Theft Is Not “Property Damage”

A CGL Is Not a Cargo Policy

A Commercial General Liability (CGL) policy is a third party liability insurance policy only insures an insured for risks of loss from third parties claiming damage to their property or bodily injury. In Artisan and Truckers Casualty Company v. Hanover Insurance Company, Slip Copy, 2015 WL 5081458 (N.D.Ill., 8/27/2015) the District Court for the Northern District of Illinois, was asked to provide coverage under a CGL for losses by theft to property in control of the insured.

FACTS

Plaintiff Artisan and Truckers Casualty Company (“Artisan”) filed a complaint for declaratory judgment, asking this Court to find that Artisan does not have a duty to defend and indemnify its insured Alekseya Piskunov, Kateryna Piskunov, Star Way Corporation, and Star Way, Corp. (collectively “Star Way”) in an underlying suit brought against Star Way by Hanover Insurance Company (“Hanover”).

The relevant facts when determining an insurer’s duty to defend in the summary judgment context are those alleged in the underlying complaint that alleged the following:  Hanover insures Access America Transport, Inc. (“Access America”).  Access America entered into a Broker–Carrier agreement with Star Way, and pursuant to that agreement Star Way agreed to transport two Case backhoes belonging to CNH America LLC (“CNH”) to two consignees. Star Way accepted the shipment in Iowa and the backhoes were loaded onto a motor truck. The two backhoes were then reportedly stolen from the premises of Star Way Lines Inc. in Illinois before they could be delivered to the consignees.

Hanover paid CNH for the loss of the backhoes and in exchange for such payment CNH assigned its claims arising out of the loss of the backhoes to Hanover. Hanover then sued Star Way under the Carmack Amendment, 49 U.S.C. § 14706, for the value of the backhoes.

DISCUSSION

The insurance policy at issue (“the policy”) was issued by Artisan to “Star Way Corp.”  In the case before this Court, Artisan claims it has no duty to defend Star Way in the underlying suit because there is no coverage under the policy. Artisan argues that the policy does not provide “cargo coverage” and that at least six exclusions in the Commercial General Liability Endorsement of the policy (“CGL Endorsement”) preclude coverage.

When evaluating an insurer’s motion for summary judgment based on an asserted lack of duty to defend, courts compare the allegations in the underlying complaint with the relevant policy provisions. If the facts alleged in the underlying complaint are within or potentially within policy coverage, the insurer has a duty to defend and cannot prevail on summary judgment. The burden is on the insured to prove that its claim falls within the coverage of an insurance policy. Once the insured has demonstrated coverage, the burden then shifts to the insurer to prove that a limitation or exclusion applies.  When an insurer seeks summary judgment on the basis that an exclusion in the policy precludes coverage, the applicability of the exclusion to the allegations in the underlying complaint must be clear and free from doubt.

Artisan asserts that cargo insurance is a “distinct form of liability insurance” and not part of the policy.  But aside from referring to the exclusions, it makes no argument as to whether the CGL Endorsement covers cargo loss.

The parties’ arguments suggest that both believe it is obvious that theft of the backhoes constitutes “property damage” for purposes of the CGL Endorsement. damages caused by theft were not property damages for the purposes of general liability insurance coverage, reasoning that there is a difference between damage to property and loss of property. In Hanover and Star Way have failed to meet their burden to demonstrate that their claim falls within the CGL Endorsement’s coverage for “property damage.” This alone is sufficient reason to grant Artisan’s motion for summary judgment.

Damage to Your Work Exclusion

The “Damage to Your Work” exclusion (“DTYW exclusion”) precludes coverage for “property damage to your work[,] arising out of it or any part of it …” For purposes of the CGL Endorsement, “your work” means “work or operations performed by you or on your behalf; and materials, parts or equipment furnished in connection with such work or operations.”

CGL insurance policies often include DTYW exclusions because “[t]he risk intended to be insured [by CGL insurance] is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable … The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or complete work is not that for which the damaged person bargained.” State Farm Fire & Cas. Co. v. Tillerson, 777 N.E.2d 986, 992–93 (Ill.App.2002) (internal quotations omitted) (ellipsis in original).

DTYW exclusions tend to arise in cases where the “work” at issue involves “workmanship,”  the word “work” is unambiguous, and the Court must afford it its “plain, ordinary, and popular meaning.” W. Am. Ins. Co. v. Yorkville Nat. Bank, 939 N.E.2d 288, 293 (2010).

Here, the theft of the backhoes arose out of Star Way’s activity directed toward accomplishing the delivery of the backhoes. In addition, the exclusion applies where the damages arise during the course of the insured’s work rather than after the relevant work has been completed. Here the backhoes were stolen before Star Way had completed the relevant job by delivering the backhoes to the consignees; therefore the DTYW exclusion applies to the underlying complaint even if the theft constitutes “property damage.”

Damage to Property

Artisan asserts that the Damage to Property exclusion for “[p]roperty damage to … personal property in the care, custody or control of the insured” applies. Hanover responds that the underlying complaint does not allege that the backhoes were in the exclusive possessory control of Star Way when they were stolen.  Artisan replies that possessory control is apparent from the allegation that Star Way received the backhoes for transport to the consignees.

Under Illinois law, an insured must have “possessory control … at the time of the loss” in order for the property to be deemed in its “care, custody, or control.” Bolanowski v. McKinney, 581 N.E.2d 345, 348 (1991). Illinois courts also note that the possessory control at the time the property is damaged must be “exclusive.” Another person or entity’s limited access to the property does not negate the exclusiveness of the insured’s possessory control. Country Mut. Ins. Co. v. Waldman Mercantile Co., 430 N.E.2d 606, 609 (Ill.App.1981).

Exclusive possessory control is determined by looking at the extent of the insured’s right and power to “access” and “maintain, move, or protect” the property.

It cannot be gleaned from the underlying complaint who among Star Way, Star Way Lines Inc., or any other entity that may have been involved had the predominant authority to access, maintain, move, and protect the backhoes at the time they were stolen. Hanover and Star Way did not establish coverage under the CGL Endorsement, and even if they had, the DTYW and the property exclusions apply to the allegations in the underlying complaint.

As a result the Court granted Artisan’s motion for summary judgment.

ZALMA OPINION

Cargo insurance is a specific type of insurance protecting the insured against the loss of property in his, her or its care custody and control while a CGL does not and specifically excludes such coverage. Trying to stretch a CGL into a cargo policy is asking the court to re-write the policy which it, properly, refused to do.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

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

Keep it Simple, Stupid

Over-Pleading Makes Insurer Acting in Bad Faith Look Good

When an insurer fails to deal fairly and in good faith with its insured it compels its insured to sue to gain the benefits promised by the policy. Sometimes, rather than suing for breach of contract and bad faith lawyers feel compelled to add every conceivable cause of action both contractual, tortious and for violation of statute. By so doing the case becomes complex, difficult to deal with, and gives the defendant insurer the opportunity to move the court to dismiss large portions of the suit and prejudice the trial judge in favor of the insurer.

In Wheeler v. Assurant Specialty Property, Slip Copy, 2015 WL 5117770 (N.D.Ill., 8/28/2015) the District Court for the Northern District of Illinois was faced with just such a complex, multiple cause of action suit, and a motion to dismiss by the insurer.

FACTS

Stephen A. Wheeler sought coverage for alleged damage to his house caused by a windstorm from the providers of his home insurance policy, Defendants Assurant Specialty Property d/b/a Assurant and American Security Insurance Company d/b/a Assurant (collectively, “ASIC”). ASIC determined that only a portion of the claimed damages were caused by the windstorm and denied the majority of Wheeler’s claim.

Wheeler sued alleging breach of contract, vexatious and unreasonable conduct in violation of the Illinois Insurance Code, 215 Ill. Comp. Stat. 5/155, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), 815 Ill. Comp. Stat. 505/1 et seq., fraud, and unjust enrichment.

ASIC asked the court to dismiss Counts I through VI of the complaint.

Wheeler owns property at 1317 E. 50th Street in Chicago, Illinois. Wells Fargo Bank, N.A. (“Wells Fargo Bank”) holds the mortgage for Wheeler’s property. On May 20, 2011, Wells Fargo Bank and Wells Fargo Insurance, Inc. (“Wells Fargo Insurance”) required Wheeler to obtain insurance for the property from ASIC.

On July 11, 2011, a windstorm near Wheeler’s property caused significant damage to the interior and exterior of Wheeler’s house. Wheeler filed a timely claim under his ASIC policy that month. But from then until January 2012, ASIC did little to process Wheeler’s claim and did not hire a professional expert to examine Wheeler’s house. Wheeler promptly contacted ASIC, informing it that he had retained a structural engineer to examine his house. ASIC’s Raymond Parello responded that he also had contacted a structural engineer.

Parello informed Wheeler that ASIC had hired Alan Moersfelder of Kelsey Engineering and Electric Inc. Moersfelder conducted his inspection on April 4 and provided ASIC with a report on April 9. He concluded that it was possible that “much, if not all, of the visible floor, wall, ceiling, and visible structural member damage inside the house is a direct result of the July 10, 2011 weather event” and that it was “very possible that there is additional damage which is not visible.” He further noted that it was “difficult to postulate any man-made or natural event, other than a weather event, that could cause the visible damage to the Wheeler residence, cause the visible damage to the trees in the immediate neighborhood, cause the roof damage which has been repaired, and yet not damage other close proximity buildings.”

Approximately a year later, on March 11, 2013, at ASIC’s request, Wheeler executed a sworn statement in proof of loss regarding the July 11, 2011 damage to his house, claiming $695,943.00 under the policy.  On March 27, Parello notified Wheeler’s counsel that ASIC was reviewing the materials. In an April 24 conversation with Wheeler’s counsel, Parello represented that the amount claimed was greater than ASIC had expected. Wheeler’s counsel suggested that all engineers and contractors meet to expedite the repairs to Wheeler’s house. That meeting occurred on June 7, but no ASIC representative was present. On June 25, ASIC’s Tom Frankino told Wheeler’s counsel that the claim amount was over his authority and that additional inspections were required.

ASIC then, a year after the loss, hired Peter Quinn of Rimkus Consulting to perform the additional inspection, which occurred on July 18. Rimkus Consulting issued its report on August 13, finding that Wheeler’s house suffered no structural damage as a result of the windstorm, although it attributed the damage to the roof that had already been repaired and damage to an upper pane of glass in a third floor bathroom window to the storm.

Rimkus Consulting concluded that “[t]he undulations observed in the floor systems, un-level stairs and localized small areas of surface cracks in the ceilings and walls resulted from one or more of the following items: a) Inadequate support for the transfer of dead and live loads from the roof to foundation piers. b) Construction defects. c) Expected natural deterioration over time.” Based on this report, the opposite of the report prepared by its original engineer a year earlier while damages were visible, ASIC rejected Wheeler’s submitted proof of loss. Because Rimkus Consulting found that a pane of glass in the third floor bathroom window had been damaged as a result of the windstorm and that damage was not included in the previous allowed payment, the adjuster’s estimate was revised to include a supplemental payment of $112.83. This was added to the previous payment of $16,113.87, which had been made on January 17, 2013. ASIC also noted that $992.95 of recoverable depreciation would be available once repairs were complete. Wheeler never accepted any payments for the claimed covered damage, however. His property is now in foreclosure proceedings.

ANALYSIS

Breach of Contract

ASIC argued that the Court must dismiss Wheeler’s breach of contract claim because it sounds in fraud but does not meet the particularity requirements of Rule 9(b). The District Court concluded that ASIC is asking for too much from Wheeler on this claim. Wheeler alleges the existence of an insurance contract that he claims was breached when ASIC refused to fully compensate him for damage he maintains is covered under the policy. This is a classic claim for breach of an insurance policy.

Determining whether conduct is vexatious or unreasonable is a factual question determined by looking at the totality of the circumstances. Here, Wheeler alleges that ASIC acted in bad faith, providing a detailed list of allegations that he contends amount to vexatious and unreasonable conduct. This is sufficient at this stage to allow the damages request to go forward.

ICFA Claim

To state an ICFA claim, Wheeler must allege:

(1) a deceptive or unfair act or practice by ASIC,

(2) ASIC’s intent that Wheeler rely on the deceptive or unfair practice,

(3) the unfair or deceptive practice occurred in the course of conduct involving trade or commerce, and

(4) ASIC’s unfair or deceptive practice caused Wheeler actual damage.

A deceptive practices claim must meet Rule 9(b)’s heightened pleading standard, while an unfair practices claim need not because it is not based on fraud. Wheeler may not take his breach of contract claim and “dress [it] up in the language of fraud” in an attempt to state an ICFA claim.

Courts have found that plaintiffs cannot proceed on ICFA or fraud claims against their insurers where they merely allege that the insurer  failed to pay the claim, made “bad faith” demands for documents, conducted a burdensome investigation, delayed in resolving the claim, rested the denial of the claim on the actions or inactions of  the insured or its agents, and represented in its policy that it would pay valid claims, when in fact it has not paid.

The court concluded that Wheeler’s ICFA claim must be dismissed as Wheeler has not adequately alleged the purported deceptive conduct with particularity as required by Rule 9(b).

For the foregoing reasons, ASIC’s motion to dismiss is granted in part and denied in part. Counts III (fraud), IV (ICFA violation), and V (unjust enrichment) are dismissed without prejudice.

ZALMA OPINION

The conduct of ASIC, ignoring the report of its original expert engineer, failing to resolve the claim with its insured for a year leaving the insured to deal with the damage without assistance, and letting the insured’s home go into foreclosure indicate a classic breach of insurance contract and bad faith. By approving most of the insurer’s motion without prejudice the plaintiff can amend his suit or simply proceed to trial on the breach of contract and bad faith suit, which, if the facts reported could be proved, will result in a high dollar verdict in favor of the insured plaintiff.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

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

Fail to Read Your NFIP Policy at Your Own Peril

Agent, Read The Policy Before Advising Insured of its Provisions

The National Flood Insurance Program policy is a creature of federal statute and is limited to what it says to protect the federal treasury. In Pittman v. Farmers Fire Ins. Exchange, Slip Copy, 2015 WL 4507607 (W.D.Mo., 7/24/2015) the insureds, by failing to comply with the policy conditions and by having a loss not covered by the policy, lost their suit against the insurer and left them with nothing more than a suit against the agent for misrepresenting the coverage available.

FACTS

Defendant Colby Yoder (“Yoder”), an insurance agent with Defendant Farmers Fire Insurance Exchange (“Farmers”), sold a flood insurance policy to Plaintiffs Catherine Lynn Pittman (“Cathy Pittman”) and Troy Vernon Pittman (collectively, “the Pittmans”). The Pittmans claim Yoder misrepresented that their policy would cover all contents of their basement from flood damage. After floodwaters inundated their basement and ruined the items they kept there, the Pittmans read their policy for the first time and learned that it actually excluded most basement contents.

Yoder sought summary judgment on all claims against him.

In federal court a moving party is entitled to summary judgment if he shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The Pittmans response attached a single affidavit from Cathy Pittman to support their version of the facts, but failed to tie the affidavit to any specific facts they dispute.

This dispute concerns flood insurance, an area governed to some extent by rules quite different from those that would apply in a normal insurance dispute.

Flood insurance policies are not an inherently lucrative product for insurance companies. Floods often evade reliable prediction, recur frequently in some areas, and wreak extensive damage. This led private insurance companies to refuse to offer flood insurance on flood-prone property. Without an adequate flood insurance market serving these areas, the federal government was spending large sums of money on flood disaster aid.  To address this problem, in 1968 Congress enacted the National Flood Insurance Program (“NFIP”). As amended, the NFIP charges the Federal Emergency Management Agency (“FEMA”) with providing unified flood insurance coverage nationwide below actuarial rates.

Private sector property insurance companies may participate in the NFIP as so-called “Write–Your–Own” (“WYO”) companies. The federal governmen pays claims and the WYO companies’ defense costs. The federal government also sets the terms of the policies by requiring the use of the Standard Flood Insurance Policy (“SFIP”), the terms of which cannot be varied without express permission from FEMA.

It is through this program that the Pittmans came to buy a flood insurance policy. The Pittmans owned a single family home in Peculiar, Missouri, on property that abuts a river.
Cathy Pittman contacted Yoder, an insurance agent for Farmers, a WYO company. They discussed the Pittmans purchasing a flood insurance policy. Cathy Pittman specifically told Yoder that she wanted a flood insurance policy to cover the contents of her basement. She detailed the high value possessions she kept in the basement, including furniture, televisions, kitchen appliances, a computer, and hunting supplies.

Because the SFIP was the only flood policy available, Yoder prepared to sell Cathy Pittman that policy. He asked her several questions to complete the SFIP application, including questions about her basement. Yoder said that he could procure a federal flood insurance policy that covered up to $250,000 for the house and $100,000 for its contents. He specifically promised that the policy would cover all of the contents of their home, including items in the basement. Cathy Pittman did not have a copy of the prospective policy in front of her during this conversation. The parties later executed the policy.

In June 2008, the river flooded the Pittmans’ house and damaged some personal property in their basement. Farmers agreed to pay for structural damage and for most of the house’s contents, but refused to pay for most items in the basement. Until this point, the Pittmans had never read their policy. They then learned that their policy, like all SFIPs and pursuant to federal regulations, specifically limited: “Coverage for items of property … in a basement … to the following items, if installed in their functioning locations and, if necessary for operation, connected to a power source: ¶ a. Air conditioning units, portable or window type;  ¶ b. Clothes washers and dryers; and ¶ c. Food freezers, other than walk-in, and food in any freezer.”

Contrary to what Yoder had told Cathy Pittman over the phone, their policy did not cover most of the items in their basement. The Pittmans formally submitted a claim, but Farmers decided that the claim was incomplete per the policy’s terms and so could not be considered timely. They properly executed their proof of loss in July 2012, over four years after the flood well beyond the 60 day requirement of the policy.

ANALYSIS

Yoder moves for summary judgment on all claims pled against him: breach of contract, vexatious refusal to pay, negligent procurement, and negligent misrepresentation. As for the first two claims, since the Pittmans concede in their brief that “actions for breach of contract and vexatious refusal to pay … cannot be asserted against Defendant Yoder” and the Court granted Yoder summary judgment on these claims.

Count II alleges that Yoder negligently failed to procure them insurance that covered the contents of their basement. A negligent procurement claim cannot stand where “there was no insurance that could be purchased insuring against the peril causing the loss.” Russell v. Reliance Ins. Co., 672 S.W.2d 693, 694 (Mo.Ct.App.1984) (emphasis added).

In reaching its goal, the NFIP does not explicitly regulate every aspect of flood insurance. While the NFIP immunizes insurers when they would otherwise be subject to liability, this provision reflects the NFIP’s intent to not create any new indemnification or immunity for casualty agents.

Because Missouri’s negligent misrepresentation tort lies within this undisturbed status quo, the tort does not obstruct any provision of the NFIP. Negligence claims brought under Missouri law for errors and omissions committed by insurance agents during the procurement process do not pose an “obstacle to the accomplishment … of the full purposes and objectives of Congress.”  Therefore, the NFIP does not preempt Count II, so Yoder is not entitled to judgment as a matter of law on the negligent misrepresentation claim.

The Court now turns to the merits of the Pittmans’ claim that Yoder committed negligent misrepresentation by falsely telling them that their flood insurance policy covered all contents of their basement. Negligent misrepresentation requires proof that:

(1)  the speaker supplied information in the course of his business;

(2)  because of the speaker’s failure to exercise reasonable care, the information was false;

(3)  the information was intentionally provided by the speaker for the guidance of limited persons in a particular business transaction;

(4)  the hearer justifiably relied on the information; and

(5)  due to the hearer’s reliance on the information, the hearer suffered a pecuniary loss.

Yoder argues that the Pittmans’ reliance was unjustified as a matter of law, because they could have read their policy at any time before the flood and realized that his prior representations about the policy coverage were incorrect. Whether a party can be liable for negligent misrepresentation when his statements predate the formation of a contradictory contract is a difficult issue, and it is appears to be unresolved under Missouri law. NFIP regulations create the legal fiction that the insurance agent acts for the insured, not the WYO company or the federal government underwriting the flood insurance policy. Therefore, this doctrine does not establish that the Pittmans unreasonably relied on Yoder’s alleged misrepresentations as a matter of law.

Because there is a genuine dispute over facts material to the Pittmans’ negligent misrepresentation claim, the Court must deny summary judgment to Yoder.

ZALMA OPINION

The National Flood Insurance Program policies look like an insurance policy but are, rather, a tightly limited government entitlement providing funds to rebuild a dwelling and replace its contents after a flood that no insurance company is willing to write. The policy wording is strictly enforced. The agent who sold the policy is considered to be a broker, transacting insurance with, but not on behalf of the insurer. If he misrepresents the coverages available and the insured relies on that representation to the insured’s detriment the agent may be held liable for damages resulting from the misrepresentation.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

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 CLAIMS 101 – A Webinar by Barry Zalma

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Does a D & O Policy Have a Duty to Defend?

D & O Insurer’s Duty Only Arises After Final Judgment

One of the most dangerous positions in business, in my humble opinion, is being a director or officer of a small condominium association. People, not normally involved in business, find themselves acting as a corporate director. Since the other officers of the corporation are also neighbors, disputes arise that make living in a condominium an unbearable situation. Acting as a condominium director or officer is often as difficult as being a person who lends money to a relative.

In John B. Clark, Jr. v. Travelers Casualty Insurance Company of America, Slip Copy, 2015 WL 5096418 (C.D.Cal., 8/28/15) the U.S. District Court for the Central District of California was called upon to deal with the rights of a director of a small condominium association who was sued by the homeowners association for defense expenses incurred defending the suit.

BACKGROUND

The action before the District Court arose from an underlying state action brought by the Sea Court Homeowners Association (the “HOA”) against Clark. Clark and his wife own a condominium unit in a three-unit condominium development known as “Sea Court,” which is located in Manhattan Beach, California. The HOA is an unincorporated non-profit mutual benefit association that was created to manage and maintain the common areas and facilities of Sea Court.  The HOA is governed by a three-member board of directors. From 1995 through March 27, 2014, Clark served as a member of the HOA’s board of directors. From June 8, 2006 through March 20, 2013, Clark served as an officer of the HOA in various capacities, including as president, chief financial officer, and secretary.

On November 26, 2012, Clark, in his capacity as chief financial officer, opened an account in the HOA’s name at Bank of America (the “BofA Account”) to hold the HOA’s funds pending the retention of a new management company for Sea Court. Clark’s actions in opening the BofA Account were ratified by the HOA.  On December 14, 2012, the other two members of the HOA board voted to remove Clark as chief financial officer of the HOA, a removal Clark contends was wrongful.

On February 15, 2013, $5,000 was withdrawn from the BofA Account. Clark, allegedly concerned that the withdrawal was unauthorized, placed a 20-day “hold” on the BofA Account. At some point after the hold was placed, $5,000 was deposited back into the BofA Account. Subsequently, on March 20, 2013, the other members of the HOA voted to remove Clark as secretary of the HOA. Clark contends that this action was illegal.

Clark alleges that on March 21, 2013, Paul F. McCaul (“McCaul”), at the time the chief executive officer of the HOA, purposely commingled his own personal funds with the HOA’s funds in the BofA Account. Clark alleges that he was concerned about the commingling, and that therefore, on March 25, 2013, he divided the money in the BofA Account and issued separate checks disbursing the funds to himself and the other two HOA members.

On April 12, 2013, after subsequent transfers and disputes over the HOA’s funds and maintenance at Sea Court, an action (the “State Action”) was filed in Los Angeles Superior Court on behalf of the HOA against Clark. The operative complaint in the State Action alleges claims against Clark for (1) conversion, (2) injunctive relief regarding bank account, (2) injunctive relief enjoining harassment, (3) fraud and deceit, and (5) intentional interference with prospective economic advantage and contractual relationships. The HOA brought the claims in the State Action against Clark in his individual capacity and allege that Clark was acting solely for his own personal motives when he committed the illegal acts.

The State Action is, at present, still pending.

At the time the State Action was filed, the HOA was insured by Defendant Travelers Casualty Insurance Company of America (“Travelers”). The terms of the policy, as it applies to director and officer liability, are laid out in the “Directors and Officers Liability Owners Associate Claims Made Form” (the “D&O Form”).

The D&O Form does not provide a duty to defend. Rather, it states: “We will not be called to assume charge of the settlement or defense of any claim or ‘suit’ brought or proceeding instituted against you or any insured.’” The D&O Form defines “loss” as “adjudicated damages, settlements and ‘defense expenses,’ ” with some exceptions.

DISCUSSION

Clark moves for partial summary judgment on his first claim for declaratory relief regarding reimbursement of defense expenses. Clark argues that the undisputed facts support finding that the D&O Form provides for the reimbursement of the costs of Clark’s defense in the underlying State Action.

Travelers opposed Clark’s motion, arguing that Clark is not entitled to indemnification of costs because the State Action only includes allegations of actions Clark took when acting in his individual capacity rather than his capacity as a director of the HOA. Travelers further contends that Clark’s request for a declaration is over-broad and unripe.

RIPENESS

The court concluded that given that the underlying State Action is yet unresolved and no final decision has been made regarding the extent and scope of Clark’s liability, Clark’s coverage claim for a declaration regarding his right to reimbursement of defense costs is not yet ripe for decision.

Although, in insurance coverage disputes, the duty to defend is broader than the duty to indemnify. Ultimately, it may turn out that the final judgment in the underlying suit was for damages not covered by the insurance policy. While an insurer has a duty to defend suits which potentially seek covered damages, it has a duty to indemnify only where a judgment has been entered on a theory which is actually (not potentially) covered by the policy.

IS THERE A DUTY TO DEFEND?

In the present action, both parties agree that the D&O Form explicitly disclaims any actual duty to defend on the part of Travelers. Rather, the dispute is over whether the defense costs Clark paid and will continue to pay out-of-pocket are covered by the D&O Form and therefore whether Travelers has a duty to reimburse Clark’s defense costs. The alleged duty to reimburse in this case is more akin to the duty to indemnify than the duty to defend.

Clark alleges that, at a future date (presumably after judgment has been entered in the State Action), Travelers must reimburse Clark for, among other things, his defense costs. Clark contends this is so because the claims in the State Action are covered by the D&O Form. Although the reimbursement issue must be resolved at some point, now is not the time.

The defense costs are part of the overall “loss” amount that is covered under the D&O Form if it turns out that the state court finds that Clark was acting in his capacity as an HOA director when he committed the alleged actions. The D&O Form guarantees that it will indemnify those costs that constitute the covered “loss” under the terms of the insurance policy. Furthermore, the D&O Form provides that recovery under the insurance endorsement “will not be made until your liability or an ‘insured’s’ liability has been … rendered fixed and certain by final judgment; or … admitted by us in writing.”

Accordingly, Travelers only becomes obligated to pay for “loss,” including defense costs, once a final judgment has been entered on the underlying covered suit.

ZALMA OPINION

D & O Insurance is different than other kinds of liability insurance. The D & O policy has no duty to defend. Its duty to indemnify includes not only a judgment against the director or officer but also the money expended by the director or officer to defend himself or herself. As a result the insurer can sit back and do nothing until there is a judgment and pay, if covered, the amount of the judgment plus fees and costs incurred.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Zalma’s Insurance Fraud Letter — September 1, 2015

Ethics & The Insurance Fraud Investigation

In this, the Seventeenth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on September 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.    Ethics & the Insurance Fraud Investigation
2.    Proformative Academy
3.    Insurers are Not the Only Victims of Insurance Fraud
4.    New From Barry Zalma
a.    Insurance Law
b.    The Insurance Fraud Deskbook
c.    Diminution of Value Damages
5.    Fraud of Another Kind – CIGNA Unjustly Denies Claims
6.    E-Books from Barry Zalma

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.

Proformative Academy

Multiple Continuing Education Presentations

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

Also available are “How to Read & Understand an Insurance Policy” at http://www.proformative.com/courses/how-to-read-understand-business-insurance-policies  and “How to Successfully Present a Commercial Property Insurance Claim” at http://www.proformative.com/courses/how-successfully-present-commercial-property-insurance-claim.

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

I hope you find them interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    How to Limit Discovery in a Bad Faith Suit – August 31, 2015
•    Why a Structured Settlement Must Be Enforced – August 28, 2015
•    Danger – Don’t Let a Claims Made Policy Lapse – August 27, 2015
•    Insurance Claims Expert’s Testimony Limited – August 27, 2015
•    Insurance Fraud & Weapons to Defeat Fraud – August 26, 2015
•    Is Reliance & Materiality Required to Rescind Marine Insurance? – August 26, 2015
•    Insured Must Be Named In Policy To Obtain Coverage – August 25, 2015
•    Why You Can Assign A Claim After Loss – August 24, 2015
•    What is The Trigger for Wrongful Arrest? – August 21, 2015
•    Never Bring a New Theory to Court of Appeal – August 21, 2015
•    How an Easy to Read Policy Made Clear by Definitions – August 20, 2015
•    How an Insurer Can Sue to Recover Excessive Fees From Cumis Counsel – August 19, 2015
•    Can an Insurer Obtain Insured’s Tax Returns? – August 18, 2015
•    Can Insurer Litigate Coverage While Tort Case Pending? – August 17, 2015
•    What is a Claim? – August 14, 2015
•    Why Suit Was Worded to Avoid Coverage for the Defendant – August 13, 2015
•    Courses Available at Discount – August 12, 2015
•    Why is a National Flood Insurance Program Policy Not Insurance? – August 12, 2015
•    When is a Policy of Insurance Made? – August 12, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

“Insurance Law”

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

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

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

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

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

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

The Insurance Fraud Deskbook

http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or  orders@americanbar.org, or 800-285-2221.

Barry Zalma

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

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

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

If for some reason the current issue is not attached it will be available for a month at http://www.zalma.com/ZIFL-CURRENT.htm.  If you receive this notice in plain text the attachment is found at the link at the end of the message called “Location.”

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How to Limit Discovery in a Bad Faith Suit

A Plaintiff Can’t See Everything an Insurer Has

Insurance bad faith suits are often contentious and disputes over discovery that fishes for evidence of evil conduct by the insurer. The disputes taken to a trial court, are sometimes irrelevant to the issues raised by the suit or the defenses raised by the insurer. Rather, it seems that the parties seem to wish to make the litigation so difficult and contentious to compel the defendant to enter into settlement talks or otherwise gain an advantage against the other.

In NGOC TRAN  v. CHUBB GROUP OF INSURANCECOMPANIES, et al., Additional Party, Names: Federal Insurance Company, Slip Copy, 2015 WL 5047520 (S.D.Ohio, 8/27/15) Federal Insurance Company’s sought two protective orders (“Defendant’s First Motion for Protective Order”)  (“Defendant’s Second Motion for Protective Order”), while the plaintiff sought an order compelling discovery and to extend discovery dates (“Plaintiff’s Motion to Compel”).

BACKGROUND

In October 2012, plaintiff applied to defendant Federal Insurance Company (“defendant”) for insurance coverage in connection with plaintiff’s jewelry with an appraised value in the amount of $266,825.00 (“the jewelry”). The application included a section entitled “Valuable Articles Profile[,]” which contained certain representations including a specification of the safety precautions taken for maintaining the jewelry. Plaintiff alleges that defendant issued an insurance policy providing coverage to plaintiff for jewelry having an appraised value of $266,825.00 (“the Policy”). The Policy specifically advises, “We do not provide coverage if you or any covered person has intentionally concealed or misrepresented any material fact relating to this policy before or after a loss.”

Plaintiff alleges that, on June 13, 2013, her home was burglarized and that all but four pieces of her jewelry were stolen. Plaintiff further alleges that the remaining four pieces of jewelry were stolen during a second robbery that occurred on October 24, 2013. Plaintiff claims that, although she “fully complied” with the Policy’s requirements, defendant has “wrongfully refused to pay for this insured loss.”

On May 13, 2015, plaintiff noticed the deposition of defendant’s corporate representative. Plaintiff identified the following topics for deposition, which was noticed to take place on June 10, 2015:

[1.] The inception of the insurance contract relationship with the plaintiff;
[2.] The process of review for insurance applications for valuables articles coverage;
[3.] The decision to grant coverage in October of 2012, and renew coverage for the plaintiff in October of 2013, and the status of coverage on both loss dates;
[4.] The investigation by Defendant of the loss of June 13, 2013, and October 24, 2013 by plaintiff;
[5.] The investigation of the sufficiency of the appraisals of the valuable articles insured by plaintiff;
[6.] The history of granting or denial of the valuable article coverages or similar coverage, by the defendant for other applicants, and the reasons for denial of valuable article coverages for any applicants, between October 1, 2009 and October 31, 2012;
[7.] All other matters reasonably related to the issues stated in the complaint.
[8.] It is required that Defendant bring the entire file relating to subject claim including all electronic data and correspondence not previously provided by the Defense.
[9.] It is required that Defendant bring all Correspondence, Emails and Other Documents, relating to any applications for valuable articles coverage, or similar coverage, received for either Chubb Group of Insurance Companies or Federal Insurance Company, between October 1, 2009, and October 31, 2012, including but not limited to, valuable articles profile(s), and personal inland marine application(s), including all information relating to acceptance of application for coverage, or denial of application for coverage.

After defense counsel objected to the scope of this notice, the parties discussed proposed stipulations regarding their dispute. Specifically, plaintiff proposed that the parties stipulate to discovery and the defendants suggested a different stipulation that limited the issues raised by the the defendant that “The parties hereby stipulate and agree that Federal has not, and will not, attempt to rescind or have Federal Insurance Company Policy No. 13969002-01 issued to Ms. Tran declared void ab initio based on the concealment or misrepresentation of any fact in the application of insurance or valuable articles profile submitted by Ms. Tran.” Plaintiff rejected that stipulation.

DISCUSSION

Plaintiff seeks an order compelling production of the documents and a person most knowledgeable to testify about the issuance of the policy and requests for coverage from others. Defendant argued that the disputed discovery is irrelevant to the claims and defenses in this action because it relates only to whether defendant would have issued the Policy to plaintiff had it known the truth at the time of plaintiff’s application – i.e., a matter not at issue in this case.

Based on this record and on defendant’s articulation of its defense, the Court concludes that discovery regarding the “inception of the insurance contract relationship with the plaintiff,” “[t]he process of review for insurance applications for valuable articles coverage,” and defendant’s decision to grant coverage in October 2012 and renew coverage in October 2013 as well as the “history of granting or denial of the valuable article coverages or similar coverage, by the defendant for other applicants, and the reasons for denial of valuable article coverages for any applicants, between October 1, 2009 and October 31, 2012” is of limited, if any, relevance to any party’s claim or defense.

Finally, the Court notes that defendant seeks a protective order as to the records requested in the Marketsource Subpoena directing the witness to bring “[a]ll records for contracts for Federal Insurance Company initiated or processed by Marketsource”). Absent a claim of privilege, a party has no standing to challenge a subpoena to a nonparty. Defendant asserts that information sought by plaintiff in the Marketsource Subpoena seeks “confidential and proprietary business/underwriting information of Federal and confidential personal information of other Federal clients who are not party to this litigation.”

ZALMA OPINION

Rescission is an important defense to an insurer if the policy it issued was based upon misrepresentation or concealment of material facts. In some jurisdictions it is difficult to prove rescission but fairly easy to prove the intentional breach of the condition that limits coverage to any “person [that] has intentionally concealed or misrepresented any material fact relating to this policy before or after a loss.” If Tran lied, either before or after the loss, there is no coverage and by refusing to assert rescission as a defense was able to prevent discovery into Federal’s underwriting. It should give insurers faced with a material misrepresentation or concealment of material fact that can be proved, it should ignore rescission and go forward with the fraud.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why a Structured Settlement Must Be Enforced

Annuitant May Not Sell Part of Structured Settlement Annuity

When minors are severely injured in an accident for which an insured person is liable concern for protecting the funds awarded to a minor result in a structured settlement where the insurer buys an annuity to pay out the settlement amount in partial payments growing as the injured party reaches maturity. However, as needs of the minor arise attempts are made to get around the terms of the structured settlement by discounting the payments to a purchaser.

Like the old Popeye comic strips, the annuitant takes a payment today and will pay it back in the future. It is a loan made with a guarantee from the insurer issuing the annuity.

