Enforceable? – April 2, 2015
10.    “Insurance Law” A New Book From Barry Zalma – April 1, 2015
11.    Zalma’s Insurance Fraud Letter – April 1, 2015
12.    False Application For Health Insurance is a Crime In Connecticut – March 31, 2015
13.    Join Me at the 19th Annual America’s Claims Event – March 30, 2015
14.    Can Reinsured Allocate Claims Payments? – March 30, 2015
15.    The Use of the Insurance Examination under Oath – March 27, 2015
16.    Plaintiffs’ Lawyers Need to Understand Insurance – March 26, 2015
17.    Is Drunken Brawl Resulting In Death Covered? – March 25, 2015
18.    MCS-90 Controls – March 24, 2015
19.    Captive Agent Must Use Ordinary Care – March 23, 2015
20.    No Way to Avoid Workers’ Compensation – March 20, 2015

New From the ABA:

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

“Insurance Law”

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

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

Mold Claims Coverage Guide

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

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

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

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Leave a comment

Why the “Bad Faith” Expert Couldn’t Testify

Bifurcated Case Limited to Breach of Contract

Cases seeking damages for the tort of bad faith are often bifurcated so that the jury first is asked to decide if there was a breach of the insurance contract. If the jury finds the contract was breached then the bad faith portion of the trial goes forward. If, however, the jury finds no breach of contract the case is over. By bifurcating the trial the court saves a long and contentious trial and avoids confusing the jury by mingling tort issues with contract issues.

After a ten day trial, a jury agreed with Federal Insurance Company (“Federal”) in an insurance coverage dispute with property owners Jerome and Deborah Tannenbaum. Although the Tannenbaums claimed that strong winds had caused significant damage to their property in Nashville, Tennessee, the jury determined that landslides, which were excluded from policy coverage, were the primary catalyst for the damage, as Federal had contended. The Tannenbaums appealed and the Sixth Circuit Court of Appeal resolved the dispute in Tannenbaum v. Federal Ins. Co., — Fed., Appx. —-, 2015 WL 1543080 (C.A.6 (Tenn., 4/7/15)

FACTS

In August 2009, the Tannenbaums took out a one-year insurance policy from Federal for their property in Nashville, Tennessee. The policy, in relevant part, defines a “covered loss” as including “all risk of physical loss to your house or other property covered … unless stated otherwise or an exclusion applies.” One of the enumerated exclusions to coverage is “earth movement including volcanic eruptions, landslides, mud flows, and the sinking, rising or shifting of land.” Wind damage, on the other hand, is not excluded from coverage.

During the weekend of May 1–2, 2010, storms passed through Tennessee over the Tannenbaums’ property while the Tannenbaums were not present. Although the parties dispute how the damage occurred, both sides agree that the storms damaged the property extensively. The Tannenbaums assert that violent winds caused the damage by uprooting trees and hurling them into the house, a theory which, if true, would entitle them to full coverage for the damage. Federal, on the other hand, through the analysis of its two primary claim adjusters, as well as several experts, concluded that landslides had caused the majority of the damage. The only wind damage Federal found was damage to the roof caused by a single fallen tree. Federal paid the Tannenbaums $58,418.50 for the tree damage caused by the wind, but denied coverage for all remaining damage, since landslide damage was an enumerated exclusion from coverage under the policy.

The Tannenbaums sued Federal in the Circuit Court for Davidson County, Tennessee. The complaint raised four claims: 1) breach of contract; 2) failure to adjust the claim; 3) violations of the Tennessee Consumer Protection Act (“TCPA”); and 4) bad-faith refusal to pay. The district court granted Federal’s motion to bifurcate, dividing the trial into a breach-of-contract phase and a bad-faith phase. The case then proceeded to trial on October 22, 2013, beginning with the breach-of-contract phase.

On the sixth day of the trial of the breach-of-contract claim, the Tannenbaums called their expert, Charles Howarth to the stand, despite the district judge’s previous statement he could only testify in the bad faith portion of the trial. Federal objected, insisting that Howarth was the Tannenbaums’ bad-faith witness and thus his testimony would be irrelevant to the breach-of-contract phase of the trial. The court sustained the objection.

That same day, the jury returned a verdict in favor of Federal on the breach-of-contract claim.

ARGUMENT

The Tannenbaums first argue that the district court erred by excluding testimony from their expert witness during the first phase of the bifurcated trial.

The Tannenbaums contended at trial that even though Charles Howarth would have been their “bad-faith” expert witness had the trial proceeded in just one phase, they had instructed him not to testify about bad-faith issues during the breach-of-contract phase of the bifurcated trial. Howarth, they argued, would have testified about whether Federal had met the applicable standards for adjusting the type of policy the Tannenbaums had purchased..

The report submitted by Howarth to the court outlining his expert opinions, however, is littered with references to “bad-faith.” Although he discusses the industry standards on claim adjustment in the report, these standards merely form the basis for his conclusion that Federal acted in bad-faith throughout the claim adjustment process. The district court had relegated all bad-faith argumentation to the second phase of the trial, if one were needed. The Sixth Circuit concluded that there was no error in postponing the testimony of the Tannenbaums’ bad-faith witness to the bad-faith phase, especially because even the proposed, potentially relevant testimony about industry standards would not have been helpful to the jury.

A trial judge has authority to refuse to give a proposed instruction about permits for reconstruction if insufficient evidence supports it. Athough only a “slim amount” of evidence is required to support a proposed jury instruction, allowing the Tannenbaums’ claim here would strain the definition of “slim.” During a ten day trial, the Tannenbaums can point to at most a handful of, and, more realistically, two, definitive statements about permits in the entire trial transcript.

The Tannenbaums argue finally that the district court erred by not including a jury instruction on resolving ambiguity in insurance contracts. The Tannenbaums proposed an instruction stating that ambiguous language in an insurance policy is always construed against the insurer and in favor of effecting coverage. They argue on appeal that the district court’s decision removed from the jury the question of whether ambiguities in fact existed and, if so, the impact those ambiguities had on coverage for their losses.

Although, in a rush of wishful thinking perhaps, the Tannenbaums argue that the jury might have found certain provisions of the contract ambiguous had the judge instructed them on contract ambiguity, this threshold inquiry is for the judge, not the jury. And the district court never found any provisions of the policy to be ambiguous. The Tannenbaums’ proposed ambiguities are simply complaints about Federal’s application of the policy to their claims disguised as purported problems with the contract language. Thus, even if the jury were the proper avenue for resolving contract ambiguities, the proposed instruction would not have helped the Tannenbaums.

ZALMA OPINION

Since the insurer paid what it owed for windstorm damage and the jury found there was no breach of contract for the remainder of the claim because of the exclusion the purpose of a bifurcated trial was met and the parties were saved from trying the bad faith portion of the trial. The Tannenbaum’s were not happy with the result but, rather than using a bad faith expert to help them get excess damages, they should have invested in an engineer who could have convinced the jury that the damages were caused by wind, not landslide.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

May Insured Lie To Insurer When Applying?

Failure to Disclose Involvement With Ponzi Scheme Fatal to Insurance

Many policyholder lawyers forget that the obligation to deal fairly and in good faith in insurance transactions is mutual. The insured owes the duty to the insurer to deal fairly and in good faith and the insurer owes to the insured the duty to deal fairly and in good faith with the insured so that neither deprives the other of the benefits of the policy. In simple language neither should lie to the other.

When a securities firm applied for professional liability insurance, it disclosed one of the customer claims against it, but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. In Crown Capital Securities, L.P. v. Endurance American Specialty Insurance Company, — Cal.Rptr.3d —-, 2015 WL 1607164 (Cal.App. 2 Dist., 4/10/15) the insurer refused to defend the securities firm against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim.

BACKGROUND

On October 26, 2009, investor George Bou–Sliman transmitted a letter to plaintiff and appellant Crown Capital Securities, L.P., (Crown Capital), which letter attached a summary of the Final Report of the Examiner (Bou–Sliman Claim). Bou-Sliman advised Crown Capital that a bankruptcy proceeding established the principal of DBSI, was the operator of a ponzi scheme  and provided a copy of the examiner’s report that contained sad evidence contrary to your plan.

Darol Paulsen, on behalf of Crown Capital, executed an “Application for Professional Liability Insurance” from defendant and respondent Endurance American Specialty Insurance Company (Endurance) for a professional liability insurance policy for work performed by its security broker-dealers and investment advisors. Concerning Crown Capital’s claims experience Paulsen answered that question, “Yes” and disclosed the Bou-Sliman claim.

However, with regard to Question 10 of the application asked, “Is the Applicant (after diligent inquiry of each principal, partner, managing member, director or officer) aware of any fact, circumstance, incident, situation, or accident (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) that may result in a claim being made against: (a) the Applicant; … ?” Paulsen answered that question, “No.”

The application warned: “NOTE: It is agreed that any claim or lawsuit against the Applicant, or any principal, partner, managing member, director, officer or employee of the Applicant, or any other proposed insured, arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed in response to Questions 9, 10 and/or 11, is hereby expressly excluded from coverage under the proposed insurance policy.

Shortly thereafter multiple claims resulting from the alleged “Ponzi Scheme” were brought against Crown Capital.  Endurance denied insurance coverage to Crown Capital under the Policy for the three new claims, and refused to defend Crown Capital against those claims.
The trial court granted Endurance summary adjudication on its cross claims as to the three claims, ruling that those claims were excluded from coverage under the Policy’s Application Exclusion and that there was no potential for coverage. The trial court reasoned that the Final Report of the Examiner that was attached to the Bou–Sliman claim “disclosed an array of investments under the DBSI umbrella, the failure of which were tied to the DBSI activities. [¶] The evidence shows that the Bochner, Biles, and Grana claims all arise out of a ‘fact, circumstance, act, error or omission’ that was previously disclosed.”

DISCUSSION

Whether an insurer owes its insured a duty to defend is made, in the first instance, by comparing the allegations in the complaint with the terms of the policy. If there is no potential for coverage under an insurance policy’s terms, an insurer acts properly in denying a defense. If there is any doubt about whether there is a duty to defend, the matter is resolved in the insured’s favor. If an exclusion is not ambiguous, however, it will prevail over the insuring clause and preclude coverage.

Bou–Sliman’s claim concerned his investment in a DBSI investment property known as Northpointe Towers, which investment Crown Capital broker-dealer Naylor recommended. The three additional claims concerned his investment in DBSI; a claim concerned investment in DBSI investment properties other than Northpointe Towers. Crown Capital argued that the three claims did not arise from the Bou–Sliman Claim because none of the claims involved the same investor or the same investment that was at issue in the Bou–Sliman Claim, and none of the investments at issue in the claims were recommended by the same Crown Capital broker-dealer who recommended the Northpointe Towers investment to Bou–Sliman.

It is undisputed that Crown Capital was aware of the Bou–Sliman Claim when Crown Capital applied for the Policy, for that claim was reported in the application. Like the Bou–Sliman Claim, the other three claims arose out of the DBSI Ponzi scheme.
Crown Capital was aware that DBSI had declared bankruptcy and allegedly had been operating a Ponzi scheme, that Bou–Sliman had claimed that Crown Capital had failed to exercise due diligence in connection with a DBSI investment, and that its broker-dealers had sold other DBSI investments to their customers—i.e., investments that were part of a Ponzi scheme that was the subject of a bankruptcy proceeding. Crown Capital, therefore, was obviously aware of facts and circumstances that might result in a claim or claims being made against it. The facts of which it was aware, including the report showing it was selling investments in a Ponzi scheme, required it to disclose under Question 10 of the application for the Policy.

With respect to the scope of the “arising from” language, the trial court correctly stated, “ ‘ “[a]rising out of” is ordinarily understood to mean “originating from, having its origin in, growing out of, or flowing from, or in short, incident to, or having connection with.’ Davis v. Farmers Ins. Group (2005) 134 Cal.App. 4th 100, 107. ‘California courts have consistently given a broad interpretation to the terms ‘arising out of’ or ‘arising from’ in various kinds of insurance provisions. It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.’ Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App. 4th 321, 328.”

Although advancing various theories, all of the causes of action that the three asserted in their claims against Crown Capital and its broker-dealers concerned the purchase of DBSI investments. At the time that Crown Capital applied for the Policy, it was aware of facts and circumstances that might result in a claim being made against Crown Capital—i.e., DBSI’s bankruptcy, the alleged operation of a Ponzi scheme, and the investment by Crown Capital’s customers in DBSI investments.

The awareness of those potential claims brought such claims within the Application Exclusion regardless of the theory upon which such claims might be based. Accordingly, the trial court properly ruled that the entire Bochner, Biles, and Grana Claims, regardless of the theory of liability, were excluded from coverage under the Application Exclusion.

ZALMA OPINION

Crown Capital attempted to confuse the issues by claiming each of the claims and suits filed by its investors were different from the Bou-Sliman claim it did report. In so doing it lied on the application and allowed the insurer to defend based on the exclusion contained in the application. The insurer could, had it desired, also rescinded the policy from its inception because of the misrepresentations and concealment of material fact in the application. Either way it did not pay for Crown Capital to deceive its insurer and, as a result, it is without the ability to obtain defense or indemnity from its insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

May Regulator Exceed Power to Protect Public?

Regulator Not Allowed to Protect Insured From Insured’s Mistake

Modern homeowners insurance policies insure against the risk of loss to the home up to the full cost to repair or replace up to the limit of liability chosen by the insured or even a greater amount – usually 150% of the policy limit – if necessary. Generally, the amount to replace is chosen by the insured. Insurers, insurance agents, and insurance brokers, will assist the insured in determining the amount necessary to repair or replace, but do not, nor can they, guarantee the accuracy of the estimate. Insurance professionals are not construction experts. Especially in catastrophe situations, where the costs of materials and labor necessary to replace a damaged property increase exponentially, estimates of replacement cost accurate in a one off fire will not be accurate in a fire storm situation.

Insurance Regulators are consumer protection agencies and often consider the insurers they regulate to be the enemy trying to prevent people they insure from receiving the benefits of the insurance contract. As a result they often try to micro-manage the business of insurance in order to make the insurance policies issued in the state pay as many claims in sufficient amounts to indemnify the people insured, even if the policy wording agreed to does not allow payment. In Association of California Insurance Companies v. Jones, — Cal.Rptr.3d —-, 2015 WL 1569669 (Cal.App. 2 Dist., 4/8/15) the California Court of Appeal was asked to decide whether the Insurance Commissioner (Commissioner) had authority to promulgate California Code of Regulations, title 10, section 2695.183 (the Regulation) under the authority delegated to him by the Unfair Insurance Practices Act (UIPA), Insurance Code sections 790–790.15. The trial court found that he did not.

FACTUAL BACKGROUND

The Regulation

The Regulation at issue involved homeowner insurance, and specifically replacement coverage in the event of a covered event like a fire. In general, there are three kinds of replacement cost coverages. Each requires an insurer to pay replacement costs up to a limit defined in the policy or up to a set amount above the policy limit. If the cost of repairing or rebuilding a home damaged or destroyed by a covered event exceeds that limit, the homeowner has to pay the difference. The Regulation provides a lengthy and detailed methodology for determining the replacement cost of a dwelling the risk of loss of which might be insured.

Insurance Code Section 2051.5, subdivision (a) defines replacement cost, in pertinent part, as “the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.”

The Regulation was promulgated in 2010 in response to complaints received from homeowners who lost their residences in the wildfires in Southern California in 2003, 2007, and 2008. These complaints arose when homeowners learned that they did not have enough insurance to cover the full cost of repairing or rebuilding their homes because when they bought their homeowner insurance, the estimates of replacement value were too low.

The introductory sentence of the Regulation prohibits a “licensee” from “communicat[ing] an estimate of replacement cost to an applicant or insured in connection with an application for renewal of a homeowners’ insurance policy that provides coverage on a replacement cost basis” that does not satisfy the content and format provisions in the Regulation. The Regulation, therefore, requires an insurer or its agents and representatives to become experts in the replacement costs of a dwelling and punishes them if they fail.

The estimate must itemize “the projected cost” of each expense listed in subdivision (a)(1)–(4), and the assumptions as to the components listed in subdivision (a)(5). (Reg., subd. (g)(2).) A copy of the estimate and any update of the estimate “must” be given to the applicant. (Reg., subds.(g)(1), (h).) Subdivision (e) requires that “reasonable steps” be taken to “verify … sources and methods used to generate the estimate of replacement cost” “no less frequently than annually.” The Regulation also imposes recordkeeping obligations on the licensee. (Reg., subd. (i).)

Subdivision (j) of the Regulation provides that “communicat[ing] an estimate of replacement value not comporting with divisions (a) through (e)” to an applicant for homeowner insurance “provid[ing] coverage on a replacement cost basis,” or any renewal thereof, “constitutes making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.”

Furthermore, the Regulation renders as unfair and deceptive estimates that are accurate, but not in the format dictated by the Regulation. At the same time, the Regulation does not sanction an inaccurate estimate that complies with the format and content requirements of the Regulation.

DISCUSSION

Read as a whole, the UIPA did not give the Commissioner authority to promulgate the Regulation. The Commissioner has only the authority conferred on him by the Legislature. An appellate court must deduce that authority from the language of the statute itself by applying familiar maxims of statutory construction.

The expression of some things in a statute necessarily means the exclusion of other things not expressed.

The language of the UIPA reveals the Legislature’s intent to set forth in the statute what unfair or deceptive trade practices are prohibited, and not delegate that function to the Commissioner. Thus, section 790.02 states, “No person shall engage in this State in any trade practice which is defined in this article as, or determined pursuant to this article to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.”

The Commissioner did not have authority to add content and format requirements for replacement cost estimates in homeowner insurance to the list of practices set forth in section 790.03 under the guise of deeming nonconforming estimates misleading. Section 790.04 gives the Commissioner “power to examine and investigate into the affairs of every person engaged in the business of insurance … in order to determine whether such person has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice prohibited by Section 790.03 or determined pursuant to this article to be an unfair method of competition or an unfair or deceptive practice in the business of insurance.” It does not give the Commissioner the authority to add to the list of deceptive practices since, if the Legislature intended that to be in the statute it would have added it.

The Legislative Evolution of the UIPA as Well as Other Sections in the Insurance Code Support the Conclusion That the Commissioner Was Without Authority to Promulgate the Regulation

The UIPA as originally enacted in 1959 (Stats.1959, ch. 1737, § 1, p. 4187) did not include all the acts and practices currently deemed unfair and deceptive in section 790.03. Section 790.03, subdivision (h), regarding unfair claims settlement practices, was added to the UIPA in 1972. Section 790.03, subdivision (h) covers categories of claims settlement practices that could have been regulated under the Commissioner’s interpretation of his authority under sections 790.03 and 790.10 without amending the statute.

The decision, according to the court “is limited to one conclusion—that the UIPA has not as of yet given the Commissioner authority to regulate the content and format of replacement cost estimates.”

ZALMA OPINION

Anyone with knowledge of construction recognizes that estimating replacement cost of a dwelling before it is damaged is nearly impossible because of the need to determine the amount of demolition, the amount of the structure that can be saved, the cost of materials and labor at the time of the loss, and changes in codes and regulations between the time of the estimate and the loss.

The statute gives the Commissioner broad powers but it does not give the Commissioner carte blanche authority to regulate whatever he wants when he sees what he believes is a social wrong. He is limited by the statute. The court did not discuss, but I am sure noticed, that the Regulation – almost impossible to comply with in the normal course of the business of insurance – was a full employment act for policyholder’s lawyers whose clients chose to limit the premium paid by selecting a low policy limit. Regulators must remember that they are also required to keep the insurers they regulate viable so that they can pay claims and not set them up for multiple unnecessary bad faith lawsuits.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

A Fictionalized Story of Real Insurance Fraud

The Trees that Washed Away

The story that follows is based on fact. I was the lawyer who represented the insurer. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business, and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. It is adapted from my e-book, “Heads I Win, Tails You Lose” which is available at http://www.zalma.com/zalmabooks.htm.

Northern San Diego County, California is avocado country. Trees grow everywhere. The heavy green fruit is a cash crop.

The hills and valleys of California were once the bottom of the sea. Bedrock, at best, is sandstone. The soil is thin and porous. It is perfect for growing avocados because it drains well. We irrigate the roots to have enough, but not too much, water.

The farmers cannot control the rain. If Southern California receives one of its rare, real, rainstorms, the soil turns to viscous slime. Gravity moves the hillsides into the valleys.
Property owners rebuild and replant regularly. Topographical maps become inaccurate after five to ten years. Mapping companies, to keep current, get aerial photographs as often as once every three years.

The insured was a successful businessman. He had made his fortune in manufacturing. The insured sold his business, and, wanting to be a gentleman rancher purchased  a fifty-acre avocado ranch on a hillside in Northern San Diego County. He planted the hill with trees ranging in age from three to eight years. All bore the Haas variety of avocado. The insured irrigated with a drip irrigation system that provided the right amount of water to create the maximum amount of crop. The insured knew nothing about avocado ranching. He intended to learn, on the job. He did not need the income from the crop to survive. He could live a life of luxury without any income from the ranch. He was a businessman. He understood that agriculture was a risky business. Risks he understood.

The purchase of insurance can spread risks. He went to his corporate broker, told the broker of his concerns, and got a policy insuring against the loss of the trees. He had talked with his neighbors and  knew, from his experience, that the risk faced by an avocado rancher was the loss of the trees from fire or an overabundance of rain.

The broker he used was the same broker who handled his manufacturing business. A major multinational brokerage firm with the purchasing power to insure anything their clients desired. The insured told his broker what he wanted. The insurer created a special policy by adding to the normal perils of fire, lightening, windstorm and hail, the peril of rain. At the time he bought the policy the insured knew that his ranch had lost, to mudslide, half its trees six years before. He also knew most of the trees fell down the hill five years before that. The insurer, in the application for insurance, only asked if the insured had incurred prior losses. Since he was a new owner of this property, he replied “New venture, no losses.”

The insurer issued the policy and for six months the insured enjoyed his leisure and supervised his small staff of farmhands. The insured harvested his first crop in February. The proceeds equaled his expenses. He was a happy man.

In March, the rains came. First, the gentle Southern California shower that dropped an inch of rain in forty-eight hours and turned the hillside green with new grass. Then, the remnants of typhoon Pacita pulled up along the Southern California shore and stopped. Water dropped from the sky as if a giant tap had opened. Raindrops didn’t fall they cascaded out of the sky. The hillside became saturated within the first hour. The hill could absorb no more water. The rain continued. Rivers formed in every crease of every hill. The once stable hillside began to slide. Chunks of earth fifty feet wide and ten feet deep would pop off the hillsides and fall to the valleys below. Looking up through the rain, the insured saw his neat rows of trees begin to waver. Straight lines of trees danced, like an out-of-control conga line, down the hillside. By the end of the day only two hundred of his ten thousand trees still stood on his hillside. The remainder were in the pasture of his downhill neighbor with their roots pointing to the sky.

When the rains stopped the insured called his broker to report a loss as a result of rain. The trees had a fair market value between $50 and $300 each. The insured could purchase them from commercial nurseries at various stages of development. The loss seemed a simple one to resolve. The insurer could not question, from the reports of the weather bureau, that the loss of the trees would not have occurred but for the unusual rain.
The insurer was faced with a massive loss. California law bound it to conduct a thorough investigation before rejecting the claim.

The insurer learned that aerial photographs, taken regularly, were available. They purchased those photographs of the insured’s property going back thirty years before the loss. Surprised, the insurer found that in every ten year span, portions of the hillside, and its trees, washed away. After each storm, the person owning the property replanted the trees. The insurer documented seven landslides destroying trees in the thirty years before the issuance of the policy.

Since the first insurance policy was written on a clay tablet in ancient Sumeria insurers and insureds have recognized that it is a business of the utmost good faith. For an insurance contract to be effective the insurer must be fully informed of the risk it is taking. If the insurer is deceived, whether intentionally or unintentionally, the contract survive. Good faith requires the insured to reveal everything he knows about the risk that would be material to the decision of the insurer to insure or not insure him. Failure to reveal material facts is concealment. When an insured conceals a material fact from the insurer, he is committing fraud in the inception of the policy. When an insured conceals or misrepresents a material fact in the presentation of a claim then he has committed fraud.
The insurer confronted the insured with the aerial photographs. They asked if he had known about the slide. He admitted knowledge of one or two prior slides. He claimed he did not tell his insurer about the slides because they did not ask him.

The claims man consulted with the underwriter. The underwriter said that he would never have written the policy had he known of the regularity with which the property suffered landslides. The only way he would insure the property was if the insured agreed to a specific exclusion for loss due to landslide, surface water or excessive rain. The claims man sought advice of counsel. Counsel informed the insurer that the evidence it provided established a material concealment of fact. A concealment of material fact authorizes an insurer in California to rescind even if the concealment was innocent. If it wanted, the insurer could rescind the policy.

Counsel further advised that the insured would almost certainly sue. The suit would include a claim for breach of the covenant of good faith and fair dealing and would seek punitive damages. The suit would be expensive to defend. Counsel further advised that jurors, because of their dislike for insurers, had a tendency to ignore a clear statement of the law given to them by the court. Jurors more frequently find the need to punish insurers.

The insurer decided to be practical rather than aggressively pursue its rights. Counsel met with the insured, showed that the number of trees counted from the aerial photographs showed less trees than those for which the claim was presented. Over a fine restaurant meal the insured and counsel for the insurer settled the claim for the value of the tress counted in the aerial photographs less the value the remaining trees. Both considered the settlement to be a favorable settlement. The underwriters for the insurer vowed to never insure trees on a hillside again.

This is not the type of fraud insurers’ normally face. There was no intent of the insured to defraud the insurer. In fact he did deceive the insurer but he had none of the malice required to prove fraud with regard to the acquisition of the policy. He did, however, overstate the number of trees he claimed lost because he had never counted them and that, if intentional, would have been a provable fraudulent claim.

Paying his claim was a economic decision. If justice could have been done he would have been paid nothing. The insurer paid the insured because he was willing to reduce his claim to something close to his real loss and because the insurer knew it was less expensive to settle than to fight.  They insisted that the settlement be kept secret to keep others from learning its willingness to pay off a fraudulent claim. Hopefully, the insurer will not do so again.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Broker Need Only Acquire Insurance Requested

The Least Expensive Insurance is Not Always Best

People who are not knowledgeable about insurance will select their insurer based upon the lowest premium price and will pick the lowest possible coverage limits available when deciding on the insurance to acquire. When the insured incurs no loss that practice works. However, when there is a loss, there may not be sufficient coverage to indemnify the insured for the loss incurred. Rather than recognize that the insured – shopping for the lowest price – is at fault for the shortfall, they blame the insurer or the insurance broker for not forcing them to buy sufficient coverage.

Insurance brokers are only required to buy the insurance the insured requests. It has no further duty unless the insured and broker establish a special relationship where the agent agrees to use its expertise to properly value the property. Merely telling an insured to obtain insurance for the replacement value of the property does not create the special relationship but, rather, puts the insured on notice to protect herself.

THE RESULT WHEN INSURED SEEKS LEAST EXPENSIVE INSURANCE

New York appellate courts are well known for writing opinions that are brief, clear, concise and definitive. In Kaufman v. BWD Group LLC, — N.Y.S.3d —-, 2015 WL 1526154 (N.Y.A.D. 1 Dept. 4/7/15), 2015 N.Y. Slip Op. 02905 is another example of that trend in avoiding lengthy and incomprehensible opinions. In the Kaufman case the broker was sued for breach of contract and negligence alleging that defendant insurance brokerage company failed to procure sufficient insurance coverage to fully compensate her for her loss of personal property after a fire damaged her Massachusetts home in June 2009.

The court concluded that the brokerage made a prima facie showing of its entitlement to judgment as a matter of law by submitting evidence that plaintiff never specifically requested that it obtain a certain level of contents coverage for the home and that there was no special relationship between the parties requiring it to obtain appropriate coverage. The record demonstrates that plaintiff did nothing to change the contents coverage in the six months before the fire, even though defendant had informed her in January 2009 of the amount of the coverage and that it was at its lowest available limit.

In opposition, the court concluded that the plaintiff failed to raise a triable issue of fact. That plaintiff’s husband, who was not an insured, believed that the policy provided full compensation was of no moment since defendant’s employee had informed plaintiff in January 2009 of the amount of coverage. Further, it was undisputed that plaintiff never paid for an evaluation of the home’s contents and that defendant never agreed to conduct such an evaluation. Moreover, there is no evidence that defendant told plaintiff that she would be completely compensated for any damaged personal property should an insurable loss occur.

Although plaintiff had been purchasing insurance from defendant for over 20 years, this alone does not raise an issue of fact as to a special relationship, especially since the evidence shows that plaintiff chose the coverage amounts and did not rely on defendant for any advice as to the appropriate amounts.

ZALMA OPINION

Price should only be one point of consideration when deciding to purchase insurance. The risks faced by the property, the value of the property at risk, the cost to replace or repair the property, and the sufficiency of the limits acquired must all be considered. When there is valuable personal property like antiques and art, an appraisal by a professional should be used to avoid problems and to separately insure the valuable items on a personal articles floater. Kaufman did nothing necessary and since there was no special relationship with the broker, the suit was properly summarily dismissed.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When Is an Intentionally Set Fire Not Vandalism?

A Fire Started on a Kitchen Floor is not Friendly

As a young adjuster I learned the difference between a friendly and an unfriendly fire. A friendly fire is one in a place where it can be contained like an oven or a fireplace. An unfriendly fire is one where it burns property not intended to hold a fire. A fire in a house with no electricity or gas service set in the middle of a kitchen floor is, by definition, an unfriendly fire and the person who sets such a fire is a vandal and an arsonist even if he subjectively only intended to set the fire to keep warm.

In Ong v. Fire Insurance Exchange, — Cal.Rptr.3d —-, 2015 WL 1524464 (Cal.App. 2 Dist., 4/3/15) the majority of the California Court of Appeal reached an amazing and difficult to support decision that ignored reality to send the case back to the trial court for decision. Plaintiff contends that the trial court erred in concluding that a vacancy exclusion in his policy for a loss from “vandalism or malicious mischief” applied to fire damage caused by a warming fire started by a transient that spread to other parts of the property.

FACTUAL BACKGROUND

The property was vacant for more than a year when, on December 20, 2011, Ong submitted a claim to Defendant for a fire at the property. Defendant retained an experienced fire investigator, Guy Childress. On December 23, 2011, Childress went to the property to investigate and made a written report concluding, “it appears the fire may have been initiated as the result of an uncontrolled warming fire started by an unauthorized inhabitant.”  The property did not have a fireplace.

A claims log indicated that a claims adjuster for Defendant, Debra Kryklund, met with Childress and others on December 23, 2011, and noted the following: “Kitchen. Multiple pts of origin. Bed in kitchen. Unintentional incendiary. Likely transient in house and warming fire got out of hand. Firewood found inside house.”

On February 10, 2012, Kryklund sent Plaintiff a letter disclaiming coverage for his claim.

DISCUSSION

On appeal, Plaintiff contends that the trial court erred because the fire was negligently lit and since the definition of vandalism requires an intent to destroy property it was not vandalism under the ordinary and popular sense of the term. Plaintiff, grasping at straws also argued that the trial court erred because the dwelling was inhabited by a transient and therefore not vacant.

INSURANCE LAW PRINCIPLES

The California Supreme Court has recently reiterated the principles that apply when interpreting an insurance policy in State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 194–195: “While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.” The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract.  If contractual language is clear and explicit, it governs. A term is not ambiguous merely because the policies do not define it. If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist  in order to protect the insured’s reasonable expectation of coverage.

ANALYSIS

Vandalism refers to a willful or malicious destruction or defacement of public or private property.  “Malicious” in turn is defined in the dictionary as “having or showing a desire to cause harm to someone.” Using these dictionary definitions, vandalism in the ordinary and popular sense, means the willful destruction of property or the destruction of property with a “desire to cause harm.” The trial court, however, did not look to the dictionary to define “malicious” in its “ordinary and popular sense.” Rather the trial court relied on the meaning of malice in the “legal sense,” and specifically of “malice in law” in two criminal cases cited by Defendant.

Under the Penal Code, a person is guilty of arson when he or she “willfully and maliciously sets fire to or burns or causes to be burned … any structure, forest land, or property” (Pen.Code, § 451) and “maliciously” is defined as involving “a wish to vex, defraud, annoy or injure another person, or an intent to do a wrongful act, established either by proof or presumption of law” (Pen.Code, § 450, subd. (e)). Even if the plain meaning of “malice” included malice in the legal sense—i.e., that it can be presumed from a wrongful act, done intentionally and without justification, excuse of mitigating circumstances—the majority of the court of appeal believed that there would be a question of fact as to whether there were mitigating circumstances in this case precluding summary adjudication as Childress’s report indicated that the transient may have attempted “to throw burning wood outside when the warming fire got out of control.”

While a vacancy exclusion serves to protect the insurer against the increased risks of loss that occur when premises are vacant for an extended period of time such an exclusion does not protect against all increased property risks but only those within its terms. Defendant as the party drafting the policy had the opportunity to include property risks other than vandalism in its vacancy exclusion. Here, the vacancy exclusion in Plaintiff’s policy was limited to “vandalism and malicious mischief.” Defendant could have listed fire as a risk excluded under a vacancy provision but did not do so.

The trial court’s grant of summary judgment was reversed and the matter is remanded to the trial court for proceedings consistent with this opinion.

DISSENT

Rothschild, P. J., dissented with analysis that make more sense than the majority.

Presiding Justice Rothschild noted that it was undisputed that the insurer’s investigators concluded that a transient intentionally started the fire on the floor of the kitchen in order to keep warm but did not intend the fire to grow as large and destructive as it did. Starting  a fire in the middle of a kitchen floor would inevitably damage or deface the floor. It therefore constitutes vandalism under the dictionary definition. And it does not matter that the person who started the fire did not intend for it to become as destructive as it did.

The insurance policy exclusion applies to both direct and indirect loss from vandalism. Starting the fire was vandalism (because it was willful destruction or defacement), so the loss resulting from the fire is not covered. It also does not matter that the person who started the fire did it to keep warm. What is relevant is that someone intentionally started the fire on the kitchen floor, which constitutes willful destruction or defacement of property.

The damage was caused by a fire started on the kitchen floor (not in a fireplace) by a transient. That is the kind of willful destruction that becomes much more likely when the property is left vacant for an extended period. Therefore, in addition to fitting within the literal terms of the exclusion, it seems like the kind of thing to which the exclusion ought, in fairness, to apply.

ZALMA OPINION

I, like Justice Rothschild, can only wonder what the majority of the court was thinking. It seems they, rather than apply the facts to the policy and the law, decided to find some way to get coverage for Mr. Ong. Ong left his property vacant for more than a year. It was invaded by a person who unlawfully occupied the property and intentionally set a fire on the kitchen floor – whether to keep warm or to destroy the house – can only be speculation since the arsonist is not available. Anyone setting an unfriendly fire in a dwelling house in a place where it will obviously cause damage to the house is acting maliciously to cause damage. The majority based its decision on speculation. Hopefully at trial that speculation will not be allowed and the trier of fact will reach a proper decision more in concert with the dissent.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

What the Heck is an Honorable Engagement Agreement?

Arbitration Not Necessarily a Way to Resolve Problems

A party that implores a court to vacate an arbitration award normally faces a steep uphill climb: the scope of judicial review of arbitration awards is among the narrowest known in the law. In First State Ins. Co. v. National Cas. Co., — F.3d —-, 2015 WL 1263147 (C.A.1 (Mass.) 3/20/15) primary insurers filed a petition pursuant to Federal Arbitration Act to confirm the arbitrators contract interpretation award against reinsurer over reinsurance and retrocessional agreements.

BACKGROUND

A primary insurer may cede risk to another insurer who becomes a reinsurer. When a reinsurer cedes assumed risk to yet another insurer, that transfer is called a retrocessional agreement.

First State Insurance Company and New England Reinsurance Corporation (collectively, First State) entered into a number of reinsurance and retrocessional agreements with a reinsurer, National Casualty Company (National). First State demanded arbitration under eight of these agreements to resolve differences of opinion about billing disputes and the interpretation of certain contract provisions relating to payment of claims.  By agreement of the parties, all the arbitrations were consolidated in a single proceeding before a panel of three arbitrators.

After briefing and argument, the arbitrators handed down a contract interpretation award. This award established a payment protocol under the agreements. It provided that National’s payment obligations were to be triggered “upon its receipt of a billing supported by a Proof of Loss and Reinsurance Report(s) prepared by First State in a form and content generally as those introduced with the briefings on this motion.” The award further noted that “[s]aid payments may be made subject to an appropriate reservation of rights by [National] in instances where it has or does identify specific facts which create a reasonable question regarding coverage under the subject reinsurance agreement(s)” but “[p]ayment obligations on the part of [National] are not conditioned upon the exercise of its right to audit or the production of additional information or documents, other than those provided by First State as described … above.”

First State filed a petition to confirm the award. National thereafter cross-petitioned to vacate the contract interpretation award.

ANALYSIS

National’s claims of error relate only to the contract interpretation award. First State asserts that National’s cross-petition to vacate the contract interpretation award was filed outside this temporal window and is, therefore, time-barred.

A federal court’s authority to defenestrate (throw out of the window) an arbitration award is extremely limited.  Here, the sole inquiry is whether the arbitrators “even arguably” construed the underlying agreements and, thus, acted within the scope of their contractually delineated powers. A legal error (even a serious one) in contract interpretation is, in and of itself, not a sufficient reason for a federal court to undo an arbitration award. Only if the arbitrators acted so far outside the bounds of their authority that they can be said to have dispensed their “own brand of industrial justice” will a court vacate the award. As long as an arbitration award “draw[s] its essence” from the underlying agreement, it will withstand judicial review—and it does not matter how “good, bad, or ugly” the match between the contract and the terms of the award may be.

National submits that this case represents one of the rare instances in which the vacation of an arbitration award is warranted because the arbitrators exceeded the scope of their powers by re-writing the terms of the parties’ agreements. In its view, the payment protocol fashioned by the arbitrators is “ultracrepidarian,” that is, they criticized, judged, or gave advice outside the area of his or her expertise,  since it obligates National to pay billings that may not fall within the terms and conditions of any applicable agreement. National further submits that the award effectively forecloses or at least significantly impairs its broad access rights under the inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights. This reservation of rights procedure, National says, is plucked out of thin air and not derived from any contract term.

The contract interpretation award mirrors this separation; it provides that National’s payment obligations are independent of and not conditioned upon the exercise of National’s right to inspect and audit First State’s records.

This brings us to National’s complaint that the reservation of rights procedure outlined in the contract interpretation award does not draw its essence from the underlying agreements. That procedure, National says, operates to circumscribe its broad inspection and audit rights under those agreements.

Each of the eight reinsurance agreements, as well as the agreement to consolidate the arbitrations, contains an honorable engagement provision. This language directs the arbitrators to consider each agreement as “an honorable engagement rather than merely a legal obligation” and goes on to explain that the arbitrators are “relieved of all judicial formalities and may abstain from following the strict rules of law.”

We believe that an honorable engagement provision empowers arbitrators to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement. This is a huge advantage: the prospects for successful arbitration are measurably enhanced if the arbitrators have flexibility to custom-tailor remedies to fit particular circumstances. An honorable engagement provision ensures that flexibility.
Honorable engagement provisions in the arbitration clauses of the underlying agreements authorized the arbitrators to grant equitable remedies. The appellate court concluded that the reservation of rights procedure is such a remedy. Consequently, National’s objection to that procedure did not carry the day.

First State acknowledged both in its brief and at oral argument in this court that the contract interpretation award does not condition National’s inspection, audit, or recoupment rights on its submission of an appropriate reservation of rights. As First State concedes, the contract interpretation award leaves National, upon receipt of a billing from First State, with three options: it may (i) reject the billing, (ii) pay the billing without comment, or (iii) pay the billing with a reservation of rights.

Whether National employs the second or third option when paying a particular billing, it retains the right thereafter to inspect First State’s records, audit the claim, and seek recoupment through a subsequent arbitration should it conclude that payment was improperly made. First State has endorsed this reading of the contract interpretation award and, therefore, it cannot assert either the absence or inadequacy of a reservation of rights as a defense to future recoupment efforts by National.

ZALMA OPINION

One must wonder why an honorable engagement provision was placed in the contracts between the reinsurers and the retrocessionaires since it gave the arbitrators a wide latitude and removed the restrictions of the law when reaching their decision. The honorable engagement provision gave great power to the arbitrators to create an award that did, what the arbitrators in their sole discretion, believed to be justice rather than the letter of the contracts. By including an honorable engagement provision the parties left the right to argue their position based  on the law to the whim of three arbitrators with no chance of setting aside the award. We can only hope such an agreement does not find its way into an insurance policy.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Emotion Should Never Be Basis of Judgment

Judgments Must Only Be Based on Evidence

Litigants are entitled to a fair trial culminating in a jury verdict rendered after consideration of properly admitted evidence and the law. Often, although equal in the eyes of the law, insurance companies are not treated equally and fairly by trial courts who treat plaintiffs suing insurers as more equal than the insurers.

A jury verdict infused with sympathy for a litigant is based on emotion, not the evidence or the law, and may be set aside on application to an appellate court.

Government Employees Insurance Company (GEICO) invoked these well-established principles in Government Employees Insurance Company v. Madeline Kisha, — So.3d —-, 2015 WL 1470104 (Fla.App. 5 Dist., 4/2/15), claiming that it did not receive a fair trial in the underlying declaratory judgment action because the trial court erroneously allowed Madeline Kisha to introduce evidence of her long relationship with GEICO, as an insured, regarding prior policies that had expired long ago. GEICO argued that this evidence was erroneously admitted because it was irrelevant to the issue of whether GEICO cancelled Madeline’s current policy for nonpayment of premiums prior to her automobile accident and her claim for personal injury protection (PIP) benefits. GEICO also argued the evidence was highly prejudicial because it filled the jury with sympathy, thus tainting the verdict and judgment declaring Madeline’s entitlement to those benefits.

FACTS

The current policy had a designated policy period from December 19, 2010, to June 19, 2011, and provided PIP and underinsured/uninsured motorist coverage to Madeline and her husband, Stephen Kisha.

The Kishas chose to make monthly premium payments. On March 14, 2011, GEICO sent the Kishas the monthly bill requiring payment of $195.20 by March 29th. When GEICO did not receive the payment by the due date, it sent a Notice of Cancellation for Nonpayment of Premium to the Kishas on April 4th. This Notice was in conformance with the cancellation provisions in the policy and advised the Kishas that unless they submitted the past due payment prior to April 20th, the effective date of cancellation, their policy would be cancelled as of that date. The Notice stated in pertinent part, “As of 12:01 a.m. local time Apr. 20, 11, your policy will cancel due to nonpayment of your premium. It added, in boldface, larger font: “Please submit a payment immediately to prevent the cancellation of your policy.”

The Notice also advised that if they chose to pay by mail, the payment had to be postmarked by the cancellation date to avoid a lapse in coverage. The Kishas admitted they received the Notice, but neither recalled reading it.

Stephen Kisha testified that he wrote the check for $195.20 to GEICO on April 17th. Although the check was dated April 17th, the postmark on the envelope was April 25th, five days past the cancellation date. Several weeks later, on May 8th, Stephen and Madeline were injured in a rear-end collision. The Kishas were treated in the emergency room and released. They both filed claims for PIP benefits under the current policy.

THE MOTION IN LIMINE

Prior to trial, GEICO filed a motion in limine seeking to exclude evidence of the length of time the Kishas had been policyholders (between seventeen and twenty-four years), arguing that such evidence was irrelevant and prejudicial because it would enrage and curry sympathy from the jury. The court denied the motion and the case proceeded to trial.

THE TRIAL VERDICT

The jury found GEICO had waived its right to deny insurance coverage to Madeline and that GEICO was estopped from denying coverage. GEICO appealed.

INAPPROPRIATE CLOSING ARGUMENT

In closing argument counsel argued: “Now, they have been paying premiums for 17 to 24 years. I think we heard both, 17 and 24. Either way it’s a long time to have an insurance company and to pay premiums month in and month out. It’s thousands of dollars that they’ve been paying to GEICO for this coverage to protect them. This was coverage to protect them, and this is the one time that she has made a claim in all of those years and they leave her out in the cold. After all those years.” He also argued: “An insurance company like GEICO, they want to try and deny claims. They investigate, they do their evaluation. They take statements. They look over records. What way can we find to deny this claim? GEICO has the obligation to inform its insureds—in this case the Kishas—if they do not have coverage as soon as possible so they can fix that problem. They owe it to the Kishas for all those years.”

ANALYSIS

The Florida appellate court concluded that the length of time the Kishas had been insured by GEICO was not relevant to prove or disprove any material fact and was, therefore, inadmissible since relevant evidence is evidence tending to prove or disprove a material fact. The fact that the Kishas had been insured with GEICO for more than 17 yeaars did not tend to prove any of the elements of waiver: the existence of a right by GEICO that was waivable; GEICO’s knowledge of the right; or GEICO’s intention to relinquish the right. The length of her history with GEICO did not tend to prove the Kishas detrimentally relied on any act or omission of GEICO in connection with the April late payment. Madeline’s argument was that GEICO’s cashing of the late check on April 29th, nine days after the policy had been cancelled and ten days prior to the accident, and its retention of the funds after the date of the accident created the detrimental reliance—not anything that had previously occurred in the Kishas’ payment history.

There was no evidence that the Kishas had ever before made a payment after a cancellation date, such as occurred here, and thus their payment history was not relevant to the instant situation.

It also found that it was patently obvious that Madeline’s attorney used this evidence to appeal to the jurors’ sympathy when it referenced, for example, “all the years of” and “thousands of dollars of” payments the Kishas had made and argued GEICO left the Kishas “out in the cold” upon her first claim. Madeline’s attorney even argued that GEICO “owe[d] it to the Kishas” to provide coverage after all those years. This evidence did nothing more than portray Madeline as a pitiable individual who had been injured in an automobile accident and then abandoned in her time of need by GEICO after many years of paying premiums for insurance from which she never derived a benefit. To suggest, as Madeline does, that it did not unduly influence the jury is to suggest that this court indulge a naive assumption that we are not inclined to do.

The right to a fair trial necessarily imposes on jurors the duty to fairly and impartially determine the facts from relevant evidence presented to them and apply those facts to the applicable law. Fidelity to that duty prohibits a jury from being swayed by sympathy for any party when rendering its verdict. The irrelevant evidence of the Kishas’ long history with GEICO became one of the centerpieces of Madeline’s case and constituted an impermissible plea for sympathy that impeded the jurors’ ability to fulfill their duty and intruded too far into GEICO’s right to a fair trial. Accordingly, the judgment under review is reversed, and this case is remanded for a new trial.

ZALMA OPINION

It is axiomatic that when a lawyer has no facts in his favor he argues the law, when there are no facts in his favor he argues the law, and when he has neither he pounds the table and tugs at the jury’s heartstrings. That is what happened here. The only issue was whether the policy had been effectively cancelled. If not coverage would apply if so the plaintiffs would recover nothing. That they had insurance with the same insurer for many years meant nothing to the issue of whether the policy was cancelled. Had the Kisha’s mailed the check on the date it was allegedly written they would have had coverage.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Is Entrustment Exclusion Enforceable?

Do Not Entrust Your Property to a Thief

Businesses and people, as a matter of course, will entrust their property to others. They place product in a commercial warehouse; they let friends or relatives have control of their property; and they consign property to others for sale. When the person entrusted with the property is not trustworthy losses occur.

Insurance is designed to protect the insured against the risk of loss of property from designated risks of loss. The all risk or direct risk of physical loss policies, insure conceivable risks of physical loss not specifically excluded. Because the insurer has no way of gauging the risk of loss when an insured entrusts its property to another insurers have developed exclusions for losses to property when it is damaged, destroyed or stolen by the person to whom it was entrusted.

In Warehouse Wines & Spirits, Inc. v. Travelers Property Cas. Co. of America, Slip Copy, 2015 WL 1454883 (S.D.N.Y., 3/31/15), the District Court for the Southern District of New York, was asked to apply the exclusion to a theft by a warehouseman of property entrusted to it.

FACTS

On July 23, 2013, plaintiff Warehouse Wines & Spirits, Inc. (“Warehouse Wines”), a retail seller of wine and liquor, sued Travelers Property Casualty Company of America (“Travelers”) after Travelers denied Warehouse Wines’ insurance claim for stolen product.Warehouse Wines alleges that it lost over 4,000 cases of its wine and liquor when the product was stolen by James Ceseretti, who ran the warehouse in which Warehouse Wines stored excess inventory. In 2015 Ceseretti pled guilty to grand larceny in the second degree for the theft of property from Steven Goldstein, President of Warehouse Wines, in excess of one million dollars.