In RSL Funding, LLC v. Alford, — Cal.Rptr.3d —-, 2015 WL 4919874 (Cal.App. 4 Dist., 8/18/2015) the annuitant tried to sell part of an annuity to RSL Funding. State Farm Fire and Casualty Company (State Farm Fire) and State Farm Life Insurance Company (State Farm Life) (collectively, State Farm) appealed the trial court’s approval of an order directing the transfer of structured settlement payments to plaintiff and respondent RSL Funding, LLC ( RSL).

FACTS

In 1994, defendant Felicia Alford, then a minor, by her guardians, settled a personal injury claim against certain insureds of defendant State Farm Fire. The settlement was approved by a court order that provided, “for the best interest of the minor … the proceeds of such settlement be paid and used in the manner hereinafter specifically provided.” Under the settlement, the payor, State Farm Life, was to deliver an annuity providing for guaranteed payments, as follows:

(1)  $10,000 annually from August 11, 2003, through August 11, 2006;

(2)  $50,000 on August 11, 2009;

(3)  $100,000 on August 11, 2016; and

(4)  $151,558.80 on August 11, 2021.

State Farm Fire purchased an annuity contract from State Farm Life, which provides for the periodic payments to be made.

In July 2012, Alford entered into a contract with RSL under which she received $30,000 in exchange for a $50,000 portion of the payment due on August 11, 2016. RSL assigned its payment to Extended Holdings, Ltd. (EHL). The trial court approved the transfer, and State Farm did not contest the transfer. Thus, under the 2012 order, State Farm was required to deliver a $50,000 portion of the August 11, 2016, payment to EHL.

On July 12, 2013, Alford entered into a second contract with RSL in which Alford agreed to assign to RSL $25,000 of the $100,000 payment due on August 11, 2016, and $25,000 of the payment of $151,558.80 due on August 11, 2021, in exchange for a current payment of $22,500. RSL filed a petition for approval of the transfer. State Farm filed an opposition to the petition, asserting, among other grounds, that (1) the proposed transfer would violate a California statute (Ins.Code, § 10139.5, subd. (e)(3)), which provides that an annuity issuer and settlement obligor “may not” be required to divide payments; and (2) the proposed transfer would materially increase State Farm’s burdens and risks.

DISCUSSION

RSL asked the court to apply what it called “settled principles of statutory construction” direct that he court “ordinarily” construe the word “may” as permissive and the word “shall” as mandatory, particularly when a single statute uses both terms. (Tarrant Bell Prop., LLC v. Superior Court (2011) 51 Cal.4th 538, 542, 121 Cal.Rptr.3d 312, 247 P.3d 542.) RSL fails to recognize that a contrary principle of statutory construction governs when the statute, such as section 10139, subdivision (e), uses a negative form of the word “may.”

Where statutory restrictions are couched in negative terms they are usually held to be mandatory. The statute’s use of the words “neither” and “nor” combined with “may be required” clearly indicates the Legislature’s intention to impose a mandatory rule.
Moreover, while the parties have cited no published California case law expressly applying section 10139.3, subdivision (e), and our own research has revealed none, courts in other states have construed similar language in their own statutes to be mandatory. Where there is no California case directly on point, foreign decisions involving similar statutes and similar factual situations are of great value to the California courts.” (Martinez v. Enterprise Rent–A–Car Co. (2004) 119 Cal.App.4th 46, 55, 13 Cal.Rptr.3d 857.)

The court of appeal concluded that the trial court erred in entering an order that requires State Farm to divide payments because the SSPA provides that an annuity issuer may not be required to do so.

RSL argues that State Farm submitted a proposed 2013 order in the same form as the 2012 order (which provided for splitting the Aug. 11, 2016, payment between Alford and EHL) and consented to splitting payments.

State Farm filed a written opposition to the proposed transfer and appeared at hearings on the proposed transfer where it asserted its opposition to payment splitting. At the close of the September 24, 2013, hearing, the trial court stated it would approve the transfer and instructed the parties to work out the form of the order. RSL and State Farm agreed to an order similar to the 2012 order, but RSL did not submit that proposed order to the trial court. State Farm therefore filed an objection to the proposed order, stating that State Farm had not withdrawn its objection to the proposed order, that State Farm disagreed with the trial court’s ruling, and that RSL had misrepresented State Farm’s position by submitting a proposed order that differed from the proposed order to which State Farm had agreed.

It is clear from the record that State Farm never withdrew its objections to the proposed 2013 transfer and never consented to split payments in connection with the 2013 transfer.

Since the court of appeal concluded that the trial court’s order violated section 10139.5, subdivision (e), and State Farm has not forfeited its right to oppose that order, reversal was therefore required.

In addition, State Farm correctly pointed out that such an order would put it in the position of having to rely on another entity to fulfill its contractual obligations to Alford and would expose State Farm to litigation if, for example, RSL or its assignee sought bankruptcy protection.

ZALMA OPINION

People who are the beneficiaries of a structured settlement are bombarded by television advertising promising to allow immediate access to the funds promised by the annuity in the future. The purchasers take, as here, a large portion of the future payment for a small, immediate, cash payment. The statute was enacted to protect the annuitant and make sure the settlement agreed to is paid as agreed. The court of appeal recognized the intent of the insurer and the annuitant and protected her from what she wanted.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

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

Danger – Don’t Let a Claims Made Policy Lapse

Why a Claims Made Policy Requires Claim Be Made During Policy Period

Claims Made and Claims Made and Reported policies contain traps for unwary insureds who do not understand the limitations of that coverage. Unlike “occurrence” based policies if a claim is not made during the effective dates of the policy there is no coverage at all although premium has been paid to the insurer for years.

In The ACT-1 Group, Inc. v. Alternative Care Staffing, Inc., Slip Copy, 2015 WL 4967133 (E.D.Mich., 8/20/2015 Evanston Insurance Company (“Evanston”) and Markel Corporation’s (“Markel”) were sued to provide defense and indemnity to The ACT-1 and filed motions for summary judgment which were ruled upon by the District Court for the Eastern District of Michigan.

Background

On March 6, 2007, Gloria Brown died at the Henry Ford Hospital in Detroit, Michigan while being treated by Alisha Noel, a nurse employed by defendant Alternative Care Systems (“ACS”). The Henry Ford Health System (“HFHS”) contracted with plaintiff, ACT–1 Group, Inc. (“ACT–1”), a staffing company, to provide nursing staff for HFHS hospitals. (ACT–1 then subcontracted with ACS to provide the Henry Ford Hospital with nurses.

On August 21, 2008, the estate of Gloria Brown sued HFHS for medical malpractice, alleging that Noel was negligent in treating Brown (“the Brown litigation”). The Estate of Gloria Brown did not name ACS or Evanston as defendants in that lawsuit.

At some time between January and March of 2010, the Brown litigation settled for $877,243.03. Neither ACS nor Evanston participated in that lawsuit or settlement.

On September 10, 2010, HFHS sued ACT–1 and ACS in Michigan state court for indemnification in the Brown lawsuit. The court entered judgment against ACT–1 and ACS in that suit for $877,247.03. (Dkt. 1–2 at 159.)

ACS’ Insurance Policy

ACS purchased medical malpractice insurance through Evanston. However, ACS financed its insurance premiums through loans from the National Premium Budget Plan (NPBP), and the NPBP cancelled ACS’ insurance policy when ACS failed to make its monthly payments on the loan. ACS’ policy was cancelled effective March 25, 2009. Between March 25, 2009 and June 24, 2009, ACS did not have medical malpractice insurance coverage through Evanston or anyone else.

On June 23, 2009, an application was submitted and confirmed that it was unaware of “any circumstances which may [have] result [ed] in a malpractice claim or suit being made or brought against [ACS] or any of [ACS’] employees.” As a result of the application, ACS began a new Evanston insurance policy on June 24, 2009, with no retroactive coverage. That policy lasted until June 24, 2010.

HFHS Contacts ACS

On September 9, 2008, Paradiso sent a letter to Corner asking her to tell ACS about the Brown litigation. In his deposition, Paradiso referred to this letter as a “notification letter” that contained “no claim request.”

No one at Evanston or on behalf of Evanston had any discussion with the owners of ACS or Corner until Fall 2009.  On September 15, 2009, an insurance broker forwarded the Brown litigation papers, including the May 11, 2009 claim from Paradiso, and a copy of an email from ACT–1’s attorney to the claims services manager at Markel. Two days later, John Foley, the claims manager for Evanston, contacted ACT–1’s attorney for additional information. Foley then assigned the claim to Jagady Blue, senior claims manager for Markel, for handling. Blue searched the record and concluded that no claim was made against ACS during ACS’ policy period that would have triggered coverage. ACS’ policy through Evanston expired on June 24, 2010.

Indemnification Suit

On September 10, 2010, HFHS sued ACT–1 and ACS in Michigan state court for its settlement costs, plus additional costs and fees. On August 5, 2011, that court ordered ACT–1 to indemnify HFHS and entered judgment against ACT–1 for $877,243.03.
ACT–1 sued ACS, Evanston, and Markel on July 15, 2013, claiming that ACS breached its subcontracting agreement by failing to indemnify ACT–1 in the Brown litigation.  ACT–1 also sued Evanston and Markel as a third-party beneficiary under MCL § 600.1405, claiming that Evanston breached its 2008 insurance agreement with ACS by failing to indemnify ACS in the Brown litigation.

Legal Standard

Defendant moves for summary judgment on two grounds: (1) that ACT–1 failed to file a claim with ACS or Evanston during the period of ACS’ insurance coverage and (2) that Markel Corporation is not an insurer.

ACS’ insurance contract provides claims-made coverage, which means that only claims first made during the policy period will be covered. ACS was covered by Evanston insurance from May 28, 2003 to March 25, 2009, under a policy with a retroactive date of May 28, 2003, and from June 24, 2009 to June 24, 2010, with a retroactive date of June 24, 2009. The retroactive dates in the policies bar claims first made against the insured before those dates. Accordingly, plaintiff must show that HFHS first made a claim against it during one of these policy periods.

On May 11, 2009, eight months after sending the first letter, Paradiso sent a second letter to the office manager of ACS. This letter stated that HFHS “ha[s] provided [ACS] with a copy of the Summons and Complaint which [have] been served upon Henry Ford Hospital.” It then conveyed the intent to hold ACS liable for the harm caused by ACS’ employee, Noel, advising ACS that HFHS had decided to apply the contract provision requiring ACT–1 to indemnify and defend HFHS with regards to the claims against Noel. The letter further counseled ACS that “it will be important for ACS to contact Noel and make arrangements for representation.”

However, Paradiso’s letter of May 11, 2009 was sent and received in the three-month period during which ACS lacked Evanston insurance. ACS’ 2008–2009 policy was cancelled on March 25, 2009, and its next policy began on June 24, 2009, with a retroactive date of June 24, 2009. Because ACS first received Paradiso’s insurance claim on May 11, 2009, during the three-month period in which ACS lacked insurance coverage, Evanston is not contractually bound to provide insurance coverage for any restitution related to the Brown litigation that ACS may have to pay.

Because there is insufficient evidence for a reasonable juror to conclude that ACT–1 properly filed an insurance claim against ACS during the period of ACS’ Evanston insurance coverage, summary judgment must be granted.

ZALMA OPINION

Had the insured paid the loan payments its policy would not have been cancelled by the premium finance company it would have had coverage available. Because of the three month lapse in coverage the loss that occurred during the lapse was not covered.

 

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

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 Claims Expert’s Testimony Limited

Plaintiff’s Bad Faith Expert Exceeded Proper Limits of Testimony

Plaintiffs suing insurance companies find it necessary to retain the services of an expert who will testify that the conduct of an insurer in denying a claim, breached the custom and practice of the industry and the claims handling standards in the jurisdiction set by statute, regulation and claims handling experience. Since the expert seems more knowledgeable than any lay person or insurance company employee the expert’s testimony can prejudice the insurer in favor of the person retaining the expert. It is the obligation of the trial court to limit the expert’s testimony to expert testimony that will be helpful to the trier of fact to understand the evidence or to determine a fact in issue.

In response to an order to prevent an expert from testifying the U.S. District Court for the District of Colorado was asked by the insurer defendant to limit the expert testimony of plaintiffs’ expert because he went too far and stated opinions that were findings of fact and law and some that were outside his expertise. The plaintiffs tried to keep all of his testimony available. The court reached its conclusions in Weldesamuel Gebremedhin, an individual, Terhas Desta, an individual, Abrham Giday, a minor, by and through his guardians and natural parents, Weldesamuel Gebremedhin and Terhas Desta, Plaintiffs, v. American Family Mutual Insurance Company, Defendant, Slip Copy, 2015 WL 4979742 (D.Colo., 8/21/15)

BACKGROUND AND RELEVANT PROCEDURAL HISTORY

This case involves third-party breach-of-contract and bad faith claims arising out of an insurance coverage dispute between Glen and Veronica Turner (the “Turners”) and American Family. The Turners were foster parents insured by an American Family homeowner’s insurance policy in the spring of 2009 while then infant Plaintiff Abrham Giday suffered severe brain injuries while placed under the Turners’ foster care. Abrham Giday and his birth parents (also the Plaintiffs in the instant litigation) subsequently filed suit in a Colorado state court against the Turners (the “underlying litigation”).

The Turners sought a defense and indemnity from American Family under their homeowner’s policy. American Family in turn denied any obligation to provide any coverage in the form of indemnity or a defense, citing that the facts as alleged in the underlying litigation triggered intra-insured bodily injury and business pursuits exclusions in the insurance agreement.

Plaintiffs served the expert report of Garth Allen (“Professor Allen”).  His education, training and experience was sufficient to be allowed to testify as an expert. American Family filed a Motion to strike a wide range of the opinions proffered by Professor Allen. American Family contends that many of Professor Allen’s opinions improperly reach the ultimate issues in this case in contravention of Rules 702 and 704 of the Federal Rules of Evidence, improperly interpret the relevant legal standards and the contract, and improperly seek to instruct the jury of the relevant legal standards and the contract.

ANALYSIS

Even when the court is satisfied that the expert opinion is not an impermissible legal opinion or conclusion. The Tenth Circuit has repeatedly recognized that trial courts have the discretion to exclude expert testimony regarding the “industry standard,” absent an adequate showing of helpfulness to the jury.

In urging the court to deny Defendant’s Motion to Strike, Plaintiffs note that expert testimony in a bad faith action as to relevant industry custom and practice is not per se barred by Rules 702 and 704, and in a number of cases, both within and outside this jurisdiction, has been held to be admissible.

After analysis of the opinions the court noted that in some places, Professor Allen’s opinions can only be described as pronouncements of law. For example, Opinion No. 24 states “I would note that under federal law, payments received by foster parents for a qualified foster care placement agency are not considered income and are not reported on a tax return.” In another example, Opinion No. 28 states “[t]erms undefined in the policy must be given their ordinary meaning and when the terms are incorporated into an exclusion, they must be construed narrowly so as to favor coverage according to insurance industry standards and Colorado case law.”  Professor Allen himself acknowledges that there is “substantial overlap between industry standards and the law because the standard is to never act in violation of the law.”

In addition, many of Professor Allen’s challenged opinions are simply directions to the jury on how to rule that do not even refer to, let alone explain, industry standards. For instance, Opinion No. 20 states “[T]he removal of Giday from his parents’ home by DHS was temporary as a matter of law.”

Moreover, there are two opinions offered by Professor Allen that do not appear based on his expertise, and are therefore, improper and unduly prejudicial. Opinion 39, which states that foster care is “much more likely to be a humanitarian” rather than profit-driven activity, and Opinion 40, which states that Ms. Turner would have informed American Family that she wished to help out young children through such care if American Family had inquired as to her motivations, raise a different issue. The court concluded that Professor Allen cannot testify to challenged Opinions 39-40.

Finally, the court concluded that the majority of the challenged testimony, even assuming that the proffered opinions are considered to go to ultimate issues of fact rather than law, is not helpful to a properly instructed jury. In applying these standards, the court found that Plaintiffs have failed to meet their burden of demonstrating the admissibility and/or the helpfulness of Expert Opinion Nos. 1-6, 9-12, 14, 16-18, 20-25, 27-28, 32-34, 36-37, and 39-40. These challenged opinions were stricken from Professor Allen’s Report.

However, Professor Allen may testify to the following opinions:

Expert Opinions 7 that stated: “Reliance on the Business Pursuits exclusion, like the reliance on the Intra-Insured exclusion, was improper and contrary to insurance industry standards.”

Expert Opinion 8 that stated: “It was unreasonable and contrary to insurance industry standards for American Family to reject, disavow, and thus fail to meet its duty to defend.”

Expert opinion 13 that stated: “American Family acted unreasonably and contrary to insurance industry standards by failing to timely acknowledge and accept its duty to defend.”

Expert opinion 15 that stated: “As a practical matter, liability claims against the insured can seldom be denied in full, including a refusal to defend.”

Expert opinion 19 that stated: “At bottom, the allegations of the Amended Complaint gave rise to the possibility that Giday’s erroneous five-night stay with the Turners did not make him a resident of their household for the purposes of the policy’s Intra-Insured exclusion.”

Expert opinion  26 that stated: “American Family was required, by law and insurance industry standards, to determine if it was possible that Giday was not a resident of the Turner household and provide a defense if that possibility existed.”

Expert opinions 29-31 that stated: “29. If American Family questioned the residency status of Giday, it could have explored beyond the Amended Complaint, not in order to deny the claim, but to find clarification in order to provide a defense; 30. Most importantly, even without any information beyond the operative complaint, American Family was required by law and insurance industry standards, to determine if it was possible that Giday was not a resident of the Turner household and provide a defense if that possibility existed; and 31. Typically, the insurer either must, or out of an abundance of caution should, elect to defend a claim so that more information can be accumulated during the litigation process, information that can then be used to make an informed decision regarding indemnity, including settlement of the claim.”

Expert opinion 35 that said: “Both overlooked the critical issue if Giday’s residency at the time of the denial and during their deposition testimonies.”

Expert opinion 38 that said: “In Colorado, the standard and custom in the insurance industry is to defend almost all tendered claims due to the extraordinary broad nature of the defense obligation and the high cost to the insurers that improperly fail to defend their insured.”

However, even though the court will allow the testimony described, if, with respect to Opinion Nos. 26, 30, and 38, the professor attempts to testify with any reference to “the law” or in the case of No. 38, to “the extraordinary broad nature of the defense obligation,” will be stricken if brought up at trial.

ZALMA OPINION

The court performed its duty as a gate keeper over expert testimony. It limited the testimony of the expert to testimony about the custom and standard in the insurance industry but refused to allow him to testify about the law or any legal opinions. It is the duty of the expert to help the jury or judge to determine facts outside normal understanding. It is wrongful for an expert to try to instruct the jury about the law or opinion on subjects where the expert has no expertise. Bad faith litigants should never allow an expert to exceed the purpose for which he or she was retained.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insurance Fraud & Weapons to Defeat Fraud

A New Book from Barry Zalma

Insurance Fraud & Weapons to Defeat Fraud

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

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

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

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

The e-book contains the full text of the most important insurance fraud cases in over 2000 pages of material essential to every insurance fraud professional.

Posted in Zalma on Insurance | Leave a comment

Is Reliance & Materiality Required to Rescind Marine Insurance?

The Eighth Circuit Adds to Proof Needed For Rescission of Marine Insurance

Traditionally, any misrepresentation, concealment, or failure to disclose information concerning the sea worthiness of a vessel is sufficient to rescind the policy. The Eighth Circuit, ruling on a case where the trial court granted an insurer summary judgment, was faced with whether the insurer needed to prove it relied upon the concealed facts and if those facts were material, before rescission is appropriate.

In St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., — F.3d —-, 2015 WL 4939878 (C.A.8 (Minn., 8/20/2015) the insurer denyied its insured’s claim for coverage for a barge that sunk during a storm. The insurer brought action against the insured, seeking a declaration that its marine insurance policy was void under the doctrine of uberrimae fidei because the insured failed to disclose material facts in its application for coverage. The United States District Court for the District of Minnesota granted summary judgment in favor of insurer.

Abhe & Svoboda, Inc. (“Abhe”), filed a claim for insurance coverage after a barge sunk.  St. Paul Fire denied Abhe’s claims and then filed suit in the district court seeking a declaration that the policy was void under the doctrine of uberrimae fidei. That doctrine requires that parties to an insurance contract must accord each other the highest degree of good faith. Since Abhe failed to disclose material facts in its application for insurance coverage the trial court granted St. Paul’s motion for summary judgment.

FACTS

Abhe leased two barges from Sterling Equipment, Inc. to assist it in painting a bridge. These barges were “dumb” barges, meaning that they had no motor or means of propulsion and were intended to serve solely as stationary equipment platforms. The barges are SEI–34 and SEI–120.

Abhe purchased a package marine insurance policy from St. Paul Fire. St. Paul Fire did not request that Abhe complete an application for insurance, but instead accepted the application that Abhe provided to its previous insurer in May 2010. On May 3, 2011, Abhe sent St. Paul Fire an updated schedule of vessels, which included SEI–34 as a leased barge with a value of $225,000, reflecting its agreed value on its charter application with Sterling. Abhe did not provide St. Paul Fire with the November 2010 survey of SEI–34, and St. Paul Fire did not attempt to survey any of Abhe’s marine equipment, as it was entitled to do under the policy. St. Paul Fire issued Abhe a Marine Hull and Protection and Indemnity Policy effective July 1, 2011, through July 1, 2012.

On October 29, 2011, a severe nor’easter struck  and SEI–34 sank to the bottom of Narragansett Bay and landed upside down, crushing most of the equipment that was welded to its deck.

St. Paul Fire filed this action in the district court, seeking a declaratory judgment that it had no duty to defend or indemnify Abhe for several reasons.

ANALYSIS

This dispute concerns a marine insurance contract and therefore is governed by the principle of uberrimae fidei, or utmost good faith. This duty of good faith requires the insured to disclose to the insurer all known circumstances that materially affect the risk being insured.  Because the insured is in the best position to know of any facts that may be material to the risk, the insured is obligated to disclose those facts to the insurer, regardless of whether the insurer makes a specific inquiry.

The parties agree that Abhe was required to disclose all material facts to St. Paul Fire, but they dispute whether there is another element to an insurer’s claim that a policy is void for non-disclosure. Abhe argues that an insurer cannot void a policy under the doctrine of uberrimae fidei without showing both that the insured failed to disclose a material fact and that the non-disclosure induced the insurer to issue the policy.

The principal case to address the question directly is Puritan Insurance Co. v. Eagle Steamship Co. S.A., 779 F.2d 866 (2d Cir.1985), which held that reliance is a necessary element of the uberrimae fidei defense.

The insured in Puritan failed to disclose two losses suffered by two of its vessels on its application for insurance.  Even though the insurer had no knowledge of the second loss, the Second Circuit upheld the district court’s finding that while the insured should have disclosed the second loss to the insurers, the insurers “failed to prove that they would not have undertaken the risk had they been fully informed of this loss.” Puritan thus requires that an insurer seeking to void a policy show reliance on an insured’s non-disclosure, regardless of whether the insurer had knowledge of the undisclosed material fact at the time that it decided to issue the policy.

The Eighth Circuit found the Second Circuit’s reasoning persuasive. Before a party can rescind a contract due to the other party’s non-disclosure or misrepresentation, he must show that the misrepresentation induced him to enter the contract. A party is required to show a causal connection between the other party’s omission and the issuing of the contract.

St. Paul Fire’s proposed rule also would create a moral hazard and have the perverse effect of encouraging insurers to assume unreasonable risks and to issue insurance polices that they otherwise would not have issued. Under the rule proposed by St. Paul Fire, if an insurer knows that an applicant for insurance failed to disclose or misrepresented a fact that other prudent insurers may deem to be material, that insurer would have an incentive to issue the policy anyway, collect premiums from the insured, and then use the doctrine of uberrimae fidei to void the policy if an accident occurs and the insured seeks to invoke the policy’s protection.

While most circuits have not explicitly recognized reliance as a distinct element of the uberrimae fidei defense, some courts have applied a subjective test for materiality that asks whether the insurer in fact would have found the omitted information to be material.

Clarity is enhanced by preserving actual reliance and objective materiality as distinct elements. In one of its earliest cases concerning a marine insurer’s uberrimae fidei defense, the Supreme Court applied an objective test for materiality, concluding that “[h]ad [the undisclosed fact] been known, it is reasonable to believe that a prudent underwriter would not have accepted the proposal as made.” Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 509–10, 1 S.Ct. 582, 27 L.Ed. 337 (1883); see also AGF Marine Aviation & Transp. v. Cassin, 544 F.3d 255, 264–65 (3d Cir.2008); and Grande v. St. Paul Fire & Marine Ins. Co., 436 F.3d 277, 282–83 (1st Cir.2006).

St. Paul Fire argues that even if reliance is an element of the defense, there is no genuine issue of fact for trial on whether it relied on Abhe’s failure to disclose the 2010 survey. The insurer argues that its underwriter, Ed King, received, reviewed, and relied upon Abhe’s insurance application before deciding to insure SEI–34. King also testified that the 2010 survey of SEI–34, which indicated a lack of watertight bulkheads and pinholes in the hull, would have been “very important in underwriting [the] risk.” Abhe countered, however, with evidence that in June 2012, King renewed coverage for SEI–120, despite receiving an on-hire survey for that vessel that showed the vessel lacked watertight bulkheads.

The Eighth Circuit concluded that this evidentiary dispute is sufficient to create a genuine issue of material fact as to whether St. Paul Fire relied on Abhe’s failure to disclose SEI–34’s lack of watertight bulkheads in issuing the insurance policy for that barge.

If the case proceeds to trial on the defense of uberrimae fidei, the question of materiality should be submitted to a jury for resolution of disputed issues of fact.

Since reliance is an element of the defense, there are disputed issues of fact as to whether it is satisfied, so the judgment was reversed and returned to the District Court for determination of the factual issues.

ZALMA OPINION

The case relied, not on the defense of uberrimae fidei, but on the failure of evidence to convince the Eighth Circuit that there is an issue of fact to be determined. The insurer’s failure to present evidence from its underwriter that had it known the truth it would either have refused to issue the policy or would have issued the policy on different terms was why trial is required. If the jury believes the insurer rescission will apply. If, on the other hand, it believes the evidence provided by the insured, rescission will not lie because materiality is a necessary element. This is not a change as much as it is an inadequacy of proof.

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 and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Insured Must Be Named In Policy To Obtain Coverage

Another Failure to Get Insurance Money Instead of Financially Viable Defendant

Insurance is nothing more than a contract. The contract must be read as written. If a person is not named as an insured nor made an insured by a definition, it has no right to the benefits and promises made by an insurance policy.

In Diseworth at Somerby v. Western Nat. Mut. Ins. Co., Not Reported in N.W.2d, 2015 WL 4994600 (Minn.App., 8/24/15) the Minnesota Court of Appeal was faced with an argument that because multiple corporations had similar or identical owners even if not named as an insured on a policy the insurer is required to defend and indemnify a corporation owned by the same people who own the named insureds, and resolved the dispute based on the clear and unambiguous language of the policy.

The appellant, an assignee of defendants in a construction defect suit, lost to an insurer’s motion for summary judgment in the appellant’s attempt to collect on a settlement of the underlying lawsuit against the insured for negligent design, contending that the insured’s policy covered negligent design services.

FACTS

The Somerby Project and the Wensmann Companies

Herbert Wensmann is the owner and CEO of Wensmann Homes, Inc (Homes). Homes had offices in Eagan and was in the business of building single and multi-family residential buildings around the greater Twin Cities area. From 2001 through 2007, respondent Western National Mutual Insurance Company insured Homes pursuant to a commercial general liability (CGL) policy.

In 2001, Herbert Wensmann undertook a project to build residential homes around a golf course in Byron, Minnesota. The residences were titled the Somerby Golf Community and were built in three phases, one of which called for the construction of the appellant Diseworth at Somerby community. The Diseworth community was to consist of 18 luxury townhomes to be constructed between 2003 and 2008. In anticipation of this project, Herbert Wensmann formed the subchapter S corporation Wensmann Homes of Rochester, Inc. (Rochester) in 2002.

Wensmann Holding Company, Inc. and Rochester were not named insureds by respondent, the insurer.  Diseworth contended that the Wensmann entities are all “legal fictions” created and controlled by Herbert Wensmann, and that they all qualify as “insureds” under the CGL policy.

On the contrary Homes and Rochester operated as two separate legal entities. Rochester had a separate office in Byron with its own employees and its own accounting and payroll records. Rochester, not Homes, filed a “Declaration for Planned Community: Diseworth at Somerby” with Olmsted county on September 11, 2002. That document named Rochester as the project owner.

Construction Problems

The first unit at the Diseworth community was completed in June 2003 and construction for the remaining units continued until December 2006. One feature of the Diseworth townhomes was brick arches located under a unit’s back deck. Rochester hired two subcontractors to construct these arches. No detailed specifications were provided and the subcontracted masons did the work based on their previous experience working with the Wensmann affiliates.  The performance standards of the windows, that allegedly leaked, were determined by representatives from Andersen Windows.

Beginning in 2005, Rochester was made aware that some of the brick arches were failing. The masonry subcontractors performed repair work on the arches of two units, and the bill was charged to Rochester. After being notified of the work request on the arches, Tim Houge hired Kent Jones, a structural engineer with Encompass, Inc. (Encompass) to create a design plan for future arches. Jones observed that the arches were getting cracks where the arch met the post.

ANALYSIS

Interpretation of an insurance policy is a question of law. If the language of an insurance contract is unambiguous, it must be given its plain and ordinary meaning. Coverage provisions are construed according to the expectations of the insured. While the insured bears the initial burden of demonstrating coverage, the insurer carries the burden of establishing the applicability of exclusions. Insurance contract exclusions are construed narrowly against the insurer, and, like coverage, in accordance with the expectations of the insured.

Where, as here, both the scope of an insurance policy’s coverage and the enforceability of a Miller–Shugart judgment (where the defendant assigns its rights against an insurer) are at issue, the court analyzes the former prior to the latter. “If there is found to be no coverage for the Miller–Shugart judgment, that ends the matter; there is no recovery against the insurer and the reasonableness of the settlement becomes a moot issue.” Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277, 279 (Minn.1990).

The policy limited its coverage if such services are provided only for work “contracted for or completed by the insured or the insured’s employees.”  (Emphasis added).

First, Homes and Rochester were not part of the same entity.

Rochester was a separately formed corporation and had separate headquarters in Byron. Rochester had separate employees and its own accounting and payroll records. Appellant claims, but was unable to prove, that respondent’s policy names all Wensmann entities as insureds. In fact, the policy only lists Wensmann Homes, Inc., Wensmann Realty, Inc., Wensco, Inc., Wensmann Properties, Inc., Wensmann, Management Co., and Herbert and Elaine Wensmann. Notably absent in the list of those insured is Wensmann Holding Company as well as Rochester. Accordingly, because Rochester is neither directly listed nor insured indirectly through its owner, the Wensmann Holding Company, it cannot qualify as an insured. The policy does not apply because the drafting services were not performed for work “completed by [an] insured.”

Second, even if assuming that Rochester and Homes were both insureds, appellant’s argument still fails because appellant has not shown how the insured’s negligent designs caused the damaged arches and water infiltration.

Exclusion (l)

But even if the court assumed that Homes and Rochester are both insureds, appellant’s claims are still precluded from coverage under exclusion (l). Exclusion (l) of the policy states: “This insurance does not apply to: ¶  l. Damage to your work. ¶ ‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘product-completed operations hazard.’”

“Your work” is defined as “[w]ork or operations performed by [the insured] or on [the insured’s] behalf.”

The district court relied on this exclusion to conclude that any work that Homes may have done on the Diseworth project is not covered under the policy.

But even if Rochester is an insured, then construction of the arches and windows certainly qualified as “[w]ork or operations performed by [insured] or on [insured’s] behalf” because the construction was in fact done by Rochester or on Rochester’s behalf. Apellant’s argument would only be persuasive if Rochester was not an insured. But if Rochester is not an insured, then the design services liability endorsement would not provide coverage and the court did not need to consider whether the exclusion to coverage applies.

ZALMA OPINION

The appellant in this case was taken advantage of by the entities with whom they reached a settlement based upon the right to sue an insurer. Since the construction defects were the responsibility of a corporate entity not a named insured and not an insured by definition, there was no potential for coverage. Further, even if it was an insured, the policy clearly and unambiguously excluded coverage. This case teaches that before entering into an agreement to take a defendant’s right against an insurer the plaintiff should retain the services of a competent insurance coverage lawyer who would have told them, in this case, to not waste their time and money.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Why You Can Assign A Claim After Loss

When Does an Insured Loss Occur

The California Supreme Court concluded it had erred in the past and that since an insured loss occurs or happens at the time of injury during the policy period, and well before there might be any judgment or approved settlement for a sum of money. In such a situation the policy is not being assigned – as prohibited by most policies – but the right to defense and indemnity (no longer a contingent event) – is being assigned.

In Fluor Corp. v. Superior Court, — P.3d —-, 2015 WL 4938295 (Cal., 8/20/2015) the California Supreme Court, Cantil-Sakauye, J., held that after injury resulting in loss occurs within the time limits of a policy, an insurer must honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss, overruling by applying the provisions of California Insurance Code Section 530, that provides: “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss … ”

Addressing the point in time at which “injury or damage” that is continuous and occurs during successive policy periods triggers the insurer’s duty to defend under occurrence-based CGL policies, the California Supreme Court explained that the insurer’s duty arises when there is a potential for coverage, and even though there ultimately may be no duty to indemnify.  The Supreme Court rejected the insurer’s position that manifestation (the latest possible trigger time) should be used, and determined that the fourth option was the most appropriate under the words of the CGL policies and the relevant majority-rule cases.

Accordingly, the Supreme Court concluded in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 664, 42 Cal.Rptr.2d 324, 913 P.2d 878 (Montrose ) that bodily injury and property damage that is “continuous or progressively deteriorating” throughout successive policy periods is covered by all insurers’ policies in effect during those periods even though, it acknowledged the injuries at issue in such cases are latent, unknown and unknowable at the time the insurance policies were issued.

In the process of reaching these determinations concerning the trigger of the insurers’ duty to defend, the Supreme Court repeatedly employed and equated the term “loss,” not with a judgment or settlement for a sum of money, as Hartford urged it should do, but as synonymous with occurrence of bodily injury and property damage. In the third party context, the relevant risk is the insured’s act or omission, and the resulting damage, injury, or loss to another, which together form the basis of legal liability.  In State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 145 Cal.Rptr.3d 1, 281 P.3d 1000 (Continental), the Supreme Court extended its analysis and holding in Montrose to cover not only the duty to defend, but also the duty to indemnify.

California Insurance Code Section 520

The recognized rationale for enforcing a consent-to-assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is greater than what it agreed to undertake when issuing a policy. It is undisputed that an insured may not transfer the policy itself to another without the insurer’s consent, and in this sense all parties agree. But the post-loss exception to the general rule restricting assignability, recognized in the many cases discussed earlier and codified in section 520, is itself a venerable rule that arose from experience in the world of commerce.

The general rule permitting post-loss assignment is a good rule—which is why the courts have crafted it over the years even though it appears to contradict the clear text of many insurance policies and the courts’ expressed fidelity to contract language. The post-loss exception to the general rule of restricted insurance assignability is a venerable rule borne of experience and practicality. The post-loss rule prevents an insurer from engaging in unfair or oppressive conduct—namely, precluding assignment of an insured’s right to invoke coverage under a policy attributable to past time periods for which the insured had paid premiums.

Only this interpretation of the statute’s language barring veto of assignment by an insurer honors the clear intent demonstrated by the history of section 520 to avoid any “unjust” or “grossly oppressive” enforcement of a consent-to-assignment clause.  If the insurer were able to prevent its insured from assigning rights to assert such claims unless first reduced to a money judgment or approved settlement, it would effectively exert precisely the type of unjust and oppressive pressure on the insured that the early decisions, California Code Commissioners, and Legislature sought to foreclose.

“Loss” As Used in Section 108

Section 108 provides: “Liability insurance includes: [¶] (a) Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker’s compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.”

Contrary to Hartford’s view, liability can arise simultaneously with loss and injury—at the same time someone causes a compensable injury—and not only when someone loses a lawsuit. There is no indication from section 108 or section 520, or other related contemporaneous statutes proposed by the California Code Commissioners and enacted by the 1935 California Legislature, that anyone understood the term “loss” as used in section 520 to have the meaning that Hartford proposes now—as arising only upon imposition of liability by entry of a judgment or approved settlement for a sum of money.