Warehouse Wines submitted a claim under its first party property insurance policy with Travelers for loss of inventory. Travelers denied the claim based on the “Dishonest Acts” exclusion in the policy, which precludes coverage where a loss is caused by the dishonest acts of a person “entrusted with the property”. The parties agree that Warehouse Wines entrusted its wine and liquor to Ceseretti and his warehouse. As Ceseretti has already admitted guilt to the theft, there is also no dispute as to a dishonest act occurring.

Ceseretti and his Bestway Warehouse & Transportation company were conducting business as a warehouse when the theft occurred. Warehouse Wines had a written agreement for the warehousing of its merchandise. There was no time limitation to their storage and the warehouse was not used as a temporary way station while the goods waited to be transported elsewhere.  Ceseretti stole Warehouse Wines’ wine and liquor while the goods were in storage at the warehouse—not while they were in any stage of transport.

In February 2011, Ceseretti was unable to deliver cases of Captain Morgan rum to Warehouse Wines despite records indicating that there should have been 31 cases in the warehouse. In November 2011, he was unable to deliver 3 cases of Dom Perignon although the cases should have been in the warehouse. By early December 2011, he was unable to deliver a particular Belvedere vodka although he was supposed to have 60 cases. Warehouse Wines’ order on December 23, 2011 was short 53 of the 591 expected cases. On January 3, 2012, Goldstein inspected the warehouse and discovered a loss of approximately 4,000 cases he calculated to be worth approximately $1,200,000.

On May 23, 2013, James Ceseretti was arrested and charged with the theft of property belonging to Warehouse Wines and Herman from his warehouse. Ceseretti, Bestway Logistics Transportation, and Bestway Warehouse & Transportation were each indicted in connection with the theft. On January 9, 2015, Ceseretti pled guilty in the Supreme Court of the State of New York County of Suffolk to grand larceny in the second degree to Count One of the Indictment. In exchange for Ceseretti’s guilty plea, indictments against the two companies through which Ceseretti conducted business with Warehouse Wines—Bestway Warehouse & Transportation, Inc. and Bestway Logistics Transportation, Inc.—were dismissed as being “covered by [Ceseretti’s] plea.”

THE INSURANCE POLICY

Prior to the theft, Warehouse Wines and Travelers had agreed to a first party property insurance policy (the “Policy”) which insured Warehouse Wines against certain risks of direct physical loss to its property. The “Property Floater Coverage” section of the Policy provided coverage only while the goods were in storage at the Bestway warehouse, subject to a limit of $4 million and a $25,000 deductible.

The Policy provided: “2. We will not pay for a “loss” caused by or resulting from any of the following: ¶  * * *  ¶ d. Dishonest acts by you, anyone else with an interest in the property, your or their employees or authorized representatives or anyone entrusted with the property, whether or not acting alone or in collusion with other persons or occurring during the hours of employment.”.

On April 24, 2012, Warehouse Wines filed its Sworn Statement in Proof of Loss, stating a loss of 4,095 cases of wine and liquor with a claimed value of $1,155,480. The statement asserted that the amount of insurance in force was “$4,000,000 at Location”, reflecting a claim made under the “Property Floater Coverage” which applies only to property in storage at the Bestway warehouse. Travelers denied coverage and rejected the Proof in a letter dated August 6, 2013.

DISCUSSION

There is no dispute as to the existence of an insurance contract wherein Travelers agreed to “pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” That policy, however, contains an exclusion covering loss resulting from the dishonest act of someone entrusted with the insured property. There is no dispute that Ceseretti stole Warehouse Wines property that he was entrusted to store in his own warehouse. That fact is made clear by Ceseretti’s guilty plea.

DISHONEST ACT EXCLUSION

Once a plaintiff has established that it sustained a loss to covered property, the burden shifts to the insurance company to prove that the claimed loss is subject to an exclusion. The “Dishonest Acts” exclusion in the contract between the parties bars coverage where a claimed loss results from a dishonest act by, among others, anyone entrusted with the insured property. Although the parties dispute exactly which entity was the custodian of the property at the time of the theft, it is undisputed that Warehouse Wines entrusted its property to James Ceseretti and whichever of his companies that operated the warehouse.

Courts in New York have held that exclusions for the dishonest acts of persons to whom the insured entrusts its property are enforceable. [Superior Steel Studs. Inc. v. Zurich N.A., Inc., 368 F.Supp.2d 208 (E.D.N.Y.2005) (applying the exclusion to bar insurance coverage for theft of steel coils by officers of the company who had been given the property for processing); Cougar Sport, Inc. v. Hartford Ins. Co., 737 N.Y.S.2d 770, 771–72 (Sup.Ct.N.Y.Cty.2000), aff’d, 733 N.Y.S .2d 151, 152 (1st Dep’t 2001) (applying the dishonest acts exclusion to bar coverage for thefts committed by a warehouseman).

In Cougar Sport, the plaintiff was an importer of children’s clothing who arranged for some of its goods to be delivered directly to one of several warehouses for storage. When one of the warehouses sold all of the goods without authority from the plaintiff, the plaintiff made a claim to its insurer for the loss. The insurer denied the claim based upon a similar exclusion for dishonest acts as exists here. That court found that “entrust” must be given its ordinary meaning, and that the plaintiff’s surrender, delivery or transfer of possession of its goods to the warehouse with confidence that the property would be used for the purpose it intended amounted to entrustment. Here, the parties admit that Warehouse Wines entrusted its property to Ceseretti when it directed its suppliers to deliver excess inventory to his warehouse.

Warehouse Wines’ loss was caused by the dishonest acts of someone “entrusted with the property.” There can be no dispute that Travelers has met its initial burden of showing that the “Dishonest Acts” exclusion applies to Warehouse Wines’ claimed loss.

There is no dispute of material fact that James Ceseretti operated the warehouse from which he stole over one million dollars of wine and liquor goods under the name Bestway Warehouse & Transportation. It was responsible for warehousing the goods and cannot be construed to be a carrier for hire.

ZALMA OPINION

Although the guilty plea made the decision with regard to cause the insured argued against the application of the Dishonest Acts exclusion none of which were convincing. The property was entrusted to the warehouseman who stole the property. The exclusion is clear and unambiguous and once the chaff had been taken from the argument the court granted summary judgment.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

“Insurance Law” A New Book From Barry Zalma

Insurance Law Now Available for Pre-Orders

Try It RISK-FREE for 30 Days—Your Satisfaction is Absolutely Guaranteed. For Fastest Service—Call 1-800-543-0874 Today! Also you can order on line at http://www.nationalunderwriter.com/insurance-law.html

INSURANCE LAW

Only Insurance Law—the professional’s all-new, one-stop tool—delivers real-world expertise and practical guidance on:

  • Trigger of Coverage
  • Doctrine of Fortuity
  • Duties of the Insured and Insurer
  • Key Differences between
  • Property and Liability Policies
  • The Contract of Personal Indemnity
  • Rescission
  • Preemption
  • Independent Counsel Fraud and False Swearing
  • Subrogation
  • “Other Insurance” Clauses
  • Punitive Damages

The brand new Insurance Law is also available as an e-book, featuring instant download,  hyperlinking, bookmarking, print capabilities, multiple device compatibility, no WIFI  connection after download—and more.

For a limited time, when you purchase the all-new Insurance Law, you’ll also receive (at no additional cost) a subscription to the popular, powerful Monday Claims Report, the weekly e-newsletter featuring coverage and analysis of the most recent insurance law  developments across the country.

Insurance Law is the must-have reference for attorneys and numerous professionals,  including risk managers, property owners, business owners, underwriters, brokers, agents, claims representatives, insurance adjusters, insurance claims supervisors, insurance claims executives, and public insurance adjusters.

Every civil attorney quickly learns that a major part of the law firm’s income comes directly, or indirectly, from insurance—and that insurance law touches almost every civil lawsuit in some form or another.

The all-new Insurance Law is a crossdiscipline, one-stop, practical reference tool for any professional whose job necessitates a fundamental understanding of insurance law.
This brand-new resource includes:

  • Multi-jurisdictional case law, including up-to-date analysis with a focus on new cases that have changed the law
  • State-by-state fraud statutes
  • Model statutes
  • Built-in discussion questions and key focus points that guide you to the core of the most vital issues

Comprehensive yet practical, this is the ideal resource for the newcomer and veteran
alike. It clearly and concisely covers the fundamental principles of insurance law and
also provides expert insight into the most recent insurance coverage law decisions
from across the nation. Plus—You get the full text of key insurance cases with citations to relevant statutory, regulatory, and judicial sources.

The National Underwriter Company’s 100% Satisfaction Guarantee!

You can try Insurance Law , Risk-Free for 30 days. The National Underwriter Company fully guarantees your satisfaction. If for any reason you find you are not 100% satisfied with our product, just return it to us with the invoice marked “cancel.” It’s that simple. If you have pre-paid, we can provide you with a credit to your account or a refund.

Try It RISK-FREE for 30 Days—Your Satisfaction is Absolutely Guaranteed. For Fastest Service—Call 1-800-543-0874 Today! Also you can order on line at

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

About the Expert Author

Barry Zalma, Esq., CFE

Barry Zalma is a renowned and respected insurance coverage attorney, consultant
and expert witness who consults with insurers, insurance brokers and agents, and
policyholders internationally.

An independent practitioner, Mr. Zalma assists counsel for insurers and
policyholders on insurance coverage issues, claims handling, and bad faith
claims. He has represented the widest range of insurers from Allstate to
Underwriters at Lloyd’s, from Westfield Insurance Company to Allianz. He has
qualified as an expert in state and federal courts in California, Mississippi, Texas,
New Mexico, Oklahoma and the British Crown Colony in the Grand Caymans.

Mr. Zalma has authored several books on property and liability claims,
numerous articles for insurance trade publications and law journals, a bimonthly
publication, Zalma’s Insurance Fraud Letter and regular columns in National
Underwriter P&C magazine and the Underwriters Insider. He acts as an expert
commentator for the International Risk Management Institute; is a member of
the faculty of the Insurance Agents and Brokers of America’s Virtual University;
and is the author of distance learning and computer-based training programs for
people in the business of insurance.

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Zalma’s Insurance Fraud Letter – April 1, 2015

 Anti-Fraud Efforts Continue

This is not an April Fool’s joke.

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

The current issue of ZIFL reports on:

1.    New Anti-Fraud Law in New Jersey.
2.    From the California Department of Insurance – Revocation of Blue Shield’s Tax Exempt Status
3.    The Burden of Proof for Misrepresentation Defense and Statutory Fraud
4.    More on the Death Master File Violations – $4.5 Million to Be Paid
5.    Fireman’s Fund to Pay U.S. $44 Million
6.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com
7.    Fraud Accusation & Withdrawal of Claim

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 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 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.    False Application For Health Insurance is a Crime In Connecticut – March 31, 2015
2.    Join Me at the 19th Annual America’s Claims Event –  March 30, 2015
3.    Can Reinsured Allocate Claims Payments? – March 30, 2015
4.    The Use of the Insurance Examination under Oath – March 27, 2015
5.    Plaintiffs’ Lawyers Need to Understand Insurance  –  March 26, 2015
6.    Is Drunken Brawl Resulting In Death Covered? – March 25, 2015
7.    MCS-90 Controls – March 24, 2015
8.    Captive Agent Must Use Ordinary Care – March 23, 2015
9.    No Way to Avoid Workers’ Compensation – March 20, 2015
10.    Silica Dust Is a Pollutant – March 19, 2015
11.    The Equitable Remedy of Rescission – March 18, 2015
12.    Interview Techniques March 17, 2015
13.    When Is an Exclusion “Conspicuous, Plain and Clear” – March 16, 2015
14.    Zalma’s Insurance Fraud Letter – March 15, 2015
15.    Must Be Named as Insured On Date of Loss To Recover – March 13, 2015
16.    No Cover for Incorrectly Performed Work – March 12, 2015
17.    Cancellation Waives Right to Rescind – March 11, 2015
18.    Broad Exclusion – if Plain – Applies – March 10, 2015
19.    Buyer’s Remorse – March 9, 2015
20.    To Stack or Not to Stack, That is the Question – March 6, 2015

New From the ABA:

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

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

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

NEW FROM NATIONAL UNDERWRITER

Mold Claims Coverage Guide

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

URL:  www.nationalunderwriter.com/Mold

Price: $98.00

Construction Defects Coverage Guide

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

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

URL:  www.nationalunderwriter.com/ConstructionDefects

Price: $196.00

Insurance Claims: A Comprehensive Guide

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

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

URL:  www.nationalunderwriter.com/InsuranceClaims

Price: $196.00

Barry Zalma

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

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

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

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False Application For Health Insurance is a Crime In Connecticut

Probable Cause Defeats False Arrest and Malicious Prosecution Claim

Insurance fraud is a serious felony. It is especially wrongful in the health insurance context. In Connecticut, making a false statement on an application for health insurance is a crime. Insurance fraud perpetrators become offended when they are caught and have no qualms about suing the police officer who arrested them. By so doing they depress the ability of local authorities to prosecute the crime.

Michael Plude (“Plude”), upset about being arrested for insurance fraud sued Officer John T. Petrillo, Jr. of the Shelton Police Department (“Petrillo”), Rebecca Adams (“Adams”), David L. Guay, Thomas Reynolds and the Connecticut State Board of Accountancy. The court had dismissed all claims against all defendants other than Petrillo. As to Petrillo, Plude brings a claim for false arrest and a common law claim for malicious prosecution. Petrillo filed a motion for summary judgment and the District Court for the District of Connecticut resolved the issue in Plude v. Adams, Not Reported in F.Supp.3d, 2015 WL 1014526 (D.Conn.).

FACTUAL BACKGROUND

Plude is a certified public accountant and a partner in an accounting firm. From 1999 until July 2008, he provided accounting services to Pioneer Gas & Appliance Inc. (“Pioneer”). This action arises out the Shelton Police Department’s investigation and arrest of Plude, pursuant to a warrant, for health insurance fraud and conspiracy to commit health insurance fraud.

Under Connecticut General Statutes § 53–442, a person is guilty of health insurance fraud if he: “with the intent to defraud or deceive any insurer … presents or causes to be presented to any insurer or any agent thereof any written … statement as part of … an application for any policy of insurance … knowing that such statement contains any false, incomplete, deceptive or misleading information concerning any fact or thing material to such claim or application, or omits information concerning any fact or thing material to such claim or application. …”

Petrillo conducted the investigation of Plude, which revealed, among other things, that Plude had submitted an application for health insurance with Anthem Blue Cross Blue Shield Insurance (“Anthem”) through Pioneer, which stated that he worked 40 hours per week for Pioneer as its Treasurer and his date of full-time hire was December 17, 2006; and Pioneer denied that it ever employed Plude. Plude was arrested.

Petrillo learned that Anthem, Pioneer’s medical insurance carrier, had filed an Insurance Fraud Report with the Connecticut Insurance Department against Plude for fraudulently receiving medical benefits through Pioneer (the “Anthem Insurance Fraud Report”).

Over the course of the investigation that followed, Petrillo obtained, among other things, records related to Plude’s health insurance coverage and professional relationship with Pioneer, and statements and reports from Pioneer employees and others. Petrillo obtained a copy of Plude’s insurance application that claimed his employer was Pioneer, his occupation was Treasurer, and that he worked 40 hours per week. Health insurance benefits through Pioneer were limited to Pioneer employees who worked 30 hours or more per week.  Pioneer’s Vice President, Ralph Tirella (“Tirella”), provided Petrillo a written statement that contradicted material information in Plude’s health insurance application. Tirella stated that was in charge of hiring at Pioneer and that Plude was never an employee of Pioneer. Rather, Plude was an independent contractor who performed accounting services for Pioneer through his accounting firm. Plude was not authorized to add himself to the Pioneer medical insurance plan because he was never an employee, and Tirella was not aware that Plude enrolled himself on Pioneer’s insurance plan until several months after he had done so.

Petrillo also received a number of documents from Pioneer that were inconsistent with information in Plude’s health insurance application. Although Plude’s application stated that he worked for Pioneer full time, his new employee information form and weekly paystubs showed that he received an annual salary of $23,316.60, which was equal to the cost of his medical insurance, after deductions.

Plude disputes much of the information that Petrillo collected during his investigation. Plude explains that his firm ceased billing Pioneer for the accounting services it provided after Plude was enrolled in Pioneer’s health insurance plan.

LEGAL STANDARD

Petrillo argues that summary judgment should be granted in his favor on both claims because he had probable cause to arrest Plude. Probable cause is a defense to both a claim of false arrest and a common law claim for malicious prosecution. An action for malicious prosecution against a private person requires a plaintiff to prove that: (1) the defendant initiated or procured the institution of criminal proceedings against the plaintiff; (2) the criminal proceedings have terminated in favor of the plaintiff; (3) the defendant acted without probable cause; and (4) the defendant acted with malice, primarily for a purpose other than that of bringing an offender to justice.Probable cause exists when one has knowledge of, or reasonably trustworthy information as to, facts and circumstances that are sufficient to warrant a person of reasonable caution in the belief that an offense has been or is being committed by the person to be charged.

A person is guilty of health insurance fraud if he: “with the intent to defraud or deceive any insurer … presents or causes to be presented to any insurer or any agent thereof any written … statement as part of … an application for any policy of insurance … knowing that such statement contains any false, incomplete, deceptive or misleading information concerning any fact or thing material to such claim or application, or omits information concerning any fact or thing material to such claim or application….”

Petrillo had information showing that Plude submitted a health insurance application that contained material misstatements about his professional relationship with Pioneer, in the absence of which misstatements he would have been ineligible for health insurance through Pioneer.

The court found the facts in dispute in this case are not material to whether Petrillo had probable cause to believe that Plude committed health insurance fraud. It is undisputed that Pioneer employees were only eligible for health insurance through Pioneer if they worked 30 hours or more each week, and Plude offers no evidence that Petrillo ever had any information tending to show that Plude worked more than 30 hours per week for Pioneer other than Plude’s response on the health insurance application. There is no genuine issue as to the fact that Plude filled out the field on his insurance application that stated that he worked 40 hours a week, and Plude offers no evidence that Petrillo had any information tending to show that Plude did not complete that portion of the application.

In fact the record revealed that Plude continued to work for his accounting firm and the only compensation he received from Pioneer was in the form of health insurance coverage.  Plude offers no evidence that Petrillo had any information tending to show otherwise.  The record also revealed that Pioneer executives were aware of Plude’s conduct and that he was not a 40 hour a week employee.

Assessing the record in the light most favorable to Plude and drawing all reasonable inferences in his favor, the court concluded that the facts and circumstances known to Petrillo were sufficient to warrant a person of reasonable caution to believe that Plude had falsely stated on his health insurance application that he was a full-time employee of Pioneer for the purpose of obtaining health insurance through Pioneer, which was only available to employees of the company who worked more than 30 hours per week. There being no genuine issue of material fact as to whether Petrillo had probable cause to arrest Plude for health insurance fraud, Petrillo is entitled to summary judgment.

The information Petrillo had strongly suggested (and in fact still suggests) that at the time Plude was enrolled in Pioneer’s health insurance plan, he was not an employee of Pioneer, much less one who worked 30 hours per week or more, but rather had arranged to secure health insurance benefits in exchange for accounting services.  The court concluded that it was objectively reasonable for Petrillo to believe that probable cause existed and officers of reasonable competence could disagree on whether the probable cause test was met.

In addition, although unnecessary, Petrillo was entitled to qualified immunity as to Plude’s  false arrest claim

ZALMA OPINION

Fraud, either in making claims, or acquiring insurance is criminal in many states. In this case there was no basis for a suit against the officer who arrested Plude because he had a plethora of probable cause to arrest him. Plude had his license as a CPA suspended because of the arrest. The real question is why Plude was not tried and convicted of the fraud for which he was arrested.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Join Me at the 19th Annual America’s Claims Event

Attend the 19th Annual America’s Claims Event and Get A Discount

I will be speaking at the conference on the subject of “Millions for Defense and Not a Dime for Tribute”

AGENDA  SPEAKERS  SPONSORS  VENUE  REGISTER AND SAVE
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Posted in Zalma on Insurance | Leave a comment

Can Reinsured Allocate Claims Payments?

Are Cedent’s Allocation Decisions Immune from Scrutiny?

Reinsurance allows an insurer to lay off part of its obligations to a reinsurer thereby buying insurance against the obligation to pay claims as a direct insurer. Because the agreements are between insurers the covenant of good faith and fair dealing applies to all transactions whether written into the reinsurance agreement or not.

Plaintiff New Hampshire Insurance Company (New Hampshire) settled, along with several affiliated liability insurers under common corporate control (collectively, AIG), hundreds of millions of dollars of claims—most but not all of which are asbestos-related personal injury claims—with nonparty Kaiser Aluminum & Chemical Corporation (Kaiser), a common insured of the settling carriers. AIG’s settlement agreement with Kaiser does not address the allocation of losses to particular claims, policies or carriers beyond providing that AIG may effect such an allocation “for its own purposes, in its own books and records,” which AIG has done. That allocation ascribes 100% of the settlement amount to asbestos product liability claims within the coverage of Kaiser’s New Hampshire excess policy (issued for the period from June 1973 to June 1976) and none of the amount to other settled claims—for bad faith, defense costs in addition to policy limits, and premises liability—that Kaiser had asserted against certain other AIG carriers, but not against New Hampshire.

In New Hampshire Ins. Co. v. Clearwater Ins. Co., — N.Y.S.3d —-, 2015 WL 1292579 (N.Y.A.D. 1 Dept., 3/25/15) New Hampshire sued Clearwater Insurance Company (Clearwater), a reinsurer of the excess policy New Hampshire issued to Kaiser, seeking to require Clearwater to indemnify New Hampshire for the share prescribed by its reinsurance certificate of the portion of the Kaiser settlement payments that AIG has allocated to the New Hampshire policy. In its defense, Clearwater challenges AIG’s allocation of 100% of the settled losses to asbestos products liability claims, contending that this allocation unreasonably results in the reinsured New Hampshire policy bearing part of the cost of settling the premises, bad faith and defense cost claims that Kaiser had not asserted against New Hampshire or that were not covered by the New Hampshire policy. Clearwater also asserts, as additional affirmative defenses, that New Hampshire (known as the ceding company, or “cedent,” in reinsurance nomenclature) has breached its contractual notice, reporting and risk retention obligations under the terms of the reinsurance certificate.

New Hampshire argued that Clearwater, as a reinsurer, was bound, as a matter of law, by New Hampshire’s allocation of settled claims to the reinsured policy under general principles of the law of reinsurance.

Factual Background

The NH–Kaiser policy was not implicated until Kaiser’s covered losses for a given year during the policy period exceeded $50 million.  Although the NH–Kaiser policy apparently was the only one that New Hampshire issued to Kaiser, the record reflects that six other AIG-affiliated carriers issued Kaiser a total of 48 excess liability policies, at various levels of coverage, during the period from 1970 to 1985. The aggregate limits of Kaiser’s 49 AIG policies (including the NH–Kaiser policy) totaled approximately $575 million.

The Reinsurance Contract

New Hampshire ceded a portion of its risk under the NH–Kaiser policy to Clearwater  pursuant to a contract entitled “Casualty Facultative Reinsurance Certificate No. 0567,” dated July 10, 1973 (hereinafter, the Clearwater–NH certificate). The Clearwater–NH certificate established Clearwater’s pro rata share of New Hampshire’s liability under the NH–Kaiser policy to 8%, or up to $4 million per year.

The Clearwater–NH certificate provides that Clearwater’s “liability … shall follow [New Hampshire’s] liability in accordance with the terms and conditions of the policy reinsured hereunder except with respect to those terms and/or conditions as may be inconsistent with the terms of this Certificate.”  New Hampshire further agreed that it would “notify [Clearwater] promptly of any event or development which [New Hampshire] reasonably believes might result in a claim against [Clearwater]” and would “forward to [Clearwater] copies of such pleadings and reports of investigations as are pertinent to the claim” under the certificate.

The Claims Against Kaiser and Ensuing Coverage Litigation

Kaiser was first named as a defendant in asbestos-related personal injury actions in the late 1970s. Eventually, the asbestos-related claims against Kaiser numbered in the hundreds of thousands. The accumulation of these claims forced Kaiser into Chapter 11 bankruptcy proceedings in 2002.

In 2000, Kaiser commenced a declaratory judgment action in California. In the asbestos products action, Kaiser asserted, in addition to its claims for declaratory relief and breach of contract, claims for bad faith against certain insurers, including two AIG carriers, Lexington Insurance Company (Lexington) and Insurance Company of the State of Pennsylvania (ICOP), but not New Hampshire.

The Kaiser Settlement

In 2006, Kaiser’s total unliquidated liability for personal injury claims of all kinds was estimated to be as high as $2.5 billion, while the aggregate limits of its remaining solvent insurance coverage then totaled approximately $1.5 billion.

The remaining aggregate limits of Kaiser’s coverage from the AIG carriers were then approximately $568 million.

In April 2006, Kaiser and the AIG carriers, including New Hampshire, resolved their coverage disputes by entering into a settlement agreement (the Kaiser settlement), which was approved by the bankruptcy court on May 9, 2006, and went into effect upon Kaiser’s emergence from bankruptcy on September 16, 2006. The Kaiser settlement essentially requires Kaiser’s seven AIG carriers, collectively, to pay a trust that had been created to liquidate claims against Kaiser up to the full amount of the AIG carriers’ aggregate remaining policy limits as of 2006—approximately $568 million—on a quarterly basis over a period of 10 years. In exchange, the AIG carriers received a full release of all claims under, or relating to, the policies issued to Kaiser, including: (1) asbestos products claims; (2) premises claims, whether for exposure to asbestos, silica, coal tar pitch volatiles, or benzene, or for noise-induced hearing loss; (3) the bad faith claims that had been asserted against Lexington and ICOP; and (4) the defense costs claims that had been asserted against ICOP.

The Current Suit

When AIG began billing Clearwater for its 8% share of the settlement payments allocated to the NH–Kaiser policy, Clearwater declined to pay, leading to this lawsuit.  In its answer, Clearwater asserted as its second and third affirmative defenses, respectively, that New Hampshire had failed to comply with its reporting and notice requirements under the Clearwater–NH certificate, and, as its seventh affirmative defense, that New Hampshire had “breached the retention warranty in the Facultative Certificate.”

Discussion

A reinsurer is required to indemnify for payments reasonably within the terms of the original policy, even if technically not covered by it. A reinsurer cannot second guess the good faith liability determinations made by its reinsured. The rationale behind this doctrine is two-fold: first, it meets the goal of maximizing coverage and settlement and second, it streamlines the reimbursement process and reduces litigation.

In view of its finding that Clearwater has a duty under the Clearwater–NH certificate to “follow the settlements,” the Supreme Court (trial court) held that New Hampshire’s decisions concerning the allocation of settlement payments among its policies are entitled to “deference”. Nonetheless, recognizing that, even under the “follow the settlements” doctrine, a cedent’s allocations decisions are not immune from scrutiny, the court denied New Hampshire summary judgment on the ground that the existing record raises a triable issue concerning the reasonableness of New Hampshire’s allocation. In this regard, the court noted that discovery had still been “in its infancy” when stayed by New Hampshire’s summary judgment motion.

The purpose of a “following form” clause is to achieve concurrency between the reinsured contract and the policy of reinsurance, thereby assuring the ceding company, that by purchasing reinsurance, it has covered the same risks by reinsurance that it has undertaken on behalf of the original insured under its own policy.

Clearwater’s affirmative defenses alleging that New Hampshire did not meet the loss notice and reporting requirements under the Clearwater–NH certificate should not have been dismissed, as issues of fact exist as to whether New Hampshire met those requirements. The requirements are intertwined and exist to ensure that a reinsured apprises the reinsurer of potential liabilities in order to enable the reinsurer to set reserves and to potentially associate in the defense and control of the underlying claims. At the very least, issues of fact exist concerning the sufficiency of New Hampshire’s reporting and notice.

Clearwater claims that it was prejudiced because New Hampshire’s allegedly late notice resulted in disadvantageous commutation agreements between Clearwater and its own reinsurers, or retrocessionaires. Since New Hampshire’s summary judgment motion was premature, given that it was made when discovery was still “in its infancy”, Clearwater’s submissions in opposition to the motion sufficiently raised the issue of whether it had been prejudiced by the alleged late notice.

The court also erred in granting New Hampshire summary judgment dismissing Clearwater’s seventh affirmative defense, which raised the issue of whether New Hampshire had retained $2 million of risk under the NH–Kaiser policy as required by New Hampshire’s retention warranty in the Clearwater–NH certificate. While New Hampshire submitted an affidavit by an administrator asserting in conclusory fashion that New Hampshire had complied with the retention warranty, Clearwater is entitled to test this claim through further discovery. In any event, an issue of fact was raised by evidence Clearwater submitted suggesting that New Hampshire had pooled the retention with other AIG companies.

ZALMA OPINION

The appellate court, faced with serious reinsurance questions, kicked the can down the road and found that the trial court was wrong in granting partial summary judgment while discovery was just in its infancy. It did, however, find that the allocation decisions made by AIG were subject to scrutiny and that a reinsurer has the right to complain about a late report of the loss, giving to the reinsurer defenses that would be available to an insured when sued by its insurer on a coverage question.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

The Use of the Insurance Examination under Oath

A Weapon to Defeat Fraud

The “examination under oath”  (EUO) is a formal type of interview authorized by an insurance contract. It is taken under the authority provided by a condition of the insurance policy that compels the insured to appear and give sworn testimony on the demand of the insurer. A notary and a certified shorthand reporter are always present to give the oath to the person interviewed and record the entire conversation.

The adjuster (in complex cases, the attorney) retained to represent the insurer questions the person interviewed in a manner similar to a deposition in a legal proceeding. Because of the formality of the proceeding—it includes an oath, and the presence of the certified shorthand reporter—the task of establishing rapport with the person interviewed and obtaining information from him or her is more difficult than in an informal interview.

A tool for gleaning the maximum amount of information, the examination under oath is an effective weapon against insurance fraud. Often, however, the purpose of the examination under oath is not to stop fraud, but rather to allow an insured the opportunity to prove his or her claim of loss in cases where evidence has been destroyed by a casualty or is otherwise unavailable.

Taking an Examination under Oath

The examination under oath is usually conducted by an attorney for the insurer. An attorney, however, is not required by law: any person appointed by the insurer can take the examination. Similarly, the insured is permitted counsel, if desired, but the presence of counsel is not a legal requirement. If the insured opts for it, his or her attorney has no right to ask questions or offer information during the examination. Regardless, the wise interviewer allows the insured’s attorney to ask any question he or she wishes, and to elaborate on any facts, since this will further the purpose of the examination—to get as much information as possible. The professional prefers to learn what the insured has to say immediately, rather than during later litigation.

In cases where more than one insured is named on a policy, the insurer may, depending on the state or the policy language, compel the insureds to testify separately outside the hearing of the other insured(s). The subject will provide less guarded responses if he or she knows that a coinsured is being questioned as well. Separate examinations under oath, exactly like separate civil interviews, lead to more accurate information and less chicanery.

The Insurance Services Office appears to have modified its form of Homeowners’ Policy–3 to avoid the impact of court decisions by specifically stating that the insurer can require each insured to appear and, furthermore, to testify separately, thereby avoiding the possibility of collusion.

The insured’s counsel may object to the form of the questions posed. If the objection is well taken, honor it, since your goal is to get usable testimony. If the objection is not well taken, though, the questioner may simply ignore it.

If the insured’s attorney instructs him or her not to answer a material question, this can in itself be sufficient grounds to deny the claim. It constitutes failure to comply with the policy condition concerning examinations under oath. When faced with an instruction not to answer, it is often effective for the interviewer to say to the insured and his or her attorney:

“I respect your decision not to answer the question. I must advise you, however, that the insurance company I represent considers the question you have refused to answer to be relevant and material to its investigation. The company can, if you continue in your refusal, decide to deny your claim on that ground alone. I make no such decisions, so I will honor your decision not to answer and go on to other questions. I feel, nevertheless, that it is my duty to advise you of the rights you gave to the company when you acquired the policy. You can certainly reconsider your decision. Would you like to meet privately with your attorney to discuss this matter?”

Usually, the insured and his or her attorney then reconsider the potentially heavy consequences and answer the question.

There is no reciprocal provision allowing the insured to take testimony of representatives of the insurer. Attorneys for insureds will attempt to pose questions to the claims person. These attempts must be rebuffed politely and with good grace.

The Role of the Insurer’s Attorney

A well-executed examination under oath is not only one of the insurer’s most effective weapons against fraud. It can also be highly instructive for the adjuster. If an attorney is responsible for performing the examination, the adjuster must make clear that it is his or her obligation to provide sufficient factual information supported by legal authority for the insurer to make a decision on the claim. The adjuster should also, if possible, attend the examination to help the attorney and to study questioning techniques. Attorneys, whose job it is to ask questions, will usually do a more thorough job of examination under oath than will insurance claims staff.

After the examination, the attorney can also give the adjuster legal advice as to the insurer’s rights, duties, and obligations.

Counsel’s report should include all the facts necessary to support any decision, whether learned in the course of the investigation or from testimony at the examination under oath. The adjuster must analyze the facts in relation to statutory and case law; only then will he or she be in a position to make a fully informed decision on the claim. More often than not, the examination will cause the insurer’s attorney to recommend payment of full indemnity to the insured.

If the attorney advises the insurer that indemnity should not be paid, the adjuster should carefully analyze the recommendations to independently verify that there are sufficient facts, supported by policy language and legal precedent, to support the conclusion. It is the claims person who makes the decision, not the attorney. Decisions made by insurers must sometimes be based on reasons other than the law.

Insurers should use the examination under oath tool judiciously. It should only be used in cases where the insured is unable to prove his or her loss, when the insured’s proof is inconsistent or incomplete, or when the insurer has a reasonable belief that a fraud is being attempted. Used properly by insurers, adjusters, and insureds who are intent on providing (or obtaining) only the indemnity promised by a policy of insurance to which they are entitled, the examination under oath will help the insured and the insurer fulfill the promises they made each other at the inception of the policy.

The Right to an Examination Under Oath

A Duty Owed by the Insured to the Insurer

Every fire insurance policy issued in the U.S. provides that, in the event of a loss, the insurance company can require the insured to produce documents and testify at an “examination under oath.” The examination under oath is not a deposition; there is no prerequisite lawsuit, nor is the examination subject to formal rules of procedure. The EUO is a product of a contractual promise. The insured, when he, she or it acquires a policy of insurance the insured promises that if a claim is presented and the insurer asks, the insured will appear for, testify at EUO and then read, correct and sign under oath the transcript of the EUO.

The purpose of examinations under oath was first described in Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 94-95 (1884):

The object of the provisions in the policies of insurance, requiring the assured to submit himself to an examination under oath . . . was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured.

The position taken by the Court in Claflin has been upheld by every court that has considered it to date. For example, in Gipps Brewing Corp v. Central Manufacturers Mutual Insurance Co., 147 F. 2d 6, 13 (7th Cir. 1945), the court stated:

We think there is no escape from the conclusion that these witnesses purposely refused to answer questions which were material to the inquiry. We see no basis for refusal to answer upon the ground that they were controversial or that the answers thereto might have been used for the purpose of impeachment. Such a limitation would seriously impair and perhaps destroy defendants’ right under this provision of the policy. . . . We would think that defendants had a right to examine as to any matter material to their liability, as well as its extent. (Emphasis added by the court).

The examination under oath and the requirement that insureds produce relevant documents in the event of a fire are essential tools to insurers faced with a possible fraud or other issue affecting insurance coverage. Insureds, and their counsel, will often argue that they are not required to produce tax returns or other financial documents because to do so would violate the so-called “taxpayers privilege” or right of privacy. They may refuse to testify about subjects they claim are irrelevant or protected by a privilege or right of privacy. In most states, refusals to testify or produce documents can result in a forfeiture of claims presented by the insured.

If, as a result of a fire, the insured has lost the documentary evidence necessary to adequately prove the loss, then the insured can only prove the loss by oral testimony. By his or her testimony, the insured can remove the suspicions of the insurer. The purpose of the examination under oath is to allow the insured a medium to prove the loss. Sworn testimony is as, or more, effective evidence than documents for an insured to prove his or her loss.

The right to examination under oath is based on language in property or fire insurance policies. For instance, the Standard Fire Policy provides:

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

Similarly, the 1991 edition of the Homeowners’ Policy (Insurance Services Office Form HO 00 03 04 91) provides, in easy to read language:

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

  1. As often as we reasonably require:

(1) Show the damage property.

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

(3) Submit to examination under oath, while not in the presence of any other ‘insured’ and sign the same.

In Rymsha v. Trust Insurance Company, 746 N.E. 2d 561 (Mass. App. CT. 2001), the insured failed or refused to provide financial records including her income tax returns, credit card information regarding the purchase of items reported stolen, photographs and receipts. When she failed the insurer denied her claim. The Massachusetts appellate court reasoned:

We think resolution of Rymsha’s appeal is controlled in all respects by Mello v. Hingham Mut. Fire Ins. Co., 421 Mass. 333, 337 (1995). In that case, the court agreed with those authorities therein cited which hold that the “submission to an examination, if the request is reasonable, is strictly construed as a condition precedent to the insurer’s liability.” Id. We see no basis for a distinction between an obligation to submit to a reasonably requested examination under oath and the duty to produce documents pertinent to the claimed loss. Rymsha does not contend otherwise. Indeed, she does not even cite to, let alone discuss, Mello. Rather, she argues only that, because she informed Trust from the outset that many of the items she reported as stolen had been given to her, the information sought by Trust (specifically, her personal and corporate income tax returns for the years 1988 through 1994) was not pertinent to her claim.

In considering whether the documents requested by Trust were pertinent to Rymsha’s claim, the Superior Court judge concluded that Rymsha’s examination under oath and the undisputed circumstances of her claim gave rise to the reasonable suspicion that she did not have the resources to purchase the allegedly stolen items, that she had a ‘motive to stage the loss,’ that Trust had the right ‘to assure itself of the validity of [the] claim,’ and that the requested documents were relevant to that question. We see no error. See Sidney Binder, Inc. v. Jewelers Mut. Ins. Co., 28 Mass. App. Ct. 459, 462-463 (1990) (in theft claim, evidence of insured’s business affairs and personal finances relevant to show that insured had motive to stage burglary). Numerous other jurisdictions have held that the financial status of an insured can be relevant to an insurer’s investigation of a claim. See, e.g., Stover v. Aetna Cas. & Sur. Co., 658 F. Supp. 156, 160 (S.D.W. Va. 1987); Pisa v. Underwriters at Lloyd’s, London, 787 F. Supp. 283, 285 (D.R.I.), aff’d, 966 F. 2d 1440 (1st Cir. 1992); DiFrancisco v. Chubb Ins. Co., 283 N.J. Super. 601, 612 (App. Div. 1995); Dlugosz v. Exchange Mut. Ins. Co., 176 A.D. 2d 1011, 1013 (N.Y. 1991); Pilgrim v. State Farm Fire & Cas. Ins. Co., 89 Wash. App. 712, 720-721 (1997). In the circumstances here presented, the Superior Court judge was not in error in concluding that the challenged documents were pertinent to Rymsha’s claim. (Emphasis added).

The insured in Rymsha attempted to defeat the insurer’s argument by claiming the insurer was not prejudiced by her failure to produce documents. The Court rejected the argument and found that the failure to produce the reasonably requested pertinent information put the insurer in the untenable position of either paying the claim without question and without any means by which to investigate its validity, notwithstanding the circumstances and amount of the loss described in her unsworn statement and examination under oath testimony, or being sued for breach of contract and unfair acts and practices. The court concluded that, without finding that a showing of prejudice was necessary, the prejudice to the insurer was “too obvious to warrant discussion.” It was enough to state that the insured’s blanket refusal to provide the reasonably requested documents even stymied the insurer’s ability to show actual prejudice.

Taking a contrary position, the Sixth Circuit Court of Appeal, applying the law of Tennessee in Talley v. State Farm Fire and Casualty Co., 223 F. 3d 323, 223 F. 3d 323, 2000 Fed. App. 0267, 2000 Fed. App. 0267 (6th Cir. 08/10/2000) found that the insurer was required to show prejudice due to the insured’s refusal to submit to an examination under oath. It reasoned that a showing of prejudice is required before an insurance provider is permitted to defeat liability in the context of a fire insurance policy claim. Talley breached a condition precedent in that Talley refused to submit to an examination under oath. Tennessee courts appear to follow the approach where a condition precedent has not been satisfied to require a showing of prejudice. The court found there is a presumption that State Farm, the insurer, was prejudiced by the failure of Talley to cooperate by submitting to an examination under oath. However, a plaintiff can rebut the presumption of prejudice with competent evidence. It then sent the case back to the trial court to determine if the insured could produce evidence that rebutted the presumption of prejudice.

Reasonableness of the Examination Requirement

Courts have consistently held that the requirement in an insurance policy that an insured submit to an examination under oath is reasonable. More than 80 years ago, in Hickman v. London Assurance Corp., 184 Cal. 524, 529, 195 P. 45 (1920), the California Supreme Court expressly approved the reasonableness of an examination under oath as a means of “cross-examining” other statements of the insured.

In West v. State Farm Fire & Casualty Co., 868 F. 2d 348, 351 (9th Cir. 1989), the Ninth Circuit, applying California law, held:

For West to claim that the scheduled examination under oath was unreasonable is tantamount to a claim that insurance companies are always required to pay claims at their face value on the basis of a preliminary interview. Besides being patently illogical, this argument is controverted by the insurance policy and by California law.

In West v. State Farm, the insurance company interviewed James West in the presence of a court reporter. During the interview West refused to answer any question that he had been asked during the interview by the adjuster because he claimed the adjuster’s interview was a statement under oath. West based this claim on a question that the adjuster, Stone, asked West at the end of the interview; namely, whether West had answered Stone’s questions truthfully.

After the interview with West, State Farm sought to interview Mrs. West, who was also named as an insured under the policy. In addition, State Farm attempted to interview the Wests’ two teenaged daughters. All three women failed to appear for the scheduled interviews. State Farm then denied the claim because of West’s alleged breach of a material condition.

In Globe Indemnity Co. v. Superior Court (Guarnieri), 6 Cal. App. 4th 725, 8 Cal. Rptr. 2d 251 (1992), the court held: “The right to require the insured to submit to an examination under oath concerning all proper subjects is reasonable as a matter of law.”

In California FAIR Plan Association v. The Superior Court, 2004 DJDAR 796 (California Court of Appeal, 01/23/04), the Court of Appeal adopted Hickman, West and Globe, and ordered the trial court to enter summary judgment in favor of the insurer because of the insured’s refusal to appear for examination under oath. The insured, as the plaintiff in the action, argued that Gruenberg v. Aetna Insurance Co., 9 Cal. 3d. 566, 108 Cal. Rptr. 480 (1973)—which found failure of an insurer to allow an insured to dispose of criminal charges before he testified at examination under oath could be considered bad faith—allowed the insured to refuse to testify. The California Court of Appeal rejected the argument:

Unlike the complaint in Gruenberg, this case does not involve allegations that the insurer rejected an insured’s claim based on trumped up charges by the insurer. Here, there is no evidence in the record that the lack of cooperation in submitting to an examination under oath was due to any statements or conduct by Fair Plan or any of its agents…An examination under oath being a condition precedent to suit on the policy, the trial court erred in denying summary judgment to Fair Plan.

ZALMA OPINION

This posting is my start in the work to write a book about the EUO. It is not complete but it provides a good look at what the EUO is and how it is used to protect the interests of the insured and the insurer. Remember, an EUO can also be used as a tool to allow the insured to prove a loss that cannot be proved because the fire or theft took away the documentation needed to prove a loss.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

 

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Plaintiffs’ Lawyers Need to Understand Insurance

Notice-Prejudice Rule Does Not Apply to “Claims Made” Policy

 

Lawyers who specialize in bodily injury tort claims usually have little or no knowledge about insurance coverage and the obligations required to obtain coverage. They know torts and will invariably demand that the tortfeasor report a claim to their liability insurer. They do not know that many liability insurance policies contain a medical payments provision that will pay for medical expenses without regard to fault. Plaintiffs’ lawyers are concerned with fault, not with making an insurance claim separate from fault.

In Brenegan v. Fireman’s Fund Insurance Co., Not Reported in Cal.Rptr.3d, 2015 WL 1309638 (Cal.App. 2 Dist., 3/23/15) Kenton Brenegan (“Kenton”) appealed from a judgment entered in favor of Fireman’s Fund Insurance Co. (“Fireman’s”). Kenton made a claim for medical expenses pursuant to a medical expenses clause in Fireman’s’s insurance policy. The trial court concluded that Kenton was not entitled to recover his medical expenses because he had failed to timely comply with a reporting requirement.

BACKGROUND

In October 2010 Kenton fell down the stairs of a parking facility in Mission Hills. The facility was owned by G & L Realty Corp., LLC (G & L), which had insurance coverage under a commercial general liability policy issued by Fireman’s.

The policy provided that Fireman’s will pay “medical expenses … for bodily injury caused by an accident … [¶] provided that: [¶] (a) The accident takes place in the coverage territory and during the policy period; [¶] (b) The expenses are incurred and reported to us within one year of the date of the accident….” (Italics omitted.) The policy further provided that payments for medical expenses will be made “regardless of fault” and “will not exceed the applicable limits of insurance.” The medical expenses limit for any one person is $20,000.

In a November 2010 letter to G & L, Kenton’s counsel asserted “[a] claim for damages” and requested that G & L “forward this letter to your liability insurance carrier.” Four days later, G & L’s counsel wrote a letter to Kenton acknowledging receipt of his claim. The letter said nothing about G & L’s insurance carrier.

In November 2011 Kenton filed an action against G & L. During discovery in September 2012, Kenton allegedly “learned of the existence of [Fireman’s’s insurance] policy, but … did not learn at this time that the policy provided medical payments coverage or had any special reporting requirements.”

In a letter to Fireman’s dated April 25, 2013, Kenton’s counsel demanded “payment of any and all Med Pay available under” its policy insuring G & L. Fireman’s’ employee, Bob Holliman, declared that this letter was Fireman’s’s first notice of Kenton’s loss. According to Holliman, Fireman’s “had not received any communications from G & L … or its attorney” about the accident. Fireman’s “notified [Kenton] it was denying his claim because it did not receive notice of medical expenses within one year of the accident” as required by the medical expenses clause of the policy.

In June 2013 Kenton filed the instant action against Fireman’s. Kenton’s complaint consisted of two causes of action: breach of insurance contract and insurance bad faith. Kenton alleged that, while on G & L’s premises, he had fallen “and suffered injuries … resulting in $65,348.02 in reasonable and necessary medical expenses.”

The trial court granted Fireman’s’s motion for summary judgment because Kenton had not given timely notice of his claim for medical expenses. The court rejected Kenton’s argument that coverage applied unless Fireman’s showed actual prejudice from the delay in making the claim.

PRINCIPLES OF INTERPRETATION OF INSURANCE POLICIES

While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. Accordingly, in interpreting an insurance policy, courts seek to discern the mutual intention of the parties and, where possible, to infer this intent from the terms of the policy.

ISSUE

The central issue here is whether the medical expenses clause is analogous to an “occurrence” policy or a “claims-made” policy. “California’s ‘notice-prejudice’ rule operates to bar insurance companies from disavowing coverage on the basis of lack of timely notice unless the insurance company can show actual prejudice from the delay. The rule was developed in the context of ‘occurrence’ policies. [Citations.]” (Pacific Employers Ins. Co. v. Superior Court (1990) 221 Cal.App.3d 1348, 1357.) The notice-prejudice rule does not apply to claims-made policies.

ANALYSIS

The medical expenses clause here is not the typical claims-made policy clause because coverage does not depend on reporting the claim to the insurer during the policy period.

Unlike an occurrence policy, the medical expenses clause contains a reporting element essential to coverage. Regardless of fault, the clause covers medical expenses up to $20,000 provided: “The expenses are incurred and reported to us within one year of the date of the accident.” (Italics added.) Coverage is triggered not by the accident, but by reporting the medical expenses within one year of the date of the accident.

Claims-made policies are essentially reporting policies. Because the medical expenses clause makes notice an element of coverage, the application of  the notice-prejudice rule would materially alter the insurer’s risk. Kenton argues that the medical expenses clause is analogous to an occurrence policy. The medical expenses clause is more correctly classified as claims-based because the reporting requirement is an element  of coverage.

Kenton contends that he should be “equitably excused” from complying with the one-year reporting requirement because he did not know of the policy’s existence within the one-year reporting period.  If the one-year reporting requirement here were a condition precedent that could be excused if equity required it, equity would not require that it be excused under the particular circumstances of this case.

The Court of Appeal concluded that Kenton was unjustifiably dilatory in reporting his medical expenses claim to Fireman’s. From the beginning, Kenton took it for granted that G & L was insured. In a November 2010 letter to G & L asserting his client’s claim, Kenton’s counsel requested that G & L “forward this letter to your liability insurance carrier.” Counsel did not ask for the policy number and name of the carrier so that he could contact it. Nor did he ask whether the policy provided for the payment of medical expenses and, if it did, whether special reporting requirements applied. Kenton alleged that, during discovery in September 2012, approximately two years after the accident, he first “learned of the existence” of Fireman’s’ policy. Kenton did not diligently pursue the medical expenses issue at that time. Kenton’s counsel declared that it was not until seven months later, on April 25, 2013, that he “directed his staff to demand medical payments benefits from” Fireman’s.

The court of appeal agreed, therefore, with the trial court’s conclusion that Kenton knew of his injuries in October 2010. He and his counsel, acquired soon thereafter, were in control of his litigation, and in control of requesting insurance information. Since Kenton gave notice to G & L and since G & L failed to notify its carrier would, at most, support a claim against G & L.

ZALMA OPINION

This case teaches that a person making a bodily injury claim against a third party who it knows, or believes, is insured should always ask if there is medical payments coverage available and, if so, what is required to make the claim. Counsel did not ask and even when he learned of the existence of medical payments coverage he did nothing to pursue the claim for seven months. Kenton not only has a case against G&L for failing to report his claim, he has a case against his lawyer for failing to protect his rights.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Plaintiffs’ Lawyers Need to Understand Insurance

Is Drunken Brawl Resulting In Death Covered?

Agent Only Responsible for Acquiring Policy Ordered

In Atlantic Cas. Ins. Co. v. Norton, Slip Copy, 2015 WL 1293666 (E.D.Tenn., 3/23/15)  a patron at the Grill & Pub died at a tavern owned and operated by Grover Norton in Harriman, Tennessee. A patron of the tavern accidently backed his vehicle into another vehicle in the tavern’s parking lot. A dispute then arose between several patrons leading to the violent beating death of David Lee Harvey. A wrongful death lawsuit was filed against Norton and others. Atlantic Casualty Insurance Company brought this declaratory action seeking a declaration that it has no duty to defend or indemnify Norton in the action. Norton has filed a Third–Party Complaint for failure to procure insurance against AGA Insurance, Inc. The parties filed cross-motions for summary judgment.

Atlantic claims that it does not owe Norton a duty to defend or indemnify him in the wrongful death lawsuit. Atlantic asserts that the allegations in the wrongful death lawsuit are excluded from coverage pursuant to the terms of the insurance policy Atlantic issued to Norton including, but not limited to, the policy’s “Assault and/or Battery” exclusion.

Norton also filed a Third–Party Complaint against AGA Insurance, Inc., alleging that he relied on AGA to exercise due diligence in providing a policy that would protect him for foreseeable perils such as the assault and battery described in the wrongful death lawsuit. Therefore, to the extent that coverage is not available to him under the policy of insurance with Atlantic, AGA should be held liable for any damages assessed against Norton as a result of its intentional or negligent acts, omissions, or misrepresentations related to procurement of coverage for the tavern.

APPLICABLE POLICY PROVISIONS

Atlantic issued a commercial lines insurance policy to Grover Norton d/b/a/ The Grill & Pub. The assault and battery exclusion provided: “This insurance does not apply to and we have no duty to defend any claims or “suits” for ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ arising in whole or in part out of:a)  the actual or threatened assault and/or battery whether caused by or at the instigation or direction of any insured, his employees, patrons or any other person;…”

ANALYSIS

As a general rule, Tennessee law construes any ambiguities in an insurance policy in favor of the insured. Yet, if the terms of the policy are clear, the court enforces insurance contracts “according to their plain terms” with the language construed in its “plain, ordinary and popular sense.” Tennessee courts do not create a new insurance contract for the parties.

Assault And Battery Exclusion

The underlying wrongful death Complaint alleged that Eric Glen Gallaher, Derek Lynn Gallaher, Devin Lee Bertram, and Anderson Treavin Wright, either acting alone or in concert with one another, did unlawfully, negligently, recklessly or intentionally assault and kill David Lee Harvey in the parking lot of The Grill and Pub owned and operated by the Defendant, Grover Norton. It also alleged that Grover Norton failed to exercise reasonable care by failing to operate the Grill and Pub and its parking lot in such a fashion so that it would not attract or provide a climate for crime such as was perpetrated on David Lee Harvey as alleged herein.

Commercial general liability policies are designed to protect an insured against certain losses arising out of business operations. Commercial general liability policies are divided into several components, including the insuring agreement, which sets the outer limits of an insurer’s contractual liability, and the exclusions, which help define the shape and scope of coverage by excluding certain forms of coverage.

The court concluded that the claims in the wrongful death action fall squarely under the policy’s exclusion. Courts construing similar policy provisions have found similar claims excluded by the policy’s Assault and/or Battery exclusion.

Norton does not challenge the validity of the Assault and/or Battery exclusion, or contest that it applies to the allegations in the underlying case; instead, he argues that the insurance agent, AGA Insurance Inc., failed to secure proper coverage for his business, and that this failure is attributable to Atlantic, because AGA is the agent of the insurer, Atlantic, and not the insured.

Responsibility of Broker

Under Tennessee law, a cause of action for failure to procure insurance is separate and distinct from any cause of action against an insurer, and the agent, rather than the insurance company, is independently liable. Norton alleges in his Third–Party Complaint that he assumed he had coverage for assaults and batteries, and he believed he had coverage for the type of incident that is at issue in the wrongful death lawsuit.

In his affidavit, Norton does not state that he instructed AGA to obtain a policy with assault and battery coverage, or that AGA made a mistake in carrying out his instructions. Nor does he state that at any time during the 20 years he purchased insurance from AGA, he ever asked AGA to obtain assault and battery coverage for him. AGA was acting as Norton’s agent, not Atlantic’s. Therefore the alleged actions by AGA do not bind Atlantic to coverage for the allegations of assault and battery in the wrongful death lawsuit.

The insured may recover from the agent the loss he sustains as a result of the agent’s failure to procure the desired coverage if the actions of the agent warrant an assumption by the client that he was properly insured in the amount of the desired coverage. An agent or broker is liable for failure to procure on the theory that he or she is the agent of the insured in negotiating for a policy, and owes a duty to the principle to exercise reasonable skill, care, and diligence in effecting the insurance.

The elements of a cause of action for failure to procure are: (1) an undertaking or agreement by the agent or broker to procure insurance; (2) the agent’s or broker’s failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure; and (3) the agent’s or broker’s actions warranted the client’s assumption that he or she was properly insured.

Norton testified he had purchased insurance for his tavern through AGA since approximately 1990. Norton admitted he did not talk to the agent or anyone else at AGA about obtaining a policy providing coverage for assault and battery, and no one at AGA ever told Norton the policies being purchased would provide coverage for assault and battery. Norton received a copy of the Atlantic policy and later received copies of the policy upon renewal. Norton acknowledged that he did not read the policy. Bob Layton, the agent with AGA who initially procured insurance coverage for Norton, testified that exclusions for assault and/or battery are universal with commercial liability policies, and that each property and commercial liability policy secured through AGA contained a similar exclusion.

Under Tennessee law, an insured, upon receipt of the policy, is conclusively presumed to have read, understood and assented to all provisions of the policy. Norton requested a property and commercial liability policy, and AGA procured a property and commercial liability policy as requested. An insurance agent does not owe a duty to sell customers more coverage than requested or selected. The agent’s obligation to the customer ends when the coverage requested by the customer is obtained

Norton received renewal notices and policies over 20 years, detailing the scope of his commercial liability coverage, Norton is presumed, as a matter of law, to possess full knowledge of the coverage provisions, irrespective of whether he actually read the policies. Tennessee law is clear that “in the absence of fraud or mistake, an insured cannot claim that he is not bound by the contract of insurance, or certain provisions thereof, because he has not read it, or is otherwise ignorant of, or unacquainted with its provisions.” Webber v. State Farm Auto. Ins. Co., 49 S.W.3d 265, 274 (Tenn.2001).

Summary judgment was granted for both the insurer and the broker.

ZALMA OPINION

Over the last 42 years I have asked insureds, under oath, if they read and understood their policy. Only two answered “yes” and further questioning proved both lied. In this case Norton admitted he had not read his policy and its renewals over a 20 year period and still claimed he was entitled to assault and batter coverage and dram shop coverage. The policy issued to him was clear and unambiguous and he eventually gave up his case against the insurer and demanded the broker pay for not reading his mind and obtaining the coverage he needed for the first time after the death. The court, wisely, did not buy his argument.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is Drunken Brawl Resulting In Death Covered?

MCS-90 Controls

Insured May Sue on Behalf of Subrogated Insurer

Insurers of people operating trucks in interstate commerce are required to add to their policy a federally mandated endorsement known as the MCS-90 that expands the coverage available under the policy and requires the insurer to insure all vehicles operated by its insured even if the vehicle is not identified in the poicy.

This insurance dispute, raised by Tri–National, Inc. v. Yelder ,— F.3d —-, 2015 WL 1260491 (C.A.8 (Mo.) 3/20/15)  presented an issue of first impression in the Eighth Circuit  whether the federally mandated Motor Carrier Act (MCA) of 1980 and the MCS–90 endorsement for motor carriers required by the statute, requires a tortfeasor’s insurer to compensate an injured party when the injured party has already been compensated by its own insurer. The district court decided the MCS–90 endorsement requires such compensation and the insurer that issued the MCS-90 appealed.

BACKGROUND

On June 14, 2007, while operating a semi tractor and trailer, Larry D. Yelder Sr., an employee of Yelder–N–Son Trucking, Inc. (collectively, Yelder defendants), collided with a Tri–National, Inc. truck, causing extensive property damage. Tri–National filed a claim with its insurer, Harco Insurance Company, which paid Tri–National $91,100 and retained a subrogation interest in the claim.

At the time of the accident, the Yelder defendants were insured by Canal Insurance Company (Canal policy), which included an MCS–90 endorsement. In 2010, in the District Court for the Middle District of Alabama, Canal sought a declaratory judgment against the Yelder defendants and Harco, among others, declaring (1) Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy, and (2) the MCS–90 endorsement did not require Canal to satisfy Harco’s subrogation claim. The Alabama court entered default judgment against the Yelder defendants only, stating Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy, but the Alabama court made no declaration about the MCS–90 endorsement.

At a pretrial conference, Harco represented to the Alabama court that it was “not [Harco’s] intention to ever make a claim against [Canal],” and that it “would be Tri–National who would go after Canal, not Harco.” The Alabama district court dismissed Harco without prejudice “[b]y agreement of the parties made during a pretrial conference.”

Tri–National sued the Yelder defendants in Missouri state court and in July 2012 obtained a $91,100 default judgment. In November 2012, Tri–National filed a petition for equitable garnishment in Missouri state court against Canal in an effort to collect on the Missouri state court’s default judgment. According to Tri–National, the decision to file the petition was Harco’s, Tri–National had no input in the decision, and any proceeds from the garnishment action are “supposed to go directly to Harco.”

On opposing motions for summary judgment, the district court granted Tri–National’s motion and denied Canal’s. Canal claimed the district court erred by finding (1) Tri–National was the real party in interest, rather than its insurer, Harco; (2) the Alabama dismissal did not bar Tri–National’s suit for equitable garnishment in Missouri; and (3) the MCS–90 endorsement required Canal to satisfy Tri–National’s default judgment against the Yelder defendants.

DISCUSSION

Although Tri–National received $91,100 in payment for its loss from Harco, Tri–National, not Harco, holds the default judgment from the Missouri state court against the Yelder defendants. In Missouri, by statute, Tri–National, as the judgment creditor may proceed in equity against the Yelder defendants and Canal to reach and apply the insurance money to the satisfaction of the judgment and Harco may not. Missouri, unlike many states, provides that the legal title to the cause of action remains in the insured, and that the insurer’s only interest is an equitable right to subrogation.  The exclusive right to pursue the tortfeasor remains with the insured, which holds the proceeds for the subrogee insurer.

The general rule in federal court is that if an insurer has paid the entire claim of its insured, the insurer is the real party in interest under Federal Rule of Civil Procedure 17(a) and must sue in its own name. However, Canal is at no risk of being subjected to more than one suit here and the Eighth Circuit, therefore, concluded that Tri–National was the real party in interest.

Alabama Litigation

The Alabama court granted a default judgment in favor of Canal as to the Yelder defendants only, stating Canal had no duty to defend or indemnify the Yelder defendants under the Canal policy. It made no determination on the merits as to Canal’s obligations under the MCS–90 endorsement to Tri–National (who was not a party to the suit) or even to Harco (who was a party). Secondly the Alabama court dismissed Harco without prejudice “[b]y agreement of the parties,” with the expressed understanding that “Tri–National is not a party so they can still sue [Canal].” Therefore, the Alabama court did not render a prior final judgment on the merits as to Tri–National’s present claim on the MCS–90 endorsement issue and therefore Tri–National’s claim is not barred. The effect of a voluntary dismissal without prejudice renders the proceedings a nullity and leave the parties as if the action had never been brought.

The MCS–90 Endorsement

Canal argues the district court erred by finding the MCS–90 endorsement obligated Canal to reimburse Tri–National for its losses.

Congress enacted the MCA, in part, to address abuses that had arisen in the interstate trucking industry which threatened public safety, where motor carriers attempted to avoid financial responsibility for accidents that occurred while goods were being transported in interstate commerce. The Secretary of Transportation issued a regulation mandating that every liability insurance policy covering a “motor carrier” contain the MCS–90 endorsement. The MCS–90 provides a broad guaranty that the insurer will pay certain judgments incurred by the insured regardless of whether the motor vehicle involved is specifically described in the policy or whether the loss was otherwise excluded by the terms of the policy.

The MCS–90 endorsement states: “In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgment recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles … [under the] Motor Carrier Act of 1980 regardless of whether or not each motor vehicle is specifically described in the policy and whether or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere….¶ It is further understood and agreed that, upon failure of the company to pay any final judgment recovered against the insured as provided herein, the judgment creditor may maintain an action in any court of competent jurisdiction against the company to compel such payment.”

Previously, in a controversy among tortfeasors’ insurers, one of whom purchased an assignment of the injured party’s judgment against the tortfeasor and then sought contribution from the other tortfeasors’ insurers, the Eighth Circuit stated that a policy “ensuring speedy satisfaction of judgments attributed to negligent truckers[ ] is best served by a rule that allows ultimate financial burdens to be allocated after injured members of the public are compensated.”   Redland Ins. Co. v. Shelter Mut. Ins. Co., 193 F.3d 1021, 1022 (8th Cir.1999). Here too, we do not want to “encourage insurers” like Harco to engage in wrangling over such allocations before the public is compensated, rather than satisfy Tri–National’s claim from the outset, as Harco did in this case.

We also note that under the MCS–90 endorsement, Canal has the right—and Harco does not—to demand reimbursement from the Yelder defendants.

The Eighth Circuit concluded that the fact Harco satisfied Tri–National’s claim does not preclude Tri–National from asserting its rights as a member of the general public under the MCS–90 endorsement. It agreed with the district court that the circumstance of Tri–National carrying its own insurance with Harco does not absolve Canal of its obligations under the MCS–90 endorsement.

ZALMA OPINION

The MCS-90 is a powerful tool for those who are injured by a trucker involved in interstate commerce. It takes away the opportunity to deny coverage just because the vehicle is not listed on the policy and greatly expands the exposure faced by the insurer. Because truckers sometimes lie to their insurer the statute allows it to recover payments from its insured if it pays a judgment and should encourage insurers of interstate truckers to underwrite its risks carefully.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on MCS-90 Controls

Captive Agent Must Use Ordinary Care

Should a Captive Agent be Treated Differently Than Other Insurance Agents

Captive agents are only allowed to sell products from the insurer with whom it has contracted. As a result the markets available to them are limited since most insurers that use captive agents limit the type of insurance they can sell. Regardless, the captive agent owes a duty to the insured to acquire the insurance they ask for if available from the insurer with whom the contract.

The Supreme Court of Illinois was asked to determine whether an insurance company’s agent had a duty to exercise ordinary care and skill in procuring the specific insurance coverage requested by his customer. The appellate court held section 2–2201 of the Code of Civil Procedure (Code) (735 ILCS 5/2–2201 (West 2010)), imposes a duty on an insurance agent to act with ordinary care under the circumstances presented in this case. In Skaperdas v. Country Cas. Ins. Co., — N.E.3d —-, 2015 IL 117021, 2015 WL 1255014 (Ill., 3/19/15) the Supreme Court analyzed the statute and state court precedent before deciding the obligation owed by a captive agent to the insured.

BACKGROUND

In 2006, Country Casualty Insurance Company, through its agent Tom Lessaris, issued an automobile insurance policy to Steven A. Skaperdas. Skaperdas’s fiancée, Valerie R. Day, was subsequently involved in an accident while driving one of his vehicles. Country Casualty covered the loss but required Skaperdas to change his policy to include Day as an additional driver.

Skaperdas met with Lessaris to request coverage for Day under the insurance policy. Lessaris prepared the policy, but identified only Skaperdas as a named insured. Day was not included as a named insured under the policy. The declarations page for the policy, however, identified the driver as a “female, 30–64.”

Following issuance of the policy, Day’s minor son, Jonathon Jackson, was struck by a vehicle while riding his bicycle and seriously injured. The driver’s automobile insurance policy limit of $25,000 was insufficient to cover Jackson’s medical expenses. Plaintiffs, therefore, made a demand for underinsured motorist coverage under the Country Casualty policy. Country Casualty denied the claim on the ground that neither Day nor Jackson was listed as a named insured on the policy.

Skaperdas and Day, on behalf of herself and as representative of Jackson, filed a complaint alleging in count I that Lessaris was negligent in failing to procure the insurance coverage requested by Skaperdas. Plaintiffs alleged Lessaris breached his duty to exercise ordinary care and skill in renewing, procuring, binding, and placing the requested insurance coverage as required by the code. In count II, plaintiffs alleged Country Casualty was responsible for the acts or omissions of its agent under the doctrine of respondeat superior.

Lessaris moved to dismiss the negligence claim. Lessaris claimed he did not owe plaintiffs a duty of care in procuring the requested insurance coverage. Country Casualty also filed a motion to dismiss the claim based on respondeat superior, asserting that it was not liable for the alleged negligence of Lessaris because he did not owe plaintiffs a duty.

The appellate court held that a plain reading of the statute together with the definition of “insurance producer” established that “any person required to be licensed to sell, solicit, or negotiate insurance has a duty to exercise ordinary care in procuring insurance.” Accordingly, the appellate court concluded that as an insurance producer, Lessaris owed plaintiffs a duty of care in procuring insurance coverage for them. The appellate court, therefore, reversed the trial court’s dismissal of counts I and II of plaintiffs’ complaint and remanded for further proceedings.

ANALYSIS

On appeal to this court, Lessaris contends that the statute does not impose a duty of ordinary care on a “captive insurance agent” to procure a specific type or amount of coverage for a client. A captive agent of an insurance company owes a duty to the company, not to the insured. Lessaris argues that only insurance brokers owe a fiduciary duty to an insured by virtue of being employed by the insured, and the statute is intended to limit the liability of insurance brokers in a fiduciary relationship. Thus, according to Lessaris, the statute applies only to insurance brokers. Lessaris contends the statute is not intended to create a new duty for captive agents to insureds. Accordingly, as a captive agent of Country Casualty, he owed no duty to plaintiffs.

In interpreting a statute, no part should be rendered meaningless or superfluous.
Section 2–2201 of the Code provides, in pertinent part: “Ordinary care; civil liability. ¶  (a) An insurance producer, registered firm, and limited insurance representative shall exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.”

This court has observed that insurance law distinguishes between an agent and a broker, stating “‘A broker is an individual who procures insurance and acts as a middleman between the insured and the insurer, who solicits insurance business from the public under no employment from any special company and who, having secured an order, places the insurance with the company selected by the insured, or in the absence of any selection by the insured, with a company he selects himself. [Citation.] An agent is an individual who has a fixed and permanent relation to the companies he represents and who has certain duties and allegiances to such companies.’” Zannini v. Reliance Insurance Co. of Illinois, Inc., 147 Ill.2d 437, 451 (1992).

The terms of subsection (a) may reasonably be applied to both captive agents and brokers. According to subsection (a), an insurance producer must exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured. The Illinois Supreme Court has long held that “‘every person owes a duty of ordinary care to all others to guard against injuries which naturally flow as a reasonably probable and foreseeable consequence of an act, and such a duty does not depend upon contract, privity of interest or the proximity of relationship, but extends to remote and unknown persons.’”  Therefore the statute imposes a duty that requires an insurance producer to exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or proposed insured.

The statute does not require an agent to obtain the best possible coverage for a customer, but only requires the agent to exercise ordinary care and skill in obtaining the coverage requested by the insured or proposed insured. If an agent’s company does not offer the coverage requested, the agent may satisfy the duty by simply notifying the customer that he or she should look elsewhere for the requested coverage.

In ruling on a section 2–619 motion to dismiss, the well-pleaded allegations of a complaint must be taken as true. Plaintiffs allege Lessaris failed to exercise ordinary care in procuring the insurance coverage they specifically requested. The declarations page showing the addition of a driver “female, 30–64” indicates that Skaperdas actually requested the extension of coverage to Day. Plaintiffs allege Country Casualty required Skaperdas to add Day as an additional driver on the policy after she was involved in an accident while driving one of his vehicles. Taken as true, those allegations show that a specific request for coverage was made in this case.

ZALMA OPINION

Insurance agents, whether independent or captive, like every person in the United States owe a duty of ordinary care to not cause harm to another. It is the general duty owed by every person to every other person. An captive insurance agent is not absolved of that duty simply because he or she is a captive of an insurer or by a convoluted interpretation of a statute. In this case the court assumes that the pleadings are true. The plaintiffs will still need to prove that the agent failed to exercise ordinary care and provide the coverage requested.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Captive Agent Must Use Ordinary Care

No Way to Avoid Workers’ Compensation

On The Books or Not Employee Entitled to Workers’ Compensation

It is axiomatic that workers’ compensation benefits are the sole and exclusive remedy of an employee against his employer for injuries in the course of employment. This precludes suits against an employer for injuries in the course of employment. It also prevents an employer from providing workers’ compensation benefits by keeping the employee off the books, paying the employee in cash, and avoiding the need to withhold taxes, social security, and other government mandated deductions required of honest employers.

In De Los Santos v. Butkovich, — N.Y.S.3d —-, 2015 WL 1213494 (N.Y.A.D. 2 Dept., 3/18/15), the defendants, in support of their motion for summary judgment, presented evidence that the plaintiff was an employee of the defendant N.B. Painting and Decorating Corp. (hereinafter N.B. Painting), who was injured in the course of his employment, and that N.B Painting maintained a Workers’ Compensation policy on the date of the accident.

Accordingly, the defendants established prima facie that the exclusivity provisions of Workers’ Compensation Law § 11 barred the plaintiff from seeking a recovery in tort against N.B. Painting.

All employees of an employer are deemed covered by the employer’s workers’ compensation policy, regardless of whether an employee may have been working “off the books,” where the employer has secured a policy of insurance coverage. Consider, for example Baljit v. Suzy’s Dept. Store, 211 A.D.2d 555, 555 and Vargas v. Crown Container Co ., Inc., 114 AD3d 762, 764) that support the position.

Accordingly, the trial court should have granted that branch of the defendants’ motion which was for summary judgment dismissing the complaint insofar as asserted against the defendant N.B. Painting.

ZALMA OPINION

The New York Supreme Court, Appellate Division, in another of its wonderful brief and to the point opinions made it clear that an employee – whether officially on the books with his taxes withheld – is still an employee entitled to workers’ compensation benefits.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Way to Avoid Workers’ Compensation

Silica Dust Is a Pollutant

Pollution & Faulty Workmanship Destroy Coverage for Property Loss

No insurance policy covers an insured against every possible risk of loss. “All Risk” policies do not cover every potential risk of loss to property. All contain exclusions that limit the agreement to indemnify the insured against certain categories of risk. Defendants issued a first-party insurance policy to plaintiff covering certain of plaintiff’s property, including a building in a government complex containing real property owned by plaintiff, the State and the City of Binghamton.

FACTS

During construction on a parking garage underneath a building that plaintiff owns, and during the policy’s coverage period, construction work caused silica dust to migrate up an elevator shaft and disperse into all of the floors in plaintiff’s building.

THE TRIAL COURT

In Broome County v. Travelers Indem. Co., — N.Y.S.2d —-, 125 A.D.3d 1241, 2015 WL 790256 (N.Y.A.D. 3 Dept., 2/26/15), 2015 N.Y. Slip Op. 01697, after defendants disclaimed coverage for this incident, plaintiff sued alleging that the property damage resulting from the spread of silica dust was a loss covered under the policy. Defendants moved for summary judgment dismissing the complaint and plaintiff cross-moved for summary judgment establishing coverage as a matter of law.

The Supreme Court (trial court in New York) found that a pollution exclusion in the policy did not bar coverage, but that there were issues of fact as to whether a faulty workmanship exclusion barred coverage.

ANALYSIS

An insurer seeking to invoke a policy exclusion must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. To determine whether a policy provision is ambiguous, courts are guided by “the reasonable expectations of the average insured upon reading the policy” The meaning of any part of such a policy must be determined upon consideration of the policy as a whole. In addition, an insurance contract should not be read so that some provisions are rendered meaningless. Upon applying these rules of construction, if an insurance policy’s meaning is not clear or is subject to different reasonable interpretations, such an ambiguity must be resolved in favor of the insured. However, if the exclusions are clear and unambiguous they must be enforced.

The appellate court concluded that the defendants were entitled to summary judgment based on the pollution exclusion clause. Pursuant to that exclusion in the policy, defendants will not cover loss resulting from the “[d]ischarge, dispersal, seepage, migration, release or escape of ‘pollutants.’” As defined in the policy, “‘[p]ollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, waste and any unhealthy or hazardous building materials (including but not limited to asbestos and lead products or materials containing lead).”

The record contained unrebutted evidence that silica dust can cause lung disease and respiratory problems, placing such dust within the policy definition of a pollutant as “unhealthy or hazardous building material[ ],” as well as a “solid … irritant or contaminant”.

The words “[d]ischarge, dispersal, seepage, migration, release or escape” are read as not intended to describe short migratory events where the relevant contaminant remains on the plaintiff’s property and does damage to it. If the exclusion was limited to the insured’s property, the exclusion would have no significance at all in this first-party policy. This is especially true when applied to the portion of the definition of pollutants addressing “building materials” including asbestos and lead paint. Applying the only reasonable reading that gives the pollution exclusion here a meaning under a first-party insurance policy, that exclusion precludes coverage for the loss at issue (see Space v. Farm Family Mut. Ins. Co., 235 A.D.2d 797, 798–799 [1997]; and American Heritage Realty Partnership v. LaVoy, 209 A.D.2d at 750, 618 N.Y.S.2d 125).

Defendants are also entitled to summary judgment dismissing the complaint based on the faulty workmanship clause.

The policy exclusion for faulty workmanship states that defendants “will not pay for loss or damage caused by or resulting from … [f]aulty, inadequate or defective … (2) … workmanship, repair, construction, renovation [or] remodeling.” Plaintiff conceded, in its response to interrogatories, that the loss here resulted from the absence of adequate protective barriers to prevent construction dust from infiltrating the elevator shaft and the building. The unrebutted record evidence establishes that a flawed process on the part of the contractors led to the loss at issue.

The average insured would reasonably expect the exclusion to apply to faulty workmanship whether it was caused by a flawed process or measured by the flawed quality of the finished product (see Wider v. Heritage Maintenance, Inc., 14 Misc.3d 963, 974–975 [2007]; Schultz v. Erie Ins. Group, 754 N.E.2d 971, 976–977 [Ind Ct App 2001]; see also Village of Potsdam v. Home Indem. Co., 52 A.D.2d 278, 280 [1976]; compare Maxwell v. State Farm Mut. Auto. Ins. Co., 92 A.D.2d 1049, 1050 [1983]; but see Allstate Ins. Co. v. Smith, 929 F.2d 447, 449–450 [9th Cir1991] ).

Additionally, the ensuing loss exception does not apply here. “Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk” (Narob Dev. Corp. v. Insurance Co. of N. Am., 219 A.D.2d 454, 454 [1995], lv denied 87 N.Y.2d 804 [1995] [citations omitted] ).

The faulty workmanship here was the failure to erect adequate dust barriers, and the resulting loss came from the spread of dust. Thus, the loss was directly related to the original excluded risk. Inasmuch as no ambiguity exists in the faulty workmanship exclusion, plaintiff has conceded that the loss was caused by a flawed construction process and no exception applies, the faulty workmanship clause precludes coverage for the loss at issue. Hence, defendants are entitled to dismissal of the complaint.

ZALMA OPINION

This case, in addition to holding that a clear and unambiguous policy exclusion, must be enforced, also notes that there is no requirement to describe every possible pollutant in a pollution exclusion. Although it did not mention the words “silica dust” the court had no problem establishing that it was a pollutant. In the decision the New York Supreme Court, Appellate Division, Third Judicial Department, held that the silica exposure fit the definition of a “unhealthy or hazardous building material” in the policy’s pollution exclusion. In addition it also held that the faulty workmanship exclusion applied since the plaintiff admitted that the cause was failure to block the dust from migrating to the building.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Silica Dust Is a Pollutant

The Equitable Remedy of Rescission

A Tool to Defeat Fraud

Most insurance fraud perpetrators know crime but have no knowledge of insurance. It is difficult to prove fraud in the presentation of a claim. It is relatively easy, on the other hand, to rescind a policy if the fraudster lies to get the insurance in the first place.

Rescission

Rescission is an equitable remedy as ancient as the common law of Britain. (Carter v. Boehm, S.C. 1 Bl.593, 3 Burr 1906, British House of Lords, 11th May 1766)

When the United States was conceived in 1776 the founders were concerned with protecting their rights under British common law. They adopted it as the law of the new United States of America modified only by the limitations placed on the central government by the U.S. Constitution approved in 1789.

The viability and ability to enforce contracts was recognized as essential to commerce. Courts of law were charged with enforcing legitimate contracts. Courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.

The common law developed rules that courts could follow to refuse to enforce the terms of a contract that was entered into because of mutual mistake of material fact, a unilateral mistake of material fact, the breach of warranty (a presumptively material promise to do or not do something), a material concealment, or a material misrepresentation. The remedy – called rescission – created a method to apply fairness to the insurance contract and allow an insurer to void a contract and allowed courts to refuse to enforce such a contract entered into by misrepresentation or concealment of material facts.

Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith. Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.

Rescission, since before the U. S. Constitution, became an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission.

In most states the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or simply an innocent misrepresentation or concealment of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, are expected to be fair. Some states, like California, follow the ancient equitable remedies and have codified the right to rescission of insurance contracts. The legislative right to rescission arose because legislatures considered it unfair to make a contracting party abide by a contract that was not obtained fairly. The ancient maxim that “No one can take advantage of his own wrong”  is applied when a court is faced with a request to confirm rescission. Other states have imposed limitations on insurers in their state and make the ability to rescind a contract of insurance more difficult than it was under the common law.

Insurers must use the rescission remedy with care. Insurers should never assume that the promise to pay indemnity to the insured under a policy of insurance can, with impunity, be broken by advising the insured that the insurer has rescinded the policy.

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Rescission without a thorough investigation is dangerous. Where no valid ground for rescission exists, the threat or attempt to seek such relief, may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.

One plaintiffs’ lawyer became wealthy when he learned that claims people were given a rubber stamp that said “RESCISSION” and had no idea what it was. He would take the claims person’s deposition and ask them to spell the word. When the claims person failed his bad faith case was established. When they spelled the word correctly, he would ask the adjuster to state the elements necessary to effect a rescission. Almost none could answer.

California, with a Draconian rescission law, still make it clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations, easily proven, of extra-contractual torts. (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 184, 243 Cal. Rptr. 639.)

If sufficient evidence exists, the rescission remedy will deprive the insured or the insurer of all rights under the policy. The court will conclude that the contract never existed and neither party has any right under the contract.

Bases for Rescission

The primary bases for rescission are:

  1. misrepresentation or material fact(s),
  2. concealment of material fact(s),
  3. mistake of material fact(s),
  4. mistake of law,

ZALMA OPINION

Rescission is an important remedy available to both parties to an insurance contract. It should be used with care and the advice of competent counsel. This article was adopted from my e-book on rescission and is available at http://www.zalma.com/zalmabooks.htm.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on The Equitable Remedy of Rescission

Interview Techniques

The following article dealing with interview techniques is adapted from my E-Book, “Getting the Whole Truth” available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.  It will provide you with a few ideas for obtaining the truth in every interview, deposition, examination under oath, or interrogation.

Misdirection and Indirect Questioning

Every professional interviewer is adept at using the technique of indirect questioning to obtain information. Indirect questioning is often the best technique, and sometimes the only one that will work. The professional poses what appear to be innocuous questions in a way that conceals the real purpose behind them. Such questions are acutely purposeful, but are designed to appear unimportant, as if the interviewer is just making friendly conversation. From the point of view of the subject, they should appear to have little or no bearing on the case.

Like a real-life Lieutenant Columbo, however, the skilled interviewer operates with the knowledge that seemingly inept, offhand, casually delivered questions frequently help produce information that leads to the truth.

The professional gains proficiency in this technique by constantly developing a taste and a talent for small talk. You can conduct informal information-gathering interviews with subjects anywhere, whether they be chats in hallways or conversations at the coffee machine . . . wherever the subject does not expect or believe the interaction to be of the “official” interview type.

Indirect questioning involves two commingled factors: word phrasing and delivery.

Delivery

The importance of your choice of words, and the effect of your delivery, can be illustrated by the variety of uses to which a common word like “you” can be put. That word, when shouted in your direction in a strange town by a police officer, would make you feel apprehensive and compel you to stop in your tracks. “You” uttered sweetly by one lover to another would convey a completely different meaning. The word is the same. The delivery is the important difference.

The interviewer’s expression of indifference will prick the ego of the person interviewed who is suspected of being an embezzler or fraud perpetrator and cause him or her to explain how effective he or she was at committing the fraud. Details on how the embezzlement was perpetrated will flow from the person interviewed before he or she realizes that wrongdoing was admitted.

Word Choice and Phrasing

The skilled interviewer should try to inject into an interview the relevant terminology that insurance professionals (or art appraisers, or construction engineers, as the case may be) would be conversant with. If the person interviewed understands what the interviewer is referring to, that establishes that he or she is not unknowledgeable in the field.

The interviewer, by a studied facility with word choice and a subtle sense of phrasing, can convey to the subject that he or she doubts the expertise claimed by the subject, without insulting him or her. Face with such articulate delivery, the subject will be anxious to match the interviewer with his or her own demonstration of specialized expertise in order to prove competence. Even the person making a fraudulent claim of art theft will be eager to show off his or her years of art expertise.

The Backhanded Compliment

In comedies, we laugh when we see actors barricading a door by piling on chairs, tables, and sofas to keep out an assailant who then comes through an open window. This is very similar to the techniques of misdirection that a skilled interviewer uses to divert attention or throw a subject off guard.

As an interviewer walks into a room to conduct an investigation into a burglary case, he senses immediate antagonism from the person to be interviewed.

“I don’t know why they consider you a suspect,” the interviewer leads. “This is way out of your line. This job took guts and brains. Taken were diamonds, a mink jacket, and expensive stuff an amateur like you wouldn’t know how to pawn or fence. Look at you! In those clothes you look so damn seedy you should be arrested for vagrancy!”

“Like hell,” the subject responds, to his immediate regret and ultimate detriment. “That night I had on my good suit.”

The prideful subject, clearly more concerned with a perceived insult contained in the interviewer’s cleverly delivered misdirection than with keeping mum, lets down his guard. Tricked by a simple ruse, despite all intentions to the contrary, he admits participation in the crime. One second too late he realizes he fell into the trap that can be set by carefully delivered misdirection.

Make Only Promises You Can Keep

The professional never makes a promise that he or she knows cannot be fulfilled. An interviewer will lose all credibility if the subject perceives that the interviewer does not have the power to effect terms or conditions that he or she vows are guaranteed.

Just as a physician will never promise a patient a cure, the professional dealing with an insurance claim will never promise the claimant that giving a confession will result in payment. When interviewing for an embezzlement case, no professional will ever promise criminal immunity.

If asked, the interviewer must say, “I have no power to make any promises in regard to payment of a claim, immunity from prosecution, or a lesser sentence if you decide to tell the truth.

“I could tell you that you won’t be arrested or go to jail, but that would be lying to you. I haven’t told you any lies here today, and I’m not going to start now. Those things are out of my hands. I’m only here to find out exactly what happened.”

The subject may be looking for assurance and promises, but if the interviewer is “caught out’” in a meaningless promise all his or her hard work will be for naught.

When an interviewer honestly tells the subject at the outset that promises of leniency from other authorities cannot be made, the subject enters the interview knowing that the interviewer is not going to attempt tricks or practice deception. This may overcome the criminal subject’s natural distrust of investigators. With his or her trust in the interviewer reinforced, he or she becomes more and more likely to tell the truth with every urging on the interviewer’s part.

The tone conveyed is as important as the words spoken. The person interviewed must be convinced that the interviewer is interested only in him and in saving him or her from even more serious problems.

An insurance agent or broker should never promise to get the person interviewed a policy that “covers everything.” Rather, the professional, in the role of broker or agent, should tell the potential insured, “I will try to get you the best policy I can. No policy covers everything. Some cover more than others. With total information—absolute truth—I can get you the best coverage available.”

This type of prudence is not for purposes of interview strategy alone: if false promises are made, the insured could later bind the insurer to coverage not intended and a lawsuit, in the event of a loss from a peril not covered by the policy, could ensue. The hard-won truth will become legally and practically tainted, and the hours of interview time will be rendered less than useless.

The interviewer who makes a false promise is simply dishonest, and will be perceived as such. This is especially true in cases where a person confesses to some criminal activity after being promised leniency or a “not guilty” decision. In the courts, prosecutors are not allowed to use confessions gained in this manner. A prudent judge, learning how the confession was obtained, will dismiss the case. The US is a litigious society, and it is common knowledge that false promises made to gain information will destroy a legitimate defense in a jury trial, too, once it becomes apparent that the investigating party acted unprofessionally.

ZALMA OPINION

Everyone dealing with insurance must be adept at interviewing whether an agent, broker, claims representative, lawyer, underwriter or executive. Information is the essence of insurance and must be obtained at the beginning when a policy is offered to an insured and when a claim has been made.  The insurer that gets full and honest information will have an advantage over the insurer that does not.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Interview Techniques

When Is an Exclusion “Conspicuous, Plain and Clear”

There is no Duty to Defend if There is no Potential for Coverage

Insurance policies must be interpreted with care. Since they are contracts of adhesion they are usually interpreted with a bias towards providing coverage for the insured. When an insured provides the information necessary to convince a court that there is a potential for coverage unless the insurer can prove that a conspicuous, plain and clear exclusion defeats coverage.

When a toymaker used Mr. Fuller’s name and designs without permission – or payment of a license fee – to build and sell toys based on the geodesic dome design and other efforts of Mr. Fuller owned by its estate, the estate sued the toy maker. The toymaker sought coverage from its insurer who refused to defend or indemnify the toymaker. It dissolved and assigned its rights against its insurer to the estate who tried to get insurance funds in Alterra Excess and Surplus Insurance Company v. Estate of Fuller, — Cal.Rptr.3d —-, 2015 WL 1054972 (Cal.App. 1 Dist., 3/9/15).

The Estate of Buckminster Fuller (Estate) appealed from a judgment on the pleadings holding that Alterra Excess and Surplus Insurance Company (Alterra) had no duty to defend, and therefore no duty to indemnify, its insured in an action brought by the Estate against the insured. The basis of the judgment was that an exclusion in the Alterra policy, referred to by all below as the “intellectual property” exclusion, applied to preclude any obligation on the part of Alterra. We reach the same conclusion, and we affirm.

BACKGROUND

R. Buckminster Fuller, nicknamed “Bucky” (Fuller), was a celebrated designer, author, and inventor. He was credited with many, and diverse, creations, and was particularly well known for popularizing the geodesic dome. He died in 1983. According to the Estate’s own pleadings, in 1985 it registered its claim as the successor-in-interest to all of Fuller’s rights, and has “licensed those rights on many occasions. In 2004, the U.S. Postal Service licensed the rights to Bucky’s image for a postage stamp. In 2003, Xerox Corporation licensed rights to Bucky’s name and likeness.” In short, it appears that various commercial enterprises have used Fuller, and perhaps his nickname, to assist in the marketing of their product.

At some point, Maxfield & Overton Holdings, LLC (Maxfield) entered the picture, attempting to do just that—apparently without permission or payment. Specifically: Beginning at least as early as 2009, Maxfield manufactured and distributed several products under the Buckyball and related trademarks. Again according to the Estate’s pleadings, these items included several variations on Buckyballs, Buckyball gift packs, Buckycubes, Bucky sidekick, and The Big Book of Bucky. Buckyballs are 216 round rare earth magnets packaged in a cube shape. The packaging states: Buckyballs by Zoomdoggle. The included Quick State Guide demonstrates several shapes that can be made with the round magnets.

The Big Book of Bucky is a paperback book which provides instructions on how to make various shapes with Buckyballs. The book states: ‘Buckyballs were named for Buckminster Fuller.’ After briefly summarizing Bucky’s accomplishments, it states: ‘He was smart, He was crazy. He was fun. Remind you of anything?’

The Underlying Action

On May 18, 2012, the Estate filed an action against Maxfield in the United States District Court, Northern District of California: Estate of Buckminster Fuller v. Maxfield & Oberton Holdings, LLC, Case No.: 5–12–CV–02570.

Maxfield tendered defense of the underlying action to Alterra, which agreed to defend under a reservation of rights and appointed Cumis counsel to defend the case. Soon thereafter Alterra filed the second lawsuit involved here: the action for declaratory relief.
The Estate received an Assignment of Claims as part of a settlement with the [Maxfield] Liquidating Trust.

Pursuant to the Delaware Limited Liability Act (18 Del. Code, § 803), Maxfield’s dissolution prohibited it from defending any action. In light of this, Cumis counsel withdrew, leaving Maxfield unrepresented. At this point, Alterra intervened in the underlying action to defend Maxfield’s position. The underlying action has since been stayed pending resolution of this coverage action.

DISCUSSION

A duty to defend exists whenever the lawsuit against the insured seeks damages on any theory that, if proved, would be covered by the policy. Thus, a defense is excused only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Thus, an insurer may have a duty to defend even when it ultimately has no obligation to indemnify, either because no damages are awarded in the underlying action or because the actual judgment is for damages not covered by the policy.

Those liberal, pro-insured rules notwithstanding, there is no duty to defend if there is no potential for coverage. As the leading California insurance treatise puts it, “The insurer’s duty to defend does not extend to claims for which there is no potential for liability coverage. This includes claims falling outside the scope of the insuring clause, or within an express exclusion from coverage, or barred by statutory or public policy limitations. ‘The insurer need not defend if the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage’ [Citations.].” (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2014) § 7:537, pp. 7B–16–17 (Croskey).)

As our Supreme Court put it in its most recent pronouncement on the subject: “In determining whether a claim creates the potential for coverage under an insurance policy, ‘we are guided by the principle that interpretation of an insurance policy is a question of law.’ [Citation.] ‘Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code, § 1636.)’ [Citation.] In determining this intent, ‘[t]he rules governing policy interpretation require us 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.’ [Citation.] We 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.” ’ [Citation.] We must also ‘interpret the language in context, with regard to its intended function in the policy.’ [Citation.]” (Hartford Casualty Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 288, 172 Cal.Rptr.3d 653, 326 P.3d 253.)

The Policy

The policy contained, as part of a standard form:

“2. Exclusions

“i. Infringement Of Copyright, Patent, Trademark Or Trade Secret

“ ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement’. [¶] However, this exclusion does not apply to infringement, in your ‘advertisement’, of copyright, trade dress or slogan.”

Trial Court Decision

The trial court held that Alterra had no obligation under the policy because exclusion i, which the court called the “intellectual property exclusion,” applied here.

DECISION

The exclusion is on an Insurance Services Office (ISO) industry form (CG 00 01 12 07). The exclusion appears under a bold-faced heading “Exclusions,” with each exclusion having its own bold-faced title.

These factors satisfy the “conspicuous, plain and clear” test for exclusions, i.e., that they be positioned in a place and printed in a form that will attract the reader’s attention. (Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 184, 231 Cal.Rptr. 791, disapproved on other grounds in Buss v. Superior Court (1997) 16 Cal.4th 35, 50, fn. 12, 65 Cal.Rptr.2d 366, 939 P.2d 766; see National Ins. Underwriters v. Carter (1976) 17 Cal.3d 380, 384, 131 Cal.Rptr. 42, 551 P.2d 362 [exclusion located under a bold-faced heading entitled “Exclusions” and appearing in the same style of print found elsewhere in the policy].)

Finally, the Estate asserts the words “other intellectual property rights” in the exclusion cannot apply as they are “buried in an inconspicuous part of a single paragraph in small type in a 39 page contract.” This ignores that courts applying the exclusion have never criticized the exclusion on this basis. And, as noted, the title of the exclusion starts with the word “Infringement”—in boldface yet—the very conduct the Estate itself alleged against Maxfield. Exclusion i. is conspicuous, plain, and clear.

ZALMA OPINION

Conspicuous, plain and clear exclusions must be enforced. The California court did just that. Although the estate was harmed by Maxfield’s actions they are judgment proof since the corporation was dissolved and the only possibility for recovering damages was the insurance policy. They made a yeoman-like effort to gain the insurance coverage but could not, nor should it, be allowed in face of the conspicuous, plain and clear policy exclusion.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When Is an Exclusion “Conspicuous, Plain and Clear”

Zalma’s Insurance Fraud Letter – March 15, 2015

 Fraud by Insurers

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

The current issue of ZIFL reports on:

1.    Did 60 Minutes Reveal Fraud by Flood Insurers?
2.    IRC Estimates Auto Injury Fraud & Buildup Adds Up to $7.7 Billion Excess Claims
3.    Dentist Loses License for Only Two Years for Medicaid Fraud
4.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 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.    Must Be Named as Insured On Date of Loss To Recover – March 13, 2015
2.    No Cover for Incorrectly Performed Work – March 12, 2015
3.    Cancellation Waives Right to Rescind – March 11, 2015
4.    Broad Exclusion – if Plain – Applies – March 10, 2015
5.    Buyer’s Remorse – March 9, 2015
6.    To Stack or Not to Stack, That is the Question – March 6, 2015
7.    Must there be More Than Damage to a Structure to be Structural Damage? – March 4, 2015
8.    Should Fraud Be Insurable? – March 3, 2015
9.    Only Stupid Fraudsters Get Caught – March 1, 2015
10.    Innocent Mortgagee Collect – Spouse Not Innocent – February 27, 2015
11.    Plea of Guilty to Insurance Fraud Stands – February 26, 2015
12.    Does “Notice-Prejudice Rule” Apply to Claims Made Policy? – February 25, 2015
13.    Rescission Means Policy Never Existed – February 24, 2015
14.    Any Insured Can Change Limits – February 23, 2015
15.    Insurance Irrelevant to Subrogation Action – February 23, 2015
16.    Can Insured Profit as an Additional Insured? – February 19, 2015
17.    Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation – February 19, 2015
18.    Comply With Insurance Condition or Lose – February 18, 2015
19.    Insurance Policy Means What It Says – February 17, 2015
20.    Passover 2015 February 16, 2015

New From Barry & Thea Zalma

Passover is a time when every Jewish father and mother tell their children the story of the Exodus of the Jews from slavery in Egypt. It is a story that Jewish people have told every year for more than 3,000 years. It is a very personal story and applies to each of us as if we were the people who lived it so long ago.

It is a story never to be forgotten. For those of us who have assimilated into the United States and who do not speak Hebrew my wife and I wrote an English only Passover story so that we and our children and grandchildren will understand the story of Passover without a great deal of ritual.

It is available for a small price as a 15 page e-book. If you purchase the e-book you have our permission to print as many copies as you need to conduct your own Passover Seder. It will be available at http://www.zalma.com/zalmabooks.htm until Passover and then will be deleted.