The Supreme Court rejected the related suggestion that section 520 is entitled to less judicial respect. In any event, we perceive a simple explanation for any prior relative obscurity or absence of express reliance on section 520 in any published case becayse it appeared generally unnecessary for litigants or courts to cite or rely upon it.

It was not until 2009 that Hartford for the first time asserted that assignment of claims for defense and indemnification coverage under its policies had been improperly made without its consent and hence was ineffective. This conduct further demonstrates that until insurers recently began to disallow and contest such assignments, there was little cause for insureds to think about, much less rely on Section 520 until very recently remained relatively obscure affords no basis to decline to construe and apply it now .

Stare Decisis

Of course, a rule once declared in an appellate decision constitutes a precedent that should normally be followed in cases involving the same problem.  As Witkin observes, however, courts have articulated reasons for overruling a prior decision—among them

(1) that it overlooked an existing statute; and

(2) that it is contrary to the general law as reflected in other cases, including out-of state cases before and after the decision.

In Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934, 129 Cal.Rptr.2d 828, 62 P.3d 69, a post-loss assignment of rights to invoke coverage under a third party liability policy, the Supreme Court rendered a common law-based holding, concluding that such an assignment is subject to consent by the insurer unless “the benefit has been reduced to a claim for money due or to become due.”

The Supreme Court now concludes that this determination, reached without consideration or analysis of section 520, conflicts with the rule prescribed by that statute. In analogous circumstances the Supreme Court has overruled our own prior authority. (Martin v. Palmer Union Oil Co. (1920) 184 Cal. 386, 389, 193 P. 950; Alferitz v. Borgwardt (1899) 126 Cal. 201, 207–209, 58 P. 460.) In light of section 520, the Henkel decision is overruled to the extent it is inconsistent with this opinion’s analysis.

Conclusion

Insurance Code section 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer—and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. The contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.

ZALMA OPINION

The California Supreme Court in a lengthy and well reasoned decision, corrected an earlier error and now allows an insured, once a claim for damage is presented, to assign the right to claim defense and indemnity to another entity. In this case Flour assigned the right to a new Flour entity that took over its rights and liabilities. Insurance Code Section 520 clearly gives every insurer the right to assign a claim, whether first or third party, and eliminated the right of the insurer to enforce an agreement against such assignment.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

 

Posted in Zalma on Insurance | 1 Comment

What is The Trigger for Wrongful Arrest?

Insurers Only Obligated to Defend or Indemnify for Losses that Occur During Policy Term

A group of consolidated cases represent a dispute among insurance companies about who ends up paying some or all of a five million-dollar settlement paid on behalf of the City of Elkhart’s civil rights liability to Christopher Parish.

FACTS

The wrongful arrest and prosecution of Mr. Parish caused a deluge of litigation. It began in November 1996, when Parish was charged with armed robbery and attempted murder based on the report of a home invasion and shooting of Michael Kershner. Elkhart Police Department Detective Steve Rezutko was the principal investigating officer. Parish was convicted in June 1998, but in December 2005, an Indiana appellate court overturned the conviction and ordered a new trial, after which the criminal case was dismissed in December 2006.

Parish, wrongly forced to spend eight years in prison, brought a civil action in federal court asserting federal and state law claims for relief. Parish contended that the city and county were liable under the Indiana Tort Claims Act for false arrest, false imprisonment and intentional infliction of emotional harm. Parish’s complaint also alleged that Rezutko falsely implicated him by staging a phony crime scene, fabricating and tampering with evidence, manipulating and coercing witnesses, and giving perjured testimony.

Parish prevailed at trial but the jury’s award of only $73,125 in compensatory damages and $5,000 in punitive damages was “astoundingly low for cases of wrongful conviction.” Parish v. City of Elkhart, 702 F.3d 997, 999 (7th Cir.2012). On appeal, the Seventh Circuit affirmed the jury’s determination of liability but remanded for a new trial on the issue of damages. Parish ultimately settled his suit for a total of $5 million. At the time the case was settled, the sole remaining claim was that Parish’s due process rights were violated by a wrongful conviction.

One of the defendants in this case, National Casualty Company, had issued Elkhart a Law Enforcement Liability policy for the period from 1996 through 2000. The limits of liability under those policies were $1 million. NCC defended Elkhart and Rezutko in the civil case before Judge Lozano but it did so under a reservation of rights. No other insurer contributed to Elkhart’s defense. Ultimately, NCC paid the entire $5 million settlement amount plus all of the cost of the defense. Why NCC paid $5 million when its yearly policy limits were $1 million is a curious question that has no relevance to the pending action.

In this consolidated case, NCC seeks contribution toward the cost of defending the Parish suit and toward the settlement from other insurers who issued policies to Elkhart at various times. This case is greatly complicated by the number of years Mr. Parish’s nightmarish odyssey took to resolve and the number of different insurance companies that insured Elkhart during all those years.

MOTION OF GEMINI AND SWISS RE INTERNATIONAL

In their motion, Gemini and Swiss Re contend that they are entitled to a judgment that their policies provide no coverage for Elkhart because, within the meaning of the policies, the “wrongful act(s)” that caused Parish’s injury did not “occur during the policy period,” and because coverage is defeated by the policies’ exclusion for damages arising from fraudulent and dishonest acts.

The question is what event triggers insurance coverage in a wrongful conviction claim? Is it the date when the bad police behavior occurred and the prosecution was commenced? Or is it the date of exoneration—a date that may be several years down the road as it was in this case—that matters?

There is no Indiana case but there are two recent Illinois cases that have decided that insurance coverage is triggered in a wrongful prosecution claim under Illinois law when the wrongful prosecution is commenced, not when the defendant is exonerated.   Indian Harbor Ins. Co. v. City of Waukegan, ––– N.E.3d ––––, 2015 WL 995093 at *7 (Ill.App. March 6, 2015); St. Paul Fire and Marine Ins. Co. v. City of Zion, 18 N.E.3d 193, 200 (Ill.App.2014).

NCC argues unpersuasively that the Parish complaint “allege[s] wrongful acts that occurred during the Gemini and Swiss Re policy periods.” The most NCC can point to are allegations about Elkhart law enforcement policies that may have continued after Parish’s conviction and into the policy periods, but any continuing Elkhart practices did not cause Parish further injury at that point. The argument “conflates continuing harmful acts with the continuing effects of one harmful act” or earlier harmful acts. Northfield Ins. Co. v. City of Waukegan, 701 F.3d 1124, 1133 (7th Cir.2012).

For all these reasons, the court concluded as a matter of law that the Swiss Re and Gemini policies did not create a duty to defend Elkhart or provide liability coverage for settlement of the Parish matter.

MOTION OF TIG INSURANCE

TIG issued certain excess umbrella insurance policies to Elkhart for the period from June 1, 1997 through March 1, 2000, during which time NCC was Elkhart’s primary Law Enforcement Liability carrier. TIG’s motion for judgment on the pleadings contends that “the only remaining claim in the Underlying Lawsuit at the time of the settlement does not trigger the TIG Excess Policies,” and that the remaining claim did not involve “personal injury” within the meaning of the policies. TIG reasons that at the time of the Parish settlement, the sole remaining claim was for wrongful conviction, and that claim did not accrue until Parish’s exoneration in 2006.

Unlike Swiss Re and Gemini’s coverage based on “wrongful acts,” TIG’s excess policy was “occurrence” based. At bottom, I agree with the Illinois Appellate Court, when it said that what really matters in deciding coverage questions is what the individual insurance policy at issue actually says. In other words, it is the language of the insurance contract that governs coverage, not some blanket judge-made rule

With appropriate definitional substitutions, the TIG policy provides coverage for damages because of malicious prosecution caused by an accident during the policy period. Let’s set aside for the moment the question. The damage from the malicious prosecution was not “caused by” the accrual of the cause of action. There is a “clear majority” of courts that have held that the “tort of malicious prosecution occurs for insurance coverage purposes … when the underlying criminal charges are filed.”

Because an “occurrence” under the TIG policies includes “continuous or repeated exposure to substantially the same general harmful conditions,” a series of related acts of police misconduct (which would include perjured trial testimony or other misconduct after the false charges are brought) constitutes a single occurrence.

The “occurrence” here dates to 1996 when Parish was wrongly charged in violation of his due process rights, and quite simply TIG was not Elkhart’s insurer at that time. In sum, TIG has demonstrated that its policy created no coverage for the settlement of Parish’s § 1983 claim because the “occurrence” that caused Parish’s injury commenced prior to the policy period.

The court concluded that as an umbrella insurer under this policy language, TIG has no obligation with respect to costs of defense, and the parties, knowing that, have not spent time addressing it. The conclusion is bolstered by the strength of my determination that there is no coverage for the settlement itself because the “occurrence” that caused the injury was not within the policy period. TIG’s motion was granted as to both Elkhart’s settlement liability and the costs of defense.

MOTION OF ST. PAUL, NORTHFIELD AND CLARENDON

Defendants St. Paul and Northfield have filed a motion for judgment on the pleadings, in which defendant Clarendon has joined. St. Paul was Elkhart’s primary Law Enforcement Liability carrier for the years 2005, 2006 and 2007, and Clarendon was the excess carrier for those same years. Northfield was Elkhart’s primary carrier in 2003.

All three of these insurers are entitled to judgment as a matter of law concerning the Parish settlement. NCC’s pleading seeks contribution not only to the settlement but also to the costs of Elkhart’s defense. The lack of coverage is sufficiently clear that there is likewise no liability for the costs of defense.

These insurers’ policies were in effect years after Parish was charged and convicted, during time periods when he was incarcerated and the state appellate process finally yielded Parish a victory and the dismissal of the charges. Nothing happened during these policy periods that could be the kind of “injury or damage” covered by these policies. Even the broader duty to defend is not broad enough to support for these insurers a duty to defend (or to share in the cost of defense) against Parish’s civil rights complaint.

ZALMA OPINION

This is an example of really poor claims handling by an insurer who owed defense and indemnity to its insured, paid five times its limit of liability and then tried to get contribution from insurers whose policies were not in effect when the Mr. Parrish was wrongfully charged. An insurer cannot cure its error by suing other insurers.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Never Bring a New Theory to Court of Appeal

Although Benefits Needed There Can Be No Insurance Coverage Without a Contract

Shawn Halvorson (Halvorson) challenged the summary-judgment dismissal of his declaratory-judgment action involving a dispute over insurance coverage. In Halvorson v. From, Not Reported in N.W.2d, 2015 WL 4877801 (Minn.App., 8/17/2015) the Minnesota Court of Appeal resolved the dispute applying common sense and precedential law.

FACTS

Halvorson was a backseat passenger in a rental vehicle that was involved in a single vehicle roll-over accident. Halvorson allegedly sustained injuries as a result of the accident. Respondent Reliance Leasing Inc. owned the vehicle, respondent National Interstate Insurance Company insured the vehicle, and Kari Dahlgren rented the vehicle under a rental agreement. Kristopher From was driving the vehicle when the accident occurred. The parties dispute whether From had Dahlgren’s permission to drive the vehicle, but no one disputes that From was not listed as an “additional driver” on the rental agreement.

Halvorson commenced a declaratory-judgment action against From, Reliance Leasing, and National Interstate, seeking a declaration that “From was an insured under the motor vehicle insurance policy issued by … National Interstate.” Reliance Leasing and National Interstate moved for summary judgment, arguing that From was not an insured under the terms of the vehicle’s insurance policy and that Halvorson lacked standing to bring the action because he had not obtained a judgment against From and had no rights under the insurance policy. The district court granted the motion and dismissed Halvorson’s complaint, determining that Halvorson lacked standing to bring an action against National Interstate and Reliance Leasing.

DECISION

By the time he arrived at the Court of Appeal, Halvorson acknowledged that he was no longer seeking the declaration requested in his complaint. Instead, Halvorson asserted a novel and untested in the trial court theory involving reparation security insurance coverage. He sought from the Court of Appeal, rather, a declaration that Reliance Leasing “is required by … Minnesota statutes to provide $30,000 in liability coverage” for his injuries.

Unfortunately for his case, Halvorson did not attempt to amend his complaint in district court to request the declaration that he sought from the appellate court, and noting that the trial court based its summary-judgment decision on the relief that Halvorson requested in his complaint.  The Minnesota Court of Appeal, as required by common sense and legal precedent, declined to analyze whether Halvorson was entitled to the declaration that he sought from it because a reviewing court must generally consider only those issues that the record shows were presented and considered by the trial court in deciding the matter before it.

Judgment in favor of the insurer was affirmed since Halvorson left the court with nothing to decide.

ZALMA OPINION

You just can’t make insurance coverage because you need it. There must be a contract between an insurer and an insured. When you fail, without amending your complaint, it is basically ridiculous to ask a court of appeal to consider an issue not raised at the trial court. The plaintiff was injured, probably through no fault of his own, but can’t get an insurance remedy where no insurance coverage exists.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How an Easy to Read Policy Made Clear by Definitions

Definition Controls Insurance Policy Interpretation

Because insurance law requires insurers to write policies in “easy to read” language modern insurance policies contain multiple definitions to make the “easy to read” policy wording more precise. In Greater Community Bancshares, Inc. v. Federal Ins. Co., — Fed.Appx. —-, 2015 WL 4897467 (C.A.11 (Ga.) 8/18/2015) the Eleventh Circuit was called upon to resolve a dispute over insurance coverage for a bank where the definition of the bank’s “Professional Services” and “Lending Services” limited coverage where the insurer and the trial court concluded there was no coverage for a dispute brought by a bankruptcy trusteee.

Plaintiffs Greater Community Bancshares, Inc. and Greater Community Bank (collectively “GCB”) appeal the district court’s grant of summary judgment in favor of the Defendant Federal Insurance Company (“Federal Insurance”).

BACKGROUND FACTS

Insurance Policy

In 2008, GCB obtained a banker’s professional liability policy from Federal Insurance covering any claim by a customer for a wrongful act while performing “Professional Services.” The policy required Federal Insurance to defend any claim covered under the policy, even if any of the allegations were groundless, false or fraudulent.

Relevant to this appeal, an amendment to the policy defined “Professional Services” to mean “Lending Services.” And “Lending Services” was then defined as “any act performed by an Insured for a Lending Customer of [GCB] in the course of extending or refusing to extend credit or granting or refusing to grant a loan or any transaction in the nature of a loan, including any act of restructure, termination, transfer, repossession or foreclosure.” A lending customer was a “person or entity” to whom “an extension of credit, an agreement to extend credit, or a refusal to extend credit was made or negotiated on behalf of” GCB.

Underlying Bankruptcy Adversary Complaint

In 2010, GCB was named as a defendant in an adversary proceeding filed in the U.S. Bankruptcy Court in the District of Idaho. In the Chapter 7 bankruptcy adversary proceeding, the trustee for Payroll America Inc. (“Payroll America”) sued GCB.

According to the adversary complaint, Payroll America contracted with one of GCB’s bank account holders, Lori Duke d/b/a Data Processing Services (“DPS”), to complete certain payroll transactions, such as withholding taxes and then depositing those tax withholdings with the appropriate government agency. Using the Automated Clearing House (“ACH”) network and the Federal Reserve banking system, DPS collected funds from Payroll America’s client accounts and transferred them to the relevant taxing authority. Pursuant to a written agreement, GCB, the “Sending Bank,” allowed DPS, as the “Third–Party Sender,” to use GCB’s Originating Depository Financial Institution routing number to obtain direct access to the Federal Reserve Bank in Atlanta and perform these payroll functions.

The bankruptcy trustee’s initial complaint sought only an accounting, but subsequent amendments added claims of fraudulent transfers by Payroll America through GCB’s bank. Specifically, the trustee’s second amended complaint alleged that Payroll America had operated a fraudulent scheme similar to a Ponzi scheme that robbed “Peter to pay Paul,” and had used DPS’s money transfers made through GCB’s bank to hide Payroll America’s insolvency and defraud its creditors.

The trustee’s second amended complaint alleged that when Payroll America had “insufficient funds” for some of these ACH money transfers, GCB “paid out” those funds on Payroll America’s behalf, obligating Payroll America to repay GCB for the “advance.” DPS, on GCB’s behalf, then demanded “repayment” from Payroll America to satisfy the “obligation,” which Payroll America did with commingled funds. The second amended complaint alleged that when these insufficient-funds transfers occurred, GCB knew or should have known that Payroll America “was incurring debt to” GCB. The second amended complaint sought, among other things, to recover the full amount of the money transfers from GCB and DPS.

Defendant Federal Insurance’s Refusal to Defend

Federal Insurance denied coverage and refused to defend GCB to the action filed by the bankruptcy trustee. Federal Insurance denied coverage and refused to defend on the basis that the trustee and Payroll America were not GCB’s customers and because the factual allegations in the bankruptcy trustee’s second amended complaint did not involve professional services, i.e., loan servicing or lending services, as defined in the policy.

GCB defended itself in the bankruptcy-adversary proceedings, ultimately winning summary judgment.

Breach of Contract Action

Plaintiff GCB sued Federal Insurance, alleging a breach of its insurance contract under Georgia law. The district court granted Federal Insurance’s motion to dismiss GCB’s amended complaint because the underlying fraud claims in the bankruptcy-adversary proceeding did not fall, or even arguably fall, within the policy’s coverage. The district court concluded that the bankruptcy trustee’s second amended complaint contained no allegations of loan servicing or lending services as defined in the policy, and GCB did not claim that it “in fact gave loans to” Payroll America.

DISCUSSION

Georgia is a four-corners state that determines an insurer’s duty to defend by comparing the language of the policy with the allegations in the underlying complaint against the insured. The ordinary rules of contract construction apply to insurance contracts, and policy terms are given their ordinary and common meaning unless otherwise defined in the contract. If the facts as alleged in the complaint even arguably bring the occurrence within the policy’s coverage, the insurer has a duty to defend the action.

Where the policy requires the insurer to defend groundless, false, or fraudulent claims, the insurer has a duty to defend even where the complaint against the insured sets forth false factual allegations which would bring the claim within the coverage of the policy. For this reason, the insurer has a duty to defend even where the complaint against the insured falsely indicates non-coverage” but the insurer knows of or can ascertain “true facts showing coverage.

When read in context, the debt allegations in the second amended complaint do not refer to the kind of activities that constitute “Lending Services,” as defined in the policy.  The terms “loan” and “extension of credit” do not appear in the second amended complaint. As the district court explained, there are no allegations of a loan agreement, an interest rate, or a term, or any other indications of a conventional bank “loan” or “extension of credit.” As the district court further noted, the “debt” as alleged appears at most to be some form of overdraft protection, rather than a loan.  In any event, GCB’s alleged role as the “Sending Bank” in Payroll America’s ACH money transfers was not a “loan” or the “extension of credit” as those terms are commonly understood.

Moreover, GCB agrees that in fact Payroll America was never GCB’s customer and that GCB did not give a loan or extend credit to Payroll America. In fact, GCB has repeatedly prevailed on this point in the underlying bankruptcy litigation. Georgia law does not require the insurer to defend against the claim.

For these reasons,the Eleventh Circuit affirmed the district court’s order granting summary judgment to Federal Insurance.

ZALMA OPINION

Whether the court applied the four corners rule or allowed extrinsic evidence to determine the existence or non-existence of coverage, the definitions contained in the policy made clear that the policy did not provide coverage for the events that are the subject of the suit. There were no professional or lending services involved.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How an Insurer Can Sue to Recover Excessive Fees From Cumis Counsel

Bill Padding by Cumis Counsel Can Be Recovered From Cumis Counsel

The advent of requirements that an insurer must pay independent counsel when it reserves its rights and creates a conflict between the insurer and its insured was rife with abuse. Consider United States v. Stites, 56 F.3d 1020 (9th Cir. 05/26/1995), National Union Fire Insurance Co. v. Stites Professional Law Corp., 235 Cal. App. 3d 1718, 1 Cal. Rptr. 2d 570 (Cal.App.Dist.2 10/25/1991) and  Fireman’s Fund Insurance Co. v. Stites, 258 F.3d 1016 (9th Cir. 08/03/2001) where the creator of the Alliance that was a scheme to defraud insurers by creating litigation to require appointment as independent counsel and profit from it. Stites was convicted and served fourteen years.

The Ninth Circuit, in United States v. Stites, concluded: “Stites had been the mastermind of a massive set of breaches of professional responsibility and of the criminal law, the more heinous because Stites was a lawyer and at least twelve other lawyers were his principal confederates in carrying out the fraud. The mentality that sees law as a business was here taken to a reductio ad absurdum — litigation was unconscionably churned to make money for the lawyers. The essence of Stites’s scheme, repeated over and over again, was for Stites to control both sides of suits in which insurance companies were paying for counsel, and to assure that the plaintiffs’ lawyers would not settle until the insurance companies would no longer pay the costs of defendants’ counsel. Stites’s network of lawyers was known as “the Alliance.” According to the jury verdict in this case, Stites’s scams extracted at least $50 million from the insurers in the period 1984 to 1987.” Since Stites, the California Legislature enacted Civil Code Section 2860 to control independent counsel and their relationship to insurers. The abuse was limited by the statute but over-billing and padding of legal bills continued and insurers have sought to remedy the over-billing and padding by arbitration required by Section 2860.

In Hartford Casualty Ins. Co. v. J.R. Marketing, LLC (2015) , Cal.4th, [No. S211645. Aug. 10, 2015.] Justice Cuéllar of the California Supreme Court dealt with a new question not before dealt with when dealing with independent counsel, who must repay the insurer for legal fees paid for work not covered or for padded and over-billed fees when incurred by an insurer when no criminal conduct is involved.

THE HISTORY OF INDEPENDENT COUNSEL

The California Supreme Court has long maintained that if any claims in a third party complaint against a person or entity protected by a commercial general liability (CGL) insurance policy are even potentially covered by the policy, the insurer must provide its insured with a defense to all the claims. (E.g., Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081.) The insurer’s provision of an immediate, complete defense in such a “mixed” action, the Supreme Court has explained, is “prophylactically” necessary, even if outside of the policy’s strict terms, to protect the insured’s litigation rights with respect to the potentially covered claims. (Buss v. Superior Court (1997) 16 Cal.4th 35, 49 (Buss).) Nevertheless, the Supreme Court concluded in Buss that the insured would be unjustly enriched at the insurer’s expense if not ultimately required to bear the cost of litigating those claims for which the insured had never purchased defense or indemnity protection. Accordingly, we held in Buss that the insurer may seek reimbursement from the insured of defense fees and expenses solely attributable to the claims that were clearly outside policy coverage.

The Supreme Court did not consider in Buss the question from whom may a CGL insurer seek reimbursement when:

(1)     the insurer initially refused to defend its insured against a third-party lawsuit;

(2)     compelled by a court order, the insurer subsequently provided independent counsel under a reservation of rights – so-called Cumis counsel (see San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis); fn. 1 see also Civ. Code, § 2860 fn. 2 ) – to defend its insured in the third party suit;

(3)     the court order required the insurer to pay all “reasonable and necessary defense costs,” but expressly preserved the insurer’s right to later challenge and recover payments for “unreasonable and unnecessary” charges by counsel; and

(4)     the insurer now alleges that independent counsel “padded” their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary?

The insurer urges that it may recoup the over-billed amounts directly from Cumis counsel themselves. Cumis counsel respond that, if the insurer has any right at all under the facts of this case to recover over-billed amounts, the insurer’s right runs solely against its insureds. Cumis counsel’s erstwhile clients might then have a right of indemnity from these counsel.

BACKGROUND

In the summer of 2005, appellant Hartford Casualty Insurance Company (Hartford) issued one CGL insurance policy to Noble Locks Enterprises, Inc. (Noble Locks), effective from July 28, 2005, to July 28, 2006, and a second CGL policy to J.R. Marketing, L.L.C. (J.R. Marketing), effective August 18, 2005, to August 18, 2006. In these policies, Hartford promised to defend and indemnify the named insureds, and their members and employees, against certain claims for business-related defamation and disparagement.

In September 2005, an action was filed in Marin County Superior Court against J.R. Marketing, Noble Locks, and several of their employees (the Marin County action). In the Marin County action, certain defendants, apparently represented by the law firm of Squire Sanders (US) LLP (Squire Sanders), filed cross-complaints.

Defense of the Marin County action was tendered to Hartford under the J.R. Marketing and Noble Locks policies. Hartford disclaimed a duty to defend or indemnify the defendants in the Marin County action on the grounds that the acts complained of appeared to have occurred before the policies’ inception dates, and that certain of the defendants appeared not to be covered insureds. Hartford subsequently agreed to defend J.R. Marketing, Noble Locks, and several of the individual defendants in the Marin County action, subject to a reservation of rights.

The trial court in the coverage action entered a summary adjudication order, finding that Hartford had a duty to defend the Marin County action effective on the date the defense was originally tendered. The order also provided that, because of Hartford’s reservation of rights, Hartford must fund Cumis counsel to represent its insureds in the Marin County action. The insureds retained Squire Sanders as Cumis counsel.

The trial court in the coverage action issued an enforcement order directing Hartford to promptly pay all defense invoices submitted to it and to pay all future defense costs in the Marin County action within 30 days of receipt. The order, which was drafted by Squire Sanders and adopted by the court, further stated that Hartford had breached its defense obligations by refusing to provide Cumis counsel until ordered to do so and by thereafter failing to pay counsel’s submitted bills in a timely fashion. The Court of Appeal subsequently affirmed both the summary adjudication and enforcement orders.

Eventually the Marin County action was resolved. The coverage action, stayed during the pendency of the Marin County action, resumed. Hartford thereafter filed a cross-complaint, and then a first amended cross-complaint, against (1) various persons for whom it had allegedly paid defense fees and expenses in the Marin County, Nevada, and Virginia actions, and (2) Squire Sanders. The cross-complaint asserted that Hartford was entitled to recoup from the cross-defendants a significant portion of some $15 million in defense fees and expenses, including some $13.5 million Hartford paid to Squire Sanders pursuant to the enforcement order.

The trial court sustained a demurrer and the Court of Appeal agreed as to Squire Sanders, the court concluded that Hartford’s right to reimbursement, if any, was from its insureds, not directly from Cumis counsel.

The Supreme Court granted Hartford’s petition for review, which raised a narrow question: May an insurer seek reimbursement directly from counsel when, in satisfaction of its duty to fund its insureds’ defense in a third party action against them, the insurer paid bills submitted by the insureds’ independent counsel for the fees and costs of mounting this defense, and has done so in compliance with a court order expressly preserving the insurer’s post-litigation right to recover “unreasonable and unnecessary” amounts billed by counsel?

DISCUSSION

Restitution and the Duty to Defend

When an insured under a standard CGL policy is sued by a third party, the insurer’s contractual duty to defend the insured extends to all claims that are even potentially subject to the policy’s indemnity coverage. Moreover, when the third party suit includes some claims that are potentially covered, and some that are clearly outside the policy’s coverage, the law nonetheless implies the insurer’s duty to defend the entire action.  And unless the insured agrees otherwise, in a case where – because of the insurer’s reservation of rights based on possible non-coverage under the policy – the interests of the insurer and the insured diverge, the insurer must pay reasonable costs for retaining independent counsel by the insured.

Hartford reserved its right to dispute coverage for some or all of the defendants or claims in the Marin County, Nevada, and Virginia actions. Accordingly, Squire Sanders acted as the insureds’ independent counsel in those suits. It did so pursuant to a court order specifying that Hartford must promptly pay Squire Sanders’s bills as and when submitted, but that the firm’s charges must be “reasonable and necessary,” and that, after conclusion of the underlying litigation, Hartford could seek reimbursement of amounts it deemed excessive by this standard. The order did not specify from whom Hartford might obtain any such reimbursement.

Hartford now seeks reimbursement from Squire Sanders based on equitable principles of restitution and unjust enrichment. By charging Hartford for fees and expenses that were unreasonable and unnecessary for the insureds’ defense, Hartford asserts, Squire Sanders unjustly enriched itself at Hartford’s expense and thus owes Hartford restitution for the over-billed amounts.

An individual who has been unjustly enriched at the expense of another may be required to make restitution. (See Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51; see Rest.3d Restitution and Unjust Enrichment, § 1; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 1013, p. 1102.) Restitution is not mandated merely because one person has realized a gain at another’s expense. Rather, the obligation arises when the enrichment obtained lacks any adequate legal basis and thus cannot conscientiously be retained.

As the Supreme Court concluded in Buss, if an insurer were required to absorb the costs of defending claims it clearly never agreed to defend, it is the insured who would gain a direct and unjust enrichment at the insurer’s expense. Hartford alleges that it is counsel who are the unjust beneficiaries of the insurer’s over-payments. As applied here, accepting for the sake of argument (because the case came to the Supreme Court on a demurrer that assumes all facts alleged in the suit are true) that Squire Sanders’s bills were objectively unreasonable and unnecessary to the insured’s defense in the underlying litigation and that they were not incurred for the benefit of the insured, principles of restitution and unjust enrichment dictate that Squire Sanders should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills.

Hartford’s obligation to pay for independent Cumis counsel was not unlimited. Hartford did not voluntarily pay the alleged “unreasonable and unnecessary” overcharges submitted by Squire Sanders out of some self-interest extraneous to the benefit conferred on those counsel. Moreover, any such overpayments were not merely an “incidental” benefit to Squire Sanders, fortuitously received by the firm and beyond its power to refuse. On the contrary, Squire Sanders, under the terms of a court order it obtained (and indeed, drafted), submitted bills to Hartford and obtained payment subject to the express provision that counsel’s bills must be reasonable, and that Hartford could later obtain reimbursement of excessive charges.

By its terms, the statute limits neither the potential “parties to the dispute” (§ 2860, subd. (c)) nor the billing issues that may be raised.

Squire Sanders’s own conduct in the course of this litigation further supports the conclusion that it is not unjust to allow Hartford to pursue its reimbursement action directly against Squire Sanders.  The holding that Hartford may pursue its claim for reimbursement against Squire Sanders stems directly from – and is wholly consistent with – that order. Squire Sanders now attempts to avoid the effects of this order by encouraging the Supreme Court to foist all responsibility for reimbursement onto its erstwhile clients. The Supreme Court refused to accept that invitation. Under the circumstances, allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel.

Under the circumstances of this case, the insurer may seek reimbursement directly from Cumis counsel. If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer’s expense.

ZALMA OPINION

Justice Cuéllar, faced with the work of almost every elite member of the California appellate bar, wrote reasonably to allow the Hartford the opportunity to prove to a trial court that Squire Sanders padded its bills or over-billed Hartford for work not necessarily necessary to defense of Hartford’s insured. If they can prove that Squire Sanders was unjustly enriched they will recover those unjust fees from the lawyers not the innocent insured who had no way to review or control the billing of their Cumis counsel. This is not the criminal conduct of Mr. Stites but the Supreme Court refused to allow padding or over-billing to be foisted upon the innocent insured.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Can an Insurer Obtain Insured’s Tax Returns?

Tax Returns Can Establish Issue If Allowed in Evidence

Whenever an issue about insurance coverage can be resolved by presentation of the insured’s tax returns, the insured would claim that tax returns are privileged and not subject to discovery by the insurer. That tax returns are private is axiomatic. However, when an insured sues an insurer seeking insurance coverage that can be resolved by information contained in a tax return, the privilege was either waived by the filing of suit or are so essential that they must be produced to prove or disprove the issue.

Defendant Farm Bureau Property and Casualty Insurance Company’s (“Defendant”) moved the District Court to compel production of certain tax records in Awadh v. Farm Bureau Mut. Ins. Co., Not Reported in F.Supp.3d, 2015 WL 4771733 (D.Utah, 8/12/2015).

BACKGROUND

The underlying action arises from an insurance claim for a stolen skid loader. Plaintiffs Naser Awadh and Stacy Awadh (“Plaintiffs”) submitted a claim to Defendant for the value of the skid loader. Defendant determined that the skid loader was property of the Plaintiffs’ business, and thus subject to a $2,500 business property coverage limitation.

Plaintiffs, on the other hand, claimed that the skid loader was personal property purchased in 2004, and that they are entitled to insurance coverage for the full value of the skid loader.

Defendant served requests for production of documents on Plaintiffs, including requests for business tax returns and schedules for the years 2004 through 2011, the period from acquisition of the skid loader until Plantiffs submitted their insurance claim. Defendant believes that these records are relevant because they show whether Plaintiffs treated the skid loader as a personal or business asset in the tax records; whether Plaintiffs claimed the stolen skid loader as a business loss; and Plaintiffs’ stated value of the asset.
Plaintiffs objected to the request, but eventually produced just eight pages of tax documents relating to a few of the years in question. Plaintiffs did not produce any schedules for 2007, 2009, and 2010 and did not produce any records at all for years 2004, 2005, 2006, 2008, or 2011. Plaintiffs claim that they do not have any additional tax records for the years in question. Defendant contends that if Plaintiffs do not have the records, the records can be obtained from the Internal Revenue Service (the “IRS”), provided Plaintiffs give the appropriate authorization. The tax records were obviously important since, if they were depreciated as an asset in a business tax return the $2,500 limit would apply and if not, it might be evident that the skid loader was personal property without a small limit.

Defendant made a good faith attempt to obtain production of the tax records from Plaintiffs without the court’s involvement, but was forced to file the current motion to compel production after the parties were unable to reach agreement.

ANALYSIS

The court finds Defendant’s request for production of the tax documents relevant and proper. Plaintiffs’ tax records appear highly relevant to claims and defenses in the case, and the requested documents appear likely to be admissible at trial or “reasonably calculated to lead to the discovery of admissible evidence.” Fed.R.Civ.P. 26(b)(1). The crux of the underlying action appears to be (1) whether the skid loader was personal or business property, and thus subject to their respective coverage limits. Further, Defendant controls the documents in that Defendant either has possession of the documents or has the ability to authorize release of the documents by the IRS.

Within ten (10) days of the date of this order, Plaintiffs are ordered to produce all personal and/or business tax returns and schedules for the years 2004 through 2011 in their possession, custody, or control, including copies of tax returns and schedules held by Plaintiffs’ accountants, attorneys, or other professionals. Plaintiffs’ production shall include an affidavit verifying whether the documents produced include full copies of all returns and schedules for the requested years. If Plaintiff’s affidavit states that they cannot produce full copies of all returns and schedules for the years in question, Defendant may prepare for Plaintiffs’ signatures any paperwork required by the IRS for release of the tax records. Plaintiffs shall sign and return the authorization paperwork within five days of receipt of the authorization paperwork from Defendant. If necessary, Plaintiffs shall cooperate with Defendant and perform any other actions reasonably necessary for Defendant to be able to obtain the tax records from the IRS.

All tax documents produced by Plaintiffs and/or the IRS shall be subject to the provisions of the Standard Protective Order provided for under civil rule 26–2(a) of the Rules of Practice for the United States District Court for the District of Utah. DUCivR 26–2(a)(1), App’x. XV.

The court ordered: “The tax records shall be designated “CONFIDENTIAL INFORMATION–ATTORNEYS’ EYES ONLY” pursuant to the Standard Protective Order. The produced tax records shall not be disclosed to anyone other than attorneys or attorneys’ professional consultants, and may only be used for purposes of this litigation. Parties shall comply with all requirements regarding the treatment of confidential information under the Standard Protective Order.”

ZALMA OPINION

Tax returns are presumably reliable documents since they are submitted to the IRS under oath and false statements on tax returns are subject to both civil and criminal penalties. When, as here, a tax return can resolve the key issue in the case, the only reason the plaintiffs seem to be attempting to conceal the tax returns is because they prove the skid loader was business property. When the documents are produced the issue will be resolved and the case will be subject to summary judgment by the plaintiff or the defendant.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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Can Insurer Litigate Coverage While Tort Case Pending?

Declaratory Relief Must Go Forward

Insurers faced with a lawsuit claiming its insured caused damages (other than bodily injury of property damage) to a plaintiff intentionally will often result in a declaratory relief action to support a decision to refuse to defend or indemnity the insured. When the issues between the insurer vs. the insured are different from the issues raised in the tort action, the insurer tries to go forward and get a ruling while the insured tries to stop the declaratory relief action so it can force the insurer to participate in settlement talks and pay for the insured’s defense.