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 | Comments Off on Zalma’s Insurance Fraud Letter – March 15, 2015

Must Be Named as Insured On Date of Loss To Recover

Mortgagee Not Required to Buy Liability Insurance for Borrower

Insurance companies only sell the insurance requested by the insured not the insurance that the insured should have purchased. Mortgagees, who require insurance on the property that was security for a loan requires that the mortgagor purchase hazard insurance to protect the mortgagee against loss of its security by fire or some other hazard. To assist its customers most lenders will keep an escrow account to be certain that premium for the hazard insurance is paid.

In Dichira v. Nawid, — N.Y.S.3d —-, 2015 WL 1035921 (N.Y.A.D. 2 Dept., 3/11/2015), 2015 N.Y. Slip Op. 01921 a New York appellate court was asked to reverse a judgment of the trial court, called the Supreme Court in New York, when an insured claimed his mortgagee should have purchased liability insurance as part of the escrow account he set up to pay premium for first party property insurance.

FACTS

In an action to recover damages for personal injuries and a related third-party action,  plaintiff appeals from an order of the trial court, the Supreme Court, Kings County, that granted summary judgment for Countrywide Home Loan (Countrywide) dismissing the complaint asserted against it, and granted the separate motion of Tower Insurance Company for summary judgment dismissing the complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify him in the main action.

The plaintiff sued the defendant and third-party plaintiff Muhammad U. Nawid to recover damages for personal injuries allegedly sustained on April 16, 2008, when the plaintiff tripped and fell on the sidewalk in front of Nawid’s property. Nawid sued, among others, his mortgagee, Countrywide and Tower Insurance Company (Tower). Nawid alleged that he had obtained liability insurance coverage for the property from Tower when he purchased the property in 2006. He alleged that after purchasing the property he made timely payments into an escrow account with Countrywide that was to be used, among other things, to pay insurance premiums, and that Countrywide had negligently failed to pay the insurance premiums.

ANALYSIS

Tower established its prima facie entitlement to judgment as a matter of law by demonstrating that it never issued an insurance policy for the subject property, and that its affiliate, Castlepoint Insurance Company, issued an insurance policy to Nawid for the subject property which only became effective on June 13, 2008, two months after the accident. “A party is not entitled to coverage if it is not named as an insured or additional insured on the face of the policy as of the date of the accident for which coverage is sought” (York Restoration Corp. v. Solty’s Constr., Inc., 79 AD3d 861, 862).

Since Countrywide established its prima facie entitlement to judgment as a matter of law by demonstrating that the insurance premiums that were to be paid from the escrow account related to a policy of hazard insurance, not the policy of liability insurance that Nawid claimed to have procured. Countrywide further demonstrated that the relationship between it and Nawid was based entirely on a contract, that it did not have a contractual duty to maintain liability insurance on the subject property, and that it did not engage in any conduct which gave rise to a legal duty independent of the contract.

“In the absence of an agreement to the contrary, the mortgagee is under no obligation to insure the mortgaged premises” (Beckford v. Empire Mut. Ins. Group, 135 A.D.2d 228, 232).

Accordingly, the Supreme Court properly granted Countrywide’s motion for summary judgment dismissing the third-party complaint insofar as asserted against it, and that branch of Tower’s separate motion for summary judgment dismissing the third-party complaint insofar as asserted against it and declaring that it is not obligated to defend or indemnify Nawid in the main action.

Since the third-party action is, in part, a declaratory judgment action, the appellate court remanded the matter to the Supreme Court, Kings County, for the entry of judgment declaring that Tower is not obligated to defend or indemnify Nawid in the main action.

ZALMA OPINION

If a person desires to be insured against the risk of loss for injuries to third persons it is imperative that a policy of liability insurance be acquired before a loss. Mr. Nawid bought liability insurance two months after the accident. He entered into a contract with Contrywide to pay premium for hazard insurance, not liability insurance thus no action against Countrywide. The appellate court made it clear that Nawid could not change a fire policy into a liability policy.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Must Be Named as Insured On Date of Loss To Recover

No Cover for Incorrectly Performed Work

Insurance is Not a Guarantee of Good Workmanship

Contractors and developers purchase insurance to protect against bodily injury or property damage caused by their negligence. It does not, nor could it do so and still be insurance, guarantee the quality of workmanship of the insured. The policies clearly exclude damages arising out of work performed by the insureds or their contractors or subcontractors, and work that had to be restored, repaired, or replaced because it was incorrectly performed. If such could be insured a contractor need only do a bad job for little money and then require its insurer to do the job right.

The state of New York’s appellate courts are famous for writing opinions that get to the point quickly and without a great deal of surplusage. The decision in Erie Ins. Co. v. Nick Radtke, Inc., — N.Y.S.3d —-, 2015 WL 1035911 (N.Y.A.D. 2 Dept., 3/11/15) is a perfect example of that fact by looking at the trial court opinion, stating the law of the case, and ruling in less than a page.

In a suit seeking a judgment declaring that the plaintiff is not obligated to defend or indemnify the defendant Nick Radtke, Incorporated, in an underlying action entitled Vela v S.E. Home Builders, Inc., pending in the Supreme Court, Orange County, New York, and a third-party action for a judgment declaring that the third-party defendants are obligated to indemnify the defendants S.E. Home Builders, Inc., and Joseph Radtke in the same underlying action, the insured appealed from a judgment of the Supreme Court, Orange County which declared that (1) the plaintiff is not obligated to defend, indemnify, or otherwise provide insurance coverage for the defendant Nick Radtke, Incorporated or any other person or entity for claims against the defendant Nick Radtke, Incorporated in the underlying action, and (2) the third-party defendants are not obligated to defend, indemnify, or otherwise provide coverage for or to the defendant S.E. Home Builders, Inc., or any other person for claims against the defendants S.E. Home Builders, Inc., or Joseph Radtke in the underlying action.

DECISION & ORDER

Michael Vela commenced an action (hereinafter the underlying action) against, among others, S.E. Home Builders, Inc., Joseph Radtke, and Nick Radtke, Incorporated, to recover damages arising from a home construction project. The plaintiff, Erie Insurance Company, then commenced this action seeking a judgment declaring that it is not obligated to defend or indemnify its insured, Radtke in the underlying action. Vela then commenced a third-party action against Essex Insurance Company, Inc., and Markel Services, Incorporated, seeking a judgment declaring that they are obligated to defend and indemnify their insureds, S.E. Home Builders, Inc., and Joseph Radtke, in the underlying action.

On their respective motions for summary judgment, the plaintiff and the insurers each established their prima facie entitlement to judgment as a matter of law declaring that they are not obligated to defend and indemnify their respective insureds in the underlying action by submitting the subject insurance policies.

These polices established, prima facie, that Vela’s claim of coverage was excluded under exclusion (2)(j)(5), which applies to damages arising out of work performed by the insureds or their contractors or subcontractors, and exclusion (2)(j)(6), which applies to work that had to be restored, repaired, or replaced because it was incorrectly performed. Vela failed to raise a triable issue of fact. Therefore, the Supreme Court (trial court) properly granted summary judgment to the insurers, denied summary judgment to Vela, and entered a judgment making the appropriate declarations.

ZALMA OPINION

As I have said many times in this place insurance is a contract that agrees to indemnify the insured for damages resulting from a contingent or unknown event.  When a contractor does a bad job that requires restoration, repair or replacement of the work because it was incorrectly performed it is not contingent or unknown and it is clearly and unambiguously excluded.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Cover for Incorrectly Performed Work

Cancellation Waives Right to Rescind

Cancellation is Anathema to Rescission When Grounds for Rescission Exist

When a person obtains a policy of insurance by means of a material misrepresentation an insurer has two options available to it when it learns of the misrepresentation: (1) It can rescind the policy from its inception and return all premium collected; (2) It can cancel the policy, retain the premium and pay all claims up to the date of cancellation. Both options are fraught with danger. If improperly rescinded the insurer faces tort and punitive damages. If it cancels it faces paying excessive claims it could have avoided if the policy was rescinded. It should be obvious that once a misrepresentation is discovered the insurer must do a thorough investigation to find if the right to rescind exists and if so it must promptly elect rescission.

In DuBeck v. California Physicians’ Service, — Cal.Rptr.3d —-, 2015 WL 970699 (Cal.App. 2 Dist., 3/5/15) the insurer selected the cancellation option because it had paid out claims in an amount less than the premium collected. When it was sued, two years later, it asserted its right to rescind and the trial court agreed. The insured appealed to the California Court of Appeal.

FACTUAL BACKGROUND

The insured submitted the signed application to Blue Shield on February 16, 2005. The insured incorrectly checked “No” in answer to questions on the application seeking health insurance although she knew, since she signed the application five days after visiting an health care provider for a lump in her breast.

Blue Shield issued a policy dated April 1, 2005. The policy contained cancellation and termination provisions allowing cancellation for deception or fraud in obtaining the policy.

Under the policy, pre-existing conditions were covered only after the insured had been “continuously covered for six (6) consecutive months, including [the] waiting period,” which began “on the date [Blue Shield] receive[d] your application.” The policy defined “pre-existing condition” as “ ‘an illness, injury, or condition … which existed during the six (6) months prior to the Effective Date with [Blue Shield] if, during that time, any medical advice, diagnosis, care or treatment was recommended or received from [a] licensed health practitioner.’ ” (Caps deleted.)

On September 8, 2006, approximately 17 months after issuing the policy, Blue Shield sent appellant a letter canceling it. The letter explained that Blue Shield had recently discovered that on February 11, 2005, appellant had been seen at the Breast Center and undergone a fine needle aspiration procedure on a mass in her breast, and that on that same date, she had scheduled a mammogram, an ultrasound and a consultation with a surgeon. The letter stated that had Blue Shield been aware of these facts, it would not have approved her application.

Although it stated standard grounds for rescission in California the letter went on to state that Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006. On the same date it sent the cancellation letter, Blue Shield sent appellant a “Certificate of Creditable Coverage” confirming that her coverage “began: 04/01/2005” and “ended: 09/08/2006.” The Certificate stated that it was “evidence of your coverage under this plan.”

Two years later, the insured sued Blue Shield. The operative second amended complaint alleged that commencing in April and May 2005, Blue Shield began receiving claims for the medical services being provided to appellant, which Blue Shield rejected as falling under the pre-existing condition exclusion of the policy.  By this time, appellant had been diagnosed with leukemia. The SAC contended that by delaying and canceling the policy, Blue Shield was able to collect and retain $19,600 in premiums, $5,450 more than it had paid to medical providers on appellant’s behalf.

The trial court granted summary judgment, finding that appellant’s application for insurance contained material misrepresentations, and that such misrepresentations were willful. The court concluded that Blue Shield was entitled to rescind, and that the policy was extinguished by such rescission.

DISCUSSION

Rescission of contracts is governed by  the California Civil Code that requires a party who desires to effect a rescission must promptly upon discovering the facts which entitle him to rescind give notice of rescission to the party as to whom he rescinds and restore or offer to restore everything of value which he has received from the other party under the contract; delay in seeking rescission may result in forfeiture of the right to rescind where the delay results in prejudice to the other party.

An insurer has the right to rescind a policy when the insured has misrepresented or concealed material information in seeking to obtain insurance. (Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60, 75, 103 Cal.Rptr.3d 906; TIG Ins. Co. of Michigan v. Homestore, Inc. (2006) 137 Cal.App.4th 749, 755–756, 40 Cal.Rptr.3d 528.) That right, like any other, can be waived.

When an insurance company, with full knowledge of all the facts, enters into negotiations and relations with the assured, recognizing the continued validity of the policy, the right to a forfeiture for any previous default which may be asserted is waived. This test for waiver in the context of insurance contracts comports with the general rule for finding a waiver.

The Court of Appeal concluded that Blue Shield’s conduct was wholly inconsistent with the assertion of its known right to rescind. It is undisputed that by September 8, 2006, Blue Shield was aware of the pertinent information and, consistent with its corporate policy, elected to cancel, rather than rescind, appellant’s policy. It communicated this election directly to appellant, along with assurances that the cancellation was “prospective,” leaving her entitled to all benefits of the policy from April 2005 to September 2006.

Had Blue Shield asserted a right to rescind in 2006, appellant would not have incurred the effort and expense of attempting to enforce rights Blue Shield itself assured her she had, viz., the right to have “[a]ny claims for covered services incurred before [September 8, 2006] … covered.” In waiting over two years to assert a right to rescind, while assuring appellant of her right to coverage during the period the policy was in effect and retaining her premiums for such coverage, Blue Shield engaged in conduct inconsistent with the intent to enforce the right as to induce a reasonable belief that it had been relinquished.

Appellant underwent breast cancer surgery five days after the effective date of the policy, and her medical providers began submitting bills for her treatment to Blue Shield shortly thereafter. In its June 2005 Explanation of Benefits, Blue Shield stated that the breast cancer “may have existed prior to the patient’s enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

By its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year. By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind.

ZALMA OPINION

Blue Shield did everything wrong to effect a rescission and still convinced a trial court of its right to rescind. Had it exercised the right shortly after the breast cancer surgery – which occurred five days after the policy was issued – it would have walked free of the insured’s claim and would have returned the premium. Instead it tried to be “nice” to its insured by cancelling the policy and keeping her premium only to find it may be obligated to pay to treat her for leukemia. If an insurer has a right to rescind and does not must be ready to pay all claims.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Cancellation Waives Right to Rescind

Broad Exclusion – if Plain – Applies

Computer Fraud Not the Same as Check Fraud

As Willie Sutton once said about why he robbed banks, “it’s where the money is.” Modern day bank robbers don’t use guns, they use computers, computer viruses, and make transfers of money from the bank to the account held by the thief without ever going near a bank. Insurers are loath to insure against the risk of computer fraud from individual bank accounts unless a major premium is paid. To prevent such losses to the insurer, theft by computer or other malicious computer code, is usually excluded.

In Metro Brokers, Inc. v. Transportation Ins. Co., — Fed.Appx. —-, 2015 WL 925301 (C.A.11 (Ga.)) Metro Brokers, Inc. (“Metro”) appealed the district court’s (1) grant of summary judgment in favor of Metro’s insurer, Transportation Insurance Company (“TIC”) and (2) denial of Metro’s motion for reconsideration claiming the exclusion was not enforceable.

FACTS

Metro is a real estate brokerage firm conducting business in Georgia. Metro maintained bank accounts with Fidelity Bank (“Bank”) and used the Bank’s online system to make payments from Metro’s accounts. On 10 December 2011, thieves logged into the Bank’s online banking system using a Metro employee’s access ID and password. Then, using a randomly generated single-transaction security code, the thieves authorized various payments—totaling over $188,000—from a Metro client escrow account to several other bank accounts. Over $154,000 of the stolen funds remains unrecovered.

Although the exact details of the theft are unknown, the parties agree that all available evidence suggests that the thieves used a key-logger virus known as “Zeus” (which was found on several Metro computers) to gain access to Metro employee access IDs and passwords.

Metro filed a claim for the loss under Metro’s insurance policy (“Policy”) with TIC. TIC denied coverage based on the Policy’s malicious-code and system-penetration exclusions. Metro, on the other hand, contends that the loss is not excluded and is covered by the Policy’s Fraud and Alteration (“F & A”) endorsement.

DISTRICT COURT DECISION

In two opinions, the district court concluded that the Policy did not cover Metro’s loss and, thus, that TIC was entitled to summary judgment on Metro’s breach of contract claim. The district court determined that Metro’s loss was not covered by the Policy’s F & A endorsement for two reasons: (1) the fraudulent electronic transfers did not involve a “check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain;” and (2) Metro’s loss fell within the Policy’s exclusions for losses caused by malicious code or system penetration. Because Metro’s claim was not covered under the Policy, the district court granted summary judgment for TIC on Metro’s claims for breach of contract and for bad faith.

ANALYSIS

The Eleventh Circuit, applying Georgia law, noted that an insurance policy is governed by the ordinary rules of contract construction. Whether the language in an insurance policy is ambiguous is a matter of law for the court to decide. Extrinsic evidence to explain ambiguity in a contract becomes admissible only when a contract remains ambiguous after the pertinent rules of construction have been applied.

The Policy’s F & A endorsement provided that TIC “will pay for loss resulting directly from ‘forgery’ or alteration of, on, or in any check, draft, promissory note, bill of exchange, or similar written promise, order or direction to pay a sum certain….” The term “forgery” is defined in the Policy as “the signing of the name of another person or organization with intent to deceive.”

The electronic fund transfers in this case did not involve a “check, draft, promissory note, [or] bill of exchange.” The transfers also cannot be characterized as involving a “written promise, order or direction to pay” that was “similar ” to the three enumerated instruments.

Under both federal and Georgia law, electronic fund transfers are distinguished from—and treated differently from—fund transfers made by check, draft, or bill of exchange. In fact the Electronic Fund Transfer Act defines an “electronic fund transfer” as “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. [O.C.G.A. § 11–4A108]

Because Metro failed to demonstrate that its loss was covered under the Policy’s F & A endorsement, TIC was entitled to summary judgment on Metro’s breach of contract claim.

That the thieves (in some way) used a computer virus to commit their theft is undisputed. The Policy defines “malicious code” as including, among other things, “computer viruses.” Although Metro argues that the computer virus did not in fact “cause” the loss (because of the thieves’ intervening conduct), the Policy states unambiguously that it does not cover losses “caused directly or indirectly” by malicious code “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

Based on this broad (but plain) exclusionary language, the Eleventh Circuit concluded that Metro’s loss is excluded.

Because Metro’s loss is not covered by the Policy, Metro’s claims for both breach of contract and for bad faith must fail.

ZALMA OPINION

Every once in a while a court will read the plain language of an insurance policy and apply it. The Eleventh Circuit did so here even though it found that although the exclusion was broad it was plain and, as a result, effective.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Broad Exclusion – if Plain – Applies

Buyer’s Remorse

No Recourse From General Release

Construction defect litigation and arbitrations are complex, expensive and difficult. Suits are often settled only to find later that there were more defects not know about at the time of the settlement.  In Belasco v. Wells (2015) , Cal.App.4th, [No. B254525. Second Dist., Div. Five. Feb. 17, 2015.] the settling party, David Belasco, bought a newly constructed Manhattan Beach residence in 2004 from the builder defendant Gary Loren Wells. In 2006, Belasco filed a complaint against Wells with the Contractors State License Board (the Board) regarding alleged construction defects. Belasco and Wells settled the dispute in 2006 by written agreement, with Wells paying $25,000 and Belasco executing a release and a Civil Code section 1524 waiver of all known or unknown claims.

In 2012, six years after signing the settlement, Belasco, a lawyer filed suit against Wells, Wells’s surety American Contractors Indemnity Company (American Contractors), and Glenn Hatch, based on an alleged defect in the roof that Belasco discovered in 2011.

The trial court granted summary judgment in favor of Wells and American Contractors, ruling that the action was barred as a matter of law by the 2006 settlement that included a release and waiver of all claims, known or unknown, in connection with the construction of the property. Belasco filed a timely notice of appeal, which he served on all defendants.

Belasco contends the trial court erred in granting summary judgment because:

(1) the general release and section 1542 waiver in the 2006 settlement agreement for patent construction defects is not a “reasonable release” of a subsequent claim for latent construction defects within the meaning of section 929 and the Right to Repair Act (the Act);

(2) a reasonable release can only apply to a “particular violation” and not to a latent defect under the language of section 945.5, subdivision (f), and the 2006 settlement was too vague to be a valid because it does not reference a “particular violation;”

(3) section 932 specifically authorizes an action on “[s]ubsequently discovered claims of unmet standards;”

(4) public policy prohibits use of a general release and section 1542 waiver to bar a subsequent claim for latent residential construction defects; and

(5) a genuine issue of material fact exists concerning Belasco’s fraud and negligence claims that would have voided the settlement pursuant to section 1668.

ALLEGATIONS OF BELASCO’S 2012 COMPLAINT

Belasco’s complaint included causes of action for breach of contract, complaint on Contractor’s License Bond, fraud, and revocation/suspension of contractor’s license. Belasco alleged that his 2006 complaint against Wells with the Board was resolved by Wells agreeing to pay a sum of money to repair the property. A defect in the roof was unknown at the time of the settlement.

The first cause of action alleged that the defective roof breached the statutory warranty on new construction. The second cause of action alleged American Contractors is liable as Wells’s surety. The third cause of action, for fraud, alleged Wells falsely represented that the roof was installed by a competent, licensed roofer (Action Roofing), and that Wells intended to mislead Belasco, who justifiably relied on the representations when he agreed to buy the home. The fourth cause of action sought suspension or revocation of Wells’s contractor’s license under Business and Professions Code section 7106.

ANSWERS TO THE COMPLAINT

Wells entered a general denial of the allegations, and asserted 17 affirmative defenses. The ninth affirmative defense asserted that Belasco’s claims are barred by the 2006 release and waiver.

THE MOTION FOR SUMMARY JUDGMENT

Wells and American Contractors moved for summary judgment on the basis that Belasco’s 2012 action was barred by a 2006 settlement of Belasco’s prior complaint about Wells to the Board. In the prior settlement, Belasco signed a release and waiver of all known or unknown construction defects in the home in return for a cash settlement of $25,000.

After escrow closed, Belasco gave Wells’s agent, Glenn Hatch, a list of approximately 150 items improperly built on the property. Belasco filed a complaint against Wells with the Board regarding construction defects. An arbitration began in 2006 between Belasco and Wells, with both parties represented by counsel. Belasco is a patent attorney, licensed since 1995, whose practice includes a small amount of litigation. Three hours into the arbitration, and before a decision was reached, Wells offered to settle the dispute for $25,000, which Belasco accepted.

The settlement was memorialized in a writing signed by Belasco and his attorney. Belasco read and understood the agreement.

Section 3 of the settlement contained a section 1542 waiver and release, as follows: “It is understood and agreed that I and all future purchasers hereby EXPRESSLY WAIVE all rights under section 1542 of the Civil Code of California, which provides as follows: [¶] Certain Claims Not Affected by General Release . . . A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH DEBTOR.”

The California Court of Appeal recognized that the 2006 release was the reasonable result of an arms-length negotiation, with counsel on both sides, that settled Belasco’s 2006 claim and all other potential claims in return for a $25,000 payment by Wells. Belasco, an attorney, testified that he read and understood the terms each of the three sections in the release referring to broad waivers of claims before signing the agreement.

Because the law permits a release and waiver of unknown claims, there was no need for the parties to have contemplated an issue with the roof in 2006 when the settlement was signed. Belasco knowingly assumed the risk of unidentified construction by releasing Wells of all liability in return for $25,000.

DISCUSSION

In construing statutes, courts aim to ascertain the intent of the enacting legislative body so that they may adopt the construction that best effectuates the purpose of the law.  When the statutory text is ambiguous, or it otherwise fails to resolve the question of its intended meaning, courts look to the statute’s legislative history and the historical circumstances behind its enactment. Finally, the court may consider the likely effects of a proposed interpretation because where uncertainty exists consideration should be given to the consequences that will flow from a particular interpretation. Similarly, when interpreting the settlement agreement, the court must apply the general rules of contract interpretation. The goal of contractual interpretation is to determine and give effect to the mutual intention of the parties.

Belasco also argued that public policy prohibits a general release and section 1524 waiver as to subsequently discovered latent defects. Belasco reasons that allowing a release and section 1524 waiver allows a builder, such as Wells, to circumvent the purpose of the Act, which is to protect purchasers of new single family residences from patent and latent defects. Having specifically provided for negotiation of reasonable settlements in the context of cash payments, as opposed to the prohibition against releases in the context of repairs to settle a claim under the Act, it is apparent that there is no state policy that would prohibit a release and section 1524 waiver.

The clear and unambiguous waiver and release were not negated by fraud, because there was no fraudulent misrepresentation by Wells or reliance by Belasco. Belasco, an attorney who was represented by counsel, expressly acknowledged his understanding of the scope of the agreement. Belasco’s claim of fraud in connection with the 2006 release and section 1542 waiver was properly rejected by the trial court.

ZALMA OPINION

Contrary to Mr. Belasco’s arguments the intent of a general release are to resolve all known and unknown claims and give peace to the parties. Belasco found himself involved in an extensive and detailed litigation concerning his claim of 150 existing defects in the new home he purchased. He was offered, during the first day of testimony, a settlement that he accepted. Six years later he found a different defect and attempted to revive his suit and seek damages against the same parties he released. It failed because he knew what he signed, was a lawyer – albeit a patent lawyer – and was represented by counsel. His buyer’s remorse at signing the release were not grounds to avoid its effect.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Buyer’s Remorse

To Stack or Not to Stack, That is the Question

Can’t Change Policy After a Loss

When a person is seriously injured they work very hard to find a way to recover as much as possible from the insurance available. However, when, before the injury the insured only thought about the least expensive insurance available. With regard to uninsured motorist (UM) and underinsured motorist (UIM) insurance, courts have allowed insureds to stack coverages from multiple vehicles to increase the insurance limits available. Insurers, therefore, created anti-stacking provisions in their policies. Of course, litigation, pursued.

In Midwestern Indem. Co. v. Brooks, — F.3d —-, 2015 WL 855680 (C.A.8 (Mo.) 3/2/15) the Eighth Circuit was faced with a claim from Malissa Brooks to “stack” her underinsured motorist (UIM) coverage limits after a negligent driver struck Brooks as she rode her bicycle. Her insurer, Midwestern Indemnity Company (Midwestern), moved for summary judgment on the basis that Brooks’s policy unambiguously prohibits UIM coverage stacking. The district court agreed and granted summary judgment in Midwestern’s favor. Because Brooks’s policy clearly forbids stacking, and she appealed.

BACKGROUND

On September 19, 2011, Brooks was riding her bicycle when Clyde Lawrence negligently struck her with his car. Lawrence afterward passed away of unrelated causes. Brooks and her husband, Bradley Brooks, filed suit in Missouri state court against Lawrence’s estate (estate), which soon settled for the $50,000 limit of Lawrence’s auto insurance policy. In this settlement, the Brookses agreed not to seek additional recovery from Lawrence’s estate, heirs, or insurer, but the Brookses retained the right to seek recovery from Midwestern.

The Brookses’ auto insurance policy with Midwestern provides UIM bodily injury coverage for several vehicles. On the declarations page for the UIM endorsement, the policy states, “Insurance is provided where a premium entry is shown for the coverage.” This page lists “Underinsured Motorist Bodily Injury” with liability limits of $100,000 per-person and $300,000 per-accident. Next to this, a premium amount appears for each of five vehicles, indicating the Brookses pay five UIM premiums for UIM coverage, one for each of the five vehicles. After the Brookses settled with the Lawrence estate, Midwestern paid the Brookses $100,000, declaring this per-person limit is the maximum amount for a single application of the policy’s UIM coverage.

DISCUSSION

The Brookses argue the district court erred in reading their policy to limit their UIM coverage to $100,000, and the Brookses assert they should be permitted to stack the UIM coverage for their five covered vehicles.

As a matter of public policy, Missouri courts have invalidated attempts by insurance companies to prohibit the stacking of uninsured motorist coverage. But because Missouri does not require UIM coverage, the existence of the coverage and its ability to be stacked are determined by the contract entered between the insured and the insurer.

Although this anti-stacking limitation is unambiguous, if a policy has clauses that claim to prohibit stacking and also contain clauses that appear to authorize stacking, coverage is ambiguous and must be resolved in favor of the insured. We understand the Brookses to argue that elements of the UIM endorsement’s declarations page appear to authorize stacking, making the policy ambiguous on this point.

The declarations page reads, “Insurance is provided where a premium entry is shown for the coverage.” Because a premium entry is shown for each of five vehicles, the Brookses maintain they were promised a stack of five UIM coverage limits for any single accident. In their view, the payment of an additional premium for each additional vehicle must signify an increase in the coverage limit; otherwise, the Brookses believe, Midwestern is improperly charging them more in premiums despite providing no more coverage. As part of this argument, the Brookses contend that injuries to Brooks herself would also receive no broader coverage by adding more “covered autos”—she would be covered in whatever car she drives because UIM coverage is floating, personal accident insurance that follows the insured individual wherever she goes rather than insurance on a particular vehicle.

In this case, the declarations page only indicates the vehicles for which “[i]nsurance is provided,” giving readers no hint whether the indicated limits can be combined for a single accident. This is not enough, in view of the clear Limit of Liability provision, to create an ambiguity.

The court’s research revealed no Missouri case allowing stacking solely because multiple premiums were paid. In fact, cases from the Missouri Court of Appeals suggest clear policy language controls even in such situations. Because the policy expressly and unambiguously disallows stacking, the court concluded the claim is without merit.

ZALMA OPINION

As the Eighth Circuit made abundantly clear, merely insuring more than one automobile on a policy and charging a separate premium for each, is not an agreement to stack. Each vehicle was insured separately and each contained policy language specifically refusing to allow stacking of coverages. One limit was purchased for UIM coverage. No where in the policy did the language agree to allow the insured to quintuple the coverage they purchased and for which she did not pay premium.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on To Stack or Not to Stack, That is the Question

Must there be More Than Damage to a Structure to be Structural Damage?

Sturctural Damage Is  Damage Which Impedes the Structural Components from Supporting the Loads That They Are Intended to Support

Sinkholes are a serious problem in Florida. Without warning the earth beneath a structure simply opens up and swallows structures, cars and people. As a result homeowners policies in Florida, by statute, are required to insure against structural damage caused by a sinkhold.

In Hegel v. First Liberty Ins. Corp., — F.3d —-, 2015 WL 821146 (C.A.11 (Fla.) 2/27/15) the Eleventh Circuit Court of Appeal was asked by an insurer to reverse a trial court judgment finding that damage to the insured’s house was “structural damage” and thus covered by the insurance policy.

FACTS

Severin and Stephanie Hegel (the Hegels) sued The First Liberty Insurance Corporation (First Liberty) claiming improper denial of their claim for “sinkhole loss” that had been defined under their homeowner’s insurance policy as “structural damage to the building, including the foundation, caused by sinkhole activity.”  The Hegels claim that First Liberty improperly denied their claim for a “sinkhole loss.” First Liberty argued that the damage to the Hegels’ residence does not qualify as “structural damage,” a term that was not defined in either the policy or the version of the Florida sinkhole-insurance statute applicable to their claim. In February 2014, the district court granted summary judgment for the Hegels, finding that “structural damage” meant any “damage to the structure” and awarding them $166,518.17 in damages. First Liberty timely appealed.

BACKGROUND

The Hegels had a homeowner’s insurance policy with First Liberty for their Spring Hills, Florida residence. This policy insured against “Sinkhole Loss” as an exception to the policy’s exclusion for damage caused by earth movement. Under the policy, “Sinkhole Loss means structural damage to the building, including the foundation, caused by sinkhole activity.” (Emphasis added.)

The version of the Florida statute governing sinkhole insurance that was in effect in 2010 contained the same definition of “sinkhole loss” as the policy did, but similarly failed to define the term “structural damage.” See Fla. Stats. § 627.706(2)(c) (2005). Prior to the statute being substantially amended in 2005, however, the term “sinkhole loss” was defined as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property.” Fla. Stats. § 627.706(3) (1981) (emphasis added).

The Florida Building Code (2004), on the other hand, defined “structural” as it relates to buildings: “For purposes of this code, ‘structural’ shall mean any part, material or assembly of a building or structure which affects the safety of such building or structure and/or which supports any dead or designed live load and the removal of which part, material or assembly could cause, or be expected to cause, all or any portion to collapse or fail.”

THE DAMAGE AND ESTIMATES OF REPAIR

The Hegels allege that, on March 1, 2011, they “discovered damage to their home, including, but not limited to, progressive physical damage to the walls and floors of the residence.” They subsequently submitted a claim for their damages to First Liberty under their homeowner’s policy.

First Liberty retained Structural Engineering and Inspections, Inc. (SEI) to investigate the claim in September 2011. SEI concluded in a report that the Hegels’ residence “DOES NOT MEET the criteria for Structural Damage as defined by Florida Statutes § 627.706 [2011].” (Emphases in original.) The SEI report noted some cracking and other issues, but determined that nothing rose to the level of “structural damage” as defined in the 2011 version of the statute. In addition, SEI listed several possible causes for the observed damage that were unrelated to sinkholes, including differential settlements and ordinary concrete shrinkage.

First Liberty accordingly denied the Hegels’ claim in October 2011, stating that their residence “ha[d] not sustained structural damage to the building or foundation” and that the damage was “related to normal concrete shrinkage, differential settlement, and improper embedment of [the] foundation.”

In November 2011, the Hegels requested a neutral evaluation. Kevin Scott, the neutral evaluator engaged for the claim, issued a report in July 2012. His report concluded that the damage to the Hegels’ residence was “the result of a combination of factors, including sinkhole activity,” but that “the observed distresses to the house can primarily be attributed to minor differential settlement of the structure and normal shrinkage/drying characteristics of the masonry materials.”

ANALYSIS

On appeal, First Liberty sets forth two independent, alternative theories to support its argument that the district court’s contractual interpretation was erroneous:

(1) the plain meaning of “structural damage” cannot be any “damage to the structure” in the context of the contractual phrase “structural damage to the building”; and

(2) the insurance policy incorporates the definitions of “structural” under the Florida Building Code (2004) and “structural damage” as “clarified” by the 2011 amendment to Florida Statutes § 627.706, such that the term “structural damage” must mean more than any “damage to the structure.”

The Eleventh Circuit agreed with First Liberty that the plain meaning of “structural damage” cannot be simply any “damage to the structure” in the relevant context. The parties disagreed on what was the plain meaning of the term “structural damage”.

The Eleventh Circuit, however found no genuine ambiguity exists because construing “structural damage” to mean simply any “damage to the structure” in the context of the insurance policy “is facially unreasonable.” Terms and phrases cannot be viewed in isolation. Courts must construe an insurance contract in its entirety, striving to give every provision meaning and effect.

The district court awarded the Hegels damages for all subsurface and cosmetic repairs based on the parties’ stipulation that there was “physical damage to Plaintiffs’ home.” Because “structural damage” is necessary for the Hegels to recover under the policy, the court must have equated “physical damage to Plaintiffs’ home” with “structural damage to the building.” Equating the two, however, essentially defines “structural damage” as “physical damage” — an untenable result. Such a construction would render the word “structural” meaningless because all property damage is physical, thereby violating a foundational rule of contract construction that every word be given effect.

Florida courts commonly adopt the plain meaning of words contained in legal and non-legal dictionaries. “Structural” is an adjective, defined in the Oxford English Dictionary as “[f]orming a necessary part of the structure of a building or other construction, as distinct from its decoration or fittings.” The noun “structure,” on the other hand, is simply a synonym for a building. Based on these definitions, “damage to the structure” would encompass any physical damage to a building, even if only cosmetic, whereas “structural damage” would exclude damage to a building’s “decoration or fittings.” Although any structural damage would necessarily encompass damage to the building, the opposite is not necessarily true. For example, many types of lesser damage to a building would not be structural damage. To equate “structural damage” with any “damage to the structure,” as the district court did, was untenable.

Kevin Scott, the neutral evaluator and a professional engineer, defined the term as follows: “It’s damage which impedes the structural components from supporting the loads that they are intended to support. That is my engineering opinion of structural damage.”

ZALMA OPINION

Courts may not rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties.  Similarly, an insurer cannot, by failing to define the terms in a policy, insist upon a narrow, restrictive interpretation of the coverage provided. The independent expert found no sinkhole and no stuctural damage. He found cracks and some settling. The trial court erred by concluding that the damage seen, damage to the structure, was structural damage although the building was performing as defined and supporting the loads it was designed to support.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Must there be More Than Damage to a Structure to be Structural Damage?

Should Fraud Be Insurable?

Insurer Seeks Coverage From Its Insurers For Its Fraudulent Acts

Since insurance, by definition, only covers contingent or unknown events. Therefore, by definition intentional or fraudulent acts are not covered. Some insurers, in order to cross every “t” and dot every “i” include an intentional act exclusion to reiterate the common law.

Insurance companies often make unusual decisions when they dispute coverage where one insurer is an insured and others insure it against certain risks. In Cigna Corp. v. Executive Risk Indem., Inc., — A.3d —-, 2015 WL 836933 (Pa.Super.,2/27/15) more than ten years of litigation boiled down to a declaratory relief action seeking coverage for the insured insurer’s admittedly fraudulent acts concerning its employee retirement plan.

FACTS

Cigna Corporation appealed from the order granting summary judgment in favor of Executive Risk Indemnity, Inc. and Nutmeg Insurance Company (Appellees), and dismissing Cigna’s complaint with prejudice. Cigna sought a declaration of coverage under a fiduciary liability policy for ERISA violations found in an underlying federal class action. Appellees denied coverage under a policy exclusion for deliberately fraudulent or criminal acts or omissions. Cigna challenges the trial court’s application of the fraudulent acts exclusion.

This protracted course of litigation has extended longer than a decade. A more complete factual account is contained in Amara v. CIGNA Corp., 534 F.Supp.2d 288 (D.Conn.2008), and Amara v. CIGNA Corp., 559 F.Supp.2d 192 (D.Conn.2008), as well as the Supreme Court’s discussion of the case in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011).

In 1998 Cigna amended its retirement plan, retroactive to January 1, 1998. In simplified terms, Cigna converted its traditional defined benefit pension plan to a cash balance plan. Cigna assured plan participants in the notification materials that the conversion would not affect benefits accrued as of December 31, 1997. In fact, the conversion was presented as an enhanced benefit. Nevertheless, there is no dispute on appeal that under certain circumstances some plan participants would have their expected benefits or accruals reduced or frozen, in a process designated “wear away.” Furthermore, there is no dispute that to avoid an anticipated employee backlash at the wear away phenomenon (and the possible reduction in retirement benefits), Cigna withheld or declined to provide documentation which would have confirmed the risk of reduced benefits.

In 2001, plan participants brought a class action lawsuit on behalf of some 27,000 employees, alleging in essence that the plan amendments had the net effect of reducing benefits or benefit accruals for some plan participants in violation of ERISA. Eventually, Judge Mark R. Kravitz, of the federal district court in Connecticut, decided that Cigna’s changes were permitted under ERISA, but that Cigna or its affiliate pension plan had violated ERISA-required notice provisions by providing misleading summary plan descriptions (SPD’s) and Summaries of Material Modifications (SMM’s) in an apparent effort to forestall objections from plan participants. Judge Kravitz ruled, in part: “[I]n effectuating the conversion to the cash balance plan, CIGNA did not give a key notice to employees that is required by ERISA; and CIGNA’s summary plan descriptions and other materials were inadequate under ERISA and in some instances, downright misleading. … This is where CIGNA failed to fulfill its obligations; the company did not provide its employees with the information they needed to understand the conversion from a traditional defined benefit plan to a cash balance plan and its effect on their retirement benefits.” (emphasis added)

However, the United States Supreme Court vacated and remanded. See CIGNA Corp. v. Amara, 131 S.Ct. 1866 (U.S.2011). In reviewing whether the district court applied the correct legal standard for relief, the High Court reasoned, in part, that the district court relied on the wrong ERISA remedy provision.

CIGNA’s deficient notice led to its employees’ misunderstanding of the content of the contract, and CIGNA did not take steps to correct their mistake. Instead, CIGNA affirmatively misled and prevented employees from obtaining information that would have aided them in evaluating the distinctions between the old and new plans.

While no “single statement … accurately define[s] the equitable conception of fraud,” it generally consists of obtaining an undue advantage by means of some act or omission which is unconscientious or a violation of good faith.  Here, defendants misrepresented the terms of CIGNA’s new pension plan and actively prevented employees from learning the truth about the plan.

During the relevant time period, Cigna was insured under a multi-line insurance policy, including professional liability and fiduciary liability. The primary insurer was Certain Underwriters of Lloyd’s of London. Appellees were excess carriers whose obligations were determined on a follow-form basis to the Lloyd’s of London policy (i.e., tracking the terms, conditions, and exclusions of the primary Lloyd’s policy).

In 2012, Cigna filed the complaint seeking a declaratory judgment to declare coverage under the fiduciary liability provisions of the policy for claims made against it in the underlying class action. Appellees filed a motion for summary judgment. The trial court granted the motion for summary judgment, and dismissed Cigna’s complaint with prejudice.

THE APPEAL

Did the trial court commit an error of law or abuse of discretion in applying the “deliberately fraudulent acts” exclusion to preclude coverage under the Fiduciary Liability coverage part?

ANALYSIS

Whether [the insurer] breached a duty imposed by contract is a legal conclusion

In Pennsylvania the rule is firmly established that it is irrelevant whether or not the insured intended to be bound by the [policy’s] exclusion for intentional torts, since it is against the public policy of the Commonwealth of Pennsylvania to provide insurance coverage for intentional acts.

Notably, Cigna does not dispute that “the Liability Opinion,” Amara, supra (534 F.Supp.2d 288), found that its (Cigna’s) summary plan descriptions and summary of material modifications were “affirmatively and materially misleading.”

Under Pennsylvania law the court’s duty is to ascertain the intent of the parties as manifested in the language of the written instrument. In discharging this duty, the court must view the policy in its entirety, giving effect to all of its provisions. Moreover, an insurance policy, like every other written contract, must be read in its entirety and the intent of the policy is gathered from consideration of the entire instrument.
Cigna’s argument, in effect, would have the court of appeal (and the trial court) read the wrongful acts provision (providing coverage certain acts defined as “wrongful acts”) as negating the fraudulent acts exclusion. The plain meaning of the policy is that the fraudulent or criminal act exclusion operates as an exception to the more general wrongful acts coverage provision. The appellate court read the insurance policy in its entirety, not piecemeal, giving effect to all of its provisions.

The federal district court, and the Second Circuit in affirmance, expressly concluded that Cigna’s conduct was fraudulent.

In addition to an unequivocal finding of fraud in the Amara litigation, we observe that Cigna’s conduct, including affirmative efforts at concealment and intentionally misleading representations that the benefits under the previous plan would not be disturbed, would clearly qualify as fraudulent under Pennsylvania law.

On the issue of finality, the appellate court noted that under Pennsylvania law, the federal courts’ finding of fraud clearly constituted a final judgment.

Pennsylvania case law is unequivocal that reimbursement from insurance for intentional acts is against the public policy of the Commonwealth.  In the context of contracts for insurance, it is against the public policy of Pennsylvania to provide insurance coverage for intentional acts. Cigna attempts to distinguish numerous cases reflecting this policy, and draws a universal, albeit incorrect, conclusion that “there is no blanket public policy in Pennsylvania against insurance coverage for intentional acts.” The court of appeal could find no reason or basis to read an exception into the public policy under the facts of this case.

ZALMA OPINION

This case is an example of an insurer, caught defrauding its employees, sought to obtain from its insurers a coverage it would never have provided to any insured equally convicted of intentional fraud. To drag this dispute over a period of ten years to obtain coverage for intentional and fraudulent acts – acts that have been uninsurable since the inception of modern insurance in the 18th Century. Insurance is a contract of indemnity against damage caused by a contingent or unknown event. Since fraud is always intentional the finding of fraud made it impossible to insure against losses caused by fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Should Fraud Be Insurable?

Only Stupid Fraudsters Get Caught

    Zalma’s Insurance Fraud Letter

March 1, 2015

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

CURRENT ISSUE

The current issue of ZIFL reports on:

1.    Nine Prior Convictions for Insurance Fraud Had no Deterrent Effect
2.    New From Barry Zalma
a.    Ebooks
i.    Getting the Whole Truth
ii.    Random Thoughts on Insurance – Vol. III
b.    National Underwriter Publishes:
i.    Insurance Claims: A Comprehensive Guide;
ii.    Construction Defects Coverage Guide; and
iii.    Mold Claims Coverage Guide
iv.    All Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    The Insurance Fraud Deskbook
3.    The Biggest Legal Fraud in History
4.    Stupid Is as Stupid Does
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 shrink in 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 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 last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Innocent Mortgagee Collect – Spouse Not Innocent – February 27, 2015
•    Plea of Guilty to Insurance Fraud Stands – February 26, 2015
•    Does “Notice-Prejudice Rule” Apply to Claims Made Policy? – February 25, 2015
•    Rescission Means Policy Never Existed – February 24, 2015
•    Any Insured Can Change Limits – February 23, 2015
•    Insurance Irrelevant to Subrogation Action – February 23, 2015
•    Can Insured Profit as an Additional Insured? – February 19, 2015
•    Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation – February 19, 2015
•    Comply With Insurance Condition or Lose – February 18, 2015
•    Insurance Policy Means What It Says February 17, 2015
•    B & T Zalma’s Passover 2015 – February 16, 2015
•    Discount for Ace Conference – February 16, 2015
•    Is Pool Pop-Out Excluded? – February 16, 2015
•    Insurance Fraud Fails Occasionally – February 15, 2015
•    Interviewing is an Art & Science – February 13, 2015
•    New E-Books from Barry Zalma – February 12, 2015
•    Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith – February 12, 2015
•    Misrepresent Material Fact – Lose Coverage – February 11, 2015
•    Mailing is All Needed to Perfect Nonrenewal – February 10, 2015
•    It Doesn’t Pay to Seek Penalties Not Owed – February 9, 2015

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 | Comments Off on Only Stupid Fraudsters Get Caught

Innocent Mortgagee Collect – Spouse Not Innocent

Going to Pot

How to Lose Fire Insurance Coverage

Members of the public think that the covenant of good faith and fair dealing only applies to the insurer and the insured can do whatever they want and hide important information from the insurer to avoid increased premium or loss of coverage. In Michigan endorsements added to homeowners policies require the insured to report any change in risk on penalty of losing coverage.

In Nationwide Mut. Fire Ins. Co. v. McDermott.. — Fed.Appx. —-, 2015 WL 756206 (C.A.6 (Mich.) 2/24/15) the insurer paid for a fire loss under a reservation of rights to the insured and mortgagee and then  sought recovery of what it paid to Kasey McDermott for  a fire loss caused by the intentional acts of a co-insured.

FACTS

On January 13, 2012, McDermott’s then-husband, Brien Mathews, accidentally started a fire—while manufacturing and smoking marijuana in their basement—that burned down their home.

McDermott’s insurer, Nationwide Mutual Fire Insurance Company, paid McDermott $160,209.50 for the loss. After learning that Mathews’ marijuana lab caused the fire, however, Nationwide challenged its liability through a declaratory action filed in district court. Following discovery, the district court held: (1) that the policy did not cover McDermott’s loss; and (2) that Nationwide was entitled to subrogation for payments made to McDermott following the fire before it learned of the fire’s cause. On appeal, McDermott challenges the denial of her insurance coverage and her liability to Nationwide for payments made.

In 2010, Brien Mathews, McDermott’s then-husband, became a licensed medical marijuana patient and caregiver pursuant to M.C.L. § 333.26421 et seq. After obtaining his “registry identification card,” Mathews worked “up to eight hours a day” to operate and expand his marijuana operation, an operation that, at the time of the fire, served four patients, including himself. From 2010 to 2012, Mathews spent upwards of $20,000 on lab equipment, purchasing dirt, fertilizer, and “[t]ons of lighting.” The operation took place almost exclusively in two rooms in the basement of McDermott’s home, though occasionally Mathews stored marijuana in the garage.

THE DANGER OF PRODUCING HONEY OIL

After Mathews began growing and distributing marijuana, he learned of a process known as “butane extraction,”  which involves drawing liquid butane through chopped marijuana leaves to extract THC and produce “honey oil,” a THC-rich substance users smoke. Honey oil would sell for four to eight times as much as marijuana. Mathews understood that butane extraction was risky, because “butane was highly flammable.” He knew that he “didn’t want to have any source of ignition around the butane.” He also knew “not to smoke” when he was using butane, and to keep it away from “open flame” and “any object that sparks.”

On January 13, 2012—the day of the fire—Mathews was performing butane extractions when a flame he had lit to smoke some of the honey oil ignited butane that had not yet evaporated. The resulting fire consumed the house and most of their possessions.

Although McDermott knew that Mathews had been growing marijuana in the basement, she claims that she did not know about the butane extractions or that butane was flammable.

At the time of the fire in January 2012, McDermott had a Nationwide Homeowner Policy that provided coverage for “accidental direct physical loss to [the] property” described therein. The policy specified which types of losses were not covered, such as those caused by an intentional act of the insured or those “occurring while hazard [was] increased by a means within the control and knowledge of an insured.” Further, by a Michigan Amendatory Endorsement to the policy, Nationwide informed McDermott that she had “a duty to notify [Nationwide] as soon as possible of any change which may affect the premium risk under th[e] policy,” including “changes … in the occupancy or use of the residence premises.”

The district court found that the policy did not cover McDermott’s losses because the fire was not an accident, and, in any event, McDermott was barred from recovery under the Increased Hazard exclusion; and as a result, Nationwide was entitled to subrogation in the amount of $139,841.04 for payments made on McDermott’s behalf.

INNOCENT CO-INSURED CLAIMS

McDermott challenges the district court’s ruling, arguing that, as an innocent co-insured under Michigan law, she is entitled to recover under the policy despite her then-husband’s conduct, and should not be “required to reimburse Nationwide.”

ANALYSIS

The appellate court concluded that because McDermott failed to notify Nationwide of the change in use of her basement—notification expressly required by the policy—the district court correctly denied coverage. The “Michigan Amendatory Endorsement” to McDermott’s policy provided that McDermott had a duty to notify Nationwide as soon as possible of any change which may affect the premium risk under the policy, including, but not limited to, changes in the occupancy or use of the residence premises.

McDermott failed to fulfill the notification condition by not informing Nationwide of Mathews’ marijuana growing operation. During their depositions, both McDermott and Mathews admitted that they had not informed Nationwide that in 2010, Mathews set up a marijuana growing operation in their basement, effectively “changing” the use of the basement from an area “simply used for storage and [their] washer and dryer to an area where [Mathews was] manufacturing and processing marijuana.” Because McDermott failed to satisfy the notification condition in her policy and, by so doing, knowingly omitted—in her representations to Nationwide—a “material fact … during the policy period.” As a result she is not entitled to recovery and is obligated to reimburse Nationwide the money it paid to the mortgagee.

The ruling was required because Nationwide was not informed, as required by the policy, that:

1.  Mathews had approximately 28 marijuana plants growing in the basement.

2.  Two rooms in the basement had been converted into growing rooms—with one housing plants in the “vegetative state” and the other serving as the “flower room”.

3.  Mathews had spent upwards of $20,000 on lab equipment, including “[t]ons of lighting” and numerous cans of butane.

4.  According to Nationwide’s representative, had McDermott informed Nationwide of Mathews’ marijuana operation, Nationwide would have declined coverage altogether, because such an operation is an increased hazard and “an unacceptable risk.”

It is impossible to hold an insurance company liable for a risk it did not assume. [Auto–Owners Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich.1992).] Because McDermott is not entitled to recover under the policy, Nationwide is also contractually entitled to subrogation.

The mortgage clause clearly and unambiguously provides, “[i]f [Nationwide] pay[s] the mortgagee for loss and den[ies] payment to you[,] … [Nationwide is] subrogated to all the rights of the mortgagee granted under the mortgage on the property.”

ZALMA OPINION

This case proves, without using the words, that the covenant of good faith and fair dealing applies equally to the insured as it does to the insurer. The insured was under a mandatory duty to advise the insurer that they were using a highly flammable substance – butane – in their basement as part of a marijuana growing and processing operation. Had the insurer known the true facts it would never have insured the risk. Since it paid the innocent mortgagee it was entitled to reimbursement from the insured’s including the claimed innocent spouse who failed to advise of the change in risk.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Innocent Mortgagee Collect – Spouse Not Innocent

Plea of Guilty to Insurance Fraud Stands

Insurance Fraud Results in Eight Years in Prison

When a party pleads guilty to multiple crimes in open court and with the advice of competent counsel he or she can expect to spend time in jail or prison and to have no opportunity to withdraw the plea. However, in People v. Dobson, Not Reported in Cal.Rptr.3d, 2015 WL 466810 (Cal.App. 4 Dist., 2/3/15), the defendant attempted to withdraw his plea after being sentenced to eight years in prison claiming that his lawyer was not competent to adequately represent him.

Defendant and appellant Randy Kenneth Dobson pled guilty to arson of an inhabited structure,  presenting a false insurance claim, presenting a false statement in conjunction with an insurance claim, possession of methamphetamine, and possession of drug paraphernalia. The trial court imposed the maximum it said it would consider, which was eight years in state prison. Defendant orally moved to withdraw his guilty plea, but the trial court denied the request. His sole contention on appeal is that this act constitutes an abuse of discretion.

FACTS

On December 26, 2011, a fire broke out at a mobilehome owned by codefendant Lori Jo Alhadeff. The Riverside County Fire Department extinguished the blaze. California Department of Forestry and Fire Prevention conducted an investigation in which it concluded that two people had been present in the residence prior to the fire. It determined that the fire was the result of arson.

Investigators found a glass pipe often used for smoking methamphetamine, which contained a white crystalline substance. Defendant, whom Alhadeff described as a “casual fling,” arrived at the scene of the fire on the day it occurred. When questioned by investigators, defendant stated he had been at Aldaheff’s residence the day before the fire but insisted he was only there for a couple of hours in the afternoon. He denied that the pipe belonged to either him or Alhadeff. He asserted he “wasn’t anywhere near” Alhadeff’s mobilehome when the fire began and was instead at a friend’s house playing ping-pong.

In addition to appearing at the scene of the fire and speaking to investigators, on the day of the fire defendant also left “several urgent messages” with Alhadeff’s insurer indicating that her house had burned down but that she was “too upset to call.” Approximately an hour after an insurance representative told defendant she could not answer his questions because he was not on the policy, defendant and Alhadeff appeared at the insurer’s office to file a claim. Defendant prompted Alhadeff to ask questions about valuing the claim at $554,000. Suspicious of the fire’s origin, the People obtained and executed a search warrant for defendant and Alhadeff’s hotel room, as well as the latter’s vehicle and residence was issued.

Among other items, officers seized “a document strategizing the insurance fraud, in what appears to be [defendant’s] handwriting”; glass pipes; a substance that later field-tested positive for methamphetamine; correspondence between defendant and Alhadeff “detailing how to execute the plan to obtain the insurance claim”; and a binder and folder containing insurance paperwork. At some point during the investigation, law enforcement even discovered “a lighter engraved with what is believed to be the inception date of the arson scheme.” Once in custody and Mirandized defendant admitted that he had helped Alhadeff with her insurance claim because she was “not very smart” and he had experience in handling similar claims because of a house fire.

At the preliminary hearing on March 1, 2013, defendant entered a plea of guilty on all counts. Defendant executed a plea form explicitly stating that the maximum sentence he could serve was 11 years two months, that his entitlement to formal probation would be “decided by the court,” and the term he would serve in custody would not exceed eight years in state prison.Defendant told the court that he had a “clear mind” and understood what was happening, he understood that a conviction would violate any probation or parole from previous cases, and he had no questions about the plea form he had executed. When the prosecutor asked if he had committed the acts alleged in each count, he answered, “Yes.” The court asked, “Given our discussion, how do you plead, Mr. Dobson, to each of these counts?” Again without questions or caveats, defendant answered, “Guilty, Your Honor.”

Defendant did not appear at his sentencing hearing, and a bench warrant issued. Later the trial court filed a letter defendant had written to the trial judge indicating that he had not appeared “because this case has been packed with police misconduct and attorney misconduct and would have sent me straight to prison where [he would be] unable to fight for what is true and correct.” He then asserted that defense counsel promised him probation, with no more than one year in jail if he pled guilty, and that “state prison ha[d] been removed from the table.” A hearing was held and defense counsel explained that he and his client were present because defendant had indicated “he wished to explore withdrawing his plea” on the ground of ineffective assistance of counsel.

Defense counsel provided a lengthy description of events preceding defendant’s entry of a guilty plea. The trial court then repeated that it had reviewed the transcript from the preliminary hearing and concluded that defendant received oral advisements that he could face eight years in prison.

ANALYSIS

Defendant contends he should have been allowed to withdraw his guilty plea because: (1) he only had a few minutes to confer with trial counsel regarding his charges and possible defenses; (2) his statement that he was not at the scene of the fire constitutes proof of factual innocence; (3) he did not understand the plea terms; and (4) he could not read the plea form because he lacked his eyeglasses. The appellate court held that the trial court did not abuse its discretion in finding that defendant failed to prove by clear and convincing evidence that either contention provided good cause to withdraw his plea. In fact, reviewing his arguments he had no evidence, just a panoply of whines.

To establish good cause to withdraw a plea it must be shown that defendant was operating under mistake, ignorance, or any other factor overcoming the exercise of his free judgment. However, a plea may not be withdrawn simply because the defendant has changed his mind.   In this case, defendant had ample opportunity to consider the terms of the deal the court offered him. He pled guilty nine months after initially pleading not guilty, and defense counsel stated that he and defendant “had discussed the case for months” before entry of a guilty plea. Also, the trial court told defendant multiple times that he could serve up to eight years in state prison if he pled guilty. The court could not see any clear and convincing evidence that defendant’s plea was insufficiently knowing and voluntary.

Contrary to Defendant’s claims, a person is guilty of arson when he or she willfully and maliciously sets fire to or burns or causes to be burned “or who aids, counsels, or procures the burning of, any structure, forest land, or property.”

Defendant made no objection when the court informed him he could face up to eight years in state prison, and he asked no questions before stating, “Guilty, Your Honor,” when asked what his current plea was.

ZALMA OPINION

The Defendant helped the victim of his arson with her claim because she was not too smart. He accepted a plea, failed to appear for his scheduled sentencing, claimed his lawyer was inadequate and claimed he had no idea what he was agreeing to since he couldn’t read the agreement without his glasses. Regardless, as the court noted, the agreement was read to him aloud and the judge advised the insured that he was guilty.
A person told by a judge that he could be sentenced to 8 years in jail should never plead guilty if he believes he is innocent when there is a court reporter available to take down every word spoken when his plea of guilty was taken in open court. Apparently Mr. Dobson was even less intelligent than the woman he convinced to try an arson for profit scheme. He will spend eight years in prison.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Plea of Guilty to Insurance Fraud Stands

Does “Notice-Prejudice Rule” Apply to Claims Made Policy?

Claims Made Policies Are Different From Occurrence Policies

An insured brought a state-court action against a claims-made directors and officers (D&O) liability insurer to recover for breach of contract in connection with insurer’s denial of claim for reimbursement of legal fees and settlement payment. Insurer removed case. The United States District Court for the District of Colorado granted insurer’s motion to dismiss. Insured appealed. The federal court certified questions to the Colorado Supreme Court about the application of the notice-prejudice rule to a claims made policy.Under the notice-prejudice rule, an insured who gives late notice of a claim to his or her insurer does not lose coverage benefits unless the insurer proves by a preponderance of the evidence that the late notice prejudiced its interests.

In Craft v. Philadelphia Indemnity Insurance Company, — P.3d —-, 2015 WL 658785 (Colo., 2/17/15) the Colorado Supreme Court noted that a claims-made policy covers only those claims brought against the insured during the policy period and reported to the insurer by a date certain, typically within a brief window following the expiration of the policy period. The date-certain notice requirement effectuates the parties’ arrangement and limits the insurer’s liability to those claims reported within the time specified.

In this case, the policy required the insured to give prompt notice of a claim; specifically, notice “as soon as practicable” after learning of the claim. The policy also required the insured to give notice of the claim by a date certain; specifically, “not later than 60 days” after the expiration of the policy. Near the end of the one-year policy period, a company officer was sued for alleged misrepresentations he made during a merger. Unaware of the insurance policy, the officer defended himself against the suit. When he learned of the policy, approximately sixteen months after the policy period had expired, he immediately contacted the insurer but did not receive a response. The officer later settled the suit. He then sued the insurer for denying coverage under the policy. The district court granted the motion to dismiss, rejecting the officer’s argument that the notice-prejudice rule applied to the claims-made policy issued by the insurer. The officer appealed, and the case is now before the Tenth Circuit who submitted questions to the Colorado Supreme Court.

THE QUESTIONS

(1) whether the notice-prejudice rule applies to claims-made liability policies in general; and

(2) if so, whether the rule applies to both types of notice requirements in those policies.

Craft v. Phila. Indem. Ins. Co., 560 Fed.Appx. 710, 715 (10th Cir. 2014). The Supreme Court limited its analysis to the date-certain notice requirement.

FACTS

Dean Craft, appellant in the Tenth Circuit Court of Appeals, was the principal shareholder and president of Campbell’s C–Ment Contracting, Inc. (“CCCI”). At the time he was sued, Craft did not know that CCCI and Suburban had purchased directors and officers liability insurance from appellee Philadelphia Indemnity Insurance Company (“Philadelphia”).

As an express condition precedent to coverage, the policy required the insured to provide written notice to Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired. The relevant policy period for this coverage was November 1, 2009 to November 1, 2010.

Craft did not learn of the insurance policy until March 2012, more than a year after the policy period in which the suit was filed had expired, nor did he or the company give notice to the insurer.

ANALYSIS

In resolving this issue, the Supreme Court reviewed the development of Colorado’s notice-prejudice rule and the salient differences between occurrence and claims-made liability insurance policies. In either type of policy, a “prompt” notice requirement protects the insurer’s interest in investigating and defending a claim. Unique to a claims-made policy, however, a “date-certain” notice requirement serves only to effectuate the agreed-upon temporal limits of coverage. Thus, to excuse notice given after the expiration of the reporting period would rewrite a fundamental term of the insurance contract.

An insurer is prejudiced by an insured’s breach of a policy requirement where the breach defeats the purposes of the requirement. Such a notice requirement protects the insurer’s opportunity to investigate and defend a claim adequately. Yet where the insurer in fact has that opportunity, the rationale for strict enforcement of such a notice requirement is absent.

In Colorado there is a presumption of prejudice to the insurer in instances where the insured provides notice after disposition of the liability case, the insured has the burden of going forward with evidence to dispel this presumption, if such evidence is presented, the presumption loses any probative force it may have, and it is then up to the insurer to go forward with the evidence that actual prejudice existed.

THE DIFFERENCES BETWEEN “OCCURRENCE” AND “CLAIMS MADE” POLICIES

The Colorado Division of Insurance defines an occurrence policy as “an insurance policy that provides liability coverage only for injury or damage that occurs during the policy term, regardless of when the claim is actually made.” 3 Colo. Code Regs. 702–5:5–1–8 (2014). A claims-made policy, by contrast, is “an insurance policy that provides coverage only if a claim is made during the policy period or any applicable extended reporting period.”  Thus, occurrence policies and claims-made policies are almost the mirror image of each other.  Claims-made policies provide only potential coverage because timely notice of the claim to the insurer is a prerequisite to coverage under such policies. In other words, coverage is triggered only if the insured provides timely notice of the claim.

THE REASONS FOR CLAIMS MADE POLICIES

Claims-made policies proliferated in the 1970s as a solution to the problems many insurers were facing in writing professional malpractice insurance policies. In setting premiums for occurrence policies, underwriters had difficulty predicting decades into the future considerations such as inflationary trends, jury verdicts that outpaced inflation, and new theories of liability. Faced with increasing costs of doing business, the typical insurer either had to raise premiums, offer fewer products, or withdraw from the professional liability insurance market altogether. With claims-made policies, however, the risk to the insurer passes when the policy period expires. Given this limitation, a more predictable rate structure could be assembled and justified for such policies, and, thus, rates bore a more reasonable relationship to the current fiscal situation in a given state.”

Both occurrence and claims-made policies typically contain a requirement that the insured notify the insurer of a claim or potential claim “promptly.”Claims-made policies typically contain a second type of notice requirement not found in occurrence policies: the requirement that the insured provide notice of a claim within the policy period or a defined reporting period thereafter. Such a date-certain notice requirement fulfills a very different function than a prompt notice requirement. The date-certain notice requirement defines the temporal boundaries of the policy’s basic coverage terms. For this reason, although excusing late notice and applying a prejudice requirement make sense in the context of a prompt notice requirement, extending such concepts to a date-certain notice requirement would defeat the fundamental concept on which coverage is premised.

The Supreme Court concluded that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy, so advised the Tenth Circuit, who now will invariably adopt the position of the Colorado Supreme Court and will affirm the District Court’s decision to rule against the insured.

ZALMA OPINION

The notice-prejudice rule has an important function with regard to an occurrence policy when prejudice cannot be shown. It has no place when it comes to a claims-made policy’s date-certain notice requirement since to do so would rewrite the policy and defeat the purpose of the contract.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Does “Notice-Prejudice Rule” Apply to Claims Made Policy?

Rescission Means Policy Never Existed

Innocent Co-Insured Doctrine Does Not Apply to Rescission

Legal malpractice insurance policies are purchased by one member of a law firm on behalf of all partners and associates in the firm. The application for insurance or renewal is the basis on which the insurer makes a decision to insure or not insure a lawyer or law firm. The concept of utmost good faith requires that the lawyer signing the application or otherwise seeking renewal of an insurance policy must be frank and totally honest in response to the inquiries made by the application.

In Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, — N.E.3d —-, 2015 IL 117096, 2015 WL 728111 (Ill., 2/20/15) the Illinois Supreme Court was called upon to decide the propriety of an appellate court decision applying the Innocent Co-Insured Doctrine to rescind a policy as to the lawyer who signed the application but force the policy to stay in effect as to all other lawyers in the firm.

THE DECLARATORY RELIEF ACTION

Plaintiff Illinois State Bar Association Mutual Insurance Company (ISBA Mutual) filed a complaint for rescission and other relief against the Law Office of Tuzzolino & Terpinas (firm); Sam Tuzzolino and Will Terpinas, Jr., partners in the firm; and Anthony (“Antonio”) Coletta, the plaintiff in an underlying legal malpractice action against Tuzzolino, Terpinas and the firm. In its complaint, ISBA Mutual sought rescission of the legal malpractice insurance policy it had issued to the firm, alleging that Tuzzolino’s material misrepresentation on an ISBA Mutual renewal application induced ISBA Mutual to issue the policy. Ruling on motions for summary judgment, the circuit court of Cook County granted ISBA Mutual’s motion and rescinded the policy. Terpinas and Coletta appealed that judgment, arguing the rescission should not apply to Terpinas. The appellate court agreed and reversed the judgment of rescission as to Terpinas. 2013 IL App (1st) 122660, ¶¶ 38, 46, 377 Ill.Dec. 299.

BACKGROUND

In the underlying legal malpractice action, Coletta alleged that Tuzzolino and the firm represented either Coletta or his home construction business in various legal matters from 2002 to 2008, and that Tuzzolino mishandled some of those matters, including the “Baja litigation.”

Tuzzolino also allegedly suggested that Coletta try to recover his losses by suing the lawyer who handled a Baja bankruptcy in 1999. Tuzzolino filed a legal malpractice action against the bankruptcy lawyer at the end of 2005, but the case was dismissed six months later on the ground that it was barred by the statute of repose for legal malpractice claims. Coletta alleged Tuzzolino failed to inform him that the suit had been dismissed, allowing Coletta to believe it was proceeding toward trial. Coletta alleged that in February 2008, after he learned the case had been dismissed, he confronted Tuzzolino with that knowledge. According to Coletta, Tuzzolino offered to pay him $670,000 to settle any potential claim for legal malpractice arising out of Tuzzolino’s work on the suits against the Baja coventurers and the bankruptcy attorney.

Less than three months later, shortly before the April 30, 2008, expiration of the firm’s 2007–08 legal malpractice policy with ISBA Mutual, Tuzzolino completed a Renewal Quote Invoice and Acceptance Form for the purchase of a policy meant to cover the firm during the 2008–09 policy year. Question No. 4 on the form asked: “Has any member of the firm become aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise to a claim that has not been reported?” Tuzzolino checked the “no” box corresponding to this question. He signed his name as “owner/partner” and dated the form April 29, 2008.

Terpinas allegedly learned of Tuzzolino’s malfeasance about a month later, on June 10, 2008, when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to ISBA Mutual. In May 2009 ISBA Mutual brought suit seeking rescission and other relief against Tuzzolino, Terpinas, the firm, and Coletta.

Terpinas and Coletta, but not the firm, appealed that judgment, arguing that Terpinas was an “innocent insured” who was not to blame for Tuzzolino’s misrepresentation and the policy should not have been rescinded as to him. The appellate court agreed with that argument and concluded that a common law “innocent insured doctrine” applied to misrepresentations made on the renewal application. The court held that this doctrine preserved Terpinas’s coverage even as Tuzzolino’s was properly rescinded.

ANALYSIS

The question presented is whether Illinois law allows rescission of an insurance policy in its entirety for a material misrepresentation on the written application.

Summary judgment is appropriate when the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law

Section 154 of the Insurance Code provides: “No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefor. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company.” (emphasis added)

The Supreme Court noted that section 154 expressly refers to misrepresentations “made by the insured or in his behalf” — that is, not necessarily by the insured personally.

ISBA Mutual points to Home Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir.1992), which observed that rescission of an insurance policy because of a misrepresentation on the application is distinctly different from the denial of insurance coverage because of excluded wrongdoing.

Rather than the innocent insured doctrine, Dunn concerned a “waiver of exclusion” clause in the policy that the insurer sought to rescind. Dunn involved a “crooked attorney” who obtained a legal malpractice policy for himself and the other attorneys associated with his firm, but “understandably” failed to disclose his own criminal activities on the policy application. One of the other attorneys in the firm, who had no involvement in the policy application or his colleague’s misrepresentation, was sued for legal malpractice unrelated to his colleague’s criminal activities. The insurer sought rescission of the policy due to the material misrepresentation on the application. The insured who was not involved in the misrepresentation, as well as the underlying malpractice plaintiffs, objected to the rescission of the policy as to that attorney, relying on the waiver-of-exclusion provision.

The Seventh Circuit found it irrelevant that no other attorney in the firm took part in the crooked attorney’s fraud, or even knew of it. “Though the other attorneys did not intend to deceive, the falsehood on the application is fatal. [The crooked attorney’s] misrepresentation caused [the insurer] to issue a policy to all the attorneys that otherwise would not have been forthcoming.”

The innocent insured doctrine does not apply in the rescission context. Unlike in rescission cases, the innocence of an insured matters a great deal when another insured’s wrongdoing triggers a policy exclusion, and a dispute arises over whether the insurer has a duty to defend the innocent insured under a policy that undisputedly was in effect. A misrepresentation on the policy application goes to the formation of the contract. The Supreme Court concluded that the appellate court erred in applying the innocent insured doctrine in this case. That doctrine is relevant to issues of policy exclusions and insurance.

However, the innocent insured doctrine is not suited to rescission and contract formation.
Section 154, which establishes public policy on the issue of rescission, allows rescission when the relevant requirements are met. When the requirements were satisfied rescission was proper and the court, granting rescission, establishes that the contract of insurance never came into force so there was no insured at all, let alone an innocent insured.

ZALMA OPINION

Rescission is an ancient equitable remedy allowing parties to an insurance contract to be placed in the status they were in before the policy came into effect because of fraud, material misrepresentation or concealment of material fact. In this case the insured who signed the application for insurance knew that a client was claiming he had committed malpractice, had made an offer to settle the potential malpractice claim, and still answered the question about potential claims in the negative. He intentionally misrepresented material facts and removed from the insurer the right to evaluate the risk it was asked to take. That fraud should not be honored. The Illinois Supreme Court agreed and rescinded the policy from its inception.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Rescission Means Policy Never Existed

Any Insured Can Change Limits

Jury’s Finding Is Affirmed

When two or more people are named insured’s on a policy of insurance any one may, by the terms of the contract of insurance, ask the insurer to amend or modify the policy. When a loss occurs, the remaining insured, who did not know of the change, will argue that the change should not be enforced because he or she was not aware of the change. This is especially so when the policy limits are reduced.

In Brown v. Government Employees Ins. Co., Not Reported in A.3d, 2014 WL 7882070 (N.J.Super.A.D., 2/17/15) a New Jersey appellate court was asked to reverse a trial court verdict in favor of the insurer and grant the plaintiff a new trial because the plaintiff did not agree to a reduction in policy limits.

FACTS

This litigation arises from the tragic accidental death of a young woman and her mother. On February 14, 2011, twenty-four-year-old Jaclyn McVaugh was driving her mother’s 2005 Mitsubishi Galant heading northbound on Key Road in Winslow Township when she rear-ended a Ford Expedition, causing her car to cross over the center lane and collide with a Honda “which was stopped or almost stopped in the southbound passing lane” of Key Road. McVaugh’s mother, Frances Mitchell–Brown, was seated in the front passenger seat; McVaugh’s three-year-old daughter was in a child-seat in the rear passenger compartment. Neither one of the adult occupants of the Mitsubishi were wearing their seatbelts. Both died. The child survived.

At the time of the accident, the Mitsubishi was insured by defendant Government Employees Insurance Company (GEICO). Plaintiff Randy Brown was married to Mitchell–Brown; McVaugh was his stepdaughter. Plaintiff and Mitchell–Brown were the only named insureds on the Mitsubishi policy issued by GEICO. Plaintiff sued GEICO claiming the coverage limit on the Mitsubishi policy was improperly reduced without the authorization of one of the two named insureds. The case was tried before a jury resulting in a verdict in favor of GEICO.

In June 2008, plaintiff purchased from GEICO an insurance policy for his own car, a 2005 Mitsubishi Gallant. Plaintiff testified that he worked in the automobile industry in various capacities for nearly thirty-seven years. He testified that his employment experience made him “absolutely” familiar with coverage limits and automobile insurance policies. Thus, he requested “maximum coverage” when he purchased his policy from GEICO.

The first auto policy GEICO issued to plaintiff had a six-month coverage period that began on June 17, 2008 and ended on December 17, 2008. Thereafter, the policy renewed in six-month intervals. The policy listed plaintiff and his wife Mitchell–Brown as the named insureds. In this capacity, each had the authority to unilaterally change the terms of the policy, including the coverage limit, without the other’s knowledge or approval.

In November 2010, GEICO records reflect certain specific changes were made to plaintiff’s Mitsubishi policy. Plaintiff does not dispute that the policy was amended. However, he contended before the jury that these changes or amendments to the policy were not made by one of the two named insureds.

During the November 24, 2010 phone call, the person identified as plaintiff’s wife made a number of changes to the policy. According to GEICO’s representative, records indicated that “ ‘Ms. Policyholder requests to add daughter Jaclyn McVaugh to policy.’ And ‘Jaclyn’s driver’s license is suspended. Advised policyholder to have daughter clear.’ “ Jaclyn’s vehicle, a 2001 Toyota Camry, also became insured under the policy, and Jaclyn’s email address, jaclyn_meah@yahoo.com, was added as a contact source. GEICO’s records indicate that new “I.D. cards [were] being mailed at 12:59 p.m …. for the 2001 Toyota.” The cards were mailed to plaintiff’s home and emailed to Jaclyn McVaugh’s personal email address.

One of the key changes made to the policy concerned the coverage. Bodily injury liability limits were reduced from $250,000/$500,000 to $15,000/$30,000, to take effect at the time of the policy renewal scheduled for December 17, 2010. With respect to PIP coverage  an automated coverage adjustment form was signed and effective date 12/17/10. That refers to the coverage selection form, the e-signed coverage selection form for the reduction of the PIP option from … 250,000 to … 15,000. The change in PIP coverage required the insured’s signature to take effect. According to GEICO records, “Randy Brown” e-signed the documents on the GEICO website.

Plaintiff testified and argued to the jury that this should be considered as evidence of an improper modification of the policy because he always used his middle initial when signing his name. In rebuttal, Lubow testified that it is not uncommon for policy holders to make changes.  Policy holders routinely drop coverages from $250,000/500,000 to $15,000/30,000.

A GEICO policy with a declarations page dated November 25, 2010, was mailed to plaintiff’s residence. Lubow explained that “[a] declarations page is issued by GEICO to its policyholders.  When the PIP coverage limits were subsequently lowered, the premium decreased to $892.50.

Without a competent evidential basis, plaintiff testified that he believed Jaclyn took his credit card and made the payment without his knowledge or consent. GEICO’s records indicate payments were made on plaintiff’s policy via credit card on at least three other occasions, including twice after the death of Jaclyn and plaintiff’s wife.

The jury returned a 7–1 verdict in favor of GEICO, finding it had not “improperly lowered the automobile insurance coverage limits for [plaintiff] and his wife, Frances Mitchell–Brown.” The trial judge thereafter denied plaintiff’s motion to set aside the jury’s verdict as against the weight of the evidence.

ANALYSIS

Plaintiff failed to provide or otherwise include in the appellate record either the trial judge’s written statement of reasons explaining the basis for his decision to deny plaintiff’s motion for a new trial, or a transcript containing the judge’s oral decision.

The appellate court is bound to defer to the trial court’s “feel of the case” derived from the judge’s personal observations of the witnesses’ testimony during the trial and other intangible factors that cannot be duplicated by or extracted from the examination of the transcribed record. The “feel of the case” is not just an empty shibboleth—it is the trial judge who sees and hears the witnesses and the attorneys, and who has a first-hand opportunity to assess their believability and their effect on the jury. It is the judge who sees the jurors wince, weep, snicker, avert their eyes, or shake their heads in disbelief. Those personal observations of all of the players is the feel of the case to which an appellate court defers.

Determining the credibility of a witness’ testimony is a function exclusively delegated to the jury. Given plaintiff’s failure to provide the appellate court with the trial judge’s reasons for denying his motion to set aside the jury’s verdict.

The appellate court emphasized that the jury considered the evidence presented by the parties over two days of trial. This evidence consisted primarily of the testimony from two witnesses: plaintiff and GEICO’s senior underwriter.

Based on this evidence, the jury found plaintiff did not prove, by a preponderance of the evidence, that GEICO improperly lowered the automobile insurance coverage limits in the policy issued to plaintiff and his wife, the late Frances Mitchell–Brown. It was undisputed that plaintiff and decedent were listed as the named insureds under the original policy. They were individually vested with the authority to unilaterally amend the coverage under the policy. GEICO provided competent evidence at trial and properly admitted documentary evidence, that plaintiff’s wife lowered the bodily injury liability coverage prior to the accident on February 14, 2011.

ZALMA OPINION

This is clearly a case of sour 20/20 hindsight. The plaintiff who suffered a severe loss of a wife and step-child learned after their death, that his wife had reduced the limits of their policy instead of keeping the high limits he had originally purchased. Of course, he never complained about the lower premium, until after the accident. Since the jury and judge saw the witnesses and ruled in favor of GEICO, the appellate court had no option but to affirm because the plaintiff produced no convincing evidence that GEICO did anything wrong when it accepted the wife’s request to reduce limits and premium.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Any Insured Can Change Limits

Insurance Irrelevant to Subrogation Action

Subrogation is Only Either a Tort or Breach of Contract Action

Subrogation lawsuits seek recovery from a tortfeasor who caused damage to property, the risk of loss of which was insured, and allows the insurer to step into the shoes of its insured to recover from the tortfeasor what the insured could have recovered had the insured not been insured. In Certain Underwriters at Lloyd’s London v. North Shore Signature Homes, Inc. — N.Y.S.2d —-, 2015 WL 669745 (N.Y.A.D. 2 Dept., 218915), 2015 N.Y. Slip Op. 01409 the New York Supreme Court, Appellate Division, in one of its amazingly brief opinions, held that the insurer’s claim file was not discoverable since it had no relation to the tort action.

Applying the law of the case doctrine in a subrogation action to recover benefits paid to the plaintiffs’ insureds, the defendant Richard Wischhusen appealed, and the defendant North Shore Signature Homes, Inc., separately appealed, from so much of an order of the Supreme Court, Nassau County (Jaeger, J.), that granted that branch of the motion of the plaintiff in Action No. 1 for a protective order preventing the disclosure of its insurance coverage file referable to the underlying property damage claim, and denied those branches of those defendants’ respective cross motions to compel the disclosure of that file.

Contrary to the contention of the defendants Richard Wischhusen and North Shore Signature Homes, Inc. (hereinafter North Shore), the Supreme Court properly granted that branch of the motion of the plaintiff insurer in Action No. 1 which was for a protective order preventing the disclosure of its insurance coverage file referable to the underlying property damage claim, and properly denied those branches of their respective cross motions which were to compel disclosure of that file. In reaching its conclusions, the Supreme Court properly applied the law of the case doctrine, since, in an order dated May 24, 2011, from which Wischhusen and North Shore did not appeal, the court had already determined that the disputed file was irrelevant and not directed to discover admissible evidence in the tort action that only required proof of liability and damages.

ZALMA OPINION

A subrogation action is not an insurance case just because an insurance company is a party to the lawsuit. Every first party property insurance policy contains a contract requirement that the insured assign to the insurer its rights against any third party that caused the damage. Stepping into the shows of the insured all that the plaintiff need prove is that the defendant is liable for the injury and the damages sustained. Insurance has no bearing since the policy might have required the insurer to pay, under a replacement cost policy, more than tort damages or with a large self-insured-retention less than the damages. Allowing insurance coverage to enter the case would simply cause confusion and have no probative value.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Insurance Irrelevant to Subrogation Action

Can Insured Profit as an Additional Insured?

Construction Defect Defense Claims to Multiple Insurers May Allow Insured to Profit From Claim

Because of the way construction contracts are written multiple insurers who named or caused the general contractor to be an additional insured, are required to defend the general contractor. Usually the various insurers will work together to provide a single defense to the general contractor additional insured. Often, some of the insurers fail or refuse to defend or indemnify the additional insured. As a result, when the case is completed the general contract will sue the insurers who did not defend it seeking reimbursement for the fees expended. Some seek the same defense costs from each of the recalcitrant insurers.

Developers are more aggressively pursuing their rights under additional insured (AI) endorsements issued to subcontractors, seeking full coverage in lieu of triggering any self-insured or direct insured monies. Applying its aggressive tactics it used a motion in limine to deprive the defendant of its right to present evidence that it did not owe defense.

FACTS

In McMillin Companies, LLC v. American Safety Indemnity Company, — Cal.Rptr.3d —-, 2015 WL 270034 (Cal.App. 4 Dist. 2/33/3025), 15 Cal. Daily Op. Serv. 751, 2015 Daily Journal D.A.R. 888, it was claimed that the trial court erred and deprived an insurer that named McMillin as an additional insured of defending itself.  The general contractor, McMillin, settled the underlying construction defect action using AI monies and then pursued a dozen or more AI carriers for unreimbursed defense costs.

Since each AI carrier had an independent obligation to defend the entire action, there should have been complete coverage for all defense costs. Nevertheless, McMillin pursued its action against the AI carriers and recouped more money in that coverage action than its out-of-pocket total.

It did so by claiming that some of the amounts obtained in the coverage action should be attributed to  Brandt v. Superior Court (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796 fees (an insured can recover attorney fees “reasonably incurred to compel payment of the policy benefits”) that were incurred in pursuing the recalcitrant carriers.

BACKGROUND

McMillin, the general contractor sued a subcontractor’s commercial general liability insurer for breach of contract and breach of implied covenant of good faith and fair dealing. The trial court ruled in limine [Latin for “threshold,” a motion made at the start of a trial requesting that the judge rule that certain evidence may not be introduced in trial] that the insurer had a duty to defend but that proceeds of general contractor’s settlements with other insurers completely offset general contractor’s contract damages, and entered judgment based on the parties’ agreement that the rulings in the in limine motions would preclude general contractor from prevailing on its causes of action.

Motions in limine are designed to facilitate management of a case by deciding difficult evidentiary issues in advance of trial. Motions in limine must be limited in scope. The court of appeal concluded that, by granting McMillin’s motion as to the duty to defend, the court essentially granted a summary adjudication motion in favor of McMillin on one of the elements of its cause of action for breach of contract, ruling as a matter of law that ASIC had a duty to defend.

ANALYSIS

Relying on Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1078, 17 Cal.Rptr.2d 210, 846 P.2d 792 ( Horace Mann ), and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (Montrose), McMillin argued that the denial of ASIC’s motion for summary judgment established as a matter of law that ASIC had a duty to defend them in the Baker litigation.

Opposing the motion, ASIC disputed the legal effect of the denial of its summary judgment motion, contending that because the court did not deny the motion by expressly finding a disputed factual issue, the effect of the ruling did not establish the duty to defend as a matter of law.

The court of appeal concluded that the trial court erred in granting McMillin’s motion in limine to preclude evidence or argument that disputed ASIC’s duty to defend; the trial court erred in granting ASIC’s motion in limine to preclude McMillin from presenting evidence or argument either that the Settlement proceeds are not an offset.

Duty to Defend

An insurer owes a duty to defend any lawsuit “which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) Since the duty arises whenever the claim against the insured seeks damages on any theory that, if proved, would be covered by the policy, the insurer is relieved of its duty only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy.

ALLOCATION

The appellate court concluded that the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation.  In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC’s alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin’s proof.

In ruling that McMillin was precluded from arguing that the unallocated Settlement proceeds either are not an offset to contract damages or are allocated to the tort damages, the trial court erred in essentially granting a nonsuit in ASIC’s favor.

ASIC’s arguments regarding offsets based on the Settlement proceeds do not defeat McMillin’s right to go to trial. The fact that McMillin may have obtained the Settlement from 11 other insurers years after the tender of defense to ASIC—regardless how the Settlement proceeds are allocated—affects only McMillin’s potential right to recover damages from ASIC, not whether McMillin suffered damages as a result of ASIC’s alleged breaches.

DECISION

The minute order filed July 26, 2012, precluding ASIC from disputing its alleged duty to defend was, therefore, reversed. On remand, the court should enter an order denying the plaintiffs’ motion in limine. The minute order filed October 22, 2012, precluding McMillin from arguing that the unallocated Settlement proceeds either are not an offset to contract damages or are allocated to the tort damages, was reversed. On remand the trial court should enter an order denying ASIC’s motion in limine.

As evidenced in this appeal, using an in limine motion as a substitute for a potentially dispositive statutory motion produces substantial risk of prejudicial error.

ZALMA OPINION

The Court of Appeals refused to apply proposed precedent in which the receipt of fully offsetting settlements from other carriers resulted in no damages and thus dismissal of the insured’s case. Instead, the Court found that offsets may be used to diminish damages but do not necessarily preclude a claim against a carrier that did not participate in the insured’s defense. This  portion of the opinion leaves the door open for an insured in a multi-carrier insurance coverage case to allocate settlement monies away from defense costs and essentially profit from settlements – attributing them to Brandt fees – while continuing its efforts against non-settling carriers. Insurance is not designed to allow the insured to profit from the loss but only to indemnify it.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Can Insured Profit as an Additional Insured?

Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation

Insurance Competence Needed to Commit Insurance Fraud

Arson is relatively easy. Pour some gasoline and light a match and a fire will burn. Successfully turning an arson fire into profit is more difficult and requires some knowledge of insurance and insurance claims. In Ross v. State Farm Fire and Cas. Co., Slip Copy, 2015 WL 667608 (S.D.Ohio, 2/17/15) the District Court for the Southern District of Ohio dealt with an attempted arson-for-profit by a person who had no knowledge of insurance and what is necessary to make a successful claim to an insurance company.

State Farm denied the claim of Mr. Ross after a fire at a dwelling in Dayton Ohio.

FACTUAL BACKGROUND

A fire occurred on October 31, 2012, to a real property located in Dayton, Ohio (the “Property”). At the time of the fire, the Property was owned by Djuna Brown–Jennings. Ross, the only person insured by the State Farm policy, had owned the Property. He lived at that address until March or April of 2012. Ross moved out when renovations were started. He testified that he expended nearly $20,000 to renovate.

Ross was the prior owner of the Property and had deeded it to Djuna Brown–Jennings, his sister, prior to the fire.  Ross planned to deed the Property back over to Luxury Sports Superstore, LLC, an entity that he allegedly owned. He claimed that he transferred the Property to his sister because he did not think he could transfer the Property directly to Luxury Sports Superstore without waiting a year. State Farm was not made aware of the Property transfer prior to the fire.

The fire was called into the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Fire crews arrived at the Property at 10:03 p.m. The Dayton Fire Department’s report notes that the fire was incendiary and the material causing the fire was gasoline.

State Farm retained Fire and Explosion Consultants, LLC to determine the cause and origin of the fire who determined that the fire was intentionally set with the use of gasoline and an open flame ignition source. All other potential causes of the fire were eliminated according to the consultants’ report.

Relative to the issues in this case, the Policy includes the following provision regarding concealment or fraud: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.”

On July 3, 2013, State Farm denied Ross’s claim and voided the Policy for multiple reasons. The Policy premiums paid after October 31, 2012, were refunded to Ross.

ANALYSIS

State Farm asserted that the Policy should be voided because Ross misrepresented or concealed material information pertinent to his claim and that Ross did not have an insurable interest in the Property at the time of the incident so he could not collect under the Policy, and that it did not act arbitrarily, capriciously or without reasonable justification when it denied Ross’s claim and voided the Policy.  Ross responded claiming genuine issues of material fact.

Insurable Interest

In Ohio, and every other U.S. jurisdiction, a policy owner must have an insurable interest in the subject matter of the insurance. If not, the policy is void.  A person has an insurable interest when the person would profit by or gain some advantage by the continued existence of the property or would suffer a loss or disadvantage by the destruction of the property. In this case there was evidence that Ross had made an investment in the Property, including renovations, prior to deeding it to his sister. However, the Property was owned by Ross’s sister, Djuna Brown–Jennings, at the time of the fire.
Even though Ross indicates that he planned to deed the Property to Luxury Sports Superstore in the future and assuming that he alone could cause this to happen, Ross was not the owner of the Property at the time of the fire.

Therefore, even though Ross may have made an investment in the Property before the fire, he did not own the Property. Further, since Ross was not the only member of Luxury Sports Superstore, LLC, at the time of the fire, he alone would not profit by the continued existence of the Property and would not suffer a loss or disadvantage by the destruction of the Property.

Since Ross did not have an insurable interest in the Property at the time of the fire the Policy was void at the time of the fire.

Misrepresentation Or Concealment of Material Information?

The Policy at issue here is void if any insured intentionally concealed or misrepresented any material fact or circumstance relating to the insurance. A misrepresentation is material if, in the context of an insurer’s post-loss investigation, the false statement concerns a subject relevant and germane to the insurer’s investigation. Therefore, false answers are material if they might have affected the attitude and action of the insurer or if they were calculated either to discourage, mislead or deflect the insurer’s investigation in an area that might seem to the insurer a relevant or productive area to investigate. Finally, materiality can be decided by a court if reasonable minds could not differ on the materiality question.

Although there is no evidence as to when the fire was set there was evidence that the fire was first reported to the Dayton Fire Department at 9:59 p.m. on October 31, 2012. Ross indicated that he was at Luxury Sports Superstore, his place of business, until about 7:00 or 8:00 p.m. on the night of the fire after which he went to the Marriott. He also indicated that he arrived at the Marriott ten (10) to twenty (20) minutes later. Video at the Marriott, accurate to within fifteen (15) minutes, showed Ross arriving at 9:52 p.m.

Based upon the accuracy of the video time, Ross could have had the opportunity to start the fire and proceed to the Marriott. Ross’s statement that he left his office between 7:00 p.m. and 8:00 p.m. and arrived at the Marriott ten (10) to twenty (20) minutes later is shown to be a misrepresentation by the video at the Marriott. Ross, therefore, misrepresented the time at which he arrived at the Marriott.

This misrepresentation is material to State Farm’s investigation because if Ross’s whereabouts was unknown between 8:20 p.m. at the latest and 9:37 p.m. at the earliest and the fire was reported at 9:59 p.m., Ross could have had time to start the fire. Ross tried to avoid summary judgment by asserting that he was never prosecuted for the fire. This assertion is, of course, irrelevant as to whether Ross misrepresented his whereabouts at the time of the fire. Ross made a misrepresentation of a material fact to State Farm relating to State Farm’s insurance coverage of the Property. Thus, based upon language in the Policy, the Policy is void.

Bad Faith?

An insurer, such as State Farm, has a legal duty to act in good faith, and a bad faith refusal to settle a claim is a breach of the legal duty to act in good faith. In this case, State Farm had reasonable justification for denying Ross’s claim and voiding the Policy. Ross did not have an insurable interest in the Property, and State Farm thought that Ross had materially misrepresented his whereabouts at the time of the fire.

The court concluded that Ross did not have an insurable interest in the Property and that as a matter of law the Policy was properly voided by State Farm. The court also concluded that Ross misrepresented his whereabouts at the time of the fire to State Farm and that according to its terms, the Policy was properly voided by State Farm. Finally, it concluded that State Farm’s voidance of the Policy and failure to pay Ross’s claim was reasonable under the circumstances and was not an act of bad faith.

ZALMA OPINION

Mr. Ross was ignorant of the law of insurance. He maintained insurance on a property in which he had no interest. To obtain the benefits of an insurance policy the person must be insured and must have an interest in the property, the risk of loss of which is insured, so that its loss will cause some damage to the insured. Ross had no interest since he gave it away to his sister. Further, he lied to his insurer about his conduct on the night of the arson fire thereby voiding any coverage that existed.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Arson-for-Profit Fails Because of Lack of Insurable Interest and Misrepresentation

Comply With Insurance Condition or Lose

Failure to Submit Timely Proof of Loss Fatal to Flood Claim

Flood insurance, because it is part of a federal government program is different from insurance written by commercial insurers. As a result, courts require the policy to be strictly construed rather than the opposite result when dealing with a commercial insurer. In Reine v. State Farm Ins. Co., Slip Copy, 2015 WL 631413 (E.D.La., 2/13/15) the insured learned that it was expensive to deal with a flood policy as if it was issued by a commercially based insured.

FACTS

The insurer refusal to make payments on a home insurance policy for some damages that plaintiffs allege they suffered from Hurricane Isaac’s storm surge. Plaintiffs own property in LaPlace, Louisiana (“the residence”). They maintained flood insurance coverage under a Standard Flood Insurance Policy (“SFIP”) issued by FEMA through the National Flood Insurance Program and effective from June 23, 2013 through June 23, 2013.

According to plaintiffs, on August 29, 2012, the residence sustained damage from Hurricane Isaac’s storm surge. Per declarations and documents provided by FEMA, on September 4, 2012, an independent adjuster inspected the property and issued a final report. The report recommended a payment of $116,944.18 for damage to the building and contents loss. On September 10, 2012 an advance payment of $5,000 was issued. On October 30, 2012, plaintiffs submitted a signed proof of loss for $105,629.29 with a statement for replacement cost coverage for $11,314.89.  On November 9, 2012, FEMA issued a final building payment and final contents payment for the amount sworn to in the proof of loss.  On that date, FEMA also issued a denial of additional amounts that plaintiffs had claimed for property damage which FEMA found could not have been caused by the three inches of water that entered the home.

On November 27, 2012, plaintiffs submitted a new estimate of damages by Michaelson and Messinger Insurance Specialists, LLC for $390,203.16 (“November estimate”). However, FEMA alleged that plaintiffs never submitted an additional proof of loss to substantiate the amount claimed in the November estimate. On August 28, 2013, plaintiffs filed suit against FEMA and State Farm Insurance Company (“State Farm”), alleging breach of contract, bad faith claims adjusting, negligent claims adjusting, and intentional infliction of emotional distress due to defendants’ refusal to make further payments for the damages claimed in the November estimate.

ANALYSIS

FEMA claims it is entitled to summary judgment on plaintiffs’ breach of contract claim because plaintiffs failed to submit a proof of loss in support of the November estimate. Plaintiffs were covered under a Standard Flood Insurance Policy (“SFIP”) issued by FEMA. Federal regulations require as a precondition to recovery that the insured submit a proof of loss to their insurer within 60 days.

The proof of loss must be signed and sworn and must the date and time of loss, specifications of damaged buildings and detailed repair estimates, and an inventory of damaged personal property. Although normally the insured must submit proof of loss within 60 days, the Acting Federal Insurance Administrator extended this deadline for claims related to Hurricane Isaac, giving plaintiffs approximately 240 days to submit the proof of loss.

The Fifth Circuit Court of Appeals has held that “the provisions of an insurance policy issued pursuant to a federal program must be strictly construed and enforced” and that the failure to provide proof of loss “relieves the federal insurer’s obligation to pay what otherwise might be a valid claim.” Gowland v. Aetna, 143 F.3d 951, 954 (5th Cir.1998). Because plaintiffs failed to produce any evidence that they did in fact timely submit a proof of loss, the Court was compelled to find that FEMA is entitled to summary judgment on plaintiff’s breach of contract claim.

ZALMA OPINION

In state courts dealing with commercially issued insurance policies that contain the same 60-day requirement for a proof of loss required by the Flood Insurance policies, courts will ignore the harsh result unless the insurer can prove it was prejudiced by the delay. However, since flood insurance is issued as a result of a federal statute, there are no arguments available to the insured if he, she, or it fails to present the proof of loss within 60 days or whatever date that was extended. This insured failed even when the claim was presented with the assistance of what was assumed to be an insurance professional.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Comply With Insurance Condition or Lose

Insurance Policy Means What It Says

No Cover for Person Not Named as an Insured

Some people refuse to accept the fact that an insurance  policy is controlled by the language of the policy if clear and unambiguous. When a policy explains, in clear and unambiguous language, who is insured, no brilliant argument, no Aristotelian logic can change the meaning of the contract of insurance.  For example, in Dean v. Kentuckiana Medical Reciprocal Risk Retention Group, Not Reported in S.W.3d, 2015 WL 603729 (Ky.App., 2/13/15), the Kentucky Court of Appeal was asked to rule that a person not named on a policy of insurance as an “insured” was intended to be an insured.