The covenant of good faith and fair dealing, used by many plaintiffs to compel an insurer to provide coverage that it did not agree to, remains a mutual duty. An insured who fails to act in good faith to its insurer breaches the material implied covenant of good faith.

Homeowners Property & Casualty Insurance Company, Inc. (the insurer), asked the Florida Court of Appeal to reverse a circuit court order that stayed its declaratory judgment action on insurance coverage pending resolution of an underlying tort action filed against the insured, because it deprived the insurer of the benefits of the contract. In Homeowners Property & Cas. Ins. Co., Inc. v. Hurchalla, — So.3d —-, 2015 WL 4747551 (Fla.App. 4 Dist., 8/12/15) the Florida Court of Appeal resolved the dispute.

FACTS

Respondents Lake Point Phase I, LLC and Lake Point Phase II, LLC (collectively, Lake Point) sued Margaret Hurchalla (Margaret), the South Florida Water Management District (SFWMD) and Martin County, seeking injunctive relief and damages. Lake Point claimed that Margaret intentionally made false statements that caused the other defendants to void contracts they had with Lake Point. Lake Point sought injunctive relief and economic damages against Margaret.

The insurer provided a defense under a reservation of rights but later withdrew its defense. It then filed a complaint for declaratory judgment, alleging that, based on the homeowner’s insurance policy, it is not required to defend or indemnify Margaret in the tort action. The insurer argued that the intentional acts alleged in the tort action are excluded from coverage and that Lake Point has not claimed bodily injury or property damage caused by an “occurrence” that triggers coverage under the homeowner’s policy.

After the denial of its motion for summary judgment, the insurer noticed Margaret for deposition. In response, she moved for protective order and to abate the declaratory judgment action pending resolution of the underlying tort action. She argued that litigation of the disputed issues on insurance coverage may prejudice her defense of the tort action. Lake Point is a party in both cases, and she claimed that discovery may force her to disclose defense strategy.

The insurer opposed abatement or stay of the coverage action, arguing that the two actions were mutually exclusive and that expeditious resolution of the coverage action would promote settlement of the tort case. After hearing argument, the trial court granted the motion to abate the coverage action and stayed discovery.

A STAY IS DIFFERENT THAN AN ABATEMENT

Courts often have used the terms “stay” and “abate” interchangeably, but they are not the same. The granting of a stay of one action in favor of another is reviewed for an abuse of discretion, but the propriety of abatement can be determined as a matter of law. While abatement requires complete identity of parties and causes of action a stay should require substantial similarity of parties and actions.

The circuit court’s order in this case is properly characterized as having entered a stay, rather than abatement, as the two actions do not have the same parties and causes of action.

In the declaratory judgment action, the insurer is the plaintiff, and is not a party in the tort action. James Hurchalla is a party defendant in the declaratory judgment action but not a party in the tort action. The trial court effectively postponed the declaratory relief action.

ANALYSIS

In Higgins v. State Farm Fire and Cas. Co., 894 So.2d 5 (Fla .2004), the Florida Supreme Court identified factors a court should consider in determining whether to stay a coverage action pending resolution of an underlying tort action.

(1) whether the two actions are mutually exclusive;

(2) whether proceeding to a decision on the indemnity issue will promote settlement and avoid the problem of collusive actions between the claimant and the insured in order to create coverage where there is none; and

(3) whether the insured has resources independent of insurance, so that it would be immaterial to the claimant whether the insured’s conduct was covered or not covered by the indemnity insurance.

The tort action and the declaratory relief action are mutually exclusive. All of Lake Point’s claims against Margaret are outside of the scope of the policy. The disputed facts in the coverage action, relating to coverage by estoppel, are separate and distinct from the issues in the tort case. As for the second factor, a determination of whether the insurer has a duty to defend Margaret and indemnify her from Lake Point’s claims likely will promote settlement of the tort claim.

In addition, a decision on coverage also will avoid the potential for collusion between Margaret and Lake Point to create coverage where none exists.  The insurer explains that Lake Point could attempt to re-plead its tortious interference claim to omit the allegations of intentional, knowing acts by Margaret causing harm, damage or injury, so as to give rise to potential insurance coverage.

The Court of Appeal agreed with the insurer that Margaret has not shown how discovery in the coverage action could prejudice her defense in the tort action. The insurer has agreed that it will not seek attorney-client privileged communications. Any other prejudice can be avoided by allowing Margaret to raise objections to any specific discovery that would reveal her defense strategy.

The Court of Appeal concluded that the circuit court departed from the essential requirements of law in staying the coverage action pending resolution of the underlying tort action and, therefore, granted the petition and quashed the order.

ZALMA OPINION

Few members of the public like insurance companies. Some judges feel the same. Insurance companies are simply not a favored party in litigation. By staying the declaratory relief action and the right to depose the insured who was seeking coverage, the trial court abused its discretion by postponing the right of the insurer to seek declaratory relief. The stay allowed the insured and the plaintiff in the underlying action to set up the insurer for a major judgment and deprived it of the right to defend itself and protect its rights and that is why the stay was voided.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

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Zalma’s Insurance Fraud Letter – August 15, 2015

How There Can Be No Coverage for Fraud

In this, the Sixteenth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on August 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.    No Coverage for Defense of Suit Alleging Only Fraud
2.    Insurance Company Can Is a Victim of Insurance Fraud
3.    New From Barry Zalma
a.    Insurance Law
b.    The Insurance Fraud Deskbook
c.    Diminution of Value Damages
4.    Can an Insurance Company be a Victim of Fraud?
5.    E-Books from Barry Zalma
6.    California Funds Workers’ Compensation Fraud Fight

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.

PROFORMATIVE ACADEMY

“INSURANCE FRAUD – AN OVERVIEW”

A Continuing Education Presentation

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

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

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

How to Read & Understand Business Insurance Policies

No business can operate profitably without insurance to protect it against contingent or unknown catastrophic losses. By spreading the risk among many businesses, insurers can charge reasonable sums to protect against losses to the business or its real and personal property. In this course you will listen to an internationally recognized insurance coverage lawyer, author, consultant and expert witness explain why and how an insurance policy provides protection for the business. A business person with the ability to read and understand the insurance policies they acquire has an advantage over every other business person who cannot read and understand a such policies.

Continuing Education Credit available for many, including Certified Fraud Examiners with 1.5 CPE Credits, in Fraud Prevention and Deterrence. I hope you find it interesting and informative.

http://www.proformative.com/courses/how-to-read-understand-business-insurance-policies

I hope you find it interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    What is a Claim? – August 14, 2015
•    Why Suit Was Worded to Avoid Coverage for the Defendant – August 13, 2015
•    Courses Available at Discount – August 12, 2015
•    Why is a National Flood Insurance Program Policy Not Insurance? – August 12, 2015
•    When is a Policy of Insurance Made? – August 12, 2015
•    How a Court Changed Parties Positions to Do Justice August 10, 2015
•    Why A Claimant Can Not be a Third Party Beneficiary of an Insurance Policy – August 7, 2015
•    How to Lose Coverage as an Additional Insured – August 6, 2015
•    Why it’s Important to Select A Forum – August 5, 2015
•    Why There is an Examination Under Oath – August 4, 2015
•    Why Failure To Read Policy Hurts Both Insured and Insurer – August 3, 2015
•    Insurance Fraud – An Overview – July 31, 2015
•    How to Lose A Judgment by Taking an Assignment – July 31, 2015
•    A Horse is a Horse, of Course – July 30, 2015
•    No Nonsense Application of Plain Meaning of Exclusion – July 29, 2015
•    How to Defeat an Arson for Profit Attempt – July 28, 2015
•    Crime Doesn’t Pay – July 27, 2015
•    Insurance & The Absolute Litigation Privilege – July 24, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Insurance Law

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

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

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

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

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

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

The Insurance Fraud Deskbook

http://shop.americanbar.org/eBus/Default.aspx?TabID=251&productId=214624; or orders@americanbar.org, or 800-285-2221.

Barry Zalma

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

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

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

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What is a Claim?

Demand for Money Is A Claim

Claims made liability insurance policies are different from other liability insurance policies. A claims made policy only provides coverage for a claim made during the policy period. Because insurers believe that the word “claim” is clear, unambiguous and understood throughout the country, it is often a term not defined by the policy. As a result litigation often arises over the meaning of the word “claim” and how it applies to the interpretation, duties and obligations of the insured and the insurer.

In Ritrama, Inc. v. HDI-Gerling America Ins. Co., — F.3d —-, 2015 WL 4730916 (C.A.8 (Minn.) 8/11/2015) the Eighth Circuit Court of Appeal was faced with an argument over the meaning of the word “claim” in a claims made policy.

FACTS

Ritrama, Inc. (“Ritrama”) appealed the trial court’s decision that Ritrama’s general liability insurer, HDI–Gerling America Insurance Co. (“Gerling”), does not have a duty to defend Ritrama in a defective-product action filed against it by Burlington Graphics Systems (“Burlington”).

Ritrama manufactures pressure-sensitive flexible films and cast vinyl films for various applications, including for vehicle graphics products. Over a number of years, Burlington—Ritrama’s former customer—purchased more than $8 million worth of cast vinyl film products from Ritrama to manufacture graphic decals for customers in the recreational vehicle (“RV”) industry.

No later than early 2008, Burlington reported to Ritrama that RV owners were experiencing issues with the graphics. In one of its early emails, Burlington informed Ritrama that it was “not going to let [quality issues] just pass by” and that if Ritrama failed to take corrective action, it would seek an alternate supplier.  On July 8, 2008, Patrick McCormack, a manager for Ritrama, met with Burlington’s President, Mark Edwards, to discuss the product failures.

On September 9, 2008, Burlington sent Ritrama a spreadsheet detailing three claims for monetary damages based on the product failures, which totaled $53,219.37. McCormack responded to the spreadsheet by explaining that his “group went over the claim summary and [he] left Mark [Edwards] a voicemail with some questions,” which included: “What is [Burlington’s] expectation of Ritrama on this claim? Is there a certain percentage split you have in mind? When we settle on what the split will be, will this be it? Our intention is to close this out with [Burlington] and have nothing else waiting in the balance (so-to-say).” (Emphasis added)

In early 2009, Ritrama purchased a commercial general liability insurance policy from Gerling (the “Policy”). The Policy provided coverage only for claims made between March 31, 2009, and March 31, 2010. As relevant to this appeal, the policy included the following terms: “A claim by a person or organization seeking damages will be deemed to have been made at the earlier of the following times: ¶ (1) When notice of such claim is received and recorded by any insured or by us, whichever comes first; … All claims for damages because of ‘property damage’ causing loss to the same person or organization will be deemed to have been made at the time the first of those claims is made against any insured.”

On July 17, 2009, Ritrama advised its insurance agent of its issues with Burlington. The same day, the insurance agent sent a “notice of occurrence” to Gerling. Ritrama argues that the notice was not an acknowledgment of a claim, but merely a notification of a “customer having problems.” On January 6, 2011, Burlington sent a letter through its litigation counsel to Ritrama more formally demanding payment and threatening litigation. After Ritrama failed to meet Burlington’s demands Burlington brought suit against Ritrama in federal court. On June 14, 2011, Gerling denied coverage and refused to defend Ritrama in its liability suit.

ISSUES

Ritrama raises three issues on appeal: the district court erred in (1) adopting too broad a definition of “claim” for the Policy; (2) finding the term unambiguous; and (3) granting summary judgment in favor of Gerling because whether Burlington made a claim under the Policy was a disputed factual issue.

ANALYSIS

The insurance policy does not define the term “claim,” so the court employs ordinary contract interpretation principles to determine the meaning the parties ascribed to the term. The trial court found the term unambiguous with the following definition: “an assertion by a third party that the insured may be liable to it for damages within the risks covered by the Policy.”

First, the definition adopted by the district court is entirely consistent with dictionary definitions, including Black’s Law Dictionary. Two listed definitions—“[t]he assertion of an existing right” and “[a] demand for money or property to which one asserts a right”—are much more on point and consistent with the district court’s definition.

Second, the district court’s definition is also consistent with the Policy as a whole. Ritrama believes the term “claim” should carry a similar meaning to “suit” because the terms are used “side-by-side,” but the Policy specifically defines the term “suit” and does not define the term “claim”—suggesting they carry different meanings within the Policy.

Third, the district court’s definition is not contrary to the primary purpose of claims-made insurance policies to only cover claims submitted during the policy period. Under such a policy, “coverage is provided if the error or omission is discovered and brought to the insurer’s attention during the term of the policy.”  A chief purpose of claims-made policies is to allow the insurer to accurately fix its potential liabilities. Adopting the district court’s definition in no way undermines this purpose. To the contrary, it reaffirms the purpose of such policies by recognizing that, absent policy language to the contrary, a claim is submitted when a demand has been made or when the claim is “brought to the insurer’s attention”— not when an unnecessarily formalistic procedure for making a claim has been followed. As such, an insured cannot take advantage of such a policy when it receives a clear demand for relief and then purchases a claims-made insurance policy before a third-party can put the stamp on its written demand letter from its attorney.

Fourth, the Eighth Circuit refused to believe the district court’s definition is inconsistent with Eighth Circuit and Minnesota law. The Eighth Circuit and Minnesota courts have likewise made clear that the focus of whether a claim has been made is whether a demand for relief has been made. Although a mere request for information is generally insufficient to constitute a claim, a demand for relief generally constitutes a claim.

Generally speaking, a “claim” in a liability policy is considered to be an assertion by a third-party to the effect that the insured has caused the claimant damages through some acts or omissions and that the claimant intends to hold the insured responsible for all or a portion of the damages so caused.

Ritrama argued there was no communication from Burlington which could be considered a claim within the definition above. The Eighth Circuit agreed with the district court that explicitly held that the spreadsheet sent from Burlington to Ritrama in September 2008 constituted a list of demands for damages in spreadsheet form.  At the July 2008 meeting in which Burlington and Ritrama met to discuss the product failures and damages that were accruing, Burlington informed Ritrama it would be compiling and submitting a summary of the re-work expenses it had incurred based on the product failures. True to its word, on September 9, 2008, Burlington sent Ritrama a spreadsheet with the specific total of how much monetary damages it had sustained thus far.

There is no reasonable way to interpret the spreadsheet as anything other than a demand for relief. Indeed, this is precisely how Ritrama itself understood the communication. In response to the spreadsheet, Ritrama acknowledged “the original $53k claim that was submitted to [it],” and asked Burlington about its “expectation as to how much Ritrama should share in this claim ” (emphasis added by the court).

A month later, Ritrama reached out to Burlington again with a settlement proposal of 50% for the “claim value [of] $53,219.37” communicated thus far and stated that it would “consider this claim closed” (emphasis added).

ZALMA OPINION

As the plaintiffs’ bar loves to explain insurance is a business of utmost good faith. That duty is defeated when a person, knowing a claim has been presented and demands made upon it, buys an insurance policy to cover that risk without telling the insurer about when applying for the insurance. Ritrama tried to gain coverage wrongfully and in bad faith. It knew there was a claim pending when it bought a claims made policy. The claim happened before the inception date of the policy. Doing so is like buying a fire insurance policy at 3:00 p.m. to be effective that day at 12:01 because the house burned down at 10:00 a.m. Ritrama intentionally misrepresented or concealed a material 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 Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Leave a comment

Why Suit Was Worded to Avoid Coverage for the Defendant

The Danger of the Eight Corners Rule

The Eight Corners rule applied in states like Louisiana, limits analysis of the coverage issue to the four corners of the law suit and the four corners of the policy. It prevents the court from considering extrinsic evidence that might allow coverage or allow insurers to refuse coverage when if the true facts were known would have a different result.

In Haygood v. Dies, — So.3d —-, 2015 WL 4748136 (La.App. 2 Cir.), 49,972 (La.App. 2 Cir. 8/12/15) a dentist and a member of the state regulatory board for dentistry was sued with others for actions taken by the board concerning the plaintiff and his dental practice. The allegations of the claim were that the Dr. Herman O. Blackwood, III (“Dr.Blackwood”) acted in concert with others in a conspiracy to slander or defame the character of the plaintiff. Following the dentist’s claim for insurance coverage from his homeowner’s insurance, the insurer intervened in the action seeking a declaratory judgment that no coverage or duty to defend was owed under the policy. The trial court rendered judgment on a motion for summary judgment in favor of the insurer which is now appealed.

FACTS

This lawsuit is based on the investigation and disciplinary proceeding against Dr. Ryan Haygood, where Dr. Haygood’s dental license was initially revoked by the Louisiana State Board of Dentistry (“Dental Board”). The Dental Board began investigating Dr. Haygood and ultimately filed charges against him after receiving formal complaints from patients and other dentists that Dr. Haygood was recommending treatment plans after over-diagnosing or unnecessarily diagnosing patients with periodontal disease.  The Dental Board found that Dr. Haygood had violated the Dental Practice Act and revoked his dental license and levied fines against him.

Dr. Haygood appealed the Dental Board’s decision and the appellate court found that the Dental Board’s independent counsel participated in the administrative hearing in dual roles as prosecutor and adjudicator in violation of Dr. Haygood’s due process rights.

After the appeal court’s ruling, Dr. Haygood and his limited liability company filed this suit for damages in 2011, naming the Dental Board and others as defendants.  Dr. Haygood supplemented his petition to add Dr.Blackwood, as a defendant. Dr. Haygood claims that Dr. Blackwood, with others, caused him damage through actions that were initiated by the Dental Board, resulting in the disciplinary hearing.

Dr. Blackwood gave notice of the lawsuit to Encompass Insurance Company of America (“Encompass”), his homeowner’s insurance provider, seeking defense and indemnity. Encompass refused to defend and sought declaratory relief. The trial court issued a judgment granting Encompass’ motion and denying Dr. Blackwood’s motion, finding that the homeowner’s policy did not provide coverage for the claims asserted against Dr. Blackwood and that Encompass had no duty to defend and indemnify Dr. Blackwood.

LAW

An insurance policy should be interpreted by using ordinary contract principles. Interpretation of a contract is the determination of the common intent of the parties. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. To determine if the an insurer owes the insured a duty to defend, the court is confined to the “eight corners” of the allegation and the insurance policy.

THE “EIGHT CORNERS” REVIEW

Following the so-called “eight corners” analysis, the parties’ opposing motions for summary judgment rest on the petition’s factual allegations against Dr. Blackwood and the contractual provisions for coverage under the Encompass policy. In Dr. Haygood’s initial petition, the following charge is made against the executive director of the Dental Board and other dentists/defendants:

Dr. Haygood claimed that the defendants knowingly and intentionally deprived Dr. Haygood of his right to a fair and impartial hearing; presented knowingly false or exaggerated claims, provided evidence obtained through unlawful means; and took other actions which deprived Dr. Haygood of the right and privilege to conduct his livelihood as a licensed dentist in the State of Louisiana.

The suit alleged, among other things that Dr. Blackwood has actively sought to conceal both the existence of the conspiracy and his role in it by providing false testimony in this action as recently as January 2013 regarding his actions that materially supported the illegal action taken against Dr. Haygood.

THE POLICY

The provisions of the Encompass policy that detail coverage are listed as follows:

“Liability Coverage—Losses We Do Not Cover …

“4. Personal injury does not apply to:

“(a)     Injury caused by a violation of a law or by, or with the knowledge or the expressed or implied consent of the covered person; …

“(c)     Civic or public activities performed for pay by any covered person;

“(d)     Injury arising out of:

“(1)     oral or written publication of material, if done by or at the direction of any covered person with knowledge of its falsity.”

DISCUSSION

Dr. Blackwood appealed and asserted that the coconspirator claims against him in conjunction with the actions of certain defendants who were not members of the Dental Board are not unambiguously excluded from coverage under the policy.

Dr. Haygood’s suit is brought against the executive director of the Dental Board, members of the Board, and other dentists with practices in the Shreveport and Bossier City area. The petition asserts that the Dental Board investigated and charged Dr. Haygood with defrauding his patients by improper diagnoses of periodontal disease. The allegations are that those charges were totally unfounded and presented by knowingly false or exaggerated claims. Thus, the investigations were “sham” actions conducted against Dr. Haygood by his competition and the members of the Board, including Dr. Blackwood. All of the charges directed at Dr. Blackwood are framed in terms of a conspiracy between Dr. Blackwood, other members of the Dental Board, and possibly some of the other dentists named as defendants, yet not members of the Board.

Dr. Haygood’s allegations against Dr. Blackwood amount to a claim for libel, slander, or defamation of character, which is defined to be “personal injury” in the Encompass policy. Nevertheless, we do not find that any publication of the alleged defamatory statements against Dr. Haygood is stated to have occurred by Dr. Blackwood’s mere negligence. Dr. Blackwood’s alleged actions as a member of the Dental Board are not stated to rest upon false information upon which Dr. Blackwood negligently relied without knowledge of the falsity. Instead, the allegations are that Dr. Blackwood and the Dental Board members intentionally presented false and exaggerated claims.

The distinction between a negligent defamation of one’s character and an intentional one is clearly recognized when the tortfeasor is charged to have acted in a conspiracy with others to commit the willful act. Torts committed by conspiratorial actors are intentional. Dr. Blackwood is not sued in this action as an independent actor who slandered or defamed Dr. Haygood. He is sued as one of the conspirators who agreed to commit an intentional or willful act.

Under Louisiana law, while a contract of insurance may extend to cover the insured’s negligent slander, libel or defamation of character, public policy forbids a person from insuring against his own intentional acts. The “personal injury” coverage in the Encompass policy recognizes this public policy and provides in exclusions that the publication of defamatory material with the insured’s knowledge of its falsity is an excluded intentional tort.

Accordingly,  intentional slander and defamation through a deliberate conspiracy among the defendants are charged and, therefore Encompass was correct when it refused to defend or indemnify Dr. Blackwood.

ZALMA OPINION

If the plaintiff wanted money from Dr. Blackwood’s insurer he could have alleged that Dr. Blackwood acted negligently. If he wanted to punish Dr. Blackwood and make him pay from his own pocket to defend the suit. Artful pleading in an eight corners state like Louisiana allows the suit – whether successful or not – to punish the defendant. If it was filed in an extrinsic evidence state evidence could show Dr. Blackwood’s negligence and he would receive a defense paid for by his insurer. Also, coverage may exist in Dr. Blackwood’s errors and omissions policy or from the dental board.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Courses Available at Discount

I have course(s) live on Proformative, which just launched, and you can save 10% on a quarterly or annual subscription if you follow my link to the platform. If it’s your first course on Proformative, you can take advantage of the same discount everyone else has right now, which is to try the platform by taking their first course for free on the site. But the 10% discount  will be good for you to enroll with at any time, now or in the future.
10% Discount code is: Zalma10
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Why is a National Flood Insurance Program Policy Not Insurance?

Fulfill the Condition Strictly or Get Nothing

Contrary to what it is called the National Flood Insurance Program is not insurance. It is, rather, a government funded entitlement that can only pay claims by dipping into the treasury of the United States. As a result, unlike insurance policies, federal courts strictly construe the language of the National Flood Insurance policy. In the majority of state jurisdictions substantial compliance with the proof of loss requirement is all that is necessary while Flood policies are strictly construed.

The proper inquiry in determining substantial compliance with a proof-of-loss condition in an insurance policy is whether the proof of loss fulfilled its three intended purposes: (1) allowing insurer an opportunity to investigate the loss; (2) allowing insurer to estimate its rights and liabilities; and (3) preventing fraud. [Bowlers’ Alley, Inc. V. Cincinnati Ins. Co., — F.Supp.3d —-, 2015 WL 3540039 (E.D.Mich.). “A substantial compliance with the provision requiring a sworn proof of loss, resulting in the insurer being able to adequately investigate the claim and estimate its liabilities, is all that is required.” [Greenbrier Hotel Corp. v. Lexington Ins. Co., Slip Copy, 2015 WL 691450 (S.D.W.Va., 2/18/15)

However, in Ferraro v. Liberty Mut. Fire Ins. Co., — F.3d —-, 2015 WL 4666106 (C.A.5 (La.) 8/6/2015) Ron and Patricia Ferraro sued Liberty Mutual to recover flood-insurance proceeds after their house was damaged by Hurricane Isaac. The Ferraros submitted an original signed, sworn proof of loss with the handwritten note “Will send supplement later.” They later sought payment from Liberty Mutual for the supplemental amount without providing a second proof of loss.

The district court granted summary judgment for Liberty Mutual, holding that a second sworn proof of loss is necessary to support a claim under the National Flood Insurance Program.

BACKGROUND

The Ferraros own a house in LaPlace, Louisiana. They purchased a Standard Flood Insurance Policy (SFIP) from Liberty Mutual via the National Flood Insurance Program’s (NFIP) Write–Your–Own (WYO) program. The policy was in place on August 29, 2012, after Hurricane Isaac made landfall on Louisiana.

The Ferraros’ home suffered damage, and they filed a claim for benefits with Liberty Mutual. Liberty Mutual dispatched an independent adjuster, who recommended payment of $103,826.83 and prepared a proof-of-loss form in that amount. The Ferraros signed the proof of loss and handwrote on the form: “Will send supplement later.” Liberty Mutual paid the Ferraros the full amount claimed by the proof-of-loss form.

The Ferraros then hired Dan Onofrey, a public adjuster, to evaluate the damage on their home. Onofrey issued a report valuing the Ferraros’ loss at $320,436.55. Surprisingly, since a licensed public adjuster is expected to know the requirements of the NFIP, the Ferraros only submitted Onofrey’s report to Liberty Mutual. They did not submit a second signed, sworn proof-of-loss form. Liberty Mutual made no further payments to the Ferraros.

For claims relating to Hurricane Isaac, policyholders were required to provide a complete, signed, sworn-to proof of loss within 240 days of the loss (extended by FEMA from the standard 60 days).

The district court granted summary judgment, noting that the NFIP requires strict compliance and holding that the Ferraros’ failure to provide a second proof of loss to accompany Onofrey’s loss valuation barred their suit.

DISCUSSION

Congress created the NFIP to provide flood-insurance coverage at affordable rates. The program, which is operated by the Federal Emergency Management Agency (FEMA), draws funds from the federal treasury. Homeowners can purchase an SFIP policy directly from FEMA or through private insurers, which serve as WYO providers and are fiscal agents of the United States.

Because the NFIP puts at stake the government’s money its regulations are subject to sovereign immunity. Although WYO insurers administer SFIP policies, payments made pursuant to such policies are “a direct charge on the public treasury.”   Gowland v. Aetna, 143 F.3d 951, 955 (5th Cir.1998) The provisions of an insurance policy issued pursuant to a federal program must be strictly construed and enforced.

The central issue in this case is the interpretation of the proof-of-loss requirement in Article VII of the SFIP.

The regulations make strict compliance with the proof-of-loss requirement a condition precedent to suit. “You may not sue us to recover money under this policy unless you have complied with all the requirements of the policy. … This requirement applies to any claim that you may have under this policy and to any dispute that you may have arising out of the handling of any claim under the policy.” 44 C.F.R. pt. 61, app. A(1) art. VII(R) (emphasis added). An insured’s failure to provide a complete, sworn proof of loss statement, as required by the flood insurance policy, relieves the federal insurer’s obligation to pay what otherwise might be a valid claim.

The Ferraros argue that they discharged their proof-of-loss obligation when they filed a signed, sworn statement claiming $103,826.83 in damages and advised Liberty Mutual that a supplement would follow. They contend that they seek only additional benefits (for a total of $320,436.55) and not a wholly separate, “materially different” claim. “The policy at issue,” they assert, “does not require the Ferraros to submit supplementary proof of loss forms to sue for additional payments for previously perfected claims.”

Whether an insured must submit an additional proof of loss to recover an additional amount on a preexisting claim is a question of first impression in the Fifth Circuit. However,  Gunter v. Farmers Ins. Co., 736 F.3d 768 (8th Cir.2013), provides strong persuasive authority for the conclusion that a second proof of loss is indeed required.

It does not matter that the estimate from [the insured’s] adjuster was submitted at the same time and along with compliant proof-of-loss forms claiming undisputed sums because, under the plain terms of the SFIP, [the insured] still had to sign and swear to the amount in that estimate, which he did not do.

SFIP is clear that statements by an adjuster are provided only as a courtesy, and the proof of loss is the signed and sworn final statement of the insured as to how much damage is claimed.  Failure to provide a proof of loss for any supplemental amount is a bar to recovery.

The Fifth Circuit found persuasive the reasoning of other Circuits and applied the same principles to the suit filed by the Ferraros that an insured’s failure to strictly comply with the SFIP’s provisions—including the proof-of-loss requirement—relieves the federal insurer’s obligation to pay the non-compliant claim.

Because the Ferraros’ additional claim for $320,436.55 was neither signed nor sworn-to, it cannot serve as a proof of loss under the plain terms of the SFIP.

The Fifth Circuit held that a second proof of loss was necessary for the Ferraros to perfect their claim. Therefore, the district court properly granted summary judgment for Liberty Mutual.

ZALMA OPINION

Insurance policies issued by insurers not part of the NFIP also contain similar proof of loss conditions. However, they are not strictly construed because substantial compliance is enough when the money expended belongs to a profit making insurer while a NFIP policy  impacts money from the Treasury.

It seems to me that contract terms agreed to at the time the contract is made should be enforced if they are clear and unambiguous. Courts that extend the sixty day proof of loss requirement if there is evidence of “substantial compliance” are saying that the contract term is unimportant and need not be enforced except where money from the Treasury is involved. The language is the same and the contracts should be enforced the same.

A Government funded “insurance” program should never be more equal than a private insurance program.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

When is a Policy of Insurance Made?

Acceptance of Offer Effects Insurance

Insurance, like every other contract, is formed when there is an offer made, that offer is accepted, and consideration (payment or a promise to pay premium) is given.

In a diversity action, a federal court must apply the choice-of-law rules of the forum state. The parties agree that Florida’s rule of lex loci contractus governs the Court’s choice-of-law determination in this contract dispute. This rule provides that the law of the jurisdiction where the contract was executed governs the rights and liabilities of the parties in determining an issue of insurance coverage. In Sun Capital Partners, Inc. v. Twin City Fire Insurance Company, Inc., Slip Copy, 2015 WL 4648617 (S.D.Fla., 8/5/15) the District Court for the Southern District of Florida was asked to apply Florida law while the insurers concluded the contracts were effected in New York and its law should apply.

THE ISSUE

The determination of where a contract was effected is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done. The parties take differing views on where the “last act” necessary to complete Plaintiff’s insurance contracts occurred. Stressing the Eleventh Circuit’s reliance on “communication of the acceptance,” Defendant argued that the last act necessary to create a contract was the insurers’ agents’ communication of acceptance of Plaintiff’s agent’s order to bind coverage. Because acceptance was communicated from New York (to one of Plaintiff’s agents who was also in New York), Defendant argues that New York law applies. On the other hand, Plaintiff argues that the last act was the delivery of the subject policies to Plaintiff at its place of business in Florida.

FACTS: COMMUNICATION OF ACCEPTANCE

Plaintiff Sun Capital assigned the duty of purchasing its insurance policies to its national insurance broker, Marsh Inc. Underwriting for the excess policy (Twin City) was handled by the Hartford. Underwriting for the primary policy (Houston Casualty Company) was handed by Professional Indemnity Agency, Inc.

The circumstances surrounding the excess policy (Twin City) appear in the record first. On December 28, 2007, Raymond Ash, a Marsh agent located in New York, emailed Ho–Tay Ma, a Hartford agent located in New York, as follows: “Thanks for all your help with this account. Please consider this e-mail as the formal order to bind coverage for Sun Capital’s renewal GPL coverage as follows: [discussing applicable limits, period, and terms]…. Please forward the formal binders or confirmation of binding as soon as possible.” From his New York office, Mr. Ma responded to Mr. Ash’s email as follows: “Based upon the information provided regarding the above captioned account, we are pleased to provide you with the following Binder for Insurance on behalf of Twin City Fire Insurance Company.” Apparently, Mr. Ma emailed a copy of the binder to Mr. Ash in New York, as well as to two Marsh agents located in Florida.

The binding of the primary policy (Houston Casualty Company) was handled the same manner. On December 28, 2007, Jennifer Hickox, a Professional Indemnity agent, emailed Mr. Ash as follows: “In accordance with your instructions, we are binding Private Equity Professional Insurance as follows [listing applicable limits, period, and terms].”

Ms. Hickox was a Vice President for Professional Indemnity, and her business address was listed in her email as in Mount Kisco, New York. Ms. Hickox’s email does not indicate that it was sent to anyone other than Mr. Ash in New York.

These documents show that both Plaintiff’s primary and excess insurance policies were executed in materially similar ways.

Plaintiff’s agent, March Inc., emailed the insurer’s agent an offer to purchase insurance by submitting a “formal order to bind coverage.” Next, the insurer’s agent accepted that offer and issued a binder for coverage from an office in New York. This acceptance was effective at the time—and at the place—where it was dispatched, i.e., New York.

The insurer’s agent’s acceptance of Plaintiff’s agent’s offer to purchase insurance was the last act necessary to complete the insurance contract. The fact that only binders were initially exchanged, and not the actual policies, does not alter the conclusion that Plaintiff’s agent offered to purchase insurance coverage, specifying the terms of the policy, and the insurer’s agent issued an acceptance based on those terms.

CONCLUSION

Based on the foregoing, the Court concluded that the last act necessary to create an insurance contract occurred in New York when the insurers’ agents accepted Plaintiff’s agent formal offer to bind coverage.

Whatever merit might exist for the adoption of a rule in Florida that the locus contractus of an insurance policy always be the place where it is delivered, as it stands now, the determination of where a contract was executed is fact-intensive, and requires a determination of where the last act necessary to complete the contract was done.

Where the facts indicate that a fully consummated contract existed prior to delivery of the policy, the last act for contract formation may be found prior to delivery and the court concluded that the contract was formed when the offer was accepted and a binder ordered.

ZALMA OPINION

A binder is evidence of an insurance policy to be delivered at a later date. The issuance of a binder means there is a contract and that is why the court chose New York law for the case. In Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, 345 F.3d 154 (2d Cir. 09/26/2003) the Second Circuit concluded that a binder is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance.

Thus, a binder is a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. While not all of the terms of the insurance contract will be set forth in the binder, a binder is nevertheless a fully enforceable present contract of insurance.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

We’re Back

My ISP’s server went down and I could post nothing for two days.

I will post articles tomorrow.

Sorry I had nothing for you today.

 

Posted in Zalma on Insurance | 4 Comments

How a Court Changed Parties Positions to Do Justice

MCS-90 Requires Coverage for Any Vehicle Used by the Insured

Courts dealing with insurance issues often find that a logical and simple technical defense can avoid the entire lawsuit. Others believe, as did the District Court of the Northern District of Alabama, in Fowler v. Canal Ins. Co., Slip Copy, 2015 WL 4656474 (N.D.Ala., 8/6/2015), that it is the duty of the court to resolve disputes and dispense justice.

FACTUAL BACKGROUND

The Fowler declaratory judgment action concerns insurance coverage issues relating to a traffic accident. Plaintiffs Larry and Julie Fowler and their two children were traveling in a pickup truck when their truck collided with a 1999 Kenworth tractor-trailer truck. Defendant Gannon Derek Sanders was driving the tractor-trailer truck. Mr. and Mrs. Fowler and their two children sustained injuries in the accident. The Fowlers allege that defendant Todd Hauling, Inc. owned the tractor-trailer that Mr. Sanders was operating and that defendant Gerald Todd owns Todd Hauling.

Defendant Canal Insurance Company issued a commercial automobile insurance policy to Todd Hauling. The Fowlers allege that the Canal policy provides coverage for specifically described vehicles, and the 1999 Kenworth involved in the accident is not among the vehicles listed in the policy. The Fowlers also contend that the Canal policy provides coverage for specifically described drivers, and Mr. Sanders is not among the drivers identified in the policy.

Despite these allegations, the Fowlers assert that Canal must provide coverage to Todd Hauling, Mr. Todd, and Mr. Sanders for any claims that the Fowlers assert against the three parties concerning the traffic accident because Canal’s policy includes an MCS–90 Endorsement.

The Endorsement, required under the Motor Carrier Act of 1980, makes the insurer liable to third parties for any liability resulting from the negligent use of any motor vehicle by the insured, even if the vehicle is not covered under the insurance policy.