FACTS

Alan Dean Hicks and Tracy Norris Hicks, individually and as administrators of the Estate of Sarah Elizabeth Hicks, appealed from the summary judgment entered in favor of Kentuckiana Medical Reciprocal Risk Retention Group (“KMRRRG”). The issue on appeal involves insurance coverage; specifically, whether KMRRRG is obligated to provide coverage under a professional liability insurance policy purchased by Pediatric Cardiology Associates, P.S.C. (“the P.S.C. policy”) for the allegedly negligent acts or omissions of one of its physicians, Dr. Christopher L. Johnsrude. The trial court concluded that KMRRRG was not obligated to provide coverage for defense or indemnity.

As an infant, Sarah Elizabeth Hicks was diagnosed with congenital heart conditions that caused her to suffer with an abnormal heart rhythm. On April 14, 2008, Dr. Johnsrude of Pediatric Cardiology Associates performed an electrophysiology study and a cardiac ablation procedure on Sarah. These relatively minor procedures were intended to restore her heart to a proper rhythm. However, following the treatment, Sarah suffered a stroke and died at the age of ten years.

On April 10, 2009, the Hickses filed a wrongful death action against Dr. Johnsrude, Pediatric Cardiology Associates, Norton Hospitals, Inc., and Norton Healthcare, Inc. The claims against the Norton defendants were eventually dismissed by summary judgment, and no appeal was taken.
The Hickses agreed to settle the negligence action that they had brought against Dr. Johnsrude and the vicarious liability claims that they had asserted against Pediatric Cardiology Associates. Under the terms of the settlement agreement, the parties agreed that coverage for the alleged negligent acts or omissions of Dr. Johnsrude was provided by KMRRRG under a professional liability policy issued to Dr. Johnsrude individually. KMRRRG paid out the limits under the Dr. Johnsrude’s policy as part of the settlement of the wrongful death action.

However, KMRRRG and the Hickses did not agree that the separate liability policy issued by KMRRRG to Pediatric Cardiology Associates (the “P.S.C. policy”) provided coverage for the group’s vicarious liability for any negligent acts or omissions of Dr. Johnsrude. The parties agreed to submit that coverage dispute to the trial court for resolution.

The trial court observed that the P.S.C. policy was clear and unambiguous on its face. The policy expressly limited coverage to Pediatric Cardiology Associates and to those physicians and allied health professionals named on a schedule prepared by the group. Only nurses and office staff employed by Pediatric Cardiology Associates were included on the schedule, and there is no dispute that Dr. Johnsrude was not included among those named in the list submitted by the P.S.C. The court observed that no physician was identified in the policy and that no premium was paid for coverage for any liability arising from the negligent acts or omissions of any physician.

ANALYSIS

Summary judgment is proper where there exists no material issue of fact and the movant is entitled to judgment as a matter of law.

The Hickses contend that the circuit court erred by rendering summary judgment in favor of KMRRRG. They argue that the policy issued to Pediatric Cardiology Associates covers claims made against the group for its vicarious liability for the negligent acts or omissions of any physician acting on its behalf. KMRRRG contends that the limited purpose of the P.S.C. policy is to provide coverage to the P.S.C. for liability resulting from the acts or omissions of the allied health professionals and staff employed by the group.

On its declarations page, the P.S.C. policy provides, in part, as follows: “Named Insured  ¶ Pediatric Cardiology Associates, PSC ¶ Insured(s) ¶ Those physicians and allied health professionals who are named on the Schedule of Insureds on file with the company, submitted by the Named Insured.”

The named insured requires each to be listed on “Schedule of Insureds” submitted by the Named Insured. ¶ (3) An Allied Health Professional who is named on the “Schedule of Insureds” but only with respect to Professional Services rendered as an employee of the Named insured or an Insured. ¶ (4) A person or organization which, at the time of a Medical Incident giving rise to a claim under this policy, was an Insured under this policy or prior policies, issued by the Company, which this policy renews.” (emphasis added)

“Insured” is defined in Part II as follows: “any person, corporation, or organization qualifying as an Insured under the Persons Insured provisions of Section I Part C of this policy while rendering services on behalf of their respective University of Louisville Practice Plan.”

After completing its analysis the appellate court concluded that the terms of the policy are clear and unambiguous.  Part I, Paragraph C provides coverage for the P.S.C. “but only with respect to Professional Services rendered by an Insured or by any person other than a physician or dentist under the direction of such Insured, for whose acts or omissions the Named Insured is legally responsible.”

While Dr. Johnsrude may have been rendering services on behalf of the University of Louisville Practice Plan, he did not qualify as an “insured” under the provisions of Part I, Paragraph C of the policy as he was not a physician named on the “Schedule of Insureds;” an allied health professional; or an insured under a prior policy.

Under the very terms of the policy, the definition of “Insured” found in Part II of the P.S.C. policy cannot be read to expand the coverage provided to Pediatric Cardiology Associates,  so as to include coverage for the P.S.C.’s vicarious liability for the acts or omissions of Dr. Johnsrude. That construction proposed by the Hickses is not supported by the clear and unambiguous language of the policy of insurance.

ZALMA OPINION

Insurance policies must, as the Kentucky Court of Appeal found, be read as they are written and not expanded, for reasons outside the contract, to provide coverage where no premium was paid and the insurer took no risk.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

Mr. Zalma’s new e-books “Passover Seder – 2015″ for non-Hebrew speakers, “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insurance Policy Means What It Says

Passover 2015

Passover 2015 – In English

Passover is a time when every Jewish father and mother tell their children the story of the Exodus of the Jews from slavery in Egypt. It is a story that Jewish people have told every year for more than 3,000 years. It is a very personal story and applies to each of us as if we were the people who lived it so long ago.

It is a story never to be forgotten. For those of us who have assimilated into the United States and who do not speak Hebrew my wife and I wrote an English only Passover story so that we and our children and grandchildren will understand the story of Passover without a great deal of ritual.

It is available for a small price as a 15 page e-book. If you purchase the e-book you have our permission to print as many copies as you need to conduct your own Passover Seder. It will be available until Passover and then will be deleted.

Our Version of the Passover Seder are available at http://www.zalma.com/zalmabooks.htm.

 

Posted in Zalma on Insurance | 2 Comments

Discount for Ace Conference

Barry Zalma to Speak at ACE Conference & You Can Get a Discount

 

Here is, from me as one of the speakers, an opportunity to get a discount for attending the 19th Annual America’s Claims Event.

We here at the 19th Annual America’s Claims Event are very excited to welcome you to the event as a speaker in Austin on June 17-19. ACE is a great event and we know you will be an excellent addition to the speaker lineup this year. As a heads-up, we have automatically registered you for the event and no further action needs to be taken on your end with this matter.

Now, there are many industry events out there, and it is our top-notch speaker lineup more than anything else that drives attendees to the event. As such, I would like to provide you with our $100 Guest of Speakers Discount Code – SP100.

This code is designed to encourage you to invite your colleagues/peers/clients to the event as your guest at a discounted rate. An HTML is attached that contains a message that can be easily forwarded to interested parties. We would really appreciate it if you can help spread the word about you speaking at ACE this coming June!

Of course, feel free to reach out with any questions about this or anything else related to the event.

Attend the 19th Annual America’s Claims Event.

AGENDA  SPEAKERS  SPONSORS  VENUE  REGISTER AND SAVE
Every Angle of the Claims Process Covered
with Expertise at ACE 2015

As a speaker at the America’s Claims Event, I would like to extend a special Discount Registration to you to attend the 19th Annual America’s Claims Event in Austin, TX on June 17-19, 2015. Save $100 when you register by May 29th using promo code SP100.

There is no better way to be exposed to new ideas and insights about best practices than attending industry events with our peers.

4 *NEW* FOCUSES FOR 2015
  1. The balancing of innovation and performance in the digital age
  1. Organizational branding & market PR; harnessing the power of new & developing media to engage the client base, improving customer loyalty
  1. Change Management in Claims Transformation
  1. The latest in fraud prevention, preparedness & mitigation

I welcome you to join me at this CAN’T MISS conference. Learn more here!

The Annual America’s Claims Event is one of the ONLY industry events where senior managers, practitioners & experts involved with claims operations can get the insight they need to implement effective and tactical strategies for their claims handling process. More than 400 professionals and decision-makers from mid-size to large Fortune 500 companies attend the event to engage in idea exchanging and peer-to-peer learning. Attendees gain deep insight from the experts and obtain unparalleled access to proven solutions to confront their operational challenges. Register Here Today
Register Today

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Is Pool Pop-Out Excluded?

Clear And Unambiguous Exclusion Is Effective

Swimming pools are fun to have but they can often be an expensive addition to a home. A swimming pool is a concrete shell placed in a hole in the ground and held there by the weight of the water kept in the shell. Sometimes science gets in the way. When water gets deep into land the dirt expands and pushes itself upward. If the push from the expanding earth is greater than the weight of the concrete shell and the water in it, the shell will pop out of the ground and cause damage to the hardscape around the pool. Homeowners insurance is not necessarily intended to indemnify for such a loss caused by science and water.

In Liberty Mut. Fire Ins. Co. v. Martinez, — So.3d —-, 2015 WL 585550 (Fla.App. 5 Dist.) the Florida Court of Appeal was called upon to determine the appeal filed by Liberty Mutual Fire Insurance Company (“Liberty”) to set aside a summary judgment entered in favor of its insureds, Nigel and Melissa Martinez, and determine if the water damage exclusion applied.

FACTS

Liberty issued an all-risk insurance policy to the Martinezes insuring their residence and other structures located on their property. During a tropical storm, Nigel Martinez partially emptied his family’s in-ground swimming pool because it was overflowing. The following day, he discovered that the pool had lifted out of the ground. As would be later agreed upon by experts, subsurface water accumulated underneath the pool during the storm, which exerted hydrostatic pressure on the partially emptied pool. This pressure caused the pool shell to lift out of the ground, damaging the shell as well as the pool deck, rock garden, and waterfall.

Thereafter, the Martinezes filed a claim with Liberty, which was denied on the ground that the Water Exclusion provision in the policy excluded damage caused by hydrostatic pressure from coverage.

THE POLICY

The questioned exclusion provides: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.  ¶ …. ¶  c. Water Damage, meaning:  (1) Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind; ¶ …. (3) Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.” (Emphasis added).
In response, the Martinezes filed suit for breach of contract and argued that their damage was covered under the ensuing-loss provision in the policy.

Both sides moved for summary judgment. The trial court found that the direct cause of the Martinezes’ damage was the pool shell coming out of the ground, rather than the hydrostatic pressure. Accordingly, the court found that the damages were ensuing losses covered by the policy, denied Liberty’s motion for summary judgment, and granted the Martinezes’ motion for summary judgment.

ISSUE

The issue on appeal is whether the Water Exclusion provision excludes the Martinezes’ losses from coverage.

ANALYSIS

Insurance policies are construed in accordance with the plain language of the policy and must be read as a whole, giving each provision its full meaning. As a general rule, insurance coverage must be broadly construed in favor of the insured, while exclusions must be narrowly construed against the insurer. Insurance policies may contain exclusionary provisions that exclude certain risks from the scope of coverage, and exclusionary provisions may carve out coverage exceptions for losses that ensue from an excluded cause of loss. The court of appeal noted that ensuing-loss exceptions are not applicable, however, if the ensuing loss was directly related to the original excluded risk.

Although there are no Florida cases on point, courts in New York and South Carolina have interpreted similar anti-concurrent cause provisions and applied those provisions to analogous facts. For example, in Jahier v. Liberty Mutual Group, 883 N.Y.S.2d 283, 284–86 (N.Y.App.Div.2009), rainfall increased hydrostatic pressure surrounding the insureds’ drained swimming pool and forced it out of the ground. As a result of the pool lifting out of the ground, the pool, surrounding patio, and plumbing were damaged. The insureds filed a claim with their insurer for those damages. Notwithstanding the rainfall and drainage of the pool contributing to the losses, the court held that the water damage exclusion clearly and unambiguously applied to the insureds’ losses.  Similarly, in South Carolina Farm Bureau Mutual Insurance Co. v. Durham, 671 S.E.2d. 610, 612–14 (S.C.2010), the court found that the insureds’ damages—which were sustained when rain increased hydrostatic pressure around their pool, forcing the pool out of the ground and damaging their deck—were excluded from coverage because the policy contained an anti-concurrent cause provision that applied to water damage. Because water pressure was one of the causes that forced the pool out of the ground, the court concluded that the water damage exclusion applied.

The court of appeal agreed with Liberty that under the policy’s plain language, the damage to the Martinezes’ pool deck, rock garden, and waterfall was not an ensuing loss. Rather, the policy expressly excluded the Martinezes’ loss as it specifically excluded losses that occurred directly or indirectly from subsurface water pressure. The damage to the deck, rock garden, and waterfall resulted, directly or indirectly, from subsurfa the court found no reason to look to the ensuing-loss provision.

ZALMA OPINION

Although the thought of something as big and heavy as a swimming pool popping out of the ground like a cork popping off a bottle of sparkling wine is difficult to conceive, it happens more often than one might believe. The effect of hydrostatic pressure is not unusual and is scientifically well known. For that reason the homeowners policy contains the exclusion applied by the court because insurers cannot properly calculate a premium to accept a risk of losing a swimming pool or other property by hydrostatic pressure.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Is Pool Pop-Out Excluded?

Insurance Fraud Fails Occasionally

    Zalma’s Insurance Fraud Letter

February 15, 2015

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

The current issue of ZIFL reports on:

1.    Insurance Fraud Conviction Affirmed.
2.    New From Barry Zalma
a.    Ebooks
i.    Getting the Whole Truth
ii.    Random Thoughts on Insurance – Vol. III
b.    National Underwriter Publishes:
i.    Insurance Claims: A Comprehensive Guide;
ii.    Construction Defects Coverage Guide; and
iii.    Mold Claims Coverage Guide
iv.    All Part of the Zalma Insurance Claims Library.
c.    The ABA Tort & Insurance Practice Section publishes:
i.    The Insurance Fraud Deskbook
3.    Coalition Against Insurance Fraud Chooses 2015 Leadership Slate
4.    Insurer Agrees to Pay $1.3 Million to California For Fraud In Annuity Sales.
5.    News From the Insurance Research Council
6.    Say It Isn’t So.
7.    Bank Pays Allstate for Mortgage Fraud
8.    Insurance
9.    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 shrink in 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 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 last 20 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

1.    Interviewing is an Art & Science – February 13, 2015
2.    New E-Books from Barry Zalma – February 12, 2015
3.    Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith – February 12, 2015
4.    Misrepresent Material Fact – Lose Coverage – February 11, 2015
5.    Mailing is All Needed to Perfect Nonrenewal – February 10, 2015
6.    It Doesn’t Pay to Seek Penalties Not Owed – February 9, 2015
7.    Investigating Arson For Profit – February 6, 2015
8.    Covenant Not to Execute Not A Release – February 5, 2015
9.    Duty to Defend Not Effected by Denial of Motion for Summary Judgment – February 4, 2015
10.    Evidence Required to Defeat Summary Judgment – February 4, 2015
11.    Endorsement Trumps Body of Policy – February 3, 2015
12.    Crime Often Pays Until the Criminal Is Caught – February 2, 2015
13.    Insurance Fraud Continues Unabated – February 1, 2015
14.    Don’t Sue Your Agent Until Action Accrues – January 30, 2015
15.    No Good Deed Goes Unpunished – January 29, 2015
16.    When Are Operations Completed? – January 29, 2015
17.    The Staged Insurance Loss – January 28, 2015
18.    Insured Owes Utmost Good Faith To Insurer – January 28, 2015
19.    Insurer Not Obligated to Pay High Bid – January 27, 2015
20.    Careful With Applications – January 26, 2015

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 | Comments Off on Insurance Fraud Fails Occasionally

Interviewing is an Art & Science

Getting the Whole Truth

The following is an excerpt from my ebook “Getting the Whole Truth” now available from ClaimSchool, Inc. at http://www.zalma.com/zalmabooks.htm.

Prejudice Blocks the Truth

The foremost aim of the interview is to learn the truth, the whole truth, and nothing but the truth. Truth can only be obtained by an accurate classification of facts obtained through a methodical and detailed investigation and interview. In this regard, the greatest danger any interviewer faces is that resulting from entering into an interview with preconceived opinions.

As the philosopher William James said, “A great many people think they are thinking when they are merely rearranging their prejudices.”

No professional can conduct an effective interview if he or she is convinced, prior to the start of the interview, that the witness will be truthful (or untruthful). A hallmark of the professional is that he or she remains vigilant in this regard, trained to avoid all preconceived opinions and prejudices that could endanger the success of an interview.

Sometimes an unskilled interviewer will jump to a conclusion of guilt long before the interview itself is conducted. Based on such things as the subject’s family background, social position, or seeming lack of an alibi, the novice interviewer’s tendency to prejudge will inevitably limit the effectiveness of the truth-seeking process and the scope of the interview. Starting an interview with a preconceived notion of any kind will simply cause the interviewer to miss important facts . . . facts that his or her prejudices did not envision or investigate.

The tendency to prejudge is extremely common. Insurance brokers, consummate salespeople, feel they could never be deceived by a wealthy customer who pays the full premium before inception. Mothers ardently believe their children would never lie to them. There are police officers who cannot comprehend that a wealthy individual living in Beverly Hills or Vail can commit a petty crime. Judges and lawyers doubt children have the guile to effectively lie to them. Most businesspeople believe a long-time or politically connected customer would never cheat.

Similarly, many inexperienced interviewers immediately assume that an individual is lying because he or she has a past criminal record, or is from a particular racial group or of a particular religion . . . or for any of thousands of other “reasons’” founded in nothing more than the personal biases of the interviewer himself or herself. Prejudice based on preconceptions about the wealth, age, gender, race, religion, or national origin of the subject must be avoided by every professional, not simply as an obvious and positive egalitarian principle, but as anathema to conducting a successful interview. Everyone has prejudices, but the prudent professional recognizes this, places judgment “on hold,” and keeps it out of any interview.

When conducting an interview, the professional accepts that the witness will also, in James’s words, be rearranging his or her prejudices throughout the process. An interviewer who cannot dismiss prejudice during an interview tends to look for and listen to only those things that confirm his or her prejudice. He or she will never get the truth; even if it presents itself he or she will not hear it if it does not comport with the preconceptions, biases, and prejudices he or she brought to the interview.

The Interviewer Who Is Not Objective Has Failed before the Interview Begins

To avoid the negative effects of his or her own prejudices, the professional:

  • believes only what is corroborated and proven
  • never lets personal biases or prejudices color his or her judgment
  • never allows a subject’s personal charisma to influence or curtail an interview
  • exploits the expressed prejudices of the subject to gain truthful answers

Yes; you read that last point right: ironically, the witness’s prejudices and preconceived notions can be used by the skilled interviewer to get to the truth quicker. For example, when interviewing a person who expresses racist opinions, the interviewer can use knowledge of those prejudices to develop a false but effective rapport with the subject. Or, by challenging the subject’s apparent racist attitudes, the interviewer can anger the subject enough that he or she lets loose with a vituperative explosion of words that could provide the breakthrough needed to allow the interviewer to get the whole truth.

Demeanor: Always Remain Calm

Never lose your temper. It’s liable to frighten the subject, and few will respond to or confide in those they fear. Faced with rage, the subject will limit his or her answers to single-syllable words and provide no useful information.

Furthermore, if you lose your temper you will no longer be able to think clearly, nor plan the next step in the interview. You will be forced to cede control of the interview, which will render it ineffective. Like a chess match, the interview must be planned and executed with knowledge of the next four to 10 moves; there is no room for outbursts of temper. If you lack anger management skills, the interview is bound to fail.

Maintain Perspective

The professional never lets a subject think that a full response to all questions is more important to the professional than it is beneficial to the witness him- or herself. Therefore, the professional should not appear to be trying too hard, and should not permit his or her consciousness of the interview’s importance to contribute to an atmosphere of stress. Much as the manager of a business might tell his sales personnel not to use the hard sell technique on a client, the skilled interviewer should not appear to be trying too hard to “oversell” the witness on the necessity of telling the truth. Rather, the interviewer should convey confidence that the truth will be forthcoming.

The interviewer who tries too hard to convince the witness of the necessity for telling the truth is like the young Roman Catholic lady who fell in love with a Protestant. Her mother suggested to her that perhaps he could be taught the tenets of their faith and be converted to Roman Catholicism.

A week later the girl came home in tears. She sobbed:

“I oversold him! He decided he was going to study for the priesthood!”

Have Faith in Your Abilities . . . and in the Process

As an interviewer you will on occasion find yourself discouraged with the lack of progress in an interview. It is important to keep in mind that these periods of depression also strike the world’s greatest athletes, singers, and other performers.

One of two things can happen to the interviewer faced with an interview slump:

  • The interviewer becomes so discouraged that he or she gives up trying.
  • The interviewer works his or her way out of the situation.

Far from allowing him- or herself to succumb, he professional persists by resorting to a multiplicity of tried-and-true techniques, sticking to the fundamentals, and maintaining confidence in the process until the truth is obtained. Like a baseball player in a hitting slump, the professional recognizes that it is necessary to work through the slump . . . to continue confidently applying the process until success ensues. The professional who keeps studying, practicing, reviewing, and interviewing will find that such periodic slumps soon end. He or she recognizes that instances of failure are just slip-ups on the stepping stones on the path to becoming a truly great interviewer.

The Effective Interviewer

The effective interviewer:

  • has self-confidence and demonstrates it
  • is courteous, even in the face of discourtesy
  • honors his or her promises and controls his or her passions
  • wins respect by being respectful and respectable
  • turns up with a smile even when turned down
  • understands, and is understood by, people
  • has faith in purpose
  • is persistent
  • gets all the truth that can be gotten from an interview

Qualifications of an Interviewer

Key qualities a skilled interviewer possesses include:

  • an interest in the operations of human nature
  • a thorough knowledge of the principles of civil investigation
  • a thorough knowledge of the specific subject matter of the interview
  • the ability to engender trust and inspire confidence

Actors often have months in which to learn their lines, practice their gestures, and incorporate their reactions. Moreover, movie or TV actors can always resort to calling for a retake if anything goes wrong in a performance. If an actor is great, his or her words can affect our emotions, even though we know the lines are only scripted by professional writers. We cry at the death scene, even as we are fully aware that it is just the movie character who is dying, not the actor, whose sixth divorce was splashed all over the tabloids last week.

The interviewer must be an actor. No!—He or she must be more than just an actor: the true interview professional must be a consummate actor, the kind of acting professional who does not merely mouth lines someone else has had the luxury of many weeks’ time to write. The interviewer must be ready to improvise and deliver lines with lightning speed, adapting to any and all possible shifts in the interview drama. He or she has no truly meaningful chance to practice the art of interview except within the interview itself. Neither is the interviewer provided with a director to instruct him or her in the use of gestures to maximize dramatic effect. The interviewer is strictly and entirely alone. Any mistakes made in the interview are final. There are no retakes.

An ordinary stage actor performs in front of an audience that is at least 20 feet away. The audience members to whom the professional interviewer plays can be as close as four inches away. If the performance is less than flawless, the audience will not believe the performance and will be silent. If the audience is silent, the performance—the interview—is a failure.

When an actor is doing a good job, the performance itself is invisible. The audience suspends disbelief and the character being portrayed comes to life. Similarly, though it is apparent to the witness when the interviewer is doing a bad job, a good performance by the actor/interviewer passes for reality and the subject becomes convinced of interviewer’s persona and role, forgetting for the moment—or never fully realizing—that he or she is being interviewed. When the interviewer’s acting skills are “on,” the interviewer and the subject become just two interested parties having a lively conversation. Information gained from that purposeful but improvised “conversation” is more detailed than any information extracted through the well-known “third degree” tactic of interrogation. The subject will have no hesitation to converse and will freely convey information.

Consummate acting skills, along with patience and diligence, will give the interviewer information-laden answers like:

“I obtained my Masters degree in biology from Oxford.”

“I’d never wear those ugly-ass shoes!”

“It depends on what the meaning of ‘is,’ is.”

“She had sex with me. I did not have sex with her.”

“I didn’t buy any gasoline in a can.”

“I never had an insurance policy cancelled.”

All these are definite statements that can be corroborated, supported, or proven false by further investigation. If lies are produced in the free flow of this well-acted conversation, they can eventually be proven to be such. If the truth emerges, the ongoing interview and continuing investigation will prove it out. In either case, the interviewer’s acting skill will have produced a wealth of material to verify later, and the interview will be well on the way to a successful conclusion.

The person interviewed is the toughest drama critic in the world. If the interviewer does the acting job correctly, the subject will become not only a spectator but a willing participant, and a complete story will unfold. The subject who participates and tells a complete story even when doing so disadvantages him or her is in effect giving the interviewer a rave review! Again, the acting can only be of the highest quality: if the understudy actor/novice interviewer hams it up or flubs a line, the subject will immediately sense the attempted deception and withdraw. The interview will effectively be over. No matter how long the “performance” is dragged out, it will get nowhere.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Interviewing is an Art & Science

New E-Books from Barry Zalma

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New E-B00ks From Barry Zalma

Getting the Whole Truth

The interview is an essential form of fact gathering for every type of human interaction. Interviews happen everywhere; they are performed by almost everyone. Interviewing is also an art, and the most effective interviews are conducted by those who are knowledgeable and skilled in this art.

The purpose of an interview is to uncover the truth; the method of uncovering the truth is the art of the interview. The standard interview does not have, nor should it be given, the pejorative sense conveyed by the expression “giving someone the third degree.” Interview professionals do not use rubber hoses or hot lights, or subject the interviewee to torture. In their limited arsenal, professionals do not have the power of the state, the reputation of the FBI, the majesty of a court trial, nor the intimidation of a search warrant.

Civil interviewing professionals are, therefore, compelled to get the information they need by intelligence, wit, skill, and experience. They must be masters of the social graces; they must know how to put people at ease. The skill of the professional causes the person being interviewed to actually want to give information to the interviewer. When the interview is successful, the subject becomes a virtual partner with the professional in the effort to uncover the truth, the whole truth, and nothing but the truth.

This ebook will help anyone who needs to obtain information from anyone else gain the information needed whether a business person, reporter, interviewer, investigator or lawyer.
The book will be delivered to you by e-mail shortly after purchase.

Random Thoughts on Insurance – Vol. III

Since 2010 I have been writing a blog post at least five days a week. This e-book is a collection of those posts that reveal my interest in insurance case law. Some of the cases reviewed were important. Some were of first impression. Others will be totally unimportant. All were interesting to me and I hope are interesting to the reader. This e-book is more than 1200 pages of my review of interesting cases from 2013 through January 2014.
After you purchase please wait for the e-book to upload from PayPal. If it does not upload please e-mail zalma@zalma.com and I will personally send you a copy of the e-mail in pdf format.

Both are available with payment through PayPal.

 

Posted in Zalma on Insurance | Comments Off on New E-Books from Barry Zalma

Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith

Defense Duty Exists Without Right to Indemnity

Indemnity agreements and additional insured agreements go hand in hand. The insurer agrees to produce the defense and indemnity its insured agreed in the indemnity agreement. Sometimes, the insurer is kept in the dark about a case for years only to learn about a suit shortly before trial or after a settlement is reached. In Kmart Corp. v. Footstar, Inc., — F.3d —-, 2015 WL 448633 (C.A.7 (Ill.) 2/4/15) the Third Circuit was called upon to resolve such a situation where, under an agreement between Footstar and Kmart, Footstar operated the footwear departments in various Kmart stores as though they were islands. Footstar employees could only work in those departments unless they had written permission from Kmart. On July 27, 2005, a Footstar employee tried to help a customer get an infant carrier off a shelf outside the footwear department and the customer was injured. She sued, and Kmart eventually sought indemnification for the settlement and defense costs from Footstar and its insurer, Liberty Mutual.

BACKGROUND

Section 18.1 of the Master Agreement required Footstar to defend and indemnify Kmart under certain conditions. On July 27, 2005, a customer named Judy Patrick walked into a Kmart store in Hollywood, Florida. According to her complaint, she asked for assistance from Alex Sehat, who turned out to be a Footstar employee, in getting a stroller down from a shelf. Sehat, along with a Kmart employee, reached up and attempted to bring the stroller down. As they were bringing it down, an infant carrier inside the stroller fell and struck Patrick in the face. The accident took place in the infant/stroller department, which is entirely outside of the Footstar department.

Patrick sued Kmart alleging negligence, with no mention of Footstar in her initial complaint. But Patrick’s counsel discovered during the course of the litigation that Sehat was actually a Footstar employee and called Footstar a year into the suit to get Sehat’s employment records. Footstar contacted Liberty Mutual.

Shortly thereafter Kmart defense counsel wrote to Footstar formally requesting defense and indemnification for the first time. Footstar forwarded the request to Liberty Mutual and Patrick amended her complaint two days later to include Footstar as a defendant. Liberty Mutual wrote Kmart refusing to defend or indemnify, stating: “Footstar is not responsible for the referenced claim as it is not a product liability incident.”

Kmart settled with Patrick eight months later for $300,000 and $10,000 in Kmart gift cards.

The Declaratory Relief Action

Kmart then filed a complaint in this action originally against Footstar only, but then added Liberty Mutual, alleging both owed Kmart a duty of defense and indemnification for the Patrick suit. The magistrate judge entered partial summary judgment on Kmart’s breach of contract and declaratory judgment counts, finding both defendants owed a duty to defend, but only as of January 24, 2008, when Kmart first requested defense. The court found Liberty Mutual and Footstar also had a duty to indemnify but only for Footstar’s relative fault, which a jury apportioned at 15%. The court also found Liberty Mutual did not act in bad faith by denying coverage and Kmart did not breach the notice provisions of the Policy and Master Agreement. Kmart appealed naming only Liberty Mutual as an Appellee, while Liberty Mutual and Footstar cross-appealed.

ANALYSIS

The issues on appeal are whether: (1) Footstar and/or Liberty Mutual had a duty to indemnify Kmart; (2) Liberty Mutual and/or Footstar had a duty to defend Kmart and, if so, when that duty began; (3) Liberty Mutual acted in bad faith by denying coverage; (4) Kmart breached the notice provisions of the Policy and Master Agreement; and (5) the court erred in denying Kmart’s motion for prejudgment interest.

Liberty Mutual and Footstar Did Not Have a Duty to Indemnify

Liberty Mutual and Footstar appeal the magistrate judge’s determination that they had a duty to indemnify Kmart for the Patrick suit. The magistrate judge found Liberty Mutual and Footstar liable because it determined the injury arose from Footstar’s work. However, Liberty Mutual /Footstar contend the court ignored the requirement that any injury had to arise “pursuant to” or “under” the Master Agreement to trigger indemnification, and the Master Agreement explicitly prohibited Sehat’s out-of-department action that resulted in the injury.

The duty to indemnify only arises where the insured’s activity and the resulting damages actually fall within the coverage of the policy. In order to determine whether an activity actually falls within the coverage of the policy, the court must review the plain language of the policy. Indemnity contracts are to be strictly construed, and any ambiguity in the agreement is to be construed most strongly against the indemnitee, in this case, Kmart.

Under subpart 1 of the additional insured clause, Liberty Mutual was liable to Kmart for injuries “arising out of” Footstar’s “work.” Under subpart 2, the Policy applies only to “coverage and limits of insurance required by” the Master Agreement, but coverage will “in no event exceed[ ] either the scope of coverage or the limits of insurance provided by this policy.”

Turning to Footstar, it had a duty to indemnify for those injuries “arising out of [Footstar’s] performance or failure to perform under this Agreement.” Again, any indemnification obligation only relates to those acts taken “under [the] Agreement.” A breach of contract, however, was not a “performance” under the Master Agreement—it was an act taken in direct violation of the contract. For the same reasons as with Liberty Mutual, Footstar had no indemnification obligation for its performance.

Liberty Mutual and Footstar Had a Duty to Defend and Are Liable for Defense Costs from When They Received Notice

The duty to defend is broader than the duty to indemnify. The complaint alleged that Footstar caused Patrick’s injuries by “negligently and carelessly … failing to properly remove” the infant stroller from the shelf. Based on these allegations and the expansive way “arising out of” has been interpreted by Illinois and New Jersey courts, the claim could have been potentially covered under subpart 1. There is certainly an argument that Patrick’s injury arose from Sehat’s “work or operation[ ]”, especially if the injury does not have to be “pursuant to” the Master Agreement, as required by subpart 2.

Although the court rejected these readings for indemnity purposes, two triers of fact found that the injury arose from Footstar’s work, including the jury and the magistrate judge, showing the injury was potentially coverable under the terms of the Master Agreement and Policy.

Liberty Mutual Did Not Act in Bad Faith

While Liberty Mutual had a duty to defend, the flip side is that Liberty Mutual had a defensible position and therefore did not act in bad faith in denying coverage. “[I]n order to prove a claim of bad faith under New Jersey law, a plaintiff must prove that: ‘(1) the insurer lacked a ‘fairly debatable’ reason for its failure to pay a claim, and (2) that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.’” Certain Underwriters at Lloyd’s of London v. Alesi, 843 F.Supp.2d 517, 531 (D.N.J.2011) (citation omitted).  Though Liberty Mutual’s denial letter erroneously refused coverage based on the nature of the complaint—there was an indemnification requirement for personal injury and not just products liability—Liberty Mutual’s position was, at the very least, “fairly debatable” at the time Liberty Mutual denied coverage.

Footstar and Liberty Mutual Cannot Deny Defense Costs Based on Kmart’s Breach of the Notice Provisions

Kmart did not alert Liberty Mutual or Footstar to the suit until thirty months after it first learned about the claim and one-and-a-half years after the suit was filed. This was in contravention of the notice provisions in both the Master Agreement and the Policy.  However, that does not mean that Kmart’s actions precluded it from recovering defense costs. Under New Jersey law, an insurer must show that it was appreciably prejudiced by its insured’s failure to cooperate in order to disclaim coverage based on that failure.  Absent any evidence that the case would have come out differently had the insurer been involved earlier, the third circuit found no bad faith on Liberty Mutual’s part.

ZALMA OPINION

Almost every policy of liability insurance and indemnity agreement requires prompt, if not immediate, notice to the insurer and the indemnitor. In this case that prompt notice was not provided. Regardless, defense duty was owed because there was a potential for coverage, but only from the time of notice. Also, even though the insurer denied coverage in error it had a fairly debatable position and thus avoided bad faith allegations.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fairly Debatable Position Sufficient to Avoid Claim of Bad Faith

Misrepresent Material Fact – Lose Coverage

Uberrimae Fidei Allows Voidance of Marine Insurance Policy

Insurance has, from its inception, been an agreement requiring utmost good faith by both parties to the contract of insurance. As used in maritime insurance failure of an insured to deal in the utmost good faith with its insurer allows the insurer to void the insurance.

A marine insurer sued its insured seeking a declaration that a maritime insurance policy for the insured’s floating drydock was void. The trial involved a maritime insurance policy issued by Appellee Catlin (Syndicate 2003) at Lloyd’s (“Catlin”), to cover the floating drydock Perseverance owned by San Juan Towing and Marine Services (“SJT”), a ship repair company based in San Juan, Puerto Rico. At trial, the district court concluded that the insurance policy was void ab initio by reason of SJT’s violation of the doctrine of uberrimae fidei in its application for the policy. SJT appealed in Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing and Marine Services, Inc., — F.3d —-, 2015 WL 500744 (C.A.1 (Puerto Rico) 2/6/2015) requiring the First Circuit to determine whether the doctrine of Uberrimae Fidei, utmost good faith, applied to the sinking of the floating dry dock.

BACKGROUND

In 2006 SJT purchased the Perseverance for $1,050,000. Subsequently, SJT made improvements to the floating drydock, modifying it so that it could be towed from Louisiana to Puerto Rico. Marine Consultants then issued a valuation report on November 21, 2006, in which it valued the floating drydock at $1,750,000. By 2009, and as late as 2011, due to declining business and increasing financial distress, SJT was actively trying to sell the Perseverance. After failing to sell the dry dock by reducing prices from in September 4, 2011, SJT agreed to sell the Perseverance to Leevac Shipyards (“Leevac”), a Louisiana-based company, for $700,000. However, the deal later fell through.

Between August 2006 and February 2011, SJT insured the Perseverance with the RLI Insurance Company (“RLI”), with a declared hull value of the Perseverance under this policy of $1,750,000, presumably based on the Marine Consultants condition and valuation report dated on November 21, 2006. In February 2011, RLI cancelled the drydock’s insurance policy, cryptically stating “Loss History” as the reason.

Thereafter, at SJT’s request, SJT’s insurance broker, John Toscani (“Toscani”), who was located in New York, approached Catlin seeking, through Lloyd’s, a marine insurance policy “consisting of hull, [protection and indemnity], ship repairs, general liability and contractor’s equipment” (emphasis added). SJT’s broker represented that the Perseverance’s prior insurance coverage was for $1,750,000, but did not provide Catlin with a copy of RLI’s notice of cancellation.  Most importantly, SJT also did not disclose information regarding substantial, preexisting damage to the Perseverance’s hull, which had been evident since at least April 2010.

SJT tug Captain Padilla (“Padilla”) returning from a towing assignment called SJT manage to inform him of the total sinking of the Perseverance. They observed that a fire hose connected to a water main on the dock was still pumping water into the sunken drydock, with the valve on shore still in an open position. Payne proceeded to shut the valve, which was easily seen and accessible to anyone who wished to turn off the flow of water.

SJT proceeded to file a claim with Catlin, alleging the total loss of the Perseverance, in the amount of $1,750,000. Catlin denied this claim, relying on the discrepancy between the amount the Perseverance was insured for according to the Endorsement ($1,750,000) and its actual market value (approximately $700,000 to $800,000), as evidenced by the sale price advertised to potential buyers around the time when SJT sought the quote for the Policy.

On October 8, 2013, after a bench trial, the district court resolved the merits of this controversy. See Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 979 F.Supp.2d 181, 191 (D.P.R.2013) ( “Catlin IV ”).

DISCUSSION

The application of the doctrine of uberrimae fidei to this controversy, which the First Circuit concluded only existed in modern American jurisprudence in the context of maritime insurance, depends on the outcome of the central issue raised by SJT both here and below: whether Puerto Rico’s Insurance Code, P.R. Laws Ann. tit. 26, §§ 1101 et seq. (“the Code”), is the controlling substantive law in this controversy rather than general federal maritime law.

As a general rule, in the absence of established and governing federal admiralty law, the states have largely unfettered power to regulate matters related to marine insurance. The rules of admiralty and maritime law of the United States are presently in force in the navigable waters of the United States in and around the island of Puerto Rico to the extent that they are not locally inapplicable either because they were not designed to apply to Puerto Rican waters or because they have been rendered inapplicable to these waters by inconsistent Puerto Rican legislation.

There can be no doubt that the Policy is an ocean marine insurance policy. The Policy was procured for SJT by Toscani, who “placed a package policy consisting of hull, P & I, ship repairs, legal, general liability and contractors equipment” (emphasis added), with Catlin. Indeed, Toscani admitted that he considered the Policy to be a marine insurance policy. Based on the evidence presented, the district court found as follows: “The Perseverance was designed, constructed, and used to provide marine maintenance and repair services to vessels,” and “[i]ts intended use [was] to lift floating equipment for inspection and repair.”

Marine insurance is vital to the adequate flow of commerce. The nature of the risks that are covered by maritime insurance is such that, given the urgent necessity for the placement of this type of insurance coverage that is often present in the business of maritime commerce, as well as the extreme distances that often separate the insurance seeker and the insurer, it is imperative that the insurer be provided with truthful and valid information about the risk the insurer is asked to undertake by the party most able to provide such data: the insured.
Uberrimae fidei is an established rule of maritime law. This ruling should hardly be surprising. As early as 1828, the Supreme Court characterized an insurance contract as “a contract uberrimae fidei.McLanahan v. Universal Ins. Co., 26 U.S. 170, 185, 1 Pet. 170, 7 L.Ed. 98 (1828).

At the bench trial, Richard Thompson (“Thompson”), a hull inspector who surveyed the Perseverance, testified that he found “heavy wastage” in the drydock’s hull during an April 2010 inspection. After Thompson notified SJT of the rust and deterioration problems, SJT admitted that “those damages were pre-existing.” Because the Perseverance was not in prime condition and business was slow, SJT offered to sell the floating drydock to potential buyers at a price between $700,000 to $800,000, which presumably approximated its actual value at the time. Indeed, in April 2011—the same month that the Catlin Policy took effect—SJT advertised the Perseverance for sale at a price of $800,000. Yet, SJT, in its request for marine insurance coverage from Catlin, represented to Catlin that the Perseverance had been previously insured by RLI for $1,750,000—$700,000 more than what SJT paid for the drydock originally. Catlin could have reasonably assumed the value presented to it in the previous insurance policy from RLI as the actual value and evaluated its risks based on the conditions it would have reasonably expected from a drydock of that value. SJT’s failure to disclose the true value of the Perseverance, what SJT paid for the Perseverence, and the Perseverance’s level of deterioration, therefore, are all material facts, the nondisclosure of which violates uberrimae fidei.

Under uberrimae fidei, when the marine insured fails to disclose to the marine insurer all circumstances known to it and unknown to the insurer which “materially affect the insurer’s risk,” the insurer may void the marine insurance policy at its option. In other words, the policy becomes voidable. As discussed above, the evidence conclusively shows that SJT failed to disclose material information about the Perseverence’s actual value and preexisting deteriorated condition prior to Catlin determining whether it would accept the risk. Catlin was free, therefore, to void the policy.

SJT violated the doctrine of uberrimae fidei in its procurement of the Policy. Thus, Catlin was entitled to void the Policy. The decision of the district court is affirmed, however, its holding is modified to reflect that the contract was voidable, not void ab initio.

ZALMA OPINION

Uberrimae fidei Latin for utmost good faith. It, contrary to the First Circuit’s comments, applies in every jurisdiction as a concept of how the business of insurance should be conducted. For example, in New York or California, even an innocent misrepresentation of the value of a property over half its true value, would allow the insurer to rescind the policy from its inception (ab initio). In cases of marine insurance, rather than allow rescission, the First Circuit concludes that the insurer can declare the policy void in the event of a material misrepresentation. A difference without meaning since, in either case, the insured is without coverage and the policy void.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Misrepresent Material Fact – Lose Coverage

Mailing is All Needed to Perfect Nonrenewal

Agent Not Required to Inform Insured of Nonrenewal

Some cases go on and on with trial decisions reversed, remanded, retried and appealed again. In Collins v. State Farm Ins. Co., — So.3d —-, 2015 WL 468970 (La.App. 4 Cir.), 2014-0419 (La.App. 4 Cir. 2/4/15) after eight years of litigation over damages resulting from Hurricane Katrina the insured ended up with nothing. His last attempt at recovery was to sue his agent for negligence because he did not inform the plaintiff that his policy had been non-renewed well before Katrina hit New Orleans.

The insured, Edward Collins, brought this suit against his insurer, State Farm Fire and Casualty Company (“State Farm”), and his insurance agent, Reggie Glass. From the trial court’s judgment granting Mr. Glass’ motion for summary judgment. Mr. Collins appeals.

FACTUAL BACKGROUND

In January 2000, Mr. Collins filed a claim under his homeowner’s policy with State Farm for roof damage to his property located at 7508 Lafourche Street in New Orleans, Louisiana. State Farm adjusted the claim and paid the damages due under the policy. In September 2004, Mr. Collins submitted another claim under his homeowner’s policy. During its investigation of this claim, State Farm discovered that Mr. Collins failed to repair his roof after he was paid for his 2000 claim. State Farm thus decided not to renew Mr. Collins’ homeowner’s policy when it expired on May 30, 2005. On April 27, 2005, State Farm sent a notice of nonrenewal to Mr. Collins and his mortgagees. Mr. Collins alleged that he never received a notice of nonrenewal.

On August 28, 2006, Mr. Collins sued State Farm and Mr. Glass. Collins alleged that State Farm violated its duties as an insurer by failing to adjust his claim and by denying coverage in bad faith. He alleged that the week before Hurricane Katrina, Mr. Glass, his insurance agent, informed him that he was fully covered with his flood and homeowner’s insurance policy.

In the deposition of Ms. Jackson, Mr. Glass’ assistant, she testified that the computer system that they used at the time, ECHO, would not display an insurance policy that had been cancelled or non-renewed for more than thirty days. Thus, she contended that Mr. Collins’ story that she turned the computer around and showed him his policy was impossible.

State Farm filed its motion for summary judgment. It contended that it mailed a notice of nonrenewal of the homeowner’s policy to Mr. Collins in compliance with Louisiana law; thus, it contended that it should be dismissed from the lawsuit. The trial court granted State Farm’s motion for summary judgment.

Louisiana law requires that statutes be applied as written and no further interpretation made in search of the legislature’s intent when the law is clear and unambiguous and its application does not lead to absurd consequences. In the present case, the statutes’ language is clear. The mailing of a notice of nonrenewal to the insured’s address, as listed on the policy, at least thirty days before the expiration of the policy, satisfies the burden placed upon the insurer. Noticeably absent from the statutes is language requiring the notice of nonrenewal be received in order for it to be effective.

State Farm presented the trial court with a Certificate of Mailing Listing authenticated by a team manager’s affidavit. The certificate bore the signature of State Farm Postal Operator Margaret Wynn and U.S. Postal Operator Larry Bailey, Jr., the two persons involved in the mailing of Mr. Collins’ nonrenewal notice. The certificate included the name and addresses for the notice recipients, as well as, copies of the notices. These documents indicated that Mr. Collins and his first and second mortgage holders were sent nonrenewal notices on April 27, 2005.

Once State Farm established mailing as required by the applicable statutes, the burden shifted to Mr. Collins. Since receipt of the nonrenewal notice is not required by law, the mere denial of receipt cannot create a genuine issue of material fact under these circumstances. Mr. Collins was unable to produce any evidence that the notice was not mailed.

DISCUSSION

The Louisiana Supreme Court held in the past that an insurance agent owes a duty of “reasonable diligence” to his customer. The duty of “reasonable diligence” is fulfilled when the agent procures the insurance requested. The statute is clear. The insurance agent has no additional or independent duty to inform the insured of the insurer’s decision not to renew. Thus, Mr. Glass had no duty to inform Mr. Collins of State Farm’s decision not to renew his homeowner’s insurance policy in September 2004 or thereafter.

Although Mr. Collins contends that Mr. Glass should have at least informed him of State Farm’s notice of nonrenewal when Mr. Collins’ visited his office in July 2005, Mr. Collins himself admitted, in his deposition, that he had never seen Mr. Glass before Hurricane Katrina, which occurred in August 2005.

ZALMA OPINION

It is almost a certainty that when a loss happens after a policy has been cancelled or non-renewed that the insured will claim that he did not receive the notice. That is the reason why Louisiana law, and that of most states, requires only that the insurer prove mailing. Mr. Collins was not an honorable insured. He took money from State Farm to repair his roof after a legitimate loss only to not use the money to repair it. As a result State Farm decided to non-renew. Mr. Collins ignored the notice of nonrenewal and litigated this case for eight years when, he should have known he had no coverage because he did not receive a bill to pay premium to renew. He gambled that he would not have a loss. Katrina proved his gamble was not a wise one.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Mailing is All Needed to Perfect Nonrenewal

It Doesn’t Pay to Seek Penalties Not Owed

Settlement Is Only a Settlement When Agreed to In Writing

States, like Louisiana, have enacted statutes requiring insurers to pay an agreed claim immediately but no later than 30 days from the date of the agreement. In Louisiana a court can assess a penalty even if the payment is made 34 days after the settlement agreement. However, to get the penalty it is necessary that the statute be read strictly and there must be evidence to establish the date of the written agreement.

FACTUAL BACKGROUND

The plaintiffs in this automobile accident suit settled with the plaintiff/car-owner’s uninsured motorist insurer. After the insurer allegedly failed to remit the settlement funds within thirty days, the plaintiffs filed a motion for penalties. The trial court granted the motion and imposed a $5,000.00 penalty. The insurer appealed.

The underlying claims in this matter arise from an automobile accident. The plaintiffs’ vehicle was driven by Tony Barnes and owned by Shirley Cross, who was also a passenger. In addition to Mr. Barnes and Ms. Cross, Keshela Woodland, Destiny Woodland, Kimberly Miles, Antonio Barnes, Jazalyn Miles, and Ja’Kayshia Miles were all passengers in the plaintiffs’ vehicle. The defendant’s vehicle was driven by Reata West. According to the record, it was eventually determined that the only applicable insurance coverage was Ms. Cross’ uninsured motorist coverage, which was issued by Safeway Insurance Company of Louisiana.

All eight settled with Safeway for the policy limits. However, the plaintiffs alleged that Safeway failed to fund the settlement within thirty days of the date that the agreement was put into writing, and that Safeway is liable for penalties pursuant to a Louisiana statue. Neither the plaintiffs nor Safeway agree on the date that the settlement agreement was put into writing. The trial court found that the agreement was effective March 18, 2013, and that Safeway acquiesced to that date. Accordingly, the trial court found that Safeway paid the settlement thirty-four days after the settlement agreement was reduced to writing. Having made that determination, the trial court assessed a penalty of $5,000.00 against Safeway.

ANALYSIS

Because it is penal in nature, the statute is strictly construed. When a party seeks penalties as a result of an insurer’s failure to pay a settlement within thirty days, the party need not prove that the insurer was “arbitrary, capricious, or without probable cause” in failing to pay the settlement. Instead, the party need only show that the insurer’s failure was “knowingly committed.”

The plaintiffs assert that a settlement was reached and put into writing on March 18, 2013. Safeway objects to this date and contends that the settlement was put into writing on April 5, 2013. It is undisputed that Safeway did not tender the settlement funds until April 22, 2013. If the settlement was put into writing on March 18, 2013, Safeway’s payment was untimely. However, if it was put into writing on April 5, 2013, the payment was within the thirty-day time period, and Safeway would not be liable for penalties under that provision.

On March 18, 2013, the plaintiffs’ attorney, Howell D. Jones, IV, sent a letter to Safeway’s attorney, Simone Dupre, which stated: “This will confirm that we have settled the above referenced matter for $30,000 under Shirley Cross’ UM and for $3137.00 for Ms. Cross’ property damage. Please forward payment and settlement documents to me at your earliest convenience.”
Ms. Dupre sent Mr. Jones an email on March 28, 2013, which referenced an attached letter. However, the attachment, which was a letter from Ms. Dupre to Mr. Jones dated March 28, 2013, was missing from Ms. Dupre’s March 28 email. We note that although the letter indicates that it was sent via facsimile to Mr. Jones, it is unclear from the record before us if that is indeed the case. In any event, the record reveals that Ms. Dupre emailed the letter to Mr. Jones on April 1, 2013. The March 28 letter stated, in part: “This will confirm that on March 20, 2013, you and your clients agreed to accept our policy limits of $30,000.00, plus costs, and in exchange will agree to dismiss all claims of your clients’ against Safeway, with prejudice. In addition, this will confirm that Shirley Cross agrees to accept $3,137.00 (this amount is after deducting the $250.00 deductible) for payment of her property damage claims and will also dismiss her claim for property damage against Safeway, with prejudice. In addition, as discussed, since there seem to be Medicaid and/or medical liens asserted against all or most of your clients, this will confirm that you and your client agree to indemnify and hold harmless Safeway from and for any demands for payment of those liens that are related to treatment received for the subject accident. In exchange for this agreement, Safeway will agree to issue the settlement funds directly to you and your clients, and will not list the lienholders on the check.”

The parties do not dispute that a compromise had been reached, only the date that the agreement was put into writing. The trial court found that the parties’ correspondence reflects a meeting of the minds on March 18, 2013, i.e., the date of Mr. Jones’ initial correspondence and that mentioned in Ms. Dupre’s email of April 5, 2013. the appellate court concluded that the trial court erred in so finding.

Although there is no requirement that a compromise be contained in one writing, a letter written by one party memorializing their understanding of an oral agreement is insufficient to satisfy the “in writing” requirement. Mr. Jones’ March 18 letter is unquestionably such a one-party letter. The earliest date at which multiple writings could be read together such that they would constitute a compromise is March 28, 2013, the date of Ms. Dupre’s confirmatory letter.

Moreover, we are cognizant that there must not only be an agreement to settle a dispute or uncertainty, but that the agreement must be in writing. Thus, for the purposes of invoking the statute the appellate court concluded that any purported acquiescence to a March 18, 2013 settlement date was contrary to law because, although the agreement may have existed on that date, there was no writing at that time as required by statute.

The order was reversed and the costs were imposed on the plaintiffs.

ZALMA OPINION

Penalties should only be assessed in this type of case where eight people had to share in what was left of a $30,000 settlement after the attorney takes his cut, if there is clear evidence that there was a written agreement of settlement. A one sided letter acknowledging an oral agreement is not enough. In this case the one sided letter did not cover the entire agreement which required the supplemental letter from the adjuster that together made a single agreement. Greed seeking penalties that were not appropriate cost the parties plaintiff the costs incurred by the insurer and a loss of the penalty assessed. That the case went to court and then the court of appeal over $5,000 is amazing.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on It Doesn’t Pay to Seek Penalties Not Owed

Investigating Arson For Profit

The Most Evil Form Of Insurance Fraud

The following was excerpted from my book “The Insurance Fraud Deskbook” published by the American Bar Association, Tort and Insurance Practice Section and is available at : http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221. 

When indicators exist that a fire was intentionally caused and a claim follows it is incumbent on the insurer to conduct a thorough fire cause and origin investigation and insurance fraud investigation. Arson for profit is the most evil form of insurance fraud because, unlike other white collar crimes, people are injured and die as a result of an accelerated fire.

Do a Detailed Examination

In most fire investigations, a visual search is sufficient. Examine and record burn patterns and other indicators. Examine all utilities, appliances, and other heat producing items to see if they could have caused or contributed to the fire.

If the cause is not obvious, however, it may become necessary to retain a fire cause-and-origin expert to examine the property. An expert will section out each room in the structure like an archeological dig, sifting through the debris and recording a detailed description of the findings at each level.

For a detailed examination, most of the following equipment will probably be required:

•    at least two sets of sifting screens, starting at one-inch mesh down to one eighth-inch mesh or window screening;
•    a 35 mm camera or a single lens reflex film or digital camera;
•    a video recorder;
•    heavy equipment, if large amounts of debris must be removed;
•    a water supply to wash down the scene investigation;
•    lighting equipment for the interior of the structure;
•    a large tarp or ground covers for placement of the evidence; and
•    evidence collection cans.

Instantaneous or onsite laboratory analysis is not practical, so the materials collected must be properly preserved until the analysis is conducted. Clean, new metal paint cans that are easily sealed and resealed are best for debris that contains suspected volatile items. Because cans are non-permeable and available at low cost, they are often used by fire departments and fire cause-and-origin investigators. Glass jars with tight-fitting lids are an alternative, but are subject to breakage.

The investigators must take precautions to prevent evidentiary materials from escaping the container or becoming lost. It is also very important to avoid contamination of the specimens. Each item collected should, therefore, be packed in separate containers of appropriate size with all openings secured by appropriate means, such as tape or staples and labeled at the scene describing the contents.

Trace evidence, like soil specimens or paint chips, should be placed in folded paper bundles that can then be wrapped with tape and sealed or placed in a small cardboard box or envelope on which all seams and other openings have been sealed with tape. These precautions are especially important for multiple items of evidence.

The heat of a fire can indicate whether accelerants have been used. If items are melted, the following list of temperatures at which different materials succumb is a useful starting point to an investigation:

1.    solder melts at 361º F.
2.    tin melts at 449º F.
3.    lead melts at 618º F.
4.    zinc melts at 786º F
5.    magnesium melts at 1203º F.
6.    aluminum melts at 1220º F.
7.    glass melts at 1400º F.
8.    copper melts at 1981º F.
9.    steel melts at 2606º F.
10.    iron melts at 2795º F.

Remember, most metals are alloys and each component will melt at a different temperature. Always examine for melting indicators that will point toward a source of heat. The side of a metal item that has melted is usually the side that is facing the source of heat. This can be used as another indicator pointing back to where the fire came from to help the investigator establish a point or points of origin of the fire.

Check for Arson – An Intentionally Caused Fire

There are many indicators to look for to find out whether an accelerant was used to start a fire. The following are some of the most common.

Spalling

Concrete floors can provide clues to the use of an accelerant. Water trapped in the concrete expands when heated and turns to steam. It then explodes from the concrete, leaving marks called spalling.

Spalling is not always due to arson or the presence of accelerants. Old concrete that has eroded leaving an uneven surface may be subject to spalling even without the help of accelerants. Tar falling from a roof can generate sufficient heat to cause spalling. Polyurethane foam mattresses or furniture cushions burn with extreme heat and will leave a trail of spalled concrete similar to that caused by liquid accelerants. The adjuster and the investigator must be cautious with spalling since polyurethane may give a false indication of an accelerated fire.

Liquid Accelerant Trails

Carpeted floors can also reveal signs of arson. When a liquid is spilled onto a carpet and the fumes are ignited, an outline of the spill can be readily seen. This is because the liquid gasoline does not burn. The liquid keeps the carpet on which it was poured cooler than the surrounding air and there will be islands of unburned carpet visible if the fire was extinguished quickly.

Use of Trailers

To make the building burn faster and completely, some arsonists will use a “trailer,” which is a substance used to spread and accelerate a fire so that the fire buildup is rapid and covers a large area. The arsonist intends the fire to be so complete there will be no evidence of the trailer left.

Trailers can be as sophisticated as small plastic bags filled with accelerants and suspended from ceilings or as simple as newspapers spread throughout a house and sprinkled with accelerants. If they are not totally destroyed in the fire the trailers leading from one room to another will be as obvious as a road cutting through a woodland.

Detection Devices

If the adjuster believes there is the presence of a liquid accelerant, a combustible vapor detector or “sniffer” may be needed. The sniffer, available to most fire cause-and-origin investigators, can help to find where a sample should be taken. Since the sniffer can be confused by naturally occurring products of fires, it is essential to have a qualified person operate the sniffer.

Some fire departments and private investigators use specially trained dogs to sniff out accelerants much as they sniff out illicit drugs in luggage. These trained animals can be of great assistance when finding areas where the use of a flammable liquid is suspected. The dogs have been found, by many investigators, to “alert” on tiny amounts of accelerants that cannot be detected by a combustible vapor detector. The well trained accelerant detection dog is usually able to detect smaller amounts of combustible materials than the electronic accelerants.

Samples of suspected accelerants can also be sent to a laboratory for analysis. An instrument called a gas chromatograph can identify each substance in the sample and whether hydrocarbon-based accelerants were used.

Incendiary Devices

The most basic incendiary system consists of putting a lighted match to easily combustible material. However, a simple match, as anyone who has tried to light candles on a birthday cake, is not always effective and will often fail to cause a destructive fire. The author investigated a claim many years ago where the insured attempted to set fire by starting clothing in a closet. However, he closed the closet doors after lighting the fire, and starved the fire for oxygen. He tried the same thing four times in four different closets only to have the four fire claims denied.

Incendiary devices come in many different shapes and sizes, some simple, some quite elaborate in design. All have the same objective: to burn themselves or to set something else on fire.

Each device consists of three or more basic major components: the fuse, the body, and the filler or incendiary material. The body will be either fragile or unbreakable, depending on its desired usage. A device employing the use of a flammable liquid will usually have a breakable container, while a device containing thermite or other explosive material will be confined to a non-breakable, metal container.

The combination of matches and a cigarette is a simple and often-used incendiary device. It can be assembled in several different ways. One of the most common is to place a cigarette horizontally, just along the tops of the heads of a book of matches after the cover is removed. The distance that the end of the cigarette protrudes beyond the row of match heads measures the amount of delay time wanted by the arsonist. The cigarette is lit. As it burns, it eventually comes in contact with the match heads, which burst into flames. Sometimes, the matches are placed around the cigarette and wrapped with tape, rubber bands, string, or wire. The cigarette/match device is sometimes weighted with a nail or a bag of rocks. This type of incendiary device can be used in conjunction with any combustible or flammable materials. The adjuster who detects the remains of such a device must immediately retain the services of a fire cause-and-origin investigator and a coverage lawyer experienced in fraud and arson.

Arsonists have used candles for more than three centuries as a timed incendiary ignition device.

A hard-to-detect incendiary device is made from paraffin wax and sawdust. Melted wax is combined with a quantity of sawdust and allowed to cool. The wax mixture is then placed into a paper bag next to the intended target. A match is used to ignite the paper bag, and that in turn ignites the wax-sawdust mixture. The fire starts very slowly, taking about two or three minutes before the wax-sawdust mixture is burning strongly enough to spread flames throughout the structure.

In summary, the following are factors that can lead to the conclusion that a fire is of incendiary origin:

•    trailers (connections to or between fire sets);
•    candles used to ignite fire or trailers;
•    discarded matches in out of the way places;
•    chemicals that are unusual for the occupancy;
•    rags, clothing, or curtains soaked in oils;
•    timing devices;
•    unusual arrangements of electrical equipment;
•    electrical equipment that had been tampered with before the fire;
•    disturbed or broken gas piping;
•    gas burners in the “ON” position;
•    unexplained multiple fires;
•    rearrangement of the contents of a room or area in an unnatural way to help the fire burn rapidly;
•    accelerant containers, accelerant patterns, or other evidence of the presence of combustible liquids;
•    fire late at night;
•    fire in a vacant building;
•    unusual burn patterns; and
•    lack of contents in a dwelling that was reported to have been occupied at the time of the fire.
None of these factors, standing alone, allow for the conclusion that a fire is incendiary, but they are all factors that will lead the adjuster or the fire cause and origin investigator to conduct a more thorough investigation.

If you are interested in learning more about arson for profit and other fraud investigations purchase “The Insurance Fraud Deskbook” from the ABA.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Investigating Arson For Profit

Covenant Not to Execute Not A Release

Claim Against Broker Can Be Assigned

It is almost common for a plaintiff who gets a large judgment against a tortfeasor that cannot be collected to enter into an agreement with the defendant to not execute upon the judgment in exchange for an assignment of the defendants claims against its insurer. It is unusual, however, for the insurer to go broke before the suit can be resolved. The assignee then sought recovery against the insurance broker who placed the insurance with the insolvent insurer.

Just such a situation was presented to the Tennessee Court of Appeal in Littleton v. TIS Insurance Services, Inc., Slip Copy, 2015 WL 443740 (Tenn.Ct.App., 2/3/15) after the trial court granted a judgment to the broker.

FACTS

During a prior lawsuit, a construction company – in exchange for a covenant not to execute against the company’s assets – assigned to the entity that obtained a judgment against it the company’s insurance coverage claims. The trial court entered judgment on the pleadings in favor of the insurance broker on the ground that the current plaintiffs would not be entitled to recover any compensatory damages at trial. The plaintiffs appeal.

The plaintiffs, Joy Littleton, Grayling Littleton, and Will Allen Hildreth (“the Assignees”) were assigned a judgment and settlement order in the amount of $3.2 million. The Merit Litigation arose out of a contract between JAG and Merit for the construction of a Holiday Inn Express hotel in Loudon, Tennessee.

The final judgment references the settlement agreement between JAG and Merit and the covenant not to execute on the judgment.After entry of the judgment, JAG was able to collect only a portion of its $3.9 million judgment against Merit because Merit’s Commercial General Liability (“CGL”) carrier, the Highlands Insurance Group (“Highlands”), was placed in receivership by the State of Texas during the pendency of the Merit Litigation. TIS Insurance Services, Inc. (“TIS”) was Merit’s insurance broker and the entity that placed Merit’s CGL coverage with Highlands.

The current action was filed on January 28, 2011, seeking recovery from TIS of the unpaid balance of the judgment (approximately $2.67 million). TIS filed a motion for judgment on the pleadings, on October 12, 2012, the trial court granted the motion and held “that the [Assignee]s’ claim for compensatory damages which they may seek in the trial of this cause is limited to the $25,000 actually paid by Merit Construction in this matter.”

ISSUE

The issue before the court of appeal is whether the trial court erred in entering judgment on the pleadings in favor of TIS on the ground that the Assignees would not be entitled to recover any compensatory damages at trial.

DISCUSSION

The trial court’s ruling is directly contrary to our holding in Tip’s Package Store, Inc. v. Commercial Insurance Managers, Inc., 86 S.W.3d 543 (Tenn.Ct.App.2001), in which we held that a judgment creditor’s covenant not to execute on a judgment debtor’s assets does “not extinguish the underlying liability” of the judgment debtor for compensatory damages. The judgment debtor is “an injured party” that can pursue a negligence claim against its insurance provider for procuring a liability policy that allowed a gap in coverage. In light of our decision in Tip’s, JAG’s covenant not to execute on the judgment against Merit does not extinguish the underlying liability of Merit under the judgment.

A covenant not to execute is merely a contract. It is not a release. Covenants not to execute are different from releases, as the legal liability remains in force against those who have covenants, whereas a release represents “total freedom from liability.” Gray v. Grain Dealers Mut. Ins. Co., 871 F.2d 1128, 1133 (D.C.Cir.1989)

The Assignees, accordingly, are entitled to assert a claim against TIS for $2,701,607.67, the uncollected balance of the judgment against Merit.

ZALMA OPINION

The assignment was an assignment of all rights the original defendant had against its insurer and everyone involved in the acquisition of the policy. The broker convinced the trial court that there was a limitation upon what could be recovered and that the assignment was limited by the covenant not to execute. Finding that the covenant was merely a contractual assignment and not a release, the broker was exposed to the entire amount of the judgment assigned. Of course, that does not resolve the situation since the assignees still need to prove responsibility of the agent to the original insured and knowledge that Highlands was not financially stable, a difficult mountain to climb.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Covenant Not to Execute Not A Release

Duty to Defend Not Effected by Denial of Motion for Summary Judgment

Defense Can’t Be Avoided by Use Of Limine Motions

The duty to defend owed by an insurer is very broad and requires an insurer to defend even if there is only a potential for coverage on the facts of the case and the policy wording. Usually, an order denying a motion for summary judgment seeking an order that there is no duty to defend will usually be sufficient to reveal the potential for coverage and a requirement for defense – at least under a reservation of rights – to those insured. In McMillin Companies, LLC v. American Safety Indemnity Company, — Cal.Rptr.3d —-, 2015 WL 270034 (Cal.App. 4 Dist., 1/22/15) the right to claim no duty to defend will still exist even after a motion for summary judgment is denied if the motion order is not dispositive of the claims made by the motion for summary judgment. It also criticized the use of a motion in limine (to limit testimony allowed at trial) when it had the effect of a motion for summary judgment without the protections of a motion for summary judgment.

FACTS

The parties cross-appeal from a final judgment of the superior court in an insurance coverage dispute between a general contractor and the commercial general liability insurer of one of its subcontractors.

ISSUES IN THE CROSS–APPEALS

The Present Insurance Coverage Litigation

In February 2009, eight McMillin-related entities (but not McMillin) filed the underlying complaint against ASIC and 11 other insurance companies. The plaintiffs alleged that each of the defendants was an insurer to one or more of the subcontractors on the projects, that each of the plaintiffs was an additional insured under each of the respective policies, that each of the defendant insurers owed each of the plaintiffs a duty to defend the Baker litigation, and that by denying the tender of the defense of the Baker litigation each of the defendants breached a contract of insurance and its implied covenant of good faith and fair dealing.

The Motions in Limine

In October 2011, in anticipation of trial, the parties filed motions in limine. One dealt with ASIC’s alleged duty to defend.

With regard to the duty to defend, the SAC plaintiffs filed a motion to exclude testimony and argument disputing that ASIC had a duty to defend the Baker litigation.

Duty to Defend

Relying on Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1078, 17 Cal.Rptr.2d 210, 846 P.2d 792 ( Horace Mann ), and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 ( Montrose ), McMillin argued that the denial of ASIC’s motion for summary judgment established, as a matter of law, that ASIC had a duty to defend them in the Baker litigation. Opposing the motion, ASIC disputed the legal effect of the denial of its summary judgment motion, contending that because the court did not deny the motion by expressly finding a disputed factual issue, the effect of the ruling did not establish the duty to defend as a matter of law.

In denying summary judgment, the court had ruled that, with regard to four allegedly undisputed issues, “ASIC has not met its initial burden of proof.” During the in limine proceedings, ASIC argued that the court could not consider the denial of the summary judgment, relying in part on Judge Nevitt’s following comments at the conclusion of the hearing in which he denied ASIC’s motion: “However, I remind counsel that this ruling is of no evidentiary value later. I don’t know what other evidence may be presented to the Court when these issues are next presented. Whether foundations may have been laid for things, not laid here, and so forth. And so should this issue come before the Court again under different circumstances and with potentially different evidence, you should not necessarily count on the same result.”

DISCUSSION

The trial court erred in granting McMillin’s motion in limine to preclude evidence or argument that disputed ASIC’s duty to defend; the trial court erred in granting ASIC’s motion in limine to preclude McMillin from presenting evidence or argument either that the Settlement proceeds are not an offset to McMillin’s Baker fees or that the Settlement proceeds are allocated to Brandt fees; and we are unable to affirm that portion of the judgment in favor of ASIC on McMillin’s cause of action for breach of the implied covenant of good faith and fair dealing.

An insurer owes a duty to defend any lawsuit “which potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) Since the duty arises whenever the claim against the insured seeks damages on any theory that, if proved, would be covered by the policy, the insurer is relieved of its duty only when “‘the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”‘ (Montrose, supra, 6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

Horace Mann instructs: Where “factual issues exist precluding summary judgment in the insurer’s favor …, the duty to defend is then established, absent additional evidence bearing on the issue.” (Horace Mann, supra, 4 Cal.4th at p. 1085, 17 Cal.Rptr.2d 210, 846 P.2d 792.) Denying a summary judgment motion because the moving party failed to meet its initial burden of production is not the same as denying the motion based on an unresolved factual dispute. Accordingly, the trial court erred in ruling prior to trial that ASIC was precluded from presenting evidence or argument that disputed whether ASIC had a duty to defend the SAC plaintiffs in the Baker litigation.  In making such a ruling in limine, the trial court essentially granted summary adjudication as to the breach of ASIC’s alleged duty to defend without requiring the statutory procedural protections associated with summary judgment proceedings, thereby not requiring McMillin to prove its case and not allowing ASIC to defend McMillin’s proof.

Judge Alksne erred in rejecting McMillin’s presentation (that unallocated Settlement proceeds be allocated to resolving the tort claim) and accepting ASIC’s presentation (that unallocated Settlement proceeds be allocated first to resolving the contract claim), leaving McMillin without evidence of damages. In making such a ruling in limine, the trial court essentially granted a nonsuit as to the issue of McMillin’s alleged damages without requiring the statutory procedural protections associated with nonsuit proceedings, thereby precluding McMillin from trying its case.

The Orders Granting the Motions in Limine Are Reversed

Using an in limine motion as a substitute for a potentially dispositive statutory motion produces substantial risk of prejudicial error. The disadvantages of such shortcuts are obvious. They circumvent procedural protections provided by the statutory motions or by trial on the merits; they risk blindsiding the nonmoving party; and, in some cases, they could infringe a litigant’s right to a jury trial.

ZALMA OPINION

This case clarified earlier duty to defend rulings that dealt with dispositive motions for summary judgment. When a court rules that there is a potential for coverage in a partial motion for summary judgment the issue of duty to defend is established. However, in a case like this one where the motion for summary judgment does not rule on any issue and just denies the motion for failure to produce evidence sufficient to rule, the duty to defend is not established. By wrongfully using a motion in limine to prevent the presentation of evidence concerning the duty to defend deprived the party of the right to present evidence to prove its case without any of the safeguards and evidentiary requirements of a motion for summary judgment. The judgment was reversed, the orders in limine were reversed and the case was sent back to be tried.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | Comments Off on Duty to Defend Not Effected by Denial of Motion for Summary Judgment

Evidence Required to Defeat Summary Judgment

No Right to UIM Without Proof of Damages In Excess of Tortfeasor’s Insurance

When a bodily injury claim is settled with a tortfeasor the injured party often suffers from buyer’s remorse and tries to find some way to get more money. A settlement with the tortfeasor eliminates one source of funding leaving only the underinsured motorist carrier as an option for more money. In Gallagher v. Ohio Cas. Ins. Co., — Fed.Appx. —-, 2015 WL 367011 (C.A.3 (Pa.) 1/29/15) the Third Circuit Court of Appeal was asked to reverse a summary judgment in favor of an insurer and provide Marianne Gallagher underinsured motorist benefits.

FACTS

In March 2009, Gallagher was injured in an automobile accident when her vehicle was struck by another. Gallagher sued the other driver in Pennsylvania state court, seeking compensation for her injuries, and she sued her own insurer, Ohio Casualty, in federal court, seeking underinsured motorist (“UIM”) benefits.

In the state court action, Gallagher and the other driver agreed to private, nonbinding arbitration, and, after an evidentiary hearing, the arbitrator determined that Gallagher was entitled to $41,715 in total damages. While Gallagher initially rejected this assessment of her damages, in August 2013 she agreed to settle in state court for that exact amount. As required under her Ohio Casualty policy, Gallagher notified the company of her intent to settle with the other driver for $41,715, and it advised that it had no objection to settlement. The settlement was paid by the other driver’s insurance company pursuant to that driver’s liability policy, which limited coverage at $100,000.

In the federal action, Ohio Casualty moved for summary judgment, arguing that Gallagher was not entitled to UIM benefits and that collateral estoppel barred recovery. The District Court declined to apply the doctrine but granted summary judgment in favor of Ohio Casualty because Gallagher had failed to present any evidence to establish that the other driver was, in fact, underinsured — in other words, Gallagher failed to present evidence that her damages met or exceeded the limits of the other driver’s insurance coverage.

ANALYSIS

The appellate court must view the facts in the light most favorable to the non-moving party, drawing all reasonable inferences in that party’s favor. However, where a non-moving party fails sufficiently to establish the existence of an essential element of its case on which it bears the burden of proof at trial, there is not a genuine dispute with respect to a material fact and thus the moving party is entitled to judgment as a matter of law. The nonmoving party cannot establish a genuine dispute as to a material fact by pointing to unsupported allegations in the pleadings.

Pennsylvania’s Motor Vehicle Financial Responsibility Law requires that motor vehicle liability insurance policies contain underinsured motorist coverage. The purpose of such coverage is to protect an insured driver from the risk that a negligent driver of another vehicle would cause injury to the insured but would not have adequate coverage to compensate for the insured’s injuries. The policy defined “underinsured motor vehicle” as a vehicle “to which a bodily injury liability bond or policy applies at the time of the accident but the amount paid for bodily injury under that bond or policy to an insured is not enough to pay the full amount the insured is legally entitled to recover as damages.”

The Court did not hold that Gallagher’s claim failed because she accepted less than the full amount of the tortfeasor’s liability coverage; instead, it held that Gallagher could not survive summary judgment because she failed to present any evidence to support her allegation that the other driver was, in fact, underinsured.

The insured will not be allowed underinsured motorist benefits unless his or her damages exceed the maximum liability coverage provided by the liability carriers of other drivers involved in the accident.

Although Gallagher’s right to UIM benefits is not extinguished by her decision to settle with the other driver for less than the full amount of that driver’s liability coverage, Pennsylvania law also clearly indicates that she is entitled to UIM benefits only to the extent that her damages exceeded the limits of that coverage.

Gallagher failed to present anything beyond mere allegations to suggest that her damages exceeded $100,000. The appellate court refused to consider unsupported allegations in the pleadings as sufficient to establish a genuine issue of material fact and affirmed the trial court’s ruling.

ZALMA OPINION

Since Gallagher did not present evidence her damages exceeded $100,000 and since she settled with the tortfeasor with the amount found by an independent arbitrator that was less than half the available coverage, if she had evidence her damages exceeded $100,000 she would have presented it at the time the motion for summary judgment was heard. Since she did not the motion was properly granted.  If a plaintiff wants to collect more than the tortfeasor’s insurance limits accepting less makes it almost impossible to gain benefits from the UIM cover.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | Comments Off on Evidence Required to Defeat Summary Judgment

Endorsement Trumps Body of Policy

No Coverage for Assault or Battery

There are some risks that most insurers are unwilling to take. Assault and battery are two of those risks, especially when dealing with venues where alcoholic beverages are served. Coverage for such risks are available but they are extremely expensive. In George v. Great Lakes Reinsurance (UK) PLC, Not Reported in S.W.3d, 2015 Ark. App. 36, 2015 WL 374969 (Ark.App., 1/28/15) the Arkansas Court of Appeal was faced with a claim that there was no coverage provided an insured for injuries suffered by plaintiffs shot in his

FACTUAL BACKGROUND

The Benton County Circuit Court granted summary judgment to Great Lakes Reinsurance (UK) PLC. It ruled that Great Lakes had no duty to defend or indemnify separate claims made against the insured (George) because no possibility of coverage existed under the insurance policy. The claims that triggered this coverage dispute were filed in a related circuit-court case. The court found that the commercial general liability policy in this case was unambiguous in excluding coverage for claims arising from an assault or battery that spawned the separate case.

The facts are undisputed. George, through appellant Heart & Soul, LLC, owns a facility in Columbia County that is rented out for dances, parties, and other events. At one of these events, a gunman fired into the crowd and injured several people. Two of those injured, appellants Ricotta Lambert and Neca Scarber, were shot and later filed suit (the underlying action) in Columbia County against George, his LLC, and several John Does, alleging that George and his LLC were negligent in failing to protect them and seeking compensatory and punitive damages.

When the events leading to the underlying action occurred, George was insured under a commercial general liability insurance policy issued by Great Lakes. Under the policy’s liability coverage, Great Lakes agreed to pay damages for bodily injuries caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

THE ASSAULT OR BATTERY ENDORSEMENT

At the time of the policy’s issuance, there was also a Combination Endorsement –1. That endorsement specifically excluded coverage for bodily injuries that arise out of an assault or battery, or coverage for punitive damages—both of which were asserted in the underlying action. The endorsement’s “bodily injury” exclusion provides as follows:

“2. EXCLUSION—EXPECTED OR INTENDED INJURY AND ASSAULT OR BATTERY
“‘Bodily injury’ or ‘property damage’:
“(1) expected or intended from the standpoint of any insured;
“(2) arising out of assault or battery, or out of any act or omission in connection with assault or battery, or with the prevention or suppression of an assault or battery; or
“(3) arising out of charges or allegations of negligent hiring, training, placement or supervision with respect to (1) or (2) above.”

George notified Great Lakes of the underlying action, and Great Lakes notified George that it was providing a defense under a reservation of rights because the policy unambiguously excluded coverage for the claims in the underlying action. Great Lakes then filed this declaratory-judgment case, asserting that it did not have a duty to defend or indemnify George. Great Lakes moved for summary judgment and asked the court to order that George had no coverage under the policy. George also moved for summary judgment, arguing that the policy was ambiguous and should therefore be construed against the drafter to provide coverage for the underlying suit.

ANALYSIS

The trial court ruled that the policy language was not ambiguous and excluded coverage for acts or omissions arising from an assault or battery. The trial court further found that the applicable exclusionary language was contained in an endorsement, that the endorsement was a part of the insurance contract, and that the endorsement expressly deleted and replaced the exclusionary language in the Commercial General Liability Coverage Form. Therefore, the policy did not apply to the claims asserted against George in the underlying action because those claims were excluded, and Great Lakes was not obligated to defend the action.

George argued on appeal that this endorsement is not part of the insurance contract because it was not listed on the first page of the policy, which is captioned “Common Policy Declarations.” The endorsement is, however, listed as one of the forms and endorsements in the commercial general-liability-coverage declarations page. And George initialed and dated each page of the insurance contract, including the one containing the endorsement with the assault-or-battery exclusion.

Although the endorsement was not listed on one declarations page, it was listed on a separate declarations page; it was attached to the policy when it was issued; and George dated and initialed each page. The appellate court affirmed the circuit court’s decision that the assault-or-battery endorsement was part of the insurance contract’s terms.

Having settled the contract’s terms, we turn to George’s primary argument, which is that the presence of the bodily-injury exclusion in the main body of the policy is made ambiguous by the presence of an assault-or-battery endorsement.

The endorsement expressly states: “THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.” (Emphasis added.) By use of the word “changes,” the endorsement clearly advised Great Lakes’ insureds, like George, that it was making the scope of coverage different than what it would have been under the original policy. The endorsement’s plain language also states that the personal-injury exclusion in the policy’s main body “is deleted and replaced,” substituting the provisions in the endorsement for those in the basic policy.

Generally, exclusions in a policy or its endorsements are as much a part of the contract as other parts and must be given the same consideration in determining what coverage exists. George’s argument stumbles over the well-established rule of insurance law that where provisions in the body of the policy conflict with an endorsement or a rider, the provision of the endorsement governs. The more specific and more limiting language of the endorsement controls the more general exclusion that it replaces, and the two are not “irreconcilably inconsistent,” as George argues.

The appellate court concluded that the circuit court correctly found that the policy excluded any potential insurance coverage for the events asserted in the underlying action in Columbia County. Because there is no ambiguity in the policy, we need not consider George’s second point where he argues that he is entitled to summary judgment.

ZALMA OPINION

Courts are obligated to read insurance policies as written. In this case there was no ambiguity because the wording of the policy was clear and unambiguous and the insurer went so far as to require the insured to initial each page of the policy, including the limiting endorsement. That effort eliminated the argument that the insured did not know the exclusion was there. The case would have had the same result had he not initialed each page but by doing so the decision of the court was made easy. The case teaches that all endorsements should be listed on the declarations page and written in clear and unambiguous language.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Endorsement Trumps Body of Policy

Crime Often Pays Until the Criminal Is Caught

Chutzpah – The Search for a Writ of Corum Nobis

Insurance fraud comes in many different forms. Most despicable of those are when a government official who is also an insurance professional abuses the public trust to profit from insurance sold to the governmental entity he serves. In Nowlin v. U.S.— F.Supp.3d —-, 2015 WL 363868 (N.D.Miss. 2015), an insurance broker who conspired with a member of the governmental entity was convicted of the crime of conspiracy to profit from health insurance sold to the entity. He tried multiple appeals, the last of which was to seek the ancient writ of Corum Nobis from the District Court of the Northern District of Mississippi.

FACTS

Ken Nowlin and Gary Massey were indicted by the Grand Jury for the Northern District of Mississippi in a 41–count indictment on 31 May 2007. Pursuant to a plea agreement with the government, Nowlin testified before the Federal Grand Jury for the Northern District of Mississippi on 28 June 2007. A superseding indictment was returned that same day, charging both Massey and Nowlin in 53 counts. On 27 July 2007, Nowlin pled guilty to Count One of the superseding indictment and agreed to continue his cooperation with the government.

At the time of his indictment, Nowlin had been in the insurance business for almost three decades. He specialized in brokering health care plans to various companies and governmental entities.  In 1994 or 1995, Gary Massey sold Lafayette County, Mississippi its health care plan, receiving two-thirds (2/3) of the 12% commission on that plan. Massey received 8% of the face amount of the premium, and Nowlin received 4%.  Massey was then elected to the Lafayette County Board of Supervisors in 1994; he took office in January 1995.

The month before Massey took office, Nowlin and Massey discussed the fact that Massey could not sit on the Board and receive commissions as the agent for the county’s health insurance coverage. Massey’s portion of the commission on the Lafayette County plan was at that time about $11,000 per month, and the commissions Massey and Nowlin shared over the period of time from January 1996 until the county placed its coverage with another company in 2004 totaled about $827,000.

Nowlin agreed to replace Massey’s commission check from the insurance company with an equal check written on his own business account each month. When asked if he would have paid Massey the “consulting fee” had it not been for the Lafayette County plan, Nowlin responded under oath that he would not have done so. Indeed, Nowlin testified under oath before the federal grand jury that he increased Massey’s “consulting fee” approximately $3,000 per month because Massey threatened to take away the Lafayette County business—and other business—if he did not.

After failing a polygraph exam Nowlin signed a plea agreement, cooperated with the government, testified in the grand jury about the criminal conspiracy, and pled guilty a month before Massey. The government filed a § 5K1.1 motion for downward departure in recognition of Nowlin’s cooperation.

Nowlin’s case was going as smoothly as one could hope under the circumstances—until he deviated from the advice of his attorney. Prior to sentencing, Nowlin had—over and over—admitted that he was guilty of the crime charged in Count One of the superseding indictment. He had unequivocally admitted guilt. However, for some reason, shortly before sentencing, at a meeting with defense counsel, he changed his mind and began to assert his innocence, arguing once again that his co-defendant, Gary Massey, had misled him regarding the legality of the arrangement to pay Massey the commissions relabeled as “consulting fees.”

The court sentenced Nowlin to the upper end of the guidelines range despite the government’s § 5K1.1 motion. Nowlin is now attacking the 30–month sentence as unreasonable. The Fifth Circuit Court of Appeals affirmed the judgment. After losing several motions Nowlin then filed the instant petition for a writ of error coram nobis.

CORAM NOBIS RELIEF

The term coram nobis, a vehicle to mount a post-conviction collateral challenge to a judgment, is of Latin origin, and literally means “in our presence” or “before us.”  The “us” in the translation refers to the court which rendered the challenged judgment. The purpose of the writ is to present to the court—and obtain relief from errors of fact, such as a valid defense existing in the facts of the case, but which, without negligence on the defendant’s part, was not made, either through duress or fraud or excusable mistake, where the facts did not appear on the face of the record, and were such as, if known in season, would have prevented rendition of the judgment.  Coram nobis applies only to federal convictions—and may not be used to challenge convictions in state court. A defendant seeking coram nobis must do so by filing the petition in the convicting court as part of the original criminal proceeding.

The federal coram nobis remedy requires a fundamental error, whether jurisdictional, constitutional, or otherwise. Coram nobis relief is barred when another remedy is available. However, in a federal coram nobis proceeding, the person receiving relief must not only show that the conviction or sentence is invalid, he must also prove he is suffering adverse collateral consequences resulting from the conviction. Examples of adverse collateral consequences include: Receiving recidivist punishment arising out of a subsequent conviction, threat of deportation, or suffering a loss of civil rights. The requirement regarding adverse collateral consequences when seeking coram nobis reflief cannot be satisfied merely because the defendant, as a result of the conviction, (1) suffers damage to his reputation, (2) experiences difficulty acquiring or keeping a job, (3) suffers monetary loss, or (4) suffers spiritually.

Nowlin alleges a variety of civil disabilities, including: (1) loss of insurance license, (2) loss of insurance business, (3) loss of position as board member of a bank, (4) loss of right to possess a firearm, (5) loss of right to vote, and (6) loss of $500,000 in bonuses (which are non-transferrable) as of the time of his conviction. He also alleged several other losses of a personal nature. On the other hand, the adverse collateral consequences requirement to obtain coram nobis relief is not satisfied simply because the convicted person, as a result of the conviction, (1) is suffering damage to his reputation, (2) is experiencing employment difficulties, (3) is suffering monetary or financial losses, or (4) is undergoing spiritual suffering.

Nowlin pled guilty to conspiracy to commit federal government program fraud.

RESTITUTION

Nowlin argues that the court ordered him to pay more in restitution than the financial harm Lafayette County suffered. A convicted defendant has the right to be sentenced based upon accurate information. However, in this case, Nowlin pled guilty and agreed to the total amount of loss that Lafayette County suffered, though he argued during his change of plea hearing that he should be responsible for restitution only as to the amount of loss attributable directly to him—approximately $275,000. The court agreed with Nowlin’s argument and required restitution of only that amount. Nowlin has not argued that the information the court relied upon to calculate the amount of loss was inaccurate, as he, himself, provided the information and explained the operation of his business to government prosecutors and investigators.

For a defendant to afford himself of the venerable writ of error coram nobis, he must have raised the alleged error at some point earlier in the proceedings. The error Nowlin alleges is one of mathematics—and of such a nature that a longtime businessman in the insurance industry should easily have recognized and brought it before the court prior to imposition of judgment. He did not do so; as such, he has waived this issue.

CONCLUSION
In sum, for the reasons set forth above, the instant petition for a writ of error coram nobis was denied.

ZALMA OPINION

“Chutzpah” is a Yiddish term meaning unmitigated gall. The best legal definition of “chutzpah” is a person convicted of murdering his mother and father seeks clemency because he is an orphan. In this case Nowlin engaged in serious insurance fraud that cost hundreds of thousands of dollars for the governmental entity his co-conspirator represented. He admitted guilt and then, expressing his chutzpah, hired a new lawyer to bring motions to avoid the conviction and the payment of restitution. His crime cost him a great deal in loss of reputation and business. Something he should have thought of before he entered into the conspiracy that made him a great deal of money. Crime often pays well. In this case it did until the two conspirators were caught the crime properly resulted in a financial loss and prison time.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | 3 Comments

Insurance Fraud Continues Unabated

    Zalma’s Insurance Fraud Letter – February 1, 2015

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

The current issue of ZIFL reports on:

1.    Lawyers Accused of Fraud Regarding Asbestos Claims
2.    New from Barry Zalma – The Zalma Insurance Library
3.    Eight Worst Insurance Criminals of 2014 Dishonored
4.    New Hampshire Insurance Fraud Conviction Affirmed
5.    Barry Zalma on World Risk & Insurance News – http://www.wrin.com

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail. Regular readers of ZIFL will notice that the number of convictions seemed to be shrinking in 2013 and 2014. ZIFL hopes, but has little confidence, that conviction rates will  increase in 2015 as long as its readers continue in their efforts to reduce insurance fraud.

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.    Don’t Sue Your Agent Until Action Accrues – January 30, 2015
2.    No Good Deed Goes Unpunished – January 29, 2015
3.    When Are Operations Completed? – January 29, 2015
4.    The Staged Insurance Loss – January 28, 2015
5.    Insured Owes Utmost Good Faith To Insurer – January 28, 2015
6.    Insurer Not Obligated to Pay High Bid – January 27, 2015
7.    Careful With Applications – January 26, 2015
8.    Workers’ Compensation Is Exclusive Remedy – January 23, 2015
9.    The Cost Of Giving Away the Underwriting Pen – January 22, 2015
10.    Investigating Insurance Fraud – January 21, 2015
11.    No Policy Covers Everything – January 20, 2015
12.    Self-Insured Retention Is Not Insurance – January 20, 2015
13.    Statute of Limitation Tolled by Partial Payment – January 19, 2015
14.    Martin Luther King, Jr. Day & Insurance – January 19, 2015
15.    Sexual Abuse of Minor Not an Occurrence – January 16, 2015
16.    Fraud Continues Apace – January 15, 2015
17.    Failure of Condition Precedent – January 14, 2015
18.    $225 Trip & Fall Verdict Affirmed – January 13, 2015
19.    Additional Insured Breached Policy Condition – January 12, 2015
20.    Construction Defect — January 9, 2015

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 | Comments Off on Insurance Fraud Continues Unabated

Don’t Sue Your Agent Until Action Accrues

Contingent & Premature Claims Not Viable

There seems to be an unwritten rule that when filing suit in an insurance related issue to sue everyone in sight. It often happens to destroy diversity and keep the case in state courts. Just such a situation was before the District Court for the Southern District of Florida, in Pebb Cleveland, LLC v. Fireman’s Fund Ins. Co., Slip Copy, 2015 WL 328247 (S.D.Fla., 1/23/15) who was asked to remove insurance agents and brokers from the suit since they were fraudulently joined in the suit.

FACTUAL BACKGROUND

Plaintiff Pebb Cleveland LLC (“Pebb”), a Delaware corporation, originally filed this suit against defendants Fireman’s Fund, Halycon and CBIZ in the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach County, Florida. Count 1 asserted a claim of breach of contract against Fireman’s Fund, a California corporation. Counts 2 and 3 asserted negligence claims against CBIZ and Halycon, Pebb’s Florida-based insurance agent and broker, respectively.
Fireman’s Fund removed the case to the Southern District of Florida on December 1, 2014.

The following facts, drawn from the plaintiff’s complaint, were accepted as true by the court for the purpose of resolving the instant motion.

At a time prior to January 9, 2014, Pebb applied for and obtained an “all risk” business insurance policy from Fireman’s Fund which covered certain commercial property owned by it in Aurora, Ohio. Defendants CBIZ Insurance and Halycon Underwriters represented Pebb in the purchase of the policy, which was delivered to Pebb at its principal place of business in Boca Raton, Palm Beach County, Florida.

On January 9, 2014, a deep freeze caused a sprinkler pipe to burst at Pebb’s Ohio property, causing extensive water damage to the building. Pebb promptly submitted a property damage claim to Fireman’s Fund, which denied the claim on ground the building was allegedly vacant for more than sixty days and the building’s sprinkler system had not been protected from freezing.

DISCUSSION

Motion to Dismiss–Failure to State a Claim

Under Florida law, negligence claims against an insurance agent do not accrue until the existence of insurance has been completely resolved, that is, when the coverage proceedings against the insurer are final. The theory is that an insured claiming that he is entitled to insurance coverage is judicially estopped from simultaneously claiming a lack of coverage against the agent that procured the policy on his behalf.

Under Florida law Pebb’s failure to obtain appropriate insurance coverage claims against Halycon and CBIZ are contingent and premature, as the defendants’ liability for failure to procure, if any, becomes an issue for resolution only upon a final determination that no insurance coverage exists under the policy issued by Fireman’s Fund. If the Court determines that Fireman’s Fund is liable to Pebb under the policy, then Halycon and CBIZ caused no damage to Pebb because insurance was properly procured. On the other hand, if the court determines that Fireman’s Fund is not liable under the policy because it does not cover damage to unoccupied premises, then Halycon and CIBZ are potentially liable for failure to recommend and obtain adequate insurance coverage to meet the known needs of the insured.

There is no possibility that Pebb can state negligent failure to procure claims against Halcyon or CBIZ because the issue is still open and will remain open until the District Court rules on the obligation of Fireman’s Fund to pay or not pay the claim. Therefore, the District Court concluded that the insurance brokerage defendants have been fraudulently joined.

Pebb argues that a stay or abatement of its claims against Halycon and CBIZ is the appropriate remedy if the Court determines that the claims are premature. However, considering the circumstances of this case, and that fact that Pebb’s claims against Halycon and CBIZ may never mature if the court determines that Fireman’s Fund is liable to Pebb under the policy, the court dismissed Pebb’s claims against Halycon and CBIZ, without prejudice.

Pebb cannot properly state a claim against defendant Halcyon or CBIZ, as any negligence action against them is contingent and premature pending the result of the breach of contract claim against Fireman’s Fund. Without an actionable claim against Halcyon and CBIZ, the plaintiff is left with its breach of contract claim against Fireman’s Fund. As such, the two remaining parties to this action are completely diverse in citizenship and have been properly removed to this court.

Pebb has stated a cognizable breach of contract claim against Fireman’s Fund. However, any action against defendants Halycon or CBIZ is premature pending resolution of Pebb’s action against Fireman’s Fund. Because no cause of action has yet accrued against these defendants as a matter of law, they shall be dismissed. The court shall retain jurisdiction over the remaining claim against Fireman’s Fund under its diversity jurisdiction.

ZALMA OPINION

Insurance is a contract, nothing more. The plaintiff sued its insurance company seeking indemnity from its insurer. The issue of coverage, as a result of the suit, was up in the air. The court could rule that Fireman’s Fund owed the claim. If it did, there would be no claim against the agents and brokers. If they lose and the court rules there is no coverage at that point a cause of action would accrue against the agents and brokers and they could then file a separate case. To put the two different allegations together in one suit would be counterproductive and completely confusing to a trier of fact.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

Posted in Zalma on Insurance | 2 Comments

No Good Deed Goes Unpunished

Policy Limits Not Enough

Sometimes a person is not satisfied even when the insurer pays the insured everything that the policy promised to pay. Thomas v. Fire Insurance Exchange, Not Reported in Cal.Rptr.3d, 2015 WL 274068 (Cal.App. 6 Dist., 1/21/15) was just such a case that was filed even after the insurer paid its full policy limits.

FACTS

Plaintiffs Anthony G. Thomas and Wendi Thomas (the Thomases) sued their homeowner’s insurer, defendant Fire Insurance Exchange (FIE), and their insurance broker/agent, defendant Edwin Higashi, for negligence, negligent misrepresentation, and conversion after their home and its contents were destroyed by fire. FIE had paid the Thomases the full policy limits under their homeowner’s insurance policy (the policy) for the dwelling and the full policy limits under the policy for the contents of the dwelling.

The Thomases claimed that Higashi had assured them that their policy would cover more than $20 million in loose emeralds and other collectibles stored in their home even though the policy’s contents limit was $207,750. The Thomases also claimed that FIE had negligently failed to secure the property after the fire and had taken some of the Thomases’ property from the debris.