The Fowlers originally filed this declaratory judgment action seeking a declaration of the rights and obligations under a Commercial Automobile Policy issued by Canal to Todd Hauling. Todd Hauling, Mr. Sanders, and Mr. Todd filed a cross-claim against Canal. The cross-claim plaintiffs seek a declaration that Canal has a duty under the policy that it issued to Todd Hauling to provide a defense in the Fowlers’ underlying state court action.
Canal filed a motion to dismiss.

DISCUSSION

Canal’s Motion to Dismiss

Canal argues that the Court should dismiss the Fowlers’ claims against the company because the Fowlers are not insureds under Todd Hauling’s policy, and under Alabama law, an injured party may not file a direct action against an insurer until the injured party secures a judgment against the insured. Under Alabama’s Direct Action statute, an “injured party … can bring an action against the insurer only after he has recovered a judgment against the insured and only if the insured was covered against the loss or damage at the time the injured party’s right of action arose against the insured tortfeasor.” Maness v. Ala. Farm Bureau Mut. Cas. Ins. Co., 416 So.2d 979, 981–82 (Ala.1982) (citing Ala.Code § 27–23–1, et seq. (1975)).

If the Fowlers’ claim against Canal was the only claim in this action and if the Court were to find that the Fowlers’ claim was an impermissible direct action, the Court would grant Canal’s motion to dismiss. Here, though, in their cross-claim, defendants/cross-claim plaintiffs Todd Hauling, Mr. Todd, and Mr. Sanders have demanded coverage under the Canal policy for the Fowlers’ underlying state court action. Consequently, the Court realigned the parties in this action to reflect their interests in the litigation.

The Court concluded, therefore, that regardless of the the allegations in the complaint and cross-claims, that Todd Hauling, Mr. Todd, and Mr. Sanders are plaintiffs in this declaratory judgment action, and the Court regards Canal and the Fowlers as defendants in this declaratory judgment action.

Federal courts are required to realign the parties in an action to reflect their interests in the litigation. That was done.

ZALMA OPINION

It took the Fowlers lawsuit to wake up Todd Hauling, Mr. Todd and Mr. Sanders that their insurance company was not treating them fairly. As a result of the suit brought by the Fowlers, who clearly were not insured by Canal and who had no right to sue it directly, convinced Todd Hauling, Mr. Todd and Mr. Sanders to join the suit against Canal. As a result, although standing alone the Fowlers suit should have been dismissed, the court realigned the parties to put them in a position where justice could be done.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why A Claimant Can Not be a Third Party Beneficiary of an Insurance Policy

An Insurer Can Only Act in Bad Faith to Its Insured

A third party claimant whose damage was remediated by the insurers for the tortfeasor causing injury to their property sued the insurers for bad faith because, in the plaintiff’s opinion, they did not act fast enough or generous enough. Proving that no good deed goes unpunished, the plaintiffs, claiming to be third party beneficiaries of the third parties’ insurers, sued the insurers for bad faith and sought tort damages against the insurer. In Ross v. Lowitz, — A.3d —-, 2015 WL 4643775 (N.J., 8/6/2015) the New Jersey Supreme Court was called upon to resolve the dispute and determine if the plaintiffs had standing to sue the insurers.

FACTS

John and Pamela Ross, who allege that their residence was damaged by the migration of home heating oil from a leaking underground oil storage tank sued the owners of the property where the underground storage tank. Plaintiffs also sued the insurers who provided homeowners’ coverage to the former owners of the neighboring property, asserting a claim for breach of the implied covenant of good faith and fair dealing, in addition to claims for nuisance and trespass.

After plaintiffs instituted their action and following their filing of an order to show cause, two of the defendant insurers conducted a remediation of the contamination on plaintiffs’ property. The trial court granted summary judgment dismissing plaintiffs’ claims against the defendant property owners and their insurers. The Appellate Division affirmed that determination.

Plaintiffs claimed that they were third-party beneficiaries of the insurance contracts between the insurers and their insureds, and alleged that the insurers violated the covenant of good faith and fair dealing. Plaintiffs sought remediation, damages for the alleged loss of the use of their home, and damages for the alleged diminution in the value of their property.

The trial court granted all defendants’ summary judgment motions. With respect to State Farm and NJM, the trial court held that because plaintiffs were not parties to the insurance contracts at issue, they had no standing to recover the policy proceeds, and that public policy did not mandate that a third party be deemed the intended beneficiary of the insurance company’s contractual duty to its insured to act in good faith with respect to a settlement.

State Farm and NJM argued successfully that in the absence of an assignment of rights under their contracts with their insured, or an intent on the part of the parties to the contract to designate plaintiffs as third-party beneficiaries of the contract, plaintiffs may not pursue a bad faith claim against the insurers. They contend that plaintiffs had no “special relationship” with the insurers that would justify the imposition of liability for a breach of the covenant of good faith and fair dealing. State Farm also counters plaintiffs’ contention that in the absence of a direct claim, no party will be responsible for the damage to their home.

ANALYSIS

As a general rule, an individual or entity that is “a stranger to an insurance policy has no right to recover the policy proceeds.” Gen. Accident Ins. Co. v. N.Y. Marine & Gen. Ins. Co., 320 N.J.Super. 546, 553–54 (App.Div.1999) (citing Biasi v. Allstate Ins. Co., 104 N.J.Super. 155, 159–60 (App.Div.), certif. denied, 53 N.J. 511 (1969)). In the absence of an assignment, plaintiffs assert that they are third-party beneficiaries to the insurance contracts executed by Lowitz and her insurers, State Farm and NJM, and that the insurers breached that duty by delaying the remediation of plaintiffs’ residence.

When a court determines the existence of “third-party beneficiary” status, the determining factor as to the rights of a third party beneficiary is the intention of the parties who actually made the contract. Thus, the real test is whether the contracting parties intended that a third party should receive a benefit which might be enforced in the courts; and the fact that such a benefit exists, or that the third party is named, is merely evidence of this intention. If there is no intent to recognize the third party’s right to contract performance, then the third person is only an incidental beneficiary and has no contractual standing.

An insurer’s duty of good faith and fair dealing, however, has never been applied in New Jersey to recognize a bad-faith claim by an individual or entity that is not the insured or an assignee of the insured’s contract rights. The right of the assured to recover against the insurer for its failure to exercise good faith in settling a claim within the limits of a liability policy is predicated upon the potential damage to the assured in being subjected to a judgment in excess of her policy limits and the consequent subjection of her assets to the satisfaction of such judgment. The damage is peculiarly to the assured by reason of a breach of an implied condition of the policy contract. The injured third party is a stranger in that sense.

It is a fundamental premise of contract law that a third party is deemed to be a beneficiary of a contract only if the contracting parties so intended when they entered into their agreement. Here, there is no suggestion in the record that the parties to the insurance contracts at issue had any intention to make plaintiffs, then the neighbors of the insured, a third-party beneficiary of their agreements. Nor does the migration of oil from Lowitz’s property to plaintiffs’ residence retroactively confer third-party beneficiary status on plaintiffs. The insurers’ duty of good faith and fair dealing in this case extended to their insured, not to plaintiffs.

There is, in short, no basis for plaintiffs’ bad-faith claims against State Farm and NJM, as insurers of Lowitz in this case.

ZALMA OPINION

Everyone who is damaged looks to the deep pocket of insurance companies to make them whole or to profit, by means of punitive damages, from the tort action. In this case the plaintiffs tried to get damages from the insurers of the people who damaged the plaintiffs’ property. In bringing this action the plaintiffs failed to accept the fact that insurance is a contract of personal indemnity. Since there was no evidence that the insurance was taken out to benefit anyone other than those named in the policy. The tort of bad faith was created to protect persons insured against bad acts by their insurers not failing to give third party claimants what they want.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

How to Lose Coverage as an Additional Insured

Failure to Prove Contract Can Be Fatal

Insurance is always a contract. To obtain the benefits of the contract of insurance it is necessary to comply with the conditions set forth in the policy. Vendors of products usually seek to be named as an additional insured in the liability insurance protecting the manufacturer. Broad form additional insured endorsements automatically make a vendor an additional insured if the vendor and manufacturer meet certain simple conditions.

In Geraczynski v. National R.R. Passenger Corp., Slip Copy, 2015 WL 4623466 (D.N.J.,7/31/2015) the District Court for the District of New Jersey was faced with among many other things, a motion by an insurer to dismiss a declaratory relief action from an entity claiming to be an additional insured because of the failure of the putative additional insured to prove the existence of a contract between it and the manufacturer.

BACKGROUND

The core of this product liability action concerned allegations of a defectively manufactured chair, which failed and collapsed, resulting in injuries to Plaintiff William Geraczynski.

Plaintiff settled his claims against all Defendants, with the product manufacturer, Oasyschair, bearing full responsibility for the settlement. Left unresolved were Defendants’ cross-claims against each other for indemnification. Of interest to me was the Third–Party Defendant Columbia Casualty Co.’s (“Columbia”) motion to dismiss the vendor, SAFCO’s, third-party claim for a declaration of insurance coverage; and SAFCO’s motion for summary judgment on its declaratory judgment claim for coverage.

DISCUSSION

Defendant SAFCO filed a Third–Party Complaint against Columbia, asserting a single claim for insurance coverage. SAFCO claims it is entitled to coverage as an additional insured under a commercial general liability policy issued by Columbia to Oasyschair.

Columbia has moved to dismiss that claim pursuant to Rule 12(b)(6), arguing that no relief can be granted because the Third–Party Complaint has failed to set forth that SAFCO meets a condition precedent to coverage under the policy’s additional insured endorsement. SAFCO opposed the motion, and filed its own motion seeking summary judgment on the claim, asserting that there are no genuine issues of fact that it is entitled to coverage.

The policy contains an endorsement that provides coverage to vendors for losses relating to “all products insured under this policy.” The endorsement does not name any particular vendor but rather identifies an additional insured according to the following terms: “as required by written contract or agreement executed prior to the occurrence.”

Columbia argued that SAFCO cannot meet the requirements for coverage because it has failed to produce a contract between SAFCO and Oasyschair which required Oasyschair to provide insurance coverage and/or name it as an additional insured in any applicable commercial general liability policy.

The declaratory judgment claim asserted by SAFCO, asserting its entitlement to insurance coverage, alleges a loss falling within the Oasyschair policy and further alleges that SAFCO and its parent company Liberty are additional insureds under the policy per the vendor’s endorsement. It also avers that “prior to the date of the incident that is the subject matter of this litigation, SAFCO/LIBERTY entered into an agreement with Oasyschair as a downstream distributor of the chair manufactured by Oasyschair.” The Third Party Complaint contains a factual allegation, which, taken as true, establishes that SAFCO and Liberty meet the endorsement’s terms for coverage as additional insureds. These allegations suffice to state a plausible claim for relief, that is, a declaration that SAFCO is entitled to coverage. Columbia’s argument regarding the absence of a contract or agreement in the record goes to SAFCO’s ability, or lack thereof, to prove the allegation.

The vendor’s endorsement at issue here states that, for the endorsement to apply, there must be a “written contract or agreement executed” which requires policyholder Oasyschair to name the vendor in question as an additional insured. SAFCO contends that the endorsement accepts either a “written contract” or “agreement” as sufficient to trigger coverage, and thus the Court should consider the parties’ course of dealing to determine whether such an agreement was in place. At the very least, according to SAFCO, the endorsement contains an ambiguity as to whether an agreement must be in writing, and the court should resolve that ambiguity in favor of the insured.

SAFCO’s argument implies that the word “written” qualifies only the word “contract” but not “agreement,” as a different interpretation would render use of the generally interchangeable terms redundant.

The flaw in SAFCO’s argument, however, is that the vendor’s endorsement also uses the term “executed” to describe the kind of “written contract or agreement” required to secure additional insured status under the Oasyschair policy with Columbia.  The meaning of “execute,” signifying the act of formalizing the agreement by signing, is the only one that makes sense in the context of the insurance contract and vendor’s endorsement.

SAFCO bears the burden of proof on its claim against Columbia for insurance coverage, but it has not come forward with a written contract or signed agreement to establish that it is an additional insured. SAFCO has failed to demonstrate that it is entitled to a declaration of insurance coverage as a matter of law.

The Court concluded that even if it were to find the language of the vendor’s endorsement ambiguous, and construe it in SAFCO’s favor to mean that an unwritten agreement for additional insured coverage would suffice, SAFCO would not have established that summary judgment on the insurance coverage claim is warranted. SAFCO argues that the course of dealing between Oasyschair and SAFCO establishes that an agreement exists but fails to provide evidence to establish such an implied contract-in-fact. The certificate states that “SAFCO Products Company is named as an additional insured per broad form vendors endorsement where required by writ [sic] contract or agreement.” This may constitute relevant evidence on the insurance coverage claim but does not establish SAFCO’s entitlement to judgment on the claim as a matter of law.

Because SAFCO failed to satisfy the burden for summary judgment on its claim against Columbia, its motion has placed before the Court those parts of the record pertinent to the claim. Upon searching the record, the Court concludes that no reasonable juror could find in SAFCO’s favor on the insurance coverage claim, making summary judgment appropriate in favor of Columbia pursuant to Rule 56(f)(1).

Accordingly, SAFCO’s motion for summary judgment on the third-party claim against Columbia must be denied, and the Court will grant Columbia summary judgment SAFCO’s insurance coverage claim pursuant to Rule 56(f)(1).

CONCLUSION

For the reasons discussed, SAFCO’s motion for summary judgment on its Third–Party Complaint against Columbia was denied, and summary judgment in favor of Columbia on the insurance coverage claim brought by SAFCO was granted.

ZALMA OPINION

I have written to exhaustion that it is necessary to read the entire contract of insurance before making a decision with regard to the availability of insurance. SAFCO could easily have proven its right to coverage by submitting a contract between it and the manufacturer requiring the manufacturer to name SAFCO as an insured. Since no such contract existed SAFCO tried to rewrite the words of the policy and failed. The lesson: do it right the first time and avoid 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 Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why it’s Important to Select A Forum

Court Applies Choice of Law Agreement of Insured & Insurer

Insurance law is not constant across the United States. Some jurisdictions are more favorable to insurers, under certain circumstances, than others. It is prudent, therefore, when an insurer accepts a major exposure to loss, to select the jurisdiction where any disputes will be resolved.

Courts will, as a general practice, support the decision of the parties and their choices, especially when the parties are both sophisticated and have equal power. In H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., Slip Copy, 2015 WL 4608118 (W.D.Pa., 7/31/2015) the District Court for the Western District of Pennsylvania was asked to determine which state’s law should apply to the dispute between the insurer and the insured.

FACTS

This case centers on an insurance coverage dispute between Plaintiff, H.J. Heinz Company (“Heinz”), a Pennsylvania corporation, with its principal place of business in Pittsburgh, Pennsylvania, and its insurance provider, Starr Surplus Lines Insurance Company (“Starr”), an insurer incorporated in the State of Texas, with its principal place of business in New York, New York.

Both Parties seek a declaration from this Court as to Starr’s obligations under the Parties’ Product Contamination Insurance Policy, and Starr moves this Court to find that the Policy should be rescinded. Presently at issue is whether the substantive laws of the Commonwealth of Pennsylvania or the State of New York apply to this litigation. The Court has provided the Parties with an opportunity to address this issue and the matter is ripe and ready for disposition. After review of these documents and the Parties’ Product Contamination Insurance Policy.

Choice of Law Provisions in the Parties’ Product Contamination Insurance Policy

The Product Contamination Insurance Policy addresses the Parties’ intention as to the choice of law in Section 5.10, which reads as follows: “5.10 Choice of Law and Forum ¶ The construction, validity, and performance of this Policy will be governed by the laws of the State of New York. The Insurer and the Insured hereby expressly agree that all claims and disputes will be litigated in the Supreme Court of the State of New York in and for the County of New York or in the U.S. District Court for the Southern District of New York.”

This provision is contained within a 19–page document entitled Product Contamination Insurance, for the period of insurance from July 1, 2014, through July 1, 2015. The choice of law provision appears on the Declaration Page of the policy under the “Law” heading as well as the body of the policy. Both declare the law applied to the Policy will be that of “The Supreme Court of The State of New York.”

The only other potentially applicable provision between the Parties as to the choice of law is contained within a Service of Suit Endorsement, also effective July 1, 2014, which provides, that Starr will acknowledge the jurisdiction of any court where a suit is brought by the insured but does not state it is a modification of the choice of law provision.

The Policy, including the Section 5.10 and the Service of Suit Endorsement, is unambiguous, but the Parties disagree as to the interpretation of Policy and dispute the effect, if any, of the Service of Suit Endorsement upon the Parties’ Choice of Law clause.

DISCUSSION

At the threshold, the Court must determine whether the Service of Suit Endorsement supersedes or significantly modifies Section 5.10 Choice of Law and Forum. Before undertaking such review, the Court determined that the Service of Suit Endorsement does not supersede or modify the Choice of Law provision.

The plain language of the Parties’ Service of Suit Endorsement sets forth that Starr will consent to the jurisdiction of any Court chosen by Heinz and, additionally, that any dispute in the chosen forum would be conducted “in accordance with the law and practice of such Court.”  The Court found that the phrase “in accordance with the law and practice of such Court” does not imply that the substantive laws of the chosen forum also control. Instead, this language merely details the permissive suit provision, and does not modify the unambiguously expressed intent of the sophisticated business Parties that “[t]he construction, validity and performance of this Policy will be governed by laws of the State of New York.”

Clearly the Parties intended to have the substantive laws of the State of New York apply to any legal dispute. New York, the Parties’ chosen State for the Choice of Law provision, has a substantial relationship to both the Parties and the transactions at issue and there is a reasonable basis for the Parties to have elected that New York substantive laws control.

The standard for rescission in Pennsylvania is more stringent than that of New York because Pennsylvania’s standard imposes a burden on a party to demonstrate that the insured knew the representation at issue was false when it was made or the insured made the representation in bad faith. New York State does not have a similar scienter requirement for rescission. Rescission serves to protect an insurer from contractual obligations due under a policy that should not have issued. In this sense, New York has the strongest interest in this matter as Starr, who may be found liable under the insurance contract and has alleged that the Policy is not valid, is headquartered in New York, where the majority of the negotiations prior to issuance of the Policy occurred.

New York’s strong interest in the determination of whether the Insurance Policy should be rescinded implicates that Pennsylvania does not have a “materially greater interest” in this determination than New York and the Parties’ choice of law provision should be applied.
There is also a true conflict between New York and Pennsylvania law as to bad faith, in that Pennsylvania permits a party to recover punitive damages, attorneys’ fees, and interest from an insurer if a claim is denied in bad faith, while New York does not recognize a cause of action for bad faith denial of insurance claims.

In sum, the Parties contracted that legal disputes under the Product Contamination Policy would be governed by the substantive laws of the insurer’s state, New York. The Service of Suit Endorsement established that Heinz could file suit in any forum in the United States, but did not affect the application of New York’s substantive laws. There are no grounds to disturb the Parties’ valid contractual Choice of Law provision. Therefore, the substantive laws of the State of New York will apply to this litigation.

ZALMA OPINION

Because of the extreme exposure faced by the policy protecting Heinz against the expenses of product contamination, Starr insisted upon, and Heinz agreed, that all disputes about the policy would be decided by the substantive law of the state of New York because doing so would avoid the risk of a bad faith law suit and allow, if appropriate, recession for an innocent misrepresentation of material fact. If Starr can prove that the policy was acquired based upon a misrepresentation of material fact or concealment of material fact, Starr will be able to rescind the policy and avoid all exposure applying the law of New York where it might not succeed in Pennsylvania. Other insurers should consider including a choice of law provision in their policies when faced with a huge exposure and emulate the Starr plan.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Leave a comment

Why There is an Examination Under Oath

The EUO Is a Serious and Important Part of the Insurer’s Investigation

The attorney, insurance claims professional or investigator who conducts the EUO can take a role similar to the role of a prosecutor without the usual constitutional restraints controlling testimony at a deposition or trial. [Hickman v. London Assurance Corporation, 184 Cal. 524, 195 P. 45 (1920)] A false statement as to any material fact during the EUO can cause the policy to be declared void, even if the fact has no relationship to the loss.

In Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 94-95 (1884) the false testimony concerned a witness that would not affect the amount payable under the policy but to protect his reputation for veracity. The Supreme Court found that the witness of the injury was material to the investigation and declared the policy void for fraud because he made false statements under oath.

Contrary to the Belief of Lawyers for the Insured, the EUO Is Not an Adversary Proceeding like a Deposition in a Lawsuit.

The EUO is an investigative tool made available to the insurer. It allows the insurer to delve deeply and under oath into all aspects of the policy and the loss. The testimony to be elicited is not constrained by rules of discovery or the Codes of Civil Procedure.

The only restraint on the EUO is reasonableness. Unlimited questions are allowed. Only totally irrelevant and unreasonable questions dealing with facts completely outside the policy, its acquisition or the loss are not favored.

Irrelevant questions are tolerated if there is any possibility the question may lead to an inquiry about facts relevant to the policy or claim. In fact, there are no questions that are irrelevant in an EUO since each question may lead to more important information that could never have been learned about had not a foundation been laid by questions that appear, on their face, to be irrelevant. Since there are no rules for the taking of the EUO any question asked is important and must be answered.

In Ram v. Infinity Select Ins., 807 F.Supp.2d 843 (2011), during the investigation of the insured’s claim, the plaintiff produced limited records. Where an insurer has reason to suspect fraud in relation to a theft claim, inquiries into the insured’s financial status are relevant and material, and a refusal to answer questions on that subject constitutes a material breach of the insurance contract. Plaintiff refused to discuss his 2008 income at his EUO, and much of the income and employment information that he was willing to provide throughout the investigation of his claim is admittedly false. The Court found that Plaintiff’s failure to answer income questions constitutes a breach of the duty to cooperate, and no reasonable juror could find otherwise.

In Deguchi v. Allstate Ins. Co., Not Reported in F.Supp.2d, 2008 WL 1780271 (D.Hawai’I, 2008) a case where Plaintiffs’ testimony raised even more questions of possible motive, Plaintiffs prevented Allstate from further investigating and determining coverage under the Policy. Specifically, Deguchi refused to submit to a further EUO, and Plaintiffs’ attorney limited Scalas’ EUO to questions on the Princess Natasha, her loss, the two crew aboard her at the time of the loss, and her value. Under the specific circumstances of this case, the court found that Allstate’s requests for EUOs were reasonable as a matter of law. Deguchi, by refusing to allow a second EUO, and Scalas, by refusing to answer even basic questions, breached Plaintiffs’ duty under the Policy to “submit to examinations under oath” as reasonably required by Allstate. Because Plaintiffs’ refusal prevented Allstate from determining coverage under the Policy, Allstate had no duty to pay Plaintiffs under the Policy.

Similarly, in Powell v. United States Fid. & Guar. Co., 88 F.3d 271 (4th Cir.1996), the insureds’ home was destroyed by fire. Under their homeowners’ insurance policy, the insureds were required to “submit to questions under oath and sign and swear to them.” Powell, 88 F.3d at 272. During the EUO, the insureds refused to answer several questions and “to turn over financial and other documents,” claiming that an EUO did not permit the insurer to “delve into financial or other information relating to the [insureds’] possible motives to intentionally set the fire … but … [was] instead limited … to an examination relating to the existence and extent of loss under the policy.” The United States Court of Appeals for the Fourth Circuit disagreed, stating that an EUO “encompasses investigation into possible motives for suspected fraud.” Concluding that the EUO “is not restricted to amount of loss, but the insurer has the right to examine the insured and his witnesses as to any matter material to the insurer’s liability and the extent thereof.” Therefore, in Phillips v. Allstate Indemn. Co., 156 Md.App. 729, 848 A.2d 681 (2004) and Lindsey v. State Farm Fire and Cas. Co., Not Reported in F.Supp.2d, 2000 WL 1597763 (D.Md., 2000) under the facts and circumstances of the case, the refusal to answer questions about his financial circumstances during the EUO violated the terms of the policy and constituted a failure to cooperate.

In Michigan, in the context of a homeowner’s insurance policy, that the remedy for failing to comply with a requirement to submit to an EUO is dismissal of the insured’s action. Thomson v. State Farm Ins. Co., 232 Mich.App. 38, 45, 592 N.W.2d 82 (1998); Yeo v. State Farm Ins. Co., 219 Mich.App. 254, 257, 555 N.W.2d 893 (1996). The court saw no reason to distinguish between a valid EUO in a homeowner’s insurance policy and a valid EUO in a policy providing uninsured motorist benefits. An insurance policy is much the same as any other contract; it is an agreement between the parties. Because the no-fault statute does not require uninsured motorist benefits, there is no public policy against enforcing the EUO provision in this context, and we must honor the intent of the parties’ contract. [Cruz v. State Farm Mut. Auto. Ins. Co., 241 Mich.App. 159, 614 N.W.2d 689 (2000)].

The EUO Should Be Required by an Insurer:

■          When the insured has insufficient documentary evidence to prove his loss.

■          When the insured refuses to cooperate in the investigation of the insurer.

■          When the insured is unable to present documentary evidence in support of his or her claim.

■          When the Insured needs help proving his or her loss.

■          When the insurer has no other means of “cross examining” the proof of loss submitted by the insured.

■          When the insurer witnesses a fraudulent claim is being attempted.

The list of reasons for requiring an EUO are not the only reasons but a small list of potential reasons for an EUO.

When an insurance professional, whether an adjuster or a lawyer, finds a claim poses questions that cannot be answered by the usual and common methods of investigating a claim, it is important to consider the use of the EUO to get the answers not available anywhere else.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 2 Comments

Why Failure To Read Policy Hurts Both Insured and Insurer

Per Claim Deductible Defeats Cover for Bad Faith Suit

It sees to me that no one reads an insurance policy until a claim is made. Even insurers fail to read or apply the terms and conditions of the policy to the facts of a loss. In Western Heritage Ins. Co. v. Asphalt Wizards, — F.3d —-, 2015 WL 4569127 (C.A.8 (Mo.) 7/30/2015) both the insured and insurer seemed to avoid reading the terms and conditions of the policy before the insurer asserted its rights.

FACTS

Western Heritage Insurance Company (Heritage) was a Commercial general liability (CGL) for Asphalt Wizards (Asphalt) who, after defending Asphalt for four years, sued its insured and the company that had filed a class action lawsuit against Asphalt for allegedly sending unsolicited faxes in violation of the federal and state law. Heritage sought a declaration that it had no duty under the policies to defend or indemnify Asphalt in the underlying lawsuit. The company suing Asphalt brought counterclaims against insurer for supplementary payments, vexatious refusal to pay, and attorney fees. The trial court dismissed the counterclaims and found Heritage had no duty to indemnify Asphalt.

Asphalt , a parking-lot repair business, hired a company to fax advertisements to potential customers. From 2005 until 2008, more than 44,000 faxes were sent on Asphalt’s behalf. Fun Services of Kansas City (“Fun Services”), which received some of these faxes, filed a class-action petition in Missouri state court alleging that (1) Asphalt Wizards violated the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227, by sending these faxes, and (2) that Asphalt Wizards committed conversion by commandeering the recipients’ fax machines. For the alleged TCPA violations, Fun Services and the class are seeking statutory damages of $500 for each fax.

Shortly after the lawsuit was filed, Asphalt notified its insurer, Heritage  about it.  Heritage had insured Asphalt through three sequential, year-long policies from May 18, 2004 until May 18, 2007, the time frame when roughly 33,000 of the faxes were sent. The policies covered property damage and personal and advertising injury. Each of the policies also contained a deductible endorsement that provided for a $1,000 “per claim” deductible amount for property damage and for personal and advertising injury. This deductible amount applied to “all damages sustained by one person or organization as the result of any one claim” as well as to “legal expenses incurred in the handling and investigation of each claim.”

Heritage responded to Asphalt’s request for coverage. Heritage reminded Asphalt of its policy limits, including the $1,000 deductible amount, and stated that Heritage had hired a law firm to represent Asphalt.  Heritage sent a second letter, four years later, to Asphalt  styled a “supplement” to the prior one, stated that Heritage now intended to defend Asphalt subject to a reservation of rights.

Heritage filed this action against Asphalt  and Fun Services seeking a declaration that it owed no duty to defend and no duty to indemnify in connection with the class-action lawsuit. With respect to the duty-to-indemnify issue, the court found that Heritage had waived its defenses to coverage by waiting four years to issue a reservation-of-rights letter. However, the court concluded that Heritage did not waive the deductible endorsements.

DISCUSSION

Heritage’s Duty to Indemnify

The key issue presented to the Eighth Circuit was Heritage’s duty to indemnify Asphalt. In granting summary judgment to Heritage, the district court determined that Heritage had waived its defenses to coverage by failing to issue a timely reservation of rights, that the deductible endorsements were not a defense to coverage, and that because no “claim” could exceed the $1,000 deductible amount, Heritage did not have a duty to indemnify.

Summary judgment is proper only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fun Services first argues that the deductible endorsements amount to a defense to coverage and that because the district court found that Heritage waived its defenses to coverage, it necessarily waived the application of the deductible endorsements as well.

Under Missouri law, an insurer’s failure to mention a policy limit—i.e., the maximum amount of coverage—in a letter denying coverage does not preclude the insurer from later asserting that policy limit. A contrary rule would create coverage where none existed under the policy in the first place. Fun Services asks us to characterize the deductible endorsements as a defense to coverage, meaning that they can be waived. The deductible endorsements function as an apportionment of loss between the insurer and the insured.

Allowing the  deductible endorsements to be waived would, like barring an insurer from asserting policy limits, create coverage where none existed under the policy in the first place. As a result the Eighth Circuit agreed with the district court that Heritage did not waive its ability to enforce the deductible endorsements.

The district court determined that the term “claim” as used in the policy unambiguously connotes that the $1,000 deductible amount applies separately to each fax. The district court reasoned that damages and legal expenses from one fax could not exceed $1,000.
Although Fun Services’ briefs assert that a reasonable person could adopt this broader interpretation of “claim,” Fun Services fails to take the additional and necessary step of demonstrating a genuine dispute for trial about whether a class member actually received more than one fax in a policy year.

Fun Services has failed to come forward with specific facts showing that there is a genuine issue for trial. Even if an ordinary person could define “claim” to include multiple faxes sent to one class member during a policy year, Fun Services has not raised a genuine dispute of material fact about whether any class member received more than one fax in a policy year.

As a result, the grant of summary judgment to Western Heritage on the duty-to-indemnify issue was appropriate.

ZALMA OPINION

Heritage took four years to realize that the most that could be asserted against its insured, Asphalt, per claim was $500 a sum half the amount of the deductible. If it had conducted a thorough investigation and review of the policy before accepting the defense it would have saved four years of attorneys fees. If Asphalt had read the policy it would not have agreed to a per claim deductible but would have insisted on a per annum deductible.  Had Heritage properly reserved its rights it could have recovered the money it paid to defend the insured. The lesson: “read the policy before you buy it” and “read the policy before you provide a defense.”

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why Failure To Read Policy Hurts Both Insured and Insurer

Insurance Fraud Undeterred

Zalma’s Insurance Fraud Letter

August 1, 2015

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

The current issue of ZIFL reports on:

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

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

“INSURANCE FRAUD – AN OVERVIEW”

A Continuing Education Presentation

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

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

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

I hope you find it interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

NEW FROM THE AMERICAN BAR ASSOCIATION

Diminution in Value Damages

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

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

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

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

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

BARRY ZALMA

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

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

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

Posted in Zalma on Insurance | Comments Off on Insurance Fraud Undeterred

Insurance Fraud – An Overview

A Continuing Education Presentation for Insurance Professionals

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

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

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

I hope you find it interesting and informative.

Posted in Zalma on Insurance | Comments Off on Insurance Fraud – An Overview

How to Lose A Judgment by Taking an Assignment

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

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

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

FACTS

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

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

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

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

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

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

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

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

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

COVERAGE EXCLUSION

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

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

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

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

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

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

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

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

BAD FAITH CLAIMS

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on How to Lose A Judgment by Taking an Assignment

A Horse is a Horse, of Course

A Horse is Not “Mobile Equipment”

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

FACTS

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on A Horse is a Horse, of Course

No Nonsense Application of Plain Meaning of Exclusion

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

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

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

FACTS

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

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

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

THE POLICIES

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

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

ANALYSIS

A motion for summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law. The court must view the evidence in the light most favorable to the party against whom summary judgment was granted.

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on No Nonsense Application of Plain Meaning of Exclusion

How to Defeat an Arson for Profit Attempt

Suspected Arsonist’s Bad Faith Suit Fails

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

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

Factual Background

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

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

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

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

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

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

ANALYSIS

Summary Judgment

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

Count Two (fraud and suppression)

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

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

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

Fraud

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

Count Four (bad faith)

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Defeat an Arson for Profit Attempt

Crime Doesn’t Pay

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

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

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

FACTS

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

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Insurance & The Absolute Litigation Privilege

Lawyers Are Obligated To Vigorously Defend Their Clients

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

BACKGROUND

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

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

OPINION

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

The Present Action

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

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

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

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

ANALYSIS

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

Absolute Attorney Litigation Privilege

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

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Insurance & The Absolute Litigation Privilege

Why Insurance is Expensive

Statutes to Protect Consumers Not Intended to Allow Insureds to Profit

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

FACTS

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why Insurance is Expensive

Can Murder Ever Be Accidental?

Tenant is Not an Insured

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

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Can Murder Ever Be Accidental?

How to Lose Auto Coverage Without Trying

Insurable Interest Required for Coverage to Apply

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

FACTUAL BACKGROUND

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

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

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

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

INSURANCE COVERAGE

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

ANALYSIS

Insurance policies are contracts and, in the absence of an applicable statute, are subject to the same contract construction principles that apply to any other species of contract.  It is the obligation of a court to enforces contracts according to their terms. People have the liberty of contracting terms they desire. A contract’s terms are given their plain and ordinary meanings. However, no-fault insurance policies must be construed in a manner that complies with the no-fault act.

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on How to Lose Auto Coverage Without Trying

How to Obtain Coverage for Malicious Prosecution

Court Determines When Malicious Prosecution Arises

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

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

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

THE COVERAGE DISPUTE

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

INVESTIGATION AND CRIMINAL PROCEEDINGS

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

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

MR. ELKINS CIVIL SUIT

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

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

BARBERTON’S INSURERS AND THE INSTANT DISPUTE

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Obtain Coverage for Malicious Prosecution

How to Lose an Insurance Coverage Case

Insured Has Burden to Establish Coverage

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Lose an Insurance Coverage Case

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

Win Some, Lose Some

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

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

FACTUAL BACKGROUND

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

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

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

DISCUSSION

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

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

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

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

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

Plaintiffs’ Claim for Punitive Damages Is Insufficient

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

Plaintiffs May Be Entitled to Attorneys’ Fees

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How to Plead a Consumer Fraud Case for Denial of a Claim

Zalma’s Insurance Fraud Letter – July 15, 2015

 Prosecutions Continue for Perpetrators of Health Insurance Fraud

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – July 15, 2015

Is Breach of Contract Required for Bad Faith?

Payment of Appraisal Award Fulfills Policy Promises

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

BACKGROUND

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

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

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

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

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

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

ANALYSIS

Plaintiffs allege that Defendant’s “failure and/or refusal … to pay adequate compensation,” constitutes a breach of Defendant’s insurance contract with Plaintiffs. Defendant argues that Defendant’s prompt payment of the appraisal award to Plaintiffs fulfills Defendant’s contractual obligations under the Policy and precludes Plaintiffs’ claim for breach of contract. “Under Texas law, when an insurer makes timely payment of a binding and enforceable appraisal award, and the insured accepts the payment, the insured is ‘estopped by the appraisal award from maintaining a breach of contract claim against [the insurer].’” Blum’s Furniture Co. v. Certain Underwriters at Lloyds London, 459 F. App’x 366, 368 (5th Cir.2012)

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 3 Comments

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

Risk Manager Can Be Liable For Failing to Provide Coverage Ordered

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

FACTUAL BACKGROUND

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

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

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

LAW & ANALYSIS

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

PEREMPTION

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

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

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

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

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

BREACH OF FIDUCIARY DUTY

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

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

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

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

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

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

NEGLIGENT MISREPRESENTATION

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | 1 Comment

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

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

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

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

FACTUAL BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Should a Signed Rejection Of UM/UIM Cover Be Ignored?

Insurance Fraud Is Epidemic

The Most Difficult Problem Facing Insurers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Insurance Fraud Is Epidemic

Can Murder Be Accidental?

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

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

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

FACTS

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

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

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

THE ISSUE

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Can Murder Be Accidental?

How Do You Set Aside an Appraisal Award?

Umpire Must Be Unbiased

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

FACTS

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

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

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

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

ANALYSIS

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How Do You Set Aside an Appraisal Award?

What Is Needed to Refuse a Defense?

Duty to Defend Is Difficult to Disclaim on Summary Judgment

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

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

ISSUES

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

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

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

ANALYSIS

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

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

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

DECISION

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on What Is Needed to Refuse a Defense?

Why Insured Should Never Sign a Release Without Advice of Counsel

Release Means What It Says and Says What it Means

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

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

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

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

BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Why Insured Should Never Sign a Release Without Advice of Counsel

You Can’t Con an Honest Person

Insured Must Read Application For Insurance

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

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

FACTS

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

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

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

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

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

CONCLUSION

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on You Can’t Con an Honest Person

Sometimes Insurance Fraud Doesn’t Pay

Zalma’s Insurance Fraud Letter

July 1, 2015

Compliance With The California SIU Regulations

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

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

Sometimes Insurance Fraud Doesn’t Pay

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

The current issue of ZIFL reports on:

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

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Law

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

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

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

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

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

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

Heads I Win, Tails You Lose

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

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

When Does an Endorsement Supersede the Base Coverage Wording?

Coverage Determined by What Is not What Might Be

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

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

BACKGROUND

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

When is a “Known Loss” Not Known?

Know Loss Exclusion Requires Knowledge of the Damage Claimed

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Can Insured Get Back Premium if No Loss?

Risk of Loss Is Transferred to Insurer on Inception of Policy

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

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

FACTS

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

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

Posted in Zalma on Insurance | Comments Off on Can Insured Get Back Premium if No Loss?

SIU Regulations Webinar

Webinar – Compliance With The California SIU Regulations

To sign up for the live webinar by Barry Zalma, Esq., CFE on July 8, 2015 at 8:00 a.m. Pacific Time and 11:00 a.m. Eastern time, go to: http://www.complianceonline.com/compliance-with-the-california-siu-regulations-webinar-training-703989-prdw?channel=M3_NW_JL08_Barry_JN19_BR or call Toll Free: +1-888-717-2436
The SIU Regulations attempt to micro-manage the work of insurance company efforts against insurance fraud. The CDOI has audited hundreds of insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can result in a fine from $500,000 to $1 million. By attending this webinar, insurers and their claims and SIU personnel, can inoculate themselves against the potential of paying enormous fines to the CDOI.

According to the regulations, all “integral anti-fraud personnel” must be trained. Integral anti-fraud personnel are almost every employee of an insurer who may have some contact with a claim or with the agreement to ensure it fits the definition of “integral anti-fraud personnel.” Since the definition is so broad, underwriters and insurance agents are included. Therefore, people who in the past were never trained on insurance fraud are now considered part of the anti-fraud team. By training those who work to sell or accept insurance, the insurer may be able to avoid insurance fraud before a policy is issued by refusing to insure a person who might commit fraud.

This webinar will list the training required by the SIU Regulations required of all anti-fraud personnel and will highlight the effort to reduce the multi-billion dollar crime that bleeds the insurance industry of potential profits.

Areas Covered in the Webinar:
•    The Special Investigation Unit Regulations
•    Commentary on the Special Investigative Unit Regulations
•    Identifying Insurance Fraud
•    Can the CDOI Enforce the Regulations?
•    The California Insurance Frauds Prevention Act

Who Will Benefit:
•    Insurer Claims Executives
•    Insurer Claims Representatives
•    Independent Insurance Adjusters
•    Insurer SIU Investigators
•    Insurance Agents and Brokers
•    Certified Fraud Examiners
•    Operational Risk Managers
•    Insurance Coverage Lawyers
•    Insurance Claims Lawyers

Posted in Zalma on Insurance | Comments Off on SIU Regulations Webinar

Can an Insured Receive Coverage for Breach of Fiduciary Duty

Trustees Should Not Cheat Beneficiaries

Directors and officers (“D&O”) insurance is limited to the actions of the officers in their capacity as an officer of a corporation. It, like every other policy issued, contains exclusions. It’s exclusions are different than in other insurance policies and are directed to the risks of loss faced by corporate officers and directors.

In Langdale Co. v. National Union Fire Ins. Co. of Pittsburgh, Penn., — Fed.Appx. —-, 2015 WL 3823709 (C.A.11 (Ga.) 6/22/2015) the Eleventh Circuit was asked to decide whether the district court erred in finding no coverage under a D & O insurance policy for claims asserted by beneficiaries of a family trust against their family-owned corporation and against two individual family members who served simultaneously as directors or officers of the corporation and as trustees of the trust. The beneficiaries alleged violations of duties owed to and by the corporation, and violations of duties owed to the trust.

The D & O policy excluded coverage for alleged misconduct committed in a capacity other than as a corporate officer or director. The issue is whether the underlying lawsuits alleged misconduct that was covered or that was excluded from coverage.

The Langdale Company (“TLC”) sued its D & O insurer, the National Union Fire Insurance Company (“National Union”), for denying coverage and refusing to advance defense costs incurred in litigation filed in the Georgia state court. The district court granted National Union’s summary judgment motion, and TLC appealed.

BACKGROUND

The pleadings filed in the underlying litigation recount the family history. In 1947 The Langdale Company was incorporated and is known as TLC. It functions as a holding company. In 1959, the founder created the Virginia Miller Langdale Family Trust for the benefit of the founder’s daughter and her children. The founder transferred his 25–percent interest in TLC to the Trust, and the Trust beneficiaries received the TLC stock dividends. the founder’s sons, Harley and John, were the trustees.

In May 2009, the Trust beneficiaries sued Johnny and Harley Langdale in Georgia state court. They asserted several claims: (1) breach of trust; (2) breach of fiduciary duty to the Trust beneficiaries; (3) breach of fiduciary duty as directors of TLC to the company’s minority shareholders, the Trust beneficiaries (“Count III”); (4) fraud; (5) constructive trust; (6) conspiracy; (7) attorneys’ fees; and (8) equitable relief.

The beneficiaries’ state-court complaint alleged that beginning in 1994, Johnny and Harley Langdale “embarked on a scheme” to consolidate “their control over TLC” by “hav[ing] TLC redeem the Trust’s stock” in TLC “at an absurdly low price.” The complaint alleged that Johnny and Harley Langdale “used their systemic refusal to pay income to the beneficiaries, their knowledge of estate planning problems caused by the belated revelation that the Trust would terminate in 1999, and their ability to persuade the beneficiaries that the ‘Shareholders’ Agreement’ applied to TLC’s redemption or purchase of the Trust’s stock to induce Virginia Langdale Miller and her children to sign documents ‘consenting’ to the transfer of the Trust’s stock to TLC” at this unfair price.

TLC held an insurance policy with D & O coverage from National Union. The policy required the insurer to advance defense costs for, and indemnify TLC against, lawsuits seeking damages for the wrongful acts of its directors and officers committed in that capacity. The policy provided four types of D & O coverage.

The policy required National Union to “advance … Defense Costs prior to the final disposition of a Claim,” on the Insured’s written request. National Union could “withhold consent to any … Defense Costs … to the extent such Loss is not covered under” either Coverage A or B.

TLC sought defense costs under the policy based on the director-misconduct allegations in Count III of the beneficiaries’ state-court complaint. Count III alleged that Johnny Langdale breached the fiduciary duties he owed TLC as a director. Johnny Langdale sought and received indemnification from TLC, which paid all the fees incurred in the underlying suit.

Johnny Langdale and TLC sued National Union in federal district court based on diversity jurisdiction. They sought (1) damages for breach of the insurance contract, (2) a declaratory judgment that National Union had a duty to advance defense costs, and (3) damages for National Union’s bad faith. Georgia law applied.

The district court granted National Union’s motion for summary judgment and denied TLC’s cross-motion. The court agreed with TLC that National Union’s obligation to advance defense costs was the same obligation as a duty to provide a defense, and that TLC had met its initial burden to show coverage. The court, however, agreed with National Union that it could rely on all three policy exclusions and had met its burden to show that all three precluded coverage. Because the insurance policy specifically excludes any claim “arising out of” an act of an Insured serving in any capacity other than as an Executive/Employee, National Union had no duty to advance defense costs to Johnny Langdale or to TLC.

DISCUSSION

The allegations that TLC’s acts or omissions contributed to allowing Johnny and Harley Langdale to obtain control of TLC without personal cost, breaching their duties as trustees, does not negate the application of the exclusion.

Johnny and Harley Langdale’s alleged breaches of their duties as trustees started before, and continued throughout, the period when they allegedly breached their duties as TLC officers and directors. The breaches of the duties they owed as trustees of the Trust allegedly caused or created the harm to the beneficiaries—the sale of their stock at a below-market price.

The claims in the underlying litigation against TLC for corporate wrongdoing necessarily included claims that Johnny and Harley Langdale breached the duties they owed as trustees to the Virginia Miller Trust beneficiaries, who were also the company’s minority shareholders. The allegedly wrongful acts committed by TLC and by TLC directors would not have occurred but for Johnny and Harley Langdale’s alleged wrongful acts as trustees.

To the extent that Johnny and Harley Langdale were allegedly acting as directors and officers, that misconduct was so inextricably entwined with their alleged misconduct as trustees that the duty to advance defense costs was not triggered.

The gravamen of the state-court complaint and the counterclaim is that Johnny and Harley Langdale conspired to breach their duties as trustees well before the Redemption Agreement was signed, to deprive the beneficiaries of the proper value of their TLC shares and consolidate their own control over TLC.

The claims against TLC for Johnny and Harley Langdale’s alleged misconduct as directors and officers could not have existed independent from their alleged misconduct as trustees of the Virginia Miller Trust. The claims against Johnny and Harley Langdale as TLC directors and officers could not have existed independent from their alleged misconduct as trustees. The allegations of wrongdoing in Counts III and V of the state-court complaint and the counterclaim “arose out of” Johnny and Harley Langdale’s wrongful acts in their capacities as trustees, and are subject to Exclusion 4(g).

ZALMA OPINION

Insurance, even D&O insurance, is not designed to protect its insureds against wrongful conduct performed intentionally to defraud or otherwise harm someone while performing acts outside the duties of the insured as a corporate officer. Here, Johnny and Harley, as trustees of a trust acted to defeat the rights of the beneficiaries of the trust they had a fiduciary duty to protect. Their breach of the fiduciary obligations owed to the beneficiaries was conduct that was not insurable.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Can an Insured Receive Coverage for Breach of Fiduciary Duty

What is a “Residence Premises” & Who Are Resident Relatives?

Homeowners Policy Requires Insured to Reside at Dwelling

By definition a homeowners insurance policy insures the owner against the risk of loss of the dwelling where the insured resides. It should not insure the named insured who does not live in the dwelling.  When the insured does not reside at the residence premises the insuring agreement of a homeowners policy appears to be incapable of being met.

The Michigan Court of Appeal in Banks v. Auto Club Group Ins. Co., Not Reported in N.W.2d, 2015 WL 3797729 (Mich.App., 6/18/2015) was called upon to resolve a claim of coverage after a fire by the named insured who did not reside in the dwelling and spent 95% of his time in another dwelling in Detroit. The trial court granted the insurer’s motion for summary judgment and the insured appealed.

FACTS

In 2004, plaintiff Gilbert Banks purchased a residential home located at 16234 Timberview in Clinton Township. Gilbert purchased a homeowner’s insurance policy for the home from defendant, issued by defendant’s affiliate MemberSelect Insurance Company. The home was destroyed by a fire in 2006. It appears from the record that defendant provided coverage for the damages and Gilbert rebuilt the home.

Following the 2006 fire, Gilbert and Vernetta Banks’ son Myron Banks and Myron’s wife Tamika Banks lived at the Clinton Township residence with their children while Gilbert and Vernetta lived in Detroit with Gilbert’s elderly mother.

On January 28, 2009, another fire caused damage to the Clinton Township home. The Clinton Township Fire Department and defendant’s investigator determined that arson was the cause of the fire. Myron later pleaded no-contest to arson of a dwelling. After defendant denied coverage, plaintiffs commenced this lawsuit alleging breach of contract.

Defendant moved for summary arguing that there was no coverage under the policy because Gilbert did not reside at the Clinton Township residence at the time of the fire and therefore the residence was not his “residence premises” as required by the contract.

Defendant also argued that Myron and Tamika’s personal effects were not covered under the policy because they were not members of Gilbert’s household as Gilbert was residing in Detroit at the time of the fire. Finally, defendant argued that summary disposition was proper because plaintiffs failed to submit proof of loss in a timely manner.

The trial court granted summary disposition in favor of defendant. The court concluded that reasonable minds could not differ as to whether Gilbert was residing at his mother’s home at the time of the fire. Because Gilbert was not residing at the premises, there was no coverage under the policy and Myron and Tamika were not “resident relatives” of Gilbert. The court also found that plaintiffs failed to timely submit proof of loss.

ANALYSIS

Where the language in an insurance policy is clear, courts are bound by the specific language set forth in the agreement. The policy provided coverage for “your Dwelling … at the residence premises … The Dwelling must be used principally as a private residence. “Residence premises” was defined as the “premises, described on the Declaration Certificate, used as a private residence by you that is [either] a one-, two-, three-, or four-family Dwelling building … or that portion of any other building you occupy as a residence.” As defined in the policy, “you” or “your” refers to Gilbert and his spouse Vernetta.

Coverage for the insured’s dwelling required proof that the dwelling be at the “residence premises,” which, in turn, required showing that the dwelling be at the premises (1) described on the Declaration Certificate, (2) that the premises be used as a private residence by Gilbert or Vernetta, and (3) the premises be a one, two, three, or four-family dwelling building or other building occupied by Gilbert and Vernetta as a residence.

The first and third elements are not in dispute. The issue in this case is whether there was a question of fact as to whether the Clinton Township home was used as a private residence by Gilbert or Vernetta. The policy does not define the term “private residence.”
In McGrath v. Allstate Ins Co, 290 Mich.App 434, 440; 802 NW2d 619 (2010) the issue was whether the phrase “where you reside” required the insured to physically live at the single-family home listed on the Policy Declarations. The phrase is not merely descriptive of the insured premises, but rather constituted a statement of coverage that required the insured to reside at the home and use the home as a private residence at the time of loss.

In the context of the insurance policy, the definition of the term “reside” is not synonymous with the legal definition of the term “domicile,” which may have a legal or technical meaning beyond mere physical presence, including ‘the intent to live at that location at sometime in the future. Rather the term “reside” requires “that the insured actually live at the property.” (emphasis added).

In this case the phrase “used as a private residence” required that the insured actually live at the property at the time of loss. Combining these definitions, “private residence” in the context of the insurance policy means a private house or place of shelter where the named insured actually lives and occupies that is not merely a place of temporary sojourn. It is not akin to one’s domicile.

In short, there was no genuine issue of fact as to whether Gilbert or Vernetta used the Clinton Township home as their private residence where the evidence showed that they lived in Detroit at the time of the fire. Accordingly, the trial court did not err in granting summary disposition on this issue.

Similarly, the trial court did not err in granting summary disposition as to Myron and Tamika’s personal property claims. Although Myron and Tamika were related to Gilbert by blood and marriage, they were not “residents” of Gilbert’s “household.” Myron and Tamika lived at the Clinton Township home, and, as discussed above, Gilbert did not live there, but rather lived in Detroit. Therefore, Myron and Tamika were not “resident relatives” under the terms of the policy and the trial court did not err in granting summary disposition on this issue.

ZALMA OPINION

The insurer avoided the need to prove that the fire was an arson-for-profit by establishing that the admitted arsonist was not an “insured” and that the insured, who did not reside at the premises, was not entitled to indemnity from the insurer. The Banks’ could have avoided this problem by, before the fire, advising the insurer that the house was rented and they did not reside there. They would have been insured under a dwelling policy form rather than a homeowners policy and Myron and Tamika could have acquired a tenants homeowners form, which would have not paid them because of the arson but the owners could have recovered for the damage to the dwelling.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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Condition Precedent Enforced

Can an Insurer Refuse Coverage Because Insured Entered Into Settlement Without Insurer’s Consent

Insurers may limit the terms and conditions of the contract of insurance to protect their interest. No insurance company covers every possible contingency. All have exclusions and conditions. In Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., — F.3d —-, 2015 WL 3853022 (C.A.11 (Ga.) 6/23/2015) the policy contained a condition that required – before it was obligated to pay a settlement – that the insured first obtain the insurer’s consent to settle.

ISSUES

This case involves a Georgia insurance policy. Having concluded that the appeal raises a question of Georgia law that is both determinative of the case and about which this Court had substantial doubt, the Eleventh Circuit Court of Appeal certified three questions to the Supreme Court of Georgia:

(1) Under the facts of this case, and in the light of the Final Judgment and Order—in the Underlying Suit—approving of and authorizing and directing the implementation of the terms of the settlement agreement, is Piedmont “legally obligated to pay” the $4.9 million settlement amount, for purposes of qualifying for insurance coverage under the Excess Policy

(2) In a case like this one, when an insurance contract contains a “consent-to-settle” clause that provides expressly that the insurer’s consent “shall not be unreasonably withheld,” can a court determine, as a matter of law, that an insured who seeks (but fails) to obtain the insurer’s consent before settling is flatly barred—whether consent was withheld reasonably or not—from bringing suit for breach of contract or for bad-faith failure to settle? Or must the issue of whether the insurer withheld unreasonably its consent be resolved first?

(3) In this case, under Georgia law, was Piedmont’s complaint dismissed properly?

Relying on its decision in Trinity Outdoor, LLC v. Cent. Mut. Ins. Co., 285 Ga. 583, 679 S.E.2d 10 (Ga.2009), and on the “unambiguous” terms of the insurance policy at issue in this case, the Supreme Court of Georgia instructed the Eleventh Circuit that, under Georgia’s law, “Piedmont is precluded from pursuing this action against XL because XL did not consent to the settlement and Piedmont failed to fulfill the contractually agreed upon condition precedent.” Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co., No. S15Q0418, slip op. at 6–7 (Ga. Apr. 20, 2015). As a result, the Supreme Court of Georgia determined per Georgia law that “the district court did not err in dismissing Piedmont’s complaint.”

We are grateful for the help. Based on this definite response to our certified questions, we affirm the district court’s dismissal of Piedmont’s complaint.

ZALMA OPINION

At times it is a pleasure reading an appellate decision that is brief, concise and to the point. This is one of those cases. The federal court accepted the decision of the Georgia Supreme Court that an insured may not sue its insurer for indemnity for a settlement reached between the insured and the plaintiff suing the insured without first obtaining the insurer’s consent to the settlement which consent was an agreed upon condition precedent to indemnity.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

 

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Does the Notice-Prejudice Rule Unfairly Disadvantage an Insurer of Its Contractual Rights?

Montana Adopts Notice Prejudice Rule

A Commercial General Liability (CGL) insurer sued its insured contractor and real-property owners for declaratory judgment that insurer had no duty to indemnify, defend, or cover counterclaims asserted by owners in the insured’s state-court action to foreclose a construction lien. Following the insured’s default, the insurer moved for summary judgment.

The United States District Court for the district of Montana, entered summary judgment in favor of the insurer. The owners appealed. The United States Court of Appeals for the Ninth Circuit, certified a question to the Supreme Court of Montana. In Atlantic Casualty v. Greytak, 2015 WL 3444507, 2015 MT 149 No. OP 14–0412 (Decided May 29, 2015) the Supreme Court of Montana responded to the certified question.

The question posed by the Ninth Circuit: “Whether, in a case involving a claim of damages by a third party, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.”

FACTS

According to facts supplied by the Court of Appeals, this case originally arose from a civil action filed in the Montana Third Judicial District Court. In March 2010 GTL filed suit against Greytak and Tanglewood (hereafter, Greytak) for non-payment of an obligation arising from a construction project. GTL was insured by Atlantic Casualty under a commercial general liability policy. In March 2010 Greytak sent a letter to GTL asserting that it had grounds for various counterclaims involving construction defects, and in November 2010 Greytak filed counterclaims against GTL in the state court action.
In April 2011 GTL and Greytak entered a settlement agreement that required GTL to notify Atlantic of Greytak’s counterclaims. GTL and Greytak also agreed that if Atlantic did not appear to defend the case and did not file a declaratory action on the coverage issue, GTL would allow judgment to be entered against it and in favor of Greytak for $624,685.14 plus costs.

On January 23, 2012, Atlantic sued GTL and Greytak in the United States District Court for the District of Montana, seeking a declaration that it was not required to defend GTL from Greytak’s counterclaims or to pay any judgment. GTL defaulted and is not participating in the case. Atlantic’s policy issued to GTL stated that the insured “must see to it that we are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim … if a claim is made or ‘suit’ is brought against any insured, you must notify us as soon as practicable. You must see to it that we receive written notice of the claim or ‘suit’ as soon as practicable.” Atlantic sought a declaration that it was not required to provide coverage of Greytak’s counterclaims because GTL had not provided timely notice as required by the policy language.

The United States District Court granted Atlantic’s motion for summary judgment. The District Court found that Atlantic did not have timely notice of Greytak’s claims against GTL and therefore was excused from providing coverage under the policy. The District Court also found that Montana law did not require Atlantic to demonstrate that it was prejudiced by GTL’s failure to provide timely notice of Greytak’s counterclaims.

DISCUSSION

The District Court found that Atlantic’s Commercial General Liability policy was clear in its requirement that GTL provide timely (“as soon as practicable”) notice of the Greytak counterclaims. The issue presented by the certified question is whether Montana law applies the “notice-prejudice” rule to the insurance policy that Atlantic issued to GTL; specifically, whether the policy provision requiring GTL to notify the insurer of a covered event “as soon as practicable” can be invoked to bar coverage without a consideration of whether a delay in notification caused prejudice to Atlantic.

A majority of the states have adopted the notice-prejudice rule in insurance coverage disputes, requiring that the insurer demonstrate that it was materially prejudiced by not having received prompt notice or notice as soon as practicable of an event that could trigger coverage. The Supreme Court noted Prince George’s County v. Local Govt. Ins. Trust, 388 Md. 162, 879 A.2d 81, 94, n. 9 (Ct.App.Md., that listed the thirty eight states and two territories that have adopted the rule as a matter of common law. Also as noted, the Montana Supreme Court has adopted the notice-prejudice rule in several insurance dispute contexts, most recently in Estate of Gleason v. Central United Life Ins. Co., 2015 MT 140, ¶¶ 37–38, in the context of first-party (insured v. the insurer) insurance coverage disputes.

The purpose of the notice-prejudice rule is to protect the insured or those claiming through the insured from a loss of insurance coverage over a technical violation of the policy when that violation is of no prejudicial consequence to the insurer.

The Supreme Court’s answer, therefore, to the certified question was: Yes, an insurer who does not receive timely notice according to the terms of an insurance policy must demonstrate prejudice from the lack of notice to avoid defense and indemnification of the insured.

A concurring opinion concluded that the facts set forth in the Certification Order also clearly establish that Atlantic has been prejudiced as a matter of law and that, under application of the principle the notice-prejudice rule, Greytak is entitled to no relief under the policy. Of course, that issue was not before the Montana court but is before the Ninth Circuit who asked the question.

The rule does not abrogate the insured’s duty to notify. It merely excuses failure of that duty when a “technical” violation does not prejudice the insurer. Here, GTL’s violation was not “technical.” It was contrived in order to prejudice Atlantic, which it clearly did.
There are a substantial number of cases from courts around the country that hold prejudice exists as a matter of law where an insurer has not been notified prior to settlement of a claim including those holding as a matter of law that insurers were prejudiced when the insured notified the insurers of the suit after settlement because the insurers were presented with a fait accompli and were denied an opportunity to gain early control of the proceedings and to investigate among other reasons.

The notice-prejudice rule is an equitable remedy that allows an insured to escape the harsh outcome of a complete forfeiture of coverage, for which consideration has been paid, where there has been no prejudice to the insurer. The notice-prejudice rule does not rewrite the insurance contract. Where, as here, GTL and Greytak have secretly negotiated a settlement and attempted to have judgment entered in order to avail themselves of favorable UTPA jurisprudence from the Montana Court, the equitable purposes of the notice-prejudice rule do not exist.

ZALMA OPINION

The concurring opinions – although well reasoned – strayed from the issue presented to the Supreme Court by the Ninth Circuit, whether the notice-prejudice rule applies in Montana. The Supreme Court answered with a clear affirmative. The concurring opinions, stating that the rule did not apply to the facts of the case, albeit correct, was not the issue. It is up to the 9th Circuit and the District Court to apply the rule. When they do I suspect they will find the insurer was prejudiced and will rule in favor of the district court’s factual findings that will require a find that there was no prejudice.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

 

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When Must An Appraisal Award Be Reversed?

Appraisal Panel Must Appraise Loss Not Claim

Appraisal is, in California, a form or arbitration where the appraisers (arbitrators) are required to find the actual cash value of a loss. When the insured and the insurer disagreed on the scope of the loss it is the duty of the appraisers to determine the appropriate amount of loss regardless of the claims presented by the parties based upon evidence presented to the appraisers and the appraisers inspection and actual determination of loss.

In Lee v. California Capital Insurance Company, — Cal.Rptr.3d —-, 2015 WL 3797827 (Cal.App. 1 Dist., 6/18/15) California Capital appealed from a judgment confirming an insurance appraisal award. California Capital contended the trial court erred in compelling an appraisal that required the appraisal panel to assign loss values to items the insured claimed were damaged in a fire even if the items were not damaged or did not exist. It also claims the court erred in confirming the appraisal award, arguing that the appraisal panel exceeded its authority by issuing two competing and vastly different values for the loss.

FACTUAL BACKGROUND

In November 2010, a fire damaged an apartment building in Oakland owned by Li–Lin Sung Lee (the “property”). The property consists of a four-story building containing a total of twelve apartments, with four units on each of three levels and a fourth garage level underneath. The fire started in a ground floor unit—unit number 3. According to California Capital, the flames did not extend beyond unit 3. Lee claims the fire damaged six of the twelve apartments with fire or smoke.

The property was insured at the time of the fire under a California Capital policy issued to Lee.  Lee retained licensed public adjuster Kevin Dawson to assist her in the presentation of her claim. In February 2011, Dawson submitted a claim to California Capital on behalf of Lee. The total claim exceeded $800,000. The statement of loss provided breakdowns of the claimed costs for cleaning, asbestos abatement, reconstruction of the affected apartments, and loss of rent. As set forth in Dawson’s claim on behalf of Lee, the fire loss consisted of burn damage to unit 3 and smoke damage to the “common” walls located between apartments on the two floors above unit 3. According to the claim submitted by Dawson, all the interior rooms of five apartments other than unit 3 would need to be completely dismantled and then replaced. The claim also included removal of a portion of the stucco exterior around the building, as well as removal of iron balcony railings, followed by a repainting of the entire building.

The trial court granted Lee’s petition to compel an insurance appraisal. The order, as later modified directed the appraisal panel to “value three categories of items: (a) items of loss agreed by the parties to have been damaged by the fire; (b) items of loss asserted by Lee to have been damaged by the fire but where [California Capital] disputes coverage; and (c) items of loss asserted by [California Capital] to have been damaged by the fire but where Lee does not assert a claim.”

The appraisal panel declined a request by California Capital to inspect the property. According to California Capital, Lee’s appointed appraiser took the position that the panel was obligated to appraise the scope of loss presented by the insured, even if it was apparent to the panel that the scope was incorrect in matters such as square footage and the number of stories that a building contained.

On February 8, 2012, the appraisal panel issued a unanimous appraisal award setting forth, in exhibits A and B to the award, the replacement cost loss and actual cash value for each claimed item.  The award listed the following amounts:

Exhibit A replacement cost loss (insurer’s scope): $190,505.21

Exhibit A actual cash value loss (insurer’s scope): $186,041.74

Exhibit B replacement cost loss (insured’s scope): $813,884.89

Exhibit B actual cash value loss (insured’s scope): $788,057.02

The panel has made no determination whether the items claimed existed. California Capital filed a petition to vacate or, in the alternative, to correct the appraisal award.

The trial court denied California Capital’s petition to correct and/or vacate the award and separately granted in part Lee’s petition to confirm the award.

DISCUSSION

Appraisal hearings are a form of arbitration and are generally subject to the rules governing arbitration. Judicial review of an arbitration, or appraisal award, is circumscribed. Appraisal awards are immune from judicial review in proceedings to confirm or challenge the award unless:

(1)     The award was procured by corruption, fraud or other undue means.

(2)     There was corruption in any of the arbitrators.

(3)     The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator.

(4)     The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.

(5)     The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.

(6)     An arbitrator making the award either:

(A)     failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or

(B)     was subject to disqualification upon grounds specified in Code of Civil Procedure Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision. (Code Civ. Proc., § 1286.2, subd. (a)., bolding omitted.)

Law Governing Insurance Appraisals

All fire policies issued in California must be on a standard form that includes an appraisal provision as set forth in Insurance Code section 2071. The appraisal process is limited in scope. The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions of the policy. (Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 403.)

Compelling Appraisal of Disputed Items

A trial court does not necessarily err in compelling appraisal of disputed items when the disputes turn on issues such as coverage, causation, or policy interpretation. Those legal issues can be resolved in subsequent litigation, although it may be appropriate in certain cases to stay an appraisal pending resolution of the disputed issues. However, when the disputes turn on the condition or quality of damaged or destroyed items—and it is possible for the panel to assess an item’s condition or quality without simply having to rely on the insured’s representation—it is error to compel the appraisal panel to assign values to items that inspection reveals were not damaged or did not ever exist. In this case, the court erred because it directed the appraisal panel to assign loss values to items without regard to whether they were actually damaged.

An assessment of whether an item is damaged or existed is fundamental to a valuation of the amount of the loss. If an item is undamaged, there is no repair cost and no need to replace the item. Clearly, a determination that a component part of a building is undamaged is an assessment regarding its condition. Similarly, a determination that a claimed item of loss did not exist in the manner claimed by the insured bears upon the valuation of the loss. For example, if an insured claims that damaged counters are made of granite but a simple visual examination reveals they consist of a much less expensive material, the panel is not compelled to assign a value for repairing or replacing granite countertops simply because the insured lists them on the items of loss submitted for the panel’s consideration. Similarly, if an insured claims that a three-story apartment building damaged in a fire actually contains four floors, the panel is not required to place a value on a non-existent fourth floor.

There may be cases in which the identity of property damaged in a fire or other calamity is at issue, such as when an item is totally destroyed or damaged beyond recognition. An appraisal panel does not necessarily exceed its authority by assigning a value of zero to items of loss submitted to it for consideration. If inspection reveals an item is undamaged or never existed, it is appropriate for the panel to award nothing for loss or damage to that item. The existence of damage to an item as well as the nature of the claimed item are factors that directly bear upon the valuation of the loss, including the cost to repair or replace the item. An appraisal may encompass disputed items when the disputes turn on issues of coverage, causation, or policy interpretation. Here, however, the court went further and compelled the appraisal panel to assign loss values to items that may not have been damaged or never existed, simply because the insured claimed the items were damaged. In so doing, the court effectively prevented the appraisal panel from complying with the dictate of Insurance Code section 2071 to appraise the actual loss suffered by the insured. Instead, the panel was required to appraise a hypothetical loss, without regard to whether the items ever existed or actually required repair or replacement.

For these reasons, the court’s order  compelling an appraisal of three categories of items, including items claimed by Lee to have been damaged in the fire, was reversed. On remand, the trial court shall issue a revised order compelling an appraisal pursuant to Insurance Code section 2071.

The appraisal award issued is fundamentally deficient because it does not provide a single valuation of the loss suffered by the insured.  The competing appraisal amounts appear to be the result of the view that an appraisal panel is required to apply a value to every item that is presented to it by a party, without regard to whether the item was damaged or ever existed.  If inspection reveals that an item is undamaged or never existed, the panel should not apply a loss value to the item.

In addition, the panel should apply a single set of measurements to a physical space and determine what is required to effect a repair, instead of offering two dueling versions of required repairs. If one side claims a room has one window and the other side claims the room has two windows, it is the appraisal panel’s obligation to resolve the dispute to arrive at a single value for the loss.

ZALMA OPINION

Appraisals are tools to resolve disputes over the amount of loss without consideration for coverage issues. Appraisers must evaluate the loss incurred by the insured. The evaluation must be based on facts not claims and it cannot issue an award with two different findings since, to do so, avoids the reason for appraisal. The appraisers, by refusing to inspect the property, failed to fulfill the duty imposed upon them and the court order compelling two findings violated the requirement of the policy and statute. Of course, since the findings are $600,000 apart and there was evidence that the claims included things that did not exist and repair of things that were not there. As a result the court should h ave referred the case to the appropriate prosecutor.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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What is The Covenant of Good Faith and Fair Dealing?

The Covenant of Good Faith Is Mutual

In this, my second video blog I describe the definition of the tort of bad faith.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on What is The Covenant of Good Faith and Fair Dealing?

What is Insurance

A video blog.

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Millions for Defense and Never Accept Fraud

Fraud Fails – Insured Must Pay Insurer

Insurers act in good faith and pay fire claims and additional living expense promptly as required by the policy and the law. They expect that the persons insured will treat the insurer with the same good faith and fair dealing.

Proving that no good deed goes unpunished, when an insurer tried to limit its payments to what it owed it was sued by the homeowners only to learn, in discovery, that it had been defrauded. In many cases, when the insurer learns that it is a victim of fraud, they often deny the claim and allow the insured to keep what they paid in advance of learning of the fraud to avoid bad publicity. Auto-Owners Mutual Insurance Company (“Auto-Owners”) refused to lose and insisted on getting its money back in Akers v. Auto-Owners (Mut.) Ins. Co., Slip Copy, 2015 WL 3714595 (W.D.Mo., 6/15/2015). A case where, at least in Missouri, fraud doesn’t pay and can be expensive.

FACTS

A fire which occurred at Leslie and Mary Akers’ (collectively “the Akers”) home. The Akers initiated this lawsuit, alleging that Defendant Auto–Owners (Mutual) Insurance Company (“Auto–Owners”) vexatiously failed to pay all amounts due under their homeowner’s policy. Auto–Owners denied the allegations, noting that it had paid more than $3.5 million under the Policy.

During discovery, Auto–Owners discovered evidence that the Akers prepared fraudulent invoices to inflate their losses. Auto–Owners filed a one-count counterclaim alleging that the Akers’ conduct violated the policy’s anti-fraud provision. Auto–Owners seeks a declaration that the Policy is void and that Auto–Owners is entitled to reimbursement of all amounts paid out under the Policy, as well as its attorneys’ fees and costs incurred in defending this lawsuit. The Akers, caught in the act, dismissed their claim with prejudice hoping to be able to keep almost $4 million Auto-Owners had already paid. Auto–Owners did not fall for the ploy and insisted on pursuing its counterclaim through trial.

On May 13, 2015, the District Court for the Western District of Missouri, held a bench trial. After carefully considering all of the evidence, the Court found that the Akers violated the Policy’s “Concealment or Fraud” provision by misrepresenting material facts, engaging in fraudulent conduct, and making false statements. As a result, the entire Policy is void and Auto–Owners is entitled to reimbursement of all sums—$3,929,887.40—paid under the Policy. The Court also ordered the Akers to reimburse Auto–Owners $146,919.21 for its reasonable costs, expenses, and attorneys’ fees incurred in defending against the Akers’ claims in this case.

The Court entered judgment in favor of Auto Owners Insurance Company and against Leslie and Mary Akers, jointly and severally, in the amount of $4,076,806.61.

FINDINGS OF FACT

Four witnesses testified in person: Auto–Owners’ field claim representative Candice Sartin, forensic accountant Peter J. Karutz, C.P.A., Leslie Akers, and Mary Akers. Nine witnesses appeared via videotaped depositions: Akers’ family members Amy Whiting, Laura Whiting, and Randy Akers, and present and former Akers’ employees Brian Tripp, Edward Kalleck, Ron German, Bruce Parker, Levi Sherman, and Michael Stone.

In determining how much weight to give each witnesses’ testimony, the Court made the following credibility determinations. The Court found Peter Karutz, Candice Sartin, Peter Karutz, Brian Tripp, Edward Kalleck, Ron German, Bruce Parker, Levi Sherman, and Michael Stone to be very credible and believes all, or nearly all, of their testimony. The Court gave greater weight to their testimony because it was consistent with the testimony of the other credible witnesses and the exhibits, and these witnesses had little or no motivation to testify falsely. Indeed, portions of Tripp, Kalleck, German, Parker, Sherman, and Stone’s testimony were candid admissions against interest.

The Court found Amy Whiting, Laura Whiting, and Randy Akers to be somewhat credible. The Court found much of Randy Akers’ testimony not credible. The Court found Leslie Akers and Mary Akers’ testimony not credible at all. The Akers’ testimony also contradicted sworn testimony they had given in their depositions on multiple salient points. Finally the Court noted that when questioned by Auto–Owners’ counsel on several crucial topics in this case-such as whether they knowingly submitted false invoices to Auto–Owners–the Akers declined to answer, invoking their Fifth Amendment right not to testify. The Court found that if the Akers had answered these questions truthfully, their answers would have confirmed that they conspired to submit false invoices to Auto–Owners and defraud it of millions of dollars.

The court concluded that the Akers built a very large (approximately 20,000 square foot) residence located at 1999 Southwest 2 Highway in Garden City, Missouri. Shortly after they completed construction a fire of undetermined origin occurred on August 8, 2010, severely damaging the house.

THE EXCLUSION

The Policy also contained a “Concealment or Fraud” provision that stated: “This entire policy is void if, whether before, during or after a loss, any insured has: a. intentionally concealed or misrepresented any material fact or circumstance;  b. engaged in fraudulent conduct; or c. made false statements; relating to this insurance.”

PAYMENTS MADE IN GOOD FAITH

Auto–Owners subsequently made several large payments under the Policy. Under the “dwelling” endorsement, it paid up to the policy limit: $1,712,134.52 to CitiMortgage, the first mortgagee on the property; and $690,365.48 to CBK Properties III, LLC, the second mortgagee on the property. It also paid the Akers $32,000 for debris removal. Under the “other structures” endorsement Auto–Owners paid $4,585 for damage to the pool house. Under the “personal property” endorsement it paid $250,000 to CBK Properties III, LLC and four payments to the Akers totaling $1,150,837.88. Finally, under the “additional living expenses” endorsement, it made numerous payments to the Akers totaling $89,963.87. Auto–Owners’ total payments under the Policy were $3,929,887 .40.

Auto–Owners hired Peter Karutz (“Karutz”), a forensic accountant with thirty-two years of experience, to conduct an analysis. He found that as part of their claim to recover benefits under the Policy, the Akers wrote checks and produced documents for various companies that purportedly rebuilt his home. In fact, the great majority of those checks did nothing more than circulate monies though various accounts until the money came to rest in the Akers’ bank account. Specifically, he found that: (1) the Akers’ claim that they paid $4,318,000 to repair fire-related damage to their home was fictitious; (2) Akers Construction Co. was never paid the 20% “general contractor” fee; (3) the Akers deposited approximately $3,900,000 into their bank accounts that was drawn on the AL & H bank account; (4) the proposals/invoices alleging that Eddie Kalleck d/b/a Kalleck Construction, Ron German d/b/a German Landscaping, and Brian Tripp d/b/a Tripp Electrical, performed certain work does not represent actual services performed by these individuals; (5) numerous other checks drawn on AL & H’s account and purportedly issued to other workers were ultimately deposited into the Akers’ bank account; (6) based on all bank accounts, the most the Akers may have spent rebuilding the house was $1,706,393. The Court found his testimony to be very credible and adopts all of the above listed conclusions.

THE AKERS VIOLATED THE POLICY’S “FRAUD AND CONCEALMENT” PROVISION

The Court found that the Akers violated the Policy’s “Fraud and Concealment” provision. Missouri law governs this dispute, and under Missouri law where an insurance policy clearly states that a misrepresentation voids coverage under the policy, that provision is enforceable. The Akers violated the Policy’s “Fraud and Concealment” provision in every way possible. They intentionally concealed, misrepresented material facts, and made false statements concerning the scope of the damage to their house, who was performing the repair work, who the general contractor was, the amount it actually cost to repair the damage, and who was actually receiving the payments for the repairs. Furthermore, they engaged in fraudulent conduct by creating fraudulent invoices designed to hide who was actually receiving the payments for the repair work.

THE AKERS COMMITTED FRAUD AND ACTED IN BAD-FAITH IN FILING SUIT AGAINST DEFENDANT, JUSTIFYING AWARD DEFENDANT ITS REASONABLE ATTORNEYS’ FEES AND COSTS.

“Under Missouri law, a court may award attorneys’ fees in a declaratory judgment action where special circumstances exist.” Allstate Ins. Co. v. Estes, 118 F.Supp.2d 968, 974 (E.D.Mo.2000). Special circumstances exist where an insured commits fraud.

In the present case, the Akers’ blatant fraud and bad-faith prosecution of Auto–Owners for vexatious refusal to pay is a special circumstance that justifies awarding Auto–Owners its reasonable attorneys’ fees and costs incurred in defending against the Akers’ claim and prosecuting its counterclaim. The Court finds Auto–Owners billing submissions to be reasonable.

ZALMA OPINION

If there is a reason for the tort of bad faith which caused the Akers’ to sue Auto-Owners in the first place there should be, in the case where an insured acts in bad faith and commits fraud, there should be an ability for the insurer to recover punitive damages from the insured. This is a blatant case of insurance fraud and in addition to the judgment to pay the insurer its losses as a result of the fraud the Missouri Attorney General should consider prosecution.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Millions for Defense and Never Accept Fraud

Is an Arson Fire Vandalism in Tennessee?

Lack of Definition Makes Exclusion Unclear

An arson fire is an intentional act causing damage to property. Vandalism is an intentional act causing damage to a structure. A person can be convicted of the crime of vandalism if he or she sets an  intentional fire at a property.  Therefore insurers, as did the insurer in Southern Trust Insurance Company v. Phillips, Slip Copy, 2015 WL 3612989 (Tenn.Ct.App., 6/10/15), will logically attempt to exclude coverage for an arson fire in a vacant structure by means of the vandalism after vacant for 60 days exclusion.

The insurer and the insured filed cross-motions for partial summary judgment on the issue of whether there is coverage for an arson fire not set by the insured to a structure vacant for more than 60 days. The trial court found the policy ambiguous and construed it in favor of coverage, holding that arson was covered under the policy. Accordingly, the trial court granted the motion for partial summary judgment filed by the insured and denied the motion for partial summary judgment filed by the insurer.

FACTS & PROCEDURAL HISTORY

Matthew Phillips is the owner of residential real property located in Lake City, Tennessee. The property was insured under a dwelling policy issued by Southern Trust Insurance Company. On or about February 27, 2013, a fire substantially damaged the residential structure located on the insured premises. Phillips promptly reported the loss to Southern Trust and fulfilled all duties imposed on him under the policy. Nevertheless, Southern Trust denied that the fire was covered under the insurance policy.

Southern Trust filed a complaint for declaratory judgment seeking a declaration that the policy did not provide coverage for the dwelling because, according to Southern Trust, the home “was damaged by vandalism and malicious mischief.” Phillips alleged that the home was damaged by fire, not vandalism and malicious mischief.

The policy did not define vandalism or malicious mischief. However, the policy listed “vandalism and malicious mischief” separate and apart from “fire” under Coverage C, which addressed coverage for personal property.

Following a hearing, the trial court entered an order granting the motion for partial summary judgment filed by Phillips and denying the motion filed by Southern Trust. The court concluded that it was required to construe the insurance policy as a whole.

In considering the meaning of the relevant terms, the trial court noted that arson and vandalism are treated as separate and distinct offenses under Tennessee’s criminal code. The court found that the policy itself also distinguished between the perils of fire and vandalism and/or malicious mischief, differentiating between the two in two different sections of the policy. The court noted that Southern Trust could have easily defined vandalism and malicious mischief or expressed a clear intent to include arson within the exclusion, but it failed to do so.

ISSUES PRESENTED

Southern Trust presents the following issues, as we perceive them, for review on appeal:

1. Whether the trial court erred in finding the insurance policy ambiguous;
2. Whether the trial court erred in considering the section of the policy providing coverage for personal property when determining whether coverage existed under the portion of the policy providing coverage for the dwelling.

DISCUSSION

The courts in Tennessee have long recognized that a vacancy clause in a fire policy is reasonable, valid and binding. The parties do not question the enforceability of the vacancy clause, and the facts relevant to the issue on appeal are undisputed. The crux of this appeal is whether, as a matter of insurance and contract law, arson constitutes “vandalism and malicious mischief” under the policy.

Insurance policies are, at their core, contracts.  As such, courts interpret insurance policies using the same tenets that guide the construction of any other contract. The terms of an insurance policy should be given their plain and ordinary meaning, for the primary rule of contract interpretation is to ascertain and give effect to the intent of the parties. The policy should be construed as a whole in a reasonable and logical manner and the language in dispute should be examined in the context of the entire agreement.

In addition, contracts of insurance are strictly construed in favor of the insured, and if the disputed provision is susceptible to more than one plausible meaning, the meaning favorable to the insured controls.

Whether arson falls within an exclusion for vandalism or malicious mischief is an issue of first impression in Tennessee, there has been no shortage of litigation in other jurisdictions with respect to this very issue. Many courts have held that an exclusion for vandalism and/or malicious mischief clearly does not encompass arson, particularly where the policy at issue distinguishes between fire and vandalism and/or malicious mischief. Where a homeowner’s insurance policy treats “fire” and “vandalism and malicious mischief” as two distinct causes of loss and the terms are not defined, the Court of Appeal concluded that an average person would conclude that arson falls under the category of fire rather than vandalism and malicious mischief.

In Tennessee, it is well settled that exceptions, exclusions and limitations in insurance policies must be construed against the insurance company and in favor of the insured. Applying these principles to the policy as a whole, it becomes clear that the vacancy exclusion for “vandalism and malicious mischief, theft or attempted theft” does not encompass arson. In the section of the policy entitled “Perils Insured Against,” the policy clearly makes a distinction between “fire” and “vandalism or malicious mischief,” listing these as separate perils.

The court noted that if it read the dictionary definitions of the terms vandalism, malicious mischief, and arson independently and in isolation, it could read them to mean that arson is one type of vandalism and malicious mischief. However, it was not able to read portions of a contract in isolation—they must be read together to give meaning to the document as a whole.

The structure and language of the insurance policy requires the conclusion that the parties did not have such a broad understanding with respect to the meaning of vandalism and malicious mischief. As the trial court noted, Tennessee’s criminal statutes also distinguish between vandalism and arson, defining each as a separate and distinct offense.

More importantly, however, the insurance policy itself consistently makes a distinction between fire, on the one hand, and vandalism and malicious mischief, on the other. Therefore, the average policy holder would conclude that fire (and arson) is covered, while vandalism of a vacant dwelling is not.

The vacancy exclusion provided that Southern Trust did not cover loss caused by “vandalism and malicious mischief, theft or attempted theft.” If vandalism and malicious mischief were intended to be read broadly to encompass all property damage resulting from a deliberate act, the additional exclusion for damage caused by “theft or attempted theft” would be superfluous.

The Court of Appeal concluded that policy issued to Phillips unambiguously provides coverage for fire and/or arson but does not cover vandalism or malicious mischief at a vacant dwelling.

ZALMA OPINION

Affirming the trial court, the Tennessee Court of Appeal made clear that if Southern Trust desired the result to be otherwise, as the drafter of the policy, it could have clearly distinguished between damage from accidental fires and damage from intentionally set fires. Alternatively, it could have included a specific definition of vandalism and malicious mischief or expressly added fire or arson to the vacancy exclusion alongside vandalism, malicious mischief, theft, or attempted theft. I would recommend that the exclusion be amended to read that, in the event the property is vacant for more than 60 consecutive days there is no coverage for loss to the property at all or no coverage to the property caused by fire, vandalism, malicious mischief or theft.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Is an Arson Fire Vandalism in Tennessee?

May Insurers Insure Against Punitive Damages?

Insurance For Punitive Damages Against Public Policy

In most states insurance against awards of punitive damages are against the public policy of the state because it will allow the insured to defer his wrongful conduct onto an insurer. The deterrent effect of punitive damages would be eliminated. Rather, the evil conduct that would allow for punitive damages, would be encouraged.

In Wolfe v. Allstate Property & Cas. Ins. Co., — F.3d —-, 2015 WL 3634779 (C.A.3 (Pa.) 6/12/15) the Third Circuit dealt with the dispute between Allstate Property & Casualty Insurance Co. (“Allstate”) and appellee Jared Wolfe to affirm a judgment against an insurer who refused to pay punitive damages assessed against its insured.

The Third Circuit noted that it is Pennsylvania’s public policy that insurers cannot insure against punitive damages, and we therefore predict that the Pennsylvania Supreme Court will answer that question in the negative.

BACKGROUND

Karl Zierle finished his fifteenth or sixteenth beer for the night and drove off until he rear-ended Wolfe. Zierle’s blood alcohol level tested at 0.25%. Zierle also had three prior DUIs. Wolfe was injured in this accident, and he required treatment at the emergency room.

Zierle was insured by Allstate. Zierle’s policy provided liability coverage up to $50,000, and the policy required Allstate to defend Zierle in suits by third parties arising out of automobile accidents. The policy stated that Allstate would “not defend an insured person sued for damages which are not covered by this policy .”  Zierle’s policy expressly excluded coverage for punitive damages.

Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate valued Wolfe’s claim at $1200 to $1400, and Allstate responded with a counteroffer of $1200. Wolfe rejected this offer, and neither party moved from those numbers.

Wolfe then filed suit against Zierle. Allstate informed Zierle that, because Wolfe’s complaint did not indicate the extent of the damages he was claiming, the possibility remained that Zierle could face damages in excess of the $50,000 protection afforded by his policy. If the verdict did exceed the policy limit, Zierle was warned that he would be personally liable for the excess. Zierle was advised that he could hire an attorney at his own expense to cooperate with Allstate’s counsel. Zierle did hire his own counsel, but that attorney was not actively involved in the case.

During discovery, Wolfe learned of the extent of Zierle’s intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.

Settlement attempts failed. The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 compensatory damages award, but not the $50,000 punitive damages award. Following the trial, in return for Wolfe’s agreement not to enforce the punitive damages judgment against him personally, Zierle assigned his rights against Allstate to Wolfe.

DISCUSSION

Two issues were presented to the Third Circuit on appeal: First, did the District Court err by permitting Wolfe to introduce the punitive damages award from the underlying suit as evidence of damages? Second, did the District Court err by denying Allstate’s motion for summary judgment and holding that Allstate had no duty to consider the potential for punitive damages when valuing the compensatory claim, since the compensatory damages award was within the policy limits, which Allstate paid to Wolfe in full?

It is undisputed that the substantive law of Pennsylvania applies here. In the absence of a controlling decision by the Pennsylvania Supreme Court, the Third Circuit must predict how it would decide the questions of law presented in this case.

Motion in Limine

Wolfe persuaded the District Court to admit evidence of the punitive damages award because, if Allstate had acted in accordance with its contractual duty and negotiated in good faith to settle Wolfe’s claim against Zierle, the case never would have gone to trial, and the jury never would have awarded punitive damages against Zierle. Allstate argues that, by allowing Wolfe to present to the jury evidence of the punitive damages award in the underlying trial as damages in his current suit against Allstate, the District Court circumvented Pennsylvania’s public policy against insuring punitive damages.

The Third Circuit predicted that the Pennsylvania Supreme Court would conclude that, in an action by an insured against his insurer for bad faith, the insured may not collect as compensatory damages the punitive damages awarded against it in the underlying lawsuit. Therefore, the punitive damages award was not relevant in the later suit and should not have been admitted.

Our prediction is a logical extension of Pennsylvania’s policy regarding the uninsurability of punitive damages. It is Pennsylvania’s longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law. To permit insurance against the sanction of punitive damages would be to permit such offenders to purchase a freedom of misconduct altogether inconsistent with the theory of civil punishment which such damages represent.

Because Pennsylvania law prohibits insurers from providing coverage for punitive damages in order to ensure that tortfeasors are directly punished, the Third Circuit held that Allstate cannot be responsible for punitive damages incurred in the underlying lawsuit. To hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy.

California, Colorado, and New York have similar prohibitions on the indemnification of punitive damages. Wolfe argues that Allstate breached its duty of good faith by unreasonably refusing to negotiate.

In light of Pennsylvania’s public policy against insuring punitive damages, which emphasizes personal responsibility and deterrence, the Third Circuit concluded that the insured cannot shift the punitive damages to its insurer. Because the $50,000 punitive damages award is not a compensable item of damages in this case, the District Court erred in allowing evidence of that award to be presented to the jury.

The District Court’s ruling effectively shifted Zierle’s liability for punitive damages to Allstate, which violated Pennsylvania’s public policy.

It follows that an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. As a result, Allstate is entitled to a new trial, at which Wolfe may not introduce evidence relating to $50,000 in punitive damages, although he may seek compensatory damages based on injury other than the $50,000 punitive damages award

Pennsylvania law recognizes a claim in contract for an insurer’s breach of its fiduciary obligations to its insured, and an insured’s right to recover compensatory damages under that claim for injuries sustained as a result of that breach.  In defining what this duty of good faith entails, the Pennsylvania Supreme Court held that the insurer must “consider in good faith the interest of the insured as a factor” in deciding whether to settle a claim. Evidence showing only “bad judgment” is insufficient for liability and “bad faith, and bad faith alone was the requisite to render the defendant liable.” An insurer’s bad faith must be proven by clear and convincing evidence.  Wolfe’s breach of contract claim sought recovery of the $50,000 punitive damages award; interest on the $50,000 punitive damages award; and attorney’s fees and costs. By removing the $50,000 award from consideration, we remove all compensatory damages that Wolfe seeks, based on the statements in his complaint.

Therefore, Wolfe does not need compensatory damages to succeed on his statutory bad faith claim, which only permits recovery of punitive damages, interest, and costs.

The Third Circuit, therefore, affirmed the District Court’s denial of summary judgment on both the breach of contract and statutory bad faith claims and reversed the District Court’s ruling with regard to punitive damages.

ZALMA OPINION

The Third Circuit and Pennsylvania properly make it impossible to insure against wrongful conduct that allows an award of punitive damages against an insured. To do otherwise would encourage wrongful conduct.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on May Insurers Insure Against Punitive Damages?

Innocent Misrepresentation Supports Rescission

Why Did It Take Adjusting 175 Claims Before the Insurer Learned it Was Deceived?

Staffing agencies and employee leasing organizations have difficulty obtaining workers’ compensation insurance for a reasonable price. The agencies and leasing organizations are sometimes tempted to misrepresent their true profession and organization’s activities to obtain insurance at a more reasonable price. When the insurer learns that it has been deceived it has the option to unilaterally rescind the policy from its inception, return the premium, and refuse to pay claims. When the insurer has paid claims before it learned it was deceived, the case, as in American Home Assurance Company v. 99 Cents Only Stores, Not Reported in Cal.Rptr.3d, 2015 WL 3563133 (Cal.App. 2 Dist.), becomes more complicated.

FACTS

American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA and Illinois National Insurance Company (collectively Insurers) issued workers’ compensation policies to Optima Staffing, Inc. for 2008 and 2009 based in part on Optima’s representation it was a temporary staffing agency that directly hired, trained and supervised employees deployed as temporary workers in various industries and not a professional employer organization. After defending and indemnifying 175 workers’ compensation claims, the Insurers discovered Optima was operating as a professional employer organization for several temporary staffing agencies and their special employer clients. The Insurers rescinded the policies and filed an action for declaratory relief to confirm the rescission and for restitution from the temporary staffing agencies and the special employers.  The Insurers appealed from the judgments entered after the trial court sustained without leave to amend the demurrers of several of the temporary staffing agencies and special employers and subsequently granted motions for judgment on the pleadings in favor of the remaining temporary staffing agencies and special employers.

After receiving an application the Insurers issued a proposal stating that issuance of any workers’ compensation policy was conditioned upon Optima providing temporary staffing services only and not performing as a professional employer organization or employee leasing business. Optima accepted the proposal, and a binder for insurance was issued including the same condition. Policies were subsequently issued for the policy period February 22, 2008 through February 22, 2009.

Because Optima had no supervision or control over the employees, the operative complaint alleged, it greatly expanded the risk of workers’ compensation claims.

Although most of the temporary staffing agencies and special employers answered the amended complaint, on October 14, 2011 two temporary staffing agencies demurred on grounds including there could be no rescission of the insurance policies as to them because they were not parties to the agreements between the Insurers and Optima and a contract cannot be rescinded when the rights of others have intervened and rescission would harm them. The agencies argued they had reasonably relied on the workers’ compensation policies procured by Optima and, in turn, had entered into agreements with special employers to provide temporary workers.

The trial court sustained the demurrers without leave to amend.

DISCUSSION

Law Generally Governing Rescission

An insurer may rescind an insurance contract when the insured has misrepresented or concealed material information, even unintentionally, in obtaining insurance coverage. To effect rescission, the insurer must give notice to the insured and refund all premiums received before commencement of an action on the contract.

When an insurance policy is rescinded, “it is void ab initio, as if it never existed.” (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 184 [“[i]n other words, defendants, in law, never were insureds under a policy of insurance”]; LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1267 [“ ‘rescission effectively renders the policy totally unenforceable from the outset so that there was never any coverage and no benefits are payable’ ”]; see generally Civ.Code, § 1688 [“contract is extinguished by its rescission”].) Consequently, in addition to the refund of premiums by the insurer, the insured must return any advance payments that have been received. In contrast, the cancellation of a policy terminates coverage only prospectively.

Rescission applies to all insureds under the contract, including additional insureds, unless the contract provides otherwise. When an insurer rescinds a policy in conformity with all of the requirements imposed by law, the insurer generally may avoid liability on the policy to any third party injured by the insured.

The Insurers Are Not Required to Seek Reimbursement from the Injured Workers Who Received Benefits to State a Claim for Rescission.

Defendants contend the Insurers’ rescission claim fails because, by declaring they do not intend to seek reimbursement from the injured workers or to terminate previously agreed-upon benefits, the Insurers are not truly seeking rescission. Defendants’ argument that rescission is an all or nothing proposition—either the Insurers must seek to recover from the injured workers what they paid to them or the policies remain available for all third party claimants—is without merit.

Indeed, Civil Code section 1692 itself recognizes a contract may be “rescinded in whole or in part.” (emphasis added) If in an action or proceeding a party seeks relief based upon rescission, the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.

The Insurers, on the other hand, argue, although prejudice to third parties may be an inevitable consequence of rescission, the law clearly provides rescission is binding on innocent additional insureds, third party beneficiaries and injured third parties.

Unjust Enrichment

The elements for a claim of unjust enrichment are receipt of a benefit and unjust retention of the benefit at the expense of another. The theory of unjust enrichment requires one who acquires a benefit which may not justly be retained, to return either the thing or its equivalent to the aggrieved party so as not to be unjustly enriched. It is not, strictly speaking, a theory of recovery, but an effect: the result of a failure to make restitution under circumstances where it is equitable to do so. It is synonymous with restitution. Ordinarily, restitution is required only if the benefits were conferred by mistake, fraud, coercion, or request.

The Operative Complaint Adequately Alleged it Would Be Unjust for Defendants to Retain the Money Expended in Connection with Their Employees’ Workers’ Compensation Claims

Although the operative complaint does not allege defendants colluded with Optima or were aware of its fraud, participation in the fraudulent scheme is not required for a claim for unjust enrichment. Restitution may be warranted in cases in which the parties are innocent of wrongdoing, for example, in the case of a mistake of fact. This case has the added complexity that defendants may be innocent third parties, but the Insurers are also innocent third parties. How equity is best served under these circumstances is a question that can only be resolved after a full development of all the facts. In sum, the operative complaint adequately states a claim for unjust enrichment.

DISPOSITION

The orders sustaining the demurrer and granting judgment on the pleadings to the causes of action for quantum meruit were affirmed. The cause was remanded for further proceedings.

ZALMA OPINION

Insurance, as policyholder lawyers remind me continuously, is a business of the utmost good faith. They forget, just as often, that the covenant of good faith and fair dealing applies equally to both sides of the contract of insurance. Here, the insured misrepresented the risk that it asked the insurers to take and the insurers rightfully rescinded their policies. If the policy never existed the 175 recipients of workers’ compensation benefits may not have had an insurer to pay but must take their benefits directly from the employer. If the insurers succeed the workers will not be without a remedy. I can only wonder why it took 175 claims to determine the insurers were deceived.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Innocent Misrepresentation Supports Rescission

The “Chutzpah” of Fraud Perpetrators

Zalma’s Insurance Fraud Letter

June 15, 2015

The ACE Conference

Barry Zalma will be speaking, June 18, 2015 on “Millions for Defense & Not a Dime For Tribute” at the Annual America’s Claims Event in Austin, Texas. The ACE Conference is one of the ONLY industry events where senior managers, practitioners and experts involved with claims operations can get the insight they need to implement effective and tactical strategies for their claims handling process. More than 400 professionals and decision-makers from mid-size to large Fortune 500 companies attend the event to engage in idea exchange and peer to peer learning.

I will also be at the National Underwriter booth from June 17 to June 19, 2015 and would hope to meet you there and talk about the Zalma’s Insurance Claim Library.

The “Chutzpah” of Fraud Perpetrators

In this, the twelfth issue of the 19th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma, on June 15, 2015 continues the effort to reduce the effect of insurance fraud around the world. The issue indicates that, regardless of some success, the efforts must be increased.

The current issue of ZIFL reports on:

1.    The “Chutzpah” of Fraud Perpetrators Put Down by the Third Circuit
2.    New From Barry Zalma, “Insurance Law” published by the National Underwriter Company.
3.    False Swearing
4.    E-Books from Barry Zalma
5.    The Zalma Insurance Claims Library
6.    State Farm Takes the Profit Out of Fraud

The issue closes, as always, with reports on convictions for insurance fraud across the country making clear the disparity of sentences imposed on those caught defrauding insurers and the public with sentences from probation to several years in jail.

ZALMA’S INSURANCE FRAUD LETTER

ZIFL is published 24 times a year by ClaimSchool. It is provided free to clients and friends of the Law Offices of Barry Zalma, Inc., clients of Zalma Insurance Consultants and anyone who subscribes at http://zalma.com/phplist/.  The Adobe and text version is available FREE on line at http://www.zalma.com/ZIFL-CURRENT.htm.

THE “ZALMA ON INSURANCE” BLOG

The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Appraisal Can Stay Litigation – June 12, 2015
•    Conflict of Interest Required To Remove Counsel – June 12, 2015
•    Appraisal Award Binding – June 11, 2015
•    Vicarious Liability & Additional Insured Endorsement – June 11, 2015
•    Insured vs. Insured Exclusion – June 10, 2015
•    Why Is There An Insurance Adjuster? – June 9, 2015
•    Is There Coverage for Assaulting Your Employee? – June 8, 2015
•    When Does Assault & Battery Exclusion Apply? – June 5, 2015
•    New York’s Difficulty With The Tort of Bad Faith – June 4, 2015
•    Does Breach of Warranty Void Insurance Coverage? – June 3, 2015
•    When Is a Landslide a Fire? – June 2, 2015
•    The Amount of Fraud Influences Sentence – June 1, 2015
•    May a Lender Force Place Insurance? – May 29, 2015
•    Speculative Conflict & The Right to Independent Counsel – May 28, 2015
•    Webinar by Barry Zalma – May 27, 2015
•    Is an Insurer Obligated to Pay For Coverage Not Requested? – May 27, 2015
•    What Are the Insurance Obligations of a Condo Unit Owner? – May 26, 2015
•    An Important Tool – The Examination Under Oath – May 25, 2015
•    Are Intentional Acts Insurable? – May 22, 2015
•    Is The Car an Innocent Bystander to Road Rage? – May 21, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Law

Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today’s leading insurance law decisions nationwide.

URL:  http://www.nationalunderwriter.com/insurance-law.html

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

Barry Zalma

Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

Mr. Zalma publishes books on insurance topics and insurance law at http://www.zalma.com/zalmabooks.htm where you can purchase  e-books written and published by Mr. Zalma and ClaimSchool, Inc.  Mr. Zalma also blogs “Zalma on Insurance” at http://zalma.com/blog.

You can follow Mr. Zalma on Twitter at https://twitter.com/bzalma

Posted in Zalma on Insurance | Comments Off on The “Chutzpah” of Fraud Perpetrators

Appraisal Can Stay Litigation

Appraisal Compelled to Resolve Dispute Over Quantum of Loss

Insureds and insurers who have no trouble resolving disputes over the applicability of coverage have difficulty in reaching agreement about the amount of loss on either an actual cash value or replacement cost basis. Those who create insurance policies, since before the enactment of the New York Standard Fire Insurance policy more than a century ago, created an arbitration provision – called appraisal – to allow a quick, fair, and outside court proceedings to resolve the amount of loss dispute.

In Laredo Landing Owners Association, Inc. v. Sequoia Insurance Company, Not Reported in F.Supp.3d, 2015 WL 3619205 (D.Colo., 6/10/15) the District Court for the District of Colorado was asked by the plaintiff to allow the amount of loss to be determined by trial and to refuse to allow its insurer to compel appraisal.

FACTS

In its Amended Complaint, Plaintiff asserts claims for breach of insurance contract and statutory and common law bad faith based on Defendant’s alleged failure to provide full insurance coverage for damage to Plaintiff’s insured property resulting from a May 5, 2012 wind and hail storm. Plaintiff alleges that, despite Plaintiff’s independent adjuster’s estimate that the cost to repair the property was $445,545.33, Defendant’s adjuster estimated that the total cost of repairs was between $100,000 and $110,000, and that Plaintiff should be paid only $475.75 over the applicable deductible and depreciation. Although Plaintiff admits that Defendant later agreed to pay an additional $29,666.39 to replace two additional roofs on the property Plaintiff nevertheless asserts that Defendant has acted in bad faith by not paying its claim in full.

Plaintiff concedes that the relevant insurance policy contains an appraisal provision that provides, in pertinent part, as follows: “If we and you disagree on the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that the selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding….”

Based on this provision, Defendant seeks to compel an appraisal of the amount of the alleged loss caused by the storm.

ANALYSIS

At least two decisions from this District have found that the appraisal process like the one at issue here is properly “classified as an arbitration” under the Colorado Uniform Arbitration Act. The appraisal process itself—which is limited to determining the amount of loss—is binding on both parties.

Colorado possesses a tradition of supporting alternative dispute resolution mechanisms when agreed to by the parties. The right of parties to contract encompasses the correlative power to agree to a specific ADR procedure for resolving disputes. Although an appraisal process is not on all fours with arbitration, both are rooted in similar policies of economy for the parties and judicial efficiency. The court found it must accord the parties a presumption in favor of appraisal and must resolve all doubts about the scope of the appraisal clause in favor of the appraisal  mechanism.

Plaintiff argues that Defendant waived its right to demand an appraisal because (1) it denied all liability and (2) failed to demand an appraisal within a reasonable time. The denial by an insurer of all liability under a policy is a waiver of the right to an appraisement. However, Defendant has not denied all liability. Instead, the Amended Complaint makes clear that Defendant and Plaintiff disagree as to the extent of the damage caused by the storm. This disagreement as to the “amount of loss” is precisely what the appraisal provision is designed to address.

Although Defendant’s Motion to Compel was filed approximately seventh months after this action was initiated, Defendant made its first demand for appraisal on June 27, 2014—less than two months after Plaintiff filed its original Complaint. Although it appears that the parties continued to discuss the propriety of an appraisal for some time, Defendant continued to assert its right to demand an appraisal.

Finally, Plaintiff argues that an appraisal determination would have no effect on its claims for common law and statutory bad faith. While legally correct, this does not foreclose an appraisal. While the appraisal process will likely result in a binding determination as to the amount of loss–including any issues as to causation the court acknowledged that the parties may need to resume this action to resolve issues outside the scope of the appraisal.

As a final matter, the court must consider whether to stay proceedings until the appraisal process is completed. The court considered the following factors in determining whether a stay is appropriate: (1) the plaintiff’s interests in proceeding expeditiously with the civil action and the potential prejudice to plaintiff of a delay; (2) the burden on the defendants; (3) the convenience to the court; (4) the interests of persons not parties to the civil litigation; and (5) the public interest.

As to the first three factors, it is most efficient for the parties and the court to wait for the results of the appraisal before further proceeding with discovery and other matters. The appraisal process should resolve key factual issues that are in dispute. If the storm did not cause any damage beyond the amount found by Defendant’s adjuster, then there will likely be no reason for this case to proceed any further. Alternatively, if Plaintiff is correct that the storm caused damage above and beyond the amount that Defendant has agreed to cover, appraisal will resolve the extent of that damage, which, in turn, may assist the parties in resolving a number of issues outside the scope of the appraisal process. Accordingly, appraisal could limit the need for discovery in this case, resulting in a significant cost savings to both parties.

The court, therefore, ordered that the parties shall promptly and fully participate in the appraisal process, including by identifying their preferred appraisers in accordance with the appraisal provision no later than July 1, 2015. It also ordered that all discovery and other proceedings in the action were stayed until completion of the appraisal process and that, no later than 14 days after the completion of the appraisal process, the parties shall file a Joint Status Report to advise if any issues remain in this case.

ZALMA OPINION

Usually appraisal is an effective, quick, and fair method of determining the amount of loss. Sometimes it is abused and takes longer and is more expensive than a trial. Courts believe in arbitration to effectively ease the burden of the court since the award, if it agrees with the insurer, will emasculate the bad faith law suit and if in favor of the insured may establish the bad faith. I was once a trial lawyer in an appraisal proceeding that took 51 trial days and resulted in an award that was less than the amount paid by the insurer. The insured was so upset they sued their appraiser for appraisal malpractice. Nothing in the law or insurance is perfect. Appraisal, much more often than not, is fair, quick and reasonable.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Appraisal Can Stay Litigation

Conflict of Interest Required To Remove Counsel

Insurer Appointed Lawyer’s Duty is to Client It Was Retained to Defend

Insurance companies have the right and obligation to choose counsel to defend its insureds. Counsel retained by an insurer to defend an insured, contrary to the belief of many, is obligated solely to represent the rights, duties, obligation and defenses of the party insured. When that party is a corporation the counsel is obligated to represent the interest of the corporation even if it is contrary to the rights and obligations of its officers and shareholders.

In Landon v. Austin, — N.Y.S.3d —-, 2015 WL 3617141 (N.Y.A.D. 3 Dept.), 2015 N.Y. Slip Op. 04911 (6/11/15) a New York appellate court was asked to agree with a corporate officer’s attempt to disqualify the lawyers assigned to represent the corporation since counsel’s defense of the corporation could allow for a judgment in excess of the officer’s personal liability insurance.

FACTS

Plaintiff sued to recover for injuries he suffered while performing construction work on a residence owned by defendant Duane Austin. The project also involved equipment owned by, and several employees of, defendant Austin Construction, Inc. (hereinafter ACI). Austin and his wife are the sole shareholders and officers of ACI, and Austin cross-claimed against ACI for contribution and/or indemnification.

ACI has commercial liability insurance coverage, and its carrier selected Smith, Sovik, Kendrick & Sugnet P.C. (hereinafter SSKS) to provide a defense. Austin is also entitled to a defense under the terms of his homeowners insurance policy, and a separate law firm was retained to represent him.

Approximately three weeks before the trial in this matter was to begin, Austin moved to disqualify SSKS as counsel for ACI. Austin argues that he is the “alter ego” of ACI, and that SSKS is impermissibly placing the interests of ACI’s insurance carrier ahead of his stated wishes. Austin fears that the damages awarded at trial will exceed the liability limits of his homeowners insurance policy and that, should ACI not be held liable, he will be personally responsible for some of the award.

He argued that he was acting in his corporate capacity in the lead-up to the injury, which would render ACI liable and bring the liability limits of its commercial liability insurance policy into play. SSKS rejected the demands of Austin that it endorse that strategy, and has instead argued that ACI is not liable because Austin was acting solely in his individual capacity.

ANALYSIS

The court’s analysis begins with the observation that any disqualification motion is founded upon an allegation of a breach of a fiduciary duty owed by the attorney to a current or former client. Although SSKS was retained by the insurer for ACI, the paramount interest SSKS represents is that of ACI and the insurer is precluded from interference with counsel’s independent professional judgments in the conduct of the litigation on behalf of its client. (Feliberty v. Damon, 72 N.Y.2d 112, 120 [1988]; see Elacqua v. Physicians’ Reciprocal Insurers,  52 AD3d 886, 889–890 [2008]; Federal Ins. Co. v. North Am. Specialty Ins. Co., 47 AD3d 52, 59 [2007]). Disqualification is therefore appropriate only where a conflicting interest between the insurer and insured may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship.

A conflicting interest exists, for example, where the defense attorney’s duty to the insured would require that he or she defeat liability on any ground and his or her duty to the insurer would require that he or she defeat liability only upon grounds which would render the insurer liable.

With that backdrop in mind, SKSS has consistently argued that ACI is not liable at all. While this defense could harm the personal financial interests of Austin if it succeeds, SSKS has never represented Austin in his individual capacity. The defense advanced by SSKS clearly furthers the corporate interests of ACI, and the record is devoid of any indication that its actual goal is to recoup funds for the insurer’s benefit from ACI or its principals. Because Austin failed to demonstrate the existence of any conflict of interest between ACI and its insurer, the trial court did not abuse its discretion in denying his disqualification motion.

SKSS has plainly acted in furtherance of ACI’s interests, Austin has attempted to direct SSKS to take a litigation position harmful to a corporation of which he is an owner and officer. SSKS properly viewed those efforts with skepticism, as every one, dealing with an officer of a corporation who assumes to act for it in matters in which the interests of the corporation and officer are adverse, is put upon inquiry as to the authority and good faith of the officer.

The trial court order was affirmed.

ZALMA OPINION

Mr. Austin attempted to move his personal liability to the corporation he controls – which had greater insurance coverage limits than his homeowners policy’s personal liability limits – instead of asking corporate lawyers to protect the corporation’s rights. Counsel, recognizing its duty, refused to act contrary to the rights and defenses available to its client and the insurer paying for its defense. If Austin was able to remove counsel and replace them with a lawyer that would follow his instructions to put all liability on the corporation he would have acted in breach of the covenant of good faith and fair dealing owed to his corporation’s insurer to the benefit of his homeowners insurer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Conflict of Interest Required To Remove Counsel

Appraisal Award Binding

Payment of Appraisal Award Satisfies Policy Promise to Indemnify

In an opinion expressing the brevity required of a decision on an issue of insurance law that is patently obvious, the Missouri Court of Appeal decided in James-Miller v. American Family Mutual Insurance, — S.W.3d —-, 2015 WL 3610497 (Mo.App. E.D., 6/9/2015) that an appraisal award is binding on the parties to a first party property insurance policy.

Appellant Lisa James–Miller (“James–Miller”) appealed from the judgment of the trial court entered in favor of Respondent American Family Mutual Insurance Company (“American Family”) on her petition for insurance coverage.

Following a bench trial, the trial court found that any loss sustained by James–Miller was properly determined by the appraisal process set forth in James-Miller’s American Family homeowner’s insurance policy. The trial court additionally held that even if the appraisal process was not binding, James–Miller failed to prove that American Family failed to pay any amounts due under her policy.

On appeal, James–Miller argues that the trial court erred in: (1) finding that the appraisal process was binding; (2) refusing to impose a discovery sanction precluding Chris Powers, American Family’s designated appraiser, from testifying at trial; and (3) finding in favor of American Family because the decision is against the weight of the evidence.

The appellate court concluded that no error of law appears and that an extended opinion reciting the detailed facts and restating the principles of law applicable to this case would serve no jurisprudential purpose.

ZALMA OPINION

Appraisal has been a condition of first party property policies for more than a century. They were created as a device to allow resolution of disputes over the quantum of a loss when an insurer and the insured do not agree. The insured submitted to appraisal, an award was issued and the insured paid the award. As a result the insured had no case.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Appraisal Award Binding

Vicarious Liability & Additional Insured Endorsement

Duty To Defend Based on Extrinsic Evidence

Capital City Real Estate, LLC (“Capital City”) initiated a declaratory judgment action in the District of Maryland, seeking a declaration that Certain Underwriters at Lloyd’s London (“Underwriters”) were obligated to defend and indemnify Capital City against a negligence lawsuit filed in the Superior Court for the District of Columbia. The district court granted summary judgment in favor of the Underwriters, concluding that it had no duty to defend or indemnify Capital City.

On appeal, the Third Circuit Court of Appeal, in Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, Subscribing to Policy Number: ARTE018240, — F.3d —-, 2015 WL 3606861 (C.A.4 (Md.) 6/10/15), was asked to resolve the dispute. The dispute arose from a common wall shared by the structures located at 55 Bryant Street, NW, Washington, DC (“55 Bryant Street”) and 57 Bryant Street, NW, Washington, DC (“57 Bryant Street”). 55 Bryant Street was owned by Leon Yates (“Yates”) and insured by The Standard Fire Insurance Company (“Standard Fire”). Capital City, a real estate development company with its principal place of business in Washington, DC, was operating as the general contractor for the renovation of 57 Bryant Street in 2008 and 2009.

THE CONTRACTS

Capital City subcontracted the foundation, structural, and underpinning work for the 57 Bryant Street renovations to Marquez Brick Work, Inc. (“Marquez”), a corporation engaged in the business of concrete, bricks, blocks, and foundation work with its principal place of business located in Maryland. The subcontract between Capital City and Marquez Brick required Marquez Brick to indemnify Capital City for damages caused by its [Marquez’s] work and further required Marquez Brick to maintain certain general liability insurance naming Capital City as an additional insured. Accordingly, on November 17, 2008, the Underwriters issued an insurance policy (the “Policy”) to Marquez, effective from November 17, 2008, through November 17, 2009.

The Underwriters also issued an Endorsement (the “Endorsement”) to the Policy listing Capital City as an additional insured party on the Policy. As relevant to this case, the Endorsement amends the Policy to cover Capital City as an additional insured, but only with respect to liability for “property damage” caused in whole or in part by Marquez’s acts or omissions; or the acts or omissions of those acting on Marquez’s behalf in the performance of [Marquez’s] ongoing operations for  Capital City in Washington, D.C.

THE INCIDENT

On June 9, 2009, during the course of Marquez’s work on the underpinning of 57 Bryant Street, the common wall shared by 57 Bryant Street and 55 Bryant Street collapsed.

Standard Fire, as subrogee, filed suit against 57 Bryant Street, NW Limited Partnership, Bryant St., LLC, and Capital City in the Superior Court for the District of Columbia. The underlying complaint does not mention Marquez or explicitly seek any damages for any of its acts or omissions. Rather, the complaint attributes the June 9, 2009 collapse and resulting damage to 55 Bryant Street to negligence on the part of the named defendants.

Standard Fire paid for the repairs per its insurance policy with Yates, and requested $600,000 in damages, plus attorney’s fees, costs, and interest.

Capital City responded in part by filing a third party complaint against both Marquez and its owner, Feliciano Marquez. Capital City alleges that its contract with Marquez requires Marquez “to pay for defending and indemnify [Capital City] against all claims for liability that were a result of or partially resulting from Marquez’s breach of any term of the” contract, and also requires “that if [Capital City] is sued and the subject of the suit is [Marquez’s] work or the direct or indirect result of it, [Marquez] shall indemnify [Capital City] against all liabilities” and reimburse it for any damages or fees.

ANALYSIS

In determining whether an insurer has a duty to defend under an insurance policy, Maryland courts apply the following test:

(1)   what is the coverage and what are the defenses under the terms and requirements of the insurance policy?

(2)   do the allegations in the tort action potentially bring the tort claim within the policy’s coverage?

The first question focuses upon the language and requirements of the policy, and the second question focuses on the allegations of the tort suit. At times these two questions involve separate and distinct matters, and at other times they are intertwined, perhaps involving an identical issue.

Unlike the majority of other states, Maryland does not follow the rule that insurance policies are to be most strongly construed against the insurer. Empire Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 699 A.2d 482, 494 (Md.1997) Rather, Maryland law applies ordinary contract principles to insurance contracts. Nevertheless, under the general principles of contract construction, if an insurance policy is ambiguous, it will be construed liberally in favor of the insured and against the insurer as drafter of the instrument.

If the policy’s language is clear and unambiguous, the Court will assume the parties meant what they said. As with any contractual dispute, the court must start with the relevant policy wording. The Endorsement in this case is the form provided by the Insurance Services Office, Inc. (“ISO”) which is the almost exclusive source of support services in this country for commercial general liability insurance. However, the language is quite clear that coverage is provided for Capital City, as the additional insured, for “property damage … caused in whole or in part by” Marquez.

The Underwriters argued that the scope of coverage is limited to Capital City’s vicarious liability for Marquez’s acts or omissions. However, there is no mention of vicarious or derivative liability in the Endorsement. If the parties had intended coverage to be limited to vicarious liability, language clearly embodying that intention was available but was not included in the ISO form. The words “derivative” and “vicarious” are conspicuously absent from the Endorsement. The language of the Endorsement plainly lacks the vicarious liability limitation that the Underwriters seek to impose.

As the Maryland Court of Appeals has stated, “to give effect to the duty to defend where the allegations, even if groundless, present claims both within and without the policy coverage the rule in Maryland is that ‘the insurer still must defend if there is a potentiality that the claim could be covered by the policy.’” Continental Cas. Co. v. Bd. Of Educ., 489 A.2d 536, 542 (Md.1985). Maryland courts generally look to the pleadings in the underlying lawsuit to determine whether there is a potentiality of coverage. Aetna Cas. & Sur. Co. v. Cochran,  651 A.2d 859, 863 (Md.1995).

Here, the underlying complaint is silent as to the involvement of Marquez. Indeed, Marquez is not named anywhere in the complaint. However, Capital City has filed a third party complaint against Marquez and its owner, and has introduced extrinsic evidence that the collapse of the common wall between 55 Bryant Street and 57 Bryant Street was caused by Marquez.

Because the underlying complaint does not make clear that Marquez conducted the foundation, structural, and underpinning work that led to the collapse of the common wall, Capital City is entitled to rely on its extrinsic evidence to establish those facts and to thereby establish a potentiality of coverage. It was error for the district court to conclude otherwise.

By contrast, there is not such a clean delineation of which actor owes which duty in this case, in part because the underlying complaint fails to even mention Marquez. It is undisputed that Marquez did the foundation work during the course of the renovations. The appellate court, therefore found that there is a potentiality of coverage and, as a result, the Underwriters have a duty to defend Capital City in the underlying tort lawsuit.

For the foregoing reasons, the Third Circuit concluded that the scope of coverage under the Endorsement extends beyond acts or omissions of Marquez for which Capital City was vicariously liable. The plain language of the Endorsement creates a duty to defend Capital City where Capital City is being held liable for the acts or omissions of Marquez.

ZALMA OPINION

Additional insured endorsements cause a great deal of litigation and interpretation of the wording of the additional insured endorsement. In this case the insurer attempted to expand the meaning of the endorsement to limit the coverage to vicarious liability imposed on the additional insured by the actions of the named insured. Since the key words did not appear in the endorsement the court refused to limit the coverage as Underwriters desired. Intent, in insurance, must be in writing and if the limitation to vicarious liability is intended it must be put in writing in the contract of insurance. Underwriters failed to use that language and, instead used the broader ISO wording.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Vicarious Liability & Additional Insured Endorsement

Insured vs. Insured Exclusion

One Insured Can’t Get a Defense When Sued by Another Insured

Robert D. Redmond sued ACE American Insurance Company (“ACE”) after it refused to provide insurance coverage in connection with a civil suit Redmond’s former employer brought against him. The District Court dismissed Redmond’s complaint because the language of the insurance policy under which he sought coverage excluded his claim.

FACTS

Industrial Enterprises of America, Inc. (“IEAM”) purchased a “Management Protection” insurance policy (the “Policy”) from ACE. The Policy provided insurance coverage for the “Company,” defined as IEAM, its subsidiaries, “any such organization as a debtor-in-possession,” as well as “Insured Persons,” including IEAM executives. Subject to certain conditions and exclusions, the Policy required ACE to cover losses arising from, among other things, “misleading statement[s]” and other “act[s and] omission[s],” by the insureds and to pay costs “arising out of” civil proceedings related to such acts.  The Policy also included an “insured versus insured” exclusion (the “Exclusion”), under which ACE was not liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.”

During the relevant time, Redmond was an “Insured Person” under the Policy. In November 2007, shareholders sued IEAM for securities violations and accounting fraud. In 2009, IEAM filed for bankruptcy protection, and in 2011, brought an adversary proceeding (the “Adversary Proceeding”) in bankruptcy court against several former executives and employees, including Redmond. Acting as a debtor-in-possession, IEAM sought damages “on behalf of itself and as assignee of its shareholders,” alleging that the defendants, including Redmond, had engaged in a fraudulent scheme to manipulate the company’s stock price. In 2013, a Chapter 11 trustee was appointed to pursue IEAM’s claim.

Redmond asked ACE “to provide his defense in the matter” or otherwise cover his costs.  ACE denied Redmond’s request, and Redmond sued ACE in Delaware state court, alleging that ACE had breached its contractual obligations under the Policy, acted “in bad faith,” and “wrongfully conspired with IEAM … to deny [him] his right to coverage of his defense costs.” The District Court held that the Exclusion relieved ACE of its obligation to assume the cost of Redmond’s defense and dismissed his complaint. Redmond appealed.

ANALYSIS

In Redmond v. ACE American Ins. Co., — Fed.Appx. —-, 2015 WL 3514690 (C.A.3 (Del.) 6/5/2015) the Third Circuit resolved the dispute. It noted that under New York law, an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract. This is a matter of law for the court to decide, and requires the court to determine, in the first instance, whether the terms of the insurance contract are ambiguous.

Policy language is not ambiguous if it has a “definite and precise meaning, unattended by danger of misconception in the purport of the policy itself, and concerning which there is no reasonable basis for a difference of opinion.” Breed v. Ins. Co. of N. Am., 385 N.E .2d 1280, 1282 (N.Y.1978).

Noting that in this case the Exclusion provides that ACE shall not be liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.”  Generally speaking, a claim or proceeding is brought when in law it is commenced, and the same holds true in the policy exclusion context. The phrase “brought … by” as used in the Exclusion means “commence” and is not ambiguous. Having so concluded, the court concluded that it must apply the exclusion as written.

IEAM, the insured “Company,” commenced the Adversary Proceeding against Redmond, another insured. Under the Exclusion, ACE is not liable for suits commenced, or “brought,” by the “Company,” and thus it is not obligated to cover Redmond’s defense costs. The fact that the Chapter 11 trustee has been substituted as the plaintiff in the action under Fed. R. Bankr.P.2012(a) and is now pursuing the action on behalf of IEAM does not mean the trustee initiated the suit or change the fact that IEAM commenced, or “brought,” the action.

While the action now proceeds as if it had been originally commenced by the real party  does not change the fact that IEAM “brought” it. Therefore, the plain language of the Exclusion allows ACE to deny Redmond’s request for defense costs, and the District Court did not err in dismissing Redmond’s complaint.

ZALMA OPINION

Insurance Companies just don’t like insuring inter-family suits whether the family is a domestic one or a commercial family. In this case the insurer refused to insure any actions by one corporate insured against another corporate insured. As a result there was no coverage at all to defend or indemnify one insured for a suit brought by another insured. The plain language of the policy applied.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on Insured vs. Insured Exclusion

Why Is There An Insurance Adjuster?

The Adjuster

The insurance adjuster is not mentioned in a policy of insurance. Standard first party property insurance policies, based upon the New York Standard Fire Insurance policy, contain conditions requiring the insured to, within sixty days of the loss, submit a sworn proof of loss. The policy allows the insurer to then, and only then, respond to the insured’s proof of loss. The insurer could sit back, do nothing, and wait for the proof. If the insured was late in submitting the proof the insured could reject the claim. If the insured submits a timely proof of loss the insurer could accept or reject the proof of loss. Insureds were not happy with that system and most were incapable of complying with the strict enforcement of the policy conditions.

“An ‘adjuster’ or ‘insurance adjuster’ is a person, copartnership or corporation who undertakes to ascertain and report the actual loss to the subject-matter of insurance due to the hazard insured against.” As a result of its policy, an insurance company has a contractual obligation to pay its insured’s valid claim and, therefore, often dispatches one with special knowledge – the adjuster – to separate fact from fiction regarding a claim and obtain information to enable the insurance company to distinguish the valid claim from a claim for which the insurance company is not liable under its policy.

Some policies specifically state that the claimant must use his own judgment in estimating the amount of loss and that the assistance of an insurance adjuster is a “courtesy only” — the claimant must still send “a proof of loss within 60 days after the loss even if the adjuster does not furnish the form or help you complete it.” 44 C.F.R. Pt. 61, App. A(1), § VII(J)(7). [Mertz v. American Family Insurer, Slip Copy, 2013 WL 6385268 (D.Or.)]

The first person from the insurer that the insured meets when he or she suffers a first party property loss is the adjuster. Hundreds of years ago the claim adjuster was invented to smooth the claims process and be certain that the insured receives the indemnity promised and complete a thorough investigation to avoid fraudulent claims. As a result every modern claims adjuster should know that it is his or her duty to aid the insurer in its obligation to fulfill the promises made by the policy of insurance and assist the insured in presenting his or her claim to the insurer.

An insurance adjuster is a person engaged in the business of insurance. Statutes define an adjuster as one who investigates losses on behalf of an insurer as an independent contractor or an employee of an independent contractor. [Eagle Oil & Gas Co. v. Travelers Property Cas. Co. of America, Slip Copy, 2013 WL 5969920 (N.D.Tex., 2013)]

Although a special relationship exists between an insurer and insured because they are in privity of contract as an individual, the individual insurance adjuster is not in privity with the insureds based on their insurance policy wording. Thus, the employee adjuster does not owe a special duty to the plaintiffs on which the bad faith tort could be based against the adjuster although actions of the adjuster can support a claim of bad faith against the insurer for whom the adjuster works. [Morris v. Mid–Century Ins. Co., Not Reported in F.Supp.2d, 2012 WL 3683540 (S.D.Ind., 2012)] In the absence of privity of contract, an insurance adjuster is not liable to an insured for a failure to settle a claim against an insured. [Dumas v. ACCC Ins. Co., 349 Fed.Appx. 489, 2009 WL 3358479 (C.A.11 (Ga.), 2009)]

An independent insurance adjuster is not liable to an insured for malfeasance when the insurer delegates to the adjuster the responsibility to handle the insured’s claim because the adjuster is not in contractual privity with the insured. (See Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032 (Gruenberg) that held that an insurance adjuster and law firm hired to adjust claim were not liable for bad faith; Sanchez v. Lindsey Morden Claims Services, Inc. (1999) 72 Cal.App.4th 249, 253, 84 Cal.Rptr.2d 799 ( Sanchez ) where an independent adjuster hired to adjust claim was found to owe no duty to insured.

Imposed on the adjuster is an obligation to investigate the loss, interpret the policy wording, and apply the policy wording to the facts discovered in the investigation. A first party property adjuster must be educated, trained, experienced and ready to help an insured obtain the benefits promised by the insurance policy. The adjuster does not act as an attorney for the insurer. As a result any effort to expand the work-product doctrine to include the work of the insurance adjuster prior to retention of counsel requires a deliberative and participative process to assure a careful balance between advocacy and truthfulness. The routine taking of statements by an insurance adjuster is work in the ordinary course of business which fails to qualify as work product. [Popina v. Rice–Steward, Not Reported in S.E.2d, 86 Va. Cir. 402, 2013 WL 8118663 (Va.Cir.Ct., 2013)]

To do so it is necessary that the adjuster, after being assigned a first notice of loss caused by fire, lightning, windstorm, hail, or any other peril not excluded by a direct risk of loss policy, to complete a thorough investigation, determine if the loss is one for which the insurer promised to provide indemnity, determine if the conditions of the policy have been complied with by the insured, and reach agreement with the insured as to the amount of loss and the amount of claim compensable by the policy.

Zalma Opinion

The adjuster is the most important employee of an insurance company because he or she is the only person a part of the insurer the insured will meet. If the adjuster does not work to fulfill the promises made by the insurance policy the insurer fails and will lose the opportunity to be in the business of insurance profitably.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | 1 Comment

Is There Coverage for Assaulting Your Employee?

Business Dispute Not Covered by Homeowners

A Homeowners policy provides worldwide liability insurance coverage to the homeowners subject to various exclusions and limitations. In Perry v. Hartford Underwriters Insurance Company, Not Reported in A.3d, 2015 WL 3508099 (Del.Super., 6/3/2015) a physical confrontation between an employer and the person he fired resulted in both a criminal prosecution of the employer and a civil action for the injuries incurred by the ex-employee as a result of the fight.

A Delaware appellate court was asked to resolve a dispute over insurance coverage between Plaintiff, Clarence Perry, and Defendant, Hartford Underwriters Insurance Company (“Hartford”). Upon consideration of Hartford’s motion for summary judgment and Perry’s opposition thereto, the Court made the following findings:

1.     In March 2007, Perry was insured under a personal homeowners insurance policy issued by Hartford. The policy identified 1017 East 13th Street, Wilmington, Delaware as Perry’s residence.

2.     Perry owned and operated a business, Perry Trucking, LLC, from his residence. Perry did not have a commercial insurance policy with Hartford or any other insurance company to insure the business activities of Perry Trucking or losses associated with the business.

3.     Perry employed Robert White as a truck driver. If assigned a job, White used the Perry Trucking dump truck. Although White had a key for the truck, he did not have permission to use the truck for other purposes.

4.     Around 6 o’clock in the morning on March 17, 2007, Perry noticed the Perry Trucking dump truck was not parked in front of his residence. Perry had not assigned White a job for March 17. When Perry confronted White about the missing truck, White admitted that White was using the Perry Trucking dump truck to complete a job unaffiliated with Perry Trucking. When White returned the Perry Trucking dump truck to Perry’s residence on March 17, Perry fired White and attempted to give White his final paycheck. At this point, Perry and White had a verbal and physical altercation.

5.     Perry faced criminal charges for assaulting White. On May 2, 2007, Perry pled guilty to Assault Third Degree, admitting that he “intentionally or recklessly cause[d] physical injury to another person.”

6.     Anticipating a civil lawsuit, on September 17, 2008, Perry submitted a claim with Hartford under Perry’s homeowner’s policy. Perry recited the facts of the March 17 altercation and provided Hartford with a copy of the criminal complaint against Perry alleging assault and battery against White. On September 25, 2008, Hartford denied Perry’s claim for coverage on several grounds, including an exclusion for business activity. Specifically, Hartford claimed that the personal injury suffered by White arose out of dispute related to Perry’s trucking business and was therefore not covered by Perry’s homeowner’s policy.

7.     On October 29, 2008, White filed a civil action against Perry and Perry Trucking alleging intentional and negligent conduct. After a two-day trial, a jury found in favor of White and entered a verdict against Perry and Perry Trucking for $64,100.00. The jury rejected Perry’s self-defense claim.

8.     On October 18, 2013, Perry filed this insurance coverage dispute, claiming Hartford failed to defend and indemnify Perry in connection with the 2008 civil claim by White. On February 18, 2014, Hartford filed a motion for judgment on the pleadings, which the Court denied on March 12, 2014.

9.     On March 30, 2015, after discovery was completed, Hartford filed the pending motion for summary judgment on the grounds that the policy excludes coverage for White’s claim against Perry. According to Hartford, the policy does not provide coverage for Perry’s conduct in the March 17 altercation for several reasons, including an exclusion that applies because Perry’s liability arose from operating a business.

10.     In opposition, Perry maintains that there are genuine issues of material fact which defeat summary judgment. Perry contends that the trier of fact must consider the nature of the personal relationship between the parties and the circumstances that gave rise to the March 17 altercation. Specifically, Perry contends that he and White had been friends before they were business associates.

11.     The Court may grant summary judgment only where the moving party can “show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” The moving party bears the initial burden of proof and, if satisfied, the burden shifts to the non-moving party to show that material issues of fact exist.  The Court must view the facts “in the light most favorable to the non-moving party.”

12.     The Court’s interpretation of the policy is a question of law. Where the language is clear and unambiguous, “parties will be bound by the plain and common meaning of the policy language.”  Here, the parties agree the language of the policy is clear and unambiguous.

13.     The policy excludes personal liability coverage for loss from “ ‘[b]odily injury’ … arising out of or in connection with a ‘business’ conducted from an ‘insured location.’ ”  The policy defines business as a “trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or [a]ny other activity engaged in for money.”

14.     Delaware decisional law defines a business pursuit as a “continuous or regular activity, done for the purpose of earning profit, including part-time or supplemental income activities.” The record is clear, even viewing the facts in the light most favorable to Perry, that the reason White was at Perry’s residence on March 17 was to return the Perry Trucking dump truck and to collect his paycheck.

15.     The Court is satisfied that there is no genuine issue as to any material fact and Hartford is entitled to summary judgment. Perry owned and operated a trucking business on his residence and employed White to drive his dump truck. The policy at issue excludes coverage for the loss arising out of or in connection with a business – Perry Trucking – conducted from an insured location–Perry’s residence. The increased risk associated with operating a business is exactly what Hartford sought to exclude and, indeed, did exclude from coverage under the homeowner’s policy Hartford issued to Perry.

The court concluded that Hartford was entitled to summary judgment as a matter of law.

ZALMA OPINION

The only question I have is why this case was taken to a court of appeal. The insured, instead of just paying off his fired employee, beat him sufficiently that Perry pleaded guilty to the crime of assault, and a jury awarded the ex-employee $64,000 in damages. The court found the fact that there was a business pursuit was sufficient to rule in favor of Hartford. It could also have found no coverage because a criminal assault is an intentional act also excluded. Regardless, the insured must pay the damages from his own assets.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

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When Does Assault & Battery Exclusion Apply ?

Assault & Battery Exclusion Easy to Prove When Patrons Shot

Places of public accommodation like bars, restaurants and hotels that serve alcoholic beverages are subject to rambunctious customers who may injure innocent customers. Insurers are loathe to insure risks where damage from assault or battery or the use of firearms and usually exclude such causes from an assault, battery or shooting. In Seneca Specialty Ins. Co. v. 845 North, Inc., Slip Copy, 2015 WL 3400415 (M.D.Fla., 5/26/15) an insurer sought to avoid the obligation to defend and indemnify the insured who were alleged to have failed to warn and prevent patrons from being shot by other patrons.

BACKGROUND

Petitioner, Seneca Specialty Insurance Company (Seneca) Petitioned the District Court for the Middle District of Florida, seeking Declaratory Judgment that the insurance policy it issued to  845 North, Inc. (845 North) does not provide coverage for claims arising from a nightclub shooting, including two state court lawsuits filed by Respondents Kimberly Addison (Addison) and Tyler Gomes (Gomes). Both Addison and Gomes alleged that, on September 27, 2013, while at a nightclub owned and operated by 845 North, they were “assaulted and shot on the Defendant’s premises, suffering serious bodily injury and permanent disfigurement.”  Addison and Gomes each assert a single claim of negligence, alleging that 845 North failed to provide adequate security and failed to warn its invitees and the public of the numerous criminal incidents that had previously occurred on its premises.

THE  POLICY

Prior to the shooting incident, Seneca had issued a policy to 845 North. The policy provides general commercial liability coverage for the policy period of December 5, 2012, to December 5, 2013. Of particular relevance are two specific provisions identifying exclusions from the Policy’s coverage. The first provision which is entitled the “Assault, Battery or Assault and Battery Exclusion” states:

“This insurance does not apply to damages or expenses due to “bodily injury”, “property damage” or “personal and advertising injury” arising out of or resulting from: ¶ (1) “Assault”, “Battery” or “Assault and Battery” committed by any person; ¶  (2) The failure to suppress or prevent “Assault”, “Battery” or “Assault and Battery” by any person; ¶ (3) The failure to provide an environment safe from “Assault”, “Battery” or “Assault and Battery”; ¶ (4) The failure to warn of the dangers of the environment which could contribute to “Assault”, “Battery” or “Assault and Battery”(Emphasis added)

The Policy defines “Assault” as either “an act creating an apprehension in another of immediate harmful or offensive contact” or “an attempt to commit a ‘Battery.’ ”  A “Battery,” in turn, “means an act which brings about harmful or offensive contact to another or anything connected to another.”  An “Assault and Battery” is a combination of an “Assault” and a “Battery” as the Policy defines those terms.

The second provision is a weapons exclusion which states,

“This insurance does not apply to ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ arising out of or resulting from the possession, ownership, maintenance, use of or threatened use of a lethal weapon, including but not limited to firearms by any person.” (Weapons Exclusion).

APPLICABLE LAW

Seneca contends that the Assault and Battery and Weapons Exclusions negate any duty to defend or indemnity 845 North as to these claims. Accordingly, in the Petition and the instant Motion, Seneca seeks a judgment declaring that 845 North has no coverage under the Policy as to Gomes and Addison’s claims.

Pursuant to Florida law, interpretation of an insurance policy is a question of law to be decided by the court. In so doing, the court must construe the contract in its entirety, striving to give every provision meaning and effect.

In determining an insurer’s duty to defend, the Court looks solely to the allegations in the underlying complaint(s). The duty arises when the relevant pleadings allege facts that fairly and potentially bring the suit within policy coverage. The duty to indemnify is narrower than the duty to defend because it turns on the actual facts, not the facts as alleged in the complaint.

From the face of both Complaints, Gomes and Addison allege that they were “assaulted and shot” on 845 North’s premises and suffered damages as a result of 845 North’s negligence. The Weapons Exclusion precludes coverage under the Policy for claims that arise out of or result from the use of a lethal weapon. The claims at issue, which stem directly from the alleged shootings, necessarily involved, arose out of, and/or resulted from the use of a lethal weapon. Moreover, in the state court Complaints Gomes and Addison plainly assert that they were “assaulted” and that someone shot them, which is a harmful or offensive touching constituting a battery under the Policy definition.

In considering an “assault” and “battery” exclusion, the court in Evanston Ins. Co. v. S & Q Prop. Inv., LLC, No. 8:11–CV–2121–T–27MAP, 2012 WL 4855537 (M.D.Fla. Oct.11, 2012) explained that a fatal shooting “plainly constituted a battery” such that it precluded insurance coverage even though the underlying action involved a negligence claim for failing to prevent a trespasser from shooting and killing the decedent.

Similarly, in this case, the Policy explicitly excludes claims arising from an assault and battery and based on a failure to prevent an assault, battery or both, such as the ones Gomes and Addison have asserted in the underlying actions. The Court concluded from the pleadings of the underlying state court lawsuits — the Gomes and Addison Complaints — that the Assault and Battery and Weapons Exclusions apply and, therefore, Seneca has no duty to defend 845 North against these claims.

ZALMA OPINION

The decision was an expression of the obvious. When a patron of the insured property is shot and injured the assault and battery and the weapons exclusions applied without question.  Regardless of the seriousness of the injury and the court’s desire to provide indemnity to the injured, there was no way to change a shooting into an accident that was not excluded by the policy.

© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Mr. Zalma’s new e-books  “Getting the Whole Truth,” “Random Thoughts on Insurance – Volume III,” a collection of posts on this blog; “Zalma on California SIU Regulations;”  “Zalma on California Claims Regulations – 2013″ explains in detail the reasons for the Regulations and how they are to be enforced; “Rescission of Insurance in California – 2013;”  “Zalma on Diminution in Value Damages – 2013; “Zalma on Insurance,” “Heads I Win, Tails You Lose,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma’s reports on World Risk and Insurance News’ web based television programing, http://wrin.tv  or at the bottom of the home page of his website at http://www.zalma.com.

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

Posted in Zalma on Insurance | Comments Off on When Does Assault & Battery Exclusion Apply ?

New York’s Difficulty With The Tort of Bad Faith

It Takes More than a Refusal to Pay a Claim to Obtain Tort Damages

Insurance companies seldom deny a claim without a reasonable basis for the denial. Regardless, when a claim is denied, the insured feels a need to sue the insurer for both contract and tort of bad faith damages plus punitive damages. New York is not as friendly to insured’s whose claims are denied as other states who are quick to hold insurers to tort damages just because a claim was denied.

Plaintiff Jo–Ann Ripka (“Ripka” or “plaintiff”) sued her insurer, seeking to recover damages from the alleged breach of a homeowner’s insurance policy issued by Peerless Insurance Company (“Peerless”). In Ripka v. Safeco Ins., Slip Copy, 2015 WL 3397961 (N.D.N.Y., 5/26/15) the appellate court was called upon to determine if Ripka stated a viable cause of action.

BACKGROUND

Ripka, a resident of Pulaski, New York, purchased a homeowner’s insurance policy from Peerless (the “Homeowner’s Policy”).

In April 2012, a plumbing leak caused substantial damage to Ripka’s home and its contents. Although plaintiff duly reported the damage in accordance with the Homeowner’s Policy, Peerless initially failed to dispatch any representatives to inspect the damage. Eventually, at plaintiff’s repeated urging, Peerless sent a contractor to “inspect only limited physical damages to the real property.”
Ripka claims that, in her repeated conversations with Peerless’s representatives, each uniformly “claimed the damages were within the scope of coverage and [assured plaintiff she] would be promptly compensated.” However, Peerless allegedly engaged in a series of delaying tactics—continually asking for the same information, switching adjustors without notice, refusing to communicate with plaintiff for long stretches of time, and refusing to inspect the premises—before ultimately failing to “pay the claim in full or tender interest for the unsubstantiated delays in payment.”

DISCUSSION

Ripka’s complaint is hardly a model of clarity. Peerless, for its part, has moved to dismiss Ripka’s: (1) claims for relief pursuant to New York statute 11 N.Y.C.R.R. § 216, arguing New York does not recognize a private right of action under those regulations; (2) claim pursuant to N.Y. Gen. Bus. Law § 349, arguing plaintiff has failed to state a claim under this statute; and (3) claims for recovery of consequential and punitive damages. In other words, Peerless aims to limit the dispute in this case to a relatively straightforward breach of contract claim.

First, insofar as Ripka’s complaint purports to assert any claims for relief under various provisions of 11 N.Y.C.R.R. § 216, Peerless is correct—these claims must be dismissed because the regulations in question, which implement a provision of New York State’s Insurance Law, do not give rise to any private causes of action. It is well settled that no private cause of action exists for a violation of New York Insurance Law § 2601 or for an alleged violation of part 216 of the Insurance law. Accordingly, Peerless’s motion with respect to these claims was granted.

N.Y. Gen. Bus. Law § 349

The appellate court also concluded that Ripka’s claim seeking relief pursuant to § 349 of New York’s General Business Law must also be dismissed.  “To state a cause of action under § 349, a plaintiff must assert (1) the defendant’s deceptive acts were directed at consumers, (2) the acts are misleading in a material way, and (3) the plaintiff has been injured as a result.” PB Americas Inc., 690 F.Supp.2d at 251 (citations and internal quotation marks omitted). Importantly, however, the focus of § 349 cases is whether the alleged deceptive practice was “consumer oriented.”

A defendant cannot be held liable pursuant to § 349 where the disputed private transaction does not have ramifications for the public at large.

The appellate court found that it is clear that Ripka’s claims are based on Peerless’s actions toward her, not on any actions directed more generally toward the public at large. Plaintiff’s complaint rather conclusorily alleges “members of the public at large have been harmed and [i]njured by Defendant’s practices and policies as described in this complaint in that Defendant has unreasonably delayed the claim adjustment process of Plaintiff’s claims, Defendant has unreasonably denied insurance coverage of the Plaintiff’s claims, [d]emanded duplicative information, and irrelevant information in support of Plaintiff’s [c]laims.”

Finding the allegations insufficient to suggest Peerless advertised, marketed, issued, adjusted, settled, or paid out claims under its homeowner’s insurance policies in a way that might be misleading to the public generally. It only alleges claims arising from Peerless’s failure to pay what the Plaintiff claims was her legitimate and reasonable claims in a timely fashion. Accordingly, Peerless’s motion with respect to this claim was granted.

Bad Faith & Consequential Damages

Peerless also argued that Ripka failed to state a cause of action warranting the imposition of consequential damages. Under New York law, consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages “were within the contemplation of the parties