The action was tried to a jury, and the jury returned a defense verdict.
On appeal, the Thomases make two claims of prejudicial error. They challenge the trial court’s exclusion of evidence that the Thomases’ dwelling had been undervalued by FIE for insurance purposes and the trial court’s response to a jury question during deliberations about FIE’s liability for actions taken by the salvage company that FIE hired to sift through some of the debris from the fire

THE POLICY

The Thomases obtained a homeowner’s insurance policy from FIE through Higashi for their Morgan Hill residence. The policy limit for the dwelling was $277,000, and the limit for personal property was $207,750. A “personal article floater endorsement,” for which the Thomases paid an additional annual premium of about $650, provided $45,935 in coverage for several specific items of jewelry. The jewelry endorsement was the result of the Thomases obtaining supplemental coverage each time they acquired another item of jewelry. An appraisal was required for each jewelry item, and the premium increased for each item. Another of the policy’s endorsements provided coverage of $200 per card and $1,000 “in the aggregate” for “sports cards.”

THE PROPERTY CLAIMS

The Thomases had a large collection of sports “memorabilia” that they stored in their garage. This collection included hockey cards, baseball cards, and football cards that Anthony Thomas (Anthony) valued at $50,000 or $60,000. Anthony testified that he also had a collection of around 8,000 “cut and polished” emeralds weighing nearly 13 pounds, most of which he stored under a piece of plywood in his attic. Although he testified that he had acquired these emeralds for just under $300,000 (most of it in cash), he claimed that the emeralds were worth $25 million. Anthony stored about 100 of his emeralds in a gun safe and a few in his bedroom. He testified that he stored most of his emeralds in his attic because he wanted to ensure that even if someone stole his gun safe the thief would not get most of his emeralds. Anthony also had two emerald statutes.

The Thomases’ home was destroyed by fire on August 13, 2006 while they were on vacation. The Thomases immediately made a claim under their policy. By the day after the fire, the remains of the Thomases’ dwelling had been bulldozed at the direction of firefighters due to safety concerns. A neighbor retrieved the Thomases’ gun safe from the debris, and it was returned to Anthony. The day after the fire, a fire investigator visited the scene and saw nothing “salvageable.” Kristena Wilk, FIE’s claims adjuster, was assigned to the claim the day after the fire. When she inspected the site on August 16, she found piles of debris scattered around portions of the two-acre lot where the Thomases’ dwelling had been. She saw nothing salvageable or of value in the debris.

FIE hired ServiceMaster, a restoration company, to do some sifting of the debris on the property to see if any items could be recovered. The sifting occurred on August 29, 2006. A few items were found, and ServiceMaster took custody of some of these items to store for the Thomases to later retrieve. FIE ultimately paid the Thomases the $207,750 contents policy limits and $37,435 for the two of the three items of jewelry covered by the floater endorsement that had been lost in the fire.

DISCUSSION

Exclusion of “Undervalued Homes” Evidence

Both Higashi and FIE moved in limine to exclude evidence concerning the adequacy of the policy’s dwelling limits. The Thomases’ claims concerning the policy’s coverage for the dwelling had been settled. The settlement agreement included a release under which the Thomases released FIE and Higashi “from any legal theory that argues that the limits for anything other than the Coverage C—Personal Property portion of the claim are or should be different than on the declarations page … except the Coverage C Personal Property portion of the claim and all causes of action pertaining to the Coverage C Personal property claim….”

FIE sought exclusion of any evidence regarding the policy’s coverage limit for the dwelling including “allegations of under-insurance of the dwelling.” FIE’s motion identified as its targets an “ ‘undervalued homes report’ “ and certain potential testimony by Anthony’s brother. The “Undervalued Homes Report” was single-page list of about 50 FIE “insureds [including the Thomases] who had purchased their policies from defendant Higashi [and] who were possibly underinsured.” Higashi had been questioned at his deposition about this report. In a recorded statement, Higashi had stated that he believed that he had accurately valued the Thomases’ property using FIE’s computerized system based on the information available to him at that time.

An insurance expert testified at trial that the FIE contents coverage limit “is automatically 75 percent of” the dwelling coverage limit. Another insurance expert testified that the premium for a policy covering $25 million in jewelry would be about $300,000 per year. He explained that an insurance agent will generally be motivated to sell more coverage because the agent gets a portion of the premium. The only reason an agent would have for “underinsuring property” would be “to present a more attractive price to the insurance buyer.”

ANALYSIS

The evidence that the trial court excluded had very little, if any, probative value on the issues alleged by the Thomases in their operative complaint on the causes of action that went to the jury. The Thomases alleged that Higashi and FIE were liable for negligence because they had a duty to provide the Thomases with “full replacement cost insurance coverage,” represented that they had done so, but had failed to do so. They alleged that Higashi and FIE were liable for negligent misrepresentation because Higashi had affirmatively assured the Thomases that their emeralds, worth more than $20 million, “were already covered for their full replacement value under the terms of the Policy” and did not require “additional coverage,” that their other personal property was “insured for full replacement cost under the policy [,] and that their insurance coverage was adequate regardless of the specified limits.”

The determination of whether the Thomases’ dwelling was actually undervalued would have necessitated the presentation of a great deal of evidence on an issue that did not directly address any of the Thomases’ allegations. And, as the defense pointed out, it would confuse the jury because no questions concerning the policy’s dwelling coverage were before it.

While there could have been factual questions about whether ServiceMaster engaged in tortious conduct that caused harm to the Thomases, any such questions were not among the issues before the jury in this trial. Under these circumstances, the trial court did not prejudicially err in providing a response to the jury that properly excluded this unpleaded, untried, unargued issue from the jury’s purview.

ZALMA OPINION

The plaintiffs in this case knew that they needed a special coverage for jewelry with appraisals setting the value if they wished to exceed the policy limits scheduled in the policy. Had they advised FIE at the time they acquired the policy that present in the house was over $25 million in jewelry neither identified, appraised nor described the probability that a single loss would have been a total loss even if the house was only slightly damaged. A $25 million jewelry policy could have been obtained but not from FIE. It would require a surplus line broker, an appraisal, and a great deal of security. The premium could easily have been three percent of the value. The claim is obviously suspicious and since the insureds were paid the policy limits their suit was, in my opinion, frivolous.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | 1 Comment

When Are Operations Completed?

Pollution Exclusion Effective & Unambiguous

An insured manufacturer of automotive parts brought a state-court action against an umbrella insurer, seeking coverage for underlying claims by neighboring landowners for bodily injury and property damage caused by leakage of Trichloroethylene from insured’s plant into soil and groundwater. The United States District Court for the Southern District of Indiana entered summary judgment for the insurer and the insured appealed. Having struck out in the district court, Visteon appealed to the Seventh Circuit Court of Appeals in Visteon Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., — F.3d —-, 2015 WL 294384 (C.A.7 (Ind.) 2015) the Seventh Circuit Court of Appeal was asked to reverse the trial court’s decision by Visteon.

FACTS

Visteon, a large manufacturer of automotive parts, with manufacturing facilities scattered around the world but its headquarters in Michigan, brought this diversity suit for breach of contract against the National Union insurance company. Visteon had a liability insurance policy with National Union providing worldwide liability coverage between 2000 and 2002. The policy contains an exclusion for liability resulting from pollution caused by Visteon, but the exclusion is expressly made inapplicable to liability arising from a “Completed Operations Hazard.” National Union has refused to indemnify or defend Visteon from suits arising from pollution caused by one of Visteon’s plants.

The plant in question was in Connersville, Indiana. In 2001, and thus during the insurance coverage period, the powerful toxic solvent TCE that was used to clean machinery in the plant was discovered to have leaked into the soil and groundwater. Neighboring landowners sued Visteon for damages caused by the leakage. Visteon expended millions of dollars to settle the suits and additional millions to clean up the pollution that the leakage had caused. When National Union refused either to defend Visteon or to reimburse it for any of the costs it had incurred, Visteon filed this suit in an Indiana state court; National Union removed the case to federal district court.

THE POLICY

The insurance policy excludes coverage for damages caused by “the actual or threatened discharge, dispersal, seepage, migration, release or escape of pollutants anywhere in the world”—which obviously encompasses the TCE leak. With Michigan enforcing pollution—exclusion clauses, Visteon is left to argue that what happened in Connersville is within an exception (part of the Completed Operations Hazard clause) to the pollution-exclusion clause for damages “occurring away from premises you own or rent and arising out of … Your Work except … work that has not yet been completed or abandoned.”

THE QUESTIONS

Under Michigan law the court needed to determine if Visteon’s liability from the TCE leak was within the scope of the Completed Operations Hazard clause of the insurance policy, an exception as we mentioned to the pollution-exclusion clause. The district court ruled that Visteon was not entitled to coverage under that clause and so dismissed Visteon’s entire suit.

The question is whether the TCE leaked by the Connersville plant was a result of completed “work.” Visteon argues that its “work” was “completed” each time a contract to supply products made at the plant was performed. In response National Union points out that operations continued at the plant until 2007, long after the insurance policy expired, when Visteon ceased manufacturing at the plant.

Visteon’s interpretation can’t be right, because it erases the line between completed and ongoing operations. The first definition could, as a semantic matter, embrace pollution occurring after the completion of each contract to sell parts manufactured at the Connersville plant. The problem is that such an interpretation apparently would erase the pollution exclusion for all the pollution caused by the plant.

For Visteon doesn’t acknowledge that the pollution expenses resulting from the TCE leak have to be apportioned between products that the Connersville plant made under contract and products that it made hoping to sell but not yet having a contract to sell. It thinks the Completed Operations Hazard clause entitles it to reimbursement for the entire costs it incurred as a result of the pollution claims made against it. It thus interprets that clause as swallowing the entire pollution-exclusion clause—the exception becoming the rule.

ANALYSIS

Is it plausible that National Union would have issued an insurance policy that vitiated the pollution-exclusion clause of an insurance policy that covers liabilities incurred by Visteon anywhere in the world? Doubtful since it wrote a clear and unambiguous pollution exclusion that, if Visteon’s argument is upheld, would emasculate the exclusion.

The Seventh Circuit concluded that Visteon’s argument from the Completed Operations Hazard clause is wrong for another reason. Visteon doesn’t explain why it should make a difference to coverage whether a fuel injection component or other part is sold pursuant to a contract, or is shipped to some distribution facility owned by Visteon where it is then offered for sale. The difference has nothing to do with pollution, so why should it affect the scope of an insurance policy that has a pollution-exclusion provision? The contract-completion exception is more plausibly read as referring to the end of a relationship with a buyer.

Most courts have interpreted the “completed operations hazard” narrowly—more narrowly indeed than required to decide this case in favor of the insurance company. All the cases reviewed by the court hold that pollution arising from ongoing operations (including manufacturing, as in several of the cases cited above) isn’t covered by the Completed Operations Hazard clause, even though these are cases in which the insureds were completing their performance of particular sales contracts with customers.

The Seventh Circuit, in conclusion, noted finally that the pollution-exclusion clause is unambiguous, and therefore National Union had no duty to defend Visteon against the suits brought against it by neighboring landowners who experienced losses because of the leak of TCE from Visteon’s Connersville plant.

ZALMA OPINION

Pollution cases are always expensive. In this case Visteon incurred damages and defense costs in multiple millions of dollars. The expense was sufficient to attempt to obtain coverage from a policy where there was – at least – a vague possibility for coverage to apply. It’s argument was original and well stated albeit wrong. An insurer like National Union that wrote a clear and unambiguous exclusion would not then give it away. Visteon’s argument that each event in a manufacturing plant finishing a particular product is a completed operation. It’s argument failed because the argument made no logical sense because there was no evidence that there was a project completed for one particular customer that resulted in the pollution. It was, rather, due to parts cleaning over the period that the plant was in operation.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on When Are Operations Completed?

The Staged Insurance Loss

Creating Insurance Fraud

A staged insurance loss is a fictitious loss created for the sole purpose of defrauding an insurer. Wherever insurance exists in the world there is insurance fraud.  It is an equal opportunity crime performed by every race, religion, language spoken or national origin.

The number of variations on types of staged losses is limited only by the imagination of the insurance criminals. This article describes some of the variations and how an insurer should deal with a fraudulent claim when it is discovered.

Staged auto theft

A staged theft occurs when the owner contracts with an intermediary to dispose of a vehicle. The owner ‘gives up’ the vehicle and then reports it to the insurer as stolen. The person to whom the vehicle is given up will pass it to a salvor, also known as a “chop-shop,” because it breaks the vehicle up into its component parts and sells the parts.

The staged theft is difficult to detect unless the perpetrator is sloppy, aggressive or forgets his prepared script as to the loss facts. A staged theft of an automobile performed to defraud an insurer is a crime in almost every jurisdiction in the world and can be punished in both criminal and civil courts.
Abandonment

The owner abandons a vehicle upon which he or she hopes to make a fraudulent claim unlocked with the key in the ignition, on a city street or in a parking lot. Doing so creates what insurers describe as a morale hazard. The temptation is too great for people with an inclination to crime and the vehicle will be taken.  The person insured reports the vehicle stolen and collects from an insurer before the vehicle is recovered.
Dumping

Some creative insurance fraud perpetrators cannot rely on the dishonesty of their neighbors and dispose of a vehicle by dumping it into a lake or other body of water. Some cars have even been found buried underground while others have changed the level of some ponds and lakes where hundreds of allegedly stolen automobiles were found underwater.
Fires to avoid auto lease penalties

Many people, rather than purchase an automobile will lease the automobile because the monthly payments are lower than a vehicle loan. What the purchasers don’t recognize until near the end of the lease is that the lessor puts a limit on the amount of miles on the odometer. If the vehicle is driven more than the limit set by the lease – usually 10,000 to 15,000 miles a year – the lease will include penalties of $0.10 to $0.15 per mile over a pre-set limit. That amount grows rapidly as the vehicle is driven.  I have seen some very expensive cars with a penalty of $2.00 per mile lease payment over a pre-set limit.

Upon learning that at the end of the lease the owner will have to pay a considerable sum that the owner does not have the owner will consider fraud as his only way to avoid the payment. The insured-lessee will often take the vehicle to a remote location, set it afire so that it is totally destroyed, and then report it stolen to avoid payment of the excess charges. The lessor will get the market value of the vehicle at the time of the fire and the insured/lessee will walk free with no expense if he can convince the insurer that the theft and fire was true.d.

The Staged Auto Accident

A typical scenario for a staged accident involves an insured person, in collusion with others, who will drive his vehicle into the rear of a car occupied by four co-conspirators. The insured reports the “accident” to his insurer as his fault. The occupants of the other car all claim to suffer soft tissue injuries (strains, sprains, sore backs, necks, headaches) and make claims against the insured. Since there is no physical evidence of soft tissue injuries there are no effective tests available to a physician to accurately determine whether a person is being honest when he or she complains of pain. Quick settlement is reached with the “victims” of the “accident” who share the money received with the insured.

A variant of this is the Short-Stop accident, sometimes called the “swoop and squat.” The claimant, driving an old and dented automobile, deliberately stops suddenly in front of an expensive automobile. The driver cannot stop in time and has no choice but to rear-end the old vehicle. A claim is presented for extensive injuries.

In the typical swoop and squat setup, at least two conspirators drive through the streets looking for an expensive vehicle that is obviously insured. Once the victim is observed the car driven by these co-conspirators is a car with little value. The target is usually a lone driver with no passengers. The fraudsters usually concentrate on city roads with two lanes traveling in each direction. When they spot a victim driving alone in an area with no potential eyewitnesses, one “swoops” – pulling in front of the other car and then “squats” – hitting the brakes so that the scam victim rear ends their vehicle. To see how a swoop and squat works check the videos at Bankrate.com.1
Staged water damage or mold claim

Not all staged losses deal with automobiles. Real and personal property can be the victim of a staged loss.

Mold and fungi can be destructive and unhealthy. It can also create a major insurance claim for a person anxious to defraud an insurer. The fraud perpetrator first acquires an old, inexpensive dwelling which is then insured for full replacement cost. They turn the heat up to maximum and then soak the interior with hoses or interior water sources. The high humidity and heat is sufficient to start the growth of mold and fungi. The insured waits a week or two allowing the mold to grow and then report a claim to the insurer saying they returned from a short two-week holiday to find the mess. The house is usually extensive and can result in a total loss. The insurer repairs or replaces the dwelling and the fraud perpetrators sell the house at a profit.

The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002 by federal investigators, working in conjunction with the Texas Department of Insurance. The defendants were charged with presenting insurance claims for water and mold damage to a succession of homes that they purchased, bought policies for and then intentionally flooded the houses with water hoses or by damaging water pipes. At least one house was overheated (cooked) to speed up mold growth.

Other members of the ring, posing as vendors and contractors, filed false claims to repair the damage and sold the homes to each other to repeat the process.  Six of the conspirators were found guilty.

As the 21st Century began public hysteria about mold grew.  As insureds and their representatives became knowledgeable about mold the temptation to create a covered loss scenario where none would otherwise exist became almost irresistible.

It is important, therefore, for an adjuster to confirm the actual existence of the broken pipe, ruptured hot water tank or other covered cause of loss before adjusting a mold damage claim. Furthermore, during this early adjustment period, corroborating information should be obtained from plumbers, repairmen and dry-out companies that the loss occurred as claimed, and that the water intrusion appeared in areas that are now claimed to be ruined by mold.

Conclusion

Fraud perpetrators should face prosecution and jail and, at the least, an inability to recover from the insurers. Insurance adjusters and insurer fraud investigators must conduct a thorough investigation recognizing that most police agencies are not interested in insurance fraud. The thorough investigation, conducted to defeat the fraudulent claim, can then be packaged for the police and prosecutors who will prosecute since their work has been completed other than trial. The insurer should, if convinced that fraud has been perpetrated, should seriously consider presenting their cases to the local prosecutor. Staged accident perpetrators who, in the past, understood that if they were caught they faced no more than an order of restitution and probation must be convinced that, if caught, they will face hard time in prison.

No matter how the loss is staged if it was done to deceive and defraud an insurer it is a crime in almost every jurisdiction in the world where insurance is sold. When the fraud is prosecuted successfully those tempted to commit fraud will be deterred.

Insurance fraud is a serious crime taking billions from the insurance industry every year. Everyone who buys insurance must understand that if fraud is defeated or reduced they could save from 10% to 30% of the premium they pay.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on The Staged Insurance Loss

Insured Owes Utmost Good Faith To Insurer

Lie on Application – Lose Everything

Marine Insurance requires that both parties treat each other with utmost good faith or face the problem of a policy void from its inception. That means, simply, that neither party may lie to the other about anything material to the decision to insure or not insure.

In Securian Casualty Co. v. Markel American Ins. Co., Slip Copy, 2015 WL 300432 (E.D.Wis., 1/22/2015) Orestes Fernandez, Jr. (Fernandez) lied when he acquired a policy from Markel that Markel contended were material and that caused the policy to be void. Fernandez settled with Markel for a small amount, failed to pay the lienholder, who then sued Markel for the amount of its debt.

FACTS

In 2005, Fernandez purchased a speedboat, a 2005 Black Hawk USA Sea Hawk, relying in part upon financing from Eastern Financial Florida Credit Union. The boat was insured by Markel American Insurance Company for the year beginning June 12, 2007, and Eastern Financial was identified as the lienholder. Eastern Financial was named a “Loss Payee” on the declarations page of the policy.  The boat was stolen in February 2008 and subsequently recovered stripped of its equipment, leading Fernandez to file a claim with Markel.

Markel filed an action in the United States District Court for the Southern District of Florida seeking a declaration that it was not obligated to pay under the policy as a result of misrepresentations made by Fernandez in his insurance application. After the court denied Markel’s motion for summary judgment on the basis that Markel failed to introduce any evidence that the omission of a prior claim on Fernandez’s application was material to Markel’s decision to insure the vessel Markel and Fernandez settled their dispute for $35,000.00.

Eastern Financial was not notified of the loss of the vessel, the subsequent litigation, or the settlement between Markel and Fernandez. Only after Fernandez stopped making its loan payments in 2011 did Eastern Financial learn that the vessel had been stolen and that Markel had settled the insurance claim with Fernandez. Eastern Financial was left with over $61,000.00 owed on a loan for which there was no longer any collateral and with regard to which the insurance claim had already been settled. As a result, Eastern Financial submitted a claim to its insurer, Securian Casualty Company, who provided collateral protection insurance coverage for Eastern Financial. Securian paid $61,479.48 to Eastern Financial (technically, to its successor) for the loss.

Securian, as subrogee of Eastern Financial, sued Markel to recover the amount paid to Eastern Financial on the theory that Markel breached the insurance contract when it paid the settlement to Fernandez rather than to Eastern Financial as the designated loss payee.

ANALYSIS

It is Markel’s position that, notwithstanding its acknowledged error in failing to name Eastern Financial as a defendant in the Florida declaratory judgment action, Securian cannot recover in the present action because a loss payee has no greater rights than those of the named insured.

Under the doctrine of uberrimae fidei, parties to a maritime insurance contract must accord each other the “utmost good faith.” Certain Underwriters at Lloyd’s, London v. Giroire,  27 F.Supp.2d 1306, 1311 (S.D.Fla.1998. This duty requires that the applicant voluntarily and accurately disclose to the insurance company all facts which might have a bearing on the insurer’s decision to accept or reject the risk. If the applicant misrepresents or fails to disclose information that is material to the insurer’s risk, the contract is void.

On the insurance application, when asked if he had any insurance losses or claims in the past, Fernandez checked the box for “Yes.” The question continued: “If yes, please describe in detail with dates and amounts.”  On the line below is written, “NOV 1995 WATER DAMAGE $35,000.00.” Fernandez also stated that he had not had any automobile driving tickets in the past three years and that he had never had insurance refused or cancelled. All of these statements were untrue. Fernandez’s prior insurance claim was in 2005, not 1995, and was for $130,000.00 but settled for $35,000.00. That prior insurer then refused to renew his insurance. Fernandez also had three speeding citations in the year before the application.

These facts were material to Markel’s decision to issue the policy to Fernandez. According to Markel’s managing director for marine insurance, if Markel had known the truth with respect to any of these false statements, it would not have issued the policy to Fernandez. Securian has presented no evidence that calls into question the veracity of Markel’s managing director’s statements. Contrary to Securian’s assertion otherwise, it is thus undisputed that Fernandez’s misstatements were material to Markel’s decision to issue the policy. Because the policy was premised upon a material misrepresentation by the insured, the policy was void at its inception.

LOSS PAYEE’S RIGHTS ARE DERIVATIVE

As a simple loss payee, the rights of Eastern Financial, and thus its subrogee Securian, are derivative of Fernandez’s rights. Because Fernandez lacked any rights under the void insurance policy, Securian likewise has no rights. That would seem to be the end of the analysis. But Securian argues that Markel’s payment of $35,000 to Fernandez to settle the Florida lawsuit (when it was aware of the misrepresentations) was a breach of a contract that existed between Markel and Eastern Financial (and, thus, Securian) as loss payee under the policy.

Because the insurance policy was void at its inception, there was no contract for Markel to breach—either as it relates to Fernandez or Eastern Financial. Markel’s payment to Fernandez to settle the Florida lawsuit does not change this fact. Settlement payments are made for all sorts of reasons unrelated to merits of any particular party’s claim—not the least of which includes avoiding the time and expense of litigation. But Markel’s payment to Fernandez did not result in the creation of rights that Eastern Financial never had under the void insurance policy.

An alleged breach of contract does not amount to unclean hands. A failure to comply with the material terms of a loan document may be a breach of contract, and it may not be nice, but it does not amount to unclean hands.

With respect to Markel’s counterclaim, declaratory judgment in favor of Markel shall be granted as follows:

• Policy No. YH 5065166–60 is void for misrepresentations and/or for nondisclosures of material fact;
• Securian as the subrogee or successor in interest to a simple loss payee has no greater rights than the named insured under Policy No. YH 5065166–60.

• Policy No. YH 5065166–60 does not afford any coverage in any amount to Securian regarding the incident referenced in the complaint in this action.

ZALMA OPINION

This case teaches that a lender should always insist on a standard or union mortgage clause when lending money to avoid the limited protection provided by a simple loss payable provision. In addition, insurers should never settle a claim when it has sufficient evidence to enforce rescission for misrepresentation or concealment of material fact. Trial courts are loathe to grant motions for summary judgment. That does not mean the case is lost. They should have taken the Fernandez case to trial. Both sides lost. Markel paid a fraud and was sued for cost saving decision. Securian obtained nothing because its insured was satisfied with a simple loss payable clause that gives it no greater interest than the insured while a union mortgage clause is considered a separate contract between the insurer and the insured and even if rescinded as to the named insured the mortgagee can still collect up to its interest.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Insured Owes Utmost Good Faith To Insurer

Insurer Not Obligated to Pay High Bid

Limit is What a Reasonable Contractor in The Marketplace Would Charge

When a church roof was damaged by windstorm the church retained a contractor who presented a seriously – in the mind of the insurer – inflated estimate for repair of the church roof. The insurer had hired a professional adjuster and engineer to determine what a reasonable, experienced and professional contractor would charge to complete the repairs. The contractor hired by the church, on the other hand, presented an estimate as to what he would charge to do the repairs more than three times what the insurer’s experts said was reasonable.

In St. Panteleimon Russian Orthodox Church, Inc. v. Church Mut. Ins. Co., Slip Copy, 2015 WL 283044 (D.Minn. 1/22/15) the District Court for the District of Minnesota was called upon to resolve the dispute and whether the insurer’s refusal to pay what the church demanded was an act of bad faith..

BACKGROUND

Plaintiff St. Panteleimon Russian Orthodox Church, Inc. (the “church”) is a Minnesota nonprofit corporation that owns real property located at 2210 Franklin Avenue South, Minneapolis, Minnesota 55414 (the “Property”). Defendant Church Mutual Insurance Company is a mutual insurance company incorporated in, and with its principal place of business located in, the State of Wisconsin. In January 2011, Defendant issued to Plaintiff an insurance policy with a property coverage limit of $1,046,500, effective February 2, 2011 through February 2, 2014.

The Policy provides coverage for loss “caused by or resulting from any Covered Cause of Loss,” which is defined to mean “risks of direct physical loss unless the loss is: 1. Excluded under Exclusions; or 2. Limited under Limitations.” In the event that a covered loss occurs, the Policy provides Defendant with several options for payment, including paying “the cost of repairing or replacing the lost or damaged property.

The Loss and the Initial Inspections and Estimates

On March 19, 2010, there was a wind storm at the Property. Wind is a covered risk of loss under the Policy. Therefore, when Plaintiff sought coverage for damage caused by the storm, Defendant hired an outside professional insurance adjuster, Bill Berscheid, to investigate the claim and calculate the amount of the loss. As part of his investigation, Mr. Berscheid retained Stephen Mayhew, a Senior Associate Engineer with Wiss, Janney, Elstner Associates, Inc., who has approximately two decades of engineering experience involving wood structures, to render a professional opinion as to the scope of damage caused to the Property by the wind storm.

Meanwhile, Plaintiff hired Michael DuPont, a general contractor and owner of United Exteriors Midwest, Inc., who has approximately thirty-five years of experience in the construction industry, to fix the roof of the church. Plaintiff designated Mr. DuPont as its representative for purposes of its insurance claim and Mr. DuPont sent letters to Mr. Berscheid on April 20 and April 24, 2012, estimating the insurance claim at $66,320.37 and $64,565.00, respectively.

In May 2013, Plaintiff demanded an appraisal of the dollar amount of damages. In response, Defendant notified Plaintiff that Plaintiff was required to “submit a proof of loss identifying all covered damages being claimed, along with all supporting documentation for those amounts,” in order to proceed with the appraisal. Consequently, Plaintiff submitted a sworn proof of loss stating that the “whole loss and damage to the described property as a result of this loss,” and the “actual cash value of repairs or replacement being claimed,” was $1,046,500.00—i.e., the Policy’s limit. Defendant rejected the proof of loss, noting that it was not accompanied by supporting documentation and was “without question not consistent with the damages at issue.”

DISCUSSION

Summary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed ‘to secure the just, speedy, and inexpensive determination of every action

Plaintiff’s claims are based on both its alleged right to an appraisal and Defendant’s alleged failure to pay the amount owed under the Policy to cover Plaintiff’s property loss.

As discussed above, Plaintiff’s Motion to Compel Appraisal failed because Plaintiff did not identify the documents or information that it provided to Defendant in support of its claim, as required by the Policy. Plaintiff did not object to the Court’s denial of the Motion, and as of April 22, 2014, Plaintiff’s representative still could not identify any documents or information that Plaintiff had submitted to Defendant to support the claimed loss. Because Plaintiff failed to set forth specific facts showing that there is a genuine issue for trial regarding Plaintiff’s initiation of the appraisal process, summary judgment is appropriate on Plaintiff’s claims to the extent that they are based on Defendant’s failure to engage in that process.

There is no dispute in this case that the cause of Plaintiff’s loss (i.e., wind) is a covered cause of loss under the Policy. Nor is there a dispute as to the scope of property damage caused by the wind storm (i.e., damage to the Dome, a portion of the roof, several ceiling tiles, and the fence). Rather, the viability of each of Plaintiff’s claims for monetary relief is dependent upon resolution of one disputed issue: the amount of money that Defendant is required to pay Plaintiff to cover the cost to repair the damage. Plaintiff would bear the burden of proof on this issue at trial.

As discussed above, the Policy requires Defendant to pay “the cost of repairing or replacing the lost or damaged property,” but not more than the amount “necessary” to repair or replace the property. According to the Minnesota Court of Appeals, the term “necessary” is not ambiguous.

Plaintiff argues that summary judgment is inappropriate because there are two competing estimates of the cost to repair the damage at issue, and the jury must determine which contractor is correct. Defendant’s designated expert, Mr. Elert, has opined that $78,826.55 is the cost that a reasonable contractor in the Minneapolis–St. Paul area would charge to complete the work necessary to repair the damages caused by the wind storm, and that many contractors in the Minneapolis–St. Paul area who are qualified to do the work would be willing to do so for that price. On the other hand, Plaintiff’s contractor, Mr. DuPont, has estimated the cost of his own services to complete the repair work to be $219,540.00.

Because estimating the amount and cost of materials and labor needed to complete the repairs requires specialized knowledge, the Court doubts whether Mr. DuPont could provide testimony under Rule 701 even regarding his own estimate. Second, even if Mr. DuPont could testify under Rule 701 about what he would charge for the repair work, he could not testify about what a reasonable contractor in the marketplace would charge.

Accordingly, while Defendant could present a jury with Mr. Elert’s testimony as to what a reasonable contractor in the marketplace would charge for the repair work at issue, Plaintiff could—at most—present Mr. DuPont’s testimony regarding the amount that he would charge. However, Defendant is only obligated under the Policy to pay Plaintiff what a reasonable contractor in the marketplace would charge. That evidence is undisputed, and the fact that Mr. DuPont would charge more simply indicates that Plaintiff should not hire him.

 ZALMA OPINION

Disputes over the amount necessary to repair are usually resolved by appraisal. In this case the insured Church demanded appraisal but produced no documentation to support its claim nor information sufficient for the appraisers to resolve the dispute. The court refused to compel appraisal because of that failure. In addition the church allowed its contractor/adjuster to inflate the claim without the appropriate expertise to support his claim. The court gave the church good advice, don’t pay the high bid, pay what a reasonable and professional contractor would charge. Insurance is not a place to make a profit but to gain indemnity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Insurer Not Obligated to Pay High Bid

Careful With Applications

Broker’s Misrepresentation Without Knowledge of Insured Is Sufficient for Rescission

Insurance brokers, who represent the insured to transact insurance with, but not on behalf of, an insurers often will try to make the process easy for the insured by filling out the application before asking the insured to sign it. It is a practice fraught with danger that can cause the insured to have no coverage at all and make the broker a defendant in a major lawsuit.

In Douglas v. Fidelity National Insurance Co., 229 Cal.App.4th 392, 177 Cal.Rptr.3d 271, 14 Cal. Daily Op. Serv. 10,315, 2014 Daily Journal D.A.R. 12,127 (2014) the insureds sued a fire insurer for bad faith. The Superior Court, Alameda County, entered judgment on special jury verdict awarding damages to the insureds, but struck the jury’s $1.9 million punitive damages award following the granting, in part, of insurer’s motion for judgment notwithstanding the verdict (JNOV). The insurer appealed.

FACTUAL BACKGROUND

In December 2010, plaintiffs went to a business called Cost–U–Less Insurance (Cost–U–Less) where, over the telephone, an InsZone Insurance Services (InsZone) employee assisted them in obtaining a homeowner’s insurance policy with Fidelity. Three months later a fire damaged plaintiffs’ home.

After an investigation, Fidelity rescinded the homeowner’s policy on the grounds that plaintiffs’ insurance application contained material misrepresentations about various facts concerning plaintiffs’ and their home. Fidelity stated it would not have issued the policy had it known the truth about the misrepresentations.

 PROCEEDINGS AT TRIAL

In December 2010, plaintiffs went to a Cost–U–Less store in Stockton to purchase an insurance policy for the Locust Street home. The insurance paperwork Jerry signed consisted of three pages. The first page was a blank form. The employee at Cost–U–Less did not ask him any questions about the property. Jerry signed the documents and gave the employee a check.

After the fire and investigation by Fidelity, Jerry received a letter dated May 31, 2011 from an attorney named Jeffrey Charlston. The letter included a check from Fidelity in the amount of the insurance premium Jerry had paid. Charlston stated that in the course of investigating the fire loss, evidence had developed showing material misrepresentations had been made in connection with plaintiffs’ insurance application. The alleged misrepresentations pertained to: (1) whether any unit in the structure was occupied by more than one family, (2) whether the electrical panel utilized circuit breakers or fuses, (3) whether there were roommates or boarders in the home and/or if the home was used as a rooming or boarding house, and (4) whether a business was conducted on the property. Charlston also stated it did not appear Jerry had ever personally lived in the home, asserting the property was being used either as a halfway house for parolees or as a rehab facility. Jerry testified that these claims were untrue. Finally, Charlston advised that plaintiffs owed Fidelity in excess of $24,000 for benefits already paid.

THE PURCHASE OF INSURANCE AND SUCCEEDING FIRE

Richard Gasparini, Jr., had visited On the Right Path several times. During one such visit, he was setting up his laptop computer when people came through the front door yelling that they had a search warrant. He was handcuffed and taken out to the street. In connection with that visit he created a report dated December 30, 2009. He also visited plaintiffs’ home on February 10, 2011. Later, Betty came to his office and told him about the fire. She said several times that she wanted to relocate the facility to another house.

Bruce LeBlanc evaluates policies to ensure they meet Fidelity’s underwriting guidelines. He confirmed that insurance brokers use Fidelity’s website to complete online applications. The application program is called Fidelity Rating and Internet Service Technology (F.I.R.S.T.). It automatically quotes and underwrites policies in real-time. Some of the questions on the application are underwriting questions and others are rating questions. The rating questions pertain to the quote for the premium on a specific policy. The underwriting questions are intended to qualify the risk for acceptance. The broker obtains the relevant information from the applicant and inputs it into the F.I.R.S.T. system. Once the application is submitted, the broker can print the signature page off the Internet and have the applicant sign it. The system will not approve applications that have unacceptable underwriting responses.

DISCUSSION

It is well established in California that material misrepresentations or concealment of material facts in an application for insurance entitle an insurer to rescind an insurance policy, even if the misrepresentations are not intentionally made. To prevail, the insurer must prove that the insured made a material “false representation” in an insurance application.

The evidence presented at trial would support a finding that plaintiffs were licensed to operate a residential care facility out of their home and that they received money in exchange for providing room and board to mentally ill clients. For example, the unusual incident/injury report that Betty submitted to the licensing agency after the fire states that two male clients were residing in the home at the time of the fire. Plaintiffs’ counsel essentially stipulated, outside the presence of the jury, that Betty was running a business out of her home.

INSZONE’S STATUS AS BROKER OR AGENT

As a matter of law, if an insurance application was prepared by an insurance broker (the agent of the insured), the application’s contents are the insured’s responsibility. Unlike insurance brokers an “insurance agent” is one who represents an insurer under an employment by the insurer.  Brokers and insureds are ordinarily involved in what can be viewed as a series of discrete transactions, while agents and insureds tend to be under some duty to each other during the entire length of the relationship.

Insurance agents and insurance brokers must be licensed by the Department of Insurance (DOI) (California Insurance Code § 1631). But a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.

There was evidence, albeit conflicting, that InsZone and Lockefeer acted as plaintiffs’ insurance brokers, and not as agents of Fidelity. The court’s review of the record indicates a reasonable probability that a properly instructed jury could have rendered a different verdict. The instructional errors were exacerbated by plaintiffs’ counsel’s closing arguments. He repeatedly asserted the “application” was the blank form Jerry had signed, emphasizing that this form did not include the disputed underwriting questions. Of course, Fidelity was not necessarily required to prove that the misrepresentations it relied on in issuing the policy were contained within an application. It only needed to prove that there was a misrepresentation or concealment of a material fact in connection with an application for insurance.

None of the questions or accompanying answers are printed on the page Jerry signed. Thus, Jerry’s testimony that he never saw the Fidelity underwriting questionnaire generated by InsZone is not implausible, and, under the instruction given, the jurors could have concluded there were no misrepresentations in Jerry’s “application” because there were no representations at all on the blank pages that he signed.

Importantly, the jury was not asked to consider whether the F.I.R.S.T. application submitted by InsZone on plaintiffs’ behalf via Fidelity’s website contained any material misrepresentations. Additionally, the instructions and jury form required Fidelity to prove that the misrepresentations were made deliberately in violation of California law that allows for rescission based on an innocent concealment or misrepresentation of material fact.

Fidelity’s affirmative defense was not properly presented to the jury and the court concluded Fidelity was prejudiced thereby, necessitating a new trial.

ZALMA OPINION

Insurance agents and brokers should always advise their clients of how they will market the insurance requested. If they are acting as a broker, that is a person who transacts insurance with but not on behalf of an insurer, the broker should advise the insured that he only works for the insured. If an agent he should advise the insured that he is acting for the insurance company. Regardless, when an application is prepared the prudent agent or broker will always provide a copy of all representations made to the insurer – whether on an application or on a computerized system like FIRST and explain to the insured that the insurer will rely on each statement of fact provided to the insurer by the application process whether on an ACORD form or by e-mail or some other method of transmitting information.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

 

 

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Workers’ Compensation Is Exclusive Remedy

Tort Judgment Against Employer Is Only Good for Wallpaper

The workers’ compensation system across the United States provides benefits to injured workers without regard to fault. When the injury is serious or results in death the workers’ compensation benefits do not feel sufficient to indemnify the injured worker or his or her estate for the loss incurred. As a result, the injured worker or his estate will attempt a tort action and then try to collect that judgment by means of a suit against the employer’s insurer.

Employers and employes make a bargain: the employer will not require proof of negligence if the employee is injured and the employee agrees that he or his estate will accept the statutory benefits provided by state law and give up the right to sue the employer for tort damages.

In Morales v. Zenith Ins. Co., — F.3d —-, 2015 WL 265445 (C.A.11 (Fla.) 1/22/15) the estate of an injured worker successfully sued an employer and sought to recover by means of a breach of contract claim filed by plaintiff-appellant Leticia Morales, on behalf of herself, the Estate of Santana Morales, Jr., and two minor children  against Zenith Insurance Company (“Zenith”).

FACTS

Santana Morales, Jr. was crushed to death by a palm tree while working as a landscaper for Lawns Nursery and Irrigation Designs, Inc. (“Lawns”). At the time of Morales’s death, his employer Lawns maintained a “Workers’ Compensation and Employers Liability Insurance Policy” with Zenith. The policy contained two types of coverage: (1) workers’ compensation insurance under Part I and (2) employer liability insurance under Part II. After Morales’s death, Zenith began paying workers’ compensation benefits to the Estate in accordance with its obligation under Part I of the policy.

Under Part II, Zenith was obligated: (1) to “pay all sums [Lawns] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance”; and (2) to defend lawsuits for such damages. In relevant part, Part II contained an exclusion barring employer liability insurance coverage for “any obligation imposed by a workers compensation … law” (the “workers’ compensation exclusion”).

On December 3, 1999, the Estate filed a wrongful death action against Lawns in Florida circuit court and obtained a default jury award to the Estate of $9.525 million in damages against Lawns.

While the Estate’s wrongful death lawsuit was still ongoing, Zenith continued to pay workers’ compensation benefits on Lawns’s behalf until August 2003, when Zenith made a final lump sum payment of $20,000 in full settlement of the Estate’s workers’ compensation claim against Lawns. The parties entered a settlement agreement where the Estate waived all rights to any and all benefits under The Florida Workers’ Compensation Act. Further, the settlement and agreement constituted an election of remedies by the Estate with respect to the employer and the carrier as to the coverage provided to the employer.

In all, the Estate received over $100,000 in workers’ compensation benefits from Zenith, pursuant to the Florida Workers’ Compensation Act and Part I of the policy.

After Zenith refused to pay the $9.525 million tort judgment entered against Lawns, the Estate sued Zenith in Florida state court, asserting that Zenith had breached its insurance policy with Lawns. After Zenith removed the case to the Middle District of Florida, Zenith and the Estate cross-moved for summary judgment.

The district court granted Zenith summary judgment on the Estate’s breach of contract claim, ruling that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the employee Estate’s $9.525 million tort judgment against the employer Lawns. Observing that Florida law provides workers’ compensation benefits as the exclusive remedy for an employee injury caused by an employer’s negligence, the district court determined that the Estate’s state court lawsuit alleging Lawns’s negligence triggered an “obligation imposed by” Florida’s Workers’ Compensation Act, and thus the judgment issued in that lawsuit fell within the policy exclusion in Part II.

APPELLATE COURT’S CERTIFIED QUESTIONS TO FLORIDA SUPREME COURT

In the first panel decision in this case, the court certified the following questions to the Florida Supreme Court:

“(1) DOES THE ESTATE HAVE STANDING TO BRING ITS BREACH OF CONTRACT CLAIM AGAINST ZENITH UNDER THE EMPLOYER LIABILITY POLICY?

“(2) IF SO, DOES THE PROVISION IN THE EMPLOYER LIABILITY POLICY WHICH EXCLUDES FROM COVERAGE “ANY OBLIGATION IMPOSED BY WORKERS’ COMPENSATION … LAW” OPERATE TO EXCLUDE COVERAGE OF THE ESTATE’S CLAIM AGAINST ZENITH FOR THE TORT JUDGMENT?

“(3) IF THE ESTATE’S CLAIM IS NOT BARRED BY THE WORKERS’ COMPENSATION EXCLUSION, DOES THE RELEASE IN THE WORKERS’ COMPENSATION SETTLEMENT AGREEMENT OTHERWISE PROHIBIT THE ESTATE’S COLLECTION OF THE TORT JUDGMENT?”

The Florida Supreme Court answered all three certified questions in the affirmative, holding that “under Florida law, the estate has standing, but that the workers’ compensation exclusion and the release prevent it from collecting the tort judgment from Zenith.” Morales v. Zenith Ins. Co., ––– So.3d ––––, 2014 WL 6836320, at *1 (Fla. Dec. 4, 2014).

As to the workers’ compensation exclusion, the Florida Supreme Court stated as follows: “[T]he estate’s tort judgment arises from an injury that plainly falls within the exclusivity of Florida’s Workers’ Compensation Law and therefore within the coverage provided by Lawns’ workers’ compensation policy. Given the mutually exclusive nature of workers’ compensation and employer liability coverages, Zenith has no obligation under the employer liability policy to pay the tort judgment.”  Accordingly, the Florida Supreme Court held that “the workers’ compensation exclusion bars coverage of the estate’s tort judgment under the employer liability policy.”

CONCLUSION

Given the Florida Supreme Court’s resolution of the certified issues, the district court correctly determined that the workers’ compensation exclusion in Part II of the policy barred Zenith’s coverage of the $9.525 million tort judgment against Lawns.

ZALMA OPINION

I can have empathy for the plaintiffs who lost a husband and father. I can imagine their joy at receiving a judgment of $9.525 million only to have that joy dashed by a bankrupt employer and the fact that workers’ compensation is an exclusive remedy.  They can frame the judgment and hang it on the wall but they can never collect it.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Workers’ Compensation Is Exclusive Remedy

The Cost Of Giving Away the Underwriting Pen

Insurer Gave Insured Right to Bind it to Coverage

Underwriting is the process by which an insurer decides which risks it is willing to take and which it is not willing to take. Insurers, attempting to increase business, have given away to others the right to decide who to insurer without even requiring notice to the insurer that the insurance had been effected. Colloquially called “giving away the pen” such an action is rife with danger.

The Supreme Court, Appellate Division, Second Department, New York, in one of its usual succinct opinions, dealt with the question of whether a corporation became an additional insured by reason of a contract between the parties where the insurer gave to the named insured the pen to make anyone it desired to contract with an additional insured. In Pinon v. 99 Lynn Avenue, LLC, –— N.Y.S.2d —-, 2015 WL 249360 (N.Y.A.D. 2 Dept., 1/21/15) it found that all the person claiming to be an additional insured needed to do to gain coverage was to prove a contract existed making such a promise.

FACTS

In 2004, 99 Lynn Avenue, LLC, and 105 Lynn Avenue, LLC (hereinafter together the Lynn LLCs), the respective owners of properties located at 99 Lynn Avenue and 105 Lynn Avenue in Hampton Bays, contracted with George E. Vickers, Jr., Enterprises, Inc. (hereinafter Vickers), a general contractor, for the construction of custom homes on each of their respective properties.

Vickers subcontracted with Paul Michael Contracting Corp. (hereinafter PMC) to perform the masonry work on the projects. On June 25, 2005, the plaintiff Miguel Pinon, an employee of PMC, was injured when, during his lunch break from his work for PMC on the projects, he dove off a bulkhead located on one of the subject properties into shallow waters in Shinnecock Bay.

The plaintiffs commenced this action to recover damages for personal injuries against, among others, the Lynn LLCs, Vickers, and PMC. Vickers commenced a third-party action against Merchants Mutual Insurance Company (hereinafter Merchants) seeking defense, indemnification, and reimbursement of past defense costs in connection with the main action as an additional insured under a commercial liability insurance policy that Merchants issued to PMC. The Lynn LLCs commenced a second third-party action against Merchants and Lexington Insurance Company (hereinafter Lexington) seeking defense, indemnification, and reimbursement of past defense costs as additional insureds under the policy Merchants issued to PMC and as named insureds under separate homeowners’ insurance policies that Lexington issued to them.

Vickers moved for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in connection with the main action. Lexington separately moved for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. Merchants cross-moved for summary judgment declaring that it is not so obligated.

THE POLICY

The policy issued by Merchants to PMC stated that it provided additional insurance coverage for “[a]ny person or organization [PMC was] required by a written contract, agreement or permit to name as an insured” with respect to liability for injuries arising out of PMC’s work for the additional insured “at the location designated in the contract.”

ANALYSIS

Contrary to Merchants’ contention, Vickers and Lexington demonstrated, prima facie, the existence of a written contract expressly requiring PMC to name Vickers and the Lynn LLCs as additional insureds under the commercial liability policy it obtained from Merchants. Vickers and Lexington further demonstrated, prima facie, that the allegations of the complaint in the underlying action suggested a reasonable possibility of coverage in that Pinon’s injuries arose out of PMC’s operations on the Lynn projects, as defined in the policy. Merchants failed to raise a triable issue of fact in opposition to Vickers’ and Lexington’s motions.

Accordingly, the Supreme Court properly granted Vickers’ motion for summary judgment declaring that Merchants is obligated to defend it in the main action and reimburse it for past defense costs in the main action, and Lexington’s motion for summary judgment declaring that Merchants is obligated to defend the Lynn LLCs in the main action. For the same reasons, the court properly denied that branch of Merchants’ cross motion which was for summary judgment declaring that it is not so obligated.

ZALMA OPINION

Insurance companies get into trouble providing insurance coverage it did not necessarily want to provide by giving its pen away – that is allow someone other than the insurer to bind insurance coverage. In this case the insurer, Merchants, agreed to provide additional insurance coverage for any person or organization required by a written contract, agreement or permit to name as an insured. That provision in the policy gave the decision to insure or not insure a person or entity as an additional insured to the named insured who could cause insurance to be in effect for a person or entity the insurer never would have agreed to insure had it been asked directly.

 

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Posted in Zalma on Insurance | Comments Off on The Cost Of Giving Away the Underwriting Pen

Investigating Insurance Fraud

The Beginning of an Insurance Fraud Investigation